America's Money Machine

110 PART II / THE GREAT REVERSAL
Wages, the Board found, apparently were falling behind advances In
prices and the cost of living.
In the light of all these factors the Board prognosticated no general
reduction of prices, though it suggested somewhat Delphicly that
changes in prices that had already taken place might be the basis for a
more far-reaching alteration in the essential price structure.
Meantime, as a measure to discourage excessive use ofFederal Reserve
credit to finance expansion the Board obtained from Congress an amendment
to the Federal Reserve Act (April 13, 1920) to permit Reserve banks
to vary or graduate the discount rate charged member banks, based upon
the total amount of their borrowing from the Reserve. (Section XIV, 5)
"In this way," explained Governor Harding, "it would be possible to
reduce excessive borrowings of member banks and induce them to hold
their own large borrowers in check without raising the basic rate. The
Federal Reserve banks would thus be provided with an effective method
of dealing with credit expansion, more nearly at the.source than is now
practicable, and without the unnecessary hardship to banks and borrowers
who are conducting their affairs within the bounds of moderation."
He went on to say that "the expansion of credit set in motion by the
war must be checked. Credit must be brought under more effective control
and its flow once more regulated and governed with careful regard
to the economic welfare of the country and the needs of its producing
industries."3
At this juncture Senator Owen, champion of easy money, launched an
attack upon the Federal Reserve's high rediscount rate, charging the
Board with responsibility for a $3 billion depreciation in the $26 billion
of government bonds outstanding.
"I do not think it wise, I do not think it just, I do not think it decent
or ethical," he declared, "for the government agencies to pursue a policy
which causes a loss of $3 billion to their patriotic bondholders."
The Federal Reserve Board, in its review ofApril business, revealed its
mounting concern over the price situation. It said:
The existence of the Federal Reserve System does not relieve a single
banker from his individual responsibility to do his share in checking further
expansion by exercising a stricter control ofthe credit he creates; for, except
in its limited open market purchases of bankers' acceptances, the Federal
Reserve System does not act directly on the volume of credit, but acts only
indirectly, through the banks, on whom the primary responsibility rests.
Clearly, the present is not an appropriate time to extend business merely
for the sake ofincreased volume ofprofits. This applies not only to producers