Credit and the Federal Reserve Part 1

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

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