Jekyll_text

494 THE CREATURE FROM JEKYLL ISLAND
THE GREAT DUCK DINNER 495
commercial loans remained constant, total
bank loans increased
from $24,121 million to $35,711 million. Loans on securities and real
estate rose nearly $8 billion. Thus, about 70% of the increase during
this period was in speculative investments. And that money was
created by the banks.
New York banks and trust companies had over $7 billion
loaned to brokers at the New York Stock Exchange for use in
margin accounts. Before the war, there were 250 securities dealers.
By 1929, the number had grown to 6,500.
The banks not only generated the money for speculation, they
became speculators themselves by purchasing large blocks of
high-yield bonds, many of which were of dubious quality. Those
were the kinds of securities that are difficult to liquidate in a
declining market. Borrowing money on short term and investing
on long term, the banks were maneuvering themselves into a
precarious position.
Did the Federal Reserve cause the speculation in the stock
market? Of course not. Speculators did that. The Fed undoubtedly
had other objects in mind, but that did not cancel its responsibility.
It was acutely aware of the psychological effect of easy credit and
had consciously used that knowledge to manipulate public behavior
on numerous occasions. Behavioral psychology is
a necessary
tool of the trade. So it could claim neither ignorance nor innocence.
In the unfolding of this tragedy, it was about as innocent as a spider
whose web "accidentally" caught the fly.
THE FINAL BUBBLE
In the Spring of 1928, the Federal Reserve expressed concern
over speculation in the stock market and raised interest rates
curb the expansion of credit. The growth in the money supply
began to slow down, and so did the rise in stock prices. It is
conceivable that the soaring economy could have been brought in
for a "soft landing"—except that there were other agendas to be
considered. Professor Quigley had said that the central bankers
were not substantive powers unto themselves but were as marionettes
whose strings were pulled by others. Just as the speculation
spree appeared to be coming under control, those strings were
yanked, and the Federal Reserve flip-flopped once again.
The strings originated in London. Even after seven years of
subsidy by the Federal Reserve, the British economy was sagging
to
from the weight of its socialist system, and gold was moving back
into the United States. The Fed, in spite of its own public condemnation
of excessive speculation, reversed itself at the brink of
success and purchased over $300 million of banker's acceptances in
the last half of 1928, which caused an increase in the money supply
of almost $2 billion. Professor Rothbard says:
Europe, as we have noted, had found the benefits from the 1927
inflation dissipated, and European opinion now clamored against any
tighter money in the U.S. The easing in late 1928 prevented gold
inflows into the UjS. from getting very large. Great Britain was again
losing gold, and sterling was weak once more. The United States
bowed once again to its overriding wish to see Europe avoid the
inevitable consequences of its own inflationary policies. 1
Prior to the Fed's reversal of policy, stock prices had actually
declined by five per cent. Now, they went through the roof, rising
twenty per cent from July to December. The boom had returned in
spades.
Then, in February of 1929, a curious event occurred. Montagu
Norman travelled to the United States once again to confer
privately with the officers of the Federal Reserve. He also met with
Andrew Mellon, Secretary of the Treasury. There is no detailed
public record of what transpired at these closed meetings, but we
can be certain of three things: it was important; it concerned the
economies of America and Great Britain; and it was thought best
not to tell the public what was going on. It is not unreasonable to
surmise that the central bankers had come to the conclusion that
the bubble—not only in America, but in Europe—was probably
going to rupture very soon. Rather than fight it, as they had in the
past, it was time to stand back and let it happen, clear out the
speculators, and return the markets to reality. As Galbraith put it:
"How much better, as seen from the Federal Reserve, to let nature
take its course and thus allow nature to take the blame." 2
Mellon was even more emphatic. Herbert Hoover described
Mellon's views as follows:
Mr. Mellon had only one formula: "liquidate labor, liquidate
stocks, liquidate the farmers, liquidate real estate." He insisted that,
when the people get an inflation brainstorm, the only way to get it out
1- Rothbard, Depression, p. 147.
2- Galbraith, p. 181.