1913 was a significant year for the US stock market.
On December 23 of that year, the US Congress passed the Federal Reserve Act, and the Federal Reserve System (Household Federal Reserve System) of the United States was established based on the bill. More than 70 years later, the United States once again has its own central bank.
The Federal Reserve Act was drafted by U.S. Senate Republican leader Nelson Wilmarth Aldrich. After the stock market crisis in 1907, he was appointed by the government to be responsible for the research of the central banking system. Inspired by the operating history of European Central Bank and the 1907 J.P. Morgan rescue measures, he designed a decentralized federal reserve system, responsible for the management of commercial banks' reserve funds, the operation of bill discount windows, and the issuance of US dollar banknotes.
Under his conception, according to geographical location, 15 independent Federal Reserve banks were established across the United States, and they were responsible for the daily work of the Federal Reserve in the local area, such as formulating local discount rates and checking the financial status of member banks.
Local Fed banks are completely "private" and are jointly owned and managed by shareholders of local member banks. In this way, large banks in New York cannot affect the personnel appointments of Fed banks in other regions, and better avoid the impact of Wall Street on the Federal Reserve. At the same time, each Fed regularly elects members to the Board of Governors in Washington, DC to discuss and coordinate monetary policy (such as reserve requirement ratio ).
However, when the bill was initially completed, the ruling parties of the US government had undergone earth-shaking changes. Democratic President Woodrow Wilson , who supports strengthening government supervision, came to power. At the sign of the new president, Nelson's successor made two important changes to the bill. First, the number of Fed banks has dropped from 15 to 12. More importantly, the right to appoint a board of directors is transferred from the Fed to the U.S. President and the Senate, while strengthening the Council's supervision of each Fed. In this way, the federal government has the power to exert influence on the Federal Reserve's monetary policy.
The establishment of the Federal Reserve and the federal government's intervention in monetary policy became a prelude to the US government's expansion of its economic role over the next half century. The frequent economic crisis in the United States in the early 20th century proves that the market's "invisible hands" cannot solve all the problems encountered in the economic development of capitalism. In terms of smoothing economic cycles and promoting social fairness, the government's "visible hands" are indispensable.
As the final lender of commercial banks and the executor of monetary policy, the Federal Reserve occupies the center of the financial system, and the operating logic of the entire US financial market has changed due to the emergence of the Federal Reserve. Today, the Fed's every move is affecting the nerves of the world's financial market, including , U.S. stocks, . Every speech by Fed officials and minutes will be followed by countless traders and investors. Every change in the direction of the Federal Reserve's governance will cause huge waves in the financial market without exception.
But if you were in the context of a more grand narrative of that era, the establishment of the Federal Reserve in 1913 might not be so conspicuous. This year, the United States and the entire world have reached a crossroads of destiny. On the other side of the ocean, the Allied Power led by Britain and the ally countries led by Germany are tense, and the war is about to break out.
Since the Second Industrial Revolution , emerging industrial countries such as the United States and Germany have been thriving. However, the world order still follows the old pattern since the first industrial revolution . The third world colonies have long been divided up by the two colonial powers of Britain and France. Even countries such as China, which are seemingly sovereign and independent, have long been divided into the " exclusive economic zone " of each country. Obstructed by the suzerain countries, it is difficult for later industrial countries to sell goods to colonies of other countries, and the difficulty in developing the world market has become a concern for those in power in these countries.
In order to break this old pattern, the United States and Germany have made many diplomatic and military efforts. In 1898, in order to seize Spanish colonies in the Americas and Asia, the United States provoked the Spanish-American War and won the victory, and successfully seized control of Cuba , Puerto Rico and Philippine . The expansion of the United States aroused the vigilance of the colonial powers of Western Europe and also became one of the origins of the "American threat theory".
However, compared with the United States, the opponent far away from the ocean, another strong rival, Germany, on the side of the bed, has made Britain and France more worried. After the decline of The Ottoman Empire , a power vacuum appeared in on the Balkans, and conflicts broke out again on the issue of ownership of interests. When the Federal Reserve was established in 1913, the two sides had already begun to expand their military forces and demonstrate their "muscles". Just half a year later, the fuse of Sarajevo detonated World War I .
This war not only determined the fate of the European countries involved, but also affected the "spectator" across the ocean in all aspects - the fate of the United States, and even determined the trend of the US stock market in the next twenty years...
1, the "lucky" war
On the eve of the outbreak of World War I, Europe's unstable factors hindered foreign investment and commodity demand, causing The US economy to fall into recession, and the stock market was bleak. On the one hand, the crumbling situation in Europe has hit hard on business confidence and world capital exchanges, and European businessmen have continuously withdrawn their investments in the United States to recover funds and prepare for the upcoming war. On the other hand, worries about the war also suppressed the daily consumption demand of Europeans, with external demand declining and the US commodity export surplus narrowing significantly.
Under the combined effect of the two, the United States lost $100 million worth of gold reserves in 1914, setting the fastest loss rate since official statistics were recorded in the 1870s. Real GDP shrank by 7.6%, and the impact of the cloud of war on the US economy is no less than a serious economic crisis.
Due to negative impacts of the economy, in the first half of the year when war broke out in 1914, the U.S. stock index stumbled down by about 10%.
On July 28, the long-planned war finally broke out, and the Allies and Allied countries were successively involved in the war. There is no doubt that the financial risks brought by World War far exceed any peaceful economic crisis. In order to prevent the stock market chaos caused by concentrated capital flight, New York Stock Exchange decisively decided to close the market on July 31, and it did not reopen until December 15 of that year. This market closure set the longest market closure record since the establishment of the New York Stock Exchange, and the record has not been broken until today.
The decision to close the NYSE was wise, and the financial markets survived the panic in the early stages of the war during the closing. Over time, American investors tried to sort out their thoughts and began to explore what this war across the ocean meant to the United States. They began to understand that the First World War may not be a huge risk to the United States. On the contrary, this is a god-given and unprecedented "luck" that will lead the United States to its peak. After the outbreak of the war, the most direct benefit was the US export department. Starting from 1915, with more and more troops investing on the battlefield, European countries were deeply trapped in the quagmire of war, domestic labor shortages, and industrial production was in short supply. At the same time, the consumption of weapons and materials on the battlefield is increasing day by day. When domestic production is far from meeting the military's material expenses, countries can only seek help from external forces. As the largest neutral industrial country outside the war, the United States naturally became the destination for belligerent countries to purchase military supplies.
1915, the orders for military supplies in Europe came like snowflakes. The American factories were working at full capacity to produce materials, and the economic momentum was full of energy, completely fading away the weakness in the early stages of the war. That year, the United States' foreign goods and services surplus reached US$1.7 billion, close to five times the surplus in 1913 on the eve of the war.As the European battlefield entered a white-hot stage, US commodity exports reached a peak again. In 1917, the US export department created a surplus of US$3.5 billion for the country, accounting for 5.76% of GDP that year. Stimulated by huge external demand, the profits of listed American companies rose by 200% in two years.
Companies that are closer to military production have more prominent profit growth. Typical examples are the number of orders in hand of the US Steel Group during World War I increased by 240%. In 1913, before World War I, the company only earned $81 million for its shareholders throughout the year, while in 1917, the company's net operating profit reached $140 million in one quarter. The net profit of American Can Company, the leading canned food production leader, rose from less than $30 million in 1914 to $80 million in 1916.
During World War I, a group of military industrial companies that are still well-known today took advantage of the good news of the war to go public to raise funds and expand the production capacity .
For example, Dupont De Nemours Inc, the largest gunpowder manufacturer in the United States, went public in 1916 and later transformed into the world's second largest chemical company. Wright-Martin Aircraft Corporation, which was founded by two founders of the American Aviation Industry, was launched in 1916 and later became the predecessor of aircraft manufacturers Curtiss-Wright Corporation and Lockheed Martin .
Stimulated by European military demand, the profits of listed American companies have recovered significantly, supporting the stock price to continue to rise by more than 30% from 1915 to the spring of 1917. However, it is obvious that the benefits of war cannot last forever. Investors expect that the profits stimulated by war will eventually fade with the slump of the war, so the stock prices of listed companies are far less obvious than their profits.
From the spring of 1917, a new factor began to restrict stock prices, that is, the United States participated in World War I and the subsequent dominant economy.
In the early days of World War I, the United States, as a neutral country in , sold military supplies to both the Allies and the Allies. But in fact, the United States has closer relations with the Allies represented by the United Kingdom and more supplies are provided, which has aroused dissatisfaction among the German side. Germany therefore announced the " unrestricted submarine warfare ", and then sank several merchant ships from the United States that were transporting supplies to the United Kingdom, triggering a huge anti-German wave among the American people.
At the same time, in order to increase its voice in the post-war world, the US government took advantage of this anti-German wave to personally participate in the war and abandoned its previous neutral policies. After joining the war, in order to better launch the war machine, the United States began to implement a "controlled economy" similar to a planned economy.
Under the control of the economy, the government not only personally participates in the design of the enterprise's production and operation plan , but also controls the price of the enterprise's goods sold to the government, squeezing the enterprise's profits.
Take US Steel as an example. Since the second half of 1917, although government military expenditures have increased and corporate output has continued to grow, corporate profits have plummeted under price control. Not only that, in order to raise military expenses, the US government also imposes high tax rates on businesses and individuals. In the company's operating profit, not only more than half of it needs to be paid to the government as corporate tax, but also in the dividends distributed to shareholders, the government also allocates nearly 30% as personal income tax .
Left picture: 1913-1920 US commodity export volume Right picture: 1914-1918 US Steel Group Profitability
Under the double blow of increased taxes and reduced profits, the US stock index fell back to its pre-war level, and this sluggish stock price continued until the end of the war in 1918. Although the price of stock after the war is almost the same as before the war, the wealth of war accumulated for several years has been undercurrent in the stock market. Through the war, the United States has transformed from the world's largest net debtor country to a creditor country, and the New York Stock Exchange has surpassed , London Stock Exchange , becoming the world's largest stock exchange. The world's economic hegemony has shifted, the era of the United States has arrived, and an unprecedented bull market will sound a salute for this era.
2, Roaring Age
Two years after World War I, the US economy experienced a brief adjustment.Due to the stimulation of external demand and national military expenditure in the war, the U.S. inflation problem is more serious. At the call of the public, the United States, which still implemented the gold standard, began to control prices in order to ensure the purchasing power of the US dollar.
At this time, the newly established Federal Reserve played its first role as a central bank in macro-control , and in 1920 it increased the discount rate from 4% to 6%. The Federal Reserve's interest rate hike operation effectively curbed consumption and investment. The US economy briefly fell into recession from 1920 to 1921. The most direct result was that general prices fell by 15% within two years, and the inflation problem was completely solved.
After the end of economic adjustment, the United States entered a post-World War I prosperity, with rapid economic growth and unemployment rate continuously declining, known in history as the "roaring twenties."
At the same time, an unprecedented bull market in stocks appeared, becoming the most conspicuous footnote of this era. From 1922, the U.S. stock market rose unilaterally. Before the stock market collapsed in 1929, the U.S. stock index rose by more than 300%, the highest in the world. In fact, European countries also experienced similar post-war reconstruction and recovery in the 1920s, but other stock markets performed far less well than US stocks. For example, the British stock market rose by only about 70% during the same period.
Why is the only US stock market making such an amazing rise? The reason also needs to be found in the United States' fundamentals and financial system.
1921-1929 Profit index of US listed companies
In the First World War, the American people accumulated rich war wealth by producing war materials and turned into consumption power after the war. This is the foundation of the bull market in the United States in the 1920s that other countries do not have.
1914 to World War I and post-war reconstruction in Europe, the United States obtained a total of about $20 billion in wealth through its commodity surplus. World gold flowed from Britain to the United States, turning into workers' wages, corporate profits and government taxes, but it was eventually put into the pockets of the American people.
During the war, the US government issued approximately US$21.5 billion in government bonds in order to raise military expenses, temporarily suppressing the consumption demand of the people during the war. After the war, as the US government continued to repay debts, the American people's pockets were bulging again and consumption was gradually released. From 1922 to 1929, the profits of listed American companies increased by more than 4 times, which is the best proof of the strong consumption capacity of the American people.
htmlIn the 2020s, American people began to cultivate the habit of borrowing and consumption ahead of schedule, which further strengthened consumption demand.After the war, the US government began to implement welfare systems such as minimum wage standards, which ensured the basic lives of the people. Coupled with the long-term economic prosperity, the labor market is in short supply, which makes the American people forget the risks of unemployment and savings, and cultivates the habit of advanced consumption.
In the consumption of large furniture and durable goods, this kind of consumer installment loan is more common. According to statistics, more than 90% of pianos were purchased in installments at that time. Objectively speaking, loan consumption actually advances future consumption capacity and promotes the current economic growth .
However, when the income of ordinary people falls and consumer loans are difficult to repay, the consequences are very terrible. The tragic scene of American people displaced and unable to eat during the Great Depression of in the 1930s was partly due to this habit of advanced consumption. Of course, no one could have foreseeed this result in the prosperous 20s.
The innovation of enterprise production organization forms has also promoted the improvement of production efficiency and the increase of people's income and consumption capacity.
1913, Henry Ford After visiting the meat slaughterhouse, he got inspiration and applied the assembly line to car assembly. His revolutionary idea was a huge success and his production efficiency was greatly improved. The production labor hours of the famous Ford Model T-car were reduced from 12.5 hours to 1.5 hours, and the production price was reduced by 2/3. At its peak in 1923, the Ford could produce 1.83 million cars, while the second car manufacturer, Chevrolet could produce only 330,000 cars. The great success of the
Ford assembly line was quickly promoted, not only promoting the American automobile culture, but also improving the production efficiency of the entire American durable goods manufacturing industry.After Ford succeeded and occupied the market, he decided to increase the daily salary of production workers from $2.34 to $5, intending to cultivate the consumer group of Ford Automobile , so that a Ford worker can buy a car in less than four months' salary.
Due to the improvement of production efficiency, the number of middle class in the United States increased greatly in the 1920s.
In addition to fundamental factors, the US stock bull market in the 20s also contained a lot of bubbles. The long-term rise in stock prices provides opportunities for stock speculation, and at this time, the financial system lacking regulation has become an accomplice in the accumulation of bubbles.
Since the establishment of the Federal Reserve, the US government's governance ideas have changed and began to emphasize the government's public functions. However, at this time the federal government still lacks experience in financial supervision and ignores the specific flow of commercial bank credit. After many years of bull markets, the stock market has attracted more and more people's attention, and the ability to make wealth in the bull market has also attracted speculation. stock broker provides credit leverage for speculators to help the latter amplify the gains of stocks' rise. As more and more speculators join the market, stockbrokers obviously have insufficient funds, and they have begun to seek financial help from commercial banks.
is just at this time. The Federal Reserve, which completed the inflation governance task, began to continuously lower the discount interest rate, resulting in the reduction of large enterprises' income from surplus funds for investment notes and bonds, and therefore it is more radical in terms of high-interest loans to brokers.
For example, in early 1929, the short-term loan that was lending to brokers every day reached a huge amount of US$69 million. In 1928, when speculation was the most prosperous, non-financial institutions doubled their loans to stock market brokers compared with the previous year. A total of US$3.9 billion in corporate surplus funds flowed into the stock market through lending to brokers, even exceeding the banks' loans to stock market brokers.
As long as the stock market continues to rise and stock market brokers are worried about repaying their loans, this kind of loan is "a hen that can lay golden eggs" in the eyes of corporate finance managers. However, it is these funds that finally make the US stock market blow up a huge bubble.
Despite the bubble, the bull market in the US stock market in the 1920s still reflects to a certain extent the fact that the United States has increased its economic strength in World War I and after the war and surpassed the United Kingdom to become a global wealth center.
However, the United States' leading position is not stable. Although Britain's strength is damaged, it still has a large number of colonies as its backing. The world's two monetary systems of the US dollar and the British pound are on par. Within more than ten years, the United States will need to wait for another historical opportunity to achieve an unshakable hegemony.
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