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Paul Streitz

Milton Friedman's Smoot-Hawley Lie
By Paul Streitz
Mar 20, 2010 - 12:35:34 AM

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The Smoot-Hawley tariff passed in 1931 is the silver bullet of Free Trade advocates. All other arguments do not matter for them because they say the Smoot-Hawley tariffs either were part of the cause of the Great Depression or were responsible for continuing the depression by reducing international trade.

This reasoning does not hold up to close inspection. Smoot-Hawley did not cause the Great Depression, nor did it extend the Depression.

Milton Friedman, Noble Prize winning economist, was for the duration of his life the main pitchman for Free Trade. Friedman won his academic reputation with his publication of A Monetary History of the United States, 1967-1960. In it, he accurately attributes the cause of the Great Depression to the restrictive monetary policies of the Federal Reserve.

Nowhere in the book does he even mention tariffs, or the Smoot-Hawley tariffs. Here is the index entries where the tariff should be listed, "Silver Purchase Act; Silver Standard;..... Snyder, Carl." Where's "Smoot?" It is nowhere to be found.

  • The United States had tariffs throughout the nineteenth century, and they were raised still higher in the twentieth century, especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression. - Milton Friedman and Rose Friedman "The Case For Free Trade" Hoover Digest, No. 4, 1997.

There are two falsehoods in this paragraph. The first is the implication that the United States suffered from the middle of the nineteenth century until 1930 because of tariffs. Quite the contrary, under the tariffs imposed by Abraham Lincoln, the United States became the greatest industrial society on the planet.

Second, Friedman knows that Smoot-Hawley had nothing to do with the Great Depression, but avoids directly lying or contradicting his Monetary History by attributing this statement to "some scholars." It certainly was true that "some scholars" advocated this, but they were wrong, and Friedman knew it.

The Joint Economic Committee of the U.S. Congress (October 2008) reports on the fall of foreign trade.

  • Consequently, world trade flows collapsed. U.S. goods imports declined from $5.3 billion in 1929 to just $1.7 billion in 1933, while U.S. goods exports fell from $4.4 billon in 1929 to a mere $1.5 billion in 1933.

If these drops were so great and so influential, why doesn't Milton Friedman mention them? First, in comparison to the total economy, foreign trade was then and is today, a small part of the United States economy. Second, the total balance of trade deficit went from (0.9 billion to 0.2 billion). In other words, the United States was losing less money because of Smoot-Hawley. It was in aggregate better off.

The purpose of foreign trade is simply not to trade. As with any business, the objective is to sell more than you buy. It is true that some industries may sell less if foreign trade is reduced, but the overall national objective is to have a surplus balance of trade. Smoot-Hawley moved the United States closer to that objective.

Milton Friedman was a conservative on government spending, sound money, limiting the Federal Reserve and government regulation. Therefore, Conservatives bought into Milton Friedman on the issue of Free Trade.

If Friedman ever made a convincing, statistical argument for the benefits of free trade, I have yet to see it. He has given no detailed, exhaustive economic and historical investigation as he did with his monetary history. Rather, he gives simple-minded and often deceptive support for Free Trade. He briefly covers Free Trade in Capitalism and Freedom, but there is no scholarly, detailed and comprehensive examination on the scale such of his monetary history.

In general, the statistical arguments made by current Free Traders are deceptions. They generally say something like, "the United States economy grew after NAFTA." That may be true, but there is a growing population driven by massive immigration.

At the same time, they simply ignore the loss of manufacturing jobs and the impending bankruptcy of all U.S. auto companies, soon to be a reality.

Despite the facts of the matter, the hysteria from The Wall Street Journal (that supports mass immigration for the same reason of cheap labor) and other conservative economists continue the canard of Smoot-Hawley to this day. Remember, being a conservative in economic measures does not necessarily make one a nationalist concerned with the best interests of the United States.

  • Among those consequences is a repeat of the single action that turned the recession of 1929 into the Great Depression -- the Hawley-Smoot Act of 1930, which destroyed the international trade system through vindictive tariffs. The "Buy American" clause of the Obama stimulus would have the same exact result. The appalling thing here is that Obama appears to have no understanding of this fact.) - Obama's Busted Bubble, J.R. Dunn, consulting editor of American Thinker.

As seen in the facts shown above, Smoot-Hawley did not destroy the international trade system. It reduced trade into the United States, but to declare that it "destroyed the international trade system" is simply scare mongering.

Milton Friedman was a globalist peddling his utopian economics of Free Trade. Everything would be better when nations traded without limitation. All boats would rise. The rich nations would be richer because of lower cost goods, and the poor nations would be richer. Free Trade was the emperor's new clothes, smoke and mirrors, song and dance.

Friedman's globalist economics totally focus on consumption and ignore the problem of production. Free Traders blithely state the United States will solve the loss of core industries by inventing new industries, the business and other delusions.

It is also worth pointing out that Friedman supported Open Borders. His only caveat was that our social safety net of welfare was attracting massive immigration and illegal immigration. If the United States opened its borders to five million immigrants a year, that would have been fine with Milton.

Friedman showed no understanding of the economic history of the United States or any real understanding of the consequences of Free Trade. In a sense, he was not an American citizen, concerned with the country. He was a globalist who just lived here.

Here is Friedman to me on Alexander Hamilton.

  • If your argument is valid as between countries, why is it not valid as between states (of the USA)? Are you in favor of each state separately setting up trade barriers? Economists have always argued that one of the main reasons for the prosperity of the U.S. has been the fact that the Constitution prohibited states from interfering with commerce between states. However, on your argument that should have led the U.S. into penury. - private correspondence

Friedman makes no distinction between moving a factory from Massachusetts to Mississippi from moving a factory from Mississippi to Taiwan. In the former case, workers in Mississippi clearly see their wages rise, while workers in Massachusetts see their wages fall. Nevertheless, this is within the same country. The country itself is not poorer; it is using a means of driving up the wages of the lower paid workers. It is income redistribution and leveling of wages across all Americans.

If the factory is moved to Taiwan, American workers as consumers gain somewhat lower prices, but the demand for labor goes down and American workers' wages go down. The entire country is poorer as money flows out of the country. Milton Friedman and Free Traders refuse to recognize this.

A protected economy has the effect of equalizing wealth, driving up the wages of workers and driving down the value of capital. A protected economy is by far the most efficient way to harness the productive efforts of all classes and producing the greatest equality of wealth.

  • Even if we were more efficient than the Japanese at producing everything, it would not pay us to produce everything. We should concentrate on doing those things we do best, those things where our superiority is greatest. (Capitalism and Freedom)

Here Friedman is arguing the discredit ideas of Ricardo and competitive advantage. This notion was shoddy economics to begin with and perhaps applicable a case of the Portuguese producing wine and the English producing wool. But, it is not applicable where advanced nations take their manufacturing methods abroad and teach them to underdeveloped countries to use the cheap labor in these countries.

After both the Chinese and Japanese have mastered the art of manufacturing everything from cars to computers, what area of manufacturing would Friedman propose, if he were alive, as a new source of millions of highly paying jobs? Where do Americans have an area where "our superiority is greatest?" Friedman makes a somewhat racist, cultural or national argument that Americans can always invent new industries from scratch to replace the old industries that have been sent abroad. That has proven to be false, as the loss of five million factory jobs has shown.

Friedman's thoughts about the impact of effect of Free Trade on national security are laughable.

  • Suppose it did prove cheaper to buy all our steel abroad. There are alternative ways to provide for national security. We could stockpile steel.

Despite this, only a handful of political commentators and economists support ending free trade. Most notable among these are Patrick Buchanan and Paul Craig Roberts. Rep. Ron Paul continues to exist in a Free Trade twilight zone, not understanding the negative impact of his libertarian economics in this area.

The United States was founded as a protectionist nation. The first bill passed by Congress was the tariff of Alexander Hamilton. The United States was on the verge of bankruptcy after it gradually adopted free trade until Abraham Lincoln raised tariffs. From then until the 1960's, the United States was a protectionist country. The 1913 Republican Party Platform reflected America's protectionism.

  • We reaffirm our belief in a protective tariff. The Republican tariff policy has been of the greatest benefit to the country, developing our resources, diversifying our industries, and protecting our workmen against competition with cheaper labor abroad, thus establishing for our wage-earners the American standard of living.

Karl Marx was the person who agreed most with Milton Friedman. However, as opposed to Friedman Marx correctly perceived that Free Trade would destroy advanced societies.

  • It (Free Trade) breaks up old nationalities and carries antagonism of proletariat and bourgeoisie to the uttermost point. In a word, the Free Trade system hastens the Social Revolution. In this revolutionary sense alone, gentlemen, I am in favor of Free Trade.

Karl Marx was selling the dictatorship of the Proletariat, which meant in effect a highly centralized government bureaucracy. Milton Friedman was selling American workers to the globalist elites that controlled the government bureaucracies for their own advantage. Under both, the workers of the world were and are being impoverished.
Friedman's Free Trade was not based on sound economic theory or the economic history of nations. Quite the opposite was true and Karl Marx knew it. Yet, Friedman used his prestige as a Noble Prize winner to package and sell a pack of lies.

Milton Friedman has done more damage to the United States and its citizens than any other economist.

Paul Streitz is a graduate of the University of Chicago Business School and has since recanted the Free Trade views learned there. He is the author (at Amazon) of America First: Why Americans Must End Free Trade, Stop Outsourcing and Close Our Open Borders and Oxford: Son of Queen Elizabeth I. He is a co-founder and director of CT Citizens for Immigration Control.

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