The Power of Margin Buying
During the late 1920s, many investors borrowed money to buy stocks. Brokers routinely lent small investors more than two-thirds of the value of the shares they purchased. This practice, known as buying on margin, magnified both gains and losses.
If a stock rose, borrowed money made the investor’s profit appear much larger. But if the stock fell, the lender could demand additional cash—a margin call. Investors who could not provide it had to sell their shares, often immediately.
A Market Fed by Its Own Rise
The system helped create a feedback loop. Rising prices attracted more buyers, while borrowed money allowed people to purchase more stock than their savings alone could support. The additional buying pushed prices higher, encouraging still more speculation.
By August 1929, more than $8.5 billion was out on loan—more than the entire amount of currency circulating in the United States. Stock prices also stood far above historical norms; the average price-to-earnings ratio of S&P Composite stocks reached 32.6 in September.
When the Direction Changed
Once prices began falling, leverage worked in reverse. Investors were no longer buying because they expected endless gains. They were selling because lenders demanded repayment and because every delay threatened larger losses. Each forced sale put further downward pressure on prices.
Margin buying did not operate in isolation, but it made the market far more vulnerable. A modest change in expectations could become a wave of compulsory selling. The lesson was stark: borrowed confidence can produce spectacular gains, but borrowed money makes panic spread faster when confidence breaks.