Protectionism
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 1929
Many believe mistakenly that the stock
market crash that occurred on Black
Tuesday, October 29, 1929 is one and the
same with 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. So 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.
O 3. Reduction in Purchasing Across the Board
With 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 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 Conditions
While 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.
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.
Opinion
O “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 Benefits
• The 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 Consequences
• Free trade advocates argue that protectionism
leads to higher prices because workers at home
are not necessarily willing to work for lower
wages.
Timeline
O
O
1913- Underwood-Simons Tariff
1927- World Conference at Geneva
O Realized world was reliant on trade
O
1930- U.S. passed the Hawley-Smoot Tariff act which limited
imported goods to America
O Over 30 countries protested
O 60 filed suit
O
1930- Beggar-thy-neighbor policy
O Designed to improve ones own lot at the expense of others
O Lose-lose situation
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 worst
O 1929 -1934 -World trade declined by 66%
O
Key Reasons
O Unemployment increased in U.S..
O Europe found it difficult to pay off reparations
and war debts.
O Proved far worse for less developed countries
that depended heavily on the export of raw
materials and cash crops for revenues.
O Malaysia experienced an 80% drop in export
revenues between 1929 and 1932.
O Efforts to protect domestic industries had a
disastrous impact on the world economy and
greatly contributed to the length and depth of
the Great Depression.
Trade vs. Production
O Lacking other instruments with which to support
economic activity, governments enforced 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
Why Did Tariffs Rise So Sharply In Some Countries,
But Not Others?
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.
Average tariff on imports, 1928-1938, percentage
The Gold Standard
O “A commitment by participating countries to fix the
prices of their domestic currencies in terms of a
specified amount of gold.”
O National money and other forms of money (bank
deposits and notes) were freely converted into gold
at the fixed price.
O A county under the gold standard would set a price
for gold, say $100 an ounce and would buy and sell
gold at that price.
O This effectively sets a value for the currency; in our
fictional example $1 would be worth 1/100th of an
ounce of gold.
O Other precious metals could be used to set a
monetary standard.
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 Tariff
O
O
O
O
O
O
In 1928, Hoover ran on a platform of higher tariffs designed to protect
farmers from European competition.
Congress passed the Smoot-Hawley Tariff Act in 1930; Hoover signed the bill
although economists protested.
Tariffs fostered global protectionism; world trade declined by 66% from 1929
to 1934.
The original intention behind the legislation was to increase the protection
afforded domestic farmers against foreign agricultural imports.
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 decade
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.
Stimulus
O 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 protectionism.
What Do We Use Today?
O Almost every country, including the United
States, is on a system of fiat money, which is
"money that is intrinsically useless; is used only
as a medium of exchange".
O The value of money is set by the supply and
demand for money and the supply and demand
for other goods and services in the economy.
O The prices for those goods and services,
including gold and silver, are allowed to fluctuate
based on market forces.
Bibliography
O Google Images
O http://www.investopedia.com/terms/p/protectio
O
O
O
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nism.asp
http://www.voxeu.org/index.php?q=node/3280
http://www.marketobservation.com/blogs/index
.php/2009/03/18/the_danger_of_protectionis
m_during_econo?blog=10
http://economics.about.com/cs/money/a/gold_
standard.htm
http://www.u-s-history.com/pages/h1053.html