America's Money Machine

The Fulcrum and the Lever 149
banks themselves, which took occasion to reduce their own borrowings
at the Reserve banks from $857 million to $314 million during the year
1924. They soon began to get the idea, however, and encouraged by the
reduction of the rediscount rate from 4.5 per cent to 3 per cent (in New
York), they began again to borrow to increase their reserves, and their
own lending power. By the end of 1927 they were again in debt by the
amount of $609 million.
When the central bank authorities became alarmed in 1928 over the
results of their easy credit·policy, and attempted to halt the further
expansion ofcredit, it was too late. As rapidly as the Reserve banks drew
credit out ofthe banking system by the process ofselling bills and securities,
it was siphoned back in by the banks increasing their own borrowing.
By the end ofJuly, 1929, the Reserve banks had reduced the volume of
their open market purchases to $222 million, but meantime member
banks had increased their borrowings to $1,076 million, and when the
Reserve authorities began to shake their fingers in warning, the head of
the largest American bank replied by thumbing his nose and announcing
that his institution would continue to support the security markets, and
had $25 million to lend.
The actual degree· to which the gold reserves of the Federal Reserve
System were thinned out behind the deposit liabilities at any
one time cannot be precisely stated as the gold holdings of the System
support both deposit and note liabilities. On December 31, 1928,
when the speculative frenzy was approaching a climax, the gold holdings
of the System amounted to only $2,584,232,000 against note
liabilities of $1,838,194,000 and total net deposit liabilities of member
banks of $33,397 million. As the Federal Reserve Act required, as a
minimum metallic reserve against notes issued, gold in amount equivalent
to 40 per cent of note liabilities, or $735,277,000 at this date,
the remaining gold holdings represented a· reserve of only slightly
over 5.5 per cent of the total commercial deposit liabilities of the System.
Actually, of the gold held by the Reserve banks, $1,307,437,000
had been deposited as .security against notes issued, so that the remaining
gold held by the Federal Reserve banks ($1,276,795,000)
constituted a reserve of only 3.9 per cent against the total deposits of
member banks.
Not all the gold reserves of the country were concentrated in the
Federal Reserve banks, nor, on the other hand, did the Federal Reserve
System comprise the total banking power of the country. The greater
number of banks were outside the System. At the end of 1928 the total