As Dire as the Times May Seem, History Isn't About to Repeat Itself
A long streak of speculative lending got out of hand as banks and even staid industrial companies made a stream of risky loans. Consumer spending on cars and clothes was slipping, but no one was paying attention. The stock market grew shaky in September, and then in October, the bottom fell out.
(Depositors crowd outside a failed New York bank in 1931.)
Initially, the Federal Reserve did nothing. To try to keep speculative borrowing on stocks from continuing, it declined to reduce interest rates, choking off credit. Unemployment climbed toward 25% at a time when there was no unemployment compensation. In the Prohibition era, those without jobs couldn't even legally drown their sorrows in beer.
The years after the crash told a different story. By the middle of 1932, the Dow had dropped 90% from its peak in September 1929. By the end of 1933, an estimated 44% of all first mortgages were in default. Only in the depths of that crisis did the government truly step up to address the many underlying problems.