How did borrowed money turn a stock market fall into the Great Crash?

Borrowed money is the answer. In the late 1920s, many people bought shares with loans from their brokers. By August 1929 brokers were routinely lending small investors more than two-thirds of the price of the stocks they were buying, and over $8.5 billion was out on loan, more than all the currency circulating in the United States. Borrowing on this scale, known as buying on margin, was one of the major contributing factors that led to the crash.

Here is how it worked. Say you buy a $100 share with $20 of your own money and $80 borrowed from your broker. The share is collateral for the loan, and the broker requires a minimum cushion, say $10. If the price falls to $85, your cushion shrinks to $5, so the broker issues a margin call: add cash, or the share is sold. In the 1920s loose margin rules meant investors put in very little of their own money, and when prices contracted many lacked the equity to cover their calls. Their shares were sold, which pushed prices down, which triggered further margin calls.

The Dow had risen tenfold over nine years and peaked at 381.17 on 3 September 1929. Economist Irving Fisher declared that stock prices had reached "what looks like a permanently high plateau". Two days after the peak a financial expert, Roger Babson, predicted "a crash is coming, and it may be terrific", and the September dip was dismissed by many as a healthy correction.

It was not. On Thursday 24 October the market lost 11% at the opening bell, and a record 12.9 million shares were traded. Black Monday, 28 October, brought a record daily loss of 12.82% for the Dow, and on Black Tuesday 16.4 million shares changed hands, with some stocks having no buyers at any price.

The slide did not stop that year. The Dow closed at 41.22 on 8 July 1932, down 89.2% from its peak, and it did not regain its 1929 peak close until 1954. Whether the crash caused the Great Depression is still debated by historians.