Over the Christmas week, CapX is republishing its favourite pieces from the past year. You can find the full list here.
In the year 1929, as America slides into recession, a Republican senator, avowed patriot, Mormon “prophet” and businessman named Reed Smoot decides that he wants to do something about saving the country’s jobs.
They are being lost, insists Senator Smoot, because too many countries are selling too many goods into the United States and undermining the lives of honest, hard-working, ordinary folk.
Fortunately, the senator has a solution. Higher tariffs and duties, he promises, will protect those jobs. And as chairman of the Senate Finance Committee, he’s in a position to do something about it.
Working with Congressman Willis C Hawley, chairman of the House Ways and Means Committee, he devises the Tariff Act, which becomes law, after months of horse-trading, in June 1930.
Hailed by its co-sponsor Hawley as the precursor to “a renewed era of prosperity”, the Act hikes tariffs on the more than 20,000 dutiable goods to an average of 59.1 per cent. Duties on some individual items are quadrupled.
Given Donald Trump’s campaign speeches, I’m guessing he has little knowledge of Smoot-Hawley. Yet his campaign promises – and his actions since he became President-elect – position him very much as Senator Smoot’s heir.
Even before he’s got his feet under the desk in the Oval Office, he has killed off the Trans-Pacific Partnership (“a terrible deal”) that had just been agreed by 12 Pacific Rim countries, and has for good measure condemned the 22-year-old North American Free Trade Agreement with Canada, US and Mexico, on the grounds that it’s costing American jobs.
In short, the 45th president sounds very much like a protectionist – an impression underlined a few days ago when he warned that if any US firms moved production abroad then tried to sell those products back home, he’d slap on a 35 per cent tariff. (Never mind, as many an expert has pointed out, that this could run into all kinds of problems under international law, not to mention America’s own constitution.)
But what exactly was Smoot-Hawley? Its stated purpose sounds eerily similar to the goals that Trump has espoused. It was, said its title, “an Act to provide revenue, to regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes…”
Senator Smoot, however, had his own motives.
A xenophobe who lived in the United States all his life, apart from 10 months spent in Liverpool as a Mormon missionary, Smoot had a self-imposed mission to keep his nation clean of insidious foreign influences – such as Lady Chatterley’s Lover.
An astute businessman with interests in banking, mining, construction and agricultural goods (particularly sugar and wool, which were important industries in Utah), he was preoccupied with putting his name on an enduring piece of legislation.
And he was also an amateur economist who firmly believed that the recession that was then under way – generally agreed to have been triggered by the 1929 Wall Street Crash – was the result of the volume of goods for sale exceeding the capacity of Americans to buy them. Hence prices were falling.
At the time, this doctrine was known variously as “overproduction” or “underconsumption”. The solution, Smoot said, was to reduce the volume of goods on the market and get things back in balance – and for him, that meant pricing foreign products out of the American market.
There was also a part of the Utah senator that seemed to see tariff barriers as a form of retribution for the bloodshed of the First World War. “The world,” he wrote, “is paying for its ruthless destruction of life and property and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war.”
Apart from Republican politicians, who spotted votes in protectionism, few who knew anything about the subject were enthusiastic about Smoot’s ideas.
In fact, more than 1,000 American economists wrote to President Herbert Hoover, pleading with him not to sign the bill into existence. Despite this, and despite his own misgivings – he’d once damned the bill as “vicious, extortionate and obnoxious” – Hoover did.
The results were almost immediate. As global trade dried up, much of the world’s shipping fleet was mothballed and orders for new ships cancelled. Other major industries were affected – steel production, fishing, farming and manufacturing of all kinds.
And predictably, America’s trading partners reacted in kind.
An outraged Canada slammed tariffs on goods that accounted for 30 per cent of American exports. France, Germany and the British Empire followed suit, either turning to alternative markets or developing substitute manufacturing that would replace goods previously acquired from America – or elsewhere, since many other countries were erecting wall-of-death tariffs.
It would take decades for some of these policies to be unwound.
Although historical economists still differ about the extent of the damage caused by Smoot-Hawley, nobody doubts that it dealt a serious blow to the global economy at a vulnerable time – or that it deepened and lengthened the Depression, both inside and outside the United States.
The incoming president, Franklin Delano Roosevelt, said Smoot-Hawley “compelled the world to build tariff fences so high that world trade is decreasing to vanishing point”.
Between 1929 and 1933, US imports collapsed by 66 per cent. Exports plummeted by 61 per cent. Total global trade fell by a similar amount.
As the Depression worsened, the deflating US economy was hit ever harder by the Smoot-Hawley tariffs. Because the tariffs were fixed, the dutiable percentage of products grew as their value collapsed. The less trade there was, the more difficult it became.
Rather than the promised new era of prosperity, Smoot-Hawley had helped bring about an era of misery. Between 1929 and 1933, America’s wealth nearly halved – and the unemployment rate more than tripled from eight per cent to 25 per cent.
The tragedy was that the Act was a solution to a problem that didn’t exist. America had actually been in surplus on its trade account, right across the board. Although food exports had been falling and were in deficit, manufactured exports more than compensated for the decline.
And while it was true that imports of foreign manufactures were indeed rising before Smoot-Hawley, economist Jakob B Madsen pointed out in a 2002 study that exports were rising even faster.
Rather like Donald Trump, Reed Smoot wasn’t a man to admit he might be wrong. As one biographer wrote: “There is no evidence that any apparent fact, any argument, any introspection even faintly disturbed him.”
“The Great Protectionist”, as author James B Allen once described him, lost office in 1932. Till his dying day, the only problem he would admit to with his tariffs was that they might not have been set quite high enough.