Causes of the Great Depression



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Causes of the Great Depression

On October 29, 1929, the economic boom of the twenties abruptly came to an end. The stock exchanges of New York, Toronto, and Montreal “crashed”, and North American were plunged into a Great Depression.



Overproduction:


  • Expanding industries accumulated huge supplies of goods and simply stockpiled them. These unsold goods caused factory owners to panic, lay off workers and slow down production. Workers thus had less money to spend on buying goods. The industrial capacity had expanded beyond the ability of the consumer to consume.


Canada’s Reliance on Exporting Staple Products:

  • Staple products (timber, minerals and crops) were Canada’s most important exports. Our economy depended on other countries abilities to buy them. With a bumper crop harvest in Canada and many other countries at the end of the 1920’s, prices dropped. Farmers were left with huge quantities of product. Moreover, prairie farmers were faced with a huge drought, which caused crops to die. The “Dust Bowl” led to a massive chain reaction that rippled through the Canadian economy.


Canadian Dependence on the United States:

  • Canada’s dependence on its staple economy also meant that it was dependent on foreign economies; Canada’s most important trading partner – the United States – at 40%. Thus, when the American economy failed, so did the Canadian. “When the U.S. has a cold, Canada has a flu.”


The Stock Market Crash:

  • As many people began to purchase more and more, it became important to many to “keep up with the Jones’”

  • In order to finance their lifestyle, people borrowed large amounts of cash and attempted to make quick fortunes in the Stock Market

  • Stocks could be bought on credit (on margin), so people bought more than they could afford

  • Buyers only needed to pay 10% of the stock price up front; they owed the rest when the stock was sold

  • On October 29th, 1929 (Black Tuesday) most stocks lost 50% of their value causing many to panic and sell off their stocks

  • Because so many still owed on the original price, people could not afford to pay, leading them to bankruptcy

  • The problems in the stock market made it impossible for people to pay their debts to banks and stores

  • This turn caused layoffs and inflation (as stores needed to recover profits)

  • Canada, and many other countries, quickly slipped into a massive recession


Economic Protectionism and Tariffs:

  • In order to protect home industries, governments charged tariffs on imports (protectionism) – led by the USA. As such, this caused other countries to lose their export markets. As such, other countries had little choice but to protect their own industries by raising tariffs – trade was restricted further by this cycle.


International Debt After WWI:

  • the U.S. lent money to foreign nations after WWI. These nations became dependent on their ability to sell their products to the U.S. in order to pay back the loans. When the U.S. initiated the protectionist movement, trade was reduced, and these countries could no longer pay back their loans.



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