From George Melloan at the Wall Street Journal, Whoever Wins, Capitalism Will Survive:
The seeds of the Depression were planted with the Federal Farm Loan Act of 1916, in a two-year interval in which President Woodrow Wilson had a compliant Democratic Congress. The act set up 12 regional government banks to make preferential loans to farmers. Farmers had done well earlier, so much so that years later they would ask the government to support prices on a parity with the year 1912. But the 1916 government venture damaged country banks with unfair competition and encouraged farmers to overproduce. That lowered prices.
Calvin Coolidge fended off their demands for relief from low prices but Herbert Hooverrefinanced the FFLA, suggesting that he was an easier mark than Coolidge. After the 1929 crash, farmers again pressured the Republican Congress for relief, prompting Sen. Reed Smoot of Utah and Rep. Willis C. Hawley of Oregon to draft a bill raising tariffs on farm products. Had Congress stopped there the damage would have been limited. But lobbyists for industry and labor demanded protection as well. The final Smoot-Hawley bill doubled already-high tariffs on 20,000 dutiable items to an average of 50% of value.
Ignoring his own better instincts and a petition signed by more than 1,000 economists, Hoover signed Smoot-Hawley into law. The sharp drop-off in trade that resulted sent prices plummeting, worsening what was already a deflationary cycle caused by the loss of liquidity in the crash. Europeans were inhibited from selling goods in the U.S. to earn dollars to buy U.S. products and pay their war debts. The reduced flow of funds worsened deflation. Europe’s retaliation with tariff increases made matters worse. A global money shortage ensued.
U.S. exports nose-dived to $1.7 billion in 1933 from $5.2 billion in 1929, with farmers—big exporters even then—hit the hardest. Democrats swept the 1932 elections but instead of giving the country less market interference they gave it more.
The most egregious was the 1933 National Industrial Recovery Act, which required businesses to adopt 557 “codes” to prevent price cutting. These cartels violated the key principle that market competition is the guarantor of a vigorous, efficient economy. The NIRA veered the U.S. close to European-style fascism, which had many admirers at that time. Fortunately, the Supreme Court put it out of its misery in 1935, declaring it an unconstitutional extension of government power.
Despite Smoot-Hawley, the New Deal’s revolutionary farm production quotas, the NIRA and FDR’s attacks on capitalism, the business cycle turned upward in 1933. Unemployment fell from nearly a quarter of the labor force that year to 17% in 1936. But then the “second New Deal” Congress slapped a tax on “surplus” business profits, the equivalent of a tax on job-creating investment. The market crashed again in 1937 and took the economy with it.