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As the world escaped the War To End All Wars (for about 20 years), the United States grew to be one of the more dominant - if not the world's most dominant - economies of the world. Post-War giddiness gave way to the Roaring '20s, a stretch of unbridled economic advancement that, in a lot of ways, was fake. More and more Americans were investing in the stock market, which just kept going up. Regard, the Dow Jones as of September of the respective year:
1921: 1017.65
1922: 1465.83
1923: 1281.46
1924: 1511.50
1925: 2203.23 (October value - September 1925 wasn't available for some reason)
1926: 2264.81
1927: 2616.73 (again, October)
1928: 3437.74
1929: 4973.84
With the exception of a minor blip in 1923 the Dow Jones increased from September-to-September of every year. As Herbert Hoover accepted the Republican nomination for the presidency during the campaign in August 1928, he famously (and short-sightedly) declared:
Unemployment in the sense of distress is widely disappearing...We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poor-house is vanishing from among us. We have not yet reached the goal, but given a change to go forward with the policies of the last eight years, and we shall soon with the help of God be in sight of the day when poverty will be banished from this nation.
Cool prediction, Herb. Hoover's election over New York Governor Al Smith (who suffered politically from being Catholic, being anti-Prohibition, and his connections to Tammany Hall) in 1928 accelerated the growth of the stock market.
As more of the United States plugged in, a new Industrial Revolution occurred. But things weren't all aces. As this history professor describes, the October 1929 stock market crash and the resulting Great Depression was a perfect storm of economic calamities. Among them:
-The Immigration Act of 1924 put a quota on the number of immigrants allowed into the United States. The unintended result was that immigrants tend to need a place to live once they arrive, and once that market slowed to a trickle, it created a housing bubble. That bubble burst in Florida in 1925 with the Florida Land Boom, foreshadowing a growing economic crisis. Construction slowed in 1928.
-Goods were too durable. You didn't need to buy a radio every year if the radio never broke. Same with your car, vacuum cleaner, iron, etc. This slowed down purchasing in America.
-Wages for workers rose, but not as quickly as productivity, so the demand wasn't meeting the output of the goods.
-What goods most Americans did buy was on credit. Installment plans, which had been around for almost 100 years by that point, were decidedly becoming A Thing. This included investment in the stock market, a process known as buying on margin.
Buying on margin meant that Americans were buying stock with borrowed money. As long as the price of the stock increased (and it had for much of the previous decade heading into that fateful October 1929), then you could sell and cover your loan. But if the bottom dropped out of the stock market, not only did you lose your investment but you also had to pay the money you no longer had back to the bank. And then that's exactly what happened. The price of the stock wasn't equal to the actual value of the stock - their P/E (price-to-earnings) ratio was out of whack. And we haven't even gotten into what happens when the stock is manipulated - buy enough stock to raise the price, short it, and then buy it back after it falls in order to make money at every stage of the manipulation.
But that's not why we're here. We're here to talk about tariffs, which are simply taxes on imported goods. A protective tariff is one in which you drive up the price of foreign goods, which generally makes the buyer go with the cheaper, home-made option. Why by an avocado from Mexico for $1.25 when you can buy one from California for $1? This is where there is overlap.
Whenever there's some sort of economic downturn, the rallying cry is to Buy American! Spend money on American goods and it will help the American economy. Everybody wins, right? Enter Reed Smoot (R-Utah) and Willis Hawley (R-Oregon).
Reed Smoot had an interesting political history, winning Utah's senate seat in 1903. However, given that Smoot was an Apostle in the Church of Jesus Christ of Latter Day Saints, Utah's history with Mormonism and the condition that the Mormon Church renounce the practice of polygamy as a criteria for Utah's admittance to the Union. The result was the 1890 Manifesto, a document that officially "advised against" Mormons practicing polygamy. Utah was admitted as the 45th state in the Union. Smoot was not the first Mormon to be elected to Congress - that distinction belongs to B.H. Roberts, elected to the House of Representatives in 1898. The House of Representatives refused to seat Roberts on account of his three wives. Smoot had only one wife, but that didn't stop the Senate from debating - for four years - Smoot's viability. The Salt Lake Tribune reported that Mormon leaders (one of which Smoot certainly was) secretly approved of polygamy following the adoption of the 1890 Manifesto. Senators opposed to Smoot's seating argued that Smoot could not take the oath of office if he subscribed to a religion that approved of breaking the law. Finally, in 1907, Smoot prevailed. Though the majority of the investigative committee recommended that Smoot be expelled, there weren't enough of the 2/3 majority required to actually get rid of Smoot. Re-elected in 1908, Smoot stayed in the Senate he was defeated in the 1932 election, when a Democratic wave rebelled against the Republicans - whom the public felt hadn't done enough to stop, or at least slow, the Great Depression.
Willis Hawley had a much less dramatic political history than his partner in legislative history. He was born in Oregon in 1864 and was the president of Willamette University from 1891-1902 and was a professor of history and economics from 1891-1907, a position he resigned when he was elected to the House of Representatives. Hawley was elected every two years until the Democratic wave got him, too.
Anyhow, Smoot became Chairman of the Senate Finance Committee in 1923. Hawley was the Chairman of the House Ways and Means Committee from 1927-1931. Together they would come up with a plan that almost nobody who knew anything about politics approved of, yet was passed anyway.
A drought hit the Plains in the late 1920s (which would peak in the Dust Bowl). In an effort to cover their losses, farmers over-extended themselves to plant more crops, which meant buying equipment to plant them. There had been a robust worldwide market for American wheat, particularly in European countries which had been jacked up during World War I. By the end of the 1920s those countries started to get back on their feet, decreasing the demand for American crops. Still they planted, trying to cover their losses. This was of course made worse by the stock market crash, in which bank runs led to bank closures. Even if you hadn't invested a penny in the stock market, you could get wiped out.
In the late 1910s/early 1920s the "Protectionists" (Republicans who wanted to, well, protect the American economy at all costs) argued that the United States' economy had grown because Europe wasn't exporting anything and had to import all their goods from...somewhere, and it just happened to be the United States. With the War over, exports would increase and imports would naturally decrease. Thus, the Protectionists argued, Congress - because Congress could make this call back then - should raise the tariffs on imported goods. Protectionism worked hand-in-hand with Isolationism as the Republicans voted against joining the League of Nations.
Democrats were against a protective tariff. That little recession in the early 1920s? Protectionists argued that it would end with higher tariffs by protecting American factories and workers. Thus the Fordney-McCumber Tariff was passed in 1923, which raised the average tariff on taxable imports to 38.5%. That tariff really marked the end of prosperity for the American farmer. As a result, foreign nations issued their own retaliatory tariffs, placing higher duties on American exports. The League of Nations got involved in an effort to draw a truce between the United States (who was not a member of the League of Nations) and the rest of the world, but no agreement could be achieved. Both domestic and international economies were weakened.
Despite campaigning through 1928 to revise the tariff, President Herbert Hoover kept on keeping on. Smoot and Hawley went to work. Hawley's version in the House raised tariff rates on 845 imported goods and cut the rates on 82. By the time Smoot got done with it in the Senate, it had increased tariff rates on an additional 177 and cut rates on 254. The final bill from the Senate, after compromising with the House, raised tariff rates on 890 dutiable imports. It was deeply unpopular.
Senator Robert LaFollette (R-Wisconsin) was a weird guy. He was a Republican isolationist who supported FDR's New Deal and formed the new Progressive Party advocating for workers' rights and would be a co-founder of the America First Committee. Still, the isolationist LaFollette railed against the Smoot-Hawley Tariff, calling it:
The product of a series of deals, conceived in secret, but executed in public with a brazen effrontery that is without parallel in the annals of the Senate.
Plot twist: It wasn't unparalleled in the annals of the Senate (see: Abominations, Tariff of) but that's neither here nor there.
Check the New York Times from May 1930:
1,028 economists from across the country signed a petition asking Hoover to veto the bill, which had only passed 44-42 in the Senate, nowhere near the votes needed to override Hoover's veto. Thomas Lamont, a partner at J.P. Morgan, related that he "almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff. That Act intensified nationalism all over the world." Henry Ford told Hoover that the tariff was "an economic stupidity." About sixty nations sent formal protests to Hoover and the government begging him not to sign it.
Hoover signed it anyway, though in private he called it "vicious, extortionate, and obnoxious." Immediately the New York Stock Exchange lost $1 billion in value - the second crash in eight months. By making it more difficult for foreign nations (mainly Europe) to sell their goods to the United States, it made it harder for them, specifically Germany, to repay their war reparations. Pretty much everyone in American government was betting on the punished countries remaining passive. They didn't.
Spain enacted the Wais Tariff a month after the Smoot-Hawley Tariff was signed, which raised the tariff on American automobiles in Spain. Three months after Hoover signed the Tariff, Canada - long an extensive trading partner with the United States - raised tariffs on textiles, agricultural tools, electrical apparatuses, meat, gasoline, shoes, jewelry, and fertilizer. In 1932 Great Britain signed the Ottawa Agreements which placed high tariffs on American goods.
These retaliatory tariffs were part of a tactic known as the Beggar-Thy-Neighbor policy, in which countries attempt to address its own economic problems by worsening the economic issues in other countries. U.S. exports in 1929 stood at about $7 billion. By the end of 1932 U.S. exports were about $2.4 billion. With the U.S. engaging aggressively in protectionist and isolationist economic policies, the rest of the world followed suit, deepening the economic crisis. World trade fell by about two-thirds from 1929 to 1934.
Economists generally agree that the Smoot-Hawley Tariff did not cause the Great Depression - that was undertaken by the aforementioned perfect storm of factors, of which the Fordney-McCumber Tariff was one. But I think we can safely assume that the Smoot-Hawley Tariff did not prop up American industry or agriculture and, by extension, worsened European economies, which were already in bad shape.
Germany's exports (which they would use to repay their WW1 debt) fell by 20% from 1930 to 1931. So in 1933, after years of depression and hyper-inflation that saw Germany's currency become "utterly worthless,"
To be fair, it's not like the Smoot-Hawley Tariff created Germany's economic problems. It just deepened them and pushed Germany to a breaking point. Germany's unemployment in the early 1930s was 30%. Economic uncertainty - of which there was plenty in Germany in the early 1930s - meant that there wasn't a majority party in the Reichstag. The National Socialist German Workers' Party used the crisis to their advantage and allied with other right-leaning parties to build a coalition that eventually led President Paul von Hindenburg to name Adolf Hitler chancellor in an effort to keep the Communists out of power. When the Reichstag burned down, Hitler blamed the Communists and used that to consolidate his power over Germany. Again, is the Smoot-Hawley Tariff responsible? Not directly, but it did help create an economic climate that led to Hitler's ascension to power. Like Thomas Lamont said, the Tariff intensified nationalism around the world.
So when President Trump says that "Trade wars aren't so bad," he might want to ask a historian or an economist. Already we're seeing reaction to the (since suspended) rise in tariffs on aluminum and steel on Canada, Mexico, and Europe. China has announced tariff increases on American pork, wine, and nuts. Mexico has delivered the most pointed tariff rates against the Trump Administration, raising tariffs on goods exported from Republican leaders' home bases - steel from Indiana (VP Mike Pence) and bourbon from Kentucky (Senate Majority Leader Mitch McConnell). Speaker of the House of Representatives Paul Ryan's home state of Wisconsin exports 90% of its cheese outside of the United States, exports which have recently been targeted for tariff increases by Canada and Mexico, and by tariff increases on Harley-Davidson motorcycles, also headquartered in Wisconsin.
A Tariff War which leads to retaliation against the United States, could have broader consequences than the economic impact of the Smoot-Hawley Tariff. Back in 1920, exports accounted for 5% of the U.S.'s Gross Domestic Product. Today's exports account for about 13% of our GDP. Again, was the Smoot-Hawley Tariff responsible for the Great Depression and World War II? Not directly. There were plenty of reasons that had to come together for both to occur. Still, we currently see this administration embracing protectionism and isolationism, when most economists explain that it doesn't really work. Ultimately the Smoot-Hawley Tariff was an unnecessary flame, the match that over a thousand economists begged not be struck, near the tinderbox of a rough generation in world history.
