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With a Bang, not a Whimper: Pricking Germany's "Stock Market Bubble" in 1927 and the Slide into Depression

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Author Info
Hans Joachim Voth ()

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Abstract

In May 1927, the German central bank intervened indirectly to reduce lending to equity investors. The crash that followed ended the only stock market boom during Germany’s relative stabilization 1924-28. This paper examines the factors that lead to the intervention as well as its consequences. We argue that genuine concern about the ‘exuberant’ level of the stock market, in addition to worries about an inflow of foreign funds, tipped the scales in favour of intervention. The evidence strongly suggests that the German central bank under Hjalmar Schacht was wrong to be concerned about stockprices-there was no bubble. Also, the Reichsbank was mistaken in its belief that a fall in the market would reduce the importance of short-term foreign borrowing, and help to ease conditions in the money market. The misguided intervention had important real effects. Investment suffered, helping to tip Germany into depression.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 516.

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Date of creation: Nov 2000
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Handle: RePEc:upf:upfgen:516

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Stock market; foreign lending; fixed exchange rates; asset prices; bubbles; Germany; monetary policy;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
N14 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Europe: 1913-
N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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