The Causes of the 1929 Stock Market Crash: A Speculative Orgy or a New Era?

Secretary of the Treasury Mellon opened 1929 with a statement for the January 1 newspapers. The New York Times (p. 26) headed a column with "Mellon Optimistic on Business Trend." His comments were eagerly awaited by the investment community. Mellon did not make frequent announcements. The Times said the comments were awaited "with unusual interest because of the unprecedented speculative activities on the Stock Exchange." The closest Mellon came to commenting on the state of the stock market was in reference to interest rates: "High interest rates in the open market, due to the speculation on the Stock Exchange, forced the Treasury during the year to pay 4 ¾ per cent in selling one of its short-term issues."

In February the Federal Reserve Board sent out its famous letter dated February 2, 1929, to all Federal Reserve banks. The objective was to tell all members banks that a bank could not use the rediscount facilities at its Federal Reserve Bank "when it borrows either for the purpose of making speculative loans or for the purpose of maintaining speculative loans." This letter alerted the participants of the New York Stock Exchange that the board believed that there was too much stock market speculation. Member banks were urged not to borrow from the Federal Reserve Bank to finance stock market speculation.

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