A Story to Remember

April 8, 2018

 

The founding fathers of this country were of the belief that history, above all other subjects, was the most important for people to study. History gives us insight as to who we are, where we have been and where we are going.

 

I love to read history and believe that it can be a gauge to the future. That said, I realize that even those who know historical facts are still liable to repeat the mistakes of that past.

 

Indeed, we often view history much as we do current events, through a very subjective lens. Those things that support our beliefs, we latch onto. Those things that don’t, we conveniently ignore. In short, we tend to cherry pick.

 

In telling this story, I’ll do my best to be objective and keep to the facts. Now is an especially good time to remember what actually happened.

 

A Wealthy Businessman

 

Our story begins with a wealthy businessman, a man with no elected office experience, running for president. Despite that, he easily won the Republican Party nomination. During his campaign for the presidency, he was known to frequently insult African-Americans and scapegoat Mexican-Americans.

 

But Herbert Hoover, the former mining engineer once quoted as saying, “If a man has not made a million dollars by the time he is forty, he is not worth much,” won the presidency in 1928. Hoover defeated Democrat Al Smith, with the Republicans maintaining comfortable majorities in both the House and Senate.

 

Less than a year later, the Wall Street Crash of 1929, also known as Black Tuesday (October 29), happened, signaling the beginning of the Great Depression.

 

The Farm Crisis of the 1920s

 

In some respects, the Great Depression came a decade earlier for American farmers. While most people were enjoying relative prosperity in the 1920s, farmers were finding it a tough going.

 

Horses and mules had been replaced by expensive trucks and tractors. With up to one-quarter of farmland previously devoted to feeding horses and mules freed up for production, supply soon outstripped demand, and commodity prices dropped by as much as 60 percent.

 

In his bid for the presidency, Hoover promised to help farmers by increasing tariffs of agricultural products. At that time, about one-third of American families were living on farms.

 

True to his word, soon after taking office in March 1929, Hoover called a special session of Congress to ask for an increase of tariff rates for agricultural goods and a decrease of tariff rates for industrial goods. He said he wanted to keep the overall tariff burden even.

 

Lobbyists immediately got to work, and it soon turned into a special interest feeding frenzy with every industry seeking protection. The result was increased tariffs on both agricultural and industrial goods. Even tombstone makers got an increase in tariff protection with the bill that passed the House in May 1929. The Senate refused to act on the issue of tariffs before adjourning in November.

 

A Congressman from Oregon, A Senator from Utah

 

1930 was a pivotal year. The worm had started to turn with the economy worsening. On a lighter note, 3M began selling Scotch Tape in January, and Mickey Mouse was born in a comic strip. In February, Elm Farm Ollie became the first cow to fly in an airplane. (She also became the first cow milked in flight.) And in April, Hostess Twinkies were invented.

 

Also in April, the Senate, feeling pressure because of the deteriorating economy, passed a bill that increased tariffs, albeit less than the House version. A conference committee then reconciled the two bills, mostly favoring the House version.

 

The result was the Hawley-Smoot Tariff – named after its sponsors, Willis Hawley, a congressman from Oregon, and Reed Smoot, a senator from Utah. The legislation, calling for the highest set of tariffs in American history, became a testament to economic isolationism of that era.

 

Vicious, Extortionate, and Obnoxious

 

To be sure, many people were opposed to the bill. No fewer than 1,028 prominent economists signed a petition in May 1930 asking Hoover to veto the bill. Henry Ford spent an evening in the White House trying to convince Hoover to veto Smoot-Hawley, which Ford called "an economic stupidity."

 

Wall Street banker Thomas Lamont, a partner at J.P. Morgan, said he came very close to groveling. “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff,” he recalled. “That Act intensified nationalism all over the world.”

 

Hoover actually didn’t like the bill, calling it "vicious, extortionate, and obnoxious," noting that it would undermine his commitment to international cooperation. Despite that, he yielded to the pressure from his own party and signed the bill into law on June 17. The Tariff Act of 1930 as it was formally known raised U.S. tariffs on over 20,000 imported goods.

 

Hoover's reservations were well founded. Countries that began warning of retaliation in 1929 followed through with their threats in 1930. In May, Canada, the U.S.'s most loyal trading partner, imposed new tariffs on 16 products that accounted for about 30 percent of U.S. exports to Canada.

(When Hoover was elected president, Canadian Prime Minister, Mackenzie King wrote in his diary that it might lead to “border warfare.”)

 

Disastrous Effects

 

While most economists don’t believe Smoot-Hawley caused the Great Depression, it certainly did not alleviate it and may have made it worse. Certainly, Smoot-Hawley failed to lower unemployment. In 1930, the unemployment rate was 8 percent. It would jump to 16 percent in 1931 and peak at 25 percent in 1932-33.

 

The Tariff Act also poisoned the well in terms of international relations with other countries. The League of Nations, of which America was not a member, had talked of a “tariff truce,” but Smoot-Hawley killed that idea.

 

In the aftermath, world trade collapsed. American exports, which had been $5.24 billion in 1929, were worth $1.16 billion three years later, a 78 percent decline.

 

And Hoover, Smoot, and Hawley paid the price. They were taken to the woodshed by the voters, all three being decisively defeated for re-election in 1932. 

 

Today there is a broad consensus among historians and economists that the Smoot-Hawley Tariff only made a bad situation worse. As a result, most economists today view protectionism as a blunting force to economic growth and that it often harms the very people it was meant to help.

 

It Could Get Very, Very Bad

 

In the fall of 2016, I was saw the Trump signs posted in farm fields throughout rural America. They were the size of school buses in western Nebraska and eastern Colorado.

 

And now farmers are waking up to the realization that a president who they helped put in office is instigating a trade war with China, the second largest economy in the world, and that it is they, the farmers, who will pay the price.

 

Trump last week instructed the U.S. Trade Representative’s Office to consider tariffs on an additional $100 billion in Chinese imports, bringing to $150 billion the range of Chinese goods under consideration.

 

China, which had proposed duties on $50 billion in American goods including aircraft, soybeans, corn and other row crops after the first U.S. move, has said it will respond proportionately.

 

“This could get very, very bad,” an economic developer from Iowa told me last week. Iowa is the No. 2 U.S. agriculture state in terms of farm cash receipts.

 

A wide swath of the U.S. farm economy could be impacted if China goes ahead with tariffs on soybeans, cotton, corn, wheat and beef. China buys roughly half of the U.S. soybean exports, or about $14 billion annually, and is the second-largest buyer of American cotton. In all, U.S. agricultural exports to China represent almost $20 billion annually for American farmers.

 

History can be a great teacher, but only if we allow it so. History tells us that no one wins in a trade war, and that working people on the ground get hurt. Like Hoover, President Trump is ignoring the warnings from the experts. He is certainly ignoring the warning from the past.

 

I’ll see you down the road.

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