The Fordney-McCumber Tariff of 1922 and the Emergency Tariff of 1921 were two major tariff acts in the 1920s:
This law raised the average import tax to about 40%, making it one of the most punitive tariffs in U.S. history. The tariff was intended to protect U.S. farmers and manufacturers, but it had several consequences:
- Retaliation: European countries raised their own tariffs on U.S. goods. For example, France raised its tariffs on automobiles from 45% to 100%.
- World War I debt: The tariff made it harder for European nations to export to the United States and earn dollars to pay their war debts.
- Great Depression: The tariff is considered to have sown the seeds for the Great Depression of the 1930s
Here are the annual inflation rates for the United States in the 1920s:
- 1920: 15.6%
- 1921 -10.9%
- 1922 -6.2%
- 1923: 1.8%
- 1924: 0.0%
- 1925: 2.4%
- 1926: 0.9%
The inflation rate in the United States is measured by the consumer price index (CPI), which is calculated by the Bureau of Labor Statistics.
The inflation rate in the United States was historically high during World War I and the immediate postwar era. The early 1920s saw a steep recession, which led to a sharp drop in prices. The years from 1923 to 1929 were a period of modest price changes, though there was slight deflation in 1927 and 1928.
The Emergency Tariff of 1921, also known as the Emergency Tariff Act, was a temporary bill passed by Congress and President Warren G. Harding to protect American products and end the post-war recession:
- Purpose: The tariff was created to protect American farmers and industries that were struggling after World War I. The Underwood Tariff, passed under President Woodrow Wilson, had left farmers in a difficult situation.
- When it was passed: The Emergency Tariff Act was enacted on May 27, 1921.
- What it did: The tariff raised tariffs, especially on farm products.
- What happened next: The Fordney-McCumber Tariff Act of 1922 replaced the Emergency Tariff Act with a permanent bill that had even higher tariff rates.
The protectionist legislation destabilized international commerce by heightening economic nationalism.
Now with this study why did 1921 and 1922 have deflation?
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The deflationary period of 1921 and 1922 primarily occurred due to a rapid contraction of the money supply after a period of significant inflation during World War I, where the Federal Reserve, in an attempt to stabilize the economy, raised interest rates sharply, leading to a decrease in credit and overall spending, causing prices to fall across the economy; this period is often referred to as the “Depression of 1920-1921.”.
Key factors contributing to the deflation:
- Post-war economic readjustment:
After the war, the economy was transitioning back to peacetime production, leading to a sudden decrease in demand for war-related goods and a surplus in the market.
The Federal Reserve, in response to high wartime inflation, drastically tightened monetary policy by raising interest rates, which reduced the money supply available for borrowing and spending.
- Reduced government spending:
With the war over, government spending on military supplies and services significantly declined, further impacting demand.
- Return of soldiers to the workforce:
A large number of soldiers returning to civilian jobs led to a sudden increase in the labor force, putting downward pressure on wages and prices.
Important points to remember:
The US was still on the gold standard at this time, which meant that the money supply was closely tied to gold reserves, further exacerbating the deflationary pressures when the Fed contracted the money supply.
- Impact on businesses and consumers:
While deflation may seem beneficial at first due to lower prices, it can also hurt businesses by discouraging investment and causing consumers to delay purchases in anticipation of even lower prices in the future.