The most bizarre part of U.S. president Donald Trump’s April 2 ‘Liberation Day’ speech was when he claimed that the Great Depression, which endured from 1929 until the beginning of the Second World War, would not have happened if the American government had retained tariffs on imported goods, and not introduced an income tax.
What?
President Trump clearly has – at best – an uninformed view of history.
Prior to 1913, the president opined, the U.S. Treasury was bringing in so much money – attributable to tariffs – that a federal commission was struck to find out what to do with all that tariff cash.
He then declared that the U.S. federal government foolishly ended its tariff policy, replacing it with a new Income Tax policy which — in Trump’s words – shifted taxation away from foreign countries and onto citizens of the United States.
Trump added that it all came to an abrupt end in 1929 with the Great Depression – an event that he said would not have happened had they stuck with the tariff policy.
On top of that, he also claimed the government tried to bring back tariff policies, but the country was “too far gone.”
Wrong, wrong, and wrong again.
Here is what really happened.
Students of economics (and history) may recall “the business cycle.” It used to be a big thing in economics, not so much anymore.
It starts with an increase in business and/or consumer spending. That encourages businesses to spend more on equipment and machinery, and hire more workers. The macro economy rises (also known as GDP), profits grow, workers’ incomes go up, and prices tend to rise (because of increased demand).
After a period of time – the apex of the business cycle – higher prices cause businesses to reduce their expenditures, consumers slow their spending, and GDP falls. Then prices fall because of lower demand … and the cycle starts over again.
When the economy is growing, and the business cycle is rising upward, consumers and businesses also buy more imports (along with more locally-made goods). And because nearly all countries in the 1800s got the bulk of their receipts from tariffs, as imports grew so did government revenues.
But the reverse also was true. When the business cycle was in a downward phase and the economy slowed, consumers and businesses bought fewer imports … and government revenues (from tariffs) plunged.
A real boom-bust cycle.
Income taxes are much steadier and reliable. That was a primary reason for the change.
Trump was plainly wrong to blame the Dirty 30s on income taxes.
Yet, on April 2 – in announcing a broad range of new and increased tariffs on U.S. imports — he seems to be singing from the same song-sheet as former U.S. president Herbert Hoover, under whose watch the Great Depression got underway.
In early 1930, protectionist Republicans made a forceful push in both the House and the Senate to protect American producers. Loud calls were made for import tariffs to be enacted.
Historically, tariffs were used both to protect against unfair trade practices and raise government revenue. But not only did they contribute to the boom-bust business cycle, domestic consumers faced higher prices, rising prices, and increased inflation.
Countries with restrictive tariffs often experienced reduced economic growth.
President Hoover faced vocal opposition to the proposed Tariff Act of 1930 – known to history as the Smoot-Hawley Act, after the bill’s sponsors.
Most notably, a group of 1,038 economists – a group that included many esteemed professors from the most reputable institutions across the country — signed a letter of opposition that was entered into the Senate Congressional Record on May 5, 1930.
The economists’ letter detailed the harmful implications that would come from enacting the Tariff bill. They outlined their numerous concerns, including continued-high unemployment, low farm production, and elevated prices – which only would exacerbate the level of food insecurity for American families.
Here’s part of what they wrote:
“The undersigned American economists and teachers of economics strongly
urge that any measure which provides for a general upward revision of tariff rates
be denied passage by Congress, or if passed, be vetoed by the President. We are convinced that increased protective duties would be a mistake … A higher level of protection, such as is contemplated by both the House and Senate bills, would therefore raise the cost of living and injure the great majority of our citizens …
The vast majority of farmers would also lose. Their cotton, corn, lard, and wheat are export crops and are sold in the world market. They have no important competition in the home market. They cannot benefit, therefore, from any tariff which is imposed upon the basic commodities which they produce … America is now facing the problem of unemployment. Her labor can find work only if her factories can sell their products. Higher tariffs would not promote such sales. We cannot increase employment by restricting trade.”
President Hoover was unconvinced.
On June 17, 1930, the Tariff Act — sponsored by two protectionist Republicans, Senator Reed Smoot of Utah, and Representative Willis Hawley of Oregon — was signed into law by the president.
The Act was widely promoted as a way for America to protect the country’s means of production – and supported an effort to shift and cut immigration into the U.S.
As a populist president facing tough economic times, Hoover actively worked to repatriate Mexicans living and working in the United States to their home country. As historian John Rice has noted: “Hoover blamed Mexicans for the country’s economic problems and started the Mexican Repatriation program. It caused the forced migration of between 500,000 and two million people, 60% of whom were birthright citizens.”
The result of the Tariff Act passage was that governments around the world, indeed, retaliated with higher tariffs of their own.
As Smooth-Hawley came into effect in the spring of 1930, the United States’ neighbour, Canada commenced a federal-election campaign. The Liberal government, led by Prime Minister William Lyon Mackenzie King, was seeking re-election as the American tariffs were enacted.
In an infamous pre-election comment made in the House of Commons, King declared:
“With respect to giving moneys out of the federal treasury to any Tory [provincial] Government in this country for these alleged unemployment purposes, with these governments situated as they are today, with policies diametrically opposed to those of this government, I would not give them a five-cent piece.”
King’s dismissive remark, and his seeming obliviousness to Canada’s growing unemployment problem, ultimately led to his and the Liberal government’s defeat.
R.B. Bennett, leader of the Conservative Party, seized on the twin issues of rising unemployment and U.S. tariff threats. He, too, made an historic comment, boasting that the Tories would use retaliatory tariffs “blast Canada’s way into the world markets.”
After winning a sizeable parliamentary in the July 1930 general election, Bennett made good on his promise, quickly enacting heightened tariff on U.S. imports.
Today, as U.S. President Donald Trump rages ahead with tariffs — and Canada in the midst of yet another federal-general election — it all just seems a little too familiar.