A LITTLE LATER, Governor Young of the Federal Reserve in his speech in Cincinnati, reviewed the expansion in speculative credit in such a way as to make it obvious that he expected deflation. The stock market, however, was not alarmed because he said that he favored raising rediscount rates only as a last resort. He further declared that “there is no occasion to become unduly excited because we must recognize the fact that the changed methods of financing business have developed very rapidly. Financing business through shares or bonds can be on a sound basis and, when it is sound, is entitled to credit, but it is not entitled to all the credit or an unreasonable proportion of the total.” Stock prices moved up sharply on the publication of these reassurances, although Mr. Young’s last idea probably was to stimulate further speculation.

Most of the best informed financial authorities hesitate to make any predictions as to what will happen in either the stock or the money markets but they are all agreed that they do not envy any one with a responsible position in the Federal Reserve System.

Source: Outlook and Independent, April 3 1929

HESITATING to use force, our banking authorities have fallen back on reason. They and their allies have been trying to argue credit out of the stock market, placing before professional and amateur traders reasons why they should sell securities held on margin. If the dangers inherent in the present speculative enthusiasm are as great as the conservatives believe, the authorities are wise to use any corrective methods available. The bombardment of words, nevertheless, has its ridiculous aspects. This is especially true because of the tendency in Wall Street to interpret some statements which seem on their face to be warnings as bullish.

Mr. Paul M. Warburg, one of the original members of the Federal Reserve Board, thinks the credit situation dangerous and has said so. “Present conditions,” he warned, “recall to our mind the painful events of the years 1919-21 …. People who express the fear that increases in the Federal Reserve Bank’s rediscount rates might hurt business overlook the far greater hurt the country will have to suffer if their advice to permit the situation ‘to work itself out’ were followed.”

The whole tenor of Mr. Warburg’s statement was thoroughly bearish but many of its readers singled out his charge that the rudder of the American credit market had passed into the hands of Stock Exchange operators “who have for months governed the flow of money, not only in the United States, but in the principal marts of the world.”

These readers hailed the assertion as an implication that speculators would maintain control of the money market and could drive prices higher.

Mr. Warburg’s statement was rather critical of the Reserve authorities but it was probably issued, nevertheless, as part of their educational campaign to stop speculation. It must have sur-prised them when they heard of market letters which hailed it as a bullish argument.

Then came Mr. Melton’s famous advice to the investing public to buy bonds. Mr. Mellon is ex-officio chairman of the Federal Reserve Board and the other members undoubtedly hoped that investors would interpret his advice as a warning that stock prices are too high. But quite the contrary was the case. If bond prices seemed attractive, the speculative community urged, the Secretary of the Treasury could not expect money rates to go higher.

“Business is undoubtedly on as sound a basis as it ever has been,” the bullish propagandists insisted. “If money rates are going no higher it is safe to buy stocks.”

Source: Outlook and Independent, April 3 1929

THE well-known columnist of the New York “World,” F. P. A., recorded in his diary the other day that he found two eminent artists arguing heatedly about the policy of the Federal Reserve authorities. This would have been surprising a year or six months ago but the credit situation in this country—and it is impossible to discuss the credit situation without mentioning Federal Reserve policy has become a topic of such universal interest that it is hard to find an artist, a clergyman, a nursemaid or a barber who is not eager to talk about it.

The facts are clear enough and are familiar to almost every one. The American public is in the stock market, is betting that stocks will go higher, on a scale that has never been approximated before. You and I and the man next door have borrowed so much money to buy securities that brokerage loans have reached the record total of $5,793,000,000, according to the Federal Reserve figures. This demand for credit has raised its price to the point where both call and time loans command in the neighborhood of 8 per cent. Legitimate business is accommodated at somewhat lower but nevertheless uncomfortably high rates. The prosperity of the country rests, of course, on the soundness of business. The fear has been expressed that so much money is going into the market that business is in danger of being pinched wlien it wants money for its legitimate expansion programs.

One of the functions of the Federal Reserve authorities is to curb speculation, or at least attempt to do so. By raising rediscount rates throughout the system and by selling their holdings of Government securities the banks have already taken what would have been regarded as very severe measures a year or so ago.

At the time this is written the stock market is fairly nervous but there has been no deflation worth mentioning. What can the Federal Reserve authorities do now? Their holdings of Government securities now are so small that they cannot sell many more. The only really dangerous weapons left are higher rediscount rates. They are dangerous, however, not only for the speculator but for the business man all over the world.

If rates are raised, the business man here will have to pay 7 per cent or so instead of 6 for loans. This change almost certainly would slow up industrial activity. To prevent a deluge of gold to the United States, moreover, the European central banks would have to raise their rates still further and business there would suffer. Many conservatives insist that speculation in our markets must be checked at any cost but the Reserve authorities can be pardoned for hesitating to take such brutal measures, particularly in view of the certainty that a political uproar would follow any serious damage to business.

Source: Outlook and Independent, April 3 1929

THE COMBINATION of the Federal. Reserve scolding and the boosted British bank rate chilled the enthusiasm of Wall Street speculators, and stock prices dipped sharply. They may have gone considerably lower by the time these words appear in print. The alarm was due to the feeling that the raising of the rate in London made a corresponding advance possible here. While the London rate remained where it was it was obvious that New York’s rate could not be boosted without attracting a very torrent of gold. Now the danger would not be so great.

Even so, higher discount rates in this country would make the international position about what it was in January when our strenuous bidding for credit brought in gold. This is a condition which the Reserve authorities would not care to see restored. For the time being, then, probably the best they can do is to sit tight and pray that the market will fall of its own weight.

FROM THE MOMENT of its issuance, experts everywhere have been debating its wisdom. As to the general contention that the country would be better off if the stock market were using less money, there is fairly general agreement. Whether or not the Reserve Board should deal out reprimands is another matter. If the latest animad-version brings about real deflation, every one except bullish speculators will be gratified. If not. Federal Reserve prestige will be at a pretty low ebb. The Board issued what amounted to a warning against speculation last June and stocks soon afterwards started on a long climb that did not stop until December. The financing of this advance sucked up a good deal of capital, but commerce and industry nevertheless were able to secure accommodation at rates of 6 per cent or better. On the day after the latest rebuke, the call money rate, which is ordinarily considerably higher than the price of commercial loans, was steady at 6 per cent.

Perhaps the strangest aftermath of the Federal Reserve sermon was the resentment expressed in Congress against interference with “the natural movement of credit.” National legislators usually are threatening to take steps to deprive Wall Street of funds but Louis T. McFadden, Chairman of the House Committee on Banking and Currency and author of a great deal of banking legislation, rebuked the Board for over-stepping its authority. He feels very strongly that the natural forces of supply and demand should be allowed to operate. If the stock market runs wild, he argues, its excesses will bring retribution. At present, he contends, neither the Board nor any one else is in a position to judge whether the market is using more credit than it should.

Source: Outlook and Independent, Feb 20, 1929

WE’VE tried everything else. Let’s give them a good old-fashioned scolding.” This is about what the members of the Federal Reserve Board must have said to each other before issuing the famous statement of February 6, in which they minced no words in asserting that the amount of funds being used for speculation was a menace to business.

“During the last year or more,” the Board complained, “the functioning of the Federal Reserve System has encountered interference by reason of the excessive amount of the country’s credit absorbed in speculative security loans. . .

“Coming at a time when the country has lost some $500,000,000 of gold, the effect of the great and growing volume of speculative credit has already pro-duced some strain, which has reflected itself in advances of from 1 to 1 1/2 per cent in the cost of credit for commercial uses. The matter is one that concerns every section of the country and every business interest, as an aggravation of these conditions may be expected to have detrimental effects on business and may impair its future.”

This was the latest shot in a barrage which the country’s central banking authorities have been laying down on the stock market for more than a year. Since the first of 1928 it has been an open secret that the Reserve Board has viewed with uneasiness the growing volume of speculation as indicated by the swelling brokers’ loans. The Reserve authorities, as they made plain in their recent statement, have no interest in the price at which securities sell or the casualties among speculators but they do feel it their duty to prevent, if they can, the absorption by speculators of funds that are needed for so-called legitimate business.

In order to squeeze funds out of the market they have raised the discount rates twice and have sold Government securities, thereby restricting the supply of credit and tending to raise its price. Their measures have met with temporary successes but each set-back and each sizeable reduction in the brokerage loan total proved to be only preludes to new advances and new “record highs” for the loan figures.

These rebuffs put the Reserve authorities in rather an unpleasant position. In the first place, the failure of their semipunitive gestures lowered their prestige. Not so long ago, Wall Street took for granted that the Board could squash the stock market whenever it felt so inclined. Today the opinion of the average denizen of the customers’ rooms is that the bullish speculative forces and the Reserve authorities have locked horns and that the latter have been defeated. If we have thumbed our noses at the Board before and got away with it, reasons the man who is borrowing money to carry stocks, we can do it again.

In the second place, the Reserve Board finds that it has used up most of its available ammunition. The Board has the authority to raise discount rates again and sell more Government securities. They may, indeed, do just that. For several reasons, however, they hesitate. One of their chief functions is to act as guardians of commerce and industry. By making credit more expensive, they presumably will hamper business all through. To this they are naturally averse. Furthermore, if they boost money rates here gold will be attracted from abroad, from London in particular. Since the Reserve authorities shaped their policy in 1927 to bring about exports of gold, which foreign countries needed and we did not, it is clear that they would not care to see it coming back again.

During January gold was arriving here in large consignments and the British banking officials were frankly worried. Because of the effect on their business they too were loath to raise the discount rate. It was jumped from 5 to 6 per cent nevertheless, on February 7 and gold imports to this country stopped abruptly.

Source: Outlook and Independent, Feb 20, 1929