America's Money Machine

The Lapping Waves of Crisis 139
Electric Company and of the Radio Corporation of America, two of the
largest business enterprises ofthe country, and was also deputy chairman
of the Federal Reserve Bank of New York. Explaining the Board's action
in 1927 in reducing the rediscount rate from 4 to 3 1/2 per cent, he wrote:
In the summer of 1927, the European exchanges were weak, just at the
time that our fall crop movement was coming on. The export ofour agricultural
surplus was the most important factor ofour domestic economic problem.
It was obvious that the buying power of Europe for our agricultural
products, and to some extent for our manufactured products,- would be
greatly curtailed if the foreign currencies were at an abnormal discount.
In August, 1927, the rediscount rate of the Federal Reserve Bank of New
York, and of the other banks generally throughout the System, was 4 per
cent. Had not this foreign situation existed, it would probably have remained
at 4 per cent, but the administrators of the Federal Reserve System concluded
to make the rediscount rate 3 1/2 per cent in order that so far as the
rate could influence the money market, money in New York might be cheap
as compared with the rates in London, Paris, Berlin, Amsterdam, and other
financial centers.
This disparity would tend to strengthen the foreign· exchanges and increase
the buying power ofEuropeans for our cotton, wheat, and other food
supplies, and at the same time provide cheap domestic money for the movement
of the crops. It was most important, not only in the interest of our
farmers, but in the economic interest of the whole country that our surplus
should be exported, rather than be left to depress the domestic price.
That action, which I believe was wisely taken, had the desired effect; and
the recent improvement in our agricultural situation as well as the continued
export of our manufactured goods has been aided, in my judgment, by that
action of the Federal Reserve System.... It was also apparent that our
domestic business was slowing down, and that as a result we would, in the
normal course, have increased unemployment in the winter. Insofar as the
Federal Reserve System could stimulate business with a low discount rate it
was clearly wise both from the standpoint of our exports and our domestic
consumption.
Mr. Young went on to observe that the policy misfired, that business,
already financed, did not make use ofthis credit, and it was instead largely
absorbed in the stock market.
"During the late autumn of 1927," he continued,
the question of whether the rate should be restored to 4 percent was frequently
discussed, but that was not done until February 3, 1928.
It may be that the Federal Reserve System could have-without danger to
our export situation and our domestic business situation-and·therefore