💣european history – 1890 to 1945 review
9.1 Causes and Global Spread of the Depression
Last Updated on August 1, 2024
The Great Depression, triggered by the 1929 stock market crash, was a global economic catastrophe. Financial instability, bank failures, and misguided policies like the Smoot-Hawley Tariff Act worsened the crisis. Uneven wealth distribution and agricultural overproduction further weakened the economy's foundation.
The interconnected global economy spread the Depression worldwide. The gold standard, war debts, and international trade dependencies transmitted economic shocks between nations. The US, as the world's largest creditor, played a crucial role in the downturn through reduced lending and protectionist policies.
Causes of the Great Depression
Stock Market Crash and Financial Instability
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- Stock market crash of 1929 ("Black Tuesday") wiped out billions of dollars of wealth
- Triggered widespread panic and loss of investor confidence
- Led to a 89% decline in stock values between 1929 and 1932
- Widespread bank failures contracted the money supply
- Over 9,000 banks failed between 1930 and 1933
- Depositors lost savings, further reducing consumer spending
- Federal Reserve's tight monetary policies hindered recovery
- Raised interest rates in 1928-29 to curb speculation
- Failed to act as lender of last resort during bank panics
Economic Policies and Structural Issues
- Smoot-Hawley Tariff Act of 1930 raised import duties
- Sparked retaliatory measures from trading partners
- Caused a 66% decline in global trade between 1929 and 1934
- Uneven wealth distribution created an unstable economic foundation
- Top 0.1% of Americans owned 34% of all savings in 1929
- Limited consumer spending power for the majority
- Agricultural sector weakened by overproduction and falling prices
- Farm income fell by 60% between 1929 and 1932
- Led to widespread rural poverty and farm foreclosures
Global Interconnectedness and the Depression
International Financial Systems
- Gold standard linked major currencies to fixed gold amounts
- Transmitted economic shocks between countries
- Limited monetary policy options for individual nations
- System of war debts and reparations strained finances
- Germany owed $33 billion in reparations
- Allied powers owed $22 billion to the US
- Global financial markets spread instability across borders
- Interconnected stock exchanges (New York, London, Paris)
- International banking networks facilitated contagion
Trade Dependencies and Economic Linkages
- Countries vulnerable to trading partners' economic downturns
- Created a domino effect of declining exports and imports
- Example: Canada's exports fell by 50% between 1929 and 1933
- Multinational corporations spread troubles through global operations
- Companies like Ford and General Motors had extensive international presence
- Layoffs and production cuts affected multiple countries simultaneously
- Lack of coordinated international economic policies
- No global institutions like the IMF or World Bank existed
- Unilateral actions often worsened the crisis for other nations
The US Role in the Global Downturn
America's Economic Influence
- US position as world's largest creditor nation after World War I
- Held over $11 billion in foreign debt by 1929
- US economic health crucial to global financial stability
- Sharp reduction in American lending and investment abroad
- US foreign investment fell from 138 million in 1933
- Severely impacted countries dependent on US capital (Germany, Latin America)
- Collapse of American banking system contracted global money supply
- US dollar served as a key reserve currency
- Bank failures reduced global liquidity
US Policies and Their Global Impact
- Hawley-Smoot Tariff Act sparked global protectionism
- Over 25 countries retaliated with their own tariff increases
- Global trade volume fell by nearly 66% between 1929 and 1934
- Decline in US consumer spending and industrial production
- US GDP fell by 46% between 1929 and 1933
- Reduced demand for imports from other countries
- US adherence to gold standard until 1933 limited policy options
- Prevented expansionary monetary policies
- Forced deflationary measures to maintain gold reserves
Overproduction and its Economic Impact
Causes and Manifestations of Overproduction
- Overproduction occurs when supply exceeds consumer demand
- Results in falling prices and reduced business profitability
- Example: US automobile production fell from 5.3 million units in 1929 to 1.3 million in 1932
- 1920s technological advancements increased efficiency and output
- Assembly line production methods
- Electrification of factories
- Agricultural sector experienced chronic overproduction
- Crop prices fell by over 60% between 1929 and 1932
- Led to widespread rural poverty and farm foreclosures
Economic Consequences of Overproduction
- Inventory buildup forced production cuts and layoffs
- Unemployment rate reached 25% by 1933
- Reduced consumer purchasing power and demand
- Mismatch between production capacity and purchasing power
- Exacerbated by income inequality in the 1920s
- Top 0.1% of the population received 42% of all income in 1929
- International overproduction in key industries
- Global steel production capacity exceeded demand by 10 million tons in 1929
- Textile industry faced worldwide glut, leading to price collapses
- Underconsumption created a cycle of economic contraction
- Workers unable to afford goods they produced
- Led to further production cuts and job losses
Key Terms to Review (21)
US Dollar: The US Dollar is the official currency of the United States and serves as a global reserve currency. It became a dominant force in international trade and finance, significantly influencing economic relations during the period leading up to and during the Great Depression.
Boom and bust: Boom and bust refers to the economic cycle characterized by periods of rapid economic growth (boom) followed by sharp declines or recessions (bust). This cycle was particularly significant during the early 20th century, as it helped to explain the volatility of economies leading up to and during the Great Depression.
Declining exports: Declining exports refer to the reduction in the amount of goods and services that a country sells to other countries. This phenomenon is significant during economic downturns, as it reflects broader issues such as decreased demand from foreign markets, trade barriers, or domestic economic struggles. A drop in exports can lead to reduced national income and increased unemployment, further exacerbating economic woes, especially during periods like the Great Depression.
Protectionism: Protectionism is an economic policy that involves restricting imports from other countries through measures such as tariffs, quotas, and subsidies. This approach aims to protect domestic industries from foreign competition, promoting local businesses and preserving jobs. However, while it can provide short-term relief for specific sectors, protectionism often leads to trade wars and can exacerbate economic downturns, as seen during the global economic crisis in the early 20th century.
Deflationary measures: Deflationary measures are economic policies implemented to reduce inflation by decreasing the money supply or increasing interest rates, aiming to stabilize the economy during periods of financial distress. These measures often involve government austerity policies, cuts in public spending, and higher taxes, leading to reduced consumer demand and investment. While intended to curb inflation, deflationary measures can exacerbate economic downturns by creating a cycle of reduced spending and increased unemployment.
Consumer spending power: Consumer spending power refers to the financial capacity of individuals or households to purchase goods and services. This power is influenced by various factors, including income levels, employment rates, and inflation. The concept is crucial for understanding economic conditions, particularly during periods of financial instability, as it directly affects demand in the economy and can lead to broader economic impacts, such as recession or recovery.
Economic downturn: An economic downturn is a period of declining economic activity characterized by a decrease in consumer spending, reduced business investment, and rising unemployment. This phenomenon often leads to a contraction in the economy and can have widespread effects on society, including increased poverty and social unrest. During such downturns, governments and policymakers typically implement measures to stimulate growth and restore stability.
Unemployment rate: The unemployment rate is the percentage of the labor force that is jobless and actively seeking employment. This economic indicator reflects the health of an economy, as higher unemployment rates often signal economic distress, while lower rates indicate a more robust job market. Understanding the unemployment rate is crucial to analyzing economic conditions during significant historical events like the Great Depression.
Hawley-Smoot Tariff Act: The Hawley-Smoot Tariff Act, passed in 1930, was a U.S. law that raised tariffs on many imported goods in an effort to protect American industry during the Great Depression. This act significantly increased duties on over 20,000 products and is often cited as a contributing factor to the global economic downturn due to its role in stifling international trade.
American Banking System: The American banking system is a network of financial institutions in the United States that facilitate the flow of money through accepting deposits, making loans, and providing various financial services. This system plays a crucial role in the overall economy, impacting both domestic and global financial stability, especially during periods of economic downturn like the Great Depression.
Uneven wealth distribution: Uneven wealth distribution refers to the unequal allocation of assets and resources among individuals and groups within a society. This disparity creates significant gaps between the wealthy and the poor, impacting social stability and economic growth. Such imbalances can lead to social unrest and contribute to broader economic crises, making it a crucial factor in understanding global economic patterns.
Overproduction: Overproduction refers to a situation where the supply of goods exceeds the demand for those goods, leading to excess inventory and a decline in prices. This phenomenon is closely tied to economic cycles, where periods of rapid production can result in market saturation, ultimately contributing to economic downturns and depressions.
International banking networks: International banking networks refer to the interconnected systems of banks and financial institutions that operate across national borders, facilitating the flow of capital, investment, and credit between countries. These networks played a significant role in the global economy during the early 20th century, particularly in the context of the economic challenges leading to the Great Depression.
International trade dependencies: International trade dependencies refer to the interconnectedness of countries through trade, where the economic well-being of one nation is significantly influenced by its trade relationships with others. This concept highlights how economies rely on imports and exports to sustain growth, access resources, and achieve market stability, making them vulnerable to global economic shifts.
Federal Reserve: The Federal Reserve is the central banking system of the United States, established in 1913 to provide a safer and more flexible monetary and financial system. It plays a crucial role in managing the nation's monetary policy, regulating banks, and serving as a lender of last resort, impacting both domestic and global economies significantly. Its policies can influence interest rates, inflation, and employment levels, making it a key player in economic stability.
Monetary Policies: Monetary policies are the strategies implemented by a country's central bank to control the money supply, interest rates, and inflation, aiming to achieve economic stability and growth. During the period leading up to the Great Depression and its global spread, these policies significantly influenced economic conditions as governments attempted to manage their economies through various monetary tools.
War debts: War debts refer to the financial obligations incurred by nations as a result of borrowing funds to finance military operations during conflicts. These debts became particularly significant after World War I, when many countries struggled with the financial repercussions of the war, leading to economic strain and contributing to the onset of the Great Depression.
Global financial markets: Global financial markets refer to the interconnected systems of trading and investment platforms where financial assets, such as stocks, bonds, currencies, and derivatives, are bought and sold across international borders. These markets facilitate the flow of capital, allowing investors and institutions to access opportunities worldwide, and significantly impact economic stability and growth in various countries.
Smoot-Hawley Tariff Act: The Smoot-Hawley Tariff Act, enacted in 1930, was a U.S. law that raised tariffs on hundreds of imported goods to protect American industries during the Great Depression. It aimed to encourage domestic production by making foreign goods more expensive, but it led to retaliatory tariffs from other countries, contributing to a decline in global trade and worsening the economic crisis.
Stock market crash of 1929: The stock market crash of 1929 was a major financial collapse that occurred in late October, marking the beginning of the Great Depression in the United States and having profound global repercussions. This event was characterized by a rapid decline in stock prices, which led to widespread panic selling and a loss of investor confidence, resulting in economic turmoil and a severe downturn in various economies around the world.
Gold standard: The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. Under this system, countries agreed to convert currency into a fixed amount of gold, promoting stability and trust in the economy. This standard influenced global trade and investment, shaping economic policies before the Great Depression.