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Canada in the Interwar Years Canada in the Thirties: Causes of the Great Depression The World Economy after 1919 • 19th century (1800’s) was referred to as “laissez faire” - which translates to ‘let do’ • Government did not interfere with the economy. • After WW1 this changed and government became more controlling over the economy. The World Economy after 1919 • After WW1 the world’s financial centre moved from London to New York. • USA became the financial capital of the world. • Most industrialized countries experienced an economic boom in the 1920’s – Because of the demand for consumer goods like automobiles, and electronic appliances. – This boom ended in 1929 Inflation • Inflation is a rise in the general level of prices of goods and services in an economy over a period of time • during inflation everything gets more valuable except money • each unit of currency buys fewer goods and services = is worth less Economic Vocabulary • Revenue – Money taken in by government (mostly taxes and customs duties) • Expenditures – Any money spent by the government • Budget – Spending plan made by gov’t. Revenues are totaled and expenditures for the coming year are announced. Economic Vocabulary • Balanced Budget – Budget where expenditures and revenues are equal. Before the Great Depression, governments always balanced (except during wartime) • Deficit – When government spending exceeds its revenue. The difference between the expenditure and revenue is known as the deficit. Also, the amount borrowed by the government is also called a deficit. Economic Vocabulary • Currency – The actual money used in a country. Many factors effect the value of a currency. • Capitalism – Economic system in which private individuals produce and exchange goods and services through markets. Economic Vocabulary • Market Economy – Countries that have a capitalist economic system are said to have a market economy. – The most basic part of the market economy is the market itself - which is anyplace where goods (things) and services (mechanic) are bought and sold – Markets allow buyers and sellers to come together, so goods and services can be exchanged for a profit Economic Vocabulary • Market Economy – Example the stock market • Investors meet to buy and sell stocks • Supply and Demand – Explains pricing in the market economy – Supply is availability of a particular product – Demand is how badly people want that product – – – – Great supply equals lower prices Low supply equals higher prices. Great demand equals higher prices Low demand equals lower prices Economic Vocabulary • Business Cycle – It is normal for market economies to go through cycles of prosperity and recession (when economic activity is in decline) every 5 or 6 years. – Sometimes market economies have a boom (extreme growth and prosperity) followed by a serious downturn (bust) and a prolonged recession (depression). Causes of the Great Depression • On October 29, 1929 the economic boom of the 1920’s came to an abrupt end. • The stock exchanges of New York, Toronto, and Montreal ‘crashed’ and North Americans were now in the Great Depression. – Massive unemployment – Thousands of bankruptcies – Widespread poverty Causes of the Great Depression • The Great Depression – Canadian’s attitudes towards the poor began to change and Canadians developed a safety net for people who needed money. – New political parties began and new ideas for dealing with economic problems were created. 1. Overproduction • Overproduction – During the 1920’s, industries spent profits on building bigger and newer factories. – Huge supplies were stockpiled (overproduction) – Factory owners panicked, since there was so much extra goods. • Slowed down production of goods and laid off workers 1. Overproduction • Overproduction – These workers now had less to spend on buying goods, and the economy slowed down even more. – North American industrial economy expanded beyond how much the consumer would consume. 2. Canada’s reliance on exporting staple products – Canada’s economy relied heavily on a few products known as staples (crops, timber, minerals) – These were Canada’s most important exports • As long as other countries bought these staples Canada’s economy would be strong 2. Canada’s reliance on exporting staple products – From 1925 to the end of the decade, Canadian wheat farmers grew record quantities of crops and sold them at record prices. – In 1929, USA, Australia, and Argentina also grew record numbers of crops and sale competition grew. – Canadian farmers – left with large quantities of unsold wheat and prices dropped dramatically (recall: Great supply = lower prices) 2. Canada’s reliance on exporting staple products – To add to the problem prairie farmers faced drought over several summers – This time referred to as the “Dust Bowl of the 1930’s” – Without enough rain, crops died. • No wheat or flower could be shipped and money began to be lost. The Dust Bowl 3. Canada’s Dependence on the US – Because Canada relied so much on staples, and exports to other countries, any decline in foreign economies hurt Canada – Canada relied the most on the US • When US economy fell, the Canadian economy was soon to follow • 40% of Canadian exports were sold to USA 4. The Stock Market Crash – The day the stock market crashed was called Black Tuesday – This was not the only cause of the depression 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 make even more money in the future 4. The Stock Market Crash – In the 1920’s many investors bought stock shares on margin. – Buying on margin meant that investors were buying stocks with borrowed money. – They hoped that they would make quick money (their purchased stocks would rise) and pay off their loan, and still make a large profit. – This whole process was known as speculation 4. The Stock Market Crash – In Canada, bank leaders and business men strongly believed the Canadian economy depended on international trade. Especially wheat crops. – Despite indicators that the price of wheat was falling, investors kept putting money into the stock market 4. The Stock Market Crash • The Stock Market Crash – As stocks began to drop, investors worried and wanted to sell the shares they had purchased. – Investors sold their stocks quickly before prices dropped even further. Sold off stocks in large volumes. – As more investors panicked, more and more stocks were sold and the market began to drop severely. 4. The Stock Market Crash • The Stock Market Crash – Many stocks became worthless. – On October 29, 1929 the value of some stocks in Toronto dropped 1 dollar a minute! – Although few Canadians owned stocks, millions were impacted through the loss of their jobs and falling prices for their products 5. Economic Protectionism and Tariffs – Tariffs are duties (money) collected on goods coming into a country. – The US did not need other countries raw materials nearly as much as other great powers – US became protectionist • Government protected home industries from foreign goods by using tariffs. 5. Economic Protectionism and Tariffs – American protectionism caused other countries to lose their export markets – Example, Canada trying to sell the US wheat, but tariffs made Canadian wheat much more expensive for Americans by charging tariffs. 5. Economic Protectionism and Tariffs – Other countries suffered because of this – Countries responded by also raising tariffs – This made the problem worse since trade was very restricted 6. International Debt after WW1 – USA lent money to foreign nations after WW1 – These nations made money to pay back their loans by selling their products to the USA – Protectionist economy reduced international trade, and those countries could no longer repay their loans