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 1921 to 381 in September 1929. After prices peaked, economist Irving Fisher proclaimed, “stock prices have reached ‘what looks like a permanently high plateau.’” 2
The epic boom ended in a cataclysmic bust. On Black Monday, October 28, 1929, 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 1932, when the Dow closed at 41.22, its lowest value of the twentieth century, 89 percent below its peak. The Dow did not return to its pre-crash heights until November 1954.
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.
Irving Fisher’s quote appeared in the New York Times on October 16, 1929, p. 8. Fisher made the comment in a speech at the monthly dinner of the Purchasing Agents Association at the Builders Exchange Club, 2 Park Avenue. At the time, Fisher was one of the nation’s most well-known and widely quoted economists. His comments came in response to a prediction on September 5 at the Annual National Business Conference by rival financial prognosticator, Roger Babson, that “sooner or later a crash is coming, and it may be terrific.” Babson’s comment was followed by a sharp decline in stock-market prices known as the Babson break. Fisher reiterated his faith in the stock market in a speech before the District of Columbia Bankers Association on October 23.
The Board made these statements in its famous letter from February 2, 1929. For the text of the letter and discussion of its implications see Chandler 1971, pp. 56-58.
In addition to assets that could serve as collateral for discount loans, Section 14 authorized open market purchases of (a) gold coins, bullion, and certificates, and (b) securities issued and guaranteed by “any State, county, district, political subdivision, or municipality in the continental United States” (Federal Reserve Act 1913).
These requests appear in the Board’s letter of February 2, 1929. See Chandler 1971, pp. 56-58.
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. 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 1971, pp. 54-70.
Galbraith characterizes Mitchell as one of the two prominent “prophets” of the stock market boom, the other being Irving Fisher.
The account that we present is, in our opinion, the academic consensus, although on this issue we note that Meltzer (2003, 252-257) and other scholars suggest that the crash was a symptom, not a contributing force, to the contraction in 1929.
Friedman and Schwartz (1963) outline these lessons in their coverage of the stock market crash. Meltzer (2003) 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.
- 10 Irrational exuberance is, of course, a phrase popularized by Alan Greenspan and typically cited to this speech.
Bernanke, Ben, “Asset Price ‘Bubbles’ and Monetary Policy.” Remarks before the New York Chapter of the National Association for Business Economics, New York, NY, October 15, 2002.
Calomiris, Charles W. “Financial Factors in the Great Depression.” The Journal of Economic Perspectives 7, no. 2 (Spring 1993): 61-85.
Chandler, Lester V. American Monetary Policy, 1928-1941. New York: Harper and Row, 1971.
Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919 –1929. Oxford: Oxford University Press, 1992.
Federal Reserve Act, 1913. Pub. L. 63-43, ch. 6, 38 Stat. 251 (1913).
Friedman, Milton and Anna Schwartz. A Monetary History of the United States. Princeton: Princeton University Press, 1963.
Galbraith, John Kenneth. The Great Crash of 1929. New York: Houghton Mifflin, 1954.
Greenspan, Alan, “The Challenge of Central Banking in a Democratic Society,” Remarks at the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, Washington, DC, December 5, 1996.
Klein, Maury. “The Stock Market Crash of 1929: A Review Article.” Business History Review 75, no. 2 (Summer 2001): 325-351.
Kohn, Donald, “Monetary policy and asset prices,” Speech at “Monetary Policy: A Journey from Theory to Practice,” a European Central Bank Colloquium held in honor of Otmar Issing, Frankfurt, Germany, March 16, 2006.
Meltzer, Allan. A History of the Federal Reserve, Volume 1, 1913-1951. Chicago: University of Chicago Press, 2003.
Mishkin, Frederic, “How Should We Respond to Asset Price Bubbles?” Comments at the Wharton Financial Institutions Center and Oliver Wyman Institute's Annual Financial Risk Roundtable, Philadelphia, PA, May 15, 2008.
Romer, Christina. “The Great Crash and the Onset of the Great Depression.” Quarterly Journal of Economics 105, no. 3 (August 1990): 597-624.
Temin, Peter. “Transmission of the Great Depression.” Journal of Economic Perspectives 7, no. 2 (Spring 1993): 87-102.
Written as of November 22, 2013. See disclaimer.