The liberals like this explanation, but it's not quite reality. In Spencer's book, ISLAM UNVEILED, he lays out how Islam rejected intellectualism, philosophy and science about a thousand years ago. For instance, scientific laws are rejected as blasphemy, since it would box in Allah. Islam is the source of the corruption, not illiteracy.
Most of your questions are fully answered in ISLAM UNVEILED. He lays out why Islam can't support democracy, freedom, etc. The foundational books of Islam (Koran, Sharia, etc) mitigate against moderation.
What was the catalyst for this rejection? It was my understanding that early Islamic culture actually started universities (or equivalents) and sought to gather and spread knowledge. However, I have never heard what exactly caused this culture to change and embrance ignorance.