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Doctor:
You are correct about banks lending 90% but they did
not do it in 1928 or 1929.
I think most everyone will agree that the kiss of death
for a bull market is tight money. From all the
indications of what was written about the late 20"s
money rates were increasing.
Broker call rates were in the mid teens in 1928 and
around 20% in 1929. So we now know that Joe Schmuck on
the street could not borrow money at 10% in 1928 or
1929. This factor alone blows the theory out of the
water that 10% margin buying caused the 1929 crash.
The A/D line peaked in 4/14/28 and when the market made
its high on 9/3/29 it was down close to 25%. This fact
shows that a great number of stocks had already began
to decline, similar to where we are now. I can only
make the assumption that most people who might have
been on 10% margin prior to 1928, probably would have
received a margin call during 28 or 29 because of the
narrowing of market leadership as evidenced by the A/D
line. Of course if they sold and re-entered after 1927
they would have paid higher rates.
I do not have a good chart of 1929. But it looks like
the market had an initial break of about 10% and then a
pull back rally of approximately 50% lasting
approximately 2 weeks before the waterfall decline.
This initial decline not doubt reduced the margin
holders whether you were on 45% NYSE margin or less
from any other source. Margin selling fuels a decline
it does not start it.
External sources created the reasons. I do not recall
a breadth divergence in the history of recorded
statistics for the NYSE that has NOT led to a bear
market.
After many calls to the NYSE they referred me to an
expert in the industry on margin requirements. I also
talked to a Federal Reserve Bank.
The Federal Reserve System was created in 1913. They
left margin rates up to the banks and the stock
exchange until Reg-T went into effect on 10/15/34.
In 1902 the stock exchange members put into effect a
general practice of maintenance margin requirements
ranging form 10% to 25% depending on the price of the
stock. On 2/9/13 the NYSE established a house capital
requirement for member firms of 25% minimum
maintenance. This was levied against the brokerage
houses.
1922 lowered to 20%
June 1929 raised to 25%
June 1931 reduced to 20%
9/15/33: The first NYSE published minimum maintenance
requirement.
10/15/34: Effective date of Reg-T by the Federal
Reserve. Margin requirement was set at 45%
In the early part of the century the brokerage hoses
did not have the capital to lend for margin purchase as
they do today. They would go the the banks and borrow
money at the broker call rate. This amount (20% as
stated above) would be added to the stock exchange
margin requirement of 25% in 1929 making the effective
rate 45%.
An individual could go directly to the banks if they
wanted but they would pay the broker call rate plus a
margin requirement of 10%, for a total of 30%. Maybe
this is where the 10% figure comes from.
Another hand-me-down story that will probably never go
away is the remark attributed to Willie Sutton
When asked why he robbed banks, It is said that he
said, "That is where the money is." The truth is he
stated after he was in jail that he never made that
statement.
Norman E.
THE DOCTOR wrote:
>
> Norman,
>
> You are correct about the SEC rule .. however there was no fed Reg - T back so
> banks could lend 90% and in fact banks could take direct ownership of equities.
> That is where the leverage came from and the massive bank failures. The US Fed
> still restricts direct ownership (Reg 20issues)although to a larger degree than in
> the past. This came under the relaxation of Glass- Stegal.
>
> Norman E. Phair wrote:
>
> > Bruce wrote:
> >
> > >
> > > And I agree with him. Back then, investors (speculators) only had to put
> > > down 10% of the face value of the stock in order to buy it, and even that
> > > rule was rarely enforced (the SEC hadn't been created yet...). This led to
> > > massive leveraging in the market, and eventually the crash. Today margin is
> > > limited to 50%, and US investors as a whole haven't even come close to using
> > > that amount (no margin allowed in IRAs and 401Ks).
> >
> > About 5 years ago I received something in the mail
> > about this long standing statement
> > that margin in 1929 was 10% I knew it was another one
> > of those things that gets repeated
> > so much that everybody believes it. I called the NYSE
> > and wrote down all the information
> > about what the margin rules of the NYSE was back in
> > that period. I do not know where it
> > is so I can not quote it verbatim. New York Stock
> > Exchange margin in the late 20's was
> > between 45% and 60%, I believe the figure was 50%
> > during the crash. There was no
> > 10% rule that you mention, people could buy stock on
> > 10% margin from a bucket shop.
> > There are probably statistics that will show that the
> > amount of stock bought at 10% was
> > very small. As a result I thing you will find that "
> > massive leverage caused the crash"
> > is a misnomer that has been passed down through the
> > years because it has make good copy.
> > Again one can find out the real story if they would
> > take the time to do the research and
> > make one phone call, which is what I did. This is sort
> > of like the Post Office tax on e-mail that gets printed
> > here every so often. If I answered all of the
> > misstatements that have appeared here
> > in the last year I would have arthritis. The SEC has
> > nothing to do with margin requirements. I bought
> > stock on 10% margin in the early 60's. from a money
> > lender. Many people do almost the same thing today.
> > They are called options and futures and it is legal.
> >
> > Norman E.
> >
> > BruceB wrote:
> > >
> > > > AG is responsible for guiding the monetary and interest rate policies of
> > > the
> > > > US and this includes managing and preventing excessive speculation and
> > > > consumption whether it be in banking, real estate, credit, or stock
> > > markets.
> > > > Allowing bubbles to build and then explode wrecks the economy for
> > > everyone,
> > > > not just the irresponsible speculators - clearly an area where government
> > > > has a responsibility to act.
> > >
> > > Earl, what is you're definition of "speculation" and "bubble?" I think most
> > > people (myself included) define these terms as meaning asset prices that
> > > have been artificially inflated through the use of margined or borrowed
> > > money. If you agree to that definition, then there is simply no evidence
> > > for your claim. Over the past 5 years (since the stock market first began
> > > to take off), the amount of stock purchased on margin as a percentage of all
> > > stock outstanding has actually FALLEN. In absolute terms, the figure has
> > > grown significantly, but as a percentage of the whole market, it's down.
> > > Where's the bubble?
> > >
> > > > Early in his career, AG wrote some papers on
> > > > the crash of 29 which criticized the central bankers for allowing
> > > excessive
> > > > speculation and credit to grow unabated.
> > >
> > > And I agree with him. Back then, investors (speculators) only had to put
> > > down 10% of the face value of the stock in order to buy it, and even that
> > > rule was rarely enforced (the SEC hadn't been created yet...). This led to
> > > massive leveraging in the market, and eventually the crash. Today margin is
> > > limited to 50%, and US investors as a whole haven't even come close to using
> > > that amount (no margin allowed in IRAs and 401Ks).
> > >
> > > Just because people are placing a higher value on US stocks doesn't mean
> > > they're speculating (by my definition...). As I said in a post on the Omega
> > > List over two years ago, the money flowing into the stock market is "real"
> > > money. It is not borrowed or leveraged. Once again, where's the bubble, or
> > > the 1929 scenario here?
> > >
> > > > Just a few years ago, AG had it
> > > > right when he spoke of "irrational exuberance", however he was unwilling
> > > to
> > > > pay the (probably very substantial) political price of raising interest
> > > and
> > > > margin rates to head off the bubble.
> > >
> > > I personally wouldn't be opposed to higher margin rates (as long as they
> > > don't apply to S&P futures, of course...), but raising interest rates is a
> > > bad approach to subduing the stock market. You mentioned earlier how
> > > innocent people get hurt when bubbles burst. Well, nothing hurts innocent
> > > people more than higher rates (higher car and mortgage payments) in the name
> > > of punishing speculators. Isn't that kind of like destroying the village in
> > > order to save it?
> > >
> > > > Nor have our central bankers and
> > > > politicians been willing to bring an end to the import of endless cheap
> > > > goods which have held inflation in check and spurred consumption while
> > > > exporting a major portion of the US manufacturing base and building an
> > > > incredible trade deficit.
> > >
> > > Big economics question here, maybe too off topic so I'll skip it!
> > >
> > > > Consequently, by most historical measures, US
> > > > equity and credit markets have bubbled to the point where a prick of the
> > > > bubble poses a serious threat to not only the US economy, but the world
> > > > economy as well.
> > > >
> > >
> > > Once again, your definition of bubble comes into play, but if 1929 is one of
> > > your "historical measures," we're simply nowhere close to that...
> > >
> > > Bruce
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