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JakilaTheHun (99.92)

The Great Depression, Trade, and Price Engineering



November 28, 2012 – Comments (6)

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.

6 Comments – Post Your Own

#1) On November 28, 2012 at 3:11 PM, JakilaTheHun (99.92) wrote:

Sorry for the error at the beginning (should read "Been" not "Being".)  No edit or delete button here at CAPS.

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#2) On November 28, 2012 at 9:16 PM, Option1307 (30.63) wrote:

Really enjoying your recent blogging spree Jakila, you have always had some of the best and most interesting pieces around. Keep up the good work!


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#3) On November 28, 2012 at 9:29 PM, AvianFlu (< 20) wrote:

Very interesting topic and post!
This is a shining example of how the masterminds that attempt to control our destiny are not so smart after all. We are much better off with Adam Smith's invisible hand. Please note that Smoot Hawley and overly tight Fed policy that both started or exacerbated the depression were both the product of "masterminds" that were in over their heads.

 Correct me if I'm wrong, but I believe Milton Friedman pointed out that the depression lasted way longer than necessary due to the implementation of the socialist new deal programs.

I believe that Friedman's analysis of the causes and effects of the great depression can be seen for free at I think the video that covers this is called "Anatomy of a crisis".

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#4) On November 29, 2012 at 12:40 AM, awallejr (38.34) wrote:

Well I wouldn't discount the whole "dust bowl" impact either.  But "protectionism" can have its drawbacks, one of the lessons I suspect is preventing us from accusing China of currency manipulation.

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#5) On November 29, 2012 at 6:15 PM, smartmuffin (< 20) wrote:

"(Every President in both political parties since FDR has supported free trade.)  "

I'm curious as to what you are basing this statement on.  If you mean relative to Hoover, I guess it's absolutely correct, but we still have PLENTY of protective tarriffs on the books, don't we?  Wouldn't a President who supports free trade end all tarriffs?

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#6) On December 05, 2012 at 12:10 AM, TigerPack1 (33.53) wrote:

Mass psychology and demographics may be largely to blame in the 1930s, in a similar fashion to today's economy. Bob Prechter has talked about this important influence on the economy for decades and I thought him loony.  If he has contributed anything of usefulness to our knowledge of the economy, I would say his view of changing mass psychology is his greatest.

My grandfather grew up in the 1920s and 1930s and refused until his death 60 years later to invest a dime in the stock market.  His basis of thinking revolved around the devastating impact of the 1929 stock crash and bear market into 1933.

While baby-boomers were large net savers in the 1980s and 1990s that fueled the monster rise in stock values in the U.S., their aging and retirement years now is a solid singular argument against any type of prolonged bull market in stocks or real estate for another 10-15 years.

Plenty of Gen X and Y individuals will never seriously invest in stocks or real estate after growing up in the Tech bust then Real Estate bust years.  Getting burned by their first experiences will stay with them a lifetime, and is a formed foundation for future reasoning.

While previous Depressions saw bear markets in stocks, their impact on investor "psychology" en masse were not as pronounced.

The economy and spending patterns are a function of (1) jobs and income, (2) availability of credit, and (3) confidence that the economy will improve in the near term.  Today we have weaker than typical scores on all three.

Free trade is nice and helpful, if all sides are playing the same game.  The 1920s-1930s saw a global depression from a number of factors pulling things down, a perfect storm, if you will.

The similarities to today are real, because so many factors are holding U.S. back, even more so considering the  current U.S. sovereign debt mess that did NOT exist in the 1930s, derivatives meltdowns, student loans, credit card debt, etc.

Bill Gross of PIMCO agrees, and put out his slow or no growth forecast this week regarding U.S. prospects for the next deacde.

We can all look at the 1990-present Japanese example of aging populations and a devastated national psyche as additional PROOF that consumer and investor sentiment can be damaged for many deacdes at a time.

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