The 1929 Crash and the Great Depression
The boom of the 1920s, the crash of October 1929, and how banking panics, a shrinking money supply, and Federal Reserve mistakes turned a recession into the deepest downturn in US history. With the stock market's real recovery, the reforms that followed, and what investors can take from it.
The short version
The Dow rose six-fold in the 1920s, much of it on borrowed money, then lost almost half its value within weeks of October 1929 and 89% by July 1932. The crash alone might have caused a short recession. What turned it into the Great Depression were waves of bank failures from late 1930, a money supply that fell nearly 30%, and prices that fell with it, while the Federal Reserve failed to act as lender of last resort. Real GDP fell about a quarter. The Dow's price didn't regain its 1929 peak until 1954, but with dividends included and deflation taken into account, recovery came much sooner. The reforms that followed created deposit insurance and a modern central bank.
By the end of this lesson, you'll be able to
- Describe the 1920s boom, the role of borrowed money, and the size of the crash
- Explain how bank failures, a falling money supply, and Federal Reserve mistakes deepened the Depression
- Compare the price-only recovery with the recovery including dividends and inflation, and name the reforms that followed
Why this matters
The Great Depression was the longest and deepest downturn in the history of the United States and the modern industrial economy. It began in 1929 and lasted more than a decade, ending during the Second World War.1 Nearly every rule that protects bank depositors and shapes central banking today was written in response to it, and the stock market crash that opened it remains the benchmark for every crash since.
The boom
The Dow Jones Industrial Average rose six-fold, from 63 in August 1921 to 381 in September 1929. New brokerage houses, investment trusts, and margin accounts let ordinary people buy shares with borrowed money: buyers typically put down 10% of the price and borrowed the rest, with the shares as collateral.2
| Shares bought | Loan | Investor's equity | |
|---|---|---|---|
| At purchase, 10% down | $10,000 | $9,000 | $1,000 |
| Shares fall 10% | $9,000 | $9,000 | $0 |
| Shares fall 13% in a day | $8,700 | $9,000 | −$300 |
With 10% down, a 10% fall wipes out the investor's whole stake. Lenders demand more collateral or sell the shares, and those forced sales push prices down further, hitting the next borrower.
The crash
On Black Monday, October 28, 1929, the Dow fell nearly 13%, and on Black Tuesday it fell nearly 12% more. By mid-November it had lost almost half its value. The slide continued until July 8, 1932, when the Dow closed at 41.22, 89% below its peak. It didn't return to its 1929 high until November 1954.2
The Federal Reserve Bank of New York responded quickly to the crash itself. It bought government securities, lent through its discount window, cut its discount rate, and assured banks it would supply the reserves they needed. In the short run that contained the crisis: the stock market collapsed, but the banks at the center of the storm stayed open.2
The rest of this lesson is for members
Still to come in this lesson: From recession to depression, How long the recovery really took, What changed, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Bubbles, Sentiment, and NarrativesPart 6: Strategy, Behavior, Accounts, and Taxes
- Money, Banking, and CreditEconomics for Investors (depth track)
- Drawdowns and the Math of RecoveryPart 5: Building a Portfolio
- The Panic of 1907Lessons from Market History (depth track)
Notes and sources
- Federal Reserve History. Gary Richardson, The Great Depression. Checked 2026-10-17. Back to text
- Federal Reserve History. Gary Richardson, Alejandro Komai, Michael Gou, and Daniel Park, Stock Market Crash of 1929. Checked 2026-10-17. Back to text
- Federal Reserve History. Gary Richardson, Banking Panics of 1930-31. Checked 2026-10-17.
- Federal Reserve Bank of St. Louis (FRED), from the U.S. Bureau of Labor Statistics. Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, not seasonally adjusted (CPIAUCNS), monthly since 1913. Checked 2026-11-02.
- Federal Reserve History. Robert Jabaily, Bank Holiday of 1933. Checked 2026-10-17.
- Federal Reserve Bank of St. Louis (FRED), from the U.S. Bureau of Economic Analysis. Real Gross Domestic Product (GDPCA), annual since 1929. Checked 2026-10-17.
- Aswath Damodaran, NYU Stern School of Business. Historical Returns on Stocks, Bonds and Bills, with annual data through 2025 (updated January 2026). Checked 2026-11-02.