Canada and the Dirty Thirties

After the boom years of the 1920s, a dramatic economic shift in 1929 would change the Canadian economy & society The good times of the 1920s abruptly ended not just in Canada but in most industrialized countries In order to understand the Great Depression, we must first briefly look at the business cycle & develop a basic understanding of the stock market

Economic conditions constantly change, in other words there are good time and bad times, economists call these upswings and down swings the business cycle.

Business Cycle Stages There are four basic stages to the cycle: Recovery (Expansion) Prosperity (Boom) Recession Depression (Trough)

How the Stock Market Works

The boomtime of the 1920s created such confidence in the economy that many people bought stocks in businesses Shares: portion of a larger amount that is divided among a number of people Stocks: shares in a company that can be bought & sold Stock market: a place where businesses raise money by selling stocks, or shares, in their business

The owners of Nova Manufacturing Co. want to expand their company To get the money they need to expand, they sell stocks in the company People who buy the stock will receive a part of the profits of the company depending on the number of shares they own (dividend)

If the company is profitable, the value of the stock will rise Then the stockholder may choose to sell shares at a profit or hold on to them, hoping the value will increase even more

If the company is struggling stocks decrease in price Stockholders will want to try and sell their stocks if they think this is going to happen so they will still profit

During the 1920s, a stock market boom developed as the price of stocks increased in value It was a relatively easy method for becoming wealthy In1929, Canadian investors were very confident that stocks would remain high despite some notable economic problems By September, American stock market shares began to drop & Canadian stock values followed

Causes of the Great Depression

Cause 1: Over Production Produced too many products because… – Stock prices were high (companies can afford it) – Assembly line production made it easy – Unsold, extra things were warehoused and factories shut down until extra things were sold. Lesson: You should only produce as much as you can sell. (supply & demand)

Cause 2: Resource Based Economy Canada depended on too few resources: mostly exported (sold) natural resources (wheat, fish, pulp & paper). Canada experienced severe drought in the 1930s and the west became a dustbowl. Countries were no longer buying Canada’s resources.

Lesson: Selling many different kinds of products is best. (diversify)

Cause 3: Dependence on USA Pre WWI Canada’s largest trading partner was Britain; post WWI Canada depended too much on the USA as a trading partner. When the depression hit the USA, we knew it was going to hit Canada too. Lesson: “When the U.S. sneezed, the rest of the world got pneumonia.

Cause 4: Buying on Credit 1920s motto: “buy now, pay later” Buying items on credit was a NEW concept. Most people didn’t own anything they had!

Same mentality used for stocks Buying on Margin: Stocks are bought on borrowed money In the twenties, “ninety percent of the purchase price of the stock was being made with borrowed money." 

Canadians fell helplessly into debt Creditors (people who are owned money) would repossess goods and even houses, leaving some with nothing. Lesson: Don’t spend more than you make.

The Spark: STOCK MARKET CRASH October 29, 1929 is known as BLACK TUESDAY

Too many people “buying on margin” (getting loans to buy shares) When stock prices went down, people couldn’t pay back their loans This caused people to SELL shares Selling causes more selling, and more, and PANIC!

When stock prices fell, thousands of people lost their life savings meaning… People became fearful about the future and stopped spending money, meaning… Companies went out of business meaning… Workers had no jobs meaning… Unemployed people have no money to spend…