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Protectionism Didn’t Cause the Great Depression

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This is a repost of an article originally printed in The Huffington Post on April 6, 2010.

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by Ian Fletcher | October 26, 2011 | The Huffington Post

Protectionism Didn’t Cause the Great Depression

The debate over free trade is riddled with myth after myth. One that keeps resurfacing again and again, no matter how many times it is discredited, is the idea that protectionism caused the Great Depression. One occasionally even hears that the same protectionism — specifically the Smoot-Hawley tariff of 1930 — was responsible in significant part for World War Two! This is nonsense dreamed up for propaganda purposes by free traders, and can easily be debunked.

Let’s start by reminding ourselves of a basic fact: the Depression’s cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, piling up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a Depression. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of our GDP. One point three percent! America’s average tariff on goods subject to tariff went from 44.6 to 53.2 percent–not a very big jump at all. America’s tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases.

If Smoot-Hawley had caused a global trade disaster, it would necessarily have been by triggering a sharp decline in American imports of goods subject to the increased tariff. Did this happen? The data say no. In the words of economic historian, former member of the U.S. International Trade Commission, and avowed free trader Prof. Alfred E. Eckes,

Official data show that higher U.S. tariffs had little impact on American imports. From 1929 to 1932, imports of dutiable and duty-free goods fell almost the same percentage, suggesting that higher tariffs had little impact on most trading partners… The sharpest drop in exports involved commodity-exporting countries, including some like Brazil, largely unaffected by higher U.S. tariffs.

World trade did indeed decline, but this was due to the Depression itself, not higher American tariffs. This is no surprise, as declines in the values of the currencies of America’s major trading partners wiped away much of the effect of the tariff anyway.

In light of the facts noted above, it is, in fact, true that just about every serious economist or economic historian — as opposed to the ideologues of the editorial pages or the think tanks — who has examined this question in detail has come to the same conclusion. This is not a liberal vs. conservative issue, either: famous economists who have denied that Smoot-Hawley caused the Depression range from Milton Friedman on the right to Paul Krugman on the left.

The same fact can be ascertained by looking at Smoot-Hawley’s impact on the world economy at large. As the economic historian (and free trader) William Bernstein puts it in his book A Splendid Exchange: How Trade Shaped the World,

Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount — 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP — nowhere near the 17 percent falloff seen during the Great Depression… The inescapable conclusion: contrary to public perception, Smoot-Hawley did not cause, or even significantly deepen, the Great Depression.

The oft-bandied idea that Smoot-Hawley started a global trade war of endless cycles of tit-for-tat retaliation is also mythical. According to the official State Department report on this very question in 1931:

With the exception of discriminations in France, the extent of discrimination against American commerce is very slight…By far the largest number of countries do not discriminate against the commerce of the United States in any way.

That is to say, foreign nations did indeed raise their tariffs after the passage of Smoot, but this was a broad-brush response to the Depression itself, aimed at all other foreign nations without distinction, not a retaliation against the U.S. for its own tariff. The doom-loop of spiraling tit-for-tat retaliation between trading partners that paralyses free traders with fear today simply did not happen.

The myth of Smoot-Hawley continues to poison U.S. policymaking even today, as it renders the U.S. government fearful of retaliating against problems like Chinese currency manipulation. But hopefully, the present controversy over free trade will eventually provoke enough public debate that this hoary myth can finally be put to bed forever. For a more detailed discussion of these issues, please see Chapter Six of my book Free Trade Doesn’t Work: What Should Replace It and Why.

18 Responses to “Protectionism Didn’t Cause the Great Depression”

  1. When will they bring back our industries?We have lost Textiles,high tech,steel,they,the govn’t of the United States have slowly taken apart our economy as a whole and shiped it to slave wage countries for their future prosperity while we who have worked so hard to have the benifits of our labor for our families are now bankrupt!What happen to Obama,saying the man that worked on that machine for 20 years, now has to brake it down and ship it overseas then go home and tell his family he is a failure!!!!! We are going to help HIM,He said!I have prayed for a turn,and this is a turn for the worst.How do we sue this govn’t for recking our lives?

    • Bob Hall says:

      Mr. Crudello,

      There is only one political party in America: Money.
      Democrats and Republicans feed at the same trough. Our political campaigns are funded by, and our economic policy is written by, offshore producers. They’re projected to spend $6 – $7 billion on Campaign 2012 — all this just to buy our votes.

      Yes, we own the votes. You and me. So let’s stop spending our hard-earned votes on Big Money’s hand-picked candidates. We have to start voting for — and actively promoting — nonpartisans with no ties to big money.

      If enough people vote for the sure loser, the sure loser becomes the winner.

      Then we all win.

      Bob Hall

      • Mike Lamb says:

        Bob Hall I agree with you 110%! Too bad 95% of Americans think this is a high school “most popular” contest and vote for who ever “looks best.” I hate if for the other 5% of us that are awake and sober, but that’s just how it is. America was the only free republic in over 6000 years of recorded history, but the republic is dead and now we live under a banking cartel dictatorship. RIP America. The whole world misses you already. God help us.

        • Bob Hall says:

          Thanks much, Mike Lamb. I can understand your despair, but we’ve been in tight spots before and “awake-and-sober” people like you and me and CPA saved the day. I do think we waste too much time with people who already agree with us. Imagine what we could accomplish if we spent that time on the unenlightened. If everyone on our side changed just one mind–one vote–once a month until November 2012, our troubles could be over.

      • MK says:

        Actually, we don’t own the votes. I strongly suggest that all of you who cannot understand what has happened do a couple of things:

        One, visit blackbox voting as well as Bradblog and learn about the RIGGED electronic voting machines. Both the scanners and the paperless voting machines can be easily reprogrammed to flip votes, lose votes etc. and EVIDENTLY they have been. That’s right. Our elections have been being stolen for quite some time.
        PUSH for paper ballots and open vote counts. That will stop some of this mess.

        Two, support the Occupy wallstreet and other protests against the bankster greed that has caused all of this. We need Glass Steagall reinstated and we need to commodity modernization act repealed.

        Three, we need to push for the prosecution of everybody involved in the corruption including past and current US Presidents, banksters and industrialists like Richard Scaife and the Koch brothers who funded all the conservative think tanks and the Federalist Society fascism of the last 40 years.

        I recommend reading John Dean’s book, Conservatives without a Conscience and David Brock’s book, Blinded by the Right.

        MK

        • Arthur Taylor says:

          I am in total agreement with MK on paper ballots. They should be reinstated immediately as they were the best way to enable a write in candidacy and they are hard to manipulate.

          I’m also in agreement on reinstating Glass Steagall and repealing the Commodities Futures Modernization Act. The current economic realities should show us that the idea of markets without rules and regulation is nonsense. That Wall Street will honorably police itself is a heroin fueled pipe dream with utterly no basis in reality.

          Have you ever noticed that almost every policy, be it trade policy or financial policy, which causes pain to all but the upper 5% was signed by Bill Clinton? In my opinion Benedict Arnold was the better of the two.

          • Hugh Campbell says:

            Obama was short-sighted appointing so many Clintonites. Seriously, which of the Clinton wanted Obama to be a successful President?

  2. GOPNYC says:

    The last guy who tried to do anythng about money in politics, John McCain, ended up being overshadowed by the “American Idol” candidate who, this year, will raise over a $1 billion in campaign contributions and who has easily been the most disengaged president in my lifetime.

    The American people get the government they deserve. In 2008, instead of buying the durable, reliable, Lionel train set, they went for the sparkly, shiny toy that that was new and that all the other kids liked. Three years later, the new toy they chose is broken and has been sitting in its box at 1600 Pennsylvania Avenue for over two and a half years.

    • Tom says:

      The problem with John McCain was that he had the progenitor of the financial crisis campaigning with him while running for president, Phil Gramm. This showed he knew nothing about the economic rules that keep our economy strong. Phil Gram’s wife was also on the board of Enron as well as IBP, who did their own economic fraud in the meats industry with a free pass handed out by our federal court system.

      There is too much money in politics and it is corrupting the structural rules needed for an economy to succeed for the interests of corporation’s profits.

      Our Supreme Court seems to have a blind eye towards it all any time the issue is brought up to them.

      Tom

      Tom

      • gopnyc says:

        That’s probably right, but McCain never pretended to be an economist or to have special expertise in economic matters — national security was his forte.

        Gramm, being an Economist (and the only one in the Senate) held particular sway over GOP economic policy. I don’t fault McCain for deferring to his presumed expertise. Hindsight is 20-20.

        • Arthur Taylor says:

          I think we really need to begin faulting those individuals who have the educational background yet lack the intelligence and judgement to foresee the long term implications of theory implementations the likes of the Gramm–Leach–Bliley Act (which repealed Glass-Steagall. If you look at McCain closely, you will see a guy that somehow manages to vote for the things that have hurt us and the U.S the most, time and time again.

          In the 2007 Republican debate in Dearborn, Michigan Oct 9, 2007, McCain said: “I’m a student of history. Every time the United States has become protectionist and listened to the siren song that you’re hearing partially on this stage tonight, we’ve paid a very heavy price. The Smoot-Hawley Tariff Acts in the 1930s were direct contributors to World War II. It sounds like a lot of fun to bash China and others, but free trade has been the engine of our economy. Free trade should be the continuing principle that guides this nation’s economy.”

          McCain voted for NAFTA, GATT, the WTO and PNTR for China. He voted to repeal Glass Steagall in 2000, but in 2009 said he wanted to reinstate it. He voted for the Commodities Futures Modernization Act in the Omnibus bill in 2000, which many believe to be one of the major causes of the sub-prime meltdown. McCain is neither smart nor good and he probably would have been worse than Obama as he actually believes Phil Gramm to be a very intelligent individual (the results have shown otherwise).

          • Hugh Campbell says:

            All the legislation that you mentioned violate Ronald Regan’s wisdom, namely, “Trust, but verify.” Stephen M.R. Covey’s book The Speed of Trust cautions against “Blind Trust” which he defines as a high propensity to trust and low analysis.

            Sacred Cows like free trade are fertile ground for trust bias, a high propensity to trust, and lack of verification, low analysis.

            To Summarize “Blind Trust” applied to trade results in Blind Trade.

      • MK says:

        Read the books above. Search the web for Sherman Skolnick’s coverage of the Supreme Court. Find out how corrupt they are. Ted Olson who was the lead attorney on the completely unconstitutional push to put Bush II in is a law partner to Antonin Scalia’s son. He is also a member of the Federalist Society which is a secretive pseudo-fascistic organization linked to the Bush family. Olson should have recused himself from that case, but he didn’t.

        They’re all criminals.

        MK

  3. GOPNYC says:

    Yes, MK. Wild, partisan, factually unsupportable conspiracy theories will absolutely win supporters to the CPA cause and help resolve legitimate trade issues, just like Oliver Stone helped uncover JFK’s “real” killer.

    How’s your pal Jesse Ventura these days?

    • Hugh Campbell says:

      If you want conspiracy theory, check out:

      http://en.wikipedia.org/wiki/Prescott_Bush

      Appeasement of Hitler

      Appeasement of China

      Same motivation ($$$)

      Different century

      • GOPNYC says:

        I’m well aware of the crimes of former Senator Bush. But he wasn’t in a position to do much in the way of policy. Ambassador Joseph Kennedy, on the other hand, was so deep into the Hitler camp that he lost a son (and nearly lost another) who was trying to wash the stench off the family reputation.

        • Hugh Campbell says:

          Regarding the 21st century appeasement of China, the ball is in the House leadership court. If only they would bring, to the floor, the same China currency bill, which:

          passed in September, 2010 by an 80+ majority

          has a majority of cosponsors in the 112th Congress

          then, they will force the President to either sign it or veto it.

          Until then, indications are that the TOP CHINA APPEASERS are among the House leadership.

          • GOPNYC says:

            Actually, that’s probably not so. Just three weeks ago, Treasury — once again — said it would delay making a decision to label China “a currency manipulator” until after “important economic meetings later this year”.

            Hogwash.

            When the March report was due, it was delayed, too. The Obama Administration slipped it into the news stream at 5:00PM or so the Friday before Memorial Day weekend. Nobody even noticed; it was reported by only a single news service.

            I’m sure the delay this time will cause Treasury to release the determination on, say, Christmas Eve at 4;59PM. And you can bet if they finally DO declare China to be a currency manipulator, it will be as an “October Surprise” on October 15, 2012, in a last gasp populist effort to garner votes for their failed Administration.

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