Federal Reserve Jawboning Part 2

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

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