Political and Economic Causes Notes

Background

1. 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.
2. When the Wall Street Crash of October 1929 struck, it exposed structural weaknesses and interdependence across the hemisphere.
3. The result was an economic collapse that reshaped governments, policies, and ideologies from Washington to Buenos Aires.

Economic Causes

Overproduction and Falling Demand

1. Agricultural Overproduction
   1. Mechanized farming in the U.S. and Canada increased output beyond what domestic and foreign markets could absorb.
   2. Prices for wheat, cotton, coffee, and sugar fell dramatically, eroding rural incomes.
   3. In Latin America, export-based economies (Brazil’s coffee, Argentina’s wheat, Cuba’s sugar) faced similar gluts as world prices plummeted.
2. Industrial Overproduction
   1. U.S. factories produced cars, radios, and consumer goods faster than average workers could afford.
   2. Corporate profits soared, but wages lagged, creating underconsumption amid apparent prosperity.

Financial Speculation and Stock Market Instability

1. Speculative Boom
   1. Investors bought stocks on margin, paying only 10% upfront and borrowing the rest, inflating prices far beyond real value.
   2. By 1929, U.S. stock prices had risen 400% since 1924, with little connection to actual profits.
2. Wall Street Crash (October 1929)
   1. When confidence collapsed, panic selling began on Black Tuesday (October 29, 1929), wiping out billions in hours.
   2. 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

1. Lack of Regulation
   1. Thousands of small, unregulated banks operated independently, with little protection for depositors.
   2. Between 1930 and 1933, over 9,000 U.S. banks failed, wiping out savings and consumer confidence.
2. Credit Contraction
   1. Bank failures led to reduced lending, further depressing business investment and consumption.
3. International Effects
   1. U.S. loans had fueled economic growth in Latin America; when credit dried up, development projects and trade collapsed.

Decline in Global Trade

1. Protectionism
   1. The Smoot–Hawley Tariff (1930) raised U.S. import duties on over 20,000 products.
   2. Retaliatory tariffs from Canada, Latin America, and Europe reduced global trade by over 60% by 1934.
2. Impact on Latin America
   1. Export earnings plunged: coffee (Brazil), nitrates (Chile), sugar (Cuba), and beef/wheat (Argentina) prices fell by half or more.
   2. Foreign exchange shortages crippled governments’ ability to service debt, causing widespread defaults.

Political Causes

Laissez-Faire Economic Policy

1. Most governments across the Americas adhered to classical liberalism, favoring minimal state intervention.
2. In the U.S., Presidents Coolidge and Hoover resisted regulation of industry, banking, or agriculture, insisting that markets would self-correct.
3. In Latin America, elites tied to export sectors opposed reforms that could diversify or modernize the economy.
4. This ideology left states unprepared to manage crisis once private markets collapsed.

Political Dependence on Export Elites

1. Governments in Latin America were politically and economically dominated by landowning and export elites, who prioritized foreign markets over domestic welfare.
2. Argentina and Brazil relied on British and U.S. demand for agricultural goods; this dependency limited policy flexibility.
3. Political conservatism blocked industrialization, making economies vulnerable when global demand shrank.
4. The resulting social discontent (worker and peasant unrest) later fueled populist and nationalist movements.

U.S. Monetary and Fiscal Policies

1. Tight Money Policy
   1. To curb speculation, the Federal Reserve raised interest rates in 1928–29, slowing investment and credit availability.
2. Gold Standard Constraint
   1. Many countries, including the U.S., Canada, and much of Latin America, pegged their currencies to gold.
   2. The fixed exchange rate system limited governments’ ability to expand money supply or devalue currencies, worsening deflation.