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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There is no simple answer. Pretty much every financial crisis is a mix of a lot of factors all at once. Some things that contributed:
1. Over supply. Right before the depression hit the economy was booming and manufacturing was running hot. Some attribute this to a combination of the ending of WWI and the 1918 pandemic winding down. This by itself causes, which the US was struggling with before the Great Depression hit. This causes companies to scale down production, which means lost jobs.
2. Events like the Dust Bowl caused massive disruption to the flow of resources in the US, especially food. This caused massive downstream effects to the economy, like the flow of raw materials to factories on the east coast, which leads to lost jobs among other issues.
3. As unemployment increased and companies started to pull back or go out of business, people started to get nervous and started to pull money out of the banks. This basically set off a chain reaction that resulted in more runs on banks and caused the financial sector to collapse. This caused huge issues for businesses because they rely on banks to operate and pay their employees. As these banks got knocked out, entire businesses got wiped out which caused more unemployment.
4. Lack of intervention from the government to keep the financial system working. The government at the time was afraid to bail out the banks (and keep the financial system intact) because they didn’t want to bail out “bad actors,” as in the banks that were taking too many risks that led to their insolvency. The problem is that this also wipes out the deposits of both everyday people and businesses. Businesses, suddenly losing a ton of money, can’t make payroll and have to cease operations or fire people.
5. Lack of liquidity, or money circulating in the economy. This means new businesses can’t get loans to startup. Which means there are no businesses showing up to replace those lost in the earlier stages.
Prior to the Great Depression, the US literally had full blown depressions as often as we have recessions today. There’s a reason we haven’t had another depression after the Great Depression. Namely a shift to having the government intervene during a crisis. One of the things that made the Great Depression so bad was the lack of action early on and letting the system fail. That set off a huge chain reaction that made things much worse. Ever since then, the government has stepped in when necessary to soften depressions into recessions and prevent another full on collapse.
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