the end of both Britain’s and the world’s gold standard—a standard that
had existed for over 200 years.
Fearing chaos in the currency market, the British government or-
dered the London Stock Exchange closed. New York Stock Exchange of-
ficials decided to keep the U.S. exchange open but also braced for panic
selling. The suspension of gold payments by Britain, the second-greatest
industrial power, raised fears that other industrial countries might be
forced to abandon gold. Central bankers called the suspension “a world
financial crisis of unprecedented dimensions.”^3 For the first time ever,
the New York Exchange banned short selling in an effort to shore up
stock share prices.
But much to New York’s surprise, stocks rallied sharply after a
short sinking spell, and many issues ended the day higher. Clearly,
British suspension was not seen as negative for American equities.
Nor was this “unprecedented financial crisis” a problem for the
British stock market. When England reopened the exchange on Septem-
ber 23, prices soared. The AP wire gave the following colorful descrip-
tion of the reopening of the exchange:
Swarms of stock brokers, laughing and cheering like schoolboys, invaded
the Stock Exchange today for the resumption of trading after the two-day
compulsory close-down—and their buoyancy was reflected in the prices
of many securities.^4
Despite the dire predictions of government officials, shareholders
viewed casting off the gold standard as good for the economy and even
better for stocks. As a result of the gold suspension, the British govern-
ment could expand credit by lending reserves to the banking system,
and the fall in the value of the British pound would increase the demand
for British exports. The stock market gave a ringing endorsement to the
actions that shocked conservative world financiers. In fact, September
1931 marked the low point of the British stock market, while the United
States and other countries that stayed on the gold standard continued
to sink into depression. The lessons from history: liquidity and easy
credit feed the stock market, and the ability of the central banks to provide
liquidity at will is a critical plus for stock values.
A year and a half later, the United States joined Britain in abandon-
ing the gold standard, and finally every nation eventually went to a fiat,
paper money standard. But despite the new standard’s inflationary bias,
188 PART 3 How the Economic Environment Impacts Stocks
(^3) “World Crisis Seen by Vienna Bankers,” New York Times, September 21, 1931, p. 2.
(^4) “British Stocks Rise, Pound Goes Lower,” New York Times, September 24, 1931, p. 2.