What caused the stock market crash during the Great Depression?

The main cause of the stock market crash was the stock market boom that had preceded it.

During the 1920s, the stock market experienced a tremendous boom.  Essentially everyone believed that the stock market would keep gaining more and more value.  Everyone wanted to buy in because they believed they could make a lot of money with essentially no risk to themselves.  Because stock prices continued to go up and up, banks and brokers were willing to lend money to people so that they could buy stocks “on the margin.”  All of this demand drove stock prices ever higher.

The problem is that the stock prices were completely out of synch with the actual values of the stocks.  Price to earnings ratios were exorbitantly high.  People were buying because they thought all stock prices would inevitably go up, not because they thought a particular firm was in a good economic position.  This created a bubble.  Bubbles can pop for no discernible reason.  This bubble might have popped in part because Congress was debating the Smoot-Hawley Tariff and leaders in the stock market might have worried that the tariff would hurt the economy.  Overall, though, the stock market crashed simply because it was a bubble and all bubbles eventually pop.

How did the stock market crash impact the country during the Great Depression?

There is a famous photo of a worried crowd standing in front of the Subtreasury Building on October 29, 1929. The people were cognizant of the significance of the crash and apprehensive about their future prospects. Frightful as they were, few could have predicted the severity or duration of the imminent depression. America had had severe economic collapses before—such as that of 1893—but this one would be unprecedented.

The economy had overheated from too much growth fueled by speculation. For example, there was a boom-and-bust in the Florida real estate market in the mid-twenties. But that was tame compared to the speculative frenzy on Wall Street. Many people bought stocks "on margin," which was a kind of credit. It was an unsound practice based on the illusion that the market would continue its climb. By the time of the crash, the market did not reflect the sluggishness that already existed in construction and consumer spending.

Historian Howard Zinn believed the income inequality contributed to the economic collapse. Too much wealth—much of it derived from frenzied growth in the price of stocks—was concentrated at the very top. Ninety percent of the population did not own any stock. (Some financial analysts say the same things about the country in 2020.)

The panic on Wall Street caused mass unemployment, and the government response was ineffective. President Herbert Hoover did not do enough to help the suffering American people.