For decades, the use of tariffs was considered a smart economic move to protect American entrepreneurship and markets for domestic producers.
They were in place as America surpassed Great Britain in the late 1800s and early 1900s as the preeminent nation and economy in the world.
They were in place during the Roaring Twenties — first by the Emergency Tariff Act of 1920 and then the Fordney-McCumber Act of 1931.
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So why are they frowned upon now, especially by conservative economists?
Five words: The Smoot-Hawley Tariffs Act.
The tariffs applied from Smoot-Hawley are erroneously credited with prolonging the market meltdown and economic damage from the 1929 crash and turning it into the Great Depression.
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Yes, it played a role, but not to the mythical proportions now assumed.
In fact, after a brief initial spike, the U.S. tariff rate came down steadily.
One major issue was that the popularity of tariffs in Congress shifted Smoot-Hawley from just protecting U.S. farmers to protecting everything under the sun — it was too broad.
Other issues in the 1930s
The Federal Reserve pumped up the money supply from 1921 to 1928 by 62%, while at the same time, bank deposits climbed 51% and life insurance companies’ reserves climbed to 114%.
The Fed panicked and began hiking rates to slow all that cash and triggered the 1929 stock market crash.
They panicked about it and kept hiking rates after the crash.
Making matters worse, President Herbert Hoover ramped up government spending by 42% from 19230 to 1932 for a series of programs including work schemes.
Enter President Franklin Delano Roosevelt, whose spending schemes included two New Deals. They did not stop the economy from further collapsing but did turn the stock market up.
Political Fallout
I find it interesting how many in the GOP talk about tariffs as if they’ve studied the history thoroughly.
I think the problem they know best about Smoot-Hawley was the political fallout from it, rather than actual economic damage.
The Act also affected the political careers of the two men behind it. Rep. Willis Hawley of Oregon lost his renomination, while Reed Smoot of Utah was one of 12 Republican senators who lost their seats in the 1932 elections, with the swing to Democrats being the largest in Senate history, equaled only in 1958 and 1980.
Charles Payne is the host of FOX Business Network’s (FBN) “Making Money with Charles Payne” (weekdays 2-3PM/ET). He joined FOX News Media as a contributor in 2007 and provides financial analysis across FBN and FOX News Channel.
CHARLES PAYNE
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