It is time to remember Smoot-Hawley
ONE cannot repeat too often that the great depression of the '30s was generalized, deepened, and spread around the world by a protective tariff bill known as the Smoot-Hawley Act of 1930. The United States stock market drop of October 1929 was the beginning. The market at that time was virtually unregulated. Any kind of skuldruggery was permissible and every conceivable kind of trickery was employed. A break in the stock market was inevitable. Stock prices had risen beyond all reason and far beyond real values.Skip to next paragraph
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But those who have gone back and studied the event and its consequences usually agree that the initial break in stock prices need not have triggered a worldwide depression.
What did trigger the depression was the highest ever American protective tariff which was Washington's almost reflexive reaction to the first sign of a decline in the economy.
It bred instant retaliation.
The retaliation fragmented the modern industrial world. Protective tariffs all but stifled international trade. Business activity slowed. Unemployment spread. Buying power declined. Communists cheered at what they thought was the beginning of the end of the capitalist world. It took nine years for the Western world to begin to recover from the depression.
Apparently that experience still casts a shadow in Washington. As expectable there is much talk in Congress of raising tariffs ``to protect American jobs.'' There is a new trade bill pending in the Congress. But it is encouraging to notice that in its present phase it is not quite as protectionist as the one Congress played around with last year.
And it is also encouraging that the President is still opposed to protectionism and is keeping the brakes on protective tariffs as much as he seems to think is politically permissible.
What is not encouraging is that the President continues to be even more adamantly opposed to new taxes than he is to tariff protectionism.
Here is a case where two of the President's deepest convictions are coming into collision. And it is precisely that impending collision which is causing such uncertainty and hesitation in the American and European stock markets these days, and the dollar to behave as though it were teetering on the edges of an abyss.
The US has been living on borrowed money since Ronald Reagan refused to pay for his arms program out of revenue. He has been paying for it by allowing the outside world, the Japanese heavily included, to send their money to the US. The trade deficit is funded by foreign money.
There is nothing wrong, or undesirable per se, about foreigners investing in American enterprise. But not all the money coming in has been invested. Most of it has been loaned. The federal deficit measures the extent to which the US has been living on borrowed money.
A protective tariff seems like such an easy quick fix, but we know from ample human experience that the net effect of a protective tariff is to raise prices, which in turn reduces consumption, which in turn reduces employment, which in turn raises interest rates, which in turn slows the economy.
There is one quick fix which could begin to work almost at once to correct the uncertainty in the stock market and in the value of the US dollar. That would be decisive action to reduce the federal deficit to manageable proportions. That can be done by a fair balance of cutting spending and raising revenue. Mr. Reagan favors such a balance in theory, but he insists that it be done by cutting domestic spending, not by raising revenue.
It seems as certain as anything can be that one of two things is going to happen. Either Mr. Reagan will accept an increase in federal revenue sufficient to revive the stock market and save the dollar or there will be a drift into tariff protectionism.
Interest rates began creeping up last week. When interest rates go up inflation is not far behind.