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    Stock market crash October 1929: Why gentlemen prefer bonds

    “Gentlemen prefer bonds,” said Andrew Mellon (1855-1937), wealthy American financier, banker, and U.S. Treasury Secretary. Commons shares, or stock, were considered too speculative for gentlemen; best left to disreputable speculators. Had more investors heeded Mellon’s advice, the horrendous stock market crash of October, 1929, which ushered in the Great Depression of the 1930s, would likely have been much less severe.

    Crowds gather on Wall Street, October 25, 1929, as stock market crash ushers in the Great Depression of the 1930s. Wikimedia Commons.

    Crowds gather on Wall Street, October 25, 1929, as stock market crash ushers in the Great Depression of the 1930s. Wikimedia Commons.

    The Montreal Gazette October 19, chronicled the investment swing from bonds to stocks that preceded the crash.

    The reason for the swing from stocks to bonds is obvious, says the Gazette. “Stocks have a speculative outlook; and speculation today is rampant throughout the world to a degree wholly unprecedented.”

    Figures are given to show the switch from bonds to stocks. In 1925, bonds accounted for 70 percent of capital raised by Americans corporations, and stocks, 30 percent. In the first nine months of 1929, stocks accounted for 73 percent of the corporate financing—$4.1 billion—with just $1.5 billion raised from the sale of bonds. “While these figures speak decisively for themselves,” said the Gazette, there was an increase during the same period in the amount of outstanding loans by brokers to their customers who bought on margin, from about $1 billion “to the staggering aggregate” of more than $6.7 billion.

    The National City bank in New York observed:

    “The extreme ease of money conditions in 1927 started the speculative ball rolling, and the movement gained in momentum with the prosperous business conditions of 1928 and 1929. The spectacle of huge profits made by stock speculation proved a magnet to draw more funds… Fast as new stock issues have been created, they have been unable to keep pace with demand, with the result that prices have been bid up to levels which discount the future for an unusually long period ahead.”

    The Gazette concluded with a note of caution. Financing by stock to such an extent “has yet to be vindicated by the stern test of experience,” it stated. “Developments, therefore, will be watched with interest not unmingled with anxiety.”

    If only investors had listened to Andrew Mellon.

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    TAGS: Stocks, Bonds, Investments, Speculation, Stock market crash 1929; Great Depression 1930s, Andrew Mellon

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