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With a Bang, Not a Whimper: Pricking Germany’s ’Stockmarket Bubble’ in 1927 and the Slide Into Depression

By Hans-joachim Voth

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 shortterm 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. JEL classification code

Topics: Stock Market, Foreign Lending, Fixed Exchange Rates, Asset
Year: 2003
OAI identifier: oai:CiteSeerX.psu:10.1.1.196.5554
Provided by: CiteSeerX
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