Crash depression market stock
The depression was ushered in by the stock market crash that was consequence of the crash in New York. Canadian prices went higher from 1926 and declined further from their peaks, compared to New York. They were the tail of the dog. European security markets had for the most part turned down earlier;Germany as far back as 1927, the United Kingdom in mid-1928, France in February 1929. The Vienna stock market, which had led the parade in the crisis of 1873, was quiet, waiting for 1931. The action was in New York. It had its effect worldwide, but not through tightly parallel movements in security prices.
At the time, the rise of the New York stock market seemed spectacular. The Dow-Jones industrial average went from a low of 191 in early 1928 to a high of 300 in December and a peak of 381 in September 1929, or double in two years. Two sharp setbacks occurred, in December 1929 and March 1929, which in October 1929 tended to lull speculators into thinking that the market was merely undergoing another adjustment. Daily turnover increased at the peaks from 4 million shares in March 1928 and 6.9 million in November 1928 to 8.2 million in March 1929. The danger posed by the market was not inherent in the level of prices and turnover so much as in the precarious credit mechanism that supported it and the pressure it exerted on credit throughout the United States and the world.
As the market rose, the pressure on the international financial system mounted. If the New York Federal Reserve Bank had not been allowed to raise the discount rate since July 1928 or sell off its open market portfolio, it could still apply pressure on commercial banks in the city to restrain both their own loans and those for their banking correspondents to the call loan market after the end of the year. Their place was taken by others. The vast bulk of brokers loans by others came from U.S. firms. A considerable amount came from abroad, together with foreign purchases of U.S. stocks. The data are inadequately detailed to trace the extent of the movement. Breakdowns are available only for year-ends that are not turning points and these fail to give adequate coverage. But there is universal agreement that the New York stock market, nervousness over the Young Plan in April and May 1929, and French gold conversions put great pressure on the system. How much was owing to each one of the three forces is impossible to say. Italy raised its discount rate first in January, Britain a full percentage point in February, then Italy again and the Netherlands in March. Tension in Paris over the Young Plan in April and May led to discount rate increases in Central Europe, especially in Germany, Austria, and Hungary. In July the rate was increased at the National Bank of Belgium. The pressure from New York was persistent and continuous. In the first half of 1929 the United States gained $210 million in gold and France $182 million.
The pressure was particularly acute on London. With New York rates high, various borrowers from Germany, Hungary, Denmark, and Italy, were seeking sterling loans when they really wanted dollars. Normal expressed concern about the scramble for gold. Bank of England reserves reached a high for the year of $791 million at the end of May, following the Young Plan crisis, but declined steadily thereafter and precipitously in July. Norman raised with Harrison the possibility of long term financing by European central banks in New York, either with the Federal Reserve System or in the market. Discussions were undertaken and carried some distance but finally abandoned, apparently when the new Labor government in Britain decided to deal with the gold losses by raising the fiduciary issue and releasing gold behind the Bank of Englands note liabilities.
On August 9 the Federal Reserve Bank of New York moved again. The booming stock market called for higher interest rates ; faint signs of weakness in the economy suggested the opposite course. By the end of September, Bank of England gold stock was down to $640 million, a decline of almost 20 percent in four months. On August 5 Norman had told the Committee of the Treasury that unless there was a change, especially in France and the United States, some part of Europe, including the United Kingdom, might be forced off the gold standard. In these circumstances the New York stock market crash came as great relief, and Norman expressed surprise that they had not been forced off gold.
On October 29, Hamlin and James of the Federal Reserve Board feared it would bring on a real business depression, although the other members of the board did not think it would. More than forty years later, the majority opinion receives strong analytical support: the stock market crash in 1929 was a momentous event, but it did not produce the Great Depression and it was not a major factor in the Depressions severity. A sharp but not unprecedented contraction was converted into a catastrophe by bad monetary policy. Whatever happens in a stock market, it cannot lead to a great depression unless it produces or is accompanied by a monetary collapse.
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