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?

Question

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

Answer 1

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.