Douglas Irwin – Peddling Protectionism: Smoot-Hawley and the Great Depression
A non-hyperbolic take on the most notorious tariff bill in American history. The Smoot-Hawley Act of 1930 was economically harmful, made the Great Depression even worse, and soured international relations at just about the worst possible time.
But the Depression began before Smoot-Hawley passed, so the bill can’t be blamed for causing it, which is a mistake many analysts make. The main culprit was monetary policy—a one-third contraction in the money supply distorted prices, ruined the investment climate, disrupted the financial sector, created massive economic uncertainties here and abroad
Monetary contraction also made Smoot-Hawley’s tariff hikes even more severe. For example, suppose there is a $1 tariff on a good that sells for $5. A rapid deflation lowers its nominal price to, say, $3 in nominal terms, but the tariff remains at $1. What was a 20 percent tariff becomes a 33 percent tariff for reasons having nothing to do with the Smoot-Hawley bill. Outside factors made a bad bill even worse.