Black Tuesday The dirty thirties, as some may call them, was a time of hopelessness and despair, unquestionably being the most tragic economic disaster to ever strike Canada. The Great Depression was the worst and longest economic slump ever in Canadian history that spread to virtually the entire industrialized world. The over speculation in the stock market added to the build up of the economic disaster. As the effects of the stock market crash lingered on, an untimely disaster that would prove to be beneficial was about to take place. A War that sprouted into existence gave new ground to the fallen economy. World War II had a great effect on the Canadian economy, not only ending the Great Depression but also creating jobs for the numerous unemployed and literally pulling the economy out of the gutter. The times were good during the "roaring twenties" and the Canadian economy was booming. Stock prices had been rising steadily since 1921, but in 1928 and 1929 they surged forward, with the average price of stocks rising over 40 percent (1). The stock market was totally unregulated. Margin buying in particular proceeded at a feverish pace as customers borrowed up to 75 percent of the purchase price of stocks (2). That easy credit lured more speculators and less creditworthy investors into the stock market. The Federal Reserve board warned member banks not to lend money for stock speculation because if prices dropped, many investors would not be able to pay back their debts. No one listened, as the most tragic economic period. The stock market began sliding in early September, but people ignored the warning. Then on “black Thursday” (October 24, 1929) and again on “black Tuesday” (October 29, 1929) disaster struck. More than 28 million shares changed hands in frantic trading. Overextended investors, suddenly finding themselves heavily in debt, began selling their stocks. Many found that no one would buy anything at
any price. Overnight, stock values fell from a peak value of 87 billion dollars to 55 billion dollars, (refer to Graph #1 for DJIA statistics). GRAPH # 1 The crash was felt far beyond the trading floors. Speculators who borrowed money from the banks to buy their stocks could not repay the loans because they could not sell stocks. This caused many banks to fail. The Federal Reserve Banks insisted on collateral before it would offer any help. It wanted commercial bills, however, which local banks did not have. "Before the Federal reserve was created in 1913, the banks had ...
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any price. Overnight, stock values fell from a peak value of 87 billion dollars to 55 billion dollars, (refer to Graph #1 for DJIA statistics). GRAPH # 1 The crash was felt far beyond the trading floors. Speculators who borrowed money from the banks to buy their stocks could not repay the loans because they could not sell stocks. This caused many banks to fail. The Federal Reserve Banks insisted on collateral before it would offer any help. It wanted commercial bills, however, which local banks did not have. "Before the Federal reserve was created in 1913, the banks had their own created in 1913, the banks had their own clearinghouse arrangements for helping each other resist runs; now, with those arrangements all but defunct, the banks looked to the Federal reserve to do the job, and nothing happened" (3) The stock market crash intensified the course of the Great Depression in many ways. Besides wiping out the savings of thousands, it hurt commercial banks that had invested heavily in corporate stocks. It also caused a loss of confidence in the market prolonging the depression. The nations unequal distribution of wealth also contributed to the severity of the depression. During the 1920s the share of the national income going to families in the upper and middle-income brackets increased. Tax policies contributed to this concentration of wealth by lowering personal income tax rates, eliminating the wartime excess-profits tax, and increasing deductions that favoured affluent individuals and corporations (4). In 1929, the poorest 40 percent of the population received only 12.5 percent of aggregate family income, whereas the wealthiest 5 percent received 30 percent (5). Many people would spend their entire yearly paychecks on consumer goods. When this stopped the economy was hurt. Once the depression began this unequal distribution of wealth prevented people from spending the amounts of money needed to revive the economy. These causes lead to the worst of times in the Canadian economy as well as the rest of the world. The United States, being the top economic market in the world, was hit the hardest during the worldwide depression. From the height of the prosperity before the stock market crash in 1929 to the depths of the depression in 1932-1933, the U.S. gross national product was cut almost in half, declining from 103.1 billion dollars to 58 billion in 1932 (6). Consumption expenditures dropped by 18 percent, construction fell by 78 percent, private investment plummeted by 88 percent, and farm income, already low, was more than cut in half (7). During this period 9,000 banks went bankrupt or failed (8). The consumer price index declined by 25 percent and corporate profits fell from 10 billion to 1 billion dollars (9). The Depression hit hardest those nations that were most deeply indebted to the United States, i.e., Germany and Great Britain as well as Canada. In Germany, unemployment rose sharply beginning in late 1929's and by early 1932 it had reached 6 million workers, or 25 percent of the work force (10). Britain was less severely affected, but its industrial and export sectors remained seriously depressed until World War II. In Canada mass unemployment left many workers struggling to survive in a world without unemployment insurance, health care, and with very little social assistance. Many young men tracked all across the country, riding the rails in search of work. It is easy to imagine why it was a difficult time for labour. Craft unions continued to retreat into themselves, leaving all but a small group of workers without any union support. The gross national product in Canada, had been growing for a steady four years at an average annual rate of 3.5%, until it began to decline declined at a rate of over 10% annually, on average, from 1929 to 1932 (11). As well Canada's unemployment took a devastating leap and rose from 3.2 % in 1929 to 25.2 % in 1933 (refer to graph #2). GRAPH # 2 Many other countries had been affected by the slump by 1931.Almost all nations sought to protect their domestic production by imposing tariffs, raising existing ones, and setting quotas on foreign imports. The effect of these restrictive measures was to greatly reduce the volume of international trade. By 1932 the total value of world trade had fallen by more than half as country after country took measures against the importation of foreign goods (12). Economic stability needed to be restored, and in order to do these, prices and wages needed to be cut. Andrew Mellon, the US Treasury Secretary, stated that there was a need to "liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate… Purge the rottenness out of the system" (13) In an unsuccessful attempt at accomplishing these tasks, they instead transformed an ordinary recession into the Great Depression. The economic instability led to political instability in many parts of the world. Political chaos, in turn, gave rise to dictatorial regimes such as Adolf Hitler's in Germany and the military's in Japan. These regimes pushed the world ever closer to war. As world trade fell off, countries turned to nationalist economic policies that only exacerbated their difficulties. In politics the depression strengthened the extremes of right and left, helping Adolf Hitler to power in Germany and swelling left-wing movements in other European countries. The depression was thus a time of massive insecurity among peoples and governments, contributing to the tensions that produced World War II. Ironically, however, the massive military expenditures for that war provided the economic stimulus to finally end the depression in Canada and elsewhere. By 1940 so many men and women in Canada had enlisted to fight fascism and had taken jobs in munition plants that near full employment had become a reality (14). Farm workers searching for steady work headed to the cities, and many women took paid labour in war-related industries. Seeing this rapid increase in employment, the government quickly introduced a system of wage and price controls. Also the creation of the National Selective Service Agency to control workers' freedom to move from one job to another was the final element in the government's initial response to war-time conditions. Union memberships exploded and, by 1943, workers not content to wait until after the war to receive better wages and working conditions struck in greater numbers and more frequently than they had done in 1919 (15). The entire economy of Canada was beginning to pull itself out of the great recession. Between 1940 and 1945, the GDP increased from $832 billion to $1,559 billion and the GNP nearly doubled in size, (refer to graph #3). GRAPH #3 And this occurred as deficit spending soared, to levels John Maynard Keynes had earlier and unsuccessfully recommended to Franklin D. Roosevelt. In the end it was the war that restored full employment as well as the entire economy out of depression in Canada and other previously hurting countries. While the collapse of the stock market in 1929 may have triggered economic turmoil, it wasn't until the economies of the world were so deep into recession that it seemed like there was no way out. As the many unemployed were all in a frantic search for work to support themselves the economy seemed to get worse and worse and in the distance a war began to emerge. Ironically this added disaster proved to correct the economy of Canada as well as the rest of the world. It came to be that World War II boosted such things in the economy, as the GNP, and it also had a substantially positive effect on the unemployment rates, reducing them sufficiently. The Great Depression helps economists predict the economy today. It shows how an over speculation in the market with a rapid investment over a period of time could lead to an economic crash. We may never reach a point like the Great Depression because the banks are much more prepared for those kinds of situations. It is important to keep an open mind on what could happen to the market, and learn from past mistakes to live in a more prosperous economic society.