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