The Great Depression was a global economic decline that began in the United States and quickly spread worldwide. The economic downturn’s effects continued for a decade after the stock market crash, which turned the world’s attention towards the start of the decade-long economic depression. Several historical events in the United States, such as the protectionist trade policies enforced by the government and the Gold Standard’s adoption as a countermeasure, exacerbated the effects of the depression (Evenett, 2019). Besides, European economic institutions’ unwillingness to aid the ailing American banks further prolonged the financial turmoil. Thus, an examination of the historical context of the period before and during the Great Depression provides an excellent understanding of the last century’s most protracted economic depression.
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The Smoot-Hawley Tariff Act, which the government enacted as a response to the depression, led to a protectionist retaliation that increased the effects of the Great Depression. The act raised the tariff on imports to levels that irked even the closest trading partners to the United States, such as Canada, which sought alternative countries as partners (Evenett, 2019). The Hoover administration had promised the citizens that the act would protect American farmers from competition with cheap agricultural imports and be a reprieve to the country’s ongoing economic woes (Beaudreau, 2017). However, the equally extremely protectionist tariffs imposed in turn on US products by other countries led to a reduction in exports that further exacerbated its economic troubles.
Further, the United States’ mishandling of the aftermath of the Treaty of Versailles was responsible for the depression’s extended period. Because of refusing to be an active member of the international trade and later raising tariffs on its European wartime partners, relations between the United States and Europe were fraught. Moreover, the United States did not write off the war debts owed by its allies in Europe, who now had to depend on German reparations that were already crippling the country’s economy (Tavlas, 2016). All this eventually culminated in European banks denying American banks the necessary loans to alleviate the worst effects of the depression and seeking prompt repayment of previous loans owed.
Additionally, the United States’ adoption of the Gold Standard as a strategy to combat the economic downturn of the Great Depression significantly reduced the country’s purchasing power. As a result, the effects of the depression were further drawn out. To restore international equilibrium, the government had to reduce internal prices, including labor costs. Consequently, workers received low wages, which, in turn, translated into fewer goods being bought by households due to reduced income. Companies would also have to reduce their production costs and lay off some workers due to a lower inflow of money (Tavlas, 2016). Therefore, the effects of the reduction in spending lengthened the economic turmoil experienced during the Great Depression.
Several historical events ultimately led to the prolonged period of the Great Depression. The stock market crash was merely a signal of the start of the depression and was neither the sole cause nor the main perpetuating factor. European banks’ refusal to lend to American banks, coupled with a recall of their debts, increased bank closures along with many dependent businesses. Furthermore, misguided responses to the effects of the depression, such as the Smoot-Halley tariff act of 1930 and the adoption of the Gold Standard, led to further worsening of the depression. While the former led to a protectionist retaliation, the latter significantly lowered peoples’ purchasing power, which together sustained the Great Depression.
Beaudreau, B. C. (2017). Electrification, the Smoot-Hawley tariff act and the decline in investment expenditure in 1931–1932: Testing the excess-capacity hypothesis. International Advances in Economic Research, 23(3), 295-308. Web.
Evenett, S. J. (2019). Protectionism, state discrimination, and international business since the onset of the Global Financial Crisis. Journal of International Business Policy, 2(1), 9-36. Web.
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Tavlas, G. S. (2016). New perspectives on the Great Depression: a review essay. (No. 2016-28). CHOPE Working Paper. Web.