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The Great Depression 1929-1939 What is a “Depression”? A “depression” is a prolonged recession, which is when economic activity is in decline All economies go through a Business Cycle, that naturally includes periods of economic growth & prosperity (“boom”), followed by periods of recession A depression is a serious downturn in the economy (“bust”) Recession / Depression? There is an old joke among economists that states: A recession is when your neighbor loses his job. A depression is when you lose your job. Business Cycle Stage 1 - Expansion Incomes rise – full employment Cost of goods and labour rise = inflation Stage 2 Contraction • Few jobs created • Goods and service production decline Stage 3 Recession • Sharp drop in employment • Prices of goods fall •(if prolonged – DEPRESSION) Business Cycle – cont’ Business Cycle – cont’ Business Cycle cont’ Stage 1 – Expansion – Involves inflation, recovery, prosperity – leads to a “peak” Stage 2 – Contraction / Early Recession – decline in growth Stage 3 – Recession - “trough” – Sharp drop in growth, jobs, price of goods – Depression – prolonged recession The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern. Causes of the Great Depression (1929-1939) http://www.youtube.com/watch?v=gplaqa2yRgg 1. Overproduction & Stockpiling During the 1920s – many industries expanding & profits were spent on adding to factories or building new ones – Huge supplies of manufactured goods were simply stockpiled (kept in warehouses unsold) due to overproduction (producing too much too quickly so that goods did not sell) Eventually unsold goods caused factory owners to panic, so they: Slowed down production Laid off workers Overproduction – cont’ Laid off workers: Had less $$ to spend on buying goods, so Sales slowed down even more * Basically = industrial capacity of both USA and Canada expanded beyond the ability of the consumer to consume # of Jobs & Manufacturing Sales Down 2. Stock Market Speculation & Crash October 29, 1929 = Black Tuesday – the Stock Market crashed – Catalyst that triggered all other factors – was an indicator that something was already wrong with the system Stock Market Explanation Stock Market works by companies selling stocks / shares in their company to investors (people with $$$) to get money to run their companies In return, investors get a share of the profits of the company (how much depends on the amount of shares they own) – If the company does well – stock values rise – Stockholders may choose to sell shares at a profit, or hold on to them in the hopes that they will continue to increase in value, and therefore make even more money down the road shareholders company Stock Market & Crash cont’ In 1920’s – “Speculation” process took place: many investors bought stock shares “on margin” or borrowed money borrowed money to buy stocks with the hope that in a short time, the stock’s worth would rise, and they could sell at a large profit – Then they could sell the stock, re-pay the loan, and keep a large profit http://video.google.com/videosearch?hl=en&client=safari&rls=en&q=buying %20stocks%20on%20margin&um=1&ie=UTF8&sa=N&tab=wv#q=buying+stocks+on+margin+1920s&hl=en&emb=0&clie nt=safari&qvid=buying+stocks+on+margin+1920s&vid=- Stock Market & Crash cont’ When stocks began to decrease in value, investors began to worry and lose confidence in the companies whose shares they had purchased Many wanted to sell stocks quickly, before prices fell further, and this caused some to sell large volumes of stocks More investors panicked when this happened, so they sold their stocks, and the value of stocks kept falling and falling Stock Market Crash – cont’ Result of panic: downward spiral – Stocks became worthless – Very few Canadians actually owned stocks, but: Canadians mostly affected by loss of jobs and falling prices of their products 3. Economic Protectionism and Tariffs – made things Worse Fig. 4-5 from p.82 in counterpoints Answer questions on p. 82 regarding this cartoon for marks. (/10) Tariffs – duties (money) collected by the government on goods coming into a country Because the USA did not need the world’s raw materials as much as other countries, they became protectionist Protectionist – government protected home industries from the competition of foreign goods by discouraging imports through high tariffs 3. Protectionism & Tariffs cont’ American protectionism caused other countries such as Canada to lose their export markets – American tariffs made Canadian wheat more expensive in the USA, so Canadian farmers suffered – In reaction, Canada also imposed high tariffs to protect its own industries and products (known as “tariff barriers”) – This cycle made the problem worse, as trade was restricted even further 4. Reliance on Staple Product Exports Canada’s economy depended heavily on a few basic products known as staples – i.e. wheat crops, timber, minerals Economy did well – as long as other countries bought staple products Staple Products cont’ 1925-1939 – wheat farmers grew record crops, so could sell them at record prices PROBLEM: the USA, Australia, and Argentina also grew record crops in 1929, so the competition for sales was extreme Canadian farmers – left with large quantities of unsold wheat and prices dropped dramatically Wheat prices fell 5. Dust Bowl – made matters worse In addition: prairie farmers were faced with terrible droughts over several summers in a row – farmland turned into “Dust Bowls” Dust Bowl – made matters worse Inadequate rainfall crops died – farming essentially stopped on Prairies With no wheat to be shipped & no flour to be ground railways & flour mills lost business * Caused a chain reaction in many parts of the Canadian economy Dust Bowl Images 6. Economic Dependence on the USA Because the Canadian economy depended so much on staples (#2), any decline in foreign economies hurt Canada 40% of exports sold to USA – Therefore – when US economy failed, Canadian economy followed 7. Trade Collapse Canada's efforts to get out of a recession by raising export tariffs only backfired due to competition from other countries and Canada's lack of variety in its exports Led to a near halt in world trade 8. International Debt after WWI The USA lent money to foreign nations after WWI to help them out of debt, so: Those nations came to depend on their ability to sell their products to the USA in order to raise $$ to repay loans When the US turned to protectionist measures, international trade was reduced and those countries lost their ability to pay back loans International trade Reduced = Could not pay back loans Comparison with 2008 Economic Crisis Understanding 2008 Crisis http://www.youtube.com/watch?v=fPI8XF fBxHk&feature=related http://www.teachertube.com/view_video. php?viewkey=0bb7c0c1bbe242ab0333 Questions to answer in paragraph form: Name and EXPLAIN the 8 main causes of the Great Depression discussed in this presentation. 2. What are some of the similarities between the causes of the Great Depression and the 2008 Economic Crisis? 1. Using Statistics in History See page 80-81 of counterpoints In partners, look over the tables of information carefully and answer questions #1-4 on p. 81 for marks (/10) You may hand one set of answers per pair; but be sure to put BOTH names on your paper.