The Great Depression was a case study in government intervention exacerbating a recession. Rather than allowing the economic storm clouds to wash away excess, malinvestment, and credit of the 1920s, the state interfered with the laws of economics and unleashed a tsunami of big government measures that changed the fabric of the United States forever. Former Presidents Herbert Hoover and Franklin Delano Roosevelt failed to learn from one of their predecessors, Warren Harding, who did nothing in the depression of 1920 aside from allowing the market to resolve and correct itself in 18 months.
Senator Reed Smoot
Smoot Sailing
While the New Deal is credited with saving the U.S. economy, it was one of the culprits of prolonging the depression. But many might be unaware that there was another factor that contributed to extending the economic downturn.
In 1930, Senator Reed Smoot (R-UT) and Representative Willis C. Hawley (R-OR) helped pass the Tariff Act of 1930, which was designed “to provide revenue, to regulate commerce with foreign countries, to encourage industries of the United States, to protect American labor, and for other purposes.”
It resulted in raising tariffs on more than 20,000 imported goods, averaging around 59% on a diverse array of products, such as steel, shoes, bricks, bottle caps, sugar beets, and goldfish. Politicians felt like they had to do something, even if that something was wrongheaded and warned against by economists at the time. They may have had good intentions, but we all know where that road leads.
So, what were the unintended consequences of these egregious protectionist policies?
A Tariffble Policy
The U.S. government attempted to artificially boost agricultural prices to keep up with the mandate of increasing capital outlay, raising wages, and maintaining higher spending patterns. This objective, though, essentially closed the nation’s borders to foreign goods, prompting other markets to establish trade barriers of their own and embrace protectionism. Canada, for instance, applied 16% levies on 16 products that accounted for one-third of U.S. exports north of the border.
By 1932, U.S. exports cratered to $1.7 billion, from $5.5 billion at the start of the depression. While most exporting industries suffered, it was the agricultural sector that bared the brunt of the failed public policy endeavor.
American farmers witnessed their crop exports, including cotton, meat, tobacco, and wheat, cut in half. It didn’t help when commodity prices cratered from a few dollars to mere pennies. The government attempted to reverse this trend by destroying inventories and slaughtering pigs, which didn’t rescue farmers from ruin but did prevent new supplies from coming to market.
In the end, foreclosures and bankruptcies were widespread until states intervened with moratoria laws. This created a ripple effect: As rural banks closed their doors, the remaining creditors had to curtail operations by liquidating customers’ loans on securities, refusing to make new loans, and demanding payment for old accounts.
We Hawley Knew Ye
Legendary economist Thomas Sowell correctly noted in 2011 that there wasn’t a Great Depression until after the government intervened. After the stock market crashed in 1929, the unemployment rate spiked to 9% for one month, but then it fell to 6.3% less than a year later. While Sowell isn’t stating that the tariffs were the principal cause of skyrocketing joblessness – foreign imports were too small to the national economy at the time to make a dent to the labor market – he did aver that it was the first step in a series of wrong moves that worsened the depression.
Government begets government. The New Deal launched new regulatory agencies, ran up the debt, increased labor union power, and disparaged industry without any positive results. The only thing it achieved was creating more obligations for future generations to pay.
The more things change, the more they stay the same. U.S. farmers today are enduring the wrath of protectionist trade policy; stockpiles are rotting, prices are crashing, the government is buying crops, and insolvencies are surging. Meanwhile, Washington is allocating billions of dollars to farmers, and the White House is considering another bailout package to limit the damage from the trade spat with China.
It is important to point out that Smoot and Hawley both lost their seats in the 1932 election. Could a similar fate be in store for President Donald Trump nine decades later? This is his fight. He picked it, and now he must finish it one way or another, even if it might cost him re-election. Trade wars always claim victims, and sometimes those victims are politicians.
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