Monday, 2 February 2009

SMOOT-HAWLEY DAYS ARE HERE AGAIN, or, How to Turn and Recession into a Depression

Most people are not familiar with the "Smoot Hawley Tariff Act," named after the guys who put the ideas together. But those tariffs helped turned a U.S. recession of 1929 into a world-wide depression through most of the 1930s. And the current U.S. government is about to do the same thing all over again, with it's new $855 billion, "America first" stimulus package.

Once again, Americans are showing they cannot remember their own history. They are again jeopardizing their economy, and the economies of other nations.

Senator Reed Smoot (a Republican from Utah) and Representative Wallis Hawley (a Republican from Oregon) saw the U.S. economy needed to grow, by increasing American firms' share of business. One way to do that, and effectively "stimulate" the economy, was to restrict foreign imports. That way, people would be forced to "buy American" or pay a lot more for the same thing. In fact, the Bill raised import charges on about 20,000 items.

Opposition began even before the law was passed in June, 1930. Over a thousand economists and many business leaders begged President Herbert Hoover to veto the bill. Complaints came from well over 30 other nations as well. (People knew about it because it had passed the House of Representatives in May, 1929.)

That action may have helped to trigger the financial crash of October, 1929. By the time it became law, other countries were already boycotting or imposing their own tariffs on American goods. Canada was among the first to do so, even before the bill had passed in the U.S. Senate. The U.S. State Department says that between 1929 and 1932, overall world trade dropped by 66%.

While the U.S. stock market had been uncertain since 1929, by 1930, politicians and business leader were saying the end of the crisis was in sight. But in late 1930-1932 the market headed almost straight down, reaching its lowest point in June, 1932, a year after the Smoot-Hawley Law was signed.

Smoot-Hawley wasn't the only problem America faced, but it was significant. The other major problem was a string of bank failures. But if you cannot produce and sell enough to re-pay your debts, of course banks are going to fail. Think of Lehman Brothers, Bear Sterns, Mannie Mae, and Freddy Mack, which have run into huge problems in the last few month. It's the 1930s all over again.

History's lesson is that if you put up a brick wall around your country to keep imports out, other nations will do the same. That's the main problem with the current U.S. stimulus package. It has a clause which would do, in effect, the same thing which the Smoot-Hawley Act did in 1930; it will help turn a recession into a protracted depression.

Canada has been protesting, as it did with the Smoot-Hawley Act. The "buy American" clause in the current U.S. proposal is a fundamental violation of the North American Free Trade Agreement (NAFTA). Will the Americans listen? Who knows? Will Stephen Harper impose Canadian counter-measures if the American law passes. Not likely; I see Harper as pretty timid in his dealings with the United States. Were the stronger-willed, broader-thinking Michael Ignatieff in charge, things might be much different.

President Obama inherited an economic disaster when he took office as America's 44th President. How he handles the "buy America" language in the stimulus package will be a major test of his foreign policy. How he handles it may determine outcomes as far away as Iraq and Afghanistan.