Guest Post: Smoot Hawley Redux

Tyler Durden's picture

Submitted by Jim Quinn

Smoot Hawley Redux

As the Greater Depression continues along a parallel pathway with the
Great Depression of the 1930s, Congress is about to commit the same
blunder it made in 1930. The rocket scientists in the House of
Representatives in September passed the Currency Reform for Fair Trade Act,
which aims to crack down on Chinese currency manipulation by targeting
imports from China and other countries with currencies that are
perceived to be undervalued.

The vote was 348 to 79, with more than 100 Republicans voting in
favor of the bill. It died in the Senate before the mid-term elections,
but Representative Sander Levin, Representative Tim Ryan and
Representative Tim Murphy are expected to reintroduce the bill when the
House returns in February from a congressional district work break.
Senators Shumer and Casey are also planning legislation to punish the
Chinese for unfair trade practices.

The head rocket scientist, Nancy Pelosi, declared:

“For so many years, we have watched the China-U.S. trade deficit
grow and grow and grow. Today, we are finally doing something about it
by recognizing that China’s manipulation of the currency represents a
subsidy for Chinese exports coming to the United States and
elsewhere. We owe that to American workers.”

This legislation is part of the Democrats’ “Make It in America”
initiative that endeavors to increase domestic manufacturing and
creating new American jobs. In classic congressional fashion, they are
attempting to pass a bill that will make them look good in the eyes of
their constituents, but will exacerbate already dangerous world trade

You can count on Congress to pander to unions, protectionists, and
America Firsters with hollow legislation, when 40 years of bad
decisions, bad policies, and bad choices placed us in this situation.
When you have made legislative choices that will require the U.S.
government to borrow another $6 trillion in the next four years and you
already owe someone $868 billion, it is not a good idea to punch them in
the nose.

The U.S. is running an annual trade deficit exceeding $500 billion
per year. It has not run an annual trade surplus since 1975. The trade
deficit peaked at $769 billion in 2006, subtracting 5.7% from GDP. The
enormous trade deficits are a result of government spending policies,
Federal Reserve monetary policies, and corporate outsourcing that have
gutted the industrial base of the U.S. These policies resulted in
personal consumption expenditures surging from 62% of GDP in 1970, to
71% of GDP in 2009.

The trade deficits are not the fault of the countries selling goods
to American consumers. Trade subtracted 3.5% from growth in April
through June, the most since 1947, as imports surged at the fastest pace
since 1984.

The trade deficit with China reached a record level in August of $28
billion, as imports skyrocketed. The U.S. is on track to exceed the 2008
record trade deficit with China of $268 billion. The facts that you
don’t hear from the protectionist crowd is that exports to China are on
track to reach $84 billion in 2010, 20% higher than the previous peak in
2008. Exports to China have increased by 525% since 2000, while imports
from China have increased by 340%. The storyline about China not
allowing U.S. imports into their country is false. Putting tariffs or
quotas on goods coming from China will not create jobs in America and
will only deepen and lengthen the current depression, just as it did in
the 1930s.

Protectionism During the Great Depression

The complete collapse of worldwide trade during the 1930s, with its
root in trade protectionism, did not cause the Great Depression, but it
certainly didn’t help. In 1929, exports totaled $5.9 billion and
accounted for 5.7% of GDP. By 1933, exports had plunged to $2.0 billion
and accounted for only 3.5% of GDP. Imports plummeted by an equal
amount. Global trade declined by 60% as tariffs were imposed and
retaliation created a downward spiral. The U.S. provoked the trade war
with the passage of the Smoot-Hawley Tariff Act.

Senators Reed Smoot and Willis C. Hawley sponsored the bill, and it
was signed into law on June 17, 1930, by Herbert Hoover. It raised U.S.
tariffs on over 20,000 imported goods to the highest levels since 1828.
The new tariff imposed an effective tax rate of 60% on more than 3,200
products and materials imported into the United States, quadrupling
previous tariff rates. According to the U.S. Statistical Abstract, the overall effective tariff rate was 13.5% in 1929 and 19.8% by 1933.

It seems politicians never change. During the 1928 presidential
campaign, Herbert Hoover promised to help beleaguered farmers by
increasing tariffs on agricultural products. After getting elected,
Hoover asked Congress for an increase of tariff rates for agricultural
goods and a decrease of rates for industrial goods. The
Republican-dominated House and Senate did him one better and increased
tariffs across the board. 

In May 1930, a petition was signed by 1,028 economists asking
President Hoover to veto the legislation. Henry Ford begged him to veto
the legislation. Hoover opposed the bill and called it “vicious,
extortionate, and obnoxious” because he felt it would undercut his
pledge to international cooperation. Then he proved that he was a
standard-issue weak-kneed politician by signing the bill. Hoover’s
initial instinct proved correct. The international community levied
their own tariffs in retaliation after the bill became law. Canada,
Britain, and other European countries immediately imposed their own
tariffs. World trade came to a grinding halt.

Germany, with its war reparations, was particularly vulnerable to
this contraction. Ironically, the U.S. was the lender to the world
during the 1920s. American lending propped up the entire world economy.
Former allies paid war-debt installments to the U.S. chiefly with funds
obtained from German reparations payments, and Germany was able to make
those payments only because of large private loans from the U.S. and
Britain. Similarly, U.S. investments abroad provided the dollars, which
alone made it possible for foreign nations to buy U.S. exports.

By killing world trade with the Smoot-Hawley tariffs, the U.S. shot
itself in the foot and contributed to worsening the Depression in
Germany. This inadvertently led to the rise of Hitler. Talk about
unintended consequences.

Decades of Bad Choices

Blustering politicians like Nancy Pelosi and Chuck Schumer are
attempting to ram through populist legislation in order to appear to be
on the side of the American people. The Treasury secretary of the United
States has declared China a currency manipulator. Chinese Premier Wen
Jiabao responded in kind:

“If we increase the Yuan by 20% to 40%, as some people are
calling for, many of our factories will shut down and society will be in
turmoil. If China saw social and economic turbulence, then it would be a
disaster for the world.”

They are playing a high-stakes game of chicken, and the ante is much
higher than it was in 1930. Exports account for 12.5% of our GDP today,
versus 5.7% prior to the Great Depression.

The United States was a net exporter when the 1970s started. Our
enormous trade deficits, which subtract from GDP, were not imposed on us
by foreign countries. We are in this predicament because we made
appalling choices.

We chose to allow the Federal Reserve to inflate away 95% of the
purchasing power of the USD since 1971. We chose to elect politicians
that have driven the national debt from $371 billion in 1970 to $13.6
trillion today. We chose to support “free trade” legislation that
allowed corporate CEOs to gut our industrial base and ship good-paying
jobs to China, while filling the pockets of these executives with
millions. We chose to spend rather than save and invest in our country.
We chose to become a consumer debt-centered society, relishing in the
cheap goods we could buy from China on credit. We chose low prices at
Walmart over small-business owners and sustainable domestic production
of goods. Decades of bad choices cannot be reversed through taxation,
tariffs, and quotas.

The Chinese have pegged their currency to the USD since 1995. For a
decade, the U.S. was just fine with the peg, as American consumers got
cheap goods, American corporations reaped huge profits from outsourcing,
and banks raked in billions by lending money to everyone. Now that we
have entered the Greater Depression, the finger pointing and accusations
have begun.

Politicians and the people who elected them want someone to blame for
their bad choices. The Chinese are the bogeyman that forced Americans
to buy on credit. They forced American corporations to offshore millions
of U.S. jobs. If the U.S. had a strong dollar policy, ran surpluses,
and lived within its means, the Chinese peg would be meaningless.

U.S. GDP has grown by 335% since 1985. Over this same time frame,
exports to China have grown by 1,800%, and imports from China have grown
by 7,700%. Do politicians actually believe that imposing 30% tariffs on
all Chinese products will magically create new manufacturing jobs in
America? The 42,400 factories that have closed since 2001 and the 5.4
million manufacturing jobs lost are not coming back. A 30% upward
revaluation of the yuan or 30% tariffs on Chinese products would
devastate an economy that is still 70% dependent upon consumer spending.
Just as in 1930, protectionist measures would boomerang and smack
America in the back of the head.  

If the pandering politicians in Washington D.C. are myopic enough to
ignore the lessons of the past and start a trade war with China and/or
the rest of the world, the possible implications would be:

  • An immediate increase in the prices of goods from China, which would
    proportionately hurt the lower and middle classes who shop at Walmart.
  • Retaliatory tariffs and protectionist policies by other countries, resulting in a decline in U.S. exports.
  • A net loss of U.S. jobs as the decline in consumer spending-related jobs will far outweigh any benefits to exporting businesses.
  • A decrease in world trade, resulting in a deepening of the current worldwide depression.
  • Possible unintended consequences similar to what happened in Germany
    after the hyperinflationary collapse of their currency (dictators, war,

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midtowng's picture

Smoot-Hawley is the most overblown piece of legislation in history. Sure, it didn't help things, but it was hardly the job killer is was made out to be. There were far more serious factors. One of them that few economists talk about, is the war debts from WWI. And I'm not talking about Germany. I'm talking about England, France, etc. having to pay American bankers.

It was these unpayable war debts that caused the begger-thy-neighbor currency wars, which led to the trade wars, which led to soveriegn defaults. Because the fault was the bankers rather than efforts by the politicians to protect jobs, you never here about them.

AUD's picture

It wasn't the bankers who abrogated the gold standard leading to the accumulation of unpayable war debts.

The fault is with the government. No private banker can force you to accept his dubious credit.

Sabibaby's picture


"No private banker can force you to accept his dubious credit"

Maybe no banker can, but what about the government?

Sure, maybe they can't either but it's still tough to buy stuff without credit regardless of how dubious YOU think it is.

I'm not disagreeing, that just seems to be the way it is. 


btw, this is my third captcha, do you think I could get a job at the SEC?

A Nanny Moose's picture

Wrong skillset. You need to be good at finding, and bookmarking the newest pr0n sites.

Cheesy Bastard's picture

That'll teach 'em.  Those asian guys are a just bunch of Chinesey Bastards.

buzzsaw99's picture

Agreud. We should exploit the chink in their armor.

Biosci's picture

The slant in your argument is obvious.

snowball777's picture

It's just a little yellow journalism.

Arch Duke Ferdinand's picture

""That'll teach 'em.  Those asian guys are a just bunch of Chinesey Bastards.""

Chinese Espionage Techniques

(covered by Mish)....

StarvingLion's picture

Senators Shumer and Casey are also planning legislation to punish the Chinese for unfair trade practices.

Hahahahaha...lets see, the traitors who set up shop over in China are going to punish themselves.  Okay!  Really, the question should be:

"When are the American Dolts (aka sheep, aka esteemed socialists) going to realize a war with China has been going on for many many years and only one side is fighting?"

DavidPierre's picture


You're still just dragging more Red Herrings around on ZH to cover the stench of your Moronic articles. 

"By killing world trade with the Smoot-Hawley tariffs, the U.S. shot itself in the foot and contributed to worsening the Depression in Germany. This inadvertently led to the rise of Hitler. Talk about unintended consequences."

However, that is not the nature of the real financial world.

In fact, the Rockefellers, the Morgans, the Dillons and their minions are fleecing ordinary Americans of hundreds of millions of dollars in an orgy of financial scams many of which will be later uncovered in the long-suppressed Pecora Hearings.

Massive manipulation and speculation drives share prices to unsupportable levels. A few months before the Crash, word has it that the Rockefellers, Joe Kennedy and all the other scam artists quietly exit the market, selling when the artificially inflated prices are sky high.

On October 24th, the big banks, owned by the same unindicted co-conspirators, call the loans to the suckers. Invevitably, a selling panic ensues and the whole house of cards collapses. Gee, what a surprise.

Following the Crash, the boys who run the Federal Reserve contract the money supply, plunging the U.S. into the Great Depression and making it possible to snap up anything they want including farms, businesses and land for pennies on the dollar.

Not coincidentally, hundreds of small banks which provide the big boys with a bit of competition, are also driven to the wall and snapped up.

Does any of this sound familar today?

After the Nazis seize power in Germany with arms and financing supplied by the Rockefellers, the Harrimans, the Duponts and other members of the U.S. ruling class, with the help of their minions such as the Bush family, the Nazis begin their "Aryanization" program under which Jews are forced to sell their business assets for a small percentage of their true value to "Aryans".

Many American corporations are quick to cash in their markers with the Nazis by sticking their snouts in the "Aryanization" trough, none more avidly so than the Ford Motor Company under one the world's most rabid anti-Semites, Henry Ford.


"I detest that man, who hides one thing in the depths of his heart, and speaks forth another." … Homer


Kayman's picture

Ahh... the Mighty Quim


1." American exports to China are growing at a faster RATE that China's exports to the U.S. are growing".  A fine example of FIGURES LIE AND LIARS FIGURE !

What exactly are the absolute numbers ?  Oh, yeah, not given !

2. Any American exports to China will be technology that the Chinese have not yet stolen.

The only thing I can agree with in this article is that the same old American Political Whores are arguing over the price of selling their souls.

I watched a flipping idiot espousing the theory that unemployed Americans should be grateful that China is selling their crap so cheap to America; inferring that Americans are better being unemployed while buying cheap Made-in-China shit than being employed and having to purchase more expensive American-made goods !

PS. StarvingLion- this is likely the only war in history where the defeated nation gave the technology to enemy to build a Trojan Horse and let the enemy enter tariff-free to destroy the backbone of their country.

gwar5's picture

We have complete idiots running our country. Schumer for sure would be there...

Chinese don't have to raise the value of the Yuan.

Bernankicide is crashing ours instead. Won't take much longer.

TPTB don't want American consumption to slow down growth in the East

Party is over. Time for the hangover.

StarvingLion's picture

TPTB don't want American consumption to slow down growth in the East

No, its because the Muslim brotherhood isn't in China like the West.  We have to go overseas to fight the Muslim brotherhood so that the oil can go to China.  We get death out of the deal.

Freddie's picture

Schumer - friend of Madoff. Typical corrupt Democrat like Obama.  Republicans may suck but the Democrats are pure evil like their Muslim leader.

snowball777's picture

That one definitely deserves a healthy does of Zyklon-B.

equity_momo's picture

I'll take no 5 : dictators , wars , chaos.


Politicians will do whatever it takes to keep their job and entitlements. That means taking the easy option every time. That'll be blaming Ching-chong-chinaman for Joe 6 Packs problems.

snowball777's picture

While making Joe's sixer more expensive than Guinness.

fragrantdingleberry's picture

Confucious say, "Man who jizz in cash register come into money."

The Alarmist's picture

You know, life was not so bad for the 75% or so who managed to keep their jobs during the Great Depression.  To make an omlette, you need to break a few eggs ... in this case, accepting the "new normal" and keeping your head down as you push the grindstone will get you through while the other poor slobs out there are suffering a fate worse than ours.

We were going to have this problem anyway as more and more human capital became redundant in the face of advances in technology, productivity, and international competition, so it is better that we get this re-adjustment out of the way now. 

Now, what to do with them??? World seems to need more rice these days, so how about something like what Cambodia tried in the 70's ....



Sophist Economicus's picture

Elect Pol Pot and have him murder about 43 million people on food stamps?

snowball777's picture

Send em on P-boats up the Yangtze...apocalypse now style.

I think this is about Bernanke and QE...

StarvingLion's picture

middle classes who shop at Walmart

Hahahaha...another one.  This guy is the best stand up comedian since Carlin. 

topcallingtroll's picture

Our congress definitely needs education on smoot howley. The bottom line is that the yuan needs to go up 20 percent. I am all in favor of accepting adam smith's subsidized trade gifts from china but it is only in our interest to do so if china plans to give us these free gifts forever which they dont. I think the entire world is sick of chinese poison and intellectual theft and undervalued currency. We may need to risk a trade war and continue to pay them in ever cheapening dollars in order to get them to play fair. Most of the rest of the world seems to be with us on this and the trade war may be isolated to china as others join us with their list of grievances against china too.

StarvingLion's picture

I think the entire world is sick of chinese poison and intellectual theft and undervalued currency.

Yep, I took one look at Dr. Oz's audience today and thats exactly what those livestock (uh people) are thinking.

cosmictrainwreck's picture

LOL - yup, beef on the hoof say "mooo", not: "un-peg yer stinkin' currency"

Yen Cross's picture

Yes I am well aware of the trade imbalance spreads, and put a fork up Cramer. I saw him in perfect the blueberry waffle section last weekend.

RonnieColeman's picture

Correct me if I'm wrong, but he is arguing against protectionism but also rails against free trade and "shipping jobs overseas". Outsourcing and offshoring is part of free trade and disallowing that would be a form of protectionism. Low prices at walmart are a direct result of free trade, and if we use protectionism to keep inefficient businesses afloat we would be doing exactly what the morons in Congress are doing. I'm all for small businesses, but you still have to be competitive in some way (perhaps not on price)

Quotas/tarriffs/protectionism = bad, in all of its forms. This guy needs to at least be consistent in his thesis

StarvingLion's picture

I'm all for small businesses, ...

Buddy, all small business does is burn oil less efficiently.  It has no reason to exist at all in your ideological world. 

Efficiency Efficiency slaves are so brainwashed, I'm off to my small business to ship 1 case of ketchup 40 miles to Hicksville, Usa

RonnieColeman's picture

The point of a capitalist economy is that it maximizes efficiency (as much as possible). If you dont want efficiency then I take it you are a fan of government bailouts as well, because clearly thats about as inefficient as it gets

Kayman's picture

Efficiency in economics is a concept stolen from engineering. It is output over input.

Since America has "outsourced" its output, I guess, for you, we have given up on the concept of efficiency.

P.S. Let me know what you think America's long term strategy is by sending jobs to their Chinese Fascist Enemy ? Are we better off now, will we be better off in another decade ?

What will you say to your children and grandchildren when the country no longer adds any value ? Are you going to tell them its been a hell of a ride.  The nation produces nothing (ergo no output) and employs no one (ergo no input).  Ummm.... what is the measure of efficiency of zero divided by zero ??


snowball777's picture

The point of a capitalist economy is that it maximizes efficiency


The efficient...

- exploitation of cheap labor

- squandering of finite resources

- redistribution of capital UP the pyramid

Now get your ass back on that grindstone slave. Massa says breaktime's over.


Kayman's picture


Think again. Chinese shit is cheap because there are no environmental laws, the government grants fully serviced land for free, the "employees" are slaves or indentured servants, the ideas and technology were gifted by Corporate America to China or stolen, there are no payroll taxes, OSHA, no state taxes, and no Health Insurance nor Social Security Taxes.

Oh, Yeah and then the Chinese arbitrarily peg the yuan at a low level and prevent it from floating; providing yet another subsidy.

And last but not least the Chinese CHEAT on the quality of everything. Lead paint on children's toys and sulfur-laced drywall are but a few of their favorite tricks. No American government has yet to divulge how many people have lost their lives over shoddy electrical cords, lights and equipment.

Naturally, to mention any of this in Public, the Chinese paid-for Apologists whip out the Race Card.

RonnieColeman's picture

double post, my bad

Misean's picture

Just what this country needs, action by the most over priced group of idiots on earth.

StarvingLion's picture

Go to this retards website and try and argue that the trade problem is rooted in how the monetary system has evolved.  He will label you a conspiracy nut and delete your message.  This fucking country is full of livestock who fell off a truck.

Bill Lumbergh's picture

For anyone needing a refresher on this legislation, look no further than Ferris Bueller's Day Off:

RobotTrader's picture

So far, the market has not yet taken this news as negative.

I keep looking for reasons to short, or look for follow through from Friday's "distribution day".

But I can't find any yet.

NYSE Summation Index has turned back up, believe it or not.

Rainman's picture

......and the old DJIA  point was just 10 without a bust, now we look for a 12 in the center board. You keep moving the dice til you boxcar, Robo. You can do it.

william the bastard's picture

Might as well play fot it to come the hard way cause when it does it's gonna be a trip whopper with cheese loaded.

chet's picture

Im confused by posts which argue against protectionism and then complain about the following:

"We chose to support “free trade” legislation that allowed corporate CEOs to gut our industrial base and ship good-paying jobs to China, while filling the pockets of these executives with millions."

"We chose low prices at Walmart over small-business owners and sustainable domestic production of goods."

How would you prevent those things except with protectionism?  So you're against tariffs, but for reneging on free trade agreements?

I don't get what specifically such a person is really arguing for.

Personally, I understand why protectionism is bad, and what happened in the 1930's, but I'd like to do SOMETHING about the status quo with China.  Right now I feel like we're playing a game of dodge ball where we just stand there with our hands at our side while they bean us in the face.

Sophist Economicus's picture

It is very difficult to do business in this country today. Major capital outlays for plant and equipment come down to more than simply American labor costs. I was in the board room of many fortune 100 companies when decisions were being made. Capricious EPA rules, legal environment ( law suits over gender discrimination, race discrimination, product liability, workman compensation, unemployment compensation, union labor board requirements, etc.) ever changing federal, state and local requirements, mandates, fees and taxes, constantly changing architectural and building codes, OSHA regulations that do little to protect workers, etc etc etc. all factor into the decision. Also, the US has a split labor force personality. Incredibly skilled, motivated and industrious people AND some of the most unskilled, unproductive, unmotivated, illiterate human beings around. Couple that with making sure products are close to the regional markets and that most companies don't want to compete for commodity products with tight margins and subject to price .vs. Quality decisions by consumers (that usually choose price) and one finds that most of this protectonist hogwash is full of hot air.

Kayman's picture


Then Congress needs to pass legislation that requires China to provide the same employment standards and environmental standards required by American Companies, otherwise an equalizing tariff would apply.

It is the height of Hypocrisy that the American environmental movement sits on its hands while the biggest polluter in the world dumps its products into the American market. 

Sophist Economicus's picture



I think congress needs to get the heck out of the way.   As for the 'American Environmental movement', I don't really know of one.   Most of these folks (some of whom I know)  are funded by European Unions and leftist organizations as well as Soviet Communist (I guess now now ex-soviet Communists) as well as American leftists/socialists/communists that really couldn't give a rats ass about the environment.  Their agenda lies elsewhere.   You can divine this by direct observation of this movement's conflicting messages and documented litigation in various federal and state courts.


But reading your posts - my guess is you probably know this first hand or are a deluded fellow traveller

bugs_'s picture

the time traveling tariff returns!

I think I need to buy a gun's picture

I'm so glad everyone accepts their work schedule. How many fuckin breaks do they have? Christmas break, new years break Beginning of Feb break or they just never returned after the shooting. If they don't give a shit and no one else seems to then give me my gold and land and fuck it all....