America's Money Machine

The Lapping Waves of Crisis 141
United States. It desires to contribute to stability in the purchasing power of
our money, and to provide proper credits for business at reasonable rates
without wide fluctuations.
When, however, it became apparent that Federal Reserve credit, created
primarily for business and made cheap to aid business, is being principally
used for speculative purposes, then it becomes the duty of the Federal Reserve
System to limit that credit to our commercial needs. It is not its purpose
to control prices on the Stock Exchange but it is true that as a consequence
of adjusting credit to commercial needs, prices on the Stock Exchange may
be affected.
There are some who believe that when the Federal Reserve System knew
that its member banks were permitting credit in large amounts to go into the
stock market, it should have refused the credit. Also, it has been suggested
that ifthe Federal Reserve System will not undertake the responsibility, then
a law should be passed penalizing, through taxation, the use of credit for
speculative purposes which Congress might from time to time think undesirable.
I have grave doubts about the wisdom of such action. It is a tremendous
power to pass over to a few men in a central bank to determine in specific
instances the purposes for which their credit shall be used....
As to Congress using the limitless power of taxation in the assignment of
credit, that seems to me to be fraught with much greater danger than the evils
which it is designed to cure.
A central bank, as I see it, should be influenced in its action only by the
economic conditions of the country as a whole. It cannot determine the size
of the pot of credit, nor can it determine the price; but it can, in some
measure, influence both; and that influence should be exercised in the light
of economic conditions as a whole.
Whether the pot ofcredit should be used for one thing or another should,
in my judgment, be left to competitive economic forces uncontrolled by
political interference either directly by law or indirectly through a quasigovernmental
institution, such as the Federal Reserve System.
Then, too, it must be remembered that call money on the Stock Exchange
is now being supplied in substantial measure by others than the member
banks of the Federal Reserve System. Large corporations and wealthy individuals
are withdrawing their money from deposit and putting it on call.
I suspect even that individuals are borrowing at their banks and putting the
money on call, scalping the margins.
All this shows that ifwe take the member banks out of the call loan market
by arbitrary controls, it will not be long before the banks and the Federal
Reserve System will have no direct control ofthe call market whatever. Their
influence right now is relatively small. The large New York banks have called
a very large percentage of their loans, but the vacuum created by their call
has in many instances been filled by their own depositors withdrawing depos-