America's Money Machine

PART II / THE GREAT REVERSAL
that all other loans, which comprise loans for agricultural and industrial
purposes as well as commercial loans, actually decreased during the year.
The Report went on to comment that loans on securities meantime had
increased 15.8 per cent, and that "the decrease in other loans would have
been larger but for the real estate loans, which increased $276 million,
while commercial loans proper decreased $230 million."
During 1927, the Federal Reserve, to counter the business decline that
had begun, had adopted a moderate "easy money" policy, made effective
through authorizing reductions in the discount rate and increasing the
System's open market purchase of securities. The discount rate was reduced
in August from 4 per cent to 3 1/2 per cent; open market purchase
of securities rose from $210 million at the end ofJune to $392 million
at year end, but this was less significant than it appears, for ordinarily the
end ofJune figures ran substantially less than end of year figures.
Early in 1928, the Board concluded that business no longer required
the stimulus of easy money, and "determined to exercise its influence
toward firmer money conditions."2 The Reserve banks therefore sold
securities in the first six months in approximately the.same amount as
they had purchased earlier to offset the gold outflow ofthe previous year.
Actually, the actions of the Reserve authorities to modify the diversion
ofcredit to the security markets remained, in accordance with their stated
policy, tentative and modest until early in 1929. On February 7 of that
year, the Board addressed the member banks by letter, stating:
During the last year or more the functioning ofthe Federal Reserve System
has encountered interference by reason ofthe excessive amount ofthe country's
credit absorbed in speculative security loans. The volume is still growing....
The matter is one that concerns every section of the country and
every business interest. ...
The Federal Reserve Board neither assumes the right nor has it any disposition
to set itself up as an arbiter of security speculation or values. It is,
however, its business to see to it that the Federal Reserve banks function as
effectively as conditions will permit. . . . The extraordinary absorption of
funds in speculative security loans ... deserves particular attention.... A
member bank is not within its reasonable claims for rediscount facilities when
it borrows for purpose of making or maintaining speculative loans. 3
For a less formal and more intimate statement ofthe theory and convictions
upon which Federal Reserve policy moved, we have an illuminating
article written by Owen D. Young for Review of Reviews for September,
1928. Mr. Young was at this time chairman of the board of General