Why did banks lose money in the stock market in the 1920's?

The Stock Market in the '20s had gone through a bubble as people saw stock prices rising and rising and believed they'd keep rising. Banks were happy to lend investors money to buy stocks.

As with all bubbles, this bubble popped. Remember that the price of a stock has a real correlation to the value of the company--if a price is too high, eventually it will come back down to earth.

When prices started to fall to more sensible levels, a lot of people lost a lot of money. They'd borrowed money they didn't have to pay too much for stocks that suddenly weren't worth what they'd paid for them.

When that selloff started, so did a panic, and prices dipped far below a sensible level, but by then the damage was done. A lot of people were broke, on paper, like they'd been rich, on paper, and the stampede continued.