the Federal Reserve was raising interest rates and choking off the money
supply. For example, its discount rate (the rate the Fed charges member banks
for loans) was increased four times, from 3.5 percent to 6 percent, between
January 1928 and August 1929. The central bank took further deflationary action
by aggressively selling government securities for months after the stock market
crashed. For the next three years, the money supply shrank by 30 percent. As
prices then tumbled throughout the economy, the Fed's higher interest rate
policy boosted real (inflation-adjusted) rates dramatically.
comprehensive chronicle of the monetary policies of the period can be found in
the classic work of Nobel Laureate Milton Friedman and his colleague Anna
Schwartz, "A Monetary History of the United States", 1867-1960. Friedman and Schwartz argue conclusively that the
contraction of the nation's money supply by one-third between August 1929 and
March 1933 was an enormous drag on the economy and largely the result of
seismic incompetence by the Fed. The death in October 1928 of Benjamin Strong,
a powerful figure who had exerted great influence as head of the Fed's New York
district bank, left the Fed floundering without capable leadership — making bad
policy even worse.
only the "smart" money — the Bernard Baruchs and the Joseph Kennedys who
watched things like money supply and other government policies — saw that the
party was coming to an end. Baruch actually began selling stocks and buying bonds
and gold as early as 1928; Kennedy did likewise, commenting, "only a fool holds
out for the top dollar."
of investors eventually sensed the change at the Fed and then the stampede
began. In a special issue commemorating the 50th anniversary of the stock
market collapse, U.S. News & World Report described it this way:
Actually the Great Crash was by no means a
one-day affair, despite frequent references to Black Thursday, October 24, and
the following week's Black Tuesday. As early as September 5, stocks were weak
in heavy trading, after having moved into new high ground two days earlier.
Declines in early October were called a "desirable correction." The Wall Street Journal, predicting an autumn rally, noted that "some
stocks rise, some fall."
Then, on October 3, stocks suffered their
worst pummeling of the year. Margin calls went out; some traders grew
apprehensive. But the next day, prices rose again and thereafter seesawed for a
The real crunch began on Wednesday, October 23, with what one
observer called "a Niagara of liquidation." Six million shares changed hands.
The industrial average fell 21 points. "Tomorrow, the turn will come," brokers
told one another. Prices, they said, had been carried to "unreasonably low"
But the next day, Black Thursday, stocks were dumped in even
heavier selling ... the ticker fell behind more than 5 hours, and finally
stopped grinding out quotations at 7:08 p.m.
At their peak, stocks in the
Dow Jones Industrial Average were selling for 19 times earnings — somewhat
high, but hardly what stock market analysts regard as a sign of inordinate
speculation. The distortions in the economy promoted by the Fed's monetary
policy had set the country up for a recession, but other impositions to come
would soon turn the recession into a full-scale disaster. As stocks took a
beating, Congress was playing with fire: On the very morning of Black Thursday,
the nation's newspapers reported that the political forces for higher
trade-damaging tariffs were making gains on Capitol Hill.
market crash was only a reflection — not the direct cause — of the destructive
government policies that would ultimately produce the Great Depression: The
market rose and fell in almost direct synchronization with what the Fed and
Congress were doing. And what they did in the 1930s ranks way up there in the
annals of history's greatest follies.