Tuesday, November 4, 2008

How Capitalism Will Save Us?

The Depression was actually triggered by the Smoot-Hawley Tariff of 1929--30, which imposed massive taxes on countless imports. Other countries retaliated in kind. The global trading system collapsed. International capital flows dried up.

How Capitalism Will Save Us?

The legislative history of Smoot-Hawley is instructive. When it first surfaced in Congress during the fall of 1929, the stock market cratered. When near the end of 1929 it appeared that Smoot-Hawley was being sidetracked, stocks rallied, ending the year almost where they had begun. But then in early 1930 Smoot-Hawley resurfaced, and stocks resumed their slide, which continued after Smoot-Hawley was signed into law that June.

A devastating global contraction ensued. Compounding that error was the U.S.' giant tax increase in 1932. President Herbert Hoover thought a balanced budget would restore confidence. The top income tax rate was raised from 25% to 63%. Hoover even legislated an excise tax on checks--you had to pay Uncle Sam a fee every time you wrote a check.

Not surprisingly, strapped consumers withdrew massive amounts of cash from banks in order to conduct their business, which put even more stress on troubled banks. This check tax was one of the factors leading to the bank closures of 1933. The huge tax increase deepened the U.S. economic slump.

Read the full article here.