In the summer and spring of 1929 in 1929, it was 1929, and the U.S. economy was riding high on the winning streak that was known as”the Great Depression However, the Fed was increasing interest rates to stop a booming market, and a growing small group of bankers and economists began to ask what the future of the party might be expected to continue.
The year 1929 was a time when popular forecasters such as Yale economics professor Irving Fisher swore that if there was a correction and it looked like an uninvolved slump, while others predicted a sharp slope. However, nobody, not even the most shrewd of people could have predicted the destruction of the stock CBLI market that took place in the latter part of October.
In two consecutive days that were dubbed Black Monday and Black Tuesday The market plunged at a rate of 25 percent and in mid-November, it had diminished by half. When the market’s collapse eventually reached its lowest point in 1932 in 1932, it was 1932 and the Dow Jones Industrial Average had lost nearly 90 percent.
It’s 20/20 in hindsight However, there were signs from the summer of 1929 that trouble was ahead.
Gary Richardson, an economics professor at the University of California Irvine and an former historian at the Federal Reserve, has researched the role of the Fed in the 1929 crash and subsequent Great Depression. Richardson says the first indication of a possible market correction was the general acceptance that the soaring rate of stock prices increasing in the latter part of 1920 was not sustainable.
“People could tell in 1929 and 1928 that if the stock market continued increasing at the rate they are now over the next few decades, they’d be staggering,” says Richardson. The main issue was not the possibility that the astronomical stock market growth was about to come to an be over however, it was the way it would come to an end.
The financial market in the world is now extremely sophisticated and has some of the most brilliant minds as well as the most powerful computer systems dedicated to forecasting future market trends. The discipline that was known as quantitative forecasting was still in its early stages. Every major economic forecaster developed his own indexes of the stock market in an effort to determine the market’s trends.
The economist Roger Babson was one of the most well-known forecasters of doom, stating that the prices of stocks were massively overvalued in comparison to the potential of dividends to come in the future. The month of September, 1929 was when Babson stated at the National Business Conference in Massachusetts that “sooner or later a major crash is on the way that will result into account the most popular stocks and lead to a fall of 60-80 points on the Dow-Jones barometer… One day it will be the day where the price will start to fall away, the sellers would surpass buyers, and profits from paper will disappear. In the next moment, there will be a stampede to protect the paper profits that were then in existence.”
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Others, like Yale economist Fisher did not dismiss the possibility of a reverse, stating that the stock market was on the same level as soaring profits from corporations. To counter Babson’s dire forecasts, Fisher famously told a crowd of stockbrokers that stock prices were at “what seems to be a forever elevated plateau.” This was October 15th, 1929, which was less than two weeks ahead of Black Monday.
Fed tried to put on the Brakes
Richardson claims that Americans had a particularly bad tendency to create boom/bust markets prior to the crash in stock markets in 1929. This was due to an economic banking system which money was able to be pooled in a few economic cities such as New York City and Chicago. When markets were hot, be it stock or bonds issued by railroads the banks would lend money to brokers in order that investors could purchase shares at a high margin. Investors would deposit 10% of the value of shares, and then take the rest using the bond or stock in itself for collateral.
The option of buying on margin allows investors to purchase more shares with less money, however it’s also risky because the broker could issue an “in-margin” call anytime to recover the loan. If the price of the shares is down then the buyer will need to repay the entire credit balance, plus any adjustments. One of the main reasons Congress in 1914 created the Federal Reserve in 1914 was to stop this type of speculation on markets fueled by credit.
Beginning in 1928 In 1928, the Fed started a public campaign to slow price inflation by denying investors from easy credit, Richardson says. The campaign began with a strategy known as “moral suasion” identical to Alan Greenspan’s admonition in 1996 that “irrational enthusiasm” is artificially pushing up prices of stocks. In 1929 there was an instruction that read “Stop lending money in the name of investors” Richardson says. Richardson. “This has created problems.”
Banks weren’t aware of the warning which is why the Fed went to “direct action” that acted more as direct threats. In a letter addressed to each commercial U.S. bank under the Fed’s remit the central bank warned that in the event that you keep lending to investors and brokers We’ll cut out access to discount window. There will be no credit available to you.
In a desperate attempt to limit the increase in prices for stocks to reduce the price of stocks, the Fed took the decision to increase rates of interest in the month of August 1929. If investors didn’t see the first two indicators that the Fed was planning to smash the brakes in the market for stocks, then this should have been clear.
“The Fed made a string of public announcementsthat stated “We’re doing this in order to slow the growth in prices for stocks”” Richardson says. Richardson. “Investors are cognizant that the Fed is working to lower prices for stocks by using every instruments at its disposal.”