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The Causes of the Great Depression WWI Changes the system Countries overdeveloped their industrial sector to produce wartime goods. Higher tariffs were put into place to protect their new industries. 1922 – U.S. began increasing their tariffs, and by 1930 the Hawley-Smoot Tariff had raised the countries tariffs to an all-time high. Currency Wartime purchases had drained European wealth. Convertible currency was in short supply. Many countries were barely able to import goods. To remedy this situation (1920s), the capital rich countries (U.S. Britain, and France) invested a great deal of money in the capital poor countries (Germany). Loans and Reparations 1920 – the ex-Allied nations owed the U.S. $10.3 billion. The allies, who had lost a lot more men than the U.S., wanted the U.S. to consider the money as its contribution to the joint war effort. U.S. refused. As long as the U.S. gov’t demanded the loans to be paid, the ex-allies would continue to demand reparation payments from Germany. Germany This situation caused a steady depreciation in the German currency. In 1921, one U.S. dollar = 65 German marks; and by 1923, it took 4.2 trillion marks to = one dollar. This brought about rebellions from both the communists and Nazi party. Both revolts failed. A Solution to the German Problem Charles Dawes – economic reconstruction of Germany. Reduced schedule of reparation payments and sizable loans from the U.S. U.S. $ German reparation $ European countries loans $ back to the U.S. Great Depression caused U.S. financial institutions to stop making loans to Germany. U.S. banks lost A LOT of money. U.S. Economy 1920’s – U.S. economy is in bad shape since wages lagged behind productivity. Wages rose 2% and productivity rose 55%. Corporate profits increased 65 % from 1923-1929, and wages and salaries only increased 11%. Income of farmers declined because prices were falling and taxes and living costs were rising. Income of farmers only 30% of a non-farmer. 20% of the U.S.’s population = farmers. The Misdistribution of Wealth 42% of American families made less than $1,500 per year; 21% made less than $1,000 per year. 1/10 of 1% of the population made an annual salary nearly equal to the bottom 42% of American Families. “Playing the Stock Market” Less than 2.5 percent of the population owned stock in 1928. No gov. control. Many people bought stock on margin, borrowing up to 90% of the price of the stock. They would often mortgage their house as collateral. People bought stocks low, waited till the loan was due, sold them at high prices, and paid off their loan and made a profit. The Problem Sophisticated investors soon realized that stock prices were worth more than the value of the corporation selling them. With the cut back of production they began to sell their stocks. “Black Thursday,” Oct. 24, 1929, a record 13 million shares were sold. Market lost over $30 billion. When brokers made their margin calls because the worth of the stock fell below the amount of money invested in it, many people could not pay their loans and lost everything. A Vicious Circle As people lost money they bought fewer goods. Factories then had to fire there workers, which meant even less purchasing power on the market. 5,000 banks failed in the U.S. No gov. protection of money, so depositors lost everything. Lack of Production & Unemployment 25% of U.S. labor force was unemployed and those that had jobs saw their salaries and wages reduced. (Today = 9.6%). World industrial production fell 36%. Only fell as high as 7% in previous depressions. Trade shrunk from $69 billion to $24 billion between 1929-1933. 22% of the worlds labor force was unemployed. Causes of the Great Depression Overdeveloped industry worldwide High Tariffs Maldistribution of Wealth Speculation in the stock market Lack of gov’t regulations The interdependent nature of world-wide loans caused the depression to become global.