:introduced post trading
:installed direct telephone lines and
:published their first annual report.
The crash of 1930
There is a great deal wrong with our understanding of the 1930 sock market crash. Even the name in inexact. The largest losses to the market did not only come in October 1929, but rather in the following two years. In the calendar year 1929 the market lost only 11.9 percent of its value after having gained 37.9 percent in the previous year. In December 1929 many expert economists, felt that the financial crisis had ended and by April 1930 the Dow Jones Industrial Average had recovered a large percentage of the October losses. The 1929 Crash, like the 1987 Crash was preceded by a market top. In 1927 the top came on September 4th. As in 1987, the new highs in late summer did not cause much fuss. The market had been in a strong bull for years and new highs were almost taken for granted. In fact, the 9/4/29 Wall Street Journal did not even mention the new highs.
Before we give reasons to why the market crashed, it is important to understand some of the most significant events that led to the 1929 stock market decline. In 1920 Warren G. Harding was elected president of the United States Of America and in 1924 Calvin Coolidge was elected. These two presidents do not rank high in performance and their appointees left something to be desired. At the beginning of 1929 the Federal Reserve Board consisted of Harding-Coolidge appointees or reappointees (three members of the board-Edmund Platt, Charles S. Hamlin, and Adolph C. Miller-had originally been by Wilson). Unfortunately, these appointees were not the most talented or best prepared for controlling the United States banking system. The Federal Reserve Board in January 1929 consisted of the following six members (omitting the two ex-officio members: Secretary of the Treasurer A. W. Mellon and Comptroller of the Currency J. W. Pole):
Roy a. Young, Governor. Young had been governor of the Minneapolis reserve bank before joining the Board.
Edmund Platt, Vice-Governor. Platt was an ex-newspaper editor and ex-congressman from Poughkeepsie, New York
Adolph C. Miller. Miller had been a professor of economics at Harvard, Chicago, and Cornell.
Charles S. Hamilin. Hamilan was a Bostonian Lawyer who had been an assistant secretary of the treasury of with Cleveland and Wilson. He was the first governor of the Federal Reserve Board.
George R. James. James was a Memphis merchant.
Edward H. Cunningham. Cunningham was a farmer from Iowa.
Young, Hamlian, and Miller had relevant experience or academic qualifications, but the other members of the board required on-the-job-training. Neither Young nor Hamlin were very insightful or forceful and did not supply the leadership needed by the board, although Young actually opposed many of the board’s actions in the first six months of 1929. Miller was far the most decisive member of the board and became the de facto intellectual leader. While an academic background, his style was that of an autocrat. Hamlin Kept a diary that is an important source of our understanding of what happened in the meetings of the Federal Reserve Board.
Benjamin Strong, the most respected of the United States bankers, was the head of the New York Federal Reserve Bank from 1914 until the fall of 1928. In 1925, when direct pressure on banks to control speculation was recommended by the board as a strategy Governor Strong disagreed pointing out that direct pressure could not succeed in New York unless the federal Reserve Bank refused to discount for banks carrying speculative loans and that it would mean rationing for credit, which would be disastrous.
Although he died in 1928, Strong’s influence extended to 1929. From 1921 to August 1928 the real genius and power in the United States was Benjamin Strong, governor of the New York Federal Reserve Bank. Strong was an acknowledged leader of international finance and truly a giant in U.S. banking. Most importantly, Strong’s intellect and personality led to New York being the Power center of U.S banking from 1921 to 1928. This frustrated several members of the Federal Reserve Board, especially Young and Miller.
In the summer of 1927 the united states was on the verge of a recession. Productivity had dipped down and significant economic signals were negative. In addition, Europe was losing gold to the United States and European bankers feared an international disaster.
Strong lead a move to reduce the discount rate and to increase the Reserve Banks’ holdings of the United States securities. This easy money policy succeeded and the recession was avoided. Later Miller was to blame the resurgence of stock speculation in 1928 on Strong’s easy money policy of 1927. Miller was very influential in leading the board to avoid this mistake in 1929.
This was the mistake that lead to the incident that has been written about more than any other financial crisis in history, that lead to Black Thursday and $15 billion going “down the drain”. Although the Prohibition controversy was absorbing, public interest in the first year of the Hoover administration became diverted by an event that shook the very economic foundations of the nation, namely, the stock market panic of 1929. The United States had enjoyed a boom after World War I, in which wages were high and production and consumption increased. During this period many had developed a tendency to invest savings and earnings in speculative ventures, particularly the buying of stocks on margin?putting up as little as 3 percent of a stock’s price in cash and borrowing the remainder from the broker. The booming demand for stocks and the prosperous state of the nation as a whole led to a general rise in the prices of securities, which in turn led to increased investments in them.
The rise in stock prices reached its height in the so-called Hoover bull market during the first six months of the Hoover administration. In this period, individuals invested billions of dollars in the stock market, obtaining the money for such investments by borrowing from banks, mortgaging homes, and selling sound government securities, such as Liberty Bonds. In August 1929 stockbrokers were carrying on margin for their clients approximately 300 million shares of stock. By October 1929 the feverish wave of buying had exhausted itself and gave way to an equally feverish wave of selling. Prices dropped precipitously, and thousands of people lost all they had invested. This collapse frequently meant complete financial ruin. On October 29 the New York Stock Exchange, the largest in the world, had its worst day of panic selling. By the end of the year declines in stock values reached $15 billion.
This graph shows just how dramatic the Drop of the Dow Jones Industrial Index was.
We do not know whether stocks were too high in October 1929. There is a great deal of evidence that leads us to conclude that the high level of stock market before the crash was not the result of a well founded optimism on the part of a well informed investment community. And if the market was not too high, then why did it fall drastically in October 1929, and again in 1930, 1931, and 1932?