With tariffs in the news lately, I thought it might be insightful to tell the story of Willis Hawley. Willis was born into an Oregon farming family in May of 1864. Driven and highly intelligent, Willis would go on to earn both a Bachelor of Science, and a Bachelor of Laws, and become a teacher. By his mid-twenties, he was the president of the Oregon State Normal School, which was one of the earliest teacher-training schools in the northwestern United States, while simultaneously obtaining a Master’s degree. Before long, he took a position at Willamette University, and eventually became its principal as well.
By 1906, Willis’s interests had turn to politics, when he won the election (as Republican) for the 1st Congressional District of Oregon. He would spend the next 25 years in Congress, and serve several times as the chairman of the Congressional Committee on Ways and Means – making him one of the most influential people in Congress. His committee had jurisdiction over taxes and tariffs and other revenue programs run by the government.
A decade or so after he was first elected, the boom years hit the United States, and North American in general. Business productivity was through the roof as electrification and the development of motor vehicles made manufacturing and transportation of good easier, faster, and cheaper. Europe was recovering from WW I, and cross-border shipping amongst nations was becoming commonplace. Farming in particular, had been revolutionized, as an estimated 18-25% of North American farmland had been maintained for the care of horses prior to the invention of the automobile. As the demand for horses dropped, that farmland could be reused for crops or cattle instead.
One of the most basic concepts of economics is the relationship between supply and demand. As the depression hit in 1930, US farming production for food had never been higher – and, there were now significant imports of food from around the world.
Having grown up in a farming family, Willis was very concerned about the viability of farming income in light of such drastic oversupply. He, and Reed Smoot, a fellow republican Senator, believed that putting a tariff on food imports would help protect farmers, and farming jobs, from competition outside the US.
Tariffs are essentially an import tax, charged to the importer– which would drive up the price of goods brought into the country. Theoretically, this would lead to imports being more expensive than domestic production. In 1929, with their Republican party in full control of congress and the presidency, their tariff act had little opposition within the government.
However, in other circles, the Smoot-Hawley act was seen as a major threat to the economic stability of an already shaky economic situation. By May 1930, over 1000 economists signed a petition asking President Hoover to veto the legislation. Henry Ford called the bill “Economic Stupidity”, and pleaded with the president to kill the bill. Ironically, Hoover himself opposed the bill, as he felt it went against his own foreign policy goals of international cooperation. Under intense pressure from his own party, he signed the bill into law.
Once the bill became law, almost all of the US’s trading partners implemented their own retaliatory tariffs, including Canada. The impact on American business was immediate, and damaging. Exports fell between 18% and 31%. 23 Countries filed protests with the president. In Canada, we responded with new tariffs on items that represented around 30% of use exports to Canada.
Within a few months, US tariff rates peaked at an average rate of almost 60% on items to which tariffs applied, or about 20% of all imported items in general. This was poison to an already hobbled economic situation. Unemployment was 8% when the legislation was introduced, and would jump to a peak of 25% a few months later.
With the benefit of nearly 100 years of hindsight, the general consensus amongst historians and economists, it seems clear that the Smoot-Hawley Act and its resulting tariff-based trade war significantly worsened the great depression, despite its good intentions. It reduced trade for all impacted countries at a time where unemployment and economic contraction was already severe.
Like many of his Republican colleagues Willis Hawley would lose the election of 1932 and leave office in early 1933. While historians attribute different reasons for his loss (including his opposition to loosening prohibition era rules as well as the devastating economic impact of the Smoot-Hawley act), it’s clear that Hawley and others of his party were punished by voters in a landslide victory for the democrats in 1932, including the election of Franklin D. Roosevelt.
Hawley would move back to Oregon and practice law for the remainder of his life. He would pass away less than a decade later at age 77, just months before the United States entered WWII after the attack on Pearl Harbor.
The Butterfly Effect
Hawley and Smoot’s legislation came with a laundry list of unanticipated consequences. Some historians even argue that a direct line can be traced from the act to the rise of Fascism in Europe. Regardless, its abundantly clear that the “Promise of Prosperity” that tariffs would bring was horribly, horribly wrong .
Years ago, I remember hearing a historian speak about how many major economic events are remembered for only 3-4 generations before we collectively forget why a rule or law was put into place or removed.
We don’t know what the future will hold, and, fortunately, we are not in the midst of a major economic downturn. However, it’s clear that a trade war of any great magnitude and length of time will serve to slow down the economies of all involved parties. Unlike the 1930s, we are in a time of robust trade and prosperity, and we have far more access to economic data for decision making than any point in human history. We can also take solace that it only took 2-3 years of severe tariffs for countries to realize that punishing trade rarely, if ever, ends well for anyone.
The Rise of Populism, and the disparity of wealth
One thing that does echo the 1930s today, is the way that disparity in wealth is affecting our society. These charts (Canada – WID – World Inequality Database), show that we are now in one of the highest wealth disparity gaps in Canada since the 1930s. You might notice that from 1947 to 1984, the ratio of Canadian income between the top 10% and the bottom 50% of earners flat lined, but in the last 40 years has begun to separate dramatically, reaching almost the same levels as the 1930s.
The US shows a substantially more dramatic difference (USA – WID – World Inequality Database). I attended a conference recently where an economist pointed to the huge gap in the growth of GDP vs real wages since the 1980s and being a direct line to the rise in populist politics across numerous countries.
At the end of the day, economic growth and political stability is most stable when income and wealth are fairly and evenly distributed across a society. While it’s easy politics to promise prosperity from tariffs, history teaches us that they hurt the most vulnerable first and hardest. Wallis Hawley learned this the hard way and lost his seat in congress as a result. Hopefully modern politicians will study history and learn from his mistakes.
Ryan