← History As It Happens
History As It Happens
Smoot-Hawley Redux
00:48:51
With President Donald Trump bent on initiating a trade war by hiking tariffs on imports from major trading partners such as China, Mexico, and Canada, an infamous piece of legislation passed in 1930 is piquing Americans' curiosity. The Smoot-Hawley...
Loading summary
Transcript104 lines
- [00:01]
Advertiser
In history. It's the decisions made today that shape tomorrow. So don't wait. Invest in why refi Today? You can grow your wealth without the volatility of the stock market or the influence of political shifts. Yrefi offers a secure investment opportunity with up to a 10.25% fixed rate of return. No fees, just steady growth. Take control of your financial Future today. Visit investyrefi.com that's invest Y-R-E-F-Y.com or call 87780 invest to get started. History is defined by the names that stand the test of time. Names that inspire, unite, and lead. Now it's your turn to create a lasting legacy with a Dot Vote domain. Whether you're running for office, driving change, or rallying support, a dot vote domain ensures your name is as memorable as those in the history books. Visit GoDaddy.com type in your name. Vote and secure a web address that stands out. Claim your place in history with dot.
- [01:03]
Martin DeCaro
Vote history as it happens February 14, 2025 Smoot Hawley Redux Our nation requires.
- [01:14]
Donald Trump
Steel and aluminum to be made in America, not in foreign lands. We need to create in order to protect our country's future. A resurgence of U.S. manufacturing and production.
- [01:24]
Phil Magness
Saying that he will impose new tariffs on aluminum and steel tariffs on Canadian.
- [01:29]
Martin DeCaro
Steel and aluminum would be entirely unjustified.
- [01:33]
Franklin D. Roosevelt
The latest escalation in his trade policy.
- [01:36]
Phil Magness
Which has already brought retaliatory 25% tariffs.
- [01:39]
Advertiser
On Mexico, 25% tariffs on Canada, and a 10% tariff on China.
- [01:46]
Martin DeCaro
President Trump says raising tariffs on major US Trading partners will make the country rich again. He says tariffs don't make the goods you buy more expensive because exporters pay for them. His helter skelter policies have people Google searching two names from a bygone era when protectionism was king. What can we learn from the Smoot Hawley debacle? That is next as we report history as it happens. I'm Martin DeCaro.
- [02:11]
Phil Magness
So we go a little bit before the Smoot Hawley tariff. The immediate predecessor to it is the Fordney McCumber Tariff of 1922. And this was pitched, as they called it, the scientific tariff at the time, precisely because it created these administrative agencies that allowed some flexibility in the executive branch to modify the hard coded rate that was on the statute book for certain circumstances. And this was, you know, this is the high watermark of administrative theory that views bureaucrats as like these impartial experts that come in and to guide the state separate and apart from the flows of politics it's the rise of commissions. It's the rise of the modern administrative state in the Wilsonian sense. Well, of course, they also adapted that to the tariff schedule as well. And really what starts to take root in the 1920s and becomes expanded in the 1930s is executive primacy in being able to guide this policy, whereas it had previously been almost exclusively Congress's domain.
- [03:13]
Martin DeCaro
On June 28, 1934, President Franklin Roosevelt delivered his fifth fireside chat to review the achievements of the recent session of Congress.
- [03:22]
Franklin D. Roosevelt
It is made increasingly clear that its task was essentially that of completing and fortifying the work which it had begun in March 1933. That was no easy task, but the Congress was equal to has been well said that while there were a few exceptions, this Congress displayed a greater freedom from mere partisanship than any other peacetime Congress in our history.
- [03:51]
Martin DeCaro
One of the major enactments Roosevelt mentioned was a rational method of increasing our volume of foreign trade through reciprocal trading.
- [03:58]
Franklin D. Roosevelt
Agreements have justified our cause. I could cite statistics to show you as unanswerable.
- [04:07]
Martin DeCaro
The Reciprocal Tariff act gave the President the power to negotiate trade deals and adjust tariffs without prior congressional approval. A step toward rectifying the debacle of 1930 the Smoot Hawley Tariff act, named for Utah senator Reed Smoot and Oregon Representative Willis Hawley. As historian David M. Kennedy writes in his Pulitzer Prize winning Freedom from fear, the Fordney McCumber Tariff act of 1922 had already pegged most import levies at forbiddingly high levels. Yet the Republican platform in 1928 as well as the Democratic, called for still higher duties. President Herbert Hoover went along with his party's plan for tariff revision because he wanted two higher duties on certain agricultural imports as part of his program to aid farmers and a strengthened tariff commission with power to adjust import duties by 50%. This flexible tariff, said Hoover, would get the tariff out of congressional log rolling and thus be a large step toward reducing excessive and privilege protection. As for tariffs on manufactured goods, they should be revised upward only where there's been a substantial slackening of activity in an industry during the past few years and a consequent decrease of employment due to insurmountable competition, wrote Herbert Hoover. Kennedy goes on to say, unfortunately, this last provision, the Tariff Commission, however reasonably intended, was an invitation to what progressive Republican Senator George Norris called protection run perfectly mad. Hoover showed himself utterly unable to control the tariff legislation, and Congress proceeded to pass the Smoot hawley tariff of 1930, raising import duties to their highest level in American history. In the end, Kennedy says, Hoover swallowed Smoot Hawley because of its provisions for flexibility. But in fact, the tariff bill represented both an economic and political catastrophe. Again, historian David M. Kennedy in Freedom.
- [06:04]
Franklin D. Roosevelt
From Fear let me assert my firm belief that the only thing we have to fear is fear itself. Nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life, a leadership of frankness and of vigor has met with that understanding and support of the people themselves.
- [06:39]
Martin DeCaro
Allied victory in the Second World War opened the way toward a new global economic order based on trade liberalization. Tariffs did not disappear entirely. Indeed, almost every country today imposes some tariffs and some that are very high. Wealthy countries generally maintain lower tariffs compared to developing countries that may be trying to protect fragile industries. NAFTA From 1993, NAFTA will tear down.
- [07:05]
Donald Trump
Trade barriers between our three nations. It will create the world's largest trade zone and create 200,000 jobs in this country by 1995 alone.
- [07:16]
Martin DeCaro
While liberalizing nearly all agricultural trade among the U.S. canada and Mexico had some notable exceptions. Canada maintains a 241% tariff on American milk that exceeds its national quota. The Canadian supply management system is built to avoid a surplus. So within quota, the milk tariff is 7.5%, not 241. But again, for the most part, the lesson learned from Smoot Hawley is that sweeping tariffs are economically and politically destructive. The 1930 act put tariffs on roughly 25% of all goods imported to the United States. Now, President Trump apparently does not feel this way. As he explained at a public forum where he took questions from Bloomberg News editor in chief last year, to me.
- [08:00]
Donald Trump
The most beautiful word in the dictionary is tariff, and it's my favorite word. It needs a public relations firm to help it. But to me, it's the most beautiful word in the dictionary.
- [08:13]
Martin DeCaro
Because Trump does not know, or pretends not to know, how tariffs work, it is hard to see what purpose he believes they'll serve to protect US Industries, to bully trading partners to act in other areas like border enforcement, to raise revenue for the US treasury, to counter unfair trading practices or to safeguard national security, however defined or all of the above. In his first term, Trump insisted China would pay for the tariffs that he placed on goods imported from China. The truth is, importers pay the tax and pass it on to consumers.
- [08:47]
Donald Trump
We've taxed China on $300 billion worth of goods and products being sold into our country, and China eats it because they have to pay it. Because what they do is they devalue their currency and they push money out. Our people haven't paid, as you know. We're also charging them 25% on $250 billion. So we're taking in many billions of dollars. There's been absolutely no inflation and frankly it hasn't cost our control consumer or anything.
- [09:18]
Martin DeCaro
It costs China his second term now underway, Trump is wielding tariffs Again. A headline from the New York Times he announced sweeping tariffs on foreign steel and aluminum re upping a policy from his first term that pleased domestic metal makers but hurt other American industries and ignited trade wars on multiple fronts. Amazingly, according to a headline I saw on cnn, Americans were Google searching tariffs more frequently than Taylor Swift, a sign that people simply don't know how tariffs work. Or maybe they're asking why does the President have so much authority Here? The Council on Foreign Relations published a concise explainer on tariffs, and I'll share a link to it in my weekly newsletter. You can sign up@historyasithappens.com but I'll share some of it with you now. It was to rectify the problems caused by Smoot Hawley Congress has delegated more and more trade authority to the executive branch. There is the aforementioned Reciprocal Trade agreements Act of 1934, then the Trade Expansion act of 1962. It granted the president authority to negotiate tariff reductions of up to 80%. And then the Trade act of 1974 allowed the executive branch to strike trade deals with negotiating objectives set by Congress that were then subject to an unamendable up or down vote known as fast tracking. Both Democratic and Republican presidents have used this authority to lower tariffs and enter into a range of trade deals, including the agreement that established the World Trade Organization. So the fact is, decades of congressional legislation have given any American president plenty of justifications to choose from when levying a tariff. For instance, Trump in 2018 pointed to China's intellectual property practices, where American companies are pressured to hand over their intellectual property as a condition for doing business. In China, Trump imposed tariffs covering roughly $360 billion worth of Chinese imports.
- [11:16]
Donald Trump
We have a tremendous intellectual property theft situation going on, which likewise is hundreds of billions of dollars. So we're going to get it taken care of and frankly, it's going to make us a much stronger, much richer nation.
- [11:40]
Martin DeCaro
The Biden administration kept these tariffs in place for the most part, so maybe today we have overcorrected from the Smoot Hawley mistake. But there is another lesson here that Trump and his tariff hawks may be ignoring. Historian Phil Magness is the David J. Thoreau Chair in Political Economy at the Independent Institute. Welcome back.
- [12:00]
Phil Magness
Happy to be here.
- [12:01]
Martin DeCaro
You know, history is not fair sometimes. The only reason, really, the only reason anyone is talking about Senator Reid Smooth and Congressman Willis Hawley Smoot of Utah, Hawley of Oregon, is because their names are attached to the Tariff act of 1930. But you know, Smoot Hawley is probably being searched a lot on Google these days. And that's why I'm doing this podcast, why I invited you to come back on the show to discuss this. But I do think there are some valuable lessons to extract here.
- [12:32]
Phil Magness
Absolutely. It's a direct historical parallel to many of the events that we're seeing today. And actually on an even deeper level, it has the antecedents of some of the powers that are being exercised today written into it.
- [12:46]
Martin DeCaro
Yeah. It's one thing I want to ask you about at some point here as to why the US President can just adjust tariff rates whenever he wants to. Maybe we'll take that on now. I was going to start in 1929, the autumn of 1929. But why does President Trump have this authority? And what's Congress supposed to be doing about this, in your view?
- [13:05]
Phil Magness
So that part of the story goes all the way back to 1787 at the Constitutional Convention. The tariff power was always contemplated as being a legislative power. It's hard coded into there in Article 1, Section 8, among the enumerated powers. It's the very first enumerated power, in fact, as to in order to collect taxes, Congress has the power, the ability to impose imposts, excises and duties. So that was the original design. And from 1789 until really about 1913, Congress predominantly relies upon the tariff as its revenue generator. It does it for other things as well, but revenue is mostly from the tariff system. And actually what happens over the next couple of decades is a profound transformation in how tariff policy is done up to leading into this infamous Smoot hawley tariff of 1930. And generally, what happens after the Smoot hawley tariff in 1930 is that conditions are so bad the mistake is immediately realized with the collapse of international trade in the Depression that Congress willingly starts to cede more and more of its tariff authority over to the executive branch. It was essentially a get us out of this mess that we created for ourselves approach. And with that executive branch, primacy has emerged between then and the present day as the main mechanism for doing tariffs instead of what Congress used to do back in the founding era.
- [14:33]
Martin DeCaro
It's interesting because one reason why Hoover went along with Smoot Hawley or Hawley Smoot, depending on which order you put their names, was because he thought he would have some flexibility there with a tariff commission where he could then adjust the tariffs that were set by Congress so they wouldn't just stay cemented at one rate despite what was happening in the world. But it all backfired on him anyway, I guess.
- [14:54]
Phil Magness
Yeah, you know, that's a huge theme that emerged. So we go a little bit before the Smoot Hawley tariff. The immediate predecessor to it is the Fordney McCumber Tariff of 1922. And this was pitched, as they called it, the scientific tariff at the time, precisely because it created these administrative agencies that allowed some flexibility in the executive branch to modify the hard coded rate that was on the statute book for certain circumstances. And this is the high watermark of administrative theory that views bureaucrats as these impartial experts that come in and to guide the state. Separate and apart from the flows of politics. It's the rise of commissions, it's the rise of the modern administrative state in the Wilsonian sense. Well, of course they also adapted that to the tariff schedule as well. And really what starts to take root in the 1920s and becomes expanded in the 1930s is executive primacy in being able to guide this policy, whereas it had previously been almost exclusively Congress's domain.
- [15:57]
Martin DeCaro
You did say there are important parallels, although the world climate then, or at least the world's economic picture then, was a lot different than it is today. You're obviously not saying we're on the brink of a great depression now. But what I think does matter is what a tariff symbolizes or what it means. Right. Putting up walls between countries, not internationalism, nationalism, you know, turning away from cooperation. And that goes beyond just trade. An autarkic, if you will, an autarkic self sufficient type of attitude. But it's ridiculous. Today we have supply chain capitalism. It's impossible to do this.
- [16:35]
Phil Magness
I think it's an interesting turn in the rhetoric and it starts around the first Trump term. Although Joe Biden also picked up on some of these themes and adopted and appropriated them for himself. This notion of American self sufficiency being the, the new dominant economic model, the idea that we need to return to industrial policy to stimulate certain strategic industries. This rhetoric has all really entered in, in the last decade or so. Whereas if he had gone a decade or so before that, the great theme is globalization, breaking down the barriers, having a more integrated international economy with prominent trading partners.
- [17:12]
Martin DeCaro
So why was protectionism? I don't want to Say, popular, although it probably was popular in the 1920s. Why was it so deeply ingrained into the thinking of both parties? There are Republicans and Democrats who wanted to raise tariffs again in the 1920s. What was going on there as far as economic outlook or ideology goes?
- [17:30]
Phil Magness
So you have the aftermath of World War I, and what's really setting the stage for this is we actually had a very large tariff liberalization, the first one in the better part of half a century that occurred in 1913. And this is what that original tax swap from the tariff system over to the income tax system imposed. An income tax transferred the revenue mechanism over, and they cut tariffs in 1913. And you can see that in some of the data, there's a very pronounced decline in the average tariff rate between 1913 and about 1920, while the revenue function shifts over to the income tax completely. By the end of World War I, they discovered much more productive in yielding revenue for the government. But at the end of the war, there are sudden shocks to international prices caused by the fact that the war itself has ended. We find that we have a huge surplus of shipping that had been built specifically for the war purpose. Europe starts resuming its agriculture production. Stuff that had been completely disrupted by the fact that armies are marching across the fields where they usually grew things. So that changes the international food supply chains and demands for goods. There's rebuilding, and there's also industry that's starting to take off. In particular, electrification is a major one. Also the advent of the automobile as a mass means of transit, replacing horses. This also changes both industrial needs for products and it changes the food equation. You no longer need grain to feed all of your horses. You need gasoline to run your automobile. It's a very transformative moment. Some of these shocks that take place after the war have very acute effects on certain sectors of industry.
- [19:17]
Martin DeCaro
Agriculture.
- [19:18]
Phil Magness
Well, let's talk about agriculture in particular.
- [19:20]
Martin DeCaro
Yeah, we'll talk about industrial production in a second. Or maybe technology, if you will. But agriculture. Right. So World War I was a boon to American farmers. As you say, Europe is supplying armies. Yeah. Destroyed by war. And American farmers were able to sell their surpluses or whatever to Europe. But then after the war, prices collapse because European agriculture comes back online. So then I guess in those days, the natural thing to do was to, okay, well, we can't be flooded with cheap agricultural imports from Europe. We have to raise tariffs to protect American farmers. Is that basically the thinking?
- [19:53]
Phil Magness
It comes from an older economic philosophy. And the interesting thing about it is it had never been tested. It in an extreme, with one or two exceptions. We have to go back to the tariff of abominations in 1828 to find anything extremely severe protectionism being imposed.
- [20:10]
Martin DeCaro
That's my favorite name ever for a tariff, by the way, the Tariff of Abominations. Go ahead. You were saying?
- [20:16]
Phil Magness
Yeah. So what happens in 1922? There's essentially a micro recession emerging, especially in the agriculture sector. And this is both in food products and then raw materials that come out of agriculture caused by the aftermath of the war and some other structural issues in the economy. And when they come together, they adopt the Fordney McCumber tariff. This is also. Republicans have taken control of Congress and the presidency as well. And the Republicans were the more protectionist of the two major parties at the time. So you also get that ideological change from just who happens to be in power at the moment. And the prescribed Republican response to recessions and depressions since at least the mid 19th century when the party formed, had been to use strategic tariffs. Now, what they do in Fordy McCumber is they actually reimpose rates that are pretty comparable to the Payne Aldrich Tariff act of 1909. And this is the one that was jettisoned when we instituted. Instituted the income tax system in 1913. So it was really kind of just swinging back to where the Republicans had been a couple decades earlier. Approximately the same average tariff level. They hovered around. I think it was 40% on average. Both of those tariffs are in the same ballpark. But the idea here is that this is a recessionary relief policy to bolster and prop up American products at the expense of the world.
- [21:41]
Martin DeCaro
In 1928, Herbert Hoover, who would win the election that year, on August 11th of 1928, he said, we in America today are near to the final triumph over poverty than ever before in the history of any land. Yeah, that didn't work out very well for him, obviously, But October of 1929, a little more than a year later, with Hoover now in the White House, we have the stock market crash. And the historian David M. Kennedy has said, you know, most people, they will date the start of the Great Depression to the crash of the stock market. But I think it's smarter to look at that as a symptom more than a cause.
- [22:18]
Phil Magness
Right, right.
- [22:18]
Martin DeCaro
But we'll say that the Great Depression starts getting underway in 1929, 1930. However, you know, we today understand its scale at least better than the people then. We understand its scale, its momentum, its duration better than the people who are alive then. Right. They struggled to grasp exactly what was happening to the global and the US Economy?
- [22:39]
Phil Magness
No one expected a decade long depression.
- [22:41]
Martin DeCaro
Yeah, but Hoover was, he wasn't a sit on his hands type person. He was an activist, progressive Republican president even before the stock market crash. He calls a special session of Congress after taking office where they start to debate raising tariffs again. Again, this is before the crash of autumn of 1929. We're talking early 29 special session of Congress. Why were they already talking about raising tariffs again?
- [23:07]
Phil Magness
There's a reflection on Fordney McCumber, this 1922 act. In many senses, the Republicans saw this as validation of their economic philosophy. We raised tariffs, the economy boomed. Therefore an additional tariff raise will actually have similar stimulus effects. So they had mistaken correlation for causality. The fact that Fording McCumber went underway with a period of relative economic prosperity doesn't necessarily mean that that's the cause of the prosperity, but it was interpreted that way.
- [23:39]
Martin DeCaro
That's interesting because the 1920s were a pretty good decade economically, but not for farmers. There was an agricultural depression.
- [23:46]
Phil Magness
It's an internal micro recession in one sector.
- [23:51]
Martin DeCaro
Are you calling it a micro recession? Some have said it's an agricultural depression. Whatever it was, it was not good for farming.
- [23:58]
Phil Magness
And you have interesting dynamics because if you actually read some of the farm literature that's coming out in the mid-1920s, they view Fortnitecumber as a failure. They think that. And here's the interesting dynamic is America, even when the farm economy was struggling in some sectors, we still tended to be a very heavy agricultural exporter at that time. American food grains in particular do very well on the international market in that era. And many of those years we end up being a net food exporter. And as a result of that, they view the tariff, they start to realize something that we now refer to, economists now refer to as the symmetry effect of the tariff. And that is if you raise tariffs on imports, what's the natural thing of domestic sellers to do? They try to pass the tax hike onto their consumers, onto their buyers as much as they can. That generally works internally in the domestic economy, but it hits a wall when you get to exporters because exporters don't have that luxury. They can't dictate to the international market, hey, we just incurred this tax hike. Therefore you have to take our higher prices. They're still at the throes of the international market. So exporters end up getting hit especially hard by the symmetry effects of the import tariff that's put in place. And you actually start to see some signs that they're implicitly realizing this in the agricultural sector in the mid to late 1920s.
- [25:26]
Martin DeCaro
I don't know enough about this period to say conclusively whether Smoot Hawley would have been passed had it not been for the stock market crash. But it seems. Seems like the crash gave further impetus to get a tariff hike passed in Congress because as I mentioned.
- [25:41]
Phil Magness
Absolutely, yeah.
- [25:42]
Martin DeCaro
They were already talking about this and it didn't really go anywhere. In 1929, the Smoot Hawley bill had been debated, but it wasn't passed. But then after the crash, why did. I mean, I guess from our perspective today, it just seems ridiculous that if you're in a depression that you would raise barriers to commerce. Right. But that's what they did.
- [25:59]
Phil Magness
The dynamics of the politics and the posturing that occurred at that time involved the U.S. senate. So the House, being a majoritarian body, tended to be very favorable to localized protectionist interests. It was not hard to get a tariff passed in the House of representatives. Whether in 1930, whether in 1922, 1909, you go back over and over again. It always passes the House with ease. The Senate is where you actually had a closer contest. And I think Smoot Hawley, eventually it only passes by like three or four votes in the Senate because there are multiple factions. The Democrats tend to be more anti tariff and more free trade, with a few smaller caveats. Republicans tend to be more pro tariff, but there's always a Republican moderate faction. That's the swing block in the Senate in the years that Republicans had the majority. It's true in 1909, it was true again in 1929, 1930. What essentially happens is you had this tariff bill that had been evolving to some degree in the House of Representatives, and it seemed like it was progressing, although it was actually much more narrow than what eventually emerged out of committees after the stock market crash. The stock market crash causes a panic among policymakers. And at the time, some of the dominant economic philosophy said, well, this is what you did in response to a recession or a depression. It's what the Republicans advocated doing, going all the way back to the panic of 1857. Their response to that was a terrorist stimulus bill. So they thought that this was like the tried and true things to do. You can read some of the speeches in the House and the Senate, and they are calling upon the economic philosophy of Henry Clay to salvage us from this stock market crash.
- [27:42]
Martin DeCaro
Intellectual constraints of the time. I want to talk about that now, just for a bit before we return to the chronology here and how we eventually get Smoot Hawley, which was applied to industrial or manufactured goods as well. Really wasn't supposed to be that at first. These intellectual constraints, old ideas, Hoover and even FDR were constrained by these ideas. There was something called the mature economy thesis. What's the mature economy thesis? How did that impact on this debate about tariffs?
- [28:10]
Phil Magness
It pertains to how countries see their place, their current place in the evolution of economic development. And the notion here is that a very primitive economy will grow at a very rapid rate later when we introduce measures like GDP. This is 5, 6, 10% GDP growth in a year. It's pretty astounding when you see it happening, but you're starting from a very low base. The idea here is that as countries industrialize and develop and become more advanced economies, they settle into a more stable pattern or rate of growth. And then the policy dimensions of that, or what do you do around the margins to keep that growth generally going in an upward trajectory or to counteract anything that would imperil it. But at the same time, you weren't looking to jolt an economy into massive levels of expansion that you would have in an earlier stage of development, for.
- [29:04]
Martin DeCaro
Example, growth for growth sake. That's the credo today. In those days, that idea, you know, the mature economy, you had already reached the plateau of your industrial development. So be happy with prosperity and fine tune it. Fine tune that prosperity, not unbridled growth year over year over year. There was also another idea, and that's when times get tough, you tighten your belts. I mean, FDR was not a profligate spender. For all the talk about the New Deal did expand the scope and power of the federal government. We get all these new executive orders and new government agencies. But FDR wanted to balance a budget too.
- [29:39]
Phil Magness
Both him and Hoover are dealing with that constraint. In that era, like the general economic philosophy stated, future stability came about from signs that the full credit of the United States government was sound and solid in the international arena and domestically. And one of the indicators of sound credit for the government itself was the fact that it was spending within limits of what it took in. Even if it went into deficit in one year. It meant that you did other measures to try to catch up with that in a future year. So therefore you get both FDR and Herbert Hoover each successively raised the income tax rate. We think about this from modern economic theory. The one thing that I think, whether you're a Keynesian or a free market person or anything in between, the one thing they say not to do at the outset of a depression is to raise taxes. A contractionary fiscal policy. Well, guess what? Both Hoover and FDR did. They raised taxes and had a contractionary fiscal policy. And it doesn't make sense to us today. But it does in the context of a world in which the credit of the United States is dependent on its budget balancing.
- [30:47]
Martin DeCaro
Federal Reserve Board I know this is a favorite target of libertarian economists. The Federal Reserve Board in those days wasn't very helpful either. But understandable after the excessive commodification of credit or the freewheeling speculative days of the 1920s that they wanted to tighten monetary policy. But monetary policy did not help the situation.
- [31:07]
Phil Magness
And I think what it really comes down to, and this is some of the better work that you see on this is out of Milton Friedman and Anna Schwartz's assessment. The Federal Reserve reacts to the Great Depression almost unintentionally pursuing a course that's too tight. Contractionary monetary policy. They didn't understand the tools at their avail at the time and they went too far in the other direction. And it actually precipitates a very large contraction in the economy in the early months unfolding Great Depression Essentially like most of the economic literature, it says if there's any one single cause that we attribute the Great Depression to, it's not tariffs, it's not inequality, it's not the economy overheating. It's the fact that the Federal Reserve botched the monetary response in the early months of the Depression.
- [31:55]
Martin DeCaro
It was also a global event too. Have to take into event global factors. If you only look within the borders of the US for a cause or the most important cause. I don't know if you'll find the right answer. But I do agree monetary policy was not helpful here. This is really pre Keynes. I mean FDR was not really a full blooded Keynesian. And even when he starts spending more.
- [32:14]
Phil Magness
Money critical of a lot of what's happening in the New Deal.
- [32:17]
Martin DeCaro
Are you a Keynes guy?
- [32:19]
Phil Magness
So I study Keynes. I'm not a Keynesian. That's what I meant. I find him interesting and insightful thinker in this period. Now Keynes publishes his famous book the General Theory in 1936. So it's very much a product of the fact that this depression has been raging now for almost seven years.
- [32:36]
Martin DeCaro
When it comes out, FDR and Hoover did not have Keynesian theory at their disposal. When this nightmare descends on the country.
- [32:44]
Phil Magness
One of the other things that comes out of the 1920s at the outset of the Depression, one of the dominant ways of economic thinking about business Cycle effects. They referred to it as under consumption or overproduction theory, the idea that you're seeing collapses in price levels because people aren't spending enough or because producers are producing too much. Here's another dimension where, at least in the international arena, the tariff is purported to be a response to overproduction and under consumption. By building that wall around our borders, by reducing the number of goods coming in and by production propping up the price of a product internally, attempting to force price stability into place as a mechanism, a macroeconomic mechanism. Now we now know that doesn't work. Almost all economists have abandoned this particular philosophy in the decade since and as a response to it. But at least those are some of the views at the time that gained currency. And it helps to explain why would Congress do this? Or why would would Congress raise taxes at the outset of a depression? Which seems kind of like absurd to us today, but in that era that's the way that the thinking prescribed.
- [33:54]
Martin DeCaro
I have a lot of admiration for Franklin Roosevelt. In my view, he's the most consequential president of the 20th century, but he was pretty much economically illiterate. Yeah, Herbert Hoover was a brilliant technocrat, but he didn't get it either. In part because of what you just said. The intellectual tools available to policymakers and economists at the time were far more limited than they are today. I mean, we now know a little bit better at least how to handle a situation like this. Hoover doesn't really want to go along with this tariff bill, but he gets a couple of concessions that he thinks will help. He gets a tariff commission so he can then I mentioned this earlier, change the rate if it gets too high. That would also apply then to the inclusion of manufactured goods that made it onto the list of high tariff items. Hoover wanted to help farmers, but we wind up getting all these other products on the list.
- [34:49]
Phil Magness
We start to see the effects of interest group politics in Congress. The army of lobbyists descends on Washington D.C. and this is an old story. This is something that's happened many times before. In 1909, the Payne Aldrich revisions. They start with President Taft saying we need to tweak our tariff schedule to better attune it to the revenue system. Well, that opportunity opens the door to all sorts of industrial and agricultural interests descending on Washington, lobbying for particular carve outs for their home districts members in exchange for money votes. There are even reports of bribes changing hands on the floor of the Ways and Means Committee. And all of this just opens up like a free for all in 1930. So you already have this existing tariff bill. That was the occasion. Now everyone's trying to log roll all these different special provisions for their home district onto the bill. It essentially becomes an unconstrained, uncontrolled tariff schedule evolution to where you get this monstrosity of a bill in the protectionist vision of the Smoot Hawley tariff. So instead of 40 McCumber levels where the average tariff rate's about 40%, Smoot Hawley actually pushes it up to 59% as its peak average tariff rate.
- [36:06]
Martin DeCaro
59%. A 59% tax on imports. You know, though a Chicago economist, a future US Senator actually by the name of Paul Douglas, he drafted a letter and it was signed by a thousand economists, a petition telling Hoover to reject Smoot Hawley. What were they saying to him?
- [36:26]
Phil Magness
So this is the warning letter, and it's organized by leading economists across the country, across the ideological spectrum. And you had basically like the Harvard Econ Department is all on board with this letter. They write the president and they say, if you sign this bill, there are two or three things that are going to happen. First off, you're going to push us into an even deeper recession. We already have problems. This is not the way to handle it. Your theory of stimulus is wrong. The second major thing that they warn against is international retaliation. They say if you pass this bill, you are giving every other country in the world an excuse to put up their own tariff barriers against the United States. In effect, what you are ending up doing is actually harming the very same industries that you purport to be helping, because now they'll face a tougher export market abroad.
- [37:19]
Martin DeCaro
And that's really the key here. It's what other countries do.
- [37:22]
Phil Magness
Exactly.
- [37:22]
Martin DeCaro
Exactly. Yeah. I mean, global trade collapses after this, right?
- [37:26]
Phil Magness
Absolutely. And it's both the import and export trade in the United States kind of proving again the symmetry effect. Imports into the United States collapse after Smoot Hawley, but so do exports out of the United states. It's approximately 60% of export volume just disappears in the course of a couple years.
- [37:44]
Martin DeCaro
How dependent was the US Economy on imports, on trade in those days? Less than today. I'm assuming.
- [37:50]
Phil Magness
It's not like the huge driver of gdp, but it is, you know, it's a substantial segment of it, and it has repercussion effects into the internal market. So, for example, if you have agricultural dependence on at least having a customer base abroad, that's a big part of agricultural production, whether you have a high tariff or not. The United States was certainly in that space in the 1920s and 30s that we exported a lot of grains abroad. Now imagine all of a sudden that Europe is penalizing US Food product exports. Well, that comes home to hurt the domestic farmers who were already not in the greatest of place in the 1920s due to kind of like this internal micro recession in the agricultural economy. But now all of a sudden they're getting hit with tariffs on their own products in retaliation. That means you cannot make your mortgage payment and your neighbor cannot make his mortgage payments and the neighboring farm cannot make their mortgage payment. Next thing you know, you have bank runs that emerge in the agricultural Midwest and Western states.
- [38:53]
Martin DeCaro
CNBC.com actually just put out a really thorough article because Smoot Hawley, as I.
- [38:59]
Phil Magness
Mentioned, he's back in the news.
- [39:00]
Martin DeCaro
Yeah, as I mentioned at the top of the podcast, now everyone's starting to get used to the names of these two members of Congress who probably wish they had not attached their name to this tariff. So this cnbc article mentions 800 to 900 different types of goods were placed on the tariff lists, roughly 25% of all goods imported into the United States. It was excessively broad. And nine nations imposed retaliatory tariffs directed specifically at US Products. Argentina, Australia, Canada, Cuba, France, Italy, Mexico, Spain and Switzerland. Other nations formed trade blocs that excluded the US 35 governments lodged official protests against Smoot Hawley. And the result, according to this article, but we've been discussing this here, is global trade collapsed, exacerbating the Great Depression. U.S. exports to retaliating nations fell about 32%. Furthermore, nations that protested Smoot Hawley also reduced their U.S. imports by 15 to 23%. Not to bury people in statistics, but just to wrap up Smoot Hawley part of this conversation, so when does the tide start to turn? Does FDR start to liberalize trade during World War II or does this happen after the war?
- [40:17]
Phil Magness
It's actually a little bit before the war. Smoot Hawley is such a disaster, it contributes to the Republicans being thrown out of office in 1932. Of course, there are other reasons related to the Depression. So the Democrats come into power. FDR comes into the White House.
- [40:33]
Franklin D. Roosevelt
Values of Trump defense, fantastic levels. Taxes have risen. Our ability to pay has fallen. Government of all kinds is faced by serious curtailment of income. The means of exchange are frozen in the currents of trade. The withered leaves of industrial enterprise lie on every side.
- [40:55]
Phil Magness
And it's his Secretary of State, Cordell Hull, who is the main instrument here. So Hull is an old veteran on the Democratic side of the free trade debate. He had been one of the initial people that fought that Payne Aldrich act back in 1909. He's a young member of the House of Representatives, so he's a committed free trader. And he was opposed to essentially what became Smoot Hawley by the time that that is enacted in 1930. But he's the new Secretary of State, and he looks around at the landscape and he realizes that we have a real legislative crisis on hand. By then, everyone realized Smoot Hawley was not doing what it had promised to do. In fact, it had backfired. But to get a new bill through to repeal Smoot Hawley was going to be a next to politically impossible task. The reason being that the bill was basically a race to the legislative bottom. The senator from California would not agree to forego tariffs on goods that are in California first to appease the senator from Pennsylvania and vice versa. You basically had to get 100 people together in a room. I guess it's 96 people at that time together in a room to all agree to forego tariffs that benefited their states. The political task there, they looked at the landscape. So this is essentially impossible. So in 1934, what hall does is he proposes a flanking move. He says, I'm never going to convince you to give up your tariff, but I can convince you to give negotiating power to the executive branch. And what we'll do is we'll take it off your plate, and we will form agreements through diplomacy and other tactics like that with other countries that circumvent and work around the Smoot Hawley tariff. So you get the Reciprocal Trade act in 1934 is basically the starting point of what we see after World War II really take off the building block that leads to the General Agreement on Trade and tariffs in 1948. This is one of the Bretton woods institutions that comes into place after the war.
- [42:56]
Martin DeCaro
Now, the World Trade Organization, GATT General Agreement on Tariffs and Trade, and a Cato libertarian think tank, Cato Institute study found that the average tariff rate in the US in 1950 had dropped to about 5% from that 60% figure wherever it was you mentioned before that were meant to enhance revenue but also protect industries. I mean, it's still not entirely clear why they thought a gigantic tariff was going to be beneficial, but obviously it was not. So. So today. So today, as you know, Phil, your opponents will say, we're not going to redo Smoot Hawley. This is not Smoot Hawley.
- [43:33]
Phil Magness
Trump's own tariff policies are a Basket of contradictions. He doesn't seem to have a clear, coherent position on tariffs other than he likes them and thinks that they're good. What we're seeing today that is kind of unprecedented in the past 90 years or so is the sweeping scope of the attempts to use presidential power in the opposite direction of what Cordell hall secured. And it was originally contemplated to be on specific products. So they carved out all these exceptions. So one category, they say, is dumping. Anti dumping. If there's material injury to a specific industry, the President has the authority to come in and put in a temporary tariff to relieve that injury. There's also national security exemptions. There's an exemption for an industry or sector wide. It's called the escape clause. These are carve outs that were built into all of these sessions that came after presidential prerogative became the dominant way to do trade policy and tariffs. What Trump has started to do is rather than make the narrow, isolated case for specific industry tariffs, he's saying, I'm going to invoke emergency powers and declare 25% tariffs on all goods from Mexico, 25% tariffs on all goods from Canada. Doesn't matter what the category of good is. And this differs quite a bit from other presidents before him. So I use George W. Bush as a point of contrast. In 2003, Bush puts an escape clause tariff on the steel industry, but it's very narrow. It's very specific to that one industry. And it was probably an electoral ploy. He wanted to get Pennsylvania as a swing state. Bethlehem Steel was having some trouble and was donating to his campaign. So what did they do? They got a temporary tariff.
- [45:19]
Martin DeCaro
Is that because China was dumping cheap steel in the US Is that why Bush did that?
- [45:23]
Phil Magness
China it was. They even claimed some of the Japanese firms. They claimed pretty much anyone abroad was making cheaper steel, but it was narrow to that one industry.
- [45:33]
Martin DeCaro
They may not say it was dumping. They would probably just say they were exporting it here. But exactly, exactly.
- [45:39]
Phil Magness
There's a big WTO case that eventually rolls against the US but it's mooted because the tariffs have expired by then.
- [45:45]
Martin DeCaro
I did not know that. In his first term, Trump seemed to see tariffs not in some ideological economic program sense, but as a way of getting other countries to do what he wanted. A means to an end.
- [45:59]
Phil Magness
The leverage.
- [45:59]
Martin DeCaro
Yeah, leverage. I don't know if that's changed. I think there are people around him today who do see tariffs, or at least people who are pushing the tariff idea in. There's that one publication, Compact Magazine, the National conservative. Yeah, yeah, yeah. But in his first term, he wanted to strike a deal with China for something. Right. The revenue from the tariffs actually had to go, and I got this from the Council on Foreign Relations, had to go to US Farmers who had been crushed because they lost markets in China. So they couldn't find $61 billion. People forget about this. $61 billion had to go to subsidizing US farmers who lost the Chinese market. I mean, the tariffs in that sense did not work.
- [46:41]
Phil Magness
Right? A mutual destruction that occurs. I mean, it's like blockading yourself and blockading your enemy at the same time.
- [46:49]
Martin DeCaro
So I know there are these national conservatives, and I can't say I'm entirely familiar with their program, whether they would support tariffs against Canada and Mexico, who are two of the top trading partners of the US in the the world, along with China. They might say Canada has already has high tariffs on us on US Imports like dairy. Right.
- [47:06]
Phil Magness
They'll point to very narrow, isolated tariffs and a lot of the agricultural ones. There are weird reasons baked into that, especially with Canada and Britain, that they claim it relates to food preparation differences. And Britain, of course, had the mad cow disease scare. So they're extremely sensitive around those issues and narrowly protectionist. But then you get someone like Trump saying, okay, well, here's the answer. Anything and everything that crosses the border.
- [47:29]
Martin DeCaro
25% in the era of supply chains. Someone pointed out to me the other day that with, like, say, automobile manufacturing, there's a good deal of American auto manufacturers who have some of their plants in Mexico, some of the cars built here in the United States, and that the parts pass the border, across the border back and forth several times during the process of making an automobile. I'm not entirely sure how it works, but this is what I was told. So then the tariff would have to be paid multiple times. I mean, I guess my point here is this is not the 19th century.
- [48:02]
Phil Magness
Exactly.
- [48:03]
Martin DeCaro
It seems like a 25% tariff would be a disaster.
- [48:07]
Phil Magness
We're at a very different type of international economy, a globally integrated one that has large supply chain transfers across borders multiple times during the production process. Not just automobiles. You get everything like electronics. My cell phone here has parts in it from all over the world. Do I count that as a US Product? Do I count that as an import? I can't even give you an answer on that because it has so many different components in it.
- [48:33]
Martin DeCaro
Apple and Walmart have sophisticated supply chains in China.
- [48:37]
Phil Magness
This is where the real risk is if Trump carries through on any of these types of tariffs, its consumers are probably going to be bearing most of the cost first.
- [48:46]
Donald Trump
So the failed American trade policies have led our once incredible United States steel and aluminum industries. Once incredible? It's once incredible. They're not now. But they're, they're not bad. I saved them because of my first term. Totally saved them. If I didn't do what I did, I put massive tariffs, not the highest level, but pretty, pretty massive tariffs. We got we took in a lot of money and we took in a lot of jobs, but we were being pummeled by both friend and foe alike. Our nation requires steel and aluminum to be made in America, not in foreign lands. We need to create in order to protect our country's future resurgence of US Manufacturing and production, the likes of which has not been seen for many decades.
- [49:35]
Martin DeCaro
On the next episode of History as It Happens, historian Joseph Ellis will return to discuss civic virtue in government, 18th century to present. That is next, as we report History as it Happens. New episodes every Tuesday and Friday. My newsletter every Friday. Sign up@historyasithappens.com.