Tuesday, September 25, 2012

Tariffs and the Great Depression

My son in taking a social studies class in Middle School and came to me today after reading in his textbook that tarrifs caused or exacerbated the Great Depression. I was impressed that he remembered that I have discussed this issue with him and that I and many others disagree.

While textbooks blame the Hawly-Smoot Tariff Act for worsening the Great Depression, not everyone agrees that protectionist policies caused the Great Depression. Economists, Milton Friedman and Anna Schwartz maintain that the FED and not tariffs caused the Great Depression. Milton Friedman and Anna Schwartz said the FED's contraction of the money supply is what triggered the Depression. (A Monetary History of the United States, 1963)

The FED initially rejected this analysis, but a recent comments by FED chair Ben Bernanke demonstrates how he views this issue. In 2002, Ben Bernanke spoke at Milton Friedman's 90th Birthday and jokes that Milt was correct all along that the FED caused the great depression by contracting the money supply in a fractional reserve system:

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Later in 2004, Ben Bernanke spoke at the Washington and Lee University, Lexington, Virginia again expresses support for the monetorist theory of money, and the FED's role in exacerbating the Great Depression by increasing interest rates several times, and advocating several banking holidays which exacerbated cash and gold hording.

"Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well."

The American Civil War was fought over protectionism and tariffs among other reasons. In the beginning, the South didn't need to industrialize like the North because of slavery. But eventually the South recognized that machine-power beat man-power. As the South industrialized, they resented having to pay higher prices to the North for machines. The South preferred to buy cheap slave-produced goods and machinery from importers like the East India Trading Company instead if the North. This resentment over Tariffs vs. “Free-Trade” was one of the major economic reasons behind the American Civil War.

Unfortunately, FDR's blame of the Great Depression on tariffs is what turned the traditionally protectionist Republican Party towards “Free-Trade”. Famous Protectionist Republican US Presidents include: Lincoln, McKinley, Teddy Roosevelt, and Hoover. Unfortunately, because of mistaken general consensus, the economic policy of “Free-Trade” has robbed our county of domestic industrial and manufacturing infrastructure, millions of skilled jobs, and much of our self-reliance.

LDS Apostle/US Senator Reed Smoot did not cause the Great Depression and War (WW2) did not end it.

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