Smoot-Hawley: A Brief History

Given the tariff-happy administration and the current selloff happening, it seemed a reasonable time to compare another tariff event known as Smoot-Hawley. Bad policy can be just as dangerous as bad luck, and if there’s one economic blunder that deserves its own Hall of Shame, it’s the Smoot-Hawley Tariff Act of 1930—an absolute disaster wrapped in good intentions.

This little gem of legislation was supposed to help American businesses during tough times. Instead, it helped set the global economy on fire and make the Great Depression even worse. Let’s examine how two lawmakers—Senator Reed Smoot and Representative Willis Hawley—turned a simple and good idea (protect American jobs!) into an economic dumpster fire (global trade war!).

The Big Idea: Let’s Protect American Jobs!

The late 1920s were a weird time. The stock market had been partying hard throughout the decade, but by 1929, the hangover was brutal. The crash that October set off a chain reaction, and businesses started struggling. In classic “something must be done!” fashion, Smoot and Hawley came up with a simple plan:

• Raising tariffs (taxes on imports) on over 20,000 foreign goods, which in turn results in…
• …making foreign products more expensive so Americans buy more domestic goods, which in turn leads to…
• …boosting local businesses and keeping jobs in the US.

If that sounds logical, that’s because it is… on paper. But the real world is never that simple, and this plan had a few minor flaws—like ignoring the fact that other countries might not just sit there and take it.

Reality Check: The Global Economy Isn’t a One-Way Street

Trade is like a game of chess. You make a move, and the other guy responds. When the U.S. jacked up tariffs, foreign countries retaliated with their own tariffs on American goods. And that’s where things got messy.

• American farmers got crushed. Other countries stopped buying U.S. agricultural products, leading to massive surpluses and plummeting prices (excess supply → lower prices). Farmers, already struggling from falling demand, were now drowning in excess crops no one wanted.

• Manufacturers took a beating. U.S. companies that exported goods suddenly found their biggest customers—other countries—slamming the door shut. Exports collapsed, which meant more layoffs and more economic pain.

• Trade wars made the recession worse. Instead of encouraging growth, Smoot-Hawley helped shrink the global economy. By 1933, U.S. exports had fallen by more than 60%, and global trade was in free fall.

The Market’s Verdict: “Hard no.”

If you think today’s markets are dramatic, imagine the sheer panic of 1929-1932. The Dow Jones lost almost 90% (read that number again) of its value during the Great Depression, and Smoot-Hawley did absolutely nothing to help—except maybe speed up the decline.

The Act was signed into law in June 1930, and the market responded with all the enthusiasm of a trader seeing an overnight rug-pull. Stocks continued their downward spiral, businesses kept shutting down, and unemployment shot up.

The big irony? Even some of the biggest names in the country begged Hoover not to sign it. Over 1,000 economists sent a letter warning that this tariff war would be a disaster. Business leaders from Henry Ford to J.P. Morgan tried to talk sense into Washington. But, as we all know, politicians are seldom prone to logic.

How Bad Did It Get?

Here’s a quick stat that tells you everything you need to know:

• In 1929, U.S. exports were around $5.2 billion.
• By 1933, they had fallen to just $1.7 billion.

That’s a collapse of over 67% in just a few years. Imagine if your portfolio took that kind of hit—yeah, not great.

And as the world’s economies shrank, people started looking for someone to blame. Trade wars and economic collapse created political instability, which helped fuel the rise of some not-so-friendly leaders in Europe (Adolph comes to mind).

The Lesson: Don’t Start Trade Wars in a Recession

It took years to undo the damage. In 1934, the U.S. finally started cutting tariffs and re-opening trade lines. But by then, the damage was done, and the economy was still limping along.

What’s the takeaway?

• Trade is a two-way street. If you tax other people’s goods, they’ll do the same to yours. No one wins.
• Protectionism sounds great but usually backfires. A little protection here and there is fine, but going full “America First” without considering global consequences? Bad idea.
• Markets hate uncertainty. Smoot-Hawley didn’t just hurt trade—it made businesses scared to invest, which made everything worse.

Will We Learn This Time?

If Smoot-Hawley taught us anything, it’s that well-intentioned economic policies can still be absolutely terrible. The next time you hear politicians talking about “bringing jobs back” by slapping tariffs on imports, just remember: we’ve been down this road before. And it didn’t end well.

Smoot and Hawley may have meant well, but their names are now synonymous with one of the worst economic policies in U.S. history. The great depression saw a 90% selloff and a full 21 year recovery period. Let’s all hope we don’t repeat the same mistake twice. Unfortunately, we are flying in that direction faster and faster by the day.