Causes of the Great Depression



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Causes of the Great Depression

The stock market crash of 1929 did not cause the Depression. Rather, it was symptom that the economy of North America was very, very sick. What had happened to the once strong and healthy North American economy? What were the causes of the sickness? What remedies could be prescribed to make it well again?


There seem to be as many explanations for the Depression as there are experts to diagnose the illness. However, some of the major causes are as follows:


  1. Over-Production and Over-Expansion

During the prosperous 1920s, Canadian and American agriculture and industry reached high levels of production. Almost every industry was expanding. They spent large amounts of their profits adding to their factories or building new ones. Huge supplies of food, newsprint, minerals, and manufactured goods were being produced in Canada and simply stockpiled. Automobile centres such as Oshawa and Windsor produced 400 000 cars in 1930. To do this made little sense because Canadians already owned over a million cars and in the best year ever, had purchased only 260 000. The Canadian market could only absorb so many goods. Even in the general prosperity of the 1920s many Canadians could still not afford to buy everything they wanted. As a result, large stocks of newsprint, radios, shirts, shoes, and cars began to pile up unsold in warehouses. Soon factory owners began to panic and slowed down their production until some of the surplus goods could be sold. Workers were laid off. This meant that fewer and fewer families had money to spend on goods already produced. This in turn slowed down sales even more.

Industrialists seemed to have forgotten a basic lesson in economics: you should only produce as many items as you can sell. In the 1920s, wages were simply not high enough for people to buy everything being turned out in the factories.


QUESTIONS:

  1. Name some products that were stockpiled. ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. Why were Canadian families not buying these products? ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. Explain how over-production led to factory slow downs. ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. Explain: “You should only produce as many items as you can sell.” __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________



  1. Canada’s dependence on a few primary products.

Canada depended too much for its wealth on a few primary or basic products. These included wheat, fish, minerals, and pulp and paper. Canada’s most important exports were these goods. They are known as STAPLES. As long as there was a heavy demand in the world for these products, Canada would prosper. However, if there was a surplus of these goods on the world market, or if foreign countries stopped buying from Canada, our economy would be in serious trouble.

In the Depression, certain areas of Canada, which depended largely on one primary product, found themselves in deep economic trouble. The Maritimes and the West were especially hard hit.



Secondary industries involve the processing or manufacturing of primary products. These would also suffer from any slowdown in production. A good example is wheat. In the late 1920s Canada faced growing competition from Argentina and Australia, which were also wheat-exporting countries. The price of what on the world market began to fall. To add to the problem, western farmers were faced with terrible droughts in the summers of 1929, 1931, 1933-37. Without adequate rainfall, no crops grew. With little income, farmers could not purchase machinery and manufactured goods from eastern Canada. Many could not afford to pay the mortgages on their farms. With no wheat to be shipped and flour to be ground, railways and flour mills began to feel the pinch. The farmers’ problems had caused a chain reaction on my parts of Canadian society.
QUESTIONS:

  1. Name examples of primary industries. ___________________________________________________________________________________________________________________________________________________________________________________________________




  1. Name four industries that would also suffer if the farmer could not sell his wheat or had no wheat to sell. ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. What would the economic consequences of a decline in the world sales of wheat be for Canada? What would the chain reaction be? _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. Canada’s dependence on the United States

The economy of Canada in the 1920s was closely linked with that of the United States. This is still true today. In those years we bought sixty-five per cent of our imports from the Americans. Forty per cent of our exports were sent to the U.S.A. The Americans were our most important trading partner. The U.S.A. had replaced Britain as the largest buyer of Canadian products and the largest supplier of investment funds for our industries. Even then we were in danger of what today is called a “Branch Plant Economy”. It was not surprising that when the American economy got sick, Canada also suffered. One comedian said, “When the United States sneezed, the rest of the world got pneumonia.” When the Depression hit the United States, banks closed, industries collapsed, and people were out of work as factories shut down. No longer did Americans need our lumber, paper, wheat, and minerals. It was inevitable that Canada’s economy would suffer too.
QUESTIONS:

  1. How much did Canada export to and import from the U.S.A.? ___________________________________________________________________________________________________________________________________________________________________________________________________




  1. Why did a depression in the U.S.A. have such serious repercussions in Canada? ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. What do you think is meant by a “Branch Plant Economy”? Give Examples. ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________



  1. High Tariffs Choked off International Trade

In the 1920s European nations were recovering from a devastating war. They needed many of the surplus manufactured goods that the U.S. and Canada produced. Unfortunately, they were heavily in debt from the war and often could not afford to buy them.

At the same time, many countries adopted a policy known as “Protective Tariffs”. In order to protect their home industries from foreign competition, they placed high tariffs (taxes) on foreign imports. Country X found that its goods were being kept out of County Y by high tariffs. Soon country X placed high tariffs on imports from Country Y. Thus world trade began to slow down. Surplus goods in one country were kept out of another country that needed them. While high tariffs were used to protect home industries, they choked off international trade.


QUESTIONS:

  1. Why do countries put high tariffs on foreign goods? Who benefits from high tariffs? Who suffers? _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. Why was international trade so important to Canada? ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. How did tariffs between countries choke off international trade and contribute to the Depression? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


  1. Too Much Credit Buying

All through the twenties, Canadians were encouraged by advertising to “Buy Now, Pay Later”. A famous comedian, Will Rogers, said that the way to solve the traffic problem was to remove from highways all cars that hadn’t been paid for. He meant that so many cars were bought on credit that very few cars would actually remain on the road. Will Rogers was only joking but his remark points up the fact that by 1929, credit buying was a well established custom. Why wait to buy a washing machine or a phonograph or a tractor or a piano when you could have it now with a small down payment?

Many families got themselves hopelessly into debt with credit buying. The piano that cost $445 cash was purchased with $15 down and $12 a month for the next four or five years. It ended up costing far more than what it was worth. Sometimes by the time the purchases were paid for, they were ready for the junk pile. One radio comedian joked that he had said to his wife, “One more payment and the furniture is ours.” To this she replied, “Good, than we can throw it out and get some new stuff!”



If the wage-earner took sick or was laid off work it was often impossible to keep up the payments. As the Depression worsened, many people lost everything. Their refrigerators, stoves, washing machines, cars, and even their homes were repossessed by their creditors (the people they owed money to.)
QUESTIONS:

  1. How did too much credit buying lead to problems for many people during the Depression? ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. Is it ever wiser to buy on credit rather than with cash? If so, when? ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________




  1. Why do many people prefer to pay cash while others use credit? Which way seems best to you? _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


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