WHAT ROLE DID THE SMOOT-HAWLEY TARIFF PLAY

WHAT ROLE DID THE SMOOT-HAWLEY TARIFF PLAY?

For conservatives, the greatest economic disaster in history needs a villain, and not just any villain. Only a rapscallion the size of Big Government will suffice, and in this respect, the Smoot-Hawley Tariff of 1930 suits their needs perfectly.

According to this story, the Smoot-Hawley Tariff raised taxes on imported goods as high as 60 percent. Not only did this burden American consumers with another tax, but it effectively killed international trade. Soon all nations were raising tariffs and rushing behind the walls of protectionism. The subsequent collapse of international trade caused the Great Depression.

For a complete myth, it is astounding how much this one gets repeated. Sharp observers have probably already noticed there is a problem with dates. The stock market crashed in October, 1929, but Hoover did not sign the tariff into law until June 17, 1930. So more sophisticated conservatives have refined the story: the tariff turned an otherwise ordinary recession into a full-blown depression.

But even this is a gross exaggeration, and top economists reject it out of hand. Peter Temin, an economic historian at MIT, told The Wall Street Journal on February 22, 1996 that this historical revisionism is "wrong," according to the consensus of the nation's most respected economists. Paul Krugman, one of the world's top international trade economists, and one who is expected to win a Nobel Prize for his revolutionary theories in favor of free trade, calls the Smoot-Hawley theory "incredible."

The Smoot-Hawley Tariff only slightly worsened the depression, which was already gaining considerable momentum. Here are the reasons why:

Imports formed only 6 percent of the GNP. With average tariffs ranging from 40 to 60 percent (sources vary), this represents an effective tax of merely 2.4 to 3.6 percent. Yet the Great Depression resulted in a 31 percent drop in GNP and 25 percent unemployment. The idea that such a small tax could cause so much economic devastation is too far-fetched to be believed.

By no stretch of the imagination could Americans of the time be called heavily taxed. In 1930, 80 percent of all workers paid no federal taxes at all. The rich paid a record low 25 percent. By contrast, after the war, the top tax rate zoomed up to 91 percent, and the middle class started paying taxes as well. What followed was the boom times of the 50s. Seen in this light, blaming the Great Depression on a tariff tax of only a few percentage points is absurd.

Even an effective tax of 2.4 to 3.6 percent is overstating the effects of the tariff. The tariff rates were already high to begin with. One source reveals that Smoot-Hawley raised rates from 26 to 50 percent; another source from 44 to 60 percent. In that case, we are talking about an effective tax increase of 1.4 percent at most.

The trade war following Smoot-Hawley did not entirely shut down trade. For the U.S., it fell from 6 to 2 percent of the GNP between 1930 and 1932. This does not mean, of course, that Americans necessarily "lost" that 4 percent. It merely means that they had 4 percent more to spend on their own domestic products.

The Smoot-Hawley tariff was partially offset by a $160 million tax cut in the same year, which went entirely to the rich.

The tariff was also partially offset by the money saved by Americans no longer investing in or loaning to Europe. In 1928, investments alone amounted to $119 million. The Europeans heavily depended on this financial aid, and its loss was considered disastrous. But for Americans it represented increased savings.

As you can see, the drag of the Smoot-Hawley Tariff on the U.S. economy was minor. One could even argue that if the tariff had not been passed at all, the Depression would have hit with the same intensity anyway. Why? Because the Great Depression was a chain reaction. Just one example was the public run on banks; when one bank failed, panicked investors rushed to withdraw their deposits from the next. The process started in the United States, but it eventually spread to Europe. The central bank of Austria was the first domino to fall.

The Smoot-Hawley Tariff may have hastened this process, but it is doubtful it added to its severity. In the mid-20s, Americans stopped investing in Europe to take advantage of the raging Bull Market on Wall Street. Between 1924 and 1928, investments in Europe fell 78 percent, from $530 million to $119 million. Loans to Germany collapsed from $277 million in 1928 to $30 million in 1929. Thus, long before the tariff even passed, a credit squeeze, bank failures, and deflation were already working to contract European economies.

In sum, the Smoot-Hawley Tariff's impact on the U.S. economy was small, and probably did not result in more damage to Europe than was inevitable anyway.

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