In the 1920s, stock prices soared on optimism and easy credit. Investors bought on margin — putting down 10% and borrowing 90%. When confidence cracked, margin calls forced mass selling, amplifying the collapse. The market fell 89% from peak to trough (1929–1932).
As stock values crashed, banks that held stocks collapsed. Bank runs followed — depositors rushed to withdraw savings. By 1933, 9,000 banks had failed, wiping out savings and strangling credit. Businesses couldn't borrow; consumers couldn't spend.
The 1920s boom concentrated wealth at the top. The poorest 60% earned only 24% of income. When consumers have no cash, they can't buy goods. Factories cut production and laid off workers, deepening the spiral.
The U.S. passed the Smoot-Hawley Tariff (1930), raising import duties to protect American farms and factories. Other countries retaliated. Global trade collapsed 65% by 1934, hitting exports and deepening depression worldwide.
Agriculture was already depressed in the 1920s (farm prices had fallen 40% since WWI). Manufacturing had overexpanded; auto and steel plants ran far below capacity. The economy was fragile, not resilient.
The Federal Reserve tightened money in 1931 — the opposite of what was needed. President Hoover believed in balanced budgets and resisted government spending. These decisions prolonged the crisis. Recovery only came with Franklin D. Roosevelt's New Deal (1933) and massive WWII spending (1941+).
Unemployment fell from 24.9% (1933) to under 2% by 1943 — driven by New Deal public works and WWII industrial mobilization. The stock market recovered slowly, not reaching 1929 levels until 1954.