The Four Year Bull Market Part 2

THE most serious interruption to the stock market advance came in the early spring of 1926. The conditions which apparently brought it about are worth reviewing because they resemble in many ways those which have prevailed for the last few months.

There was no let-up in business activity. The records show that commerce and industry were making splendid progress in March while stock prices were falling 10 or 15 per cent. A shortage of credit was chiefly responsible. Business and speculation both had been making such large in-roads into the available supply of credit that the Federal Reserve banks raised their rediscount rates to 4 per cent and pumped funds out of the open market by selling Government securities. This squeeze in money induced speculators to dump their holdings.

Since the deflation in stock prices had released enough funds for business needs, the Reserve banks intervened again on the side of easy money and the stock market started another advance which continued, with only trifling set-backs, until last autumn.

In the meantime, two important changes had occurred. Business activity had begun to dwindle and the Federal Reserve authorities had used their power to bring interest rates down to the lowest point they had reached since 1920. This policy may have been prompted in part by the desire to stimulate commerce and industry, but the chief purpose was to release some of our gold to foreign countries, the most important of which either had just stabilized their currencies or were in the process of doing so.

Here were the two major influences on security prices pushing strongly in opposite directions. The phenomenon is neither an unnatural nor an unusual one, but the issue is seldom as clearly drawn as it was in the autumn of 1927.

Source: The Outlook, 17 October 1928

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