... like I'm 5 years old
The Great Depression was a severe worldwide economic crisis that occurred in the 1930s. It is often compared to a domino effect. Imagine you’re playing with a row of dominos, and you accidentally knock the first one over. What happens? All the other dominos follow. That's what happened during the Great Depression, but with banks and businesses instead of dominos.
The initial spark was the stock market crash in October 1929, which is like knocking over the first domino. This led to banks losing money, failing, and closing down. When the banks closed, people lost their savings, which is like the subsequent dominos falling. With less money to spend, businesses began to fail, leading to high unemployment. This cycle continued, causing the economy to sink into a depression.
Think of it as a garden that was once blooming and thriving, but due to lack of care and unfavorable conditions, it withered and took a long time to recover.
... like I'm in College
The Great Depression was triggered by the stock market crash of 1929, but its roots lie deeper in an unhealthy economic system. The American economy in the 1920s experienced 'Roaring Twenties', a period of significant expansion, but it was fundamentally imbalanced.
Wealth was not distributed evenly, which meant that despite the boom, many Americans were not able to fully participate in the economic growth. Additionally, the agricultural sector had been struggling due to overproduction and falling prices. When the stock market crashed, it acted as a trigger that exposed these underlying issues.
Banks, heavily invested in the stock market, suffered significant losses and began to fail. As banks closed, people lost their savings, causing a decrease in consumer spending and business investment. This led to a downward spiral, with businesses failing and unemployment rising, which further decreased spending and deepened the crisis.
Imagine a towering structure of Lego bricks, representing the booming economy of the 1920s. The bottom layers, however, are shaky and unstable, representing the uneven wealth distribution, struggling agricultural sector, and speculative investments.
Now picture a Lego brick being pulled from the bottom - this is the stock market crash. The unstable structure begins to wobble and some bricks fall, symbolizing bank failures. As more bricks fall, the structure becomes even more unstable, representing businesses failing and unemployment rising.
The structure is now half its original size, symbolizing the shrinking economy. Attempts to reconstruct the structure without addressing the unstable foundation - like the contractionary monetary policy and the Smoot-Hawley Tariff Act - only causes more bricks to topple.
Only after a new, stable base is built - representing the New Deal policies - the structure begins to slowly regain its height, symbolizing the recovery of the economy during and after World War II.
... like I'm an expert
The causes of the Great Depression involve a complex interplay of economic factors and policy failures, extending beyond the stock market crash of 1929.
In the 1920s, the Federal Reserve used contractionary monetary policy to curb the stock market speculation, leading to restricted credit access and reduced economic activity. After the crash, the Fed failed to act as a lender of last resort, causing a series of bank failures.
Additionally, the Smoot-Hawley Tariff Act of 1930 exacerbated the situation. It raised U.S. tariffs to historically high levels, which led to a reduction in U.S. exports and imports, slowing down the economy further.
The Gold Standard also played a role. It forced countries to implement deflationary policies at the worst possible time, which only served to exacerbate the economic downturn.