¹ We may roughly generalize and say that, in the 1920's, the Board of Governors had as its basic aims restoration and maintenance of the international Gold Standard and the stability of the domestic price level.

² For a résumé of the position of institutional investors during the late 1920's and early 1930's, see The Security Markets (New York: Twentieth Century Fund, 1935), Chap. VI.

³ It should be noted that the management of the New York Stock Exchange worked to improve the level of financial practices throughout the decade.

⁴ It was highly unusual for the capital market of a modern nation to be virtually exclusively oriented toward private interests. In fact, in the 1790's it was the fiscal problems of the young American government that had been responsible for creating the financial business that led to the original organization of a stock market in New York, But the peculiarities of American development in the nineteenth century reduced the necessity for government financial activity, substituting a combination of state and local government and private financial transactions. In the 1860's, briefly in the 1890's, and during the First World War, the fiscal needs of the state suddenly rose to dominate the financial markets, but in each case the need was transitory and the influence of the government was subsequently withdrawn from the market place.

⁵ “In consequence of such policies and tactics, the great investment bankers, Morgan, Baker, Stillman, Kuhn, Loeb and Company, Lee Higginson and Company, and Kidder, Pea-body and Company controlled large transactions almost to the complete exclusion of outsiders, i.e., minor nouses which they did not approve. Between about 1900 and 1910 there was only one issue exceeding $10,000,000 that was floated without their participation, and even that (an issue of $13,500,000) had the Morgan blessing.” Redlich, Fritz, The Molding of American Banking (New York, 1951), Part II, p. 380.Google Scholar

⁶ See Lauchlin Currie, “The Decline of the Commercial Loan,” Quarterly Journal of Economics, Aug., 1931.

⁷ Redlich, op. cit., pp. 380 ff.

⁸ A discussion of entry into investment banking should consider not only the number of firms but the relationship of various firms to the generation of new security issues. Therefore the evidence presented below that about 1,000 firms participated in security issues in 1929 is only partly indicative of the importance of the entry of new firms. On a more qualitative basis the extent of the entry that took place from just before the First World War to 1929 is indicated by the fact that of the 17 firms named as defendants in the antitrust suit in 1949 some 7 firms or their predecessor firms began operations after 1910. Of even greater importance was the rate of growth in the firms which entered after 1910.

⁹ Hearings before the Committee on Banking and Currency, U. S. Senate, 73d Cong., 1st Sess. on S. Res. 84, Part 3, p. 968. For a similar statement of attitude and purpose, see op. cit., Testimony of J. P. Morgan, Part 1, pp. 4, 5 and 6.

¹⁰ Because of the diverse and changing nature of investment banking firms, this categorization is only an approximation. For example, J. P. Morgan did participate in the formation of Standard Brands in 1929. For a comment on the absence of “glaring abuses” in the way the Morgan firm conducted itself during this period, see Pecora, F., Wall Street Under Oath (New York, 1939), p. 5 ff.Google Scholar

¹¹ Typical representatives of this group of “new firms” of the 20's would be Dillon Read and the National City Company. Dillon, Read & Company was formed as a joint stock association in New York in 1922. This firm had roots much further back but it only grew to national importance in the 1920's. The National City Company was formed in 1911. Charles E. Mitchell became president in 1916.

¹² This discussion of new issues applies to those issues which were not aimed primarily at providing funds for real capital additions for domestic corporations, i.e., issues for financial purposes to consolidate firms or modify the structure of industries.

¹³ We are not directly concerned here with the problem of the investing public, but rather with the kind of issues put forward by investment banking houses and the insight the various kinds of issues offered give us about the motivation and orientation of the issuing house.

¹⁴ See the testimony by Mr. O. B. Van Sweringen, Hearings, op. cit., Part 2, pp. 563 ff., especially his statement of the intent and purpose of the Allegheny Corporation on pages 564–569.

¹⁵ See testimony of Otto Kahn, Hearings, op. cit., p. 1,246.

¹⁶ Stock Exchange Practices, Report of the Committee on Banking and Currency, Senate Report No. 1455, 73d Cong., 2d Sess., 1934, III, p. 128.

¹⁷ Ibid., p. 129; Ilse Mintz, Deterioration in the Quality of Foreign Bonds Issued in the United States, 1920–1930: National Bureau of Economic Research, 1951, especially Chap. 6.

¹⁸ The data are from American Underwriting Houses and their Issues, New York City National Statistical Service, Serially 1926–1935, O. P. Scnwarzchild, editor.

Since the data represent at best an approximation of the number of issuing organizations I have used percentage figures. Organizations are primarily commercial banks and investment banks. Some Canadian firms are included.

¹⁹ Data on the number of new issues and on specific security issues by companies come from the monthly summaries in the Commercial and Financial Chronicle. All data on the dollar volume of new issues are from Banking and Monetary Statistics. The basic source of data is the record of security issues compiled by the Commercial and Financial Chronicle. A complete description of the Chronicle's sources may be found in Abbot, C. C., The New York Bond Market, 1920–1930 (Cambridge, 1937), p. 32, n. 5CrossRefGoogle Scholar; and also in the Commercial and Financial Chronicle, Vol. CXII (March 26, 1921), pp. 1, 216–1, 218.

The figures from the monthly reports of the Chronicle have been summarized by the Board of Governors of the Federal Reserve System in Banking and Monetary Statistics, Washington, D. C, 1943. The Department of Commerce in the Survey of Current Business, February and April, 1938, published certain revisions of the data; and the figures given in Banking and Monetary Statistics reflect the adjustment so that there are certain differences in the monthly figures as originally given by the Commercial and Financial Chronicle, and as summarized by the Board of Governors.

The term “new issue” does not mean that these funds were used for new plant and equipment expenditures; a large part of these new funds were spent for purely financial transactions. See George A. Eddy, “Security Issues and Real Investment in 1929,” Review of Economic Statistics (May, 1937). Eddy's data indicated that out of $8,002,000,000 new capital issues by domestic corporations in 1929, only $2,002,000,000 or approximately 25 per cent went for real investments.

²⁰ The phrase “lower credit standards” usually means less credit rationing. It applies to a loan market — quite often to borrowers from the commercial banking system — where there is at all times a “fringe of unsatisfied borrowers.” One way to test for changes in credit standards would be to examine the quality of loans that are acceptable to lending institutions. In the case of the securities markets where the “lending institutions” are the entire range of stock and bond purchasers, an indication of the change in credit standards may be obtained by examination of the terms, conditions, and quality of the new securities purchased by the public.

²¹ “This enormous increase occurred before 1927; from then on construction declined. Thus the final spurt in economic activity during 1928–1929, vigorous enough to expand total capital formation by $3 billion, and to induce the largest single year's increase in gross national product since 1923, was in the face of deflationary pressures operating on the largest single component of total investment.” Gordon, R. A., Cyclical Experience in the Inter-War Period: The Investment Boom of the Twenties, Bureau of Business and Economic Research, University of California (Berkeley, 1952), Reprint 8, p. 201.Google Scholar

²² Commercial and Financial Chronicle, Vol. 130, No. 3373 (Feb. 15, 1930), p. 1,030.

²³ In 1929 the total number of debt issues was larger than in 1930, but the dollar volume was smaller.

²⁴ Commercial and Financial Chronicle, Vol, 132, No. 3433 (April 11, 1931), p. 2,660.

²⁵ Mills, F. C., Economic Tendencies in the United States (New York, 1932)Google Scholar, Table 169, p. 427. The data, a special compilation from the Chronicle, are for the National Bureau and represent a series of issues for “unproductive” purposes. It should be recalled that in the 1920's the distinction between investment companies and holding companies was not as sharp as it is today.

²⁶ Data are from American Underwriting Houses and their Issues, op. cit., and are for issues listed as “Financial, Investment Trusts and Security Investment Companies.”

²⁷ It may be that the slight increase indicated had some effect on marginal borrowers, particularly those whose debt instruments were of low quality. Thus, bonds of poorer quality show slightly higher rates of increase than indicated on Chart IV. But in view of the amount of equity funds available in the market, this does not appear to have been a serious consideration.

²⁸ Yield expectations: “the prevailing annual dividend rate, multiplied by the number of shares outstanding, is shown as a percentage of total stock values” Cowles Commission Monograph number 3 Common Stock Indexes, 1871–1937 (Bloomington, Indiana, 1938), p. 3.

²⁹ In spite of the almost incredibly low yields on utility stocks, the utility industry did not take advantage of the situation to increase plant and equipment significantly. The year 1929 for all utilities excluding railroads shows an increase of $274,000,000 in plant and equipment expenditures over 1928, but this was only $40,000,000 more than the increase from 1923 to 1924. The bulk of the increase came in telephone ($158,000,000) and electric power ($95,000,000). Even though utility stock yields remained low in 1930, expenditures on plant and equipment dropped by about $40,000,000. George Terborgh, Federal Reserve Bulletin (Sept., 1939), Table 2, p. 732, the sum of columns 3, 4, 5 and 6.

³⁰ Perhaps the Federal Reserve System provided a false basis for estimating the strength and stability of the banking system.

³¹ The changes are slightly different if measured on an annual basis instead of from the December values.

Cowles Commission, op. cit., p. 66 “All Stocks.”

³² Ninety-two points in the index or about four points per month. In speculative issues, of course, the increases were much larger.

³³ Partly because of the moral suasion exerted by the Federal Reserve Bank, a severe monetary stringency developed in late March, 1929. Call rates jumped to an average of 14.40 in the last week of March. The rate on the 26th was well above 15.5 per cent. It was the next day that Charles E. Mitchell announced that the National City Bank was ready (in defiance of Federal Reserve Board wishes) to lend $20,000,000 in the market; $5,000,000 at 15 per cent, $5,000,000 at 16 per cent, etc. Mitchell's action apparently checked the precipitous decline of the 26th. The market regained confidence, money rates eased and prices began to move up again. Excessive manipulation of the market may have had an effect both on the supply of and demand for loan funds and so have been partially responsible for the credit tightness that developed in late March.

³⁴ Banking and Monetary statistics, op. cit., p. 494.

³⁵ For description of these practices in seventeenth-and eighteenth-century England, see Scott, W. B., The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720 (3 vols.; London, 1912)Google Scholar, see especially Vol. III; see also Redlich, op. cit., pp. 375 ff.

³⁶ In this connection, The Security Markets (New York, 1935), pp. 443–508, gives an excellent description of techniques of security manipulations in the 1920's and 1930's.

³⁷ F.T.C., Utility Corporations Report, No. 72-A, Senate Document 92, 70th Cong., 1st Sess. (1935), p. 543.

For example, in the latter part of April, 1927, a clique of ‘bear” speculators sold Cities Service common stock short in large volume while spreading a rumor of the death of Mr. Doherty. The Doherty management resisted this bear raid, making purchases in large volume of the shares offered for sale on the exchange. On one day, April 30, 1927, Henry L. Doherty & Co. purchased 25,373 shares of this stock at the total cost of approximately $1,086,000. Under the influence of the bear raid, the closing market quotation for this stock sagged from $51% per share April 1, 1927, to $44 (or a low of $41) on April 30; but after the market support furnished by the Doherty management had overcome the effects of the bear raid, the market quotations again rose and continued to rise steadily to a close of $53% per share on December 31.

Ibid., pp. 544–545.

³⁸ See Gordon, op. cit., pp. 208–209.

³⁹ The Security Markets, op. cit., pp. 475–483.

⁴⁰ See Eddy, op. cit., p. 85.

⁴¹ This conclusion is based on Eddy's evidence for 1929, but it may not have general validity. If business conditions had remained good for a longer time, and if stock prices had continued at high levels while yields were very low, it is logical to assume a greater shift to equity financing. The 1928–1929 stock bubble did not allow sufficient time for a complete reorientation of business thinking.

⁴² An important offset to this, however, was the strengthening of the cash balances of certain firms as a result of new equity issues. What is needed is analysis and evaluation of the effect of the missing $6 billion “non-productive” new issues in 1929 on the structure of industry.

⁴³ All data from Kuznets, S., National Product Since 1869 (New York, 1946), p. 52.Google Scholar The flow of goods to consumers is a sum of commodities and services. In essence it is the difference between national income and net capital formation.

⁴⁴ This data from Kuznets, S., National Income and its Composition, 1919–1938 (New York, 1941), Vol. I, p. 147Google Scholar, Table 5.

⁴⁵ Ibid.

⁴⁶ Barger, Harold, Outlay and Income in the United States (New York, 1942), p. 227, Table 22.Google Scholar

⁴⁷ There were, of course, exceptions such as radio sets, but these cases have a likely alternative explanation.

⁴⁸ Hamberg, D., Business Cycles (New York, 1951)Google Scholar suggests that speculative profits from the stock market were a stimulus to consumption. See especially pp. 373 and 426. This may have been the case, although the effects of such a stimulus were probably local, i.e., limited to certain specific metropolitan areas. These local expenditures, as indicated above, were not sufficient to show in the aggregate data and so Hamberg offers an under-consumptionist, under-investment explanation of the downturn. See pp. 420–425 and 442–453. Both Hamberg and Gordon, op. cit., suggest that rising stock prices and the condition of short-run expectations acted to shift the marginal efficiency of capital schedule to the right after 1927. This may well have been the case, but, as the Eddy evidence cited indicates, the effect did not show up in a new pattern of security sales for productive purposes.

⁴⁹ If quarterly data were available, this conclusion might have to be modified. This is particularly true of the year 1929.

⁵⁰ An interesting sidelight on this question is how did the brokers and dealers in securities actually behave during the period of the boom. There is constant reference in the literature on the South Sea Bubble of 1720 to the high and mighty ways of the directors of the South Sea Company. Their conspicuous consumption in the spring and summer of 1720 invited the same combination of disdain and envy that any nouveau riche group encounters.

⁵¹ See Gordon, op. cit., p. 209. 188