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It squashes loud things down and then increases the gain of everything, which has the effect of levelling everything out and making quiet stuff louder.
You don’t need it if you’re using any kind of dirt, as increasing the gain then squashing (clipping) the peaks has the same effect.Edit: I was assuming guitar use - it’s much more useful on bass.
Also, this morning's noodlings have led me to the conclusion that despite trying to convince myself otherwise, I don't really like compression on clean guitar. I just feels wrong. Like socks in the bath. There is now a Barber Tone Press shaped gap on my board.