Protectionism:We Are Sera

By Chelsea DeGuia, Jessica Bender, Viviana Orozco, & Caleb Mendez

First, let’s take a look at the top five causes of

the Great Depression…

O 1. Stock Market Crash of 1929Many believe mistakenly that the stock market crash that occurred on Black Tuesday, October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars. Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression.

O 2. Bank Failures Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. This exacerbated the situation leading to less and less expenditures.

O 3. Reduction in Purchasing Across the BoardWith the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. More and more inventory began to accumulate. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation.

O 4. American Economic Policy with Europe(A.K.A. Protectionism)As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation.

O 5. Drought ConditionsWhile not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves. This was the topic of John Steinbeck's The Grapes of Wrath.

PROTECTIONISM WAS THE MAJOR CAUSE!

What Was Protectionism?

O Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition.

O Typical methods of protectionism are import tariffs, quotas, subsidies or tax cuts to local businesses and direct state intervention.

OpinionO “Protectionism, as practiced even by

traditionally free trade Great Britain and by the many new nations in Eastern Europe, simply reduced market opportunities and made a bad situation worse.”O From World Civilizations: The Global

Experience 3rd Edition

Protectionism BenefitsThe aims of protectionism are to preserve jobs. By increasing the cost of importing, businesses are encouraged to produce products within the country where the products will be sold.Protectionism ConsequencesFree trade advocates argue that protectionism leads to higher prices because workers at home are not necessarily willing to work for lower wages.

TimelineO 1913- Underwood-Simons TariffO 1927- World Conference at Geneva

O Realized world was reliant on tradeO 1930- U.S. passed the Hawley-Smoot Tariff act which limited

imported goods to AmericaO Over 30 countries protestedO 60 filed suit

O 1930- Beggar-thy-neighbor policyO Designed to improve ones own lot at the expense of othersO Lose-lose situation

O 1932- U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932

O 1932- U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932

O 1933- Global Depression at its worstO 1929 -1934 -World trade declined by 66%

Key ReasonsO Unemployment increased in U.S.O Europe found it difficult to pay off reparations &

war debtsO Proved far worse for less developed countries

that depended heavily on the export of raw materials & cash crops for revenuesO Malaysia experienced an 80% drop in export

revenues between 1929 & 1932O Efforts to protect domestic industries had a

disastrous impact on the world economy & greatly contributed to the length & depth of the Great Depression

Trade vs. ProductionO Lacking other instruments with which to support

economic activity, governments erected tariff and nontariff barriers to trade in a desperate effort to direct spending to merchandise produced at home rather than abroad.

O But with other governments responding in kind, the distribution of demand across countries remained unchanged at the end of this round of global tariff hikes.

O The main effect was to destroy trade which, despite the economic recovery in most countries after 1933, failed to reach its 1929 peak, as measured by volume, by the end of the decade (chart follows).

Trade vs. Production

O It had to do with the exchange rate regime and the policies associated with it.

O Countries that remained on the gold standard, keeping their currencies fixed against gold, were more inclined to impose trade restrictions.

O With other countries devaluing and gaining competitiveness at their expense, they adopted restrictive policies to strengthen the balance of payments and fend off gold losses.

O Lacking other instruments with which to address the deepening slump, they used tariffs and similar measures to shift demand toward domestic production and thereby stem the rise in unemployment.

Why Did Tariffs Rise So Sharply In Some Countries, But Not Others?

Average tariff on imports, 1928-1938, percentage

Underwood-Simmons Tariff

O The 1913 Underwood-Simmons Tariff was an experiment with lowered tariffs.

O In 1921, Congress ended that experiment with the Emergency Tariff Act.

O In 1922, the Fordney-McCumber Tariff Act raised tariffs above 1913 levels. O It also authorized the president to adjust

tariffs by 50% to balance foreign and domestic production costs, a move to help America's farmers.

Smoot-Hawley TariffO In 1928, Hoover ran on a platform of higher tariffs designed to

protect farmers from European competition. O Congress passed the Smoot-Hawley Tariff Act in 1930; Hoover

signed the bill although economists protested. O Tariffs fostered global protectionism; world trade declined by

66% from 1929 to 1934.O The original intention behind the legislation was to increase the

protection afforded domestic farmers against foreign agricultural imports.

O Massive expansion in the agricultural production sector outside of Europe during World War I led, with the post-war recovery of European producers, to massive agricultural overproduction during the 1920s.O Led to declining farm prices during the second half of the

decadeO More generally, Smoot-Hawley did nothing to foster trust and

cooperation among nations in either the political or economic realm during a perilous era in international relations.

StimulusO Fiscal policy is the use of government expenditure and

revenue collection to influence the economy.O In the 1930s, stimulus meant monetary stimulus.

O The case for fiscal stimulus was neither well understood nor generally accepted.

O Monetary stimulus benefited the initiating country but had a negative impact on its trading partners,.

O The positive impact on its neighbors of the faster growth induced by the shift to “cheap money” was dominated by the negative impact of the tendency for its currency to depreciate when it cut interest rates.O Stimulus in one country increased the pressure for its

neighbors to respond in protectionist fashion.

BibliographyO Google ImagesO http://www.investopedia.com/terms/

p/protectionism.aspO http://www.voxeu.org/index.php?

q=node/3280O http://www.marketobservation.com/

blogs/index.php/2009/03/18/the_danger_of_protectionism_during_econo?blog=10