How did the Great Depression of 1929 break out, and what profound effects did it have on the global economy?

Alright, let's talk about the Great Depression of 1929, the one that almost brought the world economy to its knees. We'll start from the beginning and try to keep it simple.

How Did the Great Depression of 1929 Erupt?

You can imagine the United States before 1929 as one giant party, a party known as the "Roaring Twenties." After World War I, Europe was in ruins, but the U.S. mainland remained untouched. In fact, it got rich by selling weapons and supplies, becoming the world's leader.

Americans at that time were incredibly optimistic, believing the good times would last forever. This optimism was most concentrated in the stock market.

Step One: The Frenzy of the Stock Market Bubble

Everyone Playing the Stock Market: There was a popular saying back then: "Anyone who buys stocks can become a millionaire." It wasn't just the rich; even shoe shiners and waiters were discussing stocks. Everyone believed stocks were a myth that only went up.
Buying on Margin (Leverage): What was even crazier was that people traded even without money. Back then, "margin trading" was possible, meaning you only had to put down 10% of the money, and you could borrow the remaining 90% from brokers. It was like playing a $10 game with just $1 of your own capital. If it went up, you'd make a fortune, but if it dropped by 10%, your capital would be wiped out instantly. The entire market was built on this dangerous leverage.

Step Two: The Bubble Bursts, "Black Tuesday"

By October 1929, this massive bubble finally couldn't hold up anymore. Some shrewd individuals started to feel something was off; stock prices were ridiculously high, so they quietly began selling their shares.

This action triggered a chain reaction:

Panic Sets In: When someone sold, stock prices fell. As prices dropped, those who had bought on margin panicked because their capital could vanish instantly, leaving them deep in debt.
Stampede Selling: Consequently, everyone frantically rushed to dump their stocks, regardless of the price, just to sell. But the problem was, if everyone wanted to sell, who would buy?
"Black Tuesday": On October 29, 1929, the New York Stock Exchange completely collapsed. Stock prices plummeted, and countless people's fortunes evaporated in a single day. This is the famous "Black Tuesday," the fuse that lit the Great Depression.

Step Three: From Financial Crisis to Economic Crisis

The stock market crash was just the first domino to fall.

Bank Failures: Banks were the second domino. Many banks had invested depositors' money in the stock market or lent money to stock speculators. When the market crashed, all that money was lost. People heard rumors and rushed to banks to withdraw their savings (bank runs). Banks, having no money, began to collapse one after another. Ordinary people's life savings were wiped out just like that.
Factory Closures: With no money, people naturally stopped spending. Cars, radios, new clothes... nothing sold. Products piled up in factory warehouses, forcing companies to cut production, lay off workers, and eventually, large numbers of factories shut down.
Mass Unemployment: When factories closed, workers lost their jobs. Unemployed people had even less money to spend, leading to more factory closures. This was a terrible vicious cycle. Unemployment rates soared to 25% at one point, meaning one in four people was out of work.

Thus, a financial storm on Wall Street transformed into an economic catastrophe that swept across the entire nation within just one or two years.

What Profound Impacts Did It Have on the Global Economy?

When America sneezed, the whole world caught a cold, because at that time, the U.S. was the engine of the global economy.

Global Trade Wars, Worsening the Economic Crisis To protect its domestic industries, the U.S. did something foolish: it passed the Smoot-Hawley Tariff Act, drastically raising tariffs on imported goods. The intention was to encourage people to buy more domestic products, but the result was retaliation from other countries, which also imposed heavy taxes on American goods. Global trade was effectively put on pause, with trade volume plummeting by over 60%. This made the economic situation worse for every country.
Global Credit Crunch, Europe Suffers Too The U.S. was the world's largest creditor at the time. When the crisis hit, American banks, desperate to protect themselves, recalled funds from abroad (especially from countries like Germany and Austria, which had rebuilt with U.S. loans). European banks, already unstable, were drained dry and also began to collapse, dragging Europe into the depths of the depression.
The Rise of Keynesianism, Government Starts to "Intervene" Before the Great Depression, the prevailing ideology was "laissez-faire," believing that governments should not interfere with the economy and that the market would regulate itself. But this crisis proved that when the market fails, the consequences are too dire. Thus, economist John Maynard Keynes proposed that during economic downturns, the government must actively spend money (e.g., building roads, dams) to create jobs and stimulate demand. President Roosevelt's "New Deal" was based on this idea. From then on, "government intervention in the economy" became a standard practice for modern national governance.
Establishment of Financial Regulatory Systems Learning from past mistakes. To prevent similar events from happening again, the U.S. established the Securities and Exchange Commission (SEC) and enacted a series of laws to strictly regulate banks and the stock market, putting a leash on the wild horse that was the financial market. Many of the financial regulatory systems we see today are the result of the painful lessons learned back then.
Indirectly Led to World War II This is the most profound impact. Economic despair can translate into political extremism. In countries like Germany and Japan, the economic crisis led to extreme social tensions, providing fertile ground for the rise of fascist and militarist forces. They advocated for external expansion to escape the crisis, ultimately dragging the entire world into the abyss of World War II.

In summary, the Great Depression of 1929 was like an economic "perfect storm." It was not merely a simple market crash but fundamentally altered the operating rules of the world economy and the global political landscape. The world we live in today is, to a large extent, still shaped by that storm.