The stock market crash of October 1929 caused a banking
crisis largely because of the amount of money that had been borrowed to buy
stocks.
During the 1920s, banks loaned out large amounts of
money to people who wanted to use the money to buy stocks "on the margin." The people
would provide something like 10% of the stock's value and then borrow the other 90% from
an investment firm or bank. The banks were eager to loan because they had needed to
offer high interest rates to attract depositors.
As long as
the stock prices continued to rise, this was fine. People would pay the loans back with
profits from their stock sales. But when the stock prices fell, the banks lost their
money because people who had borrowed could not repay the loans. When the banks lost
their money, they failed.
The failure of the banks, caused
by excessive lending to people who were buying stocks on the margin, is why the stock
market crash provoked a banking crisis.
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