How did cheap credit and investor hubris actually cause the Great Depression?

What can the 1929 stock market crash teach us about today’s financial bubbles?

Understand the 1929 Wall Street crash through Andrew Ross Sorkin’s historical analysis. Learn how cheap credit and poor policy fueled America’s worst economic crisis.

Continue reading to explore the striking parallels between the 1929 financial crash and modern markets, and learn how to identify the warning signs of an economic bubble before it bursts.

Genres

Money, Investments, History, Economics, Society, Culture

What’s in it for me? Pull back the curtain on Wall Street’s greatest crash

1929 (2025) explores the events leading up to the most devastating stock market crash in modern history. Tracing the unchecked speculation, economic euphoria, and regulatory complacency that created the conditions for the collapse, it reveals how illusions of endless growth blinded an entire generation.

The crash of 1929 is part of our collective imagination. Somewhere in our heads, there are cinematic images of bankers hurling themselves from windows and boys in flat caps selling newspapers to panicked readers on black-and-white street corners. The chronology feels familiar too: the FOMO-driven frenzy, the bubble bursting, the Depression, the Nazis, the War.

Andrew Ross Sorkin was often asked about parallels to 1929 after he published his bestselling book about the 2008 financial crisis, Too Big to Fail. Truth be told, he knew little more than what most of us think we know about it. But when he started reading about that earlier crash, he felt something was missing. Most accounts relied on charts and data and economic systems, neglecting the human drama.

Sorkin’s own study of the crash of 1929 sets out to correct that failing, as well clearing up some common misconceptions. Those vivid images, he shows, are often misleading: bankers, to take that infamous example, rarely defenestrated themselves and suicide rates actually declined after 1929. Even when the chronology’s right, it can make contingent outcomes feel inevitable. The crash, to take one common notion, didn’t cause the decade-long Great Depression.

What sets Sorkin apart as a tour-guide, however, is the way he foregrounds the motives of the men (and they were almost exclusively men) who inflated the bubble. As we’ll see in this summary, dodgy dealing on Wall Street is one part of the story. A crash, though, requires more than freewheeling financial instruments. It also requires an all-too-human foible: hubris.

The crash of 1929 punctured the illusion of a decade

Capitalism and crisis were synonymous in nineteenth-century America. In 1819, 1837, 1857, 1873, and again in 1893 bubbles years in the making suddenly burst. Panicked depositors rushed to withdraw savings, triggering liquidity crunches, downturns, and recessions. Economists, the practitioners of the so-called “dismal science,” were pessimists. What goes up must come down, they said, and that law of nature applied to markets no less than physical objects.

Pessimism had gone out of fashion by the 1920s. It was a decade of bullish boosterism. In early 1929, a government commission concluded that America, now some 11 years into its latest boom, had scarcely “touched the fringes” of its “potentialities.” Its members included the future president, Herbert Hoover. In New York, the home of Wall Street, governor Al Smith assured investors that they needn’t carry metaphorical umbrellas: the future, he promised, was one of “eternal sunshine.” The economist Amos Dice meanwhile hailed the nation’s “optimistic psychology,” a rational view, he thought, given the rapidity of its advances.

According to this sunny credo, boom-and-bust cycles were relics of a vanished age. This, the boosters said, was a century of continuous and compounding progress. It was a fatal illusion.

It collided with reality on a day that’s gone down in history as “Black Thursday.” By the end of trading on October 24, 1929, 13 million shares had been dumped as spooked investors rushed to exit collapsing markets, wiping out $4 billion of stock value. Another $14 billion was lost on October 29 – “Black Tuesday.” America’s financial giants, including the Rockefeller family, threw money at the problem, buying up toxic stock in a bid to restore investor confidence. It didn’t work. The slide continued. The Great Depression loomed.

The economist JK Galbraith, the author of a major study of the crash, wrote that men had been swindled by other men often enough in America. In the 1920s, however, they succeeded in swindling themselves on a vast scale. That collective delusion is as important to our story as the nuts and bolts of stock-market speculation. What made otherwise rational actors lose all ability to calculate risk and distinguish between good terrible ideas? As we’ll see, answering that question helps us see what lessons 1929 might hold for our own age.

Debt is a powerful optimistic force

There were good reasons to be optimistic in the ‘20s. Progress was everywhere. Electric lights illuminated once-dingy streets, automobiles replaced horses, and modern conveniences like vacuum cleaners and washing machines became commonplace. Technological breakthroughs revolutionised culture and generated vast returns. Take radio. Between 1921 and 1928, the Radio Corporation of America, the Nvidia of its day, saw its stock rise from $1 to $85.

But it was an idea rather than a product that was truly transformative. Borrowing to spend had long been viewed with suspicion in America. For many, it was an act of desperation and an indicator of poor character in fiscal and moral matters alike. General Motors struck the first blow against this old taboo in 1919 when it started selling cars on credit. Within a few years, Americans were using newfangled “instalment plans” to purchase everything from toasters to coats and holidays. Credit was soon the lifeblood of the economy.

Changing attitudes around debt altered people’s perception of Wall Street. The financial center had never been well liked: it was too closely associated with scandals and unscrupulous bankers preying on inexperienced investors – so-called “dumb money” – to enjoy much popularity. The growing acceptability of debt, however, widened Wall Street’s appeal.

Investing in stock became like buying a car: you did it “on margin,” that is, on credit. Encouraged by Wall Street’s boosters in the press, middle-class Americans opened “margin accounts.” It was simple. You fronted 10 or 20 percent and borrowed the rest. When the market went up, you paid your debt plus interest and pocketed the profit. In a bull market in which triple-digit returns were a regular occurrence, it was like free money. Groucho Marx’s stockbroker gave the entertainer a guarantee heard by millions of Americans that decade: never mind the how, “just be assured that you’re going to wind up a very wealthy man.”

Marx’s broker wasn’t a swindler: he was investing his own money in the stocks he recommended to his clients. But he was under the sway of an intoxicating idea: optimism. Debt can’t exist without it. We borrow when we believe that we’ll be better off in the future than we are today. Debt allows us to access some of the resources we expect from that rosy tomorrow. The problem is, we sometimes take too much. Financial crises usually begin when we realise that the future is smaller and darker than we’d optimistically hoped.

Charles Mitchell helped bring Wall Street to middle America

Ordinary Americans didn’t wake up one morning with the idea of opening a margin account in their heads. The idea had to first be planted there.

Enter Charles E. Mitchell AKA “Sunshine Charley.”

The son of a small-town Massachusetts mayor, Mitchell started out as a salesman retailing telephone parts for $10 a week. That was 1899. Two decades later, he was the president of National City Bank, today’s Citibank. Under his stewardship, it became the world’s largest issuer of securities. Mitchell was soon a celebrity. Glowing profiles appeared in Time and Forbes, the “new bibles of pecuniary ambition,” as one historian calls those wealth-obsessed magazines. Ivy League graduates beat a bath to his door; reporters hung on his every word.

As the moniker suggests, Sunshine Charley was optimism personified. When salesmen at National City complained that they’d run out of buyers, Mitchell took them to lunch in a restaurant on the top floor of a Manhattan skyscraper. Look down there, he said, pointing at the streets below. There are six million people walking around with incomes adding up to millions of dollars waiting for someone to tell them what to do with their savings. “Take a good look,” he concluded, “eat a good lunch, and then go down and tell them.”

Stocks, Mitchell said, were no different than the decade’s other innovations and conveniences. Like vacuum cleaners and automobiles, investments were about making life more comfortable. If you could buy those things on credit, why should stocks be any different? Under Mitchell’s leadership, National City made a compelling case to first-time investors. Say you put up ten bucks of your own. Then you borrow ninety more. Now you’ve got a hundred-dollar blue-chip. Suppose the price doubles in a year. If anything, that’s playing it safe. Heck, say you’re paying twenty percent interest. You won’t be, but let’s say you are. You’re still clearing an eighty-two-dollar profit. That’s an 820-percent return! Why wouldn’t you jump at it?

It worked. By the fall of 1929, National City had sold the equivalent of around $12 billion worth of stocks. Of course, the whole thing only worked as long as everyone believed the line would keep going up. But that’s what Sunshine Charley was all about: boosting spirits and spreading the gospel of good old-fashioned American economic opportunity.

Cheap credit, boosterism, and a stalling economy created the perfect conditions for the crash of 1929

Today’s investors have to put up fifty percent to borrow on margin. If you walked into a National City broker’s office in the twenties, they asked for as little as five percent.

We’ve seen what happens when prices rise: borrowed money magnifies gains. The problem is, it also magnifies losses when they fall. If a $100 stock drops to $80, an investor’s $10 stake has been wiped out. At that point, his broker issues a “margin call,” a demand that he repay his loan or put up more collateral. If he can’t, his stocks are sold off. Brokers dumping stocks into a falling market is a good sign for others to get out. That, in a nutshell, is what happened in the fall of 1929. But there’s more to the story than plummeting prices.

The storm that wiped out Wall Street was set in motion in 1927 when the Bank of England lowered interest rates. Making it cheaper to borrow money, the thinking went, would help stimulate demand and encourage investment. With its economy flagging, Britain, which was still the “workshop of the world” in those days, desperately needed both. Lower interest rates, however, also meant smaller returns on assets. That triggered an exodus of gold and capital from London to New York. To head off a dangerous imbalance in the global economy, the Fed lowered its own interest rates, making it cheaper to borrow in the US too.

The erosion of the American taboo against borrowing to buy coincided with this glut of cheap credit. Throw a bullish stock market and its celebrity boosters into the mix and you have the perfect recipe for a bubble. Between 1927 and 1929, the Dow Jones Industrial Average increased by 250 percent while industrial production flattened, car sales declined, construction ground to a halt, and corporate profits fell. The market had been priced for continual and rapid growth, but the economy wasn’t delivering. The Fed tried to cool the stock market by raising interest rates on commercial loans and urging banks to stop loaning money to speculators.

The cure was worse than the disease. A market built on cheap credit couldn’t handle a sudden spike in borrowing costs. Stocks peaked on September 3, 1929, then started slipping. A trickle of sales turned into a steady flow as investors realised prices had to come down. On October 24, a wave of sale orders rocked Wall Street. Margin calls went out and investors were forced to sell to raise more collateral. That depressed prices even further and the cycle restarted.

Wall Street caused the crash but policy made the Depression

The crash wiped out vast amounts of paper wealth, including a good chunk of the $12 billion of stocks sold by National City under Mitchell’s leadership. Confidence, the oxygen of capitalism, was in short supply. But that wasn’t enough to cause a decade-long economic slump. What turned the crash of 1929 into the Great Depression were the decisions made in its aftermath.

Both the government and the Federal Reserve made mistakes. One of the most serious was a sin of omission: the failure to provide deposit insurance.

When banks went under, depositors lost everything. That only needed to happen a few times for people to get the message. Those who could get their savings out of banks and into mattresses did exactly that. Banks with money on hand stopped lending it out and hoarded it instead. Between 1929 and 1933, the amount of money circulating in the US fell by a third. Less money meant less spending. Prices started falling, pushing up the real value of debts. Soon enough people couldn’t afford to service those debts and a wave of bankruptcies shuttered businesses up and down the country. That meant fewer jobs and even more economic contraction. This deflationary spiral might have been avoided, but Herbert Hoover’s laissez-faire government believed in letting the market correct itself.

The Fed’s policy of protecting the gold standard at all costs deepened the Depression. Under the gold standard, the dollar had a fixed value in gold. Any outflow of gold threatened the Fed’s ability to maintain that value. When gold began to leave the country in 1930, it raised interest rates to attract it back. But those higher rates throttled borrowing, suppressed investment, and weakened consumer demand. The result was yet more contraction.

The irony was that the stock market was up fifty percent in the spring of 1930. The worst year for stocks in American history wasn’t 1929, but 1931, when the Dow fell by fifty percent. The United States wouldn’t fully recover until the Second World War. Wall Street was responsible for the crash, but it was America’s policymakers who plunged the nation into the Depression.

Post-crash regulation tamed Wall Street, but only momentarily

America experienced a legitimacy crisis after the crash. “People have no faith in the Government,” as one senator put it, “and no faith in industrial leaders or bankers, in economists, statisticians, or even in themselves.” The task of restoring some faith in the system fell to Ferdinand Pecora, the lawyer appointed to lead a 1932 investigation of Wall Street.

The son of a Sicilian shoemaker, Pecora put himself through law school before joining the New York District Attorney’s office. A dogged investigator of crimes in high places, he built his reputation going after sleazy politicians and moneymen who thought themselves about the law. His pursuit of the latter earned him the nickname “the Hellhound of Wall Street.”

Pecora’s inquiry began on March 4, 1932. It didn’t take much digging to expose Wall Street’s endemic culture of self-dealing. Public figures including former president Calving Coolidge and at least one Supreme Court judge received discounted stocks and tip-offs from banks like JP Morgan. Firms routinely hid losses while their leaders collected huge bonuses. National City disguised dodgy loans to Latin American countries by bundling them with higher quality stock before passing them onto unsuspecting investors. Bankers including Charles Mitchell had awarded themselves interest-free loans from their banks’ coffers.

In 1933, the newly elected Roosevelt administration launched a regulatory offensive designed to contain Wall Street. The Glass-Steagall Act of 1933 drew a line between commercial banks and investment houses, ensuring that lenders could no longer take deposits on one side and gamble in the markets on the other. The newly established Securities and Exchange Commission was tasked with policing public markets and enforcing disclosure rules. For the first time, small investors had meaningful oversight behind them. Deposit insurance arrived as well, protecting Americans’ savings in the event of bank failure.

That, though, isn’t where our story ends. In the late twentieth century, the regulatory framework constructed after the Pecora inquiry was dismantled. In 1999, key parts of Glass-Steagall were repealed, freeing finance from its Rooseveltian shackles. Excessive leverage and weak oversight were the result – two central components of the 2008 financial crisis.

In the year before that crash, leading stocks rose more than 40 percent. Today, the tech-heavy Nasdaq exchange is capable of climbing 30 percent in a year. As in the late 1920s, the buoyancy of today’s stock market owes a great deal to a glut of cheap money – in this case, the dollars, pounds, and euros created by post-2008 quantitative easing. The technological breakthroughs of the 2020s, and the boosterism around them, also recall an earlier era. From a certain angle, it looks a lot like a bubble. The question is, will it burst?

Conclusion

In this summary to 1929 by Andrew Ross Sorkin, you’ve learned that the 1920s were a decade of sunny optimism. Booming stock markets, revolutionary technology, and a humming economy convinced millions of Americans that the good times were here to stay. Wall Street’s cheerleaders and celebrity bankers convinced ordinary folk to get in on the action; a glut of cheap credit allowed them to speculate on credit. The result was a bubble. When investors realised prices had lost touch with economic reality, the bottom dropped out. Wall Street caused the crash, but poor policymaking in its aftermath dragged America – and the rest of the world – into the decade-long Great Depression.