CHAPTER 15 Instability After World War I

THE BUSINESS CYCLE

• All economies go through a natural cycle of expansion and recession• Some periods of recession are worse than others for a variety of reasons• A government’s economic policies can also play a role in how bad a recession is or how quickly it ends.

SUPPLY AND DEMAND• The Law of Supply and Demand is a basic law of free-market capitalism• Supply and Demand have an “inverse” relationship, meaning when Supply is high, Demand is low, and vice versa• Price/cost of a good is tied to Demand

CAUSES OF THE GREAT DEPRESSION Economic downturn:

Economic downturns of individual nations in the late 1920s affected the worldwide economy. Prices for farm products

fell rapidly due to overproduction.

Increase in the use of oil and hydroelectricity led to a slump in the coal industry

CAUSES OF THE GREAT DEPRESSION The Crash of the US Stock Market

Most people thought the economy was doing great in the 1920’s

Much of Europe’s prosperity from 1924-

1929 was built on US bank loans.

CAUSES OF THE GREAT DEPRESSION US Stock Market boomed in 1928 By 1928, American investors pulled money

out of Europe to invest in the Stock Market In October 1929 the US Stock Market crashed

October 29, 1929—”Black Tuesday”

Depression Goes Global—Responses Around the World United States

Hoover raised largest TARIFF in US history. Because US wouldn’t buy their goods, FOREIGN countries didn’t buy US goods. Because BUSINESSES closed, fewer businesses were IMPORTING raw materials from other countries.

Japan Japan had few RAW MATERIALS in its own

country, so they depended upon IMPORTING from other countries. When GLOBAL TRADE went down, they couldn’t get resources anymore, so military leaders suggested that they take over neighboring countries that had RESOURCES.

Global Depression cont’d.

France French FASHION industry suffered greatly as people

didn’t have money to buy PARIS fashions. French government had to loan money to French BUSINESSES, so they could repay debts from WWI to US. Government went into debt trying to REBUILD country after WWI. Wasted money building the MAGINOT LINE.

Germany and Italy Italy couldn’t sell EXPORTS, Germany faced

enormous INFLATION. The government’s inability to deal with the Depression caused FASCIST governments to come to power. These governments emphasized building up of MILITARY, keeping industries in business and unemployment low. Refused to repay war debts and REPARATIONS.

Global Depression cont’d.

USSR Communists attempted to ISOLATE themselves

economically from the world—produce GOODS only for THEMSELVES, and try not to import from other countries. Economy suffered in USSR, but was caused from flawed ECONOMIC POLICY, not from Depression.

South America Drop in GLOBAL TRADE caused industry to

suffer. Had no MANUFACTURING to keep it self-sufficient. BORROWED heavily from US and Europe, who demanded immediate REPAYMENT when banks failed. South American economy DEVASTATED.