Causes of the Great Depression

1. Overproduction The economic boom of the 20s encouraged companies to expand operations Soon more goods were being produced than being sold Oversupply led to falling prices Companies decreased production, which led to layoffs Unemployed workers had less money to spend on consumer goods, which made the problem worse. In a nutshell, North American industries could produce goods faster than the public could consume them. This snowball effect that we can see here is part of what made the Depression so hard to recover from: each of the causes exacerbated the others.

2. Canada’s Dependence on Exporting Staple Products Canada’s economy was based on the sale of staple products like wheat and lumber In the 20s, farmers grew record crops, but soon more was being produced than could be sold Beginning in 1927, world wheat prices fell due to overproduction & increased competition from countries like USA, Australia and Argentina A long drought made things worse Poor farmers defaulted on mortgages & loans; many lost their farms Flour mills & railways also lost business As long as other countries keep buying our products, our economy is strong. If prices fall or sales drop off, we’re in trouble. Drought leads to the “Prairie Dust Bowl” of the 30s. Again we see the snowball effect as associated industries suffer due to problems with agriculture. Poor farmers were also unable to buy consumer goods making the problem of overproduction worse.

3. Isolationism and Protectionism In the 20s, many governments adopted isolationist policies hoping to avoid another war Many used protective tariffs to shield domestic industries from foreign competition Countries dependent on exporting goods suffer economically and often adopted protectionist policies in retaliation Belief of isolationists: too much international involvement, alliances, etc. is what forced countries into WWI and no one wanted to be dragged into another costly war Protectionism is just the economic arm of isolationist policies Tariffs make foreign imports more expensive, which encourages consumers to buy domestically made products; they cause sales of imports to fall thereby discouraging imports Canada was hard hit by these policies because it was so dependent on exports Ironically, these policies designed to “help” the economy made the situation worse

4. International Debt Germany’s economy suffered because of the huge reparations it owed after WWI Britain & France needed the reparations to pay back the money they borrowed from the USA They depended on exports to the USA to get money to repay the loans In the 20s, the USA adopted protectionist trade policy & stopped importing so many goods European nations defaulted on their loans, which hurt their economies as well as the US economy The US became protectionist because of economic troubles within its borders and because it felt that isolating itself from international affairs would help keep it from being dragged into another major war. Protectionism usually emphasizes self-sufficiency to support homegrown industries; imports are only used for the things which the country cannot provide for itself

5. Canada’s Dependence on the USA 40% of Canada’s exports were sold to the USA When the American economy failed, the Canadian economy failed too. American economy brought down by various factors including falling prices on the world market due to overproduction, inability of European countries to repay loans and its own isolationist policies that backfired We didn’t learn from our mistakes. Today about 60% of our exports go to the US. Part of why Canada is in our current recession is because of close economic ties with USA. When they went into economic crisis, they dragged our economy down with theirs.

6. Unregulated Capitalism Overproduction Few wage increases as profits increase Credit—people borrowed more than they could afford to repay Buying on the margin/speculation: using a loan to buy stocks where repayment is dependent on stocks increasing in values Lack of controls on the stock market Lack of wage increases meant consumers didn’t have enough money to spend on consumer goods, which made overproduction problems worse Issue with credit one of the causes of the current recession as well Heavy investment in the stock market actually drove stock values up beyond the net worth of the associated companies, which left the stock market unstable—should people decide to sell their shares, many companies would have been unable to pay out the value of the stocks

The Depression Begins

The Stock Market Crash October 29, 1929 is also known as “Black Tuesday” The New York, Toronto and Montreal stock exchanges all crashed Banks and other companies that had invested heavily in the stock market failed It is important to note that the stock market crash is not the cause of the Depression. The crash made obvious what was already wrong with the economy. We need to understand how the stock market works to understand why it crashed: A company needs to raise money to expand its business It sells shares in the company (a.k.a. stocks) to investors who will get a share in the profits if the company is successful How much they receive is based on the number of stocks they own When the company turns a profit, investors may either sell their shares at a profit or keep them in the hopes that value of the stocks will increase It is the buying and selling of shares in all publically traded companies that drives the stock markets of the world In the 1920s, as prices for goods on the world market fell, companies began to lose money and the value of their stocks fell Panicked investors began to sell their stocks in large quantities, which caused stock values to drop even further (supply & demand) It caused a downward spiral that led to the stock market crash