Sunday, 27 December 2009

Smoot-Hawley tariffs and the Great Depression

A view common among economists is that the Smoot-Hawley tariffs of the 1930s in the US were a poor policy choice, but they were not a main reason for the severity of the Great Depression. With regard to the latter point in the previous sentence, Scott Sumner at the TheMoneyIllusion blog writes,
In the period around March and April 193o, there were a few “green shoots” in the economy. The stock market recovered a significant chunk of the huge losses in 1929. (I recall the Dow fell well below 200 during the famous crash, and got back up over 260 in April. The 1929 peak had been 381.) Then in May and June everything seemed to fall apart, and stocks crashed again. So what happened in May and June?

The headline news stories during those months were the progress of Smoot-Hawley through Congress. Each time it cleared a major legislative hurdle, the Dow fell sharply. This pattern was obvious to those following the markets, and was frequently commented upon. After it cleared Congress it went to Hoover. The President received a petition from over 1000 economists pleading with him to veto the bill. (A veto would not have been overridden.) Over the weekend Hoover decided to sign the bill, and on Monday the Dow suffered its biggest single day drop of the entire year.
Sumner argues that the Smoot-Hawley reduced investment not only in the US but all over the world and interest rates fell, the opportunity cost of holding gold fell, and the demand for gold rose. This caused deflation, which made the Depression even worse.

No comments: