The lesson: Leverage turns an ordinary decline into a forced one, and forced selling has no floor.
The 1929 crash was as brutal as it was because so much of the buying leading up to it was done on borrowed money. When prices started falling, brokers issued margin calls, and margin calls forced sales regardless of price, which pushed prices down further and triggered the next round of calls.
That's the whole mechanism. It doesn't require a villain. An investor holding stock outright can simply wait out a decline if he still believes in the business. An investor holding stock on margin doesn't get that choice. The lender wants cash, now, and if the investor doesn't have it, the position gets sold into whatever bid exists. Multiply that by thousands of accounts happening at once and you get selling that has nothing to do with what any of those businesses were actually worth that week.
the plateau that wasn't
Just before the crash, the economist Irving Fisher said stock prices had reached "a permanently high plateau." He said it days before the market began its collapse, and it's become one of the most cited bad calls in financial history for a reason: it's the natural thing to believe near a top, because a long climb makes the current level feel like the new normal instead of a number that can go back down.
why forced selling has no floor
Voluntary selling stops when the seller decides the price is low enough. Forced selling doesn't get a vote. It stops when the debt is paid off, not when the stock is cheap. That's the whole difference between a normal correction and a crash amplified by leverage.
“The four stages of a bull market: displacement, boom, euphoria, and, after the crisis, revulsion and discredit.”· Manias, Panics, and Crashes, 1978
Kindleberger's stages describe the whole arc, not just the top, and 1929 is the reference case for how bad the last stage gets when leverage is the fuel behind it.