The Causes of the Great Depression in the us and Brazil Causes in the us: Over-indebtedness & Over Speculation



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The Causes of the Great Depression in the US and Brazil

Causes in the US:

  1. Over-indebtedness & Over Speculation

  2. Uneven prosperity & Over-production

  3. President Hoover, the Federal Reserve & Congress

The U.S.A.

  • The 1920s was a time of economic growth and political conservatism in the United States. Calvin Coolidge, a Republican, occupied the White House from 1921 until 1929. Coolidge once said “The chief business of the American people is business” and practiced a hands-off government policy towards the nation’s economy.



  • The businessman was king, regulation was relaxed, and the era of the “Titans of Wall Street” was born. The Titans of Wall Street were a group of bankers including J.P Morgan and Charles Mitchell. Successful stock brokers and speculators became national celebrities.

Over-indebtedness & Over Speculation

  • In the 1920s, for eight years stock prices rose and for the first time many ordinary people owned stock. The price rise was fueled by speculation and easy credit. Many historians point to this over-speculation and over-indebtedness as primary causes of the Great Depression.



  • The market was manipulated by large investors who would combine money to make large purchases of stock, driving prices up. Small investors speculated (guessed) that the prices would rise higher and higher. Small investors were hoping to ride the price up and make quick money. But when the price reached high enough, the large investors sold their shares and took large profits, leaving only small investors holding stocks.



  • Instead of buying shares with cash, investors borrowed from banks: buying on margin. A buyer would put down 10% of the stock price and borrow 90%. Stockbrokers encouraged people to buy on margin, meaning they could purchase stocks using mostly borrowed money. There was always a risk that a bank could call in their loan at any time, leaving the small investor with debt. However, many small investors kept borrowing more and more money hoping that the value of their stocks would go higher and higher.



  • Expansion of consumer credit also led to over-indebtedness. Many new household appliances such as washing machines, refrigerators, and air conditioners arrived in stores. An expansion of credit markets in the 1920s had increased average Americans’ debt. Whereas people used to wait until they had cash on hand to buy household items—furniture, radios, vacuum cleaners—they were able to assume debt to get their hands on those items right away. All of the talk in the 1920s about “unending prosperity” calmed Americans’ fears about buying on credit.



  • The linchpin of the Great Depression was the Stock Market Crash of 1929 in which many investors lost their life savings. Since many investors had bought stocks on margin, they were now deeply in debt. Banks failed because so many businesses, farmers, investors and other citizens defaulted on their loans.

Uneven prosperity & Over-production

  • Contrary to common thought, the crash alone did not lead directly to the Great Depression. Several trends occurred in the 1920s that, when combined, can be said to have caused the Great Depression.



  • In the 1920s, there was uneven prosperity even though the economy appeared to be in good shape.



  • 200 large companies controlled about 50% of American industry.



  • A mere 0.1 %, or 24,000 families, maintained 34 % of the country’s savings, earning more than $100,000 annually.

On the other hand, 71 % of the country made less than $2,500 a year.

  • Those Americans lucky enough to have extra money to invest did so poorly on the stock market.



  • The declining income of the lower classed reduced their purchasing power. Factories were not aware of the declining purchasing power of the lower classes and continued to produce more goods then they could sell. This led to an overproduction of factory goods.



  • To make profit, factories began to slow down production of goods. This meant that they had to lay off workers, which in turn contributed to the growth of the lower classes. As the lower classes grew, there was yet even less demand for factory goods. This created a vicious cycle where layoffs led to less demand for goods and less demand for goods led to more layoffs.

President Hoover, the Federal Reserve & Congress

  • The President at the time of the crash in 1929 was Herbert Hoover, who had been elected the year before, promising to continue Coolidge’s policy of minimum government involvement.



  • The Federal Reserve Bank’s monetary policy, supported by the Hoover administration, continued to take money out of the economy fearing inflation. This meant that failing banks or farmers could not get new loans to survive.





  • As a result of the Federal Reserve’s monetary policy and Hoover’s reduced government spending, farms continued to lose money and rural banks continued to fail.

In all, 9,000 banks failed during the 1930s. By April 1933, around $7 billion in deposits had been frozen in failed banks. Bank failures led to the loss of billions of dollars in assets.

  • While much of the discussion focuses on banks, industry and cities, a long-term drought struck much of the middle part of the U.S. in 1930. The drought, which lasted for a decade, hit farmers who were already suffering from a devastating drop in income.



  • In 1930, the Hawley-Smoot Tariff Act passed by Congress became law. It was a measure designed to protect American manufacturers by imposing a tax on imported goods. However, the act resulted in retaliatory tariffs by other countries, further crippling American trade. The tariff wars reduced world exports by more than 50% and caused a deepening of the Depression.



  • In 1933, unemployment in the U.S. reached 25% (1 in 4 people.)



BRAZIL

Causes in Brazil:

  1. Dependency on coffee export



  1. The failure of the valorization program



  • Prior to the Stock Market Crash in the U.S., the Brazilian economy was dependent on agriculture, particularly coffee. In the 1920s, coffee exports were the source of over 70 % of the entire country’s revenue.



  • Brazil, like many other Latin American countries, had long been dependent on the US economy through exports. The primary export to the United States was coffee. Exports of coffee to the U.S. took a huge hit as the U.S. economy took a sharp downturn. In 1929, Brazilians were receiving 22.5 cents a pound for coffee. Two years later, the price had dropped to only 8 cents a pound.



  • Brazil had in place a government valorization, which guaranteed the coffee planters income during tough times. The government bought and warehoused (stored) surplus coffee when the demand for coffee fell and sold it when the demand for coffee rose again. After World War I, for instance, the Brazilian government stepped in to help struggling coffee planters. It bought coffee when the demand from the U.S. fell and warehoused (stored) the surplus. After WWI, when the U.S. demand for coffee rose again, the government began to sell the coffee that it had stored in its warehouses.



  • The Brazilian government used to generate the money needed for its valorization program by collecting taxes from businesses and getting large loans from countries like the U.S.



  • Coffee prices fell rapidly during the Depression because the consumers in the U.S. and other countries demanded less coffee. At the same time, foreign lenders, like the U.S., began to severely limit loans (credit) to Brazil because they did not see the coffee industry as profitable.





  • The Brazilian government began to sell all the gold it owned as a short time solution. But government officials had depleted Brazil’s gold reserves by 1930 and Brazil’s currency fell to an all-time low.



  • Most Brazilian rural workers were landless laborers that planters could no longer afford to pay. They began to live on food that they planted between coffee trees and faced hunger. Unemployment was also common among urban workers, including civil servants. Those who were not fired were often unpaid for months at a time.



  • The Brazilian economy was dangerously close to collapsing. The Great Depression in Brazil caused a series of political changes ultimately resulted in a new dictatorship in 1937.


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