1. Historical Context
During the 1920s, the US economy experienced extraordinary expansion. Buying stocks became a massive national pastime thanks to the rise of leverage: retail investors could buy stocks by putting up just 10% of their equity (buying on margin) and borrowing the remaining 90% from stockbrokers.
2. The Breakdown Event
The market peaked in September 1929. By October, underlying weakness in industrial production and the agricultural sector began to raise doubts. After several days of severe falls, total panic broke out on October 29, 1929, known as 'Black Tuesday'. Investors rushed to sell all their positions to cover their loss margins, but found no buyers. The New York Stock Exchange collapsed 12% in a single day, recording a record volume of 16 million shares traded. In a few weeks, the value of listed companies shrank by half.
3. Global Economic Impact
The stock market crash destroyed the liquidity of the banks that had slow money to speculate, triggering chain bank failures and the freezing of credit. This began the Great Depression of the 1930s: massive unemployment of 25% in the US, collapse of international trade and rise of social tensions around the globe.
Key Financial Lesson (Psychology of Money)
Financial leverage amplifies profits in bull markets, but is destructive in periods of decline. Buying assets with borrowed money forces forced sales in times of panic, accelerating market collapse.
4. Practical Case or Real Life Example
During the cryptocurrency bear market in 2022, excessive use of leverage on lending platforms like Celsius and funds like Three Arrows Capital forced the forced liquidation of their assets, replicating the Black Tuesday effect.