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Difficulty: HardCauses of the Great Depression

"We, the undersigned, ... protest against the passage of the Hawley-Smoot tariff bill... We believe that any increase in duties would be a mistake. It would raise the cost of living... Our export trade in general would suffer. Countries cannot buy from us unless they are permitted to sell to us... A tariff wall would invite retaliatory tariffs by other nations... and would make it more difficult for foreign debtors to pay their obligations to us."

— Petition of 1,028 Economists to President Herbert Hoover, May 1930

Based on the petition, which of the following best explains how the tariff policy protested by the economists contributed to the onset and severity of the Great Depression?

  1. A
    It was a core component of the New Deal's agricultural recovery program aimed at raising domestic crop prices by restricting foreign agricultural products.
  2. B
    It demonstrated the federal government's strict adherence to laissez-faire economic principles by refusing to regulate domestic market competition.
  3. It prompted foreign nations to enact retaliatory trade barriers, crippling international commerce and preventing European countries from generating the dollars needed to service their war debts to United States banks.Answer
  4. D
    It represented a shift toward absolute diplomatic isolationism, ending all United States participation in European peace negotiations and security alliances.

Answer

The policy prompted foreign nations to enact retaliatory trade barriers, crippling international commerce and preventing European countries from generating the dollars needed to service their war debts to United States banks.
The high tariff rates of the Hawley-Smoot Tariff led to retaliatory tariffs by America's trading partners, which dried up international trade and made it impossible for European nations to pay their wartime debts to United States financial institutions, thereby destabilizing the global banking system.

Step-by-Step Solution

1
Analyze the stimulus context and the policy being protested.
The petition is written by economists protesting the Hawley-Smoot Tariff in May 1930, warning that it would raise costs, invite retaliatory tariffs, and harm foreign debtors' ability to pay their debts.
Identifying the target policy (Hawley-Smoot Tariff) and the date (May 1930) sets the historical context for the onset of the Great Depression.
2
Connect the economists' warning to the international debt structure of the 1920s.
During the 1920s, international finance relied on a circular flow where U.S. banks lent money to Germany, Germany paid reparations to the Allies, and the Allies paid war debts back to the U.S. High U.S. tariffs broke this cycle by making it impossible for European nations to sell goods to the U.S. and earn dollars.
This shows how tariff policy directly impacted the international financial stability that undergirded the pre-Depression global economy.
3
Evaluate the options to identify which one accurately describes this economic vulnerability.
The option describing foreign retaliation and the disruption of war debt service accurately captures how this protectionist policy aggravated global economic contraction and led to defaults on loans held by U.S. banks.
Selecting the option that connects the tariff to the disruption of international commerce and credit flows.

Key Concept

The international economic consequences of protective tariffs in contributing to the Great Depression
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Topics

Causes of the Great Depression

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