BG, left this comment on my post from yesterday:
â€œIt is weird that unemployment dropped after the market crash until the Smoot Hawley act passed and then it sailed into the double digits. â€
That is a statistic that I canâ€™t believe. If that were the case, then why was Smoot-Hawley even passed? It doesnâ€™t add up.
The great depression got worse, not because of this act, but because of the massive banking runs, and all out mistrust in wall-street (sound familiar). There was no FDIC to protect investors, etc, so people just sat on cash. Also, the multi-year long deflation made it even more appealing to NOT buy stuff, and just sit on cash: which is what everyone did who had cash.
I might speculate that the Smoot-Hawley Act was passed in an effort to “do something.”
Here is Thomas Sowell from chapter five of his book, The Housing Boom and Bust: Revised Edition*:
Two months after the stock market crash in October 1929, unemployment rose and peaked at 9 percent, after which it began a generally downward movement over the next several months and subsided to a level of 6.3 percent by June 1930. Although these levels of unemployment were higher than those before the stock market crash, and were a legitimate cause for concern, they were not even half of the unemployment rate that would begin, and persist for years, after major federal interventions in the economy.
The first of these major interventions began in June 1930, when Congress passed the Smoot-Hawley tariffs, the highest in more than a century, in an effort to reduce imports and thus preserve American jobs by having the formerly imported goods produced in the United States instead. A public appeal signed by a thousand economists from leading universities warned against the consequences of the Smoot-Hawley tariffs, but these warnings were ignored, just as the many warnings about the risky housing markets were ignored in our times. As already noted, unemployment stood at 6.3 percent at this time. In November of 1930â€”five months after the Smoot-Hawley tariffsâ€”unemployment reached double digits for the first time in the decade, at 11.6 percent.
In other words, unemployment had not yet reached double digits until more than a year after the stock market crash. In the meantime, there were the Smoot-Hawley tariffs and unemployment rose to double digits just five months after those tariffs that were supposed to reduce unemployment. Moreover, while the initial rise in unemployment after the stock market crash began to subside after peaking two months later, the double digit unemployment that began after the Smoot-Hawley tariffs continued for every month throughout the entire remainder of the decade of the 1930s.
Not all of this was due to the Smoot-Hawley tariffs alone. These tariffs, passed during the Hoover administration, were only the first in a series of major federal interventions in the market that continued under FDR throughout the remainder of the decade. The biggest of the New Deal interventions was the National Industrial Recovery Act of 1933, which controlled prices and wages in industry. The Agricultural Adjustment Act of 1933 established federal control over prices and output in agriculture. The National Labor Relations Act of 1935 made it mandatory for employers to negotiate wages and working conditions with labor unions. FDR also took the country off the gold standard and issued thousands of executive ordersâ€”more than all the subsequent Presidents of the United States in the twentieth century combined.
The New Deal administration not only set up policies to deal with existing economic problems of the 1930s, it set up enduring institutions to change the way the American economy operated. Thus we are, in the twenty-first century, paying agricultural subsidies to millionaires and billionaires because of a program created during the Great Depression to help small farmers who were having a hard time. Again, once you have opened the floodgates you cannot tell the water where to go. Programs set up to help one constituency deal with a current problem acquire new constituencies and take new directions. Even if the original problem gets solved, that does not mean that the program will end, or even that it will not continue to expand.
Of course, not everyone agrees with Thomas Sowell. For instance, I did a google search looking for monthly unemployment numbers for 1929 and 1930. I didn’t find what I was looking for but I did find this piece by Paul Krugman stating that it was getting away from the New Deal that helped prolong the Depression. Of course, Mr. Krugman doesn’t mention the other acts that Sowell did in his book. That’s what makes talking about this stuff so frustrating.