SMOOT-HAWLEY REDUX (Featured Article)

This article originally appeared in the November 2010 edition of the Casey Report.

As the Greater Depression continues along a parallel pathway with the Great Depression of the 1930s, Congress is about to commit the same blunder it made in 1930. The rocket scientists in the House of Representatives in September passed the Currency Reform for Fair Trade Act, which aims to crack down on Chinese currency manipulation by targeting imports from China and other countries with currencies that are perceived to be undervalued.

The vote was 348 to 79, with more than 100 Republicans voting in favor of the bill. It died in the Senate before the mid-term elections, but Representative Sander Levin, Representative Tim Ryan and Representative Tim Murphy are expected to reintroduce the bill when the House returns in February from a congressional district work break. Senators Shumer and Casey are also planning legislation to punish the Chinese for unfair trade practices.

The head rocket scientist, Nancy Pelosi, declared:

“For so many years, we have watched the China-U.S. trade deficit grow and grow and grow. Today, we are finally doing something about it by recognizing that China’s manipulation of the currency represents a subsidy for Chinese exports coming to the United States and elsewhere. We owe that to American workers.”

This legislation is part of the Democrats’ “Make It in America” initiative that endeavors to increase domestic manufacturing and creating new American jobs. In classic congressional fashion, they are attempting to pass a bill that will make them look good in the eyes of their constituents, but will exacerbate already dangerous world trade imbalances.

You can count on Congress to pander to unions, protectionists, and America Firsters with hollow legislation, when 40 years of bad decisions, bad policies, and bad choices placed us in this situation. When you have made legislative choices that will require the U.S. government to borrow another $6 trillion in the next four years and you already owe someone $868 billion, it is not a good idea to punch them in the nose.

The U.S. is running an annual trade deficit exceeding $500 billion per year. It has not run an annual trade surplus since 1975. The trade deficit peaked at $769 billion in 2006, subtracting 5.7% from GDP. The enormous trade deficits are a result of government spending policies, Federal Reserve monetary policies, and corporate outsourcing that have gutted the industrial base of the U.S. These policies resulted in personal consumption expenditures surging from 62% of GDP in 1970, to 71% of GDP in 2009.

The trade deficits are not the fault of the countries selling goods to American consumers. Trade subtracted 3.5% from growth in April through June, the most since 1947, as imports surged at the fastest pace since 1984.

The trade deficit with China reached a record level in August of $28 billion, as imports skyrocketed. The U.S. is on track to exceed the 2008 record trade deficit with China of $268 billion. The facts that you don’t hear from the protectionist crowd is that exports to China are on track to reach $84 billion in 2010, 20% higher than the previous peak in 2008. Exports to China have increased by 525% since 2000, while imports from China have increased by 340%. The storyline about China not allowing U.S. imports into their country is false. Putting tariffs or quotas on goods coming from China will not create jobs in America and will only deepen and lengthen the current depression, just as it did in the 1930s.

Protectionism During the Great Depression

The complete collapse of worldwide trade during the 1930s, with its root in trade protectionism, did not cause the Great Depression, but it certainly didn’t help. In 1929, exports totaled $5.9 billion and accounted for 5.7% of GDP. By 1933, exports had plunged to $2.0 billion and accounted for only 3.5% of GDP. Imports plummeted by an equal amount. Global trade declined by 60% as tariffs were imposed and retaliation created a downward spiral. The U.S. provoked the trade war with the passage of the Smoot-Hawley Tariff Act.

Senators Reed Smoot and Willis C. Hawley sponsored the bill, and it was signed into law on June 17, 1930, by Herbert Hoover. It raised U.S. tariffs on over 20,000 imported goods to the highest levels since 1828. The new tariff imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States, quadrupling previous tariff rates. According to the U.S. Statistical Abstract, the overall effective tariff rate was 13.5% in 1929 and 19.8% by 1933.

It seems politicians never change. During the 1928 presidential campaign, Herbert Hoover promised to help beleaguered farmers by increasing tariffs on agricultural products. After getting elected, Hoover asked Congress for an increase of tariff rates for agricultural goods and a decrease of rates for industrial goods. The Republican-dominated House and Senate did him one better and increased tariffs across the board. 

In May 1930, a petition was signed by 1,028 economists asking President Hoover to veto the legislation. Henry Ford begged him to veto the legislation. Hoover opposed the bill and called it “vicious, extortionate, and obnoxious” because he felt it would undercut his pledge to international cooperation. Then he proved that he was a standard-issue weak-kneed politician by signing the bill. Hoover’s initial instinct proved correct. The international community levied their own tariffs in retaliation after the bill became law. Canada, Britain, and other European countries immediately imposed their own tariffs. World trade came to a grinding halt.

Germany, with its war reparations, was particularly vulnerable to this contraction. Ironically, the U.S. was the lender to the world during the 1920s. American lending propped up the entire world economy. Former allies paid war-debt installments to the U.S. chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the U.S. and Britain. Similarly, U.S. investments abroad provided the dollars, which alone made it possible for foreign nations to buy U.S. exports.

By killing world trade with the Smoot-Hawley tariffs, the U.S. shot itself in the foot and contributed to worsening the Depression in Germany. This inadvertently led to the rise of Hitler. Talk about unintended consequences.

Decades of Bad Choices

Blustering politicians like Nancy Pelosi and Chuck Schumer are attempting to ram through populist legislation in order to appear to be on the side of the American people. The Treasury secretary of the United States has declared China a currency manipulator. Chinese Premier Wen Jiabao responded in kind:

“If we increase the Yuan by 20% to 40%, as some people are calling for, many of our factories will shut down and society will be in turmoil. If China saw social and economic turbulence, then it would be a disaster for the world.”

They are playing a high-stakes game of chicken, and the ante is much higher than it was in 1930. Exports account for 12.5% of our GDP today, versus 5.7% prior to the Great Depression.

The United States was a net exporter when the 1970s started. Our enormous trade deficits, which subtract from GDP, were not imposed on us by foreign countries. We are in this predicament because we made appalling choices.

We chose to allow the Federal Reserve to inflate away 95% of the purchasing power of the USD since 1971. We chose to elect politicians that have driven the national debt from $371 billion in 1970 to $13.6 trillion today. We chose to support “free trade” legislation that allowed corporate CEOs to gut our industrial base and ship good-paying jobs to China, while filling the pockets of these executives with millions. We chose to spend rather than save and invest in our country. We chose to become a consumer debt-centered society, relishing in the cheap goods we could buy from China on credit. We chose low prices at Walmart over small-business owners and sustainable domestic production of goods. Decades of bad choices cannot be reversed through taxation, tariffs, and quotas.

The Chinese have pegged their currency to the USD since 1995. For a decade, the U.S. was just fine with the peg, as American consumers got cheap goods, American corporations reaped huge profits from outsourcing, and banks raked in billions by lending money to everyone. Now that we have entered the Greater Depression, the finger pointing and accusations have begun.

Politicians and the people who elected them want someone to blame for their bad choices. The Chinese are the bogeyman that forced Americans to buy on credit. They forced American corporations to offshore millions of U.S. jobs. If the U.S. had a strong dollar policy, ran surpluses, and lived within its means, the Chinese peg would be meaningless.

U.S. GDP has grown by 335% since 1985. Over this same time frame, exports to China have grown by 1,800%, and imports from China have grown by 7,700%. Do politicians actually believe that imposing 30% tariffs on all Chinese products will magically create new manufacturing jobs in America? The 42,400 factories that have closed since 2001 and the 5.4 million manufacturing jobs lost are not coming back. A 30% upward revaluation of the yuan or 30% tariffs on Chinese products would devastate an economy that is still 70% dependent upon consumer spending. Just as in 1930, protectionist measures would boomerang and smack America in the back of the head.  

If the pandering politicians in Washington D.C. are myopic enough to ignore the lessons of the past and start a trade war with China and/or the rest of the world, the possible implications would be:

  • An immediate increase in the prices of goods from China, which would proportionately hurt the lower and middle classes who shop at Walmart.
  • Retaliatory tariffs and protectionist policies by other countries, resulting in a decline in U.S. exports.
  • A net loss of U.S. jobs as the decline in consumer spending-related jobs will far outweigh any benefits to exporting businesses.
  • A decrease in world trade, resulting in a deepening of the current worldwide depression.
  • Possible unintended consequences similar to what happened in Germany after the hyperinflationary collapse of their currency (dictators, war, chaos).

The investment implications of trade barriers, tariffs, quantitative easing, and currency debasement are clear. Gold, silver, and virtually all commodities are likely to soar in this environment. To find out how to profit from this certain trend, check out Casey Research’s BIG GOLD REPORT.

51 thoughts on “SMOOT-HAWLEY REDUX (Featured Article)”

  1. Love the plug at the end. Good stuff Jim, solutions (other than the pelosi one)? Obviously, we need to increase manufacturing here, but how with all those in power against it?

  2. Admin

    …………..and furthermore, Boomer Bob Gates is proposing a $100 billion dollar defense budget cut. Bob Gates for president.

    This smackdown is over. You lose. Why? Because I said so.

    1. SSS

      Cutting $100 billion my fat ass. You really are a gullible delusional Boomer. The Defense budget is $700 billion today. In 5 years it will be $1 trillion, so Gates “cuts”$100 billion and it is only $900 billion in 5 years. This is the kind of BOOMER math that ruined the country. Keep up the good work destroying the country.

  3. 17 million square feet of intelligence buildings since 911.

    Cutting 100 billion from that probably only amounts to 1 million square feet.

    And still no sign of Bin Laden.

    Clearly we need 17 million more square feet of analysts, wtf is wrong with Gates?

  4. Administrator,



    Nothing between you and me but air and opportunity.

    Nothing between you and me but fear and atmosphere.

    Are you going to step up and take your medicine, or are you going to slink off in fear and shame like a fucking cur, with his tail between his legs ?

    Your move.

    SSS and I anxiously await.

    1. Smokey

      Are you hitting the sauce again?

      It is 7:45 in Tucson. SSS already went to bed.

      I fart in your general direction.

  5. Admin

    Another clueless, Lost Civic Virtue (Stauss and Howe’s characterization, not mine) child of the Thirteenth Generation who can’t even manage to view a picture, which shows up on my computer, on his own website. Absolutely pitiful.

    P.S. You’re badmouthing the instructions for posting pictures, which have worked perfectly, by your lovely wife, Avalon. It’s sofa time for you tonight. Sleep tight.

    1. SSS

      Your Atari computer running DOS doesn’t cut it in 2011. No one else can see your picture. Keep trying. Or be a real Boomer and blame it on someone else. Maybe a dead President.

  6. SSS
    Suck snot, spook. You syphilitic spooge soaked sack of shit stained scrotum scrapings. You scummy snatch sniffing, smegma slurping simpleton.

    Boomers are a tidal wave of entitled spineless feeble minded fat ass channel surfers. A few stragglers aside, they eat shit.

    SSS after a round with Punk:

  7. Smokey

    Duck. Admin threatened to fart in your general direction. Given his ability to generate prodigious and lethal amounts of verbal gas, the entire Eastern seaboard is in jeopardy.

  8. SSS—-Both your wolf pictures came across clean on my computer. I don’t know why Administrator couldn’t see the first one.

    Punk—-You are much better looking than I imagined. You sure that’s you, or are you just trying to impress ?

  9. Smokey

    Admin was just trying to screw with me on the first picture comment. He’s busy now putting the sheets and blankets on the sofa. Avalon has already locked the bedroom door.


    Fucked up the first picture try, didn’t you? Indication of how it will go for you in the future.

  10. Punk,

    Please don’t insult llpoh by later trying to tell him that you in any way, shape, or form took on SSS tonight.

    If you don’t move your game up several notches, you will forever remain with the pups.

  11. Its getting late for me, I won’t be around long enough tonight for a good fight… I am just warming up and getting into the spirit… Got a long list of beat downs to go through, I doubt very much that I will be attending the big dog Superbowl party this weekend. Not that I give a flying shit about football.

  12. I love the 2 hours time difference between Tucson and Philly. While Admin’s asleep, I can lay IEDs all over this site if I so choose. He knows this, and he’s starting to get treatment for insomnia, according to my airtight sources. All I’ve asked is a 50% cut from his TBP Store of Doom and the Google button. He refused. Honorable, but foolish, guy. I will continue to haunt him relentlessly.

    BOO, Admin!!!


  13. Punk – I have now considered the situation in full. Here is the thing. You try real hard. You bark and snarl and growl, but nobody is terrorized. The invariably go, ooh, how cute, a poodle.

    So, I have decided to promote you to probationary sidekick. You are allowed off the porch, but you must not go out alone. It is just too dangerous for you yet.

    Don’t be dismayed – sidekick is a real important role. Batman had Robin, Martin had Lewis. But until you can actually scare the living shit out of folks you can’t make the next step.

    Plus as sidekick, you are free to support any big dog you chose, at any time. You will gain valuable experience.

    I recommend you keep practising on noobies as they can be easily cowed, at least sometimes.

    Congratulations, Sidekick Punk. Please go forth and abuse your new power.

  14. Punk,


    That llpoh has deemed you fit to join the sacred ranks of our fraternal order is shocking, given that you skipped several of the steps generally required by newcomers for entrance.

    I do believe that much groveling, or perhaps the offer of a blowjob, is called for from you to show your appreciation to llpoh.

    You would not have made it if you were not worthy.

    Please do not humiliate us.

  15. interesting article. I think though first this country needs to get rid of the corporate tax (which is around 35%) which is effectively a export tariff.

    the problem is China does not engage in any form of free trade, at some point we need to engage some from of protection from China’s unfair trade policies. In reality that should been done about 20 years ago. Unfortunately American politicians fell in love with “free trade”. It made a lot of money for the banksters, Multi-national corps, but transferred the jobs from a decent paying manufacturing base to low payed service base.

    we are in a bad position to fight China now unfortunately we have two problems:

    1. a bad recession (efff what MSM says this is still a recession)
    2. and China owns our ass in government debt

  16. Smokey – I didn’t dwell on his probationary status. But it is there if he doesn’t keep up his training. He needs to keep chewing newbies and jabbing the big dogs.
    Sidekick is a good level for him – he does add a certain entertainment valeue, and scores the odd crotch kick when noone is looking. I mean, the Skipper needed Gilligan, and Matt Dillon needed Festus. it is important work. Plus, who knows, maybe someday, when there are 50,000 members, only a few of us will remember his early days. He might then be known as Piitbull Punk. Stranger things have happened.

    But for now, let us celebrate his coming off the porch. Hope he doesn’t get chewed too much too soon.

  17. Sidekick Punk…
    Has a nice ring to it.

    Shouldn’t this be something you discuss with your big dog brethren? I cannot accept this title unless it is to be honored by all. SSS and Stucky have been quiet on this issue, as has the admin, I am not sure that they feel the time is right.

  18. This picture is more like Punk. He’s a big dog, but he ain’t vicious, unless he needs to protect his best friend, and then he will lick the offender to death.


  19. Punk – all would love to have as occassional sidekick and adversary until your next promotion. Anyway, I have few realms of authority on this site (now that I think of it, overseeing your promotion is about it). If they don’t like it, you and I will kick their asses. Even Smokey, grudgingly, as acknowledged youn new exalted position. So do not worry. Keep those photos coming. And keep after the newbies. I saw one just yesterday. He stepped-lightly, but you never know when he will step off the porch uninvited. Then he is all yours.

  20. It appears the comments on this page have climbed to new heights. The difference between now and 1930 is that in 1930 the US was a creditor nation and we certainly didn’t have the equivalent of 7% or 8% of our GDP held in trust by the nation we were directing our trade war guns. Congress can bully and bluster all it wants but any serious sanctions will be met with a crushing run on our debt. Think our interest payments are high now? Try and see what happens when they double because our number one buyer of debt sits out the auction and the price in terms of interest rises to debilitating levels. Even Congress isn’t that stupid.

    1. Smokey

      Skinny’s desk and my desk faced each other with nothing between them when we worked together at IKEA. I learned some of my most offensive language from him. He would curse like a sailor at developers as he tried to find sites for our stores.

  21. Skinny

    Re your “new heights” observation on the comments on this featured article.

    Admin ticked me off with his impertinent attitude and comments on the Boomer Generation on another thread. I had to retaliate. It was a matter of honor. Stand fast and defend. I took my cue from Sir Winston. Note Admin’s weak responses. It was like getting hit with a dry sponge thrown at 50 paces.

    It won’t be the last time that comments veer off topic rapidly on a thread. Happens all the time. It’s TBP.

  22. Jim you have poetic tongue. In the 90s I was a skateboarding, spray painting anarchist loving listening to Green Day, now being a banker destorying society seeing you tie Green Day makes me nostalgic.

    Somehow you have to start use using some Smashing Pumpkins songs lyrics. Or for the plight of black people, you could listen to Nas Illmatic, I am sure there would be many quotable lines in there. I keep it in my car, Original copy that I bought as a teenager in the 90s. I need to remember sleep is just the cousin of death, and it appears society is a asleep (me too) to the changes being done.

  23. B2

    WTF are you talking about, banker boy? First, you encourage Admin to feed us more Green Day shit, and then suggest adding some Smashing Pumpkins and Nas Illmatic to this drizzle. Just what we need. More socially conscious asshole muscians and dickhead B2s to guide us to the Promised Land.

    Go back to being a skateboarding, spray painting anarchist instead of a banker. You’ll do less damage to society.

  24. In a multi-year survey of 270 New York sex workers, Wired has determined that 83% of the prostitutes involved have a Facebook page

    Insert Joke Here____________________________


    This is more like Punkin Muttley Drublic

  25. I disagree with your article. China has a war plan concerning the US and you haveny linked our interest in that. No We should not have traded with the Chi-Coms it has been a disaster 7,700 vs 1,800. You think that trend is good for us?? We are not living in our means BECAUSE there is trade with China – Like the Banks you article seems to make cutting trade with China Bad?

    Are you on Walmarts payroll that their name come in your article?? Walmart is the Bad reason Family businesses are gone. We need local distribution think gloabl act local – China is not Local- and we are losing Global as a result. I agree Free Trade is wrong it should be Equal and balanced Trade- . Nothing is Free.

    Yes We should buy American, that’s a better ratio. Beside WHO CARES if China factories close – what about ours!!!! how many people you personally know losing homes, going bankrupt etc,

    No need for China quality or jobs there- I want MY neighbor to have a Job.

    1. Mell

      You’re a moron. The Chinese made us run $700 billion trade deficits with them? Really? The brain power of some people is frightening.


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