The Great Crash · Boom & Bust

The Setup

America came out of the 1921 recession into a genuinely new world: electrification, automobiles, radio, chain stores, and a Federal Reserve less than a decade old. Productivity was real, profits were real, and for a few years stock prices simply kept pace with them. The displacement wasn’t a swindle — it was the Roaring Twenties.

What turned a bull market into a mania was the machinery built to finance it. Anyone could buy stock with 10% down, borrowing the rest from a broker; brokers funded those margin loans in the call money market, where banks — and increasingly ordinary corporations chasing 6–12% — parked cash overnight against stock collateral.

The loop that fed itself: rising prices made stock better collateral, which pulled in more call money, which raised prices. In October 1929 it ran in reverse.

By 1929, brokers’ loans had grown to roughly $8.5 billion — money lent into the market not because lenders believed in radio, but because rising collateral made the loans look riskless.

Dow Jones Industrial Average, monthly, 1921–1935 · NBER via FRED (M1109BUSM293NNBR)

Displacement, 1921–24

A young Fed cuts rates into a real productivity boom. Stocks rise with earnings — nothing here yet that a historian would call a bubble.

Boom, 1925–28

Credit finds the market. Margin buying becomes a national pastime, investment trusts multiply, and the Dow doubles while the economy — solid but ordinary — grows a fraction of that.

Euphoria, 1928–29

The final year goes vertical. Call money rates hit double digits and still the loans pour in; corporations lend their treasuries to speculators. On September 3, 1929, the Dow touches 381 — a level it will not see again until 1954.

Distress, September–October 1929

New money stops arriving. In London, the Hatry fraud collapses and tightens credit worldwide; in New York, prices drift down through September as insiders quietly leave. The market is now a queue in front of a narrow exit.

Panic, October 1929 → July 1932

Margin calls force selling, which triggers margin calls. Black Thursday, then Black Tuesday: thirteen million shares, then sixteen. The crash alone wasn’t the catastrophe — the catastrophe was three years of debt deflation and bank failures that followed, with no lender of last resort willing to act. The Dow bottoms at 41, down 89%.

The Reckoning

−89% Dow, peak to trough, 1929–32

25 years until the Dow regained 381 (1954)

~9,000 US bank failures, 1930–33

The hearings that followed gave America the SEC, deposit insurance, and the Glass–Steagall wall between banking and speculation. Kindleberger’s verdict on 1929 is less about the bubble than the response: the Federal Reserve let the banking system implode, and a stock market crash became the Great Depression. The lesson — that someone must lend freely in a panic — took a global catastrophe to learn, and 2008 to apply.

What it cost

The Dow’s 89% fall is the number everyone remembers, but the market was the smaller catastrophe. What followed — three years of bank failures and debt deflation — put a quarter of American workers out of a job, foreclosed a thousand homes a day at the worst of it, and emptied the savings of people who had never owned a share.

24.9% US unemployment in 1933, against 3.2% in 1929, on the count that treats relief workers as unemployed Lebergott series, tabulated in Smiley, Recent Unemployment Rate Estimates for the 1920s and 1930s
$1.3bn lost outright by the depositors of the 9,096 banks that suspended between 1930 and 1933 FDIC, The First Fifty Years: A History of the FDIC 1933–1983, Table 3-1
1,000 a day home mortgages foreclosed every day in 1933, the year the farm rate also peaked, near 39 per 1,000 farms Wheelock, Federal Reserve Bank of St. Louis Review, 2008, citing the Federal Home Loan Bank Board and Alston

On 11 December 1930 New York’s banking superintendent closed the Bank of United States — a commercial bank despite the name, the largest American bank failure to that point, with about $200 million of deposits and, in 1929, 440,000 account holders. Many of its customers came from the city’s foreign-born working poor: on the 1930 census, fewer than half of the later claimants gave English as their first language. The New York Fed and the clearing house banks failed to arrange a merger. Liquidation returned 92.5 cents on the dollar.

FDIC, historical timeline 1930–1939, for the deposits and the failed merger; Federal Reserve History, Banking Panics of 1930–31, for the closure by New York’s superintendent of banking; Gotham Center for New York City History, The Bank of United States, East European Jews and the Lost World of Immigrant Banking, for the depositors, the 1930 census claimants and the 92.5 cents, quoting Friedman

What followed

The American slump did not stay American. The dollar lending that had kept central Europe solvent stopped, Vienna’s Credit-Anstalt failed in May 1931, and in July Germany closed its banks for three weeks. Kindleberger’s explanation for why one country’s bust became everyone’s is that no state was both able and willing to hold the system up: Britain could not, and the United States would not.

Kindleberger, The World in Depression 1929–1939, in the DeLong and Eichengreen preface; Doerr, Gissler, Peydró and Voth, Journal of Finance, 2022 · The German credit wave, 1931