Grey Friday

The Dow-Jones averages record that on Dec. 12, 1936 the price of bonds reached the highest level in U. S. history. On that day the averages went above 106, which was more than 40 points above the Depression low. Failing to break its previous mark in a January rally, the bond market has been headed steadily downward ever since. After a wide-open break in Government issues last week there were few who dared predict that bond prices would better their old highs during the life of the present business cycle.

Bonds had been soft all week before the deluge of selling orders hit the Government bond section of the New York Stock Exchange. Most of the business in Government bonds is normally done over-the-counter by big dealers, and $10,000,000 worth of trading in Governments on the Stock Exchange is considered a boom day. Last week in what was a grey if not a black Friday the Exchange volume mounted to $23,450,000, biggest day in 16 years.

Curiously, the panicky selling did not spread to the over-the-counter market. But neither that nor Treasury support, which appeared when trading grew demoralized, prevented prices from diving to new lows for the year. At week's end long-term Government issues showed losses of as much as 1 1/4 points, which is serious in the Government market, a 1/2 point drop being rated a break.

In no sense was the Grey Friday selling a reflection on Government credit. What the bond market showed, clearly, concisely, was growing apprehension over the course of inflation. With inflation come higher interest rates, and the cost of money and the price of bonds, whose rate of retirement is fixed, work in an inflexible inverse ratio. The current downward trend in bonds set in just about the time the Federal Reserve Board was getting set to cut excess bank reserves for the second time, a move which was sure to boost short-term if not long-term interest rates.

Furthermore, a quick glance at the charts showed that the great bull bond market of the 1920s turned its crest early in 1928 when the real "boom" still had a year and a half to run. But even if bond buyers overlooked that last week, they could not, and did not, overlook two ominous signals from Washington. One was President Roosevelt's observation in his fireside talk that "the dangers of 1929 are again becoming possible, not this week or month but within a year or two." The other signal was that the last official caller at the White House before the President packed up for his vacation was Chairman Marriner Stoddard Eccles of the Federal Reserve Board. More than any other official, Mr. Eccles is charged with the job of preventing the New Deal's "controlled" reflation from becoming just plain inflation. Mr. Eccles admitted that he discussed prices with the President, and when anyone discusses prices today it is certainly not because they are too low.

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