------ EH.NET BOOK REVIEW ------
Title: Peddling Protectionism: Smoot-Hawley and the Great Depression

Published by EH.NET (July 2011)

Douglas A. Irwin, /Peddling Protectionism:  Smoot-Hawley and the Great
Depression/. Princeton, NJ:  Princeton University Press, 2011. v + 244 pp.
$25 (hardcover), ISBN: 978-0-691-15032-1.

Reviewed for EH.Net by Anthony Patrick O’Brien, Department of Economics,
Lehigh University.

Economists love the Smoot-Hawley tariff.  Why?  Because economists hate
tariffs and Smoot-Hawley is a great stick with which to beat the living
daylights out of protectionists.  “So, Mr. or Ms. Congressperson, you want
to raise tariffs on imports from China?  Trying to start a trade war?  You
know what happened the last time we tried that? We passed the Smoot-Hawley
tariff and IT CAUSED THE GREAT DEPRESSION!  Do you want to cause another
Great Depression? Do you? Huh?”  This nifty little trick worked like
gangbusters for Al Gore in his debate with Ross Perot on /Larry King Live/
years ago.  True confessions time, though:  It ain’t true.  The
Smoot-Hawley tariff didn’t cause the Great Depression.  The Great
Depression would still have been great even if Herbert Hoover had heeded the
advice of those 1,000 economists who urged him to veto Smoot-Hawley.

Economists aren’t lying when they casually refer to Smoot-Hawley playing an
important role in the Depression.  (Most economists who have studied the
issue know that it didn’t.) They think, vaguely: Tariffs Being Bad +
Highest Tariff Rates Ever = Big Impact.  Problem is that reasoning mixes
micro with macro.  Economists hate tariffs because they interfere with the
pursuit of comparative advantage, misallocate resources, and, in that sense,
lead to lower incomes ... in the long run.  The macro of tariffs is murkier,
though.  The American on the street’s argument for protectionism goes like
this:  “Raise tariffs on imports so people will buy more things made in
the USA. Then U.S. companies will produce more and hire more people.”  The
thing is, as a story about the short run, that reasoning may well be
correct.  Oh sure, foreign retaliation for tariff increases may slam
domestic exports and there can be price level effects and exchange rate
effects that have a contractionary impact, and so on.  That’s why the
macro of tariffs is murky.  But, at any rate, it’s at least conceivable
that Smoot-Hawley, rather than causing the Great Depression, actually caused
U.S. production and employment in the early 1930s to expand.  Not by much,
mind you, because foreign trade was a tiny part of the U.S. economy at that
time.  But expand rather than contract.

It’s conceivable, but did it actually happen?  That’s one of several
questions pondered by Douglas Irwin in this superb new book. Irwin, who is
Robert E. Maxwell ’23 Professor of Arts and Sciences at Dartmouth College,
has for years now been playing the part of stalwart on the ramparts of free
trade, including with his indispensible /Against the Tide: An Intellectual
History of Free Trade/ (Princeton University Press, 1996).  In /Peddling
Protectionism/, Irwin tells the story of the Smoot-Hawley tariff from its
conception as an attempt by Republicans to aid a troubled agricultural sector
– an amazing 18% of all farmers had their mortgages foreclosed on between
1926 and 1929 – through its implementation, effects on the U.S. and world
economies, and later reputation.  To many economic historians it will be a
familiar tale, but one that is well told.

When Congress began work on the tariff in early 1929, newly elected President
Herbert Hoover hoped that the bill could be confined to raising agricultural
tariffs.  In the end, though, the final bill was comprehensive and
extraordinarily detailed.  “Detailed” is an understatement; consider the
following provision quoted by Irwin from paragraph 390 of Schedule 3:
“Bottle caps of metal, collapsible tubes, and sprinkler tops, if not
decorated, colored, waxed, lacquered, enameled, lithographed, electroplated,
or embossed in color, 30 percent ad valorem; if decorated, colored, waxed,
lacquered, enameled, lithographed, electroplated, or embossed in color, 45
percent ad valorem.” And there were nearly two hundred more closely-packed
pages where that came from.

The Congressional debate dragged on for 18 months, although Irwin cites a
number of economic historians who reject the idea that uncertainty caused by
the debate led to the great stock market crash of October 1929.  Hoover –
to much criticism – had communicated little of his views to Congress during
those 18 months, but he readily signed the bill after its final passage in
June 1930.  Hoover had famously received a petition signed by 1,028
economists urging him to veto the bill.  Then as now, economists were held
in warm regard by Congress; Senator Samuel Shortridge remarked: “I am not
overawed and I am not at all disturbed by the proclamations of the college
professors who never earned a dollar by the sweat of their brows by honest
labor – theorists, dreamers – I am not so overawed or disturbed by their
pronunciamentos ....”  Irwin argues persuasively that Hoover, having
failed during the prolonged Congressional debate to make his views known, had
no choice politically other than to sign the bill because to veto it would
have undercut the Republican Congressional leadership.

In discussing the economic effects of Smoot-Hawley, Irwin begins by noting
that the bill actually raised tariffs by far less than had the
Fordney-McCumber tariff of 1922.  Fordney-McCumber had raised the average
tariff rate by 64% (or by about 13 percentage points), whereas Smoot-Hawley
increased the average tariff rate by 18% (or by 6.4 percentage points).
Smoot-Hawley’s reputation for having raised tariff rates to
“skyscraper” levels is due in part to the effects of falling prices of
imports during the years following its passage.  A specific duty – say, so
many cents per bushel of wheat – will result in a tariff that is an
increasing percentage of a good’s value as the price of the good falls.
Although imports declined sharply in the early 1930s, most of that reduction
is attributable to falling incomes in the United States, rather than to the
effects of Smoot-Hawley.  Irwin estimates that the Smoot-Hawley accounted
for only about one third of the 40% decline in imports between 1929 and 1932.

Could this reduction in imports have stimulated production in the United
States by the process of “expenditure switching” from imports to
domestically produced goods?  Irwin is skeptical that this effect was large,
particularly given that foreign retaliation for Smoot-Hawley helped
contribute to falling U.S. exports.  In fact, he notes that retaliation by
Canada alone resulted in as large a decrease in U.S. exports as the decline
in imports attributable to Smoot-Hawley.  He is also skeptical of the
monetarist argument proposed by Allen Meltzer that Smoot-Hawley worsened the
Great Depression by causing increased gold inflows into the United States,
which led to deflationary pressure on other countries.  Irwin notes that
“one problem with this argument is that there was no apparent increase in
U.S. gold inflows after the tariff was imposed.”  Similarly, he doubts the
argument that by reducing U.S. agricultural exports, foreign retaliation for
Smoot-Hawley led to increasing defaults on farm mortgages, further weakening
a reeling banking system.  Irwin believes the problems in the agricultural
sector had other causes, and, in any event, foreign retaliation for
Smoot-Hawley mainly involved higher tariffs on U.S. manufacturing exports,
not on agricultural exports.  Finally, Irwin is skeptical of the argument
that in a real business cycle model, Smoot-Hawley may have had a significant
negative effect on output by raising the cost of intermediate goods.  He
notes that only about 11% of imports of intermediate goods were affected by
the Smoot-Hawley increases.  On balance, then, Irwin argues that
Smoot-Hawley’s short-run effect on the U.S. economy was probably negative,
but was certainly small.

Irwin’s book is not technical; he summarizes research findings, including
his own, but does not formally present models or econometric results.  His
approach makes the book quite suitable for the interested general reader,
undergraduates, and economic historians and other economists interested in
the life and times of Smoot-Hawley.  Finally, this volume is well priced for
individual purchase and is nicely illustrated with a number of photographs
and political cartoons of the day.  It is also mercifully free of the typos
that plague so many university press books these days.

Anthony Patrick O’Brien is a professor of economics at Lehigh University.
He is the author of textbooks on principles of economics and money and
banking (with Glenn Hubbard) and a textbook on intermediate macroeconomics
(with Hubbard and Matthew Rafferty).  He has published several articles on
international trade during the interwar years, including most recently,
“Retreat from Protectionism: R.B. Bennett and the Movement to Freer Trade
in Canada, 1930-1935” (with Judith A. McDonald) in the /Journal of Policy
History/.  His email address is [log in to unmask]

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied
for non-profit educational uses if proper credit is given to the author and
the list. For other permission, please contact the EH.Net Administrator
([log in to unmask]). Published by EH.Net (July 2011). All EH.Net reviews
are archived at http://www.eh.net/BookReview.

Geographic Location: North America
Subject: International and Domestic Trade and Relations, Macroeconomics and
Fluctuations
Time: 20th Century: Pre WWII