Smoot-Hawley, 1930: The Tariff That Closed World Markets

A Petition in the Morning Paper

On 5 May 1930 the New York Times printed a statement signed by 1,028 American economists asking President Herbert Hoover to veto the tariff bill then sitting in conference committee. The signatories came from 179 colleges and universities and included Irving Fisher of Yale, Frank Taussig of Harvard, and Paul Douglas of Chicago, who had organised the effort with Clair Wilcox of Swarthmore. Their statement ran to a few hundred words and made a compact case. Higher duties would raise the prices Americans paid, would do nothing for farmers whose problem was surplus rather than foreign competition, would injure the export industries that employed far more workers than the protected ones, and would invite retaliation at a moment when Europe owed the United States more dollars than it could earn.

"We are convinced that increased restrictive duties would be a mistake," the petition read. "They would operate, in general, to increase the prices which domestic consumers would have to pay. By raising prices they would encourage concerns with higher costs to undertake production, thus compelling the consumer to subsidize waste and inefficiency in industry."

Hoover signed the bill six weeks later, on 17 June 1930. Thomas W. Lamont, senior partner at J.P. Morgan & Co., left his own account of the lobbying: "I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff. That Act intensified nationalism all over the world." Within three years American exports had fallen by more than two-thirds, a dozen trading partners had raised their own walls, and Britain had abandoned eighty years of free trade.

A Farm Bill That Escaped Its Cage

What became the Tariff Act of 1930 started as a narrow promise. Agriculture had never recovered from the collapse in commodity prices after the First World War, when European farms came back into production and American wheat and cotton lost their wartime premium. Campaigning in 1928, Hoover pledged limited relief for farmers through higher duties on agricultural imports, and he called Congress into special session on 15 April 1929 to deliver it.

Congress delivered something else. Once the Ways and Means Committee under Willis C. Hawley of Oregon opened the schedules, every industry with a lobbyist arrived to ask for the same treatment the farmers were promised. Hearings filled some 20,000 pages of testimony. Manufacturers of chemicals, cement, cutlery, watches, and wool cloth explained why their own foreign competition was the exception that justified an increase. Logrolling did the rest: a member voting for another district's cement schedule expected a vote for his own district's crockery. By the time the House passed the bill on 28 May 1929, by 264 votes to 147, it touched more than 20,000 dutiable items and the agricultural provisions had become a minor part of a general revision upward.

Reed Smoot of Utah, chairman of the Senate Finance Committee and a Mormon apostle who had sat in the chamber since 1903, took it from there. The Senate fight lasted ten months. A coalition of Democrats and progressive Republicans stripped rates in the autumn of 1929 and restored some of them in the spring, and the bill finally passed on 24 March 1930 by 53 to 31. Conference took three more months, and the Senate adopted the conference report on 13 June 1930 by 44 votes to 42 — a two-vote margin for a law that would carry both men's names into a century of argument.

Hoover's private view of the schedules was poor and his public defence rested almost entirely on one provision. Section 336 gave the United States Tariff Commission authority, subject to presidential proclamation, to adjust individual rates up or down by as much as 50 per cent to equalise costs of production at home and abroad. He argued that this flexible mechanism would take rate-setting out of the hands of logrolling committees. In practice the commission used it sparingly and asymmetrically, and the statutory schedules stood.

The Trap Inside the Schedules

A detail of drafting mattered more than any single rate. Roughly two-thirds of the duties in the 1930 act were specific rather than ad valorem — so many cents per pound, per dozen, per square yard, rather than a percentage of invoice value. In stable prices the distinction is technical. In a deflation it is not.

American wholesale prices fell about 32 per cent between 1929 and 1932. A duty of ten cents a pound on a commodity worth fifty cents represented a 20 per cent levy in 1929; on the same commodity at twenty-five cents it represented 40 per cent, with no vote taken and no proclamation issued. Duties collected as a share of the value of dutiable imports, the standard measure, climbed from 40.1 per cent in 1929 to 44.9 per cent in 1930 and reached 59.1 per cent in 1932, the highest reading since the Civil War era.

Douglas Irwin has done the arithmetic of separating statute from deflation. His estimate puts the act's own contribution at roughly six percentage points on impact, lifting the average duty on dutiable goods from 40.1 per cent to about 47 per cent; the remaining climb to the 1932 peak came from falling prices acting on fixed cents-per-unit duties (Irwin, 2011). Congress had written a tariff whose severity increased automatically as the economy deteriorated, and the automatic tightening arrived in the same months as bank failures and the collapse of the Creditanstalt in Vienna.

One qualification belongs alongside those numbers. Dutiable goods were only about a third of American imports; the free list covered coffee, rubber, tin, silk, and most raw materials the country did not produce. Measured against all imports, the average duty peaked near 19.8 per cent in 1933. Imports themselves were about 4 per cent of American output. Whatever Smoot-Hawley did to the world, it did not do it through the direct arithmetic of the American import bill.

The Answer From Abroad

Retaliation began before the ink dried. Canada sent two-fifths of its exports to the United States and had watched the bill's progress with alarm for a year. Prime Minister Mackenzie King's budget of May 1930 imposed countervailing duties on sixteen products chosen to hit American exporters where they would notice. King lost the July election anyway to R.B. Bennett, who had campaigned on a blunter promise: "I will use them," he said of tariffs, "to blast a way into the markets that have been closed to you." Bennett raised Canadian duties again in September 1930 and widened preferences for British goods.

Britain's reversal was the largest. A country that had run on open trade since the repeal of the Corn Laws in 1846 passed the Import Duties Act in February 1932, imposing a general 10 per cent levy, and then convened the Imperial Economic Conference at Ottawa in July and August of that year to build a preferential bloc inside the Empire. Joseph M. Jones, writing while the wreckage was fresh, traced the sequence country by country and concluded that the American act had supplied both the occasion and the political cover for measures governments had wanted and had not dared to take (Jones, 1934).

Charles Kindleberger later drew the result as a spiral. Plotting the combined monthly imports of seventy-five countries from January 1929 inward, his diagram winds from roughly $3.0 billion a month down to about $1.0 billion by March 1933, each turn tighter than the last (Kindleberger, 1973). American trade tracked the spiral closely. Merchandise exports fell from $5.24 billion in 1929 to $1.61 billion in 1932; imports fell from $4.40 billion to $1.32 billion over the same three years.

How Much of It Was the Tariff

Blaming Smoot-Hawley for the Depression is an old habit and a poor fit with the evidence. Barry Eichengreen's analysis treats the act as a political economy event rather than a macroeconomic one, noting that its direct contractionary effect was modest and might even have been expansionary in a closed-economy sense by diverting spending toward domestic producers, while its damage ran through retaliation and through the pressure it put on debtor countries trying to earn dollars (Eichengreen, 1989). Those countries owed war debts and reparations that could only be serviced with export earnings, and the United States had just made earning them harder.

Quantitative estimates cluster in a modest range. Crucini and Kahn modelled the tariff war in a general-equilibrium framework and found output losses on the order of 2 per cent of American GNP, small against a decline of nearly 30 per cent, and not trivial either (Crucini and Kahn, 1996). Jakob Madsen, working on world trade volumes rather than American output, attributed about a third of the 1929–1932 contraction to tariff and non-tariff barriers, with income collapse and deflation explaining the rest (Madsen, 2001).

A separate claim concerns the stock market. Jude Wanniski argued in 1978 that the October 1929 crash was triggered by news of the tariff's progress through the Senate, pointing to the coalition votes of that month. Most historians who have tested the timing find the correlation weak and the causation implausible, though the bill was certainly one of the anxieties priced into a market already stretched by margin debt in the weeks before Black Tuesday. What the tariff did unambiguously was foreclose one route out of the slump. An economy shedding demand at home could not export its way toward recovery through markets that were closing in response to its own law.

Voters reached their own verdict quickly. Hawley lost the Oregon Republican primary in May 1932 to James W. Mott. Smoot, after thirty years in the Senate and a career that had made him one of the most powerful men in Washington, was beaten in November 1932 by Elbert D. Thomas, a University of Utah political scientist, in a margin that mirrored Hoover's own defeat.

Hull's Reversal

Franklin Roosevelt's Secretary of State, Cordell Hull of Tennessee, had spent two decades arguing that trade barriers and war were connected. "Unhampered trade dovetailed with peace," he wrote of his conviction; "high tariffs, trade barriers, and unfair economic competition, with war." His instrument was procedural rather than substantive, and that was the point.

The Reciprocal Trade Agreements Act, signed on 12 June 1934, did not repeal a single Smoot-Hawley rate. It transferred authority to cut rates — by up to 50 per cent, in bilateral agreements, without a further vote in Congress — from the legislature to the President. Rate-setting moved out of the committee rooms where logrolling had produced the 1930 schedules and into an executive branch answerable to a national rather than a district constituency. Between 1934 and 1945 the United States concluded agreements with 29 countries, and the unconditional most-favoured-nation clause in each spread the concessions outward. That architecture became the General Agreement on Tariffs and Trade in 1947, and the institutional habit of negotiating trade in rounds rather than legislating it in schedules carried through the postwar reconstruction financed by the Marshall Plan and into the World Trade Organization half a century later.

The 1930 act was never repealed. Its rates were negotiated down to irrelevance across seventy years of agreements, but the statute remains the foundation of American customs law, and two of its provisions are still in daily use. Section 337, which lets the International Trade Commission block imports that infringe American intellectual property, generates dozens of investigations a year, and Section 338 sits unused as a standing authority to impose duties of up to 50 per cent on countries that discriminate against American commerce. Every patent exclusion order the commission issues is docketed under the law that 1,028 economists asked Hoover to veto and that he signed because he had promised something narrower to farmers who never got it.