On 24 October 1929, Winston Churchill looked down from the visitors’ gallery of the New York Stock Exchange at the dumbfounded crowd that had gathered below as panic and fear engulfed the market. The former UK chancellor of the exchequer had put Britain back on the gold standard in 1925 at the pre-war exchange rate, the consequences of which some argue spurred on the devastating Wall Street Crash.
After years of misguided optimism, that crash brought the US back to reality with a horrible jolt. It had widespread consequences, setting the scene for the Great Depression of the 1930s and a global economic slump. The greatest sell-off of shares in US market history meant that dreams of lucre ultimately ended in penury. Given its historical significance, every crash since has been compared to it.
John Kenneth Galbraith outlines, and then attacks, the received wisdom on what caused the crash in his classic 1954 work The Great Crash 1929. A common argument of the time pinned the blame on the Federal Reserve for creating the conditions in which investor speculation could run rampant. As gold flowed out of the UK and Europe into the US, central bankers went to New York in 1927 to plead for a softer monetary policy. Bank of England governor Montagu Norman, Reichsbank governor Hjalmar Schacht and Bank of France deputy governor Charles Rist had some success on their transatlantic journey. The New York Fed cut its rediscount rate and started buying up government bonds. The other US reserve banks pursued the same agenda.