1. Stock Market Speculation and the 1929 Crash
Mid-1920s: The U.S. stock market boomed, driven by confidence in continual growth and profits. Investors increasingly bought stocks on margin (borrowing up to 90% of the stock price).
Summer 1929: Warning signs emerged: production slowed, unemployment rose, and stocks became overvalued, but speculation continued.
October 24, 1929 (Black Thursday): Panic selling began. The market partially recovered due to intervention by bankers.
October 29, 1929 (Black Tuesday): A massive sell-off triggered a full-blown crash. Billions in market value were lost, shaking investor confidence and drying up capital.
2. Bank Failures and Weak Banking System
Late 1929–1933: The crash led to a loss of confidence in the banking system. Many banks, already weak or undercapitalized, couldn’t withstand mass withdrawals.
1930–1933: Over 9,000 banks failed. People rushed to withdraw money in “bank runs.” With no FDIC at the time, many lost their life savings.
Result: Credit contracted sharply. Fewer loans meant businesses couldn’t invest or expand, leading to layoffs and further economic decline.
3. Overproduction and Underconsumption
Early to Mid-1920s: Technological advances and mass production led to large increases in factory and farm output.
Late 1920s: Consumer demand didn’t keep up. Most Americans couldn’t afford the flood of goods due to stagnant wages.
Post-1929: Inventories piled up. Companies responded with layoffs, further decreasing consumer spending and deepening the cycle of overproduction and underconsumption.
4. Uneven Distribution of Wealth
Throughout the 1920s: Income inequality grew. The top 1% held a disproportionate share of wealth, while most Americans had little disposable income.
Effect: The consumer economy was fragile — a small downturn easily collapsed demand. Wealthy investors pulled back after the crash, while average Americans already had limited means.
Consequence: The economy lacked a broad base of consumers who could sustain demand in hard times, worsening the depression.
5. Decline in International Trade
1920s: Post-WWI Europe was economically unstable and relied on U.S. loans and trade.
1930: The U.S. passed the Smoot-Hawley Tariff, raising import taxes on foreign goods to protect American industry.
Result: Other nations retaliated with tariffs of their own. Global trade plummeted by over 60% by 1933.
Impact: Export-dependent sectors in the U.S. (like agriculture) were devastated, and international economic cooperation broke down, making recovery slower.