America's Money Machine

152 PART II / THE GREAT REVERSAL
York banks and trust companies alone had over $7 billion loaned to New
York Stock Exchange brokers to finance security speculation.
In addition to the bank credit that flowed into the security markets
through stock collateral loans, vast amounts of bank credit were used
indirectly, through the investment banking system, in the flotation ofnew
issues. During the five years ending 1924, the average annual volume of
new capital issues, exclusive of refunding issues and United States government
issues, was $4,280 million. During the next five years the average
annual volume mounted to $7,730 million and in 1929 over $10
billion of new capital was subscribed. The total amount of new money
made available to corporations, states and municipal bodies, and to foreign
governments and corporations, either by way ofshares or loans, was
in excess. of $38 billion in these five years. All these loans and security
flotations were sustained and assisted by the use of bank credit.
Not only did the commercial banks assist the process ofsecurity speculation
by financing the investment banker and the pseudo-investor, but
they purchased large blocks of bonds outright. The prospects of high
yields and large profits from the turnover of investments filled the portfolios
ofbanks with many high coupon bonds offoreign governments and
corporations and with second, third and fourth grade bonds ofAmerican
companies and municipalities. Between 1921 and 1929, member banks'
holdings of securities, aside from United States government securities,
increased from $3,507 million to $5,921 million. The result was to convert
many a bank from the status ofa commercial credit institution to that
of an investment company. The unsoundness of this process became
apparent later when banks had to liquidate these holdings on a falling
market. It was a policy of borrowing at short term (using deposits which
are payable on demand) and lending at long term (for bond holdings,
despite the fact that they are marketable, are loans at long term) which
the banks would never have tolerated on the part of their commercial
customers.
A second outlet during the nineteen twenties for the excessive credit
created by the banking system was in financing urban real estate. We have
already commented upon the Florida land boom. This was not an isolated
phenomenon. During the decade 1920-1930, the movementto the cities
had accelerated: the population of the sixty-three metropolitan zones
(cities of100,000 or more, plus adjacent counties) rose from 46,491,000
to 59,118,000, or from 44 per cent of total population to 48 per cent.