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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:
a) Name some products that were stockpiled.
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b) Why were Canadian families not buying these products?
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c) Explain how over-production led to factory slow downs.
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d) Explain: “You should only produce as many items as you can sell.”
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2. 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:
a) Name examples of primary industries.
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b) Name four industries that would also suffer if the farmer could not sell his wheat
or had no wheat to sell.
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c) What would the economic consequences of a decline in the world sales of wheat
be for Canada? What would the chain reaction be?
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3. 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:
a) How much did Canada export to and import from the U.S.A.?
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b) Why did a depression in the U.S.A. have such serious repercussions in Canada?
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c) What do you think is meant by a “Branch Plant Economy”? Give Examples.
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4. 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:
a) Why do countries put high tariffs on foreign goods? Who benefits from high
tariffs? Who suffers?
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b) Why was international trade so important to Canada?
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c) How did tariffs between countries choke off international trade and contribute to
the Depression?
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5. 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:
a) How did too much credit buying lead to problems for many people during the
Depression?
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b) Is it ever wiser to buy on credit rather than with cash? If so, when?
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c) Why do many people prefer to pay cash while others use credit? Which way
seems best to you?
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