In the period leading up to the stock market crash of 1929, the accumulation of capital increased the ratio between fixed capital and circulating capital. This resulted in a reduction in short-term credit from commercial banks and an increase in long-term financing. However, monetary policy did not react to this change and continued to accept only short-term assets as collateral for loans from the central bank. Monetary expansion, debt increase, and growing financing of dealers by the banking system raised a growing storm of criticism that persuaded the central bank to adopt contractionary monetary policies to stop speculation. This prepared the ground for the stock market crash of 1929. The contractionary monetary policy implemented in 1927–1928 grew out of the conviction that the expansion that had begun in previous years had produced excessive growth in credit that would harm the real economy, with the resources it needed being drawn off into the financial system. The increase in interest rates and the prohibition imposed on banks against financing dealers altered the composition of new issue backed by the liquid assets of non-bank operators, in particular the big corporations attracted by high interest rates. But eventually tight monetary policy succeeded in halting the rise of stock prices.

Non-bank Financial Intermediaries and the Crisis of 1929

Introduction, 449. — Brokerage office loan routine, 449. — Demand for funds inelastic at a given moment, 453; and over a period of time, 454. — Supply by "others" inelastic in 1927, 456. — Supply by banks elastic throughout 1927, 458. — New security issues the cause of increased demand for loans in 1928 and 1929, 460. — As a result of Federal Reserve policy, supply by banks inelastic after 1927, 461. — New security issues and high interest rates responsible for elasticity of supply by "others" in 1928 and 1929, 461. — Conclusion, 462.

Wilford J. Eiteman

Papers

The Relation of Call Money Rates to Stock Market Speculation