Thomas Rustici on Smoot-Hawley and the Great Depression

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🗓️ 4 January 2010

⏱️ 85 minutes

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Summary

Thomas Rustici of George Mason University and author of Lessons from the Great Depression talks with EconTalk host Russ Roberts about the impact of the Smoot-Hawley Act on the economy. The standard view is that the decrease in trade that followed Smoot-Hawley was not big enough to be a significant contributor to the Great Depression. Rustici argues that this Keynesian approach that looks at aggregate spending misses a crucial mechanism for understanding the impact of Smoot-Hawley. Rustici focuses on the impact of Smoot Hawley on bank closings and the money supply. Smoot-Hawley launched an international trade war that reduced world trade dramatically. This had large concentrated regional effects in the United States and around the world in areas that depended on trade. Those were the areas where the first banks collapsed, contracting the money supply via the fractional reserve banking system. Rustici argues that the Keynesian indictment of the price system ignores the policy failures that destroyed the institutions that make the price system work.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ
0:13.4	Roberts of George Mason University and Stanford University's Hoover Institution.
0:18.7	Our website is econtalk.org, where you can subscribe, find other episodes, comment on
0:24.5	this podcast, and find links to other information related to today's conversation.
0:29.9	Our email address is mailadicontalk.org. We'd love to hear from you.
0:38.5	Today is December 30th, 2009, and my guest is Thomas Rastisi of George Mason University
0:44.5	and author of Lessons for the Great Depression, the Economic Effects of the Smooth Holly
0:49.3	Act of 1930, and the Beginning of the Great Depression. Tom, welcome to Econ Talk.
0:54.0	Well, thank you. Thank you, Russ.
0:55.8	Our topic today is the Smooth Holly Tariff. A tariff that's been dismissed by many is having
1:01.0	any role in the Great Depression. Others have emphasized it. We're going to get to your
1:05.6	take on it, which is I think quite interesting and different. But to get there, I want
1:10.5	to take a slightly roundabout path and talk first about the Keynesian theory of the business
1:16.0	cycle and economic growth. So in the Keynesian model, what is the cause of downturns of
1:24.1	recessions, depressions?
1:26.1	In the simple Keynesian model, what we have is a lack of aggregate demand total spending.
1:35.8	Usually arises from an increase in the demand to hold money. People will panic, start holding
1:42.8	cash, hoarding cash. They don't spend. And in that model spending is what creates
1:49.2	income. It's designed that way, where the entire size of the real economy is determined
1:56.7	by the total demand from investors, consumers, government spending, foreign trade, and so
2:01.8	forth. So it's a demand-driven model, what's often called an overproduction under consumption
2:09.0	model, which is a very mercantilistic model. It's kind of a pre-classical view of the
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