THE GREAT DEPRESSION: POLITICAL AND ECONOMIC CAUSES IN THE AMERICAS
CAUSES IN THE UNITED STATES
Historical context
- The 1920s’ were seen as a period of ‘boom’ in the US because of technological advancements, economic efficiency and minimal government interference in business.
§ Unemployment never exceeded 3.7% between 1922-9.
- Harding and Coolidge administrations favoured a laissez faire approach to the economy.
- US began to show first signs of becoming a mass consumption society. The mechanization and modernization of all aspects of industrial production saw that business prospered.
Overabundance
1. The largest problem for farmers was overabundance.
a. Prices had fallen below those of 1914 during the 1920s, for example wheat fell from $2.50 per bushel to $1.00.
i. As farmers became more efficient through mechanization and new techniques (such as the use of improved fertilizers), they simply over-produced and prices fell.
b. Though farm population fell by 5%, production increased by 9%.
i. Technological advancements saw that more crops would be produced on the same or even reduced acreage.
ii. Farmers were reluctant to under produce voluntarily because they could not trust their neighbours to do the same.
c. The demand for crops decreased due to various factors.
i. The growth of synthetic fibres saw lessened demand for natural ones, e.g. cotton.
ii. Prohibition cut the demand for grains previously used in manufacturing alcohol.
2. High tariffs protected the domestic US market, but depressed conditions with trade partners.
a. For example, 1921 Emergency Tariff Act placed high tariffs on imported foodstuffs.
i. Foreigners retaliated by placing similar tariffs on US foodstuffs, therefore farmers could not export their surplus.
3. In Our economic society and its problems (1934) by Rexford Tugwell of FDR’s ‘Brain Trust’, Tugwell states that “overproduction …was an important cause of the Depression.”
Reckless spending (credit spending and buying on margin)
4. There was excessive and reckless purchasing of credit at all social levels.
a. ‘Get-rich-quick’ schemes resulted: in the 1920s, Charles Ponzi scammed thousands of gullible individuals to invest in his ventures since he guaranteed 50% profit within 90 days.
i. Money lost to reckless speculative ventures was very common, especially since the situation was perfect for conmen to scam others.
5. From 1927-9, spending on Wall Street increased significantly –stocks in the Radio Corporation of America rose from 85 to 420 points in the course of 1928.
a. The public could buy stocks ‘on the margin’, on credit with loans from their broker.
i. This fuelled reckless spending in the stocks, and prices became dangerously high since the public was buying shares and stocks to make a quick profit.
6. By 1929, almost $7 billion worth of goods was sold on credit.
a. This resulted in excessive debt to bank.
b. Massive credit spending coincided with a run on the banks, and banks were ultimately unable to provide cash to back savings accounts.
7. Roger Babson, a financier, commented in September 1929 that the prosperity of the time was based on a “state of mind” rather than economic facts.
a. In response to prices being dangerously high—confidence in the economy was exceptionally strong because credit buying could be done so easily.
Poor banking system
8. There were 12 regulatory reserve banks in the US, headed by the Federal Reserve Board.
a. Reserve banks acted in the interest of bankers and could not be relied to act in the best interest of the nation.
9. Dietmer Rothmond. Global Impact of the Great Depression, 1929-39 (1996). “The members of the twelve regional central banks… knew next to nothing about the problems of money supply.
a. The Reserve banks sold credit at high interest rates during periods of recession and low interest rates during periods of boom—when they should have done the exact opposite—which fuelled easy credit and enabled reckless spending.
10. There were 30 000 small banks in the US during the 1920s.
a. Small banks were not a part of centralized national banks, and therefore were more susceptible to financial problems and bankruptcy.
Foreign economies
11. Private investments by the US in foreign countries rose from $7000 million in 1919 to $17 200 million in 1930.
a. International reliance on US investment would have devastating effects on the global economy.
12. In February 1922, Congress established the Debt Funding Commission to oversee repayment of international debts left to the US following WWI.
a. European countries, still suffering from depressed economic conditions arising from the war, could not afford to repay their loans. Americans resented this.
13. German reparations were an issue. The US established the Dawes Plan in 1924 to help Germany pay its reparations.
a. Following Dawes, US investments in Germany increased to $3900 million, and therefore the US was effectively paying back itself back with its own money.
b. The process would have been simpler had “the US had taken the money out of one treasury building and put it in another” (Peter Clements, Prosperity, Depression and the New Deal: USA, 1890-1954 2008)
i. The Dawes plan only served to make the international tangle of debt more complex.
Immediate causes
14. Loss of confidence in the bull market in October 1929 led to a severe instability in the stock market.
a. Rumours of big stock players, such as Barnard Baruch and Joseph Kennedy, selling their stock.
b. Rumours that the Federal Reserve Board was going to tighten credit, making it harder to buy.
15. Robert Himmelburg, Great Depression and the New Deal. (2001). “…erosion of public confidence in banking led to ‘runs’.”
16. In this atmosphere, people began selling their stocks and lenders began demanding for their repayments.
a. The Stock Market Crash of October 29th, 1929 occurred as a result. The crash was a catalyst for subsequently failures in other sectors of the economy.
17. Individual and businesses lost billions—the President of Union Cigar jumped off a building to his death after his stocks fell from $113.50 to $4.00 in one day.
a. Significant losses demonstrate the degree of instability in bull market economy leading up to the Crash.
CAUSES IN CANADA
Historical context
- Canada was experiencing a period of significant prosperity in the 1920s.
- By the middle of the decade, the economy was on the upswing and many sectors of industry prospered.
§ For example, the Marquis wheat was being grown across Canada in the 1920s. By 1928, Canada had a record wheat crop and a major share of the world market.
- Significant improvements in the standard of living, and luxury items like radios and flush toilets became commonplace.
Overproduction and overexpansion
1. Many industries expanded and reached high levels of production.
a. Automobile centres such as Oshawa and Windsor produced over 400 000 cars in 1930.
i. Huge supplies of manufactured goods were produced and simply stockpiled—even in the best year of sales, only 260 000 cars were purchased by Canadians.
2. Large stocks of newsprint, radios, shirts, shoes and cars piled up unsold.
a. In the 1920s, wages were simply not high enough for people to buy all the products turned out by the factories.
3. In Our economic society and its problems (1934) by Rexford Tugwell of FDR’s ‘Brain Trust’, Tugwell states that “overproduction …was an important cause of the Depression.”
Trade imbalances
4. Canada had few primary staples, including wheat, fish, miners, and pulp & paper.
a. After the big crop of 1928 the Wheat Pools (wheat farmers’ co-operative) had an unsold carry-over of about a hundred million bushels. Heavy reliance on few primary products would prove extremely dangerous during the Depression—foreign countries stopped buying, and this seriously hurt the economy.
5. During the 1920s, Canada faced competition from other wheat-exporting countries like Argentina and Australia.
a. Canadian farmers lost some of their European customers forever, for the Argentine, which had been content to sell its crop at the going price, had for the first time in history outsold Canada
b. This hurt Canada severely because wheat was the staple product.
6. Western farmers were faced with terrible droughts in the summers of the late 1920s and early 1930s.
Dependence on the US
7. 65 per cent of our imports came from the US and 40 per cent of our exports went to the US.
a. When the US economy began to weaken (markedly after the stock market crash), it was inevitable that the Canadian economy would suffer as well.
High Tariffs
8. RB Bennett employed protective tariffs in 1930 as an attempt to protect home industries and bring the nation out of depression
a. While the high tariffs might protect the domestic market, the market was not sufficiently large enough to consume enough manufactured goods to help Canada’s suffering economy.
b. In many cases, other nations retaliated with their own protective tariffs.
Reckless spending
9. All throughout the 1920s, banks advertised credit buying with slogans such as “buy now, pay later.”
a. Credit buying had become a well-established custom, and many families got themselves into severe debt since they could not keep up with payments.
b. Stocks
10. On October 29 1929, the value of most stocks on the Toronto and Montreal stock exchange fell more than 50 per cent.
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