ELI5 What actually happened in America’s Great depression and how it affected other countries? as well as how we recovered from it
ELI5 What actually happened in America’s Great depression and how it affected other countries? as well as how we recovered from it
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This is probably one of the most well documented parts of history – many books and articles on it on the web.
To summarize, there was a stock market crash. This started a recession in the country as well as in other countries. Like today, the US started to enact tariffs and other barriers to “protect American industry”. This caused widespread recessions and also spurred the Japanese to go to an expansion of the war in China to secure more resources. Basically it also hit the German economy really badly which had already not gone very well after WW2. The Nazis came into power several years after the Great Depression. USSR had a famine and many people died. Basically everyone had a bad time.
The depression didn’t end until WW2. Basically once everyone started fighting – governments made many industries focus on wartime production. In the process of 50m people dying, countries that were destroyed had to rebuild and that helped many economies recover.
ELI5 – so very very quick summary
Back in the 1920s when you wanted to buy a stock you only needed to put 10% of the money down the rest was on margin that is on loan. If the stock drop by 10% then you would have to pay up which was called a margin call. As the stocks kept dropping people had no money to pay up the margin calls the banks went bankrupt. There was no governments policies to keep the banks open like there is now.
In the late 20’s everyone thought the future was going to have a lot of money in it so they tried to bring that money into the present by investing and borrowing. Investing because it makes sense that if there is a lot of money in the future than companies will be earning more when the future arrives and borrowing because all that money in the future would be able to pay back the money borrowed in the present.
It didn’t work out that way and when the reality dawned that they had overestimated the amount of money in the future suddenly all the money they had brought into the present vanished. Money people thought they had safely stored in banks turned out not to be there so lots of people lost their savings and banks collapsed. Because banks collapsed there was no one left to lend money out. Because people didn’t have savings and couldn’t borrow money to buy things, factories stopped making things because there was no one to buy those things. Because factories didn’t make things they didn’t need workers so a lot of people were laid off and with all those unemployed people nobody wanted to invest in any companies because there was even less demand for products or services that companies produce. Because there was less money than before the price of everying began to drop but because there was less money nobody could buy anything.
The economy didn’t really recover until WW2 when money was created out of thin air by once again borrowing from the future in order to pay for all the weapons and ships and stuff used by the US and the Allies in the war. Because there was now lots of money floating around people started buying and investing again leading to more money and more people buying and investing. This time when the future started arriving there was lots of money there and people felt great about it and spent and invested even more.