Saturday, February 26, 2011

Smoot Hawley and the US Contraction of 1929–1933

A persistent myth is that Smoot Hawley was the major cause of America’s Great Depression. The Tariff Act of 1930 (or Smoot–Hawley Tariff) became law on June 17, 1930. While Smoot Hawley undoubtedly hurt foreign export-led growth nations dependent on the US market, it was not a major factor in the US contraction from 1929–1933.

Peter Temin explains:
A tariff, like a devaluation, is an expansionary policy. It diverts demand from foreign to home producers. It may thereby create inefficiencies, but this is a second-order effect. The Smoot-Hawley tariff also may have hurt countries that exported to the United States. The popular argument, however, is that the tariff caused the American Depression. The argument has to be that the tariff reduced the demand for American exports by inducing retaliatory foreign tariffs … Exports were 7 percent of GNP in 1929. They fell by 1.5 percent of 1929 GNP in the next two years. Given the fall in world demand in these years from the causes described here, not all of this fall can be ascribed to retaliation from the Smoot-Hawley tariff. Even if it is, real GNP fell over 15 percent in these same years. With any reasonable multiplier, the fall in export demand can only be a small part of the story. And it needs to be offset by the rise in domestic demand from the tariff. Any net contractionary effect of the tariff was small (Temin 1989: 46).
Another factor is that the competitive devaluations in late 1931 and 1932 that other countries engaged in probably offset to some extent the effects of Smoot Hawley for American consumers.

That does not mean that Smoot Hawley was good policy. It clearly harmed world trade and many other countries. But this does not change the fact that the fall in the value of US exports from 1929 onwards – owing to Smoot Hawley, retaliatory tariffs, non tariff barriers, and trade war – does not explain the depth of the contraction of US GNP from 1929 to 1933. Other factors were clearly involved, which drove the collapse of investment and consumption. The contractionary phase of the Great Depression from 1929-1933 was caused by
(1) excessive private debt used in leveraged speculation on financial assets in a poorly/minimally regulated financial system;

(2) the collapse of the asset bubble, causing debt deflation, a process described in the model of Irving Fisher and Hyman Minsky, and now developed by Post Keynesians;

(3) severe shocks to business expectations and collapse of private investment, which led to demand shocks and mass unemployment;

(4) bank runs and bank collapses leading to loss of people’s savings, and

(5) further demand shocks causing deflation in commodity prices, leading to loss of profits, more unemployment, further demand collapse, and to a vicious circle.
Bairoch, P. 1993. Economics and World History: Myths and Paradoxes. University of Chicago Press, Chicago.

Temin, P. 1989. Lessons from the Great Depression. MIT Press, Cambridge, Mass.


  1. I have corrected a typo above:

    "That does NOT mean that Smoot Hawley was good policy."

    I left out the "not" in the original post.

  2. Could higher cost intermediate goods have greatly contributed to financial strain on business?

  3. (1) Is there any evidence that capital goods imports were even a significant part of intestment in 1929-1933?

    (2) Weren't most capital goods produced in teh US anyway

    (3) Given that investment collapsed owing to a massive aggregate demand failure, would moderately higher priced imported capital goods really matter much?