The Great Depression began with the U.S. stock market crash in October 1929 and evolved into a decade-long global economic downturn.
Years of rapid credit growth, speculative stock buying, and overproduction in key industries created fragility.
The stock market fell nearly 90% from its peak, destroying household wealth.
Banks failed in waves as depositors withdrew funds, wiping out savings and collapsing the credit system.
With no deposit insurance, each failure triggered more panic.
Consumer spending collapsed, unemployment rose above 20%, global trade contracted sharply, and deflation took hold.
Global output ultimately fell by more than 25%, making it the most severe economic contraction in modern history.

What Drove the Crisis

Easy credit and loose lending standards fueled speculation and high leverage in the 1920s.
Banks were undercapitalized, poorly regulated, and heavily exposed to market losses.
When asset prices dropped, the banking system failed.
The Federal Reserve tightened policy before the crash and failed to provide liquidity afterward.
The money supply contracted sharply, deepening the downturn.
The gold standard transmitted U.S. deflation to other countries.
Governments raised taxes and cut spending, worsening the collapse.

Investor Lessons

Crises become catastrophic when credit systems fail and policymakers tighten during downturns.
Liquidity and confidence are essential; once both disappear, even strong businesses struggle.
Leverage built on rising asset prices creates systemic fragility.
Well-capitalized banks and active central banks reduce crisis severity.
Rigid policy frameworks (like the gold standard) can block effective responses.
Investors should understand systemic risk, avoid dependence on continuous refinancing, and recognize how quickly deflationary spirals form when credit collapses.

The Great Depression (1929–1939)