Notes for Political and Economic Causes - IB | RevisionDojo
Political and Economic Causes Notes
The Great Depression resulted from a complex interplay of political and economic factors that led to a sharp contraction of the money supply, a collapse of international trade, and widespread panic following the 1929 stock market crash.
Background
By the late 1920s, the economies of the Americas appeared prosperous, but that prosperity rested on unstable foundations: speculation, unequal wealth, overproduction, and overreliance on the U.S. market.
When the Wall Street Crash of October 1929 struck, it exposed structural weaknesses and interdependence across the hemisphere.
The result was an economic collapse that reshaped governments, policies, and ideologies from Washington to Buenos Aires.
Economic Causes
Overproduction and Falling Demand
Agricultural Overproduction
Mechanized farming in the U.S. and Canada increased output beyond what domestic and foreign markets could absorb.
Prices for wheat, cotton, coffee, and sugar fell dramatically, eroding rural incomes.
In Latin America, export-based economies (Brazil’s coffee, Argentina’s wheat, Cuba’s sugar) faced similar gluts as world prices plummeted.
Industrial Overproduction
U.S. factories produced cars, radios, and consumer goods faster than average workers could afford.
Underconsumption was a key factor in the Great Depression, contributing to a vicious cycle of decreased demand, production cuts, and job losses. It describes a situation where the demand for goods and services is lower than the economy's ability to produce them, a result of insufficient consumer purchasing power.
Financial Speculation and Stock Market Instability
Speculative Boom
Investors bought stocks on margin, paying only 10% upfront and borrowing the rest, inflating prices far beyond real value.
By 1929, U.S. stock prices had risen 400% since 1924, with little connection to actual profits.
Wall Street Crash (October 1929)
When confidence collapsed, panic selling began on Black Tuesday (October 29, 1929), wiping out billions in hours.
The crash destroyed banks that had heavily invested in or lent against overvalued stocks, triggering a chain reaction across industries and borders.
Banking and Credit Weaknesses
Lack of Regulation
Thousands of small, unregulated banks operated independently, with little protection for depositors.
Between 1930 and 1933, over 9,000 U.S. banks failed, wiping out savings and consumer confidence.
Credit Contraction
Bank failures led to reduced lending, further depressing business investment and consumption.
International Effects
U.S. loans had fueled economic growth in Latin America; when credit dried up, development projects and trade collapsed.
Decline in Global Trade
Protectionism
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Note
The economic boom of the 1920s in the Americas was built on shaky foundations. While it appeared prosperous, several underlying issues made the economy vulnerable to collapse.
Speculation: People invested heavily in the stock market, often borrowing money to buy stocks, creating an artificial sense of wealth.
Unequal Wealth Distribution: The rich got richer while the majority struggled, leading to a lack of purchasing power among the masses.
Overproduction: Factories and farms produced more goods than people could buy, leading to surplus and falling prices.
Overreliance on the U.S. Market: Many countries depended on the U.S. for trade, making them vulnerable to any economic downturn in America.
AnalogyThink of the economy like a house built on sand - it might look strong, but without a solid foundation, it's bound to collapse.
ExampleIn the U.S., car production soared, but many Americans couldn't afford to buy cars, leading to unsold inventory piling up.
