Margin Buying Explosion Enables Rampant Stock Market Speculation

A new brokerage industry enabling margin stock purchases allowed ordinary investors to buy corporate equities with only 10 percent down, borrowing the rest with stocks serving as collateral for loans. By August 1929, brokers routinely lent small investors more than two-thirds of the face value of stocks being purchased, with over 8.5 billion dollars out on loan, exceeding the entire amount of currency circulating in the United States. People mortgaged homes and sold Liberty Bonds to pour cash into the stock market, with some 300 million shares carried on margin by midsummer 1929. Investment trusts, the 1929 equivalent of closed-end mutual funds, sold at premiums above underlying stock values and created complex pyramids of leverage. Goldman Sachs Trading Corporation and similar vehicles owned shares in other trusts, which owned shares in yet more trusts, creating dangerous webs of cross-ownership and hidden leverage. The speculative boom detached stock prices from company fundamentals, fueled by easy credit, media hype, and unwavering belief in perpetual market growth. When margin loans were called as the market turned in October 1929, forced selling amplified the price collapse, demonstrating the dangers of excessive leverage that regulators had failed to restrain.