Causes of
The Great Depression
STOCK MARKET CRASH
• May 1928-September 1929,
prices doubled in value
• beginning in Sept 1929, gradual
slide
• Black Thursday (Oct. 24)
– largest sell-off in NYSE history
• Black Tuesday (Oct. 29)
– $40 billion in stock value lost by Dec.
• The Great Depression
• Response of bankers, Hoover and
business leaders
Black Tuesday Wall
Street, Oct. 29, 1929
Stock Market Prices, 1921–
1932
UNDERLYING CAUSES OF THE DEPRESSION
• Overproduction - Massive business inventories (up 300%
from 1928 to 1929)
• Lack of diversification in American economy
– prosperity of 1920s largely a result of construction & auto industries
• Uneven distribution of income and wealth - Poor
distribution of purchasing power among consumers
– Farm income down 66% in 20s
– By 1929 the top 10% of the nation's population received 40% of the nation's
disposable income
UNDERLYING CAUSES OF THE DEPRESSION
• Consumer Debt – middle class installment
loans; buying on margin
• Overspeculation in Stock Market –
by wealthy and upper middle class
• Weakness of Banking Industry
Consumer Debt, 1920–1931
– bank failures in late 1920s (farmers)
– many had small reserves
– low margins encouraged speculative investment by banks, corporations, and
individual investors
• total money supply
– closing of over 9,000 American banks between 1930 and 1933
– Federal Reserve system
UNDERLYING CAUSES OF THE DEPRESSION
• Decline in demand for American goods in
international trade
– European industry and agriculture gradually recovered from World War I
– Germany so beset by financial crises/ inflation that could not afford to purchase
US goods
– High American protective tariffs
• international debt structure
Hoover and the Great Depression
• On October 29, 1929, the Stock Market crashed,
bringing the post-war decade of unrivaled prosperity,
largely fed by the emergence of the consumer
economy, to an abrupt end.
• While the causes of the Depression were primarily
rooted in the structure of the American economy,
Hoover, following conservative economic thinking,
believed that economic matters were best left to the
markets to sort out and, as a result, favored a
minimal governmental response, largely centered on
“trickle down theory,” to the growing crisis.
Refusal to Provide Direct Relief
• Didn’t want to spend federal money without further
income.
• Encouraged private charities and state and local
governments to help the poor.
• By 1932, such agencies were overwhelmed and did
not have enough money to help many Americans.
• By 1930, Americans were more frustrated and
started to blame Hoover for economic problems.
FDR Restored Confidence
• In his inaugural address,
he said “The only thing
we have to fear is fear
itself….”
• He promised vigorous
leadership and bold
action, called for
discipline and
cooperation, expressed
his faith in democracy,
and asked for divine
protection and
guidance.
Purposes of the New Deal
• Relief: to provide jobs for the
unemployed and to protect
farmers from foreclosure
• Recovery: to get the economy
back into high gear, “priming
the pump”
• Reform: To regulate banks, to
abolish child labor, and to
conserve farm lands
• Overall objective: to save
capitalism
Criticisms of Conservative Opponents
• Conservative opponents said the New Deal went too
far:
– It was socialism (killed individualism)
– It added to the national debt ($35 billion)
– It wasted money on relief and encouraged idleness
– It violated the constitution & states rights
– It increased the power of the
Presidency (FDR was reaching
toward dictatorship, Congress a
rubber stamp, independence
of judiciary threatened,
separation of powers shattered)
Maintenance of a Democratic System
• The New Deal maintained a
democratic system of government
and society in a world threatened by
totalitarianism.
– Increased size and scope of
government to meet needs of the
depression
– Provided the leadership that
enabled Congress to put through
the necessary relief, recovery, and
reform measures.
– Sponsored moderate legislation
to neutralize the popularity of
radical opponents
Causes of the Depression In
Canada
• Over Production and Expansion - Canada's companies expanded their
industries so they could meet war demand. As European industry
recovered, Canadian industry and agriculture were overproducing causing
prices to fall.
• Dependence on Commodity Exports - Canada's economy was overly
dependent on commodity exports. As U.S. and European demand fell it
created a significant drop in sales causing an economical depression.
• Dependence on the United States - The US was one of Canada’s largest
buyers of timber and minerals. Also, US corporations were buying shares
of Canadian industries, linking the stock markets of the two.
• High Tariffs – in a effort to prop up Canadian products the national
government raised tariffs. The protectionist strategy backfired when other
countries imposed retaliatory tariffs in Canadian goods.. Like SmootHawley tariffs made the problem worse.
• Too Much Credit - Canadians bought too much on lease and credit
including stocks. Therefore when the stock market crashed (partly due to
the margin buying), Canadians were in debt and faced a trying time as
they attempted to sell their personal belongings or were having their half
paid-off possessions repossessed.
• The Dust Bowl - The Prairies were hit extremely hard by several years of
drought. Dust storms swept across the prairies, making it impossible for
farmers to grow wheat. Thus, since the farmers had frequently bought
their seed and machinery by using credit, when they couldn't pay off their
debts, the farmers were often bankrupted and rural banks failed.
W.L. McKenzie King
• Prime Minister (Liberal Party) of Canada
from 1921 to 1930.
• First term struggle to work with the
Progressive Party and his own Liberal
Party, especially on the issue of tariffs
(which prairie progressives wanted
lowered).
• McKenzie King’s government presided
over a period of unrest among farmers in
the Prairies as farm prices declined.
• He also faced growing dissent from WWI
veterans who expected their sacrifices to
be compensated during difficult
economic times.
R.B. Bennett
• Prime Minister (Conservative Party)
of Canada from 1930 to 1935, during
the worst of the Great Depression
years.
• Bennett tried to combat the
depression by increasing trade
within the British Empire and
imposing tariffs for imports from
outside the Empire. Known as the
Imperial Preference Policy
• Conservative pro-business policies
provided little relief for the
unemployed
The Great Depression in
Latin America
Import Substitution Industrialization
ISI Defined
• Import Substitution Industrialization (called ISI) is a trade and
economic policy based on the premise that a country should
attempt to reduce its foreign dependency through the local
production of industrialized products.
• ISI requires state-induced industrialization through
government spending, it is largely influenced by Keynesian
economic philosophy, as well as the infant industry arguments
adopted by some highly industrialized countries, such as the
United States, until the 1940s.
ISI in Latin America
• Import substitution policies were adopted by most
nations in Latin America from the 1930s until the late
1980s.
• Adoption of ISI is attributed to the impact of the
Great Depression, when:
– Latin American countries, which exported primary
products (henequen, fruit, beef) and imported almost all
of the industrialized goods they consumed (radios,
appliances), were prevented from importing due to a sharp
decline in their foreign sales.
– This served as an incentive for the domestic production of
the goods they needed.
ISI in Latin America
• The first steps in ISI were based on pragmatic choices of how
to face the economic limitations caused by recession.
• Populist governments in Argentina (Peron) and Brazil (Vargas)
modeled Fascist Italy (and, to some extent, the Soviet Union)
as inspirations of state-induced industrialization.
• Positivism which sought a "strong government" to
"modernize" society – played a major influence on Latin
American military thinking in the 20th century.
• Perón and Vargas saw industrialization (especially steel
production) was synonymous of "progress" and was naturally
placed as a priority in ISI policy.
Vargas & ISI in Brazil
• Getúlio Vargas served as
president and dictator of
Brazil from 1930 to 1945 and
from 1951 until his suicide in
1954.
• Vargas also won the
nickname "O Pai dos
Pobres" (Portuguese for
"The Father of the Poor")
because of his worker's
policy.
Vargas-Brazil
• Like FDR in the U.S., Vargas focused on economic stimulus. A
state interventionist policy utilizing tax breaks,, and import
quotas allowed Vargas to expand the domestic industrial base.
• Vargas linked his pro-industrial policies to nationalism,
advocating heavy tariffs to
– "perfect our manufacturers to the point where it will
become unpatriotic to feed or clothe ourselves with
imported goods."
• Vargas advocated a program of social welfare and reform
similar to the New Deal.
Vargas-ISI in Brazil
• The Brazilian constitution established a Chamber of Deputies
that placed government authority over the private economy
• Established a system of state-guided capitalism aimed at
industrialization and reducing foreign dependency.
• Brazilian corporatism, was actually a strategy to increase
industrial output utilizing a strong nationalist appeal and coopting workers' demands under the banner of nationalism.
• While increasing worker’s rights, Vargas greatly imposed labor
regulations on labor. The new constitution, drafted by Vargas
allies, expanded social programs and set a minimum wage but
also placed stringent limits on union organizing and
"unauthorized" strikes.