When I first learned about the Great Depression as a kid, I was really confused. Everybody had money, and then no one had money? For a decade? Anywhere in the world? Where the hell did all the money go?
It turns out this is still a bit of a mystery even for economists, many of whom, like Federal Reserve Chairman Ben Bernanke, make academic and professional careers of studying the Depression. Fundamentally, though, I've realized that my mistake was in thinking of money as something real, of limited supply, what's called in game theory "zero-sum". Like apples. If I acquire three apples, that means that someone somewhere has lost three apples. Both of us can't simultaneously have those three apples.
However, money isn't real. It's generally an agreed-upon convenience for the exchange of goods and services, but once you've established the abstraction, there's no reason you can't borrow it many times over, or use borrowed money to persuade someone else to give you even more money (and they can have borrowed that money, and someone else could be exchanging money based on the estimated chance of someone not paying their loans back). Eventually you can create billions or trillions of dollars in money where there wasn't any before, by stacking strange credit derivatives (some good, some bad) on top of each other, and getting people to pay for them. Participants in the market call this "creating value"; colloquially, you can think of it as "generating money out of thin air".
Of course, what comes from the ether can return to the ether, and that's what happened during the Great Depression, and what's happening now with the credit freeze. Billions of dollars in "created value" are evaporating: the dodgy mortgage-backed investments are so complicated and opaque, the only way to value them was by what people were willing to pay, so when suddenly no one wanted to pay anything, it became impossible for holders (including some European banks) to put a dollar (or euro) value on their holdings. Oops! Billions to zero, just like that.
Chaos! What fun to read about, for now.