In the booming economy of the 1920s, confident business and government leaders said the nation had entered a new era of prosperity for all. The chairman of General Motors advised people to invest money in the stock market every month, and many followed his advice. “Grocers, motormen, plumbers, seamstresses, and . . . waiters were in the market,” reported writer Frederick Lewis Allen. The “market had become a national mania.” A stock market or exchange is an organized system for buying and selling shares, or blocks of investments, in corporations.

Suddenly, in October 1929, everything changed. Almost overnight the value of stocks plunged. Millionaires lost fortunes, and thousands of less wealthy investors lost their savings. The United States was about to enter its worst domestic crisis since the Civil War.

In the late 1920s, the value of stocks on the New York Stock Exchange climbed to dizzying heights, reaching record levels in September 1929. Because many investors lacked the money to continue purchasing stock, they bought on margin. This means they paid only a fraction of the stock price and borrowed the rest from their brokers. Brokers, in turn, borrowed their money from banks. As long as the value of stocks continued to rise, the buyer could sell later, pay back what had been borrowed, and make a profit. If that value fell, though, investors and brokers would not have enough cash to pay off the loans.

Fearing that the boom market would end, some investors began selling their stocks in late September. These sales made stock prices fall. Brokers began to demand repayment of loans, forcing investors who had bought on margin to sell their stock. Prices declined steadily until October 21, but most financial experts thought the market was experiencing nothing more than a “period of readjustment.” Then, for three straight days, stock prices plunged as investors sold millions of shares each day. Panicked traders sold almost 13 million shares on October 24, a day that became known as “Black Thursday.”

Following a few days of calm, the decline and confusion continued on Monday. On Tuesday, October 29, the crisis worsened. By the end of the day, more than 16 million shares had changed hands and stock prices had plummeted. Journalist Jonathan Norton Leonard described the scene: “The selling pressure was . . . coming from everywhere. The wires to other cities were jammed with frantic orders to sell. So were the cables, radio, and telephones to Europe and the rest of the world. Buyers were few, sometimes wholly absent.” The New York Stock Exchange closed for a few days to prevent more panic selling. Shock spread across the country.

The problems that led to the Great Depression began to give out warning signals in the early 1920s. Farm income shrank throughout the decade. Industries also declined. In the months before the stock market crash, the automobile and construction industries suffered from lagging orders. As a result, employers cut wages and laid off workers. With their incomes slashed, many Americans could no longer afford the consumer goods that the nation’s industries had been churning out.

Another factor that fueled the Depression was the growing gap in wealth between rich people and most Americans. The prosperity of the 1920s did not help all Americans equally. In 1929, less than 1 percent of the population owned nearly one-third of the country’s wealth. At the same time, about 75 percent of American families lived in poverty or on the very edge of it.

Borrowed money fueled much of the economy in the 1920s. Farmers bought land, equipment, and supplies on credit. Consumers used credit to buy cars. Investors borrowed to buy stocks. Many small banks suffered when farmers defaulted, or failed to meet loan payments. Large banks, which had bought stocks as an investment, suffered huge losses in the stock market crash. These losses forced thousands of banks across the nation to close between 1930 and 1933; millions of depositors lost their money.

Weaknesses in the American economy also sapped the strength of foreign economies. European countries needed to borrow money from American banks and to sell goods to American consumers to repay their World War I debts to the United States. During the late 1920s, bank funds for loans dried up. International trade slowed down because, without American loans, other nations had less money to spend.