STOCKS declined about 5 or 10 per cent in October and it looked as though the depression in business was to be the dominant factor. The recession, though, was brief. Prices soon headed upward once more.

Since speculation was becoming rampant and foreign countries had taken all the money they needed, the Reserve banks started to contract the supply of credit by their open market operations and to raise its cost. They bought Government securities and, at the beginning of this year, raised rediscount rates to 4 per cent. Stocks kept rising, so they advanced - rediscount rates another half per cent. These increases brought about the fairly severe June liquidation, deflating prices almost 10 per cent and releasing more than $200, 000, 000 in funds from the market.

Rediscount rates were jumped to 8 per cent in July but the market refused to go down any further. Business was nourishing again and holders simply refused to sell. Before the end of the summer another rally had acquired such momentum that prices went to new high records.

Funds were needed to finance the rally and the stock market’s competition with business for loans forced in-terest rates to the highest levels they had reached in more than eight years. In July and at the beginning of this month, the call money rate soared to 10 per cent. Learned financial writers insisted that such rates should bring about deflation as a milder credit stringency had done in March, 1926, but the speculators who had bought stocks stubbornly refused to sell them. They held on for dear life even though the return on the securities they held was, in many cases, less than half the interest they were paying on the money they borrowed with which to buy them. The Federal reserve banks could not raise rates still further. To do so might hamper business or bring back the gold sent abroad a year ago.

Today the deadlock persists. No outside influence can be exerted safely to bring prices down. If they fall, they will fall of their own weight. Or, to use the most popular current metaphor—Nobody can kill the present market. It will have to commit suicide.

Source: The Outlook, 17 October 1928

Related posts:

1. The Four Year Bull Market Part 2
2. The Four Year Bull Market Part 1
3. Credit and the Federal Reserve Part 1
4. The Recent Market - Bull or Bear Part 1
5. The Recent Market - Bull or Bear Part 3

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