How Tariffs Led to the Great Depression: Examining the Causes and Effects

Introduction

Tariffs are taxes imposed by a government on imported goods and services. They are used as a way for governments to protect domestic industries from foreign competition and to raise revenue. The Great Depression was an economic crisis that began in 1929 and lasted until the early 1940s. It was marked by high unemployment, poverty, low profits, deflation, plunging farm incomes, and a collapse of international trade. This article will explore how tariffs led to the Great Depression and examine the causes and effects of tariff policies on the US economy in the 1930s.

Exploring the Role of Tariffs in Causing the Great Depression

The role of tariffs in causing the Great Depression is a hotly contested topic. Some economists argue that tariffs had a significant negative impact on global trade and economic growth. According to economists Douglas Irwin and Alan Sykes, “It is clear that the imposition of higher tariffs and other forms of protectionism during the interwar period (1919–39) had a major adverse effect on world trade and output.” Others argue that the role of tariffs was limited and that the Great Depression was primarily caused by other factors such as stock market speculation and the collapse of the banking system.

One of the ways tariffs can lead to an economic downturn is by reducing global trade and economic growth. When countries impose tariffs, it makes it more expensive for other countries to trade with them, which reduces the amount of trade that takes place. This in turn leads to slower economic growth as fewer goods and services are produced and consumed. In addition, when countries impose tariffs on imports, it can lead to retaliatory tariffs from other countries, further reducing trade and economic growth.

Another way tariffs can lead to an economic downturn is through their impact on the stock market. High tariffs can discourage foreign investment in a country, which can lead to a decline in stock prices and a decrease in consumer confidence. This, in turn, can lead to a stock market crash, which can have devastating consequences for an economy. According to economist Barry Eichengreen, “The stock market crash of 1929 was triggered in part by the passage of the Smoot-Hawley tariff act in June 1930.”

Examining the Causes and Effects of Tariff Policies on the US Economy in the 1930s

In the 1930s, the US adopted a policy of protectionism in response to the Great Depression. This policy involved raising tariffs on imported goods in order to protect domestic industries from foreign competition. In addition, the US also devalued its currency in order to make its exports cheaper and more competitive in the global marketplace. These policies had far-reaching effects on the US economy.

The most significant tariff legislation of the 1930s was the Smoot-Hawley Tariff Act of 1930. This act raised tariffs on over 20,000 imported goods and services. While the intention of the act was to protect US industries from foreign competition, it ended up having a detrimental effect on the US economy. Many countries responded to the act by raising their own tariffs, which further reduced global trade and economic growth.

The Smoot-Hawley Tariff Act had a negative impact on businesses, consumers, and farmers. Businesses were hit hardest, as they had to pay higher prices for imported goods and services, which reduced their profits. Consumers were also affected, as higher tariffs meant higher prices for imported goods, making them less affordable. Farmers were hurt by the act as well, as higher tariffs on agricultural imports reduced demand for their products.

Assessing How Tariffs Contributed to the Collapse of the American Banking System

In addition to the direct effects of tariffs, they also played a role in the collapse of the American banking system. The US banking system was already fragile due to the stock market crash of 1929, but the Smoot-Hawley Tariff Act made matters worse. The act caused a decline in foreign investment in the US, as investors became wary of investing in an economy that was becoming increasingly protectionist. This lack of foreign investment made it difficult for banks to stay afloat, leading to a wave of bank failures in the early 1930s. To stem the tide of bank failures, President Franklin D. Roosevelt declared a “bank holiday” in 1933, during which all banks were closed for several days.

Conclusion

In conclusion, tariffs played a significant role in causing the Great Depression. They reduced global trade and economic growth, contributed to stock market crashes, and adversely impacted businesses, consumers, and farmers. In addition, they contributed to the collapse of the American banking system, which further exacerbated the economic crisis. Although the role of tariffs in causing the Great Depression is still debated, it is clear that they had a significant negative impact on the US economy.

The lessons of the Great Depression are still relevant today. Governments should be cautious when implementing protectionist policies, as they can have serious economic consequences. In addition, policymakers should strive to create an environment that encourages foreign investment and free trade, as this is essential for long-term economic growth and stability.