Download NOTES Causes of the Great Depression of the 1930`s

Causes of the Great Depression of the 1930’s
Important terms to know:
1. Staple products – The main products grown or
manufactured in a specific place (wheat in early
20th century Canada).
2. Staple-based economy – An economy based
almost totally on staple products.
3. Export crop – Crop that is grown for sale in
other countries.
4. Investor – Someone who invests his or her
money to make a profit. (You can invest your
money by buying bonds which would be paid
back with interest, buying shares in a company
in the hope of “sharing” in the company’s
profits)
5. Downturn – An economic decline where the
process of buying, selling and employing people
slows down causing business to fail and
unemployment to rise.
6. Recession – Temporary mild periods of
economic decline, up two years.
7. Depression – Long and severe periods of
economic decline, 3 or more years with very
high unemployment.
8. Speculators – Persons who buy and/or sell
products or money in the hope of making
profits from future price changes.
9. Stock market – A place where companies raise
money by selling shares in their business.
10.
On margin – The purchaser of shares pays
only a small percentage of the share price and
borrows the rest.
11.
Stockbroker – A person who buys for other
people and charges a fee for this service,
usually a percentage of the share value.
12.
Stock market crash – When the price of
shares drops very quickly and many people,
especially those who borrowed to buy shares,
lose their money.
13.
Bankruptcy – A person, declared by law to
be unable to pay his or her debts. Your property
can be taken and given to the person who gave
you the loan.
14.
Social safety net – Government programs
designed to protect people in times of need.
The Business Cycle
All economies go through cycles of good times to
economic hard times and recover to good times
again. The cycle works as follows:
1. Prosperity
2. Recession (economic slowdown)
3. Recovery
4. Return to prosperity
Sometimes the cycle develops into extremes, as in
1929:
1. Prosperity becomes a “boom time” or very
strong period of prosperity.
2. Depression (severe and long period of
economic slowdown)
3. Delayed recovery
4. Return to prosperity
6 Reasons Why the Depression Happened in Canada
1. Over production and over expansion. – With the
prosperity of the 1920’s business became very
optimistic and increased production and
expanded their operations beyond what the
economy could support. With a large supply of
products they could not sell, businesses cut
production resulting in drastic job losses.
2. Canada’s dependence on a few primary
products – In the 1920’s Canada depended on a
few primary products (fishing, farming,
forestry, mining). When world demand
dropped for these products Canada did not
have enough economic activity to handle the
large number of job losses.
3. Canada dependence on the United States – In
the 1920’s and today the United States is our
most important and largest trading partner. We
send 40% of our exports to the Americans so
when their economy gets into trouble so will
ours.
4. High tariffs chocked off international trade. –
Tariffs are taxes countries put on products
made in other countries to make them
expensive so people will buy from local
manufactures. While tariffs will protect local
jobs the countries trying to sell in your country
will tax products you try to sell in theirs, thus
causing you to lose jobs. In the late 1920’s there
were to many tariffs and many countries began
to lose jobs.
5. To much credit buying. – Many families got
themselves into serious debt (money owed to
others) and could not afford to make payments
or pay their other bills such as rent. As a result
many people lost their homes and essentials
such as stoves, cars, washing machines, etc.
which they could no longer afford to make the
payments on.
6. Too much credit buying of stocks. – With the
prosperity and good times of the 1920’s most
people were very optimistic about their future
and took many risks with their money. One of
these risks was to borrow money to invest in
the stock market in the hope that the shares
you buy will increase in value and you will be
able to easily pay back your loan and make a
profit. With the loss of share value in 1929
many people could not pay back the money
they borrowed.
How the Stock Market Works
A particular company needs money to expand
and does not want to worry about having to pay
back loans so it offers a “share” in its operations for
a certain amount of money. In exchange the person
who provides the money will get a “share” in the
profit of that company. If the company does not
make any money then the “shareholder” (the
person who bought the share) gets nothing. The
only way to get your money back from the “share” is
to find another person to “buy” the share from you.
The person who buys your share can offer to buy at
any price they feel the share is worth. Selling the
share is the only way to get your money back, or at
least some of your money. If the company is doing
well and you wish to try and “make some money”
then you can try to sell the share for more than you
bought it for, thus making a profit on the sale of the
share.
Share selling and buying is also subject to the rule
of “supply and demand” which states if:
 If there are a lot of shares for sale and not many
buyers then the price of the share will drop.
 If there are not many shares for sale but a lot of
buyers interested in buying the shares then
sellers can expect to get a high price for their
“shares”
The following happened on October 29, 1929:
 Companies who sold the shares in the first
place cut production (making things) and thus
could not make much, if any, profit which
meant the shareholder got nothing.
 Large numbers of people lost confidence that
their shares would make them money and tried
to sell them to anyone who was interested. Not
many people were interested and the value
(price they could get) dropped dramatically.