I try to learn more in depth about topics that interest me. I was reading about the Great Depression, but it is so hard to understand for me what exactly cause it, as I read it, it feels like a mix of fancy words that don’t tell me much (likely due to my lack of knowledge and english not being my 1st language). So, could anyone explain me in simple words what exactly cause the Great Depression?
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Simplest answer I have ever heard on this is that it takes money to make money. A healthy economy has a low but sustainable inflation rate around 2% or 3%, a growing GDP, a low interest rate, and a low unemployment rate as those are all major parts of people and companies borrowing money and expanding the economy.
Companies need to raise or borrow money to start their business or to expand. People also need to borrow money to purchase large items such as houses, vehicles, farm equipment, etc. In a recession, there is much less available money for any of these things and just like what happened at the start and the end of the COVID pandemic, some companies had made decisions that required them to borrow to expand or use much of their existing money for repairs, retooling, starting new lines of business, etc. Many of these decisions take years to finally provide a return on investment and a sudden shock to their planned income can be devastating.
If the money supply dries up, businesses go out of business or in the best case stop a lot of their production and lay off many of their employees just to avoid going out of business. Employees lost their jobs with no other companies hiring. This affected banks as well when the ability of their corporate and personal customers to have a sustainable income and qualify to borrow money stopped, and a lot of their customers had to withdraw some it all of their money, the banks went under. This snowball effect gets worse the longer it goes on.
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