Why did people buy stocks on the margin in the 1920s?

Same reason they do today....leverage.

Buying say $1,000 of stock that you believe is going up...and it does say 20% earns you $200.

On margin, the same $1,000 may get you 3 times as much stock, so the same events makes you $600 - or 60%, (minus a small interest and carrying expense). The numbers aren't quite right, but the theory is. The SEC won't allow you to borrow more than half the purchase price of the stock you're buying on margin. If you have a margin account with a $5000 maintenance margin (the amount of money you MUST leave in the account) and you have $15,000 in there, you have $10,000 of usable cash. You may then borrow up to $10,000 on margin. The reason for this rule is, of course, because buying stock on margin is one of the major factors in the Great Depression.