Buying on margin was made illegal during the Great Depression to prevent the kind of financial instability that contributed to the stock market crash of 1929. Buying on margin allowed investors to purchase stocks by borrowing money from a broker, often only putting down 10-20% of the stock’s value. This practice led to excessive speculation and inflated stock prices.
When the market began to decline, many investors were unable to repay their loans, leading to massive sell-offs and further declines in stock prices. This created a vicious cycle that exacerbated the economic downturn. To restore confidence in the financial markets and prevent future crashes, the U.S. government implemented regulations, including making buying on margin illegal, to curb excessive speculation and ensure more stable financial practices.