Smoot-Hawley Tariff Effects

This article describes the Smoot-Hawley tariff effects. The notorious Smoot-Hawley Tariff was originally intended to provide tariff protection for American agriculture, but it turned out that there was no politically feasible way to limit that protection to one sector of the economy. Pressure groups from countless industries descended upon Washington to argue for tariff protection. Virtually all American economists united in urging Hoover to veto Smoot-Hawley, but Hoover ignored them all and signed it into law in June 1930. It raised tariffs an average of 59 percent on more than 25,000 items.

Smoot-Hawley Tariff Effects

The tariff hit American export industries hard. America’s trading partners inevitably retaliated when their products were shut out of U.S. markets. For instance, the Italian government responded by doubling its tariffs on American cars—whereupon American automobile sales in Italy fell by 90 percent. The French practically shut American products out of their country altogether. Spain retaliated by raising tariffs on American cars to a level that practically guaranteed that no American cars would be sold there.

There were other tax increases—lots of them. In December 1931 Andrew Mellon, who championed lower tax rates in the 1920s, suddenly did an about-face and wanted a massive tax increase. Congress and the president listened, and the result was the disastrous Revenue Act of 1932. It was the largest peacetime tax increase in United States history up to that point. Income tax rates were increased dramatically and surtaxes on the highest incomes soared from 25 to 63 percent. This meant that in the midst of the Depression, when private investment was desperately needed, it was made much less attractive.

President Herbert Hoover’s agricultural policy was another disaster. Since the end of World War I, farmers had argued for government assistance of one kind or another, including help to prop up farm prices. (Translation: The farmers wanted the government to make food and clothing more expensive for everyone in order to benefit themselves.) Farmers were having problems making a living because there were too many of them—far more than made any economic sense. The American agricultural sector had expanded dramatically during World War I when production in Europe had been disrupted. With the war over, it was unreasonable to expect that America’s bloated agricultural sector could remain the same size. People and resources had to be shifted to industries that produced goods that Americans really needed.

Farm Subsidies History

Hoover established a Federal Farm Board (FFB) to improve the lot of American farmers. The FFB made loans to farm cooperatives so that farmers could keep their crops, particularly wheat and cotton, off the market until their prices rose. Whenever this approach did manage to get prices up, however, farmers gleefully produced more the following year, making the surplus problem even worse. Eventually, the Farm Board authorized, through its Grain Stabilization Corporation, massive purchases of wheat from American farmers at prices well above the world price. Farmers thus sold their wheat to the Grain Stabilization Corporation instead of exporting it. Government farm bureaucrats were sure that by keeping American wheat off the world market, a world shortage of wheat would ensue and foreigners would soon be begging for American wheat. Instead, Canadian and Argentinean wheat producers grabbed America’s share of the world market.

Federal bureaucrats were in fact able to raise the grain price for a brief period, but the huge surpluses, bought up by the government, depressed prices even more since the world knew they would eventually be dumped on the world market. The British economist Lionel Robbins observed several years later: “The grandiose buying organizations by which Hoover tried to maintain agricultural prices had the effect of demoralizing markets altogether, by the accumulation of stocks and the creation of uncertainty.”

Given this problem, some government officials were honest enough to admit that for a program like this to work, strict limits would have to be imposed on how much farmers would be allowed to produce. Requests that farmers voluntarily cut back their acreage of wheat and cotton fell on deaf ears. Desperate to increase prices, the FFB’s chairman went so far as to call upon state governors to “induce immediate plowing under every third row of cotton now growing.”