The Great Depression, Trade, and Price Engineering
From the Malthusian Nectar blog.
Being doing a lot of research into economic policies of the 1920′s. I’m really surprised at how much reality diverges from the traditional narratives. Far from embracing non-interventionist economic policies, the Republican Party of the 1920′s consistently supported price engineering in the agricultural sector, in order to try to return to the glory days of World War I pricing.
The Republican Congress passed a “farm relief bill” (McNary-Haugen Farm Relief Act) five times that attempted to create a massive Federal bureaucracy to control farm prices. Fortunately, Calvin Coolidge vetoed the monstrosity all five times! Once Herbert Hoover got into office, however, many of the forces that had pushed the “farm relief bill”, began to push the Smoot-Hawley Tariff.
This started almost immediately after Hoover assumed office. While the tariff wasn’t officially passed until 1930, threats of retaliation from US trading partners began immediately. Hoover opposed the tariff initially, but eventually gave in to pressure by his party, showcasing a start contrast between himself and his predecessor, Coolidge.
Is it possible that the Congressional obsession with Smoot-Hawley and agricultural price controls actually helped create the initial Wall Street crash? I’m not sure, because Milton Friedman’s theories on monetary policies being to blame also make a lot sense. But it’s very clear that once the act was passed, exports plunged. For this reason, it’s safe to say that the recession of 1930 was dramatically exacerbated by the tariff. And indeed, the Great Depression may be more accurately termed “the Great Protectionist Debacle”.
The Smoot-Hawley tariff was one of the biggest issues in the 1932 election campaign, with FDR being strongly opposed to it. FDR eventually passed the Reciprocal Tariff Act in 1934, the first US move towards free trade. (Every President in both political parties since FDR has supported free trade.) The US’s eventual recovery was directly tied to the increased trade that resulted from World War II.
I find this all very interesting, but it also makes a lot of sense. The US economy was doing extremely well until 1929, and while there was obviously too much debt in the private sector that might have created a recession, that’s never provided a great explanation for the severity of the crash. Almost all the prior recessions and depressions in the US resulted from too much debt, as well, but none of them lasted 10 years, led to 25% unemployment, or resulted in a 60% drop in exports.
The other thing about the Great Depression is that most people don’t remember the details of it. The US economy actually started to briefly recover not long after the 1929 crash, but then quickly collapsed in dramatic fashion. This may very well suggest that the Smoot-Hawley Tariff actually turned a run of the mill recession into the worst depression known in modern history.
This, of course, been one of the major explanations behind the Depression for a long time, but I find that most narratives ignore the context leading up to it. It would appear that it had become an obsession amongst policymakers to try to prevent the agricultural sector from eliminating its excess capacity, and McNary-Haugen exemplifies the extremes policymakers were willing to go to in order to try to artificially prop up agricultural prices.