The Effects of Trade Restrictions and Monetary Policy during The Great Depression

Abstract: Many factors are considered when analysing how countries managed to recover from the Great Depression. Leaving the gold standard and the increased protectionism are considered important variables regarding the length and depth of countries recessions. This work aims to estimate which variables allowed for or hindered the world’s economies to combat the economic turmoil during the 1930s. In this context, the high rates of unemployment is closely related to the decline in industrial production. To measure how the variables depreciation and tariff rates affected the industrial production, several multivariate regressions were performed. Data from relevant countries between 1929 and 1938, along with a dummy variable for observations pegged to gold, was used in the data analysis. The results showed that the depreciation of a country’s currency in relation to gold had a significant positive effect on industrial production. An individual country’s tariff rates showed to have no statistically significant effect, rather the international average tariff rate proved to have a strong negative effect on countries industrial production. Although the effects of depreciation and the international average tariff rate varied depending on how the regressions were specified, both variables proved to have a significant effect on industrial production. These results suggests that an individual country could not increase their industrial production by pursuing a policy of limited trade restrictions. Rather, it was the collectively high tariff rates that affected industrial production. Instead, the more countries that left the gold standard and decreased trade restriction, the more countries could benefit from the positive effects of depreciation and lower average tariffs, thereby recovering industrial production and in the extension, unemployment.