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By J. Bradford Churchill

On his KHOW radio show of May 2, Peter Boyles impugned the historical knowledge of Sen. Wayne Allard, expressing incredulity at the level of ignorance he thought the senator’s statements indicated.

He had asked the senator why he supports free trade. As part of his answer, the senator mentioned the Great Depression as a historical example that argues in favor of free trade. Some e-mailers defended the senator by mentioning the Smoot-Hawley Tariff Act, which, in rebuttal, Boyles asserted (falsely) was not passed until 1931 (it became law in June of 1930, a little more than six months after the Crash of 1929). It could not have caused the Great Depression, he argued, since the Great Depression had already started. Free trade, therefore, had nothing to do with it. In fact, Boyles owes his listeners and the senator an apology. It is not ignorance, but a difference of opinion, that separates their positions.

No one should be so shortsighted as to oversimplify the confluence of factors that led to the Great Depression. Impoverished European nations had taken out massive loans from others either to rebuild their own infrastructure or to pay crushing reparations required of them by the victors in World War I. Many were unable to make those payments and, for this and other reasons, there was a growing credit crunch. Some manufacturing sectors suffered consistently throughout the decade of the 1920s. Agriculture suffered from overproduction, and many efforts to introduce price supports including tariffs on foreign produce were tried to keep the sector healthy. They failed.

Two successively higher tariffs were added during the early 1920s — the Emergency Tariff on May 27, 1921, and the Fordney-McCumber Tariff on Sept. 17, 1922 — and while there will not be agreement among the differing parties on how significantly these contributed to the economic woes of the next decade, tariffs were higher than ever before in American history by 1922, long before Black Tuesday, Oct. 29, 1929.

Smoot-Hawley did not help when it more than doubled the existing record tariffs (to 50 percent or more on many goods) and touched off a worldwide war of protectionism. Europe was probably hit much harder, but the collapse of deeply indebted European economies did not help solve the credit problem that was certainly one of the primary factors in the decline.

One might also point to the fact that unemployment was high, somewhat less than 9 percent, when Smoot-Hawley was signed into law, but by 1932 it had risen to almost 24 percent and nearly hit 25 percent in the following year.

That does not prove Smoot-Hawley caused deepening unemployment by itself, but it cannot inspire confidence in those who would argue it was of little consequence. And it is important to note that FDR’s policies had barely brought unemployment to below 15 percent by 1940.

The best that the most liberal economists can say about the tariffs of the ’20s and ’30s is that they did not hurt the U.S. economy as much as others might argue, but they admit that the tariffs did cause damage. Some might argue that there are trade-offs that would make the harm of tariffs and other protectionist practices worth enduring at times, but there will be harm.

On balance, then, the Great Depression does provide evidence that trade barriers and artificial price supports cause economic problems. Thus, removing them — all other things being equal — is better than keeping them or adding to them. Allard was right. He is not an economic ignoramus, and he deserves an apology. Boyles’ listening audience deserves to know the truth.

J. Bradford Churchill is a resident of Longmont.

READER COMMENTS

J. Bradford Churchill's comment stating that "Agriculture suffered from overproduction..." seems to be as popular a myth as "Smoot-Hawley caused the Great Depression."

Some pertinent facts: 1928 production of oats, wheat, rye, barley, flax and corn was 5.333 billion bushels; 1932 production of the same commodities was 5.253 billion bushels. 1928 production of beef, pork, mutton and veal was 17 billion pounds; 1932 production of the same meats was 16.8 billion pounds.

Gross farm income for 1928 was $11.7 billion with a National Income of $82 billion, while in 1932 gross farm income was $5.3 billion and National Income was $39 billion. If you take the time to do the subtraction you find that from 1928 to 1932 gross farm income fell $6.4 billion and National Income fell $43 billion. For every dollar of gross farm income that was lost, National Income fell $7.

Nearly the same production in 1928 and 1932 for a larger population. National Income lost $43 billion due simply to low prices for farm production. Tariffs to raise imported farm products to our 1928 domestic price level, along with a parity price support program would have ended the "Great Depression" in 6 months to a year. Smoot-Hawley didn't work that way. Nor was it intended to.

It wasn't until 1941, when farm prices recovered to their 1928 levels that our National income returned to its previous levels. Then came WWII (December 1941), the Emergency War Price Stabilization Act of 1942, parity farm price supports which continued by law and extension through 1952, the "Post-War Boom," and the eventual dismantling of the parity ag price support program in the early 1950's. Our local, state and national fiscal problems today (debts galore) are all symptoms of the apparent inability or outright refusal to grasp the realities of our dependence on domestic raw material production (annual new wealth) and the proper domestic pricing of that production to create a solvent economy.

I admitted that the tariffs were only a contributing factor. I did not assert that they caused the depression nor did I assert that they caused the stock market crash. I can quote authorities who disagree with those you cite both about current economics and historical. It is well known, however, that the stock market crash was a symptom, not a cause, of the Great Depression. Most of the losses were made up in the next few months, and then there were subsequent crashes as expected recoveries never materialized. There were more systemic problems than simply "rampant speculation." If punitive tariffs were not a problem, why did the United Nations make lowering trade barriers one of its most important initiatives upon its founding? If you throw a drowning man a lead weight, you might argue later that the weight only added 1.5% to the weight he was trying to bear. But you can't suggest that you helped him.

And if free trade is so bad for us, why is our economy purring along with low unemployment, healthy job creation, high productivity, and comfortable growth? You'd have to hate America to want to change those trends.

It's a myth that the Smoot-Hawley tariff actually caused the Great Depression.

A tariff in 1930 could hardly caused a stock market collapse in October 1929. Two-thirds of U.S. imports under Smoot-Hawley came in duty-free and more items were added to the free list than were taken from the free list and made dutiable. Read FREE TRADE AND PROTECTIONISM by Alfred E. Eckes, Jr. at http://thunder.sonic.net/~doretk/Issues/97-08%20AUG/freetrade.html. Rampant speculation led to the Great Depression.

Pat Buchanan is wrong about many things, but in The Great Betrayal he astutely quotes an economist who points out that "... from 1929 to 1933, America's GNP fell from $104 billion to $56 billion, a loss of $48 billion. However, net exports fell by only $700 million, and domestic spending declined by $47.3 billion. In other words, net exports decreased by 1.5 percent of the fall in GNP, as domestic demand fell by the remaining 98.5 percent! It is patently absurd to fuss over that 1.5 percent fall and overlook the other 98.5 percent." p. 249.

Those who believe in this "free trade" nonsense really believe in "lawless trade" that's more properly called "transfer of the factors of production": "land used" and "labor used" by "capital over there" instead of over here. It's "labor arbitrage" that pits U.S. workers against an enormous reservoir of extremely low paid workers in China and India.

And the issue isn't about "protectionism," because "free trade" advocates are greatly in favor of protecting "intellectual property," but not in favor of protecting the jobs of those who spent years in universities gaining technical skills.

Current policies are "reverse protectionist." They actually subsidize the exporting of jobs. For a complete description, see "How the U.S. Subsidizes Offshoring of Jobs" at http://www.exponentialimprovement.com/cms/offshoresubsidies.shtml
Here's a summary:
- Companies can defer paying taxes on income from foreign subsidiaries ... indefinitely.
- Tax loopholes, such as moving headquarters to a tax haven.
- Allowing R&D and other investment tax credits for companies that move manufacturing off shore ... the U.S. doesn't fully benefit.
- Corporations engage in flawed transfer pricing schemes to avoid U.S. taxes, e.g., they sell components to foreign subsidiary with very low profit markup, and buy back product after manufacture with a very high foreign profit markup.
- Not including labor & environmental standards in trade pacts is a subsidy. The costs of environmental degradation and injuries to workers are externalized onto the public at large. Without standards, democracy is undermined: individuals don't value and "purchase" clean environment & workplace safety, governments do; if a government isn't a democracy, it doesn't represent the interests of its citizens.
- Corporations are allowed to write-off the cost of shutting down a factory in the U.S. when it transfers the work to a factory in a foreign country.
- Corporations are allowed to write-off the cost of bringing new foreign employees to the U.S. and requiring its U.S. employees, as their last duties before being fired, to train the foreign employees to do their jobs.

And corporations vigorously oppose increasing wages in foreign countries. See http://www.exponentialimprovement.com/cms/consdia.shtml#7.

What's called "free trade" is individually logical on the part of each corporation, but it is collectively irrational for the nation as a whole. That is, it's insane to undermine the purchasing power of the nation and its ability to produce tradable goods. An exponentially-increasing "trade" deficit is economically unsustainable. See "The Trade Deficit and the Fallacy of Composition" at http://www.exponentialimprovement.com/cms/fallacy.shtml.

To those who endorse current policies, I ask, why do you hate America?

I'm not an expert on the subject but those tariffs may indeed be the cause of the Great Depression. The financial difficulties may have been the catalyst. We previously had worse recessions but had recovered from them more quickly . Had it not been for the tariffs we may have simply gone through another bad recession.

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