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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In the late 1920s, there was a stock market bubble. Somewhat like the crypto bubble in 2021-2022, everyone was talking about how you could make quick profits in stocks. Many people took out loans to buy stocks and did not fully understand the risks involved. Using loans to buy stocks (called buying on margin) means you can earn more when stocks rise but also lose more when they fall.
When stocks fell, people were forced to sell quickly to pay back the loans. Many people did not sell in time, and ended up bankrupt and stopped paying their loans. Banks began to fail because of unpaid loans. When people are worried about banks, they often withdraw their savings and hold it as cash (paper money). If enough people withdraw all at one, even a bank with good loans can run out of money and fail.
Over the course of a few years, nearly half of America’s banks failed. The Federal Reserve can lend money to banks with good loans to keep them from failing, but due to a change in the definition of ‘good loans’ (called the Real bills doctrine), they let a bunch of banks fail unnecessarily. Seriously, in a 2002 speech Fed chair Ben Bernanke agreed that bad Fed policy was responsible for turning a stock market crash into the depression.
When banks fail, depositors lose money and businesses cannot get loans. These businesses cannot grow, and the depositors will spend less. This means businesses fire employees, and eventually close stores or factories. Unemployment reached 25% during the depression (compared to 10% during the 2008 financial crisis).
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