The spooky season is upon us, when ghosts and goblins visit door to door, and politicians ask for your vote. Yet few understand the terror of Donald Trump’s call to penalize our trading partners with 20% tariffs and 60% tariffs for China. The theory is that it would improve the value of home goods. But this form of Economic Isolationism has been tried before by the Republicans, destabilizing not only the nation, but our trading partners. So heed this tale of Tariffs Gone Wrong! (This article originally ran in the Sentinel May 25, 2020).
The Roaring ’20s saw 42% economic growth bring national unemployment down from 11.7% to 4%. Only farm goods took a tumble, shrinking from 18% of the economy to 12.4%. This set the stage for the 1928 presidential election. The Democrats chose the popular New York governor Al Smith, a jovial man-of-the-people who loved to meet the public. The Republicans chose the stiff, charmless Quaker, Herbert Hoover, a man uncomfortable with crowds and public speaking. What was his appeal?
Best man for the job
Personality aside, Hoover had gained a reputation as a World War I humanitarian, an engineer promoting the adoption of modern technology, who was the economic genius in the Harding and Coolidge administrations responsible for the booming economy. He and his environmentalist brother Theodore were Iowa natives, who graduated as mining engineers from Stanford University in the 1890s, during a national Depression. Herbert married his Stanford classmate Lou Henry in 1898, the daughter of a Monterey banker, and in 1920 built a home in Palo Alto. Brother Theodore so liked the Central Coast, he returned in 1913 to buy Rancho Del Oso, north of Santa Cruz near Año Nuevo.
At the outbreak of World War I, Herbert helped stranded Americans get out of Europe. Then when Germany invaded Belgium, Hoover coordinated aid shipments to the Belgians. When the U.S. entered the war, Democratic president Woodrow Wilson appointed Hoover to head American food rationing, so limited resources could supply Allied troops. After the war, over Republican objections, Hoover headed the American Relief Administration to aid war-ravaged Europe, including Germans and Russians. Hoover backed progressive causes, starting with his 1909 book that advocated collective bargaining, an 8-hour workday, and workplace safety. Under Wilson, Hoover backed higher war taxes, a minimum wage, a 48-hour work week, an end to child labor, and support for the League of Nations.
In 1922, Hoover was appointed secretary of commerce first by Republican president Warren G. Harding, who died in office, then by his successor Calvin Coolidge. Hoover’s insights from the wartime economy led him to promote statistical analysis, increased productivity, waste reduction, conservation of natural resources and investment in infrastructure. As the country prospered, Hoover helped organize early radio broadcasting, civilian aviation and crop dusting and paved the way for the massive Colorado River dam that would eventually bear his name.
Hoover’s discomfort with politics became the virtue of being a “non-politician.” Untainted by corruption, he held to the ethic of limited government, unfettered capitalism, rugged individualism and local volunteerism. His campaign promised farm tariffs, a balanced budget and continued prosperity, proclaiming “[We] are nearer to the final triumph over poverty than ever before in the history of any land.”
Hoover won in a landslide. New York Times reporter A.O. McCormick wrote in 1929: “We had summoned a great engineer to solve our problems for us…. The modern technical mind was for the first time at the head of a government…giving genius its chance.” Hoover said he would forego his presidential salary. In six months the stock market reached “…what looks like a permanent high plateau,” the New York Times crowed. Then a month later the economy crashed.
Isolationist tariff
It started two months after inauguration when Reed Smoot, chair of the Senate Finance Committee, partnered with Willis Hawley, chair of the House Ways and Means Committee, to draft Hoover’s promised Farm Tariff bill. The object was to set a high tax on imported farm goods to reduce competition at home. But along the way they added-in more and more manufactured goods as well. Two months after Hoover’s inauguration, the House passed their draft of the Smoot-Hawley Tariff, so shocking to our international trading partners, they threatened trade barriers against American manufacturers. The stock market dropped from 196 to 191, then rallied when Republicans promise to modify the tariff bill.
On Sept. 3, stocks gained a record high of 381.17 points. Meanwhile, 23 nations announce a retaliatory Trade War with America, which rose to 35 nations, as America’s isolationist policies spread abroad. There was a massive withdrawal of funds by foreign lenders, in an attempt to make up the losses expected by the coming tariff. On Oct. 21, the Senate rejected limiting the tariffs to just farm goods. As a result, the stock market crashed on Black Thursday, Oct. 24, followed by Black Monday, Oct. 28, and Black Tuesday, Oct. 29.
Investors who’d bought on margin with as little as 10% down and a loan on the rest, couldn’t pay the banks and went broke. Stocks used as collateral had to be sold quickly by banks, while banks that played the market faced collapse. Hoover said it was foolish to doubt the strength of the booming economy to rebound, and people should just “tighten their belts” (to lessen hunger pangs) and make-do until things improved. He expected local charities to bear the burden of the displaced, but charities were overwhelmed. Hoover told manufacturers to keep workers employed producing goods during this short downtown. Yet over-production at a time of low demand had already created a glut of goods, destabilizing the market.
On March 7, 1930, Hoover announced the recession would be over in 60 days. On March 24, the Senate passed Smoot-Hawley, one of the highest tariffs in American history, which would tax over 20,000 imports to an average of 59.1%. Seeing foreign markets closing in response, Henry Ford tried to stop this “economic stupidity,” and the CEO of J.P. Morgan called it asinine, intensifying nationalism all over the world. Even Hoover called the bill “vicious, extortionate, and obnoxious,” and 1,028 economists petitioned Hoover to veto the bill. But Republicans pressured him, and Hoover signed it, saying it was a campaign promise.
World War I once helped American banks replace Britain as the top lender to European countries. Under the 1924 Dawes Plan, U.S. banks made lucrative loans to the German government, to pay reparations to France and England, which funded allied repayment of war debts back to American banks. But the tariff upset this cycle, pushed Europe into default, who withdrew Europe’s investments from American banks, and U.S. banks pulled funds from European banks. U.S. banks scrambling for cash, sparked a bank panic from depositors, with 305 banks closed in October, 500 more in November, and 547 in December. In September 1931, Britain and 24 other nations dumped the Gold Standard, which devalued their funds held in American banks. This led 827 more U.S. banks to close making an ordinary recession into a massive Depression.
Competing responses
New York Gov. Franklin D. Roosevelt began calling for government intervention. But Hoover felt a Strong Federal Government would undermine the autonomy of the states. So in October, Gov. Roosevelt established the Temporary Emergency Relief bill for New York State, as an example of effective government leadership. Hoover got the message, and in January 1932 established a $2 billion bail-out, but only for big banks and corporations with sufficient collateral. Then in February, when Congress passed a $275 million Federal Emergency Relief bill (F.E.R.) for individuals and small businesses, Hoover vetoed it as pork-barrel handouts to “unproductive” jobs. Republican Rep. Fiorello La Guardia defended F.E.R. as a “Breadbasket Bill,” and “the first ray of hope that has been cast in a critical situation.”
The Dust Bowl produced 14 dust storms in 1932 and massive crop failures. Hoover’s response was a loan program to provide 200,000 farmers with seeds. Yet without addressing soil conservation, this made matters worse, since in drought conditions, the only thing that would grow was turnips. Unemployment had reached 24.9% when the Bonus Army, 43,000 veterans, their families and supporters, built a Hooverville in Washington D.C. while demanding their World War I bonus be honored early. It shocked the nation when Hoover had them forcibly evicted with calvary, tanks and guns, and set fire to the encampment.
In Europe, the Depression left farmers, workers, and veterans broke, starving, under-employed and angry. They gravitated to authoritarian strongmen who blamed an alleged Jewish banking conspiracy, and promised Prosperity by Dictatorship.
In the U.S. presidential campaign of 1932, FDR called tariffs “the Road to Ruin.” He was elected in a landslide. Two days after his inauguration, FDR called a “Bank Holiday” as a four-day closure of all the banks for assessment, created the Federal Deposit Insurance Corporation (FDIC) to insure banks in case of failure, and increased the cash supply by ending the U.S. Gold Standard. In June he passed legislation to stop farm foreclosures, provide farmers with credit, and set up the first Civilian Conservation Corps “soul erosion control” camp. On Dec. 5, he repealed Prohibition and began taxing liquor again.
Once the humanitarian and incorruptible man of genius, Hoover was dragged down by a tariff bill that disunited the world, and made his administration the darkest years of the Depression. In 1934, FDR signed the Reciprocal Tariff Act to cut tariffs.