WWI and Over-Production .
1) The First World War completely devastated Europe. Entire cities were destroyed, farmlands were marred by trenches and artillery craters, and close to nine million young men had been killed in the fighting. The European economy lay in ruin, but the extremely punitive war reparations in the Treaty of Versailles made recovery and reconstruction nearly impossible for Germany and Austria.
2) Across the Atlantic, the untouched American homeland experienced unprecedented economic growth in the wake of the Great War. American industries profited greatly during the war years by providing billions in supplies to the Allied powers.
3) American mobilization for war in 1917 only increased demands on industry and the military draft eliminated American unemployment. The war dramatically reversed the financial position of the United States from a debtor nation to a world creditor.
4) The U.S. Treasury loaned the Allied nations billions of dollars for their war efforts. Ironically, much of this borrowed money returned to American hands when Allied powers like Britain and France purchased war supplies and armaments from U.S. industries. This arrangement only continued into the 1920s as European countries sought U.S. loans in order to rebuild their war-torn economies.
5) American agriculture boomed in response to massive European demand for essential foodstuffs during and after the War. American industrial and agricultural production had drastically increased in order to meet the demand overseas.
6) However, a large surplus began to accumulate as the European economies recovered during the mid 1920s and foreign demand for American products substantially decreased. The demands of war led to alarming levels of over-production that eventually caused prices to plummet.
7) American farms were producing crops at a much higher rate than the population could consume them. Agricultural surpluses caused a rapid decline in prices and many American farmers found it difficult to accept their sudden change in circumstances. Depressed prices were so damaging that one in four American farms failed during the 1920s.
8) Agricultural over-production was the first sign that the American economy was headed for disaster. However, outrageous stock prices continued to soar on WallStreet and the nation turned a blind-eye to the dire omens from the heartland.
1) The First World War may have brought unmatched devastation to Europe, but it also generated unparalleled economic growth in the United States and greatly elevated its position in world affairs. The postwar era led to such unmatched prosperity that the ensuing decade became known as the “Roaring Twenties.”
2) Such rapid economic growth was reflected in the seemingly limitless rise of the U.S. Stock Market. The initial increase in stock prices was the result of Europe’s dependency on U.S. exports during the postwar era. These soaring profits led many Americans to invest in stocks in order to gain a share of the prosperity. However, this only inflated stock values and further contributed to the booming market.
3) The continued soar of stock prices almost guaranteed an instantaneous return on investment. With little to no risk, many Americans rushed to invest every penny in the markets. Banks only further fueled this frenzy by dramatically easing their credit restrictions and loaning practices.
4) Rational investment gave way to risky speculation as many even began to purchase stocks with borrowed money. This type of risky speculation is known as “buying on margin.” Under this arrangement, the investor only paid for a fraction of the investment and borrowed the rest from a stock broker. A significant rise in stock price enabled them to quickly repay their loans and glean future profits, but a decline in prices often left them with an unpayable debt.
5) Margin buying became a standard practice as the stock market continued to soar during the Roaring Twenties. Stockbrokers and lenders allowed many investors to purchase stocks with as little as a 10% down-payment. Easy credit created a frenzy of speculation that bloated the market with inflated stock values that were destined to fall.
6) The economic bubble finally burst and the stock market crashed on “Black Tuesday,” October 29th, 1929. The initial fall of stock prices led to a massive selloff that caused them to plummet in value. In a little over two months, the stock market had lost over $40 billion dollars in value (more than the total cost of World War I to the United States).
7) Some investors lost their life-savings, many defaulted on their loans, and thousands of banks failed because they loaned out excessive amounts of money during the boom. The “Great Depression” would be the most severe and prolonged economic crisis the world had ever seen. By 1933, an astounding 25% of the U.S. workforce was unemployed.
1) The crash of the U.S. Stock Market and the collapse of credit not only destroyed the U.S. economy, but it halted the international debt cycle that fueled the European recovery from World War I as well. This caused the economic crisis to spread across the globe.
2) As the Depression evolved into a global economic crisis, many industrialized nations resorted to protectionist trade measures as a means to shield their economies from ruin. Many issued tariff taxes on imported goods in order to protect their domestic industries from foreign competition.
3) The 1929 Stock Market Crash led many American businesses to pressure the government to raise the tariff tax in order to help U.S. industries recover from the economic depression. As a result, the 1930 Hawley-Smoottariff passed by the U.S. Congress was one of the highest tariff rates in history.
4) This inevitably led many European nations to raise their own tariffs in order to protect their own domestic industries. These protectionist measures crippled world trade and caused the prices of imports and exports to collapse across the globe.
5) Surpluses generated from over-production also caused prices to collapse across the globe. Such low prices made it extremely difficult for businesses to generate profits. Salaries shrank, hours were reduced, and many workers were laid off. Goods may have been inexpensive, but ironically, many people could still not afford them because of the loss of wealth and personal income.