Crash! Crash! Crash!

In the last week of July 1914, when the U. S. was still as isolated journalistically as it was politically, the threat of war in Europe was not even considered a contributing factor in the stockmarket's desultory decline. Then the unthinkable happened. In swift succession the great European markets closed their doors, and the selling of an entire world, hysterically trying to convert securities into cash, concentrated on the New York Stock Exchange. Bravely the governors announced their determination to keep open, but on the morning of July 31, after one look at the overnight accumulation of selling orders, they reluctantly reconsidered. For four months the Stock Exchange was shut tight, timidly reopening only after informal "black-bourse" trading had reached such sizable volume that brokers grew envious. At first all business was on a cash basis, but to nearly everyone's surprise prices started to climb and the Wartime boom was on. Early last week Wall Street had occasion to recall those historic days, for a thundering war scare shook the New York Stock Exchange in the worst one-day break since 1931.

When brokers cleared their desks fortnight ago, hustled out of town for the Labor Day weekend, the market had been falling steadily for three weeks. Supposedly it had fully discounted both war in China and a sudden wave of pessimism over fall business prospects. But the day sun-browned brokers returned from their holiday, a first-class European crisis burst on the front page. Apparently it caught Wall Street at a psychologically vulnerable moment. The market was thin, the selling persistent. Routed from its long rut, the trading volume soared to 1,870,000 shares, and at times the ticker was as much as three minutes behind the floor. When the closing bell bonged that day 385 stocks had touched bottom for 1937, and all three Dow-Jones stock averages had reached new lows for the year, industrials being off 8.16 to 164.39 as against a 1937 high of 194.40 last March.

As an explanation of the break the war-scare seemed pat, for commodity prices were strong and the currency of an interested power, France, was weak. Yet the European stockmarkets showed no similar apprehension. Markets in Paris and London declined but never approached a break.* As for the French franc, which sank to 3.53 1/2 cents, lowest since 1926, the logical explanation was the fact that the Chautemps-Bonnet Government has had as little success as the Blum Cabinet in bolstering France's perennial financial position--clearly indicated last week by an inflationary Bank of France statement showing: 1) the highest note circulation in French history and 2) that the Government had once more dipped into central bank reserves.

For two days after the Tuesday break the market seemed ready for a healthy rebound. Then, without war-scare, labor trouble, Washington slams or serious business news, the market nose-dived again. In the widest break since Oct. 17, 1930, on a volume of 2,320,000 shares--some three times the average daily trading for the past few months--463 stocks set new lows. The Dow-Jones industrials averages touched 157.34, wiping out the gains of 16 long months. Loss in individual issues ran as high as $35 per share. Chrysler, whose high for the year was $135, sagged to $95, off $12 for the week. American Telephone & Telegraph (high: $187) was off $7 to $160; U. S. Steel $n to $93 (high: $126); Allied Chemical $26 to $200 (high: $258); New York Central $7 to $27 (high: $55); International Harvester $14 to $90 (high: $120).

As an explanation of this second crash the war scare was out. The scare itself had faded, and the little flurry in war commodities had died a natural death. In the words of old Alexander Dana Noyes, financial editor of the New York Times, the ready rationalizers of the market's behavior were "completely nonplussed." There were explanations enough but few satisfied anyone except their authors. Some still harped on the dimmer outlook for fourth-quarter business. But as one pundit put it, "Business sentiment is worse than business, and stockmarket sentiment is worse than business sentiment."

By numerous industrial indices August was the best eighth month of any year since 1929. The Department of Commerce estimated last week that the 1937 national income would reach $70,000,000,000--12% ahead of last year and highest since 1930. The full force and effect of farm buying power, fattening on a bumper harvest at fair prices, was still to be felt.

A cheering reminder of the potentialities of swelling credit came over the week-end from the Federal Reserve Board. Loud wails had risen from Wall Street that the Board should ease its 55% margin requirements. The Board had no intention of loosening up stockmarket credit but as a broad inspirational gesture it announced a temporary reversal of its policy of holding down excess bank reserves. It persuaded the Treasury to release $300,000,000 worth of "sterilized" gold, a bookkeeping matter which will swell bank reserves by the same amount, and incidentally provide the Treasury with $300,000,000 cash. At the same time the Reserve Banks will start open-market buying of Government securities--thus automatically pumping out bank reserves. Purpose: "to provide funds to meet seasonal withdrawals of currency from the banks and other seasonal requirements." With business borrowing increasing on top of normal autumn expansion, there had been talk of a possible credit "squeeze."

Precisely opposite to that intended was the effect of the Reserve Board's move. At the start of this week the market rallied briefly. Then, as sentiment veered to the feeling that the move indicated serious apprehension in Washington, another wave of selling hit the Exchange, sending prices crashing for the third time in seven days. Declines from the day's high to the day's low were reminiscent of November 1929.

With the Reserve Board's move creating not confidence but more confusion, Wall Street came to the inevitable conclusion that it was all the fault of the New Deal. Last month Stock Exchange President Charles R. Gay took the unprecedented step of warning the Securities & Exchange Commission that the thinness of trading, resulting directly from, market regulation, would in time produce "abnormal market conditions" (TIME, Aug. 30). Last week President Gay's gloom seemed justified indeed.

During periods of pronounced market weakness like that of last week, the restriction that affects the market most is regulation of operations of insiders in stocks of their own companies. Officials and big shareholders used to step into the market when their stocks looked cheap, thus providing an important stabilizing influence. Today with the threat of law suits always present, the average insider would rather speculate in any stock than the one he knows best. Purpose of restriction on inside trading, like that of all the New Deal's securities regulations, was to make the market safe for the true investor. Violent and unjustified fluctuations were to be ended. Wall Street last week was asking whether the result, ironically enough, was to make the fluctuations more violent and unjustified than ever.

*The Toronto Exchange fell sharply with the New York market. Next day Gladstone Murray, chairman of Canadian Broadcasting Corp., announced that stockmarket commentators would henceforth be banned from the air. Reason: "We've had too many complaints from people who've taken advice from some of these commentaries."

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