9.1 Causes and Global Spread of the Depression

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 $1.3 billion in 1929 to$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