Reed Smoot

Reed Smoot (1862-1941) was a prominent American politician, but for investors, his name is forever linked to one of the most infamous pieces of economic legislation in history: the Smoot-Hawley Tariff Act of 1930. While not an investor himself, his actions as a key sponsor of this act provide a powerful, real-world case study on how government policy can go spectacularly wrong, with devastating consequences for the global economy and investment portfolios. The story of Smoot and his tariff is less about the man and more about a monumental policy error that deepened the Great Depression. For any investor who thinks politics doesn't affect their portfolio, Reed Smoot’s legacy is a stark and enduring reminder to think again. It’s a classic tale of good intentions paving the road to economic hell, a lesson every investor should learn.

Imagine the scene: it’s 1930. The stock market crash of 1929 has just shaken the world, and the U.S. economy is sputtering. Politicians, including Senator Reed Smoot of Utah and Representative Willis C. Hawley of Oregon, want to be seen as doing something. Their big idea? To protect American jobs and farms from foreign competition by slapping massive taxes on imported goods. The resulting Smoot-Hawley Tariff Act raised import duties on over 20,000 foreign products to historically high levels. The theory was simple: if foreign goods are more expensive, Americans will buy American-made products, and the economy will recover. It was a classic example of protectionism. The reality, however, was a catastrophic miscalculation.

The sponsors of the bill failed to consider a basic law of human (and national) nature: if you punch someone, they’re likely to punch back.

America’s trading partners were furious. They didn't just sit back and accept the new tariffs; they retaliated swiftly and fiercely. Canada, America’s largest trading partner, immediately slapped new tariffs on U.S. exports. European nations followed suit, creating a cycle of tit-for-tat penalties that came to be known as a trade war. A petition signed by over 1,000 economists urged President Hoover to veto the bill, warning of exactly this outcome. He ignored them and signed it into law.

The result was a deep freeze in global commerce. As country after country threw up trade barriers, international trade collapsed. Between 1929 and 1934, global trade plummeted by a staggering 66%. American exports were choked off, hurting the very farmers and factory workers the act was supposed to protect. Instead of containing the economic crisis within the U.S., the Smoot-Hawley Tariff exported the American recession to the rest of the world, transforming a sharp downturn into the longest and deepest economic depression of the 20th century.

The story of Reed Smoot is not just a dusty history lesson; it's a treasure trove of wisdom for today’s investor. As Warren Buffett often says, “It's good to learn from your mistakes. It's better to learn from other people's mistakes.”

• Politics is a Portfolio Risk: Never underestimate the power of politicians to impact your investments, for better or worse. A fantastic company with a wide moat and great management can still be kneecapped by a poorly conceived law, tax, or trade barrier. A key part of value investing is understanding the entire landscape a company operates in, and that includes the political climate.
• Global Diversification is a Shield: The Smoot-Hawley saga is the ultimate argument for diversification. An investor solely focused on the U.S. domestic market in 1930 would have seen their opportunities shrivel as both imports and exports dried up. Spreading your investments across different countries and economies can help insulate your portfolio from the political blunders of any single government.
• Know Your Company's Global Footprint: When you analyze a company, don't just look at its balance sheet. Ask critical questions. Where does it source its raw materials? Where does it sell its products? A company that relies heavily on imports from a single country or exports to a specific region is vulnerable to the whims of tariffs and trade disputes. A resilient business has a flexible and diversified supply chain.