Great Depression Causes

Throughout the 1920s the US manufacturing sector expanded rapidly, partly due to the low discount rate set by the Federal Reserve Board. A stage was reached where factories were producing more than consumers could buy. The over-investment in the manufacturing sector compared to other businesses such as agriculture, made the economy more vulnerable. During the Great Depression, the government had to start large construction projects to employ laid off factory workers.

The global economy during the 1920s was still fragile after the massive expenses of the First World War. Allied countries borrowed heavily from the United States banks to pay for the war effort. After the war ended in 1918, the Allied countries had broken domestic economies and insisted that the defeated German, Hungary and Austrian countries make reparation payments to them so that they could, in turn, pay off their own debts. The problem was that these countries, themselves had no means of paying anything as the cost of war had ruined their economies. The bottom line was that European countries could not pay back what they had borrowed from the US lending banks and these institutions had these toxic loans still on their books. In response to this situation, the United States government brought in a tariff system (Hawley-Smoot Tariff) in 1930 to protect American companies. Imported goods had a high tax put on them and thus trade with other countries soon dropped off, weakening the already fragile world economy.