The Reagan administration's most serious foreign policy problem surfaced near the end of the president's second term. In 1987 Americans learned that the administration had secretly sold arms to Iran in an attempt to win freedom for American hostages held in Lebanon by radical organizations controlled by Iran's Khomeini government. Investigation also revealed that funds from the arms sales had been diverted to the Nicaraguan contras during a period when Congress had prohibited such military aid.
The ensuing Iran-contra hearings before a joint House-Senate committee examined issues of possible illegality as well as the broader question of defining American foreign policy interests in the Middle East and Central America. In a larger sense, the Iran-contra hearings, like the celebrated Senate Watergate hearings 14 years earlier, addressed fundamental questions about the government's accountability to the public, and the proper balance between the executive and legislative branches of government.
The United States suffered an economic setback on October 19, 1987, so-called "Black Monday," when the value of stocks tumbled 22 percent -- immediately bringing back memories of the fabled stock market crash of 1929, which had been followed by the Great Depression of the 1930s. The causes of the crash included anxiety about U.S. international trade and federal-budget deficits, concern about the high level of corporate and personal debt, and a new stock market innovation known as "program trading" in which computers automatically ordered the buying or selling of a large volume of shares when certain circumstances occurred.
Nevertheless, the nation recovered in a remarkably short time. Although many Americans turned from the stock market to safer forms of investment, a recession did not materialize. In fact, economic growth continued, with the unemployment rate dropping to a 14-year low of 5.2 percent in June 1988.