November 5, 2015


Donald Trump, Meet Herbert Hoover : Today's ardent foe of free trade has a soul mate in the president who signed Smoot-Hawley into law. (GEORGE MELLOAN, Nov. 3, 2015, WSJ)

Popular legend has it that the Great Depression resulted from the 1929 stock market crash. In fact, the market was recovering nicely in 1930. The depression was caused and prolonged by a number of bad laws enacted first by Republicans and then by Democrats. Arguably, the worst was the 1930 Smoot-Hawley tariff.

Hoover had been secretary of commerce under presidents Warren Harding and Calvin Coolidge. One of his first acts as president was to refinance the 12 regional farm-loan banks established in 1916 to make preferential loans to farmers. Easy lending probably had contributed to the overproduction that cursed farmers with low prices in the 1920s and caused them to demand import protection. They found their champions in Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon.

The tariff act they wrote was initially meant to benefit farmers. But after the shock of 1929, industry and labor demanded protection as well. Both Hoover and the Republican Congress were compliant. In its final form Smoot-Hawley covered some 20,000 items. The average tariff on dutiable goods jumped to 50% from an already high 25%. U.S. trading partners responded in kind and world trade began to shut down.

U.S. exports dived to $1.7 billion in 1933 from $5.2 billion in 1929. Farmers' share of the $3.5 billion in lost business was $1 billion.

The tariffs probably worsened the post-crash deflation, which by many accounts resulted from the Federal Reserve's failure to supply banks with sufficient liquidity to replace that lost in the crash. Europeans, whose sales to the U.S. were crippled by Smoot-Hawley, found it difficult to earn dollars to make payments on their heavy World War I debts to the U.S. The world money supply tightened, aggravating deflationary tendencies everywhere.

More than 1,000 U.S. economists got up a petition urging President Hoover not to sign Smoot-Hawley. Henry Ford called the bill "economic stupidity" and J.P. Morgan CEO Thomas Lamont referred to it as "asinine." Then New York Gov. Franklin D. Roosevelt opposed it, as did Hoover initially. But on June 17, 1930, Hoover, pressured by his fellow Republicans, signed it anyway.

Posted by at November 5, 2015 6:17 PM