Eli5: What caused the Great Depression and how did the U.S.A. get out if it? How did the country have money to pay for new jobs?
In: Economics
This is an incredibly complex question but I will do my best
Economists still debate this, but it largely came down to 4 main causes.
The stock market crash of 1929 is the biggest single cause. A booming economy led to soaring stocks. People threw everything into the market, and were flying high on a wave of giddy false security of easy profits. People mortgaged their homes to buy stocks, put in every dime. So when a normal correction hit, panic set in. People sold stock en masse. A cascade started, destroying companies overnight.
Bank failures- when things went belly up, people scrambled to get their cash out of the banks before they failed. This, of course, made them fail faster. Banks ran out of money to give to people to cover their deposits. Imagine if you had your paycheck just disappear because the bank literally didn’t have money to honor it.
The Gold Standard- We used gold as the basis for the value of the dollar at the time. This had the benefit of being stable, but was also inflexible: we couldn’t easily bear a little inflation to help lower interest rates by having the Fed release more money into the economy (what has been used very recently). This inflexible system led to the final cause
Lack of foreign trade: The US had historically been a fairly isolationist nation, and without a pre-existing robust trade network, things crawled to a halt fairly quickly. With the above issues, other nations were unwilling to make trade agreements with us, stalling recovery.
As for recovery, the biggest factor was WWII. All of us a sudden, the US was the golden child of the world economy: removed from the front, in possession of massive mineral and labor potential, and largely neutral (until Pearl Harbor). We sold fuel, weapons, food, supplies, etc etc. to the allies for years before we joined the fighting for real. After the war, Europe and Asia were in ruins, leaving us to fill the gaps.
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Rule 2.
Better to r/askhistorians about this.
An economy functions when people spend money on goods and services, which is then used to pay more people to make goods and provide services, which they spend on more goods and services. This cycle repeats until someone decides not to spend it. There is an economic measurement called “gross domestic product” which is suppose to measure the total amount of spending in a country to quantify this, but I feel that it doesn’t do a good job of this because it include financial market transactions. Financial market transactions largely don’t involved the real economy of paying wages & making goods, and their value is almost purely speculative. The financial markets remove large amount of money from the real economy and “create” new wealth basically out of nothing.
The Great Depression was triggered largely by a financial market crash. All the money that people had removed from the real economy and put into the market just disappeared and suddenly people couldn’t pay wages or buy stuff. This ground the economy to a halt and millions of people lost their jobs. This was made worse by a government response under Hoover that didn’t provide any actual support to people either by hiring them for public works projects and paying them wages or by just giving them financial supports directly. This meant that the economy remained stalled until FDR got in and implemented the New Deal, which was both a massive public works program and provided numerous financial supports, though the economy didn’t fully recover until the World War 2. While there were some tax reform in the New Deal, the government largely ran on debt during this period, with the national debt roughly doubling over this period.
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