Reference no: EM132211637

Question: Summarize the below case study by listing when this happened, who caused it to happen and what the consequences were of the actions taken in in 200-300 words.

Case Study: Eighty four years ago on this day President Hoover signed the now-infamous Smoot-Hawley tariff bill, which substantially raised U.S. tariffs on some 890 products. Other countries retaliated and world trade shrank enormously; by the end of 1934 world trade had plummeted some 66 percent from the 1929 level.

The Tariff Act of 1930 (aka the Smoot-Hawley Tariff Act), started out as a bill that would only raise tariffs on some agricultural products, but a host of other special interests piled on and before the legislation finally reached President Hoover’s desk it represented one of the largest tariff increases in U.S. history.

On June 16, 1930 when the Smoot-Hawley bill was signed into law the broad economy was just starting to slip into the Great Depression. Two years later unemployment had reached almost 24 percent in the U.S., more than 5000 banks had failed, and hundreds of thousands were homeless and living in shanty towns called “Hoovervilles”. Our economic woes spread around the world, although other countries weren’t hit as hard; while our unemployment rate increased some 600%, unemployment in Great Britain rose some 130% and over 200% in France and Germany.

Did the Smoot-Hawley tariff act cause the Great Depression?  Let’s look first at some other possible causes often cited by economists.

One possible cause, of course, is the stock market crash that had begun in the last week of October 1929, some eight months before Hoover signed the Smoot-Hawley tariff. The Dow had plummeted from 326 on October 22 to 230 in the next six trading days and it finally settled at a low of 41 in July 1932.

Some economists argue that the stock market collapse was caused by overproduction in the 1920s. During World War I a number of countries, including the U.S., had greatly expanded agricultural production; as Europe recovered from the war and its agriculture production reached earlier levels, production worldwide exceeded consumption and prices fell around the world. Farmers had gone into debt during the boom times, investing in new equipment and land, and were hard hit when prices fell.

There was overproduction in the industrial sector as well. While the upper 1 percent was doing very well, those farther down the income scale were not doing as well and many were buying cars, appliances and other products on credit. Additionally, many Americans had been buying stocks on margin and when the stock market collapsed, they saw their equity plummet and they stopped buying goods and services; in the first half of 1930, consumers cut their expenditures by ten percent. Companies were afraid to invest in new capacity or products, and they too stopped spending.

Other economists, such as Milton Friedman, lay blame on the Federal Reserve. Between 1929 and 1933, the money supply contracted by one-third, and as a result many companies couldn’t get loans. The problem was exacerbated by the failure of policy makers to prevent bank failures.

Both of these explanations may well have a great deal of truth. But the Smoot-Hawley tariff also played an important role.

In early May 1930 1,028 leading American economists presented President Hoover, Senator Smoot and Congressman Hawley with a letter urging Hoover to veto the bill if it passed Congress. (The organizer of the letter was Dr. Claire Wilcox, my economics professor in college.) The economists argued that the tariff increases would raise the cost of living, limit our exports as other countries retaliated, injure U.S. investors since the high tariffs would make it harder for foreign debtors to repay their loans, and damage our foreign relations. Unfortunately, this is what happened.

Jude Wanniski argues that the stock market crash itself was heavily affected by Smoot-Hawley, even though the start of the market’s collapse preceded the signing by some eight months. Wanniski argues that “the stock market started anticipating the act as early as December 1928” and it fell over the next year as the legislation to raise tariffs looked likely to pass and rose when it seemed the legislation might fail.

Some economists argue that the Smoot-Hawley tariff act may have been a very bad idea but that it did not cause the Great Depression. They point out that exports only accounted for some seven percent of the U.S. gross national product in 1929 and the decline in U.S. exports in the ensuing years may have been caused by the depression itself and not solely by tariff retaliation. Some note that the U.S. had also enormously raised tariffs in 1922 and that this did not cause a depression.

Those who blame Smoot-Hawley counter that the drop in exports was significant. From 1929 to 1933 American exports declined from about $5.2 billion to $1.7 billion, and the impact was concentrated on agricultural products such as wheat, cotton and tobacco. As a result, many American farmers defaulted on their loans, which in turn particularly affected small rural banks.

Today, the Smoot-Hawley tariffs represent a cautionary tale. Regardless of whether they were the major cause of the Great Depression or not, they definitely were a truly terrible idea. In today’s world where Central Banks have been pumping out liquidity and inflating stocks, similar to the case in the 1920s, we must hope that we don’t repeat the mistake of Smoot-Hawley.