THE GREAT DEPRESSION

The Great Depression affected the entire western world During this period Canada becomes much poorer The most difficult period was 1929-1933, but real recovery did not occur

until after WWII started in 1939

Characteristics of a Depression

1. High Unemployment – was over 20%, it jumped from 116,000 in 1929 to 826,000 in 1933

2. Low Wages - In 1933 National income was 51% of what it was in 1929

Province 1928-29 1933 Average Decrease (%)

BC 594 314 47

Ontario 549 310 44

Alberta 548 212 61

Saskatchewan 478 135 72

Manitoba 466 240 49

Quebec 391 220 44

Nova Scotia 322 207 36

New Brunswick 292 180 39

PEI 278 154 45

3. Low Production – Industrial activity was 57% of the average it had been between 1925-1929

4. Low Business Profits

5. Low Prices – In 1928 wheat costs $1.20/bushel > 1932 - 34 cents

6. Low demand for goods – in 1933 exports were half of what they were in 1929, primary products like wheat and pulp and paper were hit especially hard

Underlying Causes of the Great Depression

There was economic instability in the 1920s both internationally and domestically.

External factors (outside of Canada)

1. WWI - While Canada and the U.S. expanded during the 1920. Europe was much slower to recover because of the devastation caused by the First World War.

2. U.S. replaced Britain as strongest nation in the world.

• Britain - Before the war Britain had been an open market for goods that other countries wanted to sell. It also lent money to countries that needed it to ensure a stable economic environment. It did not continue to do this after the war.

• U.S. – becomes the strongest nation in the world, but does not take on the same role. It is not a trading nation like Britain, trading is only a small part of its economy. Also, it is more reluctant to lend to foreigner borrowers

3. Overproduction/overexpansion Companies produce more than is needed. Lots of production and new goods

available, but many people could not afford them. Companies end up with stockpiles of goods.

4. Investment in Stocks The stock market was not well regulated. People could buy stocks “on margin,” which meant buying on credit. It was possible to borrow up to 90% of the stock and pay interest on the loan. Purchasers assumed that the stocks would go up and it would be easy to pay

back the loans. The problem was that buying on margin created an artificial demand for

shares, when shares are in demand they increase in price. This inflates their value (they are selling for more than they are actually worth). 

5. High tariffs Most countries introduce high tariffs during the Depression. The U.S. government introduces the Smoot-Hawley tariff in 1930 – U.S. taxed

imports coming into the country which made them more expensive than the goods produced in the U.S. For Canada, this means that their products cannot compete with American products.

Internal factors (Domestic)

1. Export economy Canada’s economy was vulnerable because it was dependent on the export

of primary products (wheat, fish, minerals, coal, pulp and paper). During the Depression, the world decided it no longer needed these

products. While in the 1920s, Canada’s economy expanded because of trade with the

U.S., in 1930, U.S. introduces high tariffs which had a negative effect on exports.

2. High tariffs Prime Minister Bennett raises tariffs. High tariffs lead to severe barriers to trade The problem with a high tariff policy is that Canada is an export economy

and relies on other countries to import its goods

3. Overproduction/overexpansion This happened in many industries Example: the pulp and paper industry overexpanded in the 1920s due to

U.S. demand for newsprint. The newsprint market collapses in the 1930s.

4. Debt

Canadians too optimistic about the future and many borrow money during the 1920s. Federal government borrowed heavily to pay for the war Farmers borrow to purchase land and buy machinery businesses borrow to expand consumers borrow to purchase material goods so popular during this period

(cars, electrical appliances). Also, go into debt to buy shares in companies (on margin).

Banks were generous and lent money. It was easy to pay interest on debt as long as economy was growing. When Depression hits, it becomes much more difficult to make payments The other problem is that the Canadian dollar drops in value. The financial market

in New York calls in loans and refuses to loan more. Corporations and governments that borrowed money now have to pay back those loans at a higher price.

Result: some companies go bankrupt. Canada’s largest insurance company, Sun Life, and most of Canada’s investment and brokerage firms were close to bankruptcy

Immediate Causes of the Great Depression

1. Drought in the Prairies hit in 1929 and lasted for 10 years. Also, over farming, high temperatures, and locust plague turns parts of the

Prairies into dust bowls. At the same time, competition from other countries including Argentina,

Australia, Soviet Union and U.S., drives the price of wheat down

2. Collapse of the Stock Market

October 29, 1929 known as “Black Tuesday” Investors realize their shares are overpriced and they all try to sell their

shares at once. The result was there was no demand for these stocks and prices fell Many investors lost all of their savings, those who purchased stocks on

credit lost their collateral (houses, cars, businesses …) www.youtube.com/watch?v=RJpLMvgUXe8