The New York Stock Exchange in the 1920s was the epicenter of a financial boom, a period often called the “Roaring Twenties.” Stock prices experienced unprecedented growth, with the Dow Jones Industrial Average skyrocketing sixfold, from 63 in August 1921 to a peak of 381 in September 1929. This era of exuberance led economist Irving Fisher to famously declare that stock prices had reached a “permanently high plateau.” While we reflect on such historical peaks and valleys, investors today are keenly interested in knowing, “What Did The Dow Jones Close At Today?” – a question that underscores the market’s ever-present relevance in our daily financial lives.
However, the optimism of the 1920s was abruptly shattered. The boom culminated in a devastating crash. “Black Monday,” October 28, 1929, witnessed a nearly 13 percent plunge in the Dow, followed immediately by “Black Tuesday,” with another near 12 percent drop. By mid-November, almost half of the Dow’s value had vanished. This downward spiral continued until the summer of 1932, when the Dow reached its twentieth-century nadir, closing at 41.22 – a staggering 89 percent below its peak. It took until November 1954 for the Dow to recover to its pre-crash levels, a stark reminder of the market’s volatility and the long-term consequences of financial downturns.
The prosperity of the 1920s fueled the stock market boom. Families enjoyed increased wealth, and new technologies like automobiles and telephones became widespread. Ordinary individuals began investing in stocks and bonds. The burgeoning financial industry, with brokerage houses, investment trusts, and margin accounts, made stock ownership accessible to the masses, even with borrowed funds. Margin accounts, requiring only a 10 percent down payment, amplified both gains and losses, injecting borrowed money into the equity markets and further inflating stock prices.
Despite the widespread enthusiasm, some voices of caution emerged, notably from within the Federal Reserve. Many Federal Reserve Bank governors and a majority of the Federal Reserve Board believed that stock market speculation was diverting resources from productive sectors of the economy. The Board argued that the Federal Reserve Act was not intended to support speculative credit. This stance was rooted in the Act itself, which authorized reserve banks to accept assets financing agriculture, commerce, and industry as collateral for loans, but explicitly prohibited the use of “notes, drafts, or bills covering merely investments … for the purpose of carrying or trading in stocks, bonds or other investment securities,” with limited exceptions for government bonds. This philosophy reflected the “real bills” doctrine, prevalent among the Federal Reserve’s founders, which advocated for central bank money issuance to align with real economic activity.
Faced with rising speculation, the Federal Reserve decided to intervene. However, the method of intervention was debated. The Board favored direct action, urging reserve banks to deny credit to member banks that financed stock market speculation. They also issued public warnings about the dangers of speculation. In contrast, George Harrison, governor of the Federal Reserve Bank of New York, advocated for raising the discount lending rate. This, he believed, would raise borrowing costs across the board, curbing speculative activity indirectly while also impacting broader economic activity. Initially, the Board resisted New York’s requests to raise the discount rate, but eventually relented, and the New York discount rate reached 6 percent in August 1929.
This rate hike had unintended global consequences. The international gold standard at the time meant that the Fed’s actions pressured foreign central banks to raise their own interest rates. These tighter monetary policies contributed to economic slowdowns worldwide, impacting international trade and overall global economic activity. Despite these measures, the stock market boom continued. The Federal Reserve watched with concern as banks continued lending to speculators. In September 1929, market volatility increased, with sharp drops followed by quick rebounds. Prominent financial figures, including Charles E. Mitchell, president of National City Bank (now Citibank) and a director of the Federal Reserve Bank of New York, publicly encouraged investors to buy stocks. In October, Mitchell and other bankers attempted to restore confidence by purchasing large blocks of shares at inflated prices. This effort failed to stem the tide, and panic selling ensued, causing stock prices to plummet.
As the stock market crashed, funds rushed into New York City’s commercial banks. These banks also held substantial stock market loans. The sudden influx of deposits strained bank reserves. While deposits increased, so did reserve requirements. Simultaneously, reserves were depleted as depositors withdrew cash and banks absorbed loan losses. This created temporary reserve shortages for many banks. The New York Fed responded swiftly to alleviate the crisis. It purchased government securities, expedited lending through its discount window, and lowered the discount rate. It reassured banks of its commitment to providing necessary reserves. These actions increased overall banking system reserves, easing the pressure on New York City banks and enabling them to remain operational and meet customer demands. These interventions also prevented short-term interest rates from spiking, a common occurrence during financial crises.
While controversial at the time, with some within the Federal Reserve system questioning New York’s authority, these actions are now credited with containing the immediate crisis. The stock market collapsed, but the commercial banking system, at the heart of the turmoil, remained functional. However, the stock market crash still had a significant negative impact on the broader economy. The crash instilled fear and uncertainty in investors and consumers. Many lost their savings, worried about job security, and struggled to meet financial obligations. This fear led to a sharp decrease in spending, especially on big-ticket items like automobiles, typically purchased on credit. Companies like Ford Motors experienced declining demand, reduced production, and laid off workers. Unemployment surged, exacerbating the economic contraction that had begun earlier in 1929.
Although the initial impact of the 1929 crash began to subside by the fall of 1930, and a recovery seemed possible, problems in other parts of the financial system transformed a potential recession into the Great Depression. The stock market crash of 1929 offered crucial lessons for economists and central bankers. Firstly, central banks should exercise caution when responding to equity markets. Identifying and managing financial bubbles is complex, and using monetary policy to curb investor enthusiasm can have unintended and undesirable consequences. Secondly, when stock market crashes do occur, the approach taken by the New York Federal Reserve in 1929 provides a valuable playbook for containing the immediate damage. These lessons continue to be debated and re-evaluated, especially in light of more recent financial crises, prompting ongoing discussions about the role of central banks in preventing asset bubbles and ensuring financial stability, echoing the debates within the Federal Reserve in the 1920s.
