how did the american tariff policy cause the great depression

The US tariff policy helped to cause this because it helped to make it less profitable for nations to trade with each other and because it helped make other countries impose their own tariffs. These tariffs, and the reduction of trade that they caused, helped to deepen the Depression.

Full Answer

What did high tariffs lead to?

Tariffs make imported goods more expensive, which obviously makes consumers unhappy if those costs result in higher prices. Domestic companies that may rely on imported materials to produce their goods could see tariffs reducing their profits and raise prices to make up the difference, which also hurts consumers.

What are the 5 effects of the Great Depression?

The 9 Principal Effects of the Great Depression

• Economy. During the first five years of the depression, the economy shrank 50%. ...
• Politics. The Depression affected politics by shaking confidence in unfettered capitalism. ...
• Social. The Dust Bowl drought destroyed farming in the Midwest. ...
• Unemployment. ...
• Banking. ...
• Stock Market. ...
• Trade. ...
• Deflation. ...
• Long-Term Impact. ...

How did speculation affect the Great Depression?

Why was speculation on the stock market so dangerous? Speculation. The biggest cause of the stock market crash was speculation. As prices began to rise for stocks, more investors wanted to buy to make sure they did not “miss out” on great investments. …This, along with the shock caused by the fall in wheat prices, finally caused some stocks to start to lose value.

What were 4 causes of the Great Depression?

• During the 1920s the United States had great economic development . ...
• At the end of the 1920s, agricultural production and construction began to stagnate, this caused a decrease in consumption . ...
• The decline in sales of industrial products produced a wave of layoffs in industries. ...

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Were high tariffs a cause of the Great Depression?

The legislation in the Tariff Act of 1930 had the effect of raising US tariffs on more than 20,000 imported goods. Many economists agree that Smoot-Hawley was a factor in causing the Depression, but some argue that it played only a small part.

How did tariffs contribute to the Great Depression quizlet?

This tariff increased the charge on manufactured and agricultural goods. The creation of this tariff ultimately ruined trade with foreign/European nations. this hinders the American economy and worsens the Great Depression because America is stuck with high tariffs with no one to trade to.

What was the tariff during the Great Depression?

The Smoot-Hawley Act is the Tariff Act of 1930. It increased 900 import tariffs by an average of 40% to 50%. 12 Most economists blame it for worsening the Great Depression.

What was the effect of the Tariff Act of 1930?

The Act prompted retaliatory tariffs by affected states against the United States. The Act and tariffs imposed by America's trading partners in retaliation were major factors of the reduction of American exports and imports by 67% during the Depression.

What are the 3 main effects of tariffs?

Tariffs are a tax placed by the government on imports. They raise the price for consumers, lead to a decline in imports, and can lead to retaliation by other countries.

What was the impact of tariffs?

Tariffs Raise Prices and Reduce Economic Growth Historical evidence shows tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, which results in lower income, reduced employment, and lower economic output.

What was a major result of high tariffs?

Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result.

What was America's tariff policy in 1930?

Hoover disregarded these dissenting voices and signed into law the Hawley-Smoot Tariff in June 1930. It raised tariff rates on agricultural and manufactured goods to the highest levels in American history. Some of the rates increased 50% and above.

How did tariffs cause the Wall Street crash?

When the Senate blocked Hoover's plans on tariffs people began selling their shares. This meant prices started to drop sharply.

What was the problem with the tariff of 1832?

It reduced the existing tariffs to remedy the conflict created by the Tariff of 1828, but it was still deemed unsatisfactory by some in the South, especially in South Carolina. South Carolinian opposition to this tariff and its predecessor, the Tariff of Abominations, caused the Nullification Crisis.

How did the tariff of 1828 affect the economy?

The tariff sought to protect northern and western agricultural products from competition with foreign imports; however, the resulting tax on foreign goods would raise the cost of living in the South and would cut into the profits of New England's industrialists.

What role did tariffs play during the 1920s?

These were enacted, in part, to appease domestic constituencies, but ultimately they served to hinder international economic cooperation and trade in the late 1920s and early 1930s. High tariffs were a means not only of protecting infant industries, but of generating revenue for the federal government.

What is the impact of a tariff quizlet?

What are the effects of a tariff? Tariffs bring about higher prices and revenues to domestic producers and lower sales and revenues to foreign producers. Tariffs lead to higher prices and reduce consumer surplus for domestic consumers.

How did US tariffs affect the economy during the 1920?

How did high tariffs affect the economy? They hurt the economy by limiting American producers' ability to sell goods overseas.

How did the tariff affect America quizlet?

The tariff increased the price of imported manufactured goods by an average of 20-25%. The inflated price for imports encouraged Americans to buy products made in the U.S. The tariff helped industry, but it hurt farmers, who had to pay higher prices for consumer goods.

What are tariffs How do they impact the economy quizlet?

Import tariffs reduce export competitiveness; tariffs increase the price of imported raw materials, causing an increase in the domestic price of goods using these materials. 2.

Why were tariffs a major cause of the Great Depression?

To argue that the tariffs were even a major cause of the Great Depression is really ridiculous. It was the product of Democratic propaganda to simply blame the Republicans for everything, which worked in the end. The real cause that wiped out the world economy came from Sovereign Debt Defaults. Because these were sold in the small denomination to the average public, those who believed the stock market was risky and bought bonds, suffered the total loss of their investment.

Why did the tariff issue begin?

We have to understand that the entire tariff issue began because of the overproduction of agriculture and that this sector had been 40% of the entire civil-workforce. The economy was transforming from an agricultural based system to one of industrialization. This economic transformation was NOT understood by politicians at this point in time.

How did the economy change in the 1920s?

Additionally, the economic shift in trend due to the innovation of electricity combined with the combustion engine had drastically altered the economy. In 1900, about 40% of the civil-workforce was employed in agriculture. By the late 1920s, the United States economy had changed remarkably. There were exceptional gains in productivity due to electrification, which increased production of goods and the combustion engine which profoundly altered agricultural production. With tractors replacing horses and mules, previously, up to 25% of the agricultural land had been used to feed horses and mules. This land suddenly became available to produce crops. The ability to produce food soared and exceeded market demand creating what was called overproduction and underconsumption. This is what Senator Reed Smoot, who was a Republican from Utah and chairman of the Senate Finance Committee, and Congressman Willis C. Hawley, who was a Republican from Oregon and chairman of the House Ways and Means Committee, were focused on listening to farmers who wanted high tariffs to prevent competition. Neither Utah nor Oregon were industrial states. Smoot-Hawley was to protect farmers from falling prices not due to imports as much as it was to overproduction much as the Silver Democrats had done for miners during the second-half of the 19th Century.

What were the causes of the Great Depression?

The causes of the Great Depression have been debated for decades. The problem with all of the analysis is this same attempt to reduce the cause to a single event. In school, we read the Great Crash by Galbraith. He was a socialist so he blamed the corporations and never bothered to ever even mention the Sovereign Defaults of 1931 for that would have put blame on government instead of the private sector. Then there is the argument that the tariffs at least “contributed” to the Great Depression if were the leading factor, again disregarding the Sovereign Debt defaults.

What was the Emergency Tariff Act of 1921?

The Emergency Tariff Act of 1921 was a stopgap tariff measure which was rushed out and put in place until Congress could deal with the issue. The Republican Party wanted to quickly reverse the low rates of the Underwood-Simmons Tariff of the Wilson administration prewar.

Why was the US still running a trade surplus?

Nonetheless, because of World War I and the wholesale destruction of the European economy, the United States was still running a trade account surplus as manufactured exports of goods were rising rapidly. Therefore, Smoot was looking primarily at the food exports which had been declining as Europe found it easier to restore agricultural production than manufacture goods requiring the construction of plants. The actual value of food imports was a little over half that of manufactured imports and thus the farmers were crying for help in an industry that was changing forever. It was NOT true that the markets were so concerned about the tariffs issue when the industrial production was in a trade surplus and profits were rising.

Why were the Gimme boys called Gimme Boys?

Many in Congress began to consider the Europeans calling them the “GIMME BOYS” for they wanted free access to the US market while blocking access to their markets to rebuild their economies.

How does Austrian business cycle model help us understand the economic crisis?

Here is where the Austrian business cycle model can aid our understanding of the crisis. The monetary theory of capital malinvestment arises from relative price distortions and heterogeneous capital. Both points are by and large absent from most macro modeling of business cycles. These microeconomic connections are, however, fundamental. Disguised inflation in the 1920s probably created a constellation of malinvestments in need of liquidation, meaning that by 1929 a business recession was likely inevitable. However, an extraordinary tariff war brought world trade to a screeching halt. The tariff created additional malinvestment in a capital structure already in need of market readjustments. Both prior monetary inflation and restrictive trade policy led to and exacerbated the economic downturn. They are not mutually exclusive alternatives.

What are the three major schools of economics?

Modern macroeconomics falls into three broad schools of thought: Keynesian, monetarist (including New Classical), and Austrian. While great differences exist among the different theories of the business cycle, all seem to agree that the tariff had little causal relevance to the severity of the Great Depression. For example, Keynesian Peter Temin never cites the tariff once in his Did Monetary Forces Cause the Great Depression? Likewise Milton Friedman and Anna Schwartz delegate a mere footnote to Smoot-Hawley in their massive treatise, A Monetary History of the United States, 1867–1960. To his credit Austrian economist Murray Rothbard at least devotes one and a half pages to the tariff in America’s Great Depression.

How does a negative trade shock affect monetary policy?

The thesis that a negative trade shock can impact monetary policy fits these empirical puzzle pieces together. The tariff not only closed off the U.S. export market to farmers, it also left a vast volume of heterogeneous and specific capital goods used in agricultural production idle and suddenly worthless. Empty silos and buildings, rusting tools and machinery, and unused acreage—all in particular geographical regions—led to severe liquidations and farm foreclosures in the states experiencing the first banking crisis, with the vast bulk of failures involving small state-chartered rural banks. Economic historian Eugene White, who examined individual bank balance-sheet data, identifies the agricultural distress in the Midwestern states as a central reason for the pattern of failures. The Smoot-Hawley tariff was a direct factor in both the pattern of failures and their geographic location.

How is Smoot-Hawley underestimated?

Here’s a second way Smoot-Hawley is underestimated: If regulations or tariffs are studied in partitioned models, their interrelationships are missed and their true impacts are trivialized. For example, recent attempts have been made to quantify price distortions caused by the tariff. Mario Crucini and James Kahn have tried to correct systematic underestimates of the harm of Smoot-Hawley found in a variety of macro studies that ignored the effect of tariff retaliation on the rate of capital accumulation. Using a general-equilibrium model, they calculate that the microeconomic distortion effects reduced U.S. GNP by only 2 percent in the early 1930s. Likewise, economist Douglas Irwin computed the general-equilibrium inefficiencies caused by the tariff at nearly 2 percent of GNP.

How did the Smoot-Hawley Tariff affect the world?

banks. The Smoot-Hawley Tariff threw inter-allied war-debt repayment relations into limbo by shutting down world trade. An international moratorium on debtor repayments to the United States froze billions in foreign assets, thus weakening the financial solvency of the American banks. Specifically, over $2 billion worth of German loans were obstructed by Germany’s inability to acquire dollars through trade to repay its debts. This same scenario played out in many other countries as well. The tariff wars created widespread financial crises across America, Europe, and a host of nations in South America. In September 1931 England abandoned sound money; America would follow suit in 1933. The functional operation of the post-World War I gold exchange standard was sabotaged by worldwide protectionism in reaction to Smoot-Hawley.

What did Meltzer's observation about the Great Depression mean?

banks that failed in 1930 and in 1931 were in agricultural regions.” Meltzer’s observation indicates that misguided trade policy may have triggered the bank failures and resulting monetary collapse in a significant way. We believe Meltzer’s insight gives us a better understanding of the Great Depression.

What were the factors that shaped the Great Depression?

America’s monetary and capital structure from 1921 to 1929 was primarily shaped by six factors: first, a centrally planned monetary system; second, a decade of disguised inflation; third, branch-banking restrictions; fourth, state deposit insurance programs; fifth, agricultural subsidies; and finally, a plethora of taxes and regulations.

What was the Smoot-Hawley tariff bill?

Eighty four years ago on this day President Hoover signed the now-infamous Smoot-Hawley tariff bill, which substantially raised U.S. tariffs on some 890 products. Other countries retaliated and world trade shrank enormously; by the end of 1934 world trade had plummeted some 66 percent from the 1929 level.

What happened to the world trade in 1934?

Other countries retaliated and world trade shrank enormously; by the end of 1934 world trade had plummeted some 66 percent from the 1929 level. The Tariff Act of 1930 (aka the Smoot-Hawley Tariff Act), started out as a bill that would only raise tariffs on some agricultural products, but a host of other special interests piled on and before ...

Who was the economist who urged Hoover to veto the tariff bill?

In early May 1930 1,028 leading American economists presented President Hoover, Senator Smoot and Congressman Hawley with a letter urging Hoover to veto the bill if it passed Congress. (The organizer of the letter was Dr. Claire Wilcox, my economics professor in college.) The economists argued that the tariff increases would raise the cost of living, limit our exports as other countries retaliated, injure U.S. investors since the high tariffs would make it harder for foreign debtors to repay their loans, and damage our foreign relations. Unfortunately, this is what happened.

What happened to the stock market in the 1920s?

During the 1920s, the New York Stock Exchange attracted many speculators as everyone channeled their money into stocks. The market greatly benefited from these investments, and it subsequently expanded, reaching its climax in August 1929. Stock prices were, however, higher than their real value and unemployment had already risen and production reduced. The stock prices continued to rise even though there was a mild recession in the summer of 1929. A total of 12.9 million shares were traded on October 24, 1929, which was overpriced by investors nervous about a stock market crash. A further 16 million shares were traded on October 29 as panic swept the market exchange yet again. Millions of shares were soon found out to be worthless and investors who had purchased stocks using borrowed money lost completely. Factories were forced to let go of workers and slow down production while wages and buying power reduced. Repossessions and foreclosures rose steadily while those Americans who had been forced to purchase on credit fell into debt. The global observance to the gold standard facilitated the spread of the downturn to other nations.

What were the effects of the Depression on agriculture in the 1920s?

Agriculture felt the impact of the depression severely in late 1920. Low crop prices forced farmers to farm more acreage such as poorer farmland and to introduce other crop varieties. These conditions did not get better in the early 1930s. The Great Plain farmers were particularly impacted the hardest by a drought in the early 1930s. The region had been overgrazed and over-farmed for years, and winds raised clouds of dust as they swept away. The dust settled on houses and farm buildings, and caused the sky to darken for days. The drought made it impossible for farmers to settle their debts and taxes, and they resorted to selling their land at losses. The desperate farmers opted to abandon their farmlands and seek work opportunities in the west, and farm transfers became common. This agricultural devastation further worsened the region's economy.

How did the US government respond to the Great Depression?

As the depression progressed, the US government began to look for ways to mitigate its effects. In 1930, Congress adopted the Tariff Act (Smoot-Hawley Tariff) to protect the nation's industry from foreign competitors. The act imposed high taxes on a variety of imports. Some American trading partners reacted by imposing tariffs on items made in the US. This situation facilitated the reduction of world trade by two-thirds from 1929 to 1934. Other nations instituted various protectionist policies leading to further breakdown of international trade.

How did the low purchasing power in the US affect Europe?

The low customer purchasing power in the US was mirrored by a similar situation in Europe. Europe's economy was already suffering in the aftermath of the war, and the depression aggravated the situation. The American farmers had profited enormously from supplying agricultural products to Europe in the aftermath of the war and their inability to supply adequately during the depression further weakened the global market.

What was the Great Depression?

Many nations suffered from an economic depression in the 1930s which is infamously known as the Great Depression. The downturn commenced in the US, and by the time it was over, it had made history as the longest and most extensive depression of the twentieth century. The period was characterized by a reduction in investments and industrial ...

How many banks failed in the 1930s?

More than 9,000 banks failed in the course of the 1930s. Although the Great Depression commenced like for any other recession, the situation had gotten worse in the last half of 1929. People panicked after the stock market crash, and were worried about the safety of their money. The number of bankruptcies rose as the public's confidence reduced and 650 banks failed in the first year of the recession. Large populations withdrew their money in a series of bank runs with the first starting in Nashville, Tennessee in the fall of 1930. The bank run preceded others across the Southeast. Most of the bank runs were triggered by rumors casting doubts on a bank's capability to pay its depositors. An example of this scenario is a New York Times report in December 1930 which involved a merchant spreading rumors about the inability of the Bank of the United States to pay its customers. A crowd congregated at the bank hours later and withdrew $2 million. As bank deposits were uninsured, people simply lost their deposits when they failed. The remaining banks were hesitant to offer new loans which worsened the economic conditions leading to less spending.

What conditions did not get better in the early 1930s?

These conditions did not get better in the early 1930s. The Great Plain farmers were particularly impacted the hardest by a drought in the early 1930s. The region had been overgrazed and over-farmed for years, and winds raised clouds of dust as they swept away.

Ignored Effects

Macroeconomic Thought and Smoot-Hawley

• Modern macroeconomics falls into three broad schools of thought: Keynesian, monetarist (including New Classical), and Austrian. While great differences exist among the different theories of the business cycle, all seem to agree that the tariff had little causal relevance to the severity of the Great Depression. For example, Keynesian Peter Temin ne...

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Smoot-Hawley and Bank Crises

Microeconomic Connections

Central Bank Illusion