Smoot Point

Will you stand above me?
Call my name or walk on by
Rain keeps falling, rain keeps falling
Down, down, down, down
--Simple Minds

After the stock market crash punctuated the end of the Roaring Twenties, the Tariff Act of 1930, better known as the Smoot-Hawley Act, was one of the early pieces of legislature enacted to jump start a rapidly stagnating economy, primarily by shielding domestic industry from foreign competition. The act imposed tariffs (read: raised prices) on over 20,000 imported goods.

Predictably, instead of reversing the economic decline, Smoot Hawley helped plunge the country into depression. When economies slow, natural market forces exert downward pressure on prices. Lower prices help those on lower incomes get by. Tariffs impose mandatory price increases which make it harder for people to make ends meet.

Moreover, tariffs invite retaliation. In response to Smoot Hawley, nearly every industrialized country in the world raised their own barriers on US goods being shipped abroad. The all-too-predictable result was that foreign demand for US goods decreased, thereby exacerbating the tailspin in domestic capacity utilization.

Today, as economies slow across the board and debt burdens escalate, we once again hear bureaucratic rumblings about the need to protect domestic industries. While outright tariffs are still employed, the preferred tool for tilting trade is the currency. The idea is to devalue your currency so that foreign buyers will be enticed by purchase more of your goods. Reminiscent of the mercantilist approach of old.

The problem, of course, is that all nations want their currency weaker vis a vis others. So everyone engages in currency devaluation. A world wide confetti fest results.

While it seems that most people are oblivious to the consequences of this approach, gold and silver certainly 'see' them.

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