Question

Please explain carefully; how did the "call loans" of the 1920s contribute to the severity of the stock market crash of 1929?

Answer 1

The boom of the 1920s was based on very shaky foundations. Sustained consumer demand depended on risky forms of credit, such as instalment payment schemes. In their desire for immediate gratification, customers were purchasing more and more credit products in anticipation of future earnings that they (undoubtedly) anticipated to rise. Speculators have widely used margin loans to finance investment, allowing massive leverage to be built up. These loans were initially very lucrative due to low interest rates, which were subsequently lowered in 1927.

Although the Fed changed its approach in February 1928, raising rates and warning US banks against making such loans, the demand from speculators remained strong. Supply remained strong, even in the absence of banks, as businesses could make significant profits by lending capital to the call loan market
The use of power was not limited to individuals. Utility and rail companies were merged into large holding firms called structures, with cross-shareholdings in a variety of utilities and railways, each of which was highly leveraged. This system increased the profits of the holding firm, but also increased the costs, should things turn sour.

By 1929 , the stock market had been significantly overvalued, and it was said to be "discounting not just the future, but the afterlife." Between the beginning of 1925 to the height of the market in September 1929, share prices rose by threefold.