The Hidden Truth of the Great Depression: The Smoot-Hawley Act

When people think of the Great Depression, they commonly recall the massive U.S. stock market crash of October 29, 1929. Indeed, various media outlets introduce the Great Depression in exactly that way. Schools and other educational institutions also teach students this in world history or economics classes. Even though detailed explanation of the specific causal relationships is somewhat lacking, most people have accepted this as an unquestionable “orthodox view.”

In fact, the economic situation at the time was not nearly as bad as previously mentioned. The Dow Jones index and consumer indicators were showing a clear recovery in early 1930, and on that basis, then-U.S. President Herbert Hoover (served 1929–1933) declared in May 1930 that the panic was over.

But everything changed with the enactment of the Smoot-Hawley Tariff Act (hereafter, the Smoot-Hawley Act) a month later. Economic historian John Steele Gordon argues that the Great Depression began not because of the stock market crash of October 29, 1929, but after the enactment of the Smoot-Hawley Act on June 17, 1930. Then what kind of law was the Smoot-Hawley Act?

The Smoot-Hawley Act was legislation prepared by Senator Reed Smoot and Representative Willis C. Hawley to fulfill President Hoover’s campaign pledge to protect farmers by sharply raising tariffs on agricultural products. The bill passed both houses of Congress with overwhelming support, backed not only by the ruling Republican Party but also by Democratic lawmakers.

There were, however, voices of opposition in the process. A considerable number of economists petitioned President Hoover to veto the bill, and Henry Ford, famous as the founder of the Ford Motor Company, even visited the White House in person to dissuade him. It is even said that Thomas Lamont, chairman of J.P. Morgan and one of Hoover’s mentors, pleaded pitifully before the president.

Nevertheless, President Hoover ultimately raised tariff rates on some 20,000 items to an average of 59%, with some as high as 400%. After the law took effect, U.S. imports did indeed fall sharply, from $4.4 billion in 1929 to $1.5 billion in 1933. The problem, however, was that more than 20 countries, including the United Kingdom, also began imposing retaliatory tariffs on American goods.

As a result, U.S. exports also plunged from $5.2 billion to $2.1 billion. In particular, exports such as cotton and tobacco declined sharply, meaning that farmers, who were supposed to benefit, instead suffered even more severe damage. Moreover, the unemployment rate, which had been 7.8%, soared to 25.1%, and global trade volume shrank to one-third of its previous level.

As a result, not only the United States but also neighboring countries experienced turmoil and suffered major damage, and the global economy was subsequently divided among the British pound, the French franc, and the U.S. dollar. It then remained trapped in a slump for some time.

In short, the main cause of the Great Depression lay not so much in the stock market crash as in the Smoot-Hawley Act, which was enacted in disregard of the basic principles of free trade. This historical case remains highly meaningful today. A similar situation could arise at any time. In fact, an even more serious scenario may become reality. Therefore, the institutional establishment needs to keep such cases firmly in mind and exercise caution so as not to bring about another tragic situation.

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Original title: 경제대공황의 숨겨진 진실: 스무트-홀리 법

Author: Seong-woo Jung

Date: 2020-01-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=16&idx=22303