America's Money Machine

140 PART II / THE GREAT REVERSAL
should have, advanced the rate to 4 per cent earlier than it did. But it was
wise, I am sure, to have resolved the doubt in favor of our export and
domestic business situation even if, as a collateral consequence, too much
credit was going into the stock market.
The European exchanges being strong, and the European countries being
in need of more gold to ballast their currencies, it was quite natural that a
gold flow should start out of this country. Looked at in a large way, that was
to be desired, because it would reduce the temptation to uncontrolled inflation.
Since November, 1927, something like $500,000,000 in gold has been
exported. One would have thought that speculators and financial people
generally would have given immediate attention to this movement and realized
that it would increase proportionately the rediscounts at the Federal
Reserve banks. As a matter offact, no attention was paid to it. Brokers' loans
rapidly increased in the face of it, and credit became still further expanded.
The Federal Reserve System thereupon began to sell securities from its
portfolio to the market, which would have the effect of tightening money
rates. As a result of the gold exports and these sales, the banks borrowed
additional sums from the Federal Reserve banks, and in order to discourage
borrowing the rate was advanced in New York to 4 1/2 per cent on May 17,
1928.
As a· result of all of these factors, rates for call money on the Stock Exchange
went up, and as might be expected, in a highly speculative atmosphere
they fluctuated widely and abruptly. The result was that although the
member banks endeavored to call their loans and reduce the amount of
credit in the stockmarket, private individuals and large corporations withdrew
their surplus funds from deposit with the banks, and put them directly
on call. This had the effect of taking control of the money market, to some
degree, out ofthe hands ofthe banks and out ofthe Federal Reserve System.
The banks are now borrowing over a billion dollars from the Federal
Reserve. This amount is double the borrowing of the same banks from the
System a year ago, largely because ofgold exports and Federal Reserve sales
of securities. The banks are trying to payoff some of these loans, because
they quite properly believe that Reserve credit should be used only to meet
seasonal and other temporary needs. If the banks are to payoff the Federal
Reserve they must seek funds to that purpose by restricting their loans both
at home and abroad.
Following this narration of Reserve actions, Mr. Young went on to a
spirited defense and explanation of Federal Reserve policy and philosophy,
as it was then understood:
"Now," he declared,
I would not have anyone think from what I have said that the Federal Reserve
System has its eye on the stock market. That is the last thing that enters into
its consideration. The System has its eye on the business interests of the