The Smoot-Hawley Tariff Debacle in 1930

On June 17, 1930, President Herbert Hoover signed a law that was meant to avoid a nationwide depression, but instead created one. The Smoot-Hawley Tariff Act boosted already high tariffs by 50 to 100 percent, to their highest levels in history, on virtually every American product that faced competition from abroad. Supporters confidently expected the act to fix the economic problems that had resulted from the previous autumn’s stock market crash. As the Senate’s Republican majority leader said during debate, “Within a year, . . . we shall have regained the peak of prosperity.”

Tariffs transfer wealth from consumers and unprotected industries to protected ones, with a net loss to the economy as a whole. Valid political reasons may sometimes exist for the wealth transfer, but it must be narrowly based to accomplish anything. The more goods included, the less effective a tariff becomes, since the overall losses add up, while the benefits to particular groups cancel each other out. Indeed, when Hoover first proposed a tariff hike, during the 1928 presidential election, he restricted it to agriculture. In 1929, however, as the economy started looking shaky, more industries clamored for protection, and after the Crash in October, it turned into a free-for-all.

Economists protested strongly, but, as the stampede toward protectionism accelerated, everyone lobbied for high tariff rates on the things they sold and low ones on the things they bought. After a year of horse-trading, supporters finally worked out a patchwork of compromises that squeaked through the Senate by 44 votes to 42 and passed the House by 222 to 153. The tougher time the bill faced in the rural-dominated Senate shows that Hoover’s original purpose, of helping farmers plagued by over-production, had been displaced by a general move to industrial protectionism.

Even by itself, a high tariff would have been harmful, especially at such a critical moment. But its effects became much worse when other nations responded with increases of their own. Switzerland, for example - where watchmaking for export was a major industry - imposed tariffs and quotas on American cars, machinery, produce, oil, coal, and many other items. By 1932, Swiss exports to the United States had dropped 55 percent from 1929, and American exports to Switzerland had dropped 45 percent. The story repeated itself worldwide. As each nation moved away from the things it was best at, a slumping global economy only got worse. Not until Hoover’s successor, Franklin Roosevelt, began slowly peeling away quotas did world trade start to recover.