1929 stock market crash research paper

1929 stock market crash research paper

Author: Ikrom Date of post: 14.06.2017

On Black Monday, October 28, , the Dow Jones Industrial Average declined nearly 13 percent.

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Federal Reserve leaders differed on how to respond to the event and support the financial system. The Roaring Twenties roared loudest and longest on the New York Stock Exchange. Share prices rose to unprecedented heights. The Dow Jones Industrial Average increased six-fold from sixty-three in August to in September The epic boom ended in a cataclysmic bust.

On Black Monday, October 28, , the Dow declined nearly 13 percent. On the following day, Black Tuesday, the market dropped nearly 12 percent. By mid-November, the Dow had lost almost half of its value.

The slide continued through the summer of , when the Dow closed at The Dow did not return to its pre-crash heights until November The financial boom occurred during an era of optimism.

Automobiles, telephones, and other new technologies proliferated. Ordinary men and women invested growing sums in stocks and bonds. A new industry of brokerage houses, investment trusts, and margin accounts enabled ordinary people to purchase corporate equities with borrowed funds.

Purchasers put down a fraction of the price, typically 10 percent, and borrowed the rest. The stocks that they bought served as collateral for the loan. Borrowed money poured into equity markets, and stock prices soared. Among them was the Federal Reserve. The governors of many Federal Reserve Banks and a majority of the Federal Reserve Board believed stock-market speculation diverted resources from productive uses, like commerce and industry.

Section 14 of the act extended those powers and prohibitions to purchases in the open market. These provisions reflected the theory of real bills, which had many adherents among the authors of the Federal Reserve Act in and leaders of the Federal Reserve System in This theory indicated that the central bank should issue money when production and commerce expanded, and contract the supply of currency and credit when economic activity contracted.

The Federal Reserve decided to act. The question was how.

Stock Market Crash Research Papers on the History of the Day America Crashed

The Federal Reserve Board and the leaders of the reserve banks debated this question. To rein in the tide of call loans, which fueled the financial euphoria, the Board favored a policy of direct action. The Board asked reserve banks to deny requests for credit from member banks that loaned funds to stock speculators.

The governor of the Federal Reserve Bank of New York, George Harrison, favored a different approach. He wanted to raise the discount lending rate. This action would directly increase the rate that banks paid to borrow funds from the Federal Reserve and indirectly raise rates paid by all borrowers, including firms and consumers. In , New York repeatedly requested to raise its discount rate; the Board denied several of the requests.

1929 stock market crash research paper

Tight-money policies tipped economies around the world into recession. International commerce contracted, and the international economy slowed Eichengreen ; Friedman and Schwartz ; Temin The financial boom, however, continued.

Stock Market Crash of | Federal Reserve History

The Federal Reserve watched anxiously. Commercial banks continued to loan money to speculators, and other lenders invested increasing sums in loans to brokers. In September , stock prices gyrated, with sudden declines and rapid recoveries. Some financial leaders continued to encourage investors to purchase equities, including Charles E.

1929 Wall Street Stock Market Crash

Mitchell, the president of the National City Bank now Citibank and a director of the Federal Reserve Bank of New York.

Investors began selling madly. These banks also assumed millions of dollars in stock-market loans. The sudden surges strained banks.

The counterpoised flows left many banks temporarily short of reserves. To relieve the strain, the New York Fed sprang into action. It purchased government securities on the open market, expedited lending through its discount window, and lowered the discount rate. It assured commercial banks that it would supply the reserves they needed. The actions also kept short term interest rates from rising to disruptive levels, which frequently occurred during financial crises.

The Board and several reserve banks complained that New York exceeded its authority.

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In hindsight, however, these actions helped to contain the crisis in the short run. The stock market collapsed, but commercial banks near the center of the storm remained in operation Friedman and Schwartz The crash frightened investors and consumers.

Men and women lost their life savings, feared for their jobs, and worried whether they could pay their bills.

Fear and uncertainty reduced purchases of big ticket items, like automobiles, that people bought with credit. Firms — like Ford Motors — saw demand decline, so they slowed production and furloughed workers. Unemployment rose, and the contraction that had begun in the summer of deepened Romer ; Calomiris While the crash of curtailed economic activity, its impact faded within a few months, and by the fall of economic recovery appeared imminent.

From the stock market crash of , economists — including the leaders of the Federal Reserve — learned at least two lessons. First, central banks — like the Federal Reserve — should be careful when acting in response to equity markets. Detecting and deflating financial bubbles is difficult. Second, when stock market crashes occur, their damage can be contained by following the playbook developed by the Federal Reserve Bank of New York in the fall of Economists and historians debated these issues during the decades following the Great Depression.

Their conclusions concerning these events are cited by many economists, including members of the Federal Reserve Board of Governors such as Ben Bernanke, Donald Kohn and Frederic Mishkin. In reaction to the financial crisis of scholars may be rethinking these conclusions.

Economists have been questioning whether central banks can and should prevent asset market bubbles and how concerns about financial stability should influence monetary policy. These widespread discussions hearken back to the debates on this issue among the leaders of the Federal Reserve during the s.

Fisher made the comment in a speech at the monthly dinner of the Purchasing Agents Association at the Builders Exchange Club, 2 Park Avenue. Fisher reiterated his faith in the stock market in a speech before the District of Columbia Bankers Association on October The Board made these statements in its famous letter from February 2, For the text of the letter and discussion of its implications see Chandler , pp. See Chandler , pp.

In this brief essay, we focus on the clash of opinions between the leaders of the Federal Reserve Board in Washington, DC, and leaders of the Federal Reserve Bank of New York. Several of the authors that we cite also highlight this line of debate. We should note that leaders throughout the Federal Reserve System vigorously debated this issue, and differences of opinion existed between the Board and leaders of many banks and also within those leadership groups. At times, for example, members of the Federal Reserve Board disagreed with each other about the appropriate course of action; policy proposals frequently passed only with split votes and after vigorous discussion and dissent.

1929 stock market crash research paper

Differences of opinion also existed among the board of directors of the Federal Reserve Bank of New York and between leaders in New York, Washington, and other cities. An overview of the system-wide debate appears in Chandler , pp. The account that we present is, in our opinion, the academic consensus, although on this issue we note that Meltzer , and other scholars suggest that the crash was a symptom, not a contributing force, to the contraction in Friedman and Schwartz outline these lessons in their coverage of the stock market crash.

Meltzer reaches similar conclusions in his history of the Federal Reserve. Chairmen of the Federal Reserve, including Bernanke and Greenspan, echoed these sentiments in their writings and speeches in recent decades. American Monetary Policy, Harper and Row, The Gold Standard and the Great Depression, — Oxford University Press, Friedman, Milton and Anna Schwartz.

A Monetary History of the United States. Princeton University Press, A History of the Federal Reserve, Volume 1, University of Chicago Press, The Fed's Functions Related Resources. Your Gateway to the History of the Federal Reserve System. Explore The Federal Reserve Topic. Stock Market Crash of October On Black Monday, October 28, , the Dow Jones Industrial Average declined nearly 13 percent. Endnotes 1 Gary Richardson is the historian of the Federal Reserve System in the research department of the Federal Reserve Bank of Richmond.

Alejandro Komai is a PhD candidate in economics at the University of California, Irvine. Michael Gou is a PhD student in economics at the University of California, Irvine.

Daniel Park is an undergraduate at Duke University. Federal Reserve Act, The Great Crash of Written as of November 22, Related Essays The Great Depression Banking Panics of Stock Market Crash of Related People George L. Harrison President FRB New York — Terms of Use Privacy Policy Contact Us.

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