Smoot-Hawley Tariff Act (1930)

Adam P. Plant

Many people reading this entry might know the following and no more about the Smoot-Hawley Tariff Act (P.L. 71-361, 46 Stat. 590):

Economics teacher: In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the ... Anyone? Anyone? ... the Great Depression, passed the ... Anyone? Anyone? The tariff bill? The Smoot-Hawley Tariff Act? Which, anyone? Raised or lowered? ... raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression. Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President [George H. W.] Bush called this in 1980? Anyone? Something-d-o-o economics. "Voodoo" economics.

Ah, yes, those lines delivered to a deeply disinterested high school class occur in one of the most memorable scenes in coming-of-age-film history. But what was not covered by actor Ben Stein—a speechwriter (under President Richard M. Nixon) turned comedian and actor—in that economics lecture? What else can this entry teach us about the economic climate surrounding the Smoot-Hawley Tariff Act that the film Ferris Bueller's Day Off (1986) did not? Anyone? Anyone? We will soon see.

The most important thing to know about the economic climate that spawned the Smoot-Hawley Tariff Act (and the other tariff bills that came before it) is this: in the days in which those acts were written, April 15 had much less significance than it does today. Federal income taxes, though authorized by the Sixteenth Amendment to the Constitution, were much lower and barely affected most Americans.

THE BASICS OF TARIFFS AND TRADE IN AMERICAN HISTORY

Tariffs had been a major topic of U.S. economic policy since 1789, when President George Washington's administration used a tariff to raise revenue to help fund the new national government. However, tariffs were used for other reasons as well. Sometimes the U.S. government placed tariffs on certain finished goods or raw materials to gain an economic advantage over foreign nations that sent a lot of goods to America. It also used these "protective tariffs" to keep foreign industries (for example, the English iron industry) from outselling and driving out of business comparable American industries (like the American iron and steel industry) because the foreign industry was either more established, had a better product, or sell their product at a cheaper price than could its American counterpart. The use of protective tariffs was a divisive issue to many Americans, such as those in the South, who sold agricultural goods or raw materials to overseas industries that would make the finished products. In fact, at times foreign nations who traded with America but were hurt by the use of these tariffs would enact their own tariffs on American goods sold in their country, therefore making the American goods more expensive abroad and less likely to be purchased.

So, tariffs could either be for revenue, trade, or protectionist purposes. In the economic climate of the late 1800s and early 1900s, the tariff issue came to a head in American politics.

PREDECESSORS TO THE ACT

In the 1890s following the Civil War, the nation was in a period of rapid growth. It went from thirty-five states in 1867 to forty-eight states in 1912, and with the growing national government came the responsibility for funding that government. America was just beginning to industrialize to a level where it could compete with other nations, however, it was not a leader in commercial production. The 1890s were still a period dominated by the United Kingdom and France. At the time, the British empire stretched over most of the world. The United States was still relatively young.

It was under these conditions that the McKinley Tariff was passed in 1890. In the presidential election of 1888, Republican Benjamin Harrison defeated Democrat Grover Cleveland, who had supported free trade (trade among nations without tariff restrictions). President Harrison's administration believed that American industries needed protection, so they wanted to pass protective tariffs. In fact, protectionist economic policies became the foundation of the Republican Party's economic outlook for the next two decades. The McKinley Tariff was the first in a string of tariff-raising bills that would set U.S. economic policy. It raised the tariff rate to a record high of 48 percent. It also set off a trend of American trading partners passing tariffs of their own in retaliation for the McKinley Tariff's passage.

The second major tariff passed during that era was the Payne-Aldrich Tariff. This bill, passed in 1909 by a Republican-controlled Congress, attempted to lower the average tariff rate paid on imported goods. However, the act caused little real change in the economic landscape of the United States. Politically, it angered progressive Democrats who had begun to gain some national prominence.

With Congress was so closely divided between the Democrats and Republicans, the Democrats were able to secure the proposal of the Sixteenth Amendment to the U.S. Constitution on July 12, 1909, in exchange for the Payne-Aldrich bill's passing. The Sixteenth Amendment was ratified on February 3, 1913, and created the federal income tax, giving the U.S. government an alternative manner in which they could fund the federal government. The United States then became less reliant on the income tariffs produced. At last, the Democrats had gained a foothold in developing the economic policies of the United States.

The final important precursor to the Smoot-Hawley Act was the Underwood-Simmons Tariff, which was passed in 1913 shortly after the Sixteenth Amendment was ratified. President Woodrow Wilson, who would lead the American people through World War I, was still in the early days of his first term. He appeared before a joint session of Congress, a rare occurrence, to make known his support for reforming U.S. tariff policies. Sponsored by Representative Oscar Underwood of Alabama in the House of Representatives and Senator F. M. Simmons of North Carolina in the Senate, the two legislators for whom the bill was named, this effort at tariff reduction eliminated tariffs on many goods, such as linens, iron, farm equipment, foods, and raw materials. Yet the effects of this legislation were largely unnoticed because, shortly after its passage, the world was thrown into World War I. International trade was hampered by aggressive military action taken by Germany, and the level of imported and exported goods dropped off significantly.

POSTWAR ECONOMICS AND THE GREAT DEPRESSION

The immediate economic boom right after World War I led to high expectations that were unrealized once the postwar economy returned to normal. Further, the policies passed during the 1920s reflected the Republican Party's belief that it was best to allow industry to drive the country as an economic engine. Congress passed bills setting low taxes on income and investment and establishing policies unfavorable toward international trade. However, a massive crisis unfolded that would severely hamper the nation's economy. In October of 1929 the stock market crashed, sending the country toward the Great Depression. Many major industries lost money in the market's crash, and workers at all levels were hurt either by the loss of their savings or their jobs. By 1932 almost one-quarter of Americans were unemployed.

It was in the middle of this rapidly deteriorating economic situation that the Smoot-Hawley Tariff Act was passed. The country sank deeper into the Great Depression because of the poor economic climate created in the 1920s, high unemployment rates, and other nations that enacted their own protectionist trade measures in retribution.

See also: Tariff Act of 1789.

BIBLIOGRAPHY

Bartlett, Bruce. "The Truth About Trade in History."<http://www.freetrade.org>.

United States Information Agency. "An Outline of American History: Chapter Nine: War, Prosperity, and Depression."<http://www.usis.usemb.se/usis/history/chapter9.html>.

Tax Freedom Day

"Tax Freedom Day" is the name given by the nonprofit Tax Foundation to the day that the average U.S. citizen has earned enough income to cover his or her taxes for the year. The Tax Foundation begins with government figures of all federal, state, and local taxes collected, including payroll taxes, sales taxes, property taxes, and corporate taxes (which are ultimately paid by the consumer). To calculate the average tax burden, this number is divided by the government's figures for total income earned in that year. Between 1990 and 2003, the average taxpayer worked between 109 and 120 days to pay taxes in any given year. In 2003, Tax Freedom Day was expected to fall on April 19th, or 109 days into the year.

The Laffer Curve and Voodoo Economics

At a party in the late 1970s—or so the story goes—economist Arthur Laffer used a cocktail napkin to sketch an upside-down U that became the basis for an entire movement in economic policy. The Laffer Curve, as the U came to be known, represented the theory that as taxes went down, government revenue would actually go up, as lower taxes would stimulate the economy and provide more receipts. Laffer's theory was adopted as part of Ronald Reagan's platform in his 1980 presidential campaign, and after he became president, Reagan pushed through the largest package of tax cuts in history. Counter to his expectations, the deficit mushroomed, and Laffer's theory was discredited. While most scholars agreed that a budget deficit would grow by slightly less than the full amount of a tax cut, because some economic growth would result, credible economists from across the political spectrum agreed that the net effect would be negative. During the 1980 presidential primaries, Reagan's opponent George H. W. Bush had ridiculed his theories as "voodoo economics." Twenty years later, Bush's son, President George W. Bush, promoted another package of enormous tax cuts, arguing that they would stimulate the economy, government receipts would increase, and the budget gap would be closed. Bush's detractors, who viewed the maneuver as blatant pandering to wealthy constituents, called it voodoo economics all over again.

SMOOT-HAWLEY TARIFF ACT

Reed Smoot and Willis Hawley were members of the U.S. Congress, who introduced a bill known as the Smoot-Hawley Tariff of 1930. This tariff (a tax on foreign imports) came to be synonymous with a major public policy blunder and failure. Smoot-Hawley was signed into law by President Herbert Hoover (1929–1933) after the stock market crash of 1929. Some historians argue that the tariff was so high that it created unprecedented foreign retaliation against the United States. According to this view, Smoot-Hawley helped convert what would have been a normal economic downturn in the U.S. economy into a major worldwide depression, the Great Depression (1929–1939).

The creation of the Smoot-Hawley Tariff presumably did the following: create the highest tariff rates in U.S. history, frighten the stock market, deepen the Great Depression (by reducing the foreign goods available to U.S. consumers), outrage foreign governments into retaliation, and create an open trade war in the midst of economic depression. On the other hand, there are scholars who argue that there is no compelling evidence that this tariff made the Depression worse. Several of them have even suggested that Smoot-Hawley has become a scapegoat for explaining the extended misery of the Depression. But, regardless of its effect in 1930, the Smoot-Hawley Tariff became a metaphor for underestimating the importance of the nation international trade policies.

See also: Great Depression (Economic Causes of), Tariff