Why Trump’s Tariffs Scare Me   Leave a comment

We all know the story of the stock market crash of 1929, the official start of the Great Depression. But what a lot of people aren’t taught in school is that the Depression of 1929 hit most of the industrialized world, but it only lasted about two years in most other countries. Only in the United States did the Depression of 1929 become the Great Depression as it stretched on for 12 years. Officially, the Great American Depression ended in December 1941, right after the bombing of Pearl Harbor.

So why did it last so long here when it typically only lasted 18 months in other countries?

Image result for image of smoot-hawley tariffsThere were a lot of missteps that prolonged the Great Depression, but the first big one was the brainchild of Republican Senator Reed Smoot, an avowed patriot, businessman and Mormon “prophet” who decided we needed to do something about saving the country’s jobs.

Senator Smoot was convinced that the massive loss of employment in the United States was because too many countries were selling too many goods into the United States and undermining the honest, hard-working ordinary people.

He recognized that there were some complicated processes at work that would take years to reform, but he promised the short-term fix would be higher tariffs and duties. As the chairman of the Senate Finance Committee, he could do something quickly to alleviate the country’s suffering.

Image result for image of smoot-hawley tariffsOoo, does that sound familiar?


Working with Congressman Willis C Hawley, chairman of the House Ways and Means Committee, Smoot devised the Tariff Act, a result of months of horse trading. It became law in June 1930. Hawley hailed it as the precursor to a “renewed era of prosperity” as the Act hiked tariffs on more than 20,000 dutiable goods to an average of $59.1 percent. Duties on some items quadrupled.

Maybe Trump doesn’t read a lot of history. His campaign promises on trade sound a lot like Smoot’s promises. Trump is a protectionist who says he plans to use the bully pulpit of the Presidency to shame companies into staying in America or coming back from over seas and if they don’t cooperate, he wants to slap on a 35% traffic on their imported goods.
Image result for image of smoot-hawley tariffsSmoot was an astute businessman with interests in banking, mining, construction and agricultural goods (sugar and wool were important industries in Utah). He fancied himself an amateur economist who firmly believed that the recession of 1930 was a result of the volume of goods for sale exceeding the capacity of Americans to buy them, which was leading to a huge drop in prices.

This was Keysenian doctrine of “overproduction” (or sometimes, “underconsumption). Smooth wanted to solve the crisis by reducing the volume of goods on the market and bringing things back into balance by pricing foreign products out of the American market.

More than 1000 American economists wrote President Herbert Hoover pleading with him not to sign the Tariff Bill. Hoover himself had misgivings and had once damned the bill as “vicious, extortionate and obnoxious.” In the end, he signed it. Why? Probably politics.

The results were pretty immediate. As global trade dried up, most of the world’s shipping fleet went into mothballs and orders for new ships were cancelled. Steel production, fishing, farming and manufacturing of all kinds were affected.

America’s trading partners reacted in kind. An outraged Canada placed a 30% tariff on American exports. France, Germany and the British Empire follow suit, turning to alternative markets or developing their own to replace goods previously acquired from America.

Image result for image of smoot-hawley tariffsAlthough 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. It deepened and lengthened the Depression, both inside and outside the United States. 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.

Franklin Delano Roosevelt railed against Smoot-Hawley  for building “tariff fences so high that world trade is decreasing to vanishing point”. FDR would go on to meddle in the economy far more capriciously than Hoover and with similar disasterous results, dragging the Great Depression out for eight more years.

As a matter of fact, economic indicators suggest that the US economy, though still in contraction following the 1929 Bank crash, was showing signs of recovery until the Smoot-Hawley tariffs were instituted. Rather than the promised new era of prosperity, Smoot-Hawley 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 percent to 25 percent.

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. Although food exports had been falling and were in deficit, manufactured exports more than compensated for the decline. 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.

Image result for image those who fail to learn from historyReed 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.

So now Donald Trump, another man who has difficulty admitting when he might be wrong, will be president. Does that hail a new era of prosperity or are we looking at something else that will drag the economy into the pit?

Those who fail to learn from history are doomed to repeat it.

Oh my!


Posted January 3, 2017 by aurorawatcherak in economics

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