Authors:
Historic Era: Era 7: The Emergence of Modern America (1890-1930)
Historic Theme:
Subject:
February/March 1986 | Volume 37, Issue 2
Authors:
Historic Era: Era 7: The Emergence of Modern America (1890-1930)
Historic Theme:
Subject:
February/March 1986 | Volume 37, Issue 2
We hear a lot about America’s soaring trade deficit. That deficit has zoomed past $150 billion, and the United States Commerce Department estimates that every billion dollars costs the country 25,000 thousand jobs.
It seems that we’re getting clobbered, and there’s plenty of talk about fighting back. It makes sense, doesn’t it, to pass legislation to protect American producers from foreign competition?
Let’s take a look at one of the best-known pieces of trade legislation in American history, the Smoot-Hawley Tariff Act of 1930.
World War I had made the United States a creditor nation: the world owed us more than we owed the world. In the twenties we raised tariffs in response to pressures from domestic agricultural and manufacturing interests, and thus we made it more difficult for debtor nations to service their debts to us through exportation. At the same time, we made foreign loans to keep our own level of exportation high.
Francis Bowes Sayre, assistant secretary of state under FDR, offered a lucid analysis of the consequences of this policy in The Way Forward , a study of international trade published in 1939. “In effect,” Sayre explains, “we were … shipping exports in return for promises to pay and at the same time by our tariff policy we were making it progressively more difficult for our debtors to honor their promises. Our loan and tariff policies thus had the effect of adding to the economic dislocations and tensions of our debtors.”
This house of cards collapsed in 1929. Anxiety about the quality of our loans abroad led to a contraction of credit. “Debtor nations … had neither time nor opportunity to reorganize their economies,” Sayre writes. “Credit structures were smashed; price deflation and fluctuation of currency values shook the financial foundations of even the strongest nations.”
In the United States, protectionists argued that if we raised tariffs even higher, we would check the Depression, stimulate business, and create jobs for American workers. High tariffs would ensure a “high degree of self-sufficiency,” said Senator Reed Smoot of Utah, while the congressman Willis C. Hawley of Oregon said that high tariffs would make the nation “self-contained and self-sustaining.”
Not so, said more than a thousand members of the American Economic Association, who signed a petition denouncing the Smoot-Hawley legislation. The economists predicted that the bill would lead to higher prices here and thus to a lower standard of living, and that it would cause other nations to retaliate with higher tariffs of their own, thus closing markets for our exports and producing increased rather than decreased unemployment. President Hoover ignored their warning.
In response to Smoot-Hawley, international trade collapsed. New tariffs were enacted almost immediately by Canada, Cuba, Mexico, France, Italy, Spain, Australia, New Zealand, Great Britain, and the British dominions. Not wishing to be left out, India, Peru, Argentina, Brazil, China, and Lithuania joined the hightariff club in 1931.
The value of American exports fell from $5.2