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Another factor contributing to the Great Depression was America's position in international trade. Protectionist impulses would drive nations to protect domestic production against competition from foreign imports by erecting high tariff walls. The Hawley-Smoot Tariff Act of June 1930 raised U.S. tariffs to unprecedented levels. It practically closed U.S. borders and, with retaliatory tariffs from U.S. trading partners, caused the immediate collapse of the most important export industry, American agriculture. American foreign trade seriously declined, and the volume of world trade steadily decreased.
Prior to the Great Depression, a petition signed by over 1000 economists was presented to the U.S. government warning that the Hawley-Smoot Tariff Act would bring disastrous economic repercussions, however, this did not stop the act from being signed into law.
Beginning late in the 1920s, European demand for U.S. goods began to decline. That was partly because European industry and agriculture were becoming more productive, and partly because some European nations (most notably Weimar Germany) were suffering serious financial crises and could not afford to buy goods overseas. However, the central issue causing the destabilization of the European economy in the late 1920s was the international debt structure that had emerged in the aftermath of World War I.
When the war came to an end in 1918, all European nations that had been allied with the United States owed large sums of money to American banks, sums much too large to be repaid out of their shattered treasuries. This is one reason why the Allies had insisted (to the consternation of the perhaps historically vindicated Woodrow Wilson) on demanding reparation payments from Germany and Austria. Reparations, they believed, would provide them with a way to pay off their own debts. But Germany and Austria were themselves in deep economic trouble after the war; they were no more able to pay the reparations than the Allies were able to pay their debts.
The debtor nations put strong pressure on the United States in the 1920s to forgive the debts, or at least reduce them. The American government refused. Instead, U.S. banks began making large loans to the nations of Europe. Thus debts (and reparations) were being paid only by augmenting old debts and piling up new ones. In the late 1920s, and particularly after the American economy began to weaken after 1929, the European nations found it much more difficult to borrow money from the United States. At the same time, high U.S. tariffs were making it much more difficult for them to sell their goods in U.S. markets. Without any source of revenues from foreign exchange with which to repay their loans, they began to default.
The high tariff walls critically impeded the payment of war debts. As a result of high U.S. tariffs, only a sort of cycle kept the reparations and war-debt payments going. During the 1920s the former allies paid the war-debt installments to the United States chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the United States and Britain. Similarly, U.S. investments abroad provided the dollars, which alone made it possible for foreign nations to buy U.S. exports.
By 1931 the world was reeling from the worst depression of all time, and the entire structure of reparations and war debts collapsed.
In the scramble for liquidity that followed the Great Crash, funds flowed back from Europe to America and Europe's fragile economies crumbled.
This family, the Wares, squatted on Terminal Island, California, United States in 1930 because of the Great Depression.
The Wall Street crash had ushered in a world-wide financial crisis. In the United States between 1929 and 1933 unemployment soared from approximately 3 percent to 25 percent, while manufacturing output declined by one-third. Governments worldwide sought economic recovery by adopting restrictive autarkic policies (high tariffs, import quotas, and barter agreements) and by experimenting with new plans for their internal economies.
The economic crises due to the depression were a terrible epidemic throughout the United States and many parts of the world. Consumers reduced their purchases of luxury cars, clothes, and many businesses cut production. Big businesses such as General Motors saw their sales drop by 50% in the late 1920s and the early 1930s. This caused businesses to lay off thousand of workers.
When the farm prices fell; small farmers went bankrupt and lost their land. By June of 1932, the American economy had fallen by about 55% of the work force. The Government tried to restore prosperity by spending on welfare and public works.
After the stock market collapse, the New York banks became frightened and called in their loans to Germany and Austria. However, without the American money, Germans had to stop paying reparations to France and Britain. Of course, this was a chain reaction and they could not repay their war loans to America. Therefore, the depression had spread to Europe. All governments were forced to cancel both reparations payments and war loans.
The United States government tried to protect domestic industries from foreign competition by imposing the highest import duty in American history. In retaliation, other countries raised their tariffs on imports of American goods. As a result, global industrial production declined by 36% between 1929 and 1932, while world trade dropped by a breathtaking 62%.
In 1932, the United States had elected President Franklin D. Roosevelt. He proposed the " New Deal", a platform of government programs to stimulate and revitalize the economy. The British and French governments also intervened in their economies and escaped the worst of the depression. Moreover, the Soviet Union put in the five-year plans.
Observers throughout the world saw in the massive program of economic planning and state ownership of the Soviet Union what appeared to be a depression-proof economic system and a solution to the crisis in capitalism.
In Germany unemployment increased drastically, fueling widespread disillusionment and anger. The institutions of the Weimar Republic, which had already been standing on shaky ground, started cracking in the years from 1930 to 1932, while Chancellor and finance expert Heinrich Brüning was trying to fix the economy by drastically cutting state spending. At the time, the NSDAP gained much popularity, winning the two general elections in 1932, which eventually led to the appointment of Adolf Hitler as Chancellor on January 30, 1933. (See Weimar Republic for details.) In Nazi Germany economic recovery was pursued through rearmament, conscription, and public works programs. In Mussolini's Italy the economic controls of his corporate state were tightened.
In the United Kingdom, the Labour government of Ramsay MacDonald, and later the Conservative-dominated "National Government" responded to the depression by imposing tariffs on all imports except those of the British Empire (which arguably worsened the global situation), by cutting public spending, and by abandoning the Gold Standard which reduced the cost of British exports. (see Great Depression in the United Kingdom).
In the United States, President Herbert Hoover made only half-hearted efforts to control the situation, and hindsight shows that at first, he gravely underestimated the severity of the crisis, (even announcing to Congress on December 3, 1929 that the worst effects of the recent stock market crash were behind them and that the American people had regained faith in the economy). Having realized his mistake, Hoover went before Congress again on December 2, 1930 to ask for a $150 million public works program to help generate jobs and stimulate the economy. However, one of the major problems was that with deflation, the currency that you kept in your pocket could buy more goods as prices went down. The other was that there had been no federal oversight of the stock market or other investment markets, and with the collapse, many stock and investment schemes were found to be either insolvent, or outright frauds. Unfortunately, many banks had invested in these schemes, and this precipitated a collapse of the banking system in 1932. With the banking system in shambles, and people holding on to whatever currency that they had, there was minimal cash available for any activities that would cause positive change.
The response of the Hoover administration helped little; instead of increasing the money supply, the Hoover administration did the exact opposite and raised interest rates, falsely believing that inflation was the real danger. Many in the Hoover administration believed that as wages fell, the cost of production would drop, and as a result, production would pick up again, and the depression would be self-correcting. For this reason, they saw no need for the government to intervene in the economy, a policy which proved disastrous.
Like their counterparts abroad, many Americans were disillusioned with their system of government, believing that Hoover's policies had driven the country to ruin. (Shantytowns populated by unemployed people at the time were often dubbed Hoovervilles to highlight the President's fading popularity.) During this period, several alternative and fringe political movements saw a considerable increase in membership. In particular, a number of high-profile figures embraced the ideals of Communism, although this would subsequently be used against them during the Red Scare of the 1950s. Radio speakers such as Father Charles Coughlin saw their listening audiences swell into the millions, as they sought for (and often found) easy scapegoats to blame the country's woes upon.
Upon accepting Democratic nomination for president ( July 2, 1932), Roosevelt promised "a new deal for the American people," a phrase that has endured as a label for his administration and its many domestic achievements.
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