Evening star. [volume] (Washington, D.C.) 1854-1972, 1928-07-01

The extraordinary activity in the rev
York stock market which has TAKEN
place since the first of the year Is caus-
ing much speculation as to whether IL
may be wise further to amend or sup
plement the Federal Reserve act with
view to giving some such central agency
as the Federal Reserve Board greater
control over the flow of credit Just as
IL took the Federal Reserve system q
decade to learn the workings OF the act
we'll enough to exert such control as the
law, as now constituted, permits, SO =
has taken practically decade ana Q
half to enable big traders 10 learn
enough tricks to meet the control ana
to some extent. circumvent 1t.
While the Federal Reserve act does MOI
forbid the use of Federal Reserve credit
for stock trading. 1t does frown upon
excess use of such credit, especially II
such use be to the detriment or more
directly productive enterprises. What
were believed to have been adequate
WAYS and means of controlling STOCK
speculation appear not to nave WORKED
thoroughly enough TO prevent greater
volume of trading than the theory OF the
act looks upon as desirable.
Desnite the checks and controls en-
uloved by the Federal Reserve banks.
loans of member banks have increased
since soon after the first of the yenr by
the amazing sum Of 81 .00o, 0O0, 600. Some
~ this bank credit was used by pro-
ductive trade and industry in connection
with the financing of Spring inventories
Of department stores atld other rilercan-
tile establishments and of Spring plant
ing. According to the Federal Reserve
Board. however, such financing accounts
for less than half, the greater part OF
the billion-dollar increase having gone
straight into the stock market.
Every one who reads newspapers Is
aware that the prices OF stocks nave
risen phenomenally since the peglnnIns
of 1928. What have been called carni-
val nrices have prevailed. There have
been momentary setbacks, but, on the
whole. the rise has been not only STEADY
but affecting practically the whole list.
AS customers continued to buy at ever
and ever higher prices, the money WITH
which to pay for purchases had 10 come
from somewhere. Federal Reserve Sys-
tenn figures show that 1t came from the
member banks: in a word, people were
borrowing to play the market
Restrictive Measures Taken.
Now what excites such particular IN
terest on the part of the Federal Re
serve nOdld 10 kAAhk kAk SAAN N+s1
the sensational market rise restrictive
measures began to be taken. The Fed
eral Reserve banks began pouring Sc
curities into the open market. ms
system heretofore has worked fairly wen
as a check on speculation, BY offerlne
yilt-edged securities the Federal Reserve
banks took cash out of the Market
This was designed to deplcte the supply
of available cash afioat, SO tnat tnSTe
would be less money with which TO
trade, and therefore there would be less
bidding up Of quotations.
The desired effect was not produced
Although this sale OF securities Dy req
eral Reserve banks continued through
out the Spring, member bank loans con-
tinued to be made TO stock Marker
SPECTATORS. Actually. in the month OF
Nav, member bank loans from Federal
Reserve banks were greater than at any
time in four years. Sale OF securities
euuipped the reserve banks with SO
much cash that they were able to make
advances to the member banks, when
In turn thereby were put in position
to lend still more money to traders III
the market.
Suppiementing the sale Of securities,
the Federal Reserve banks began raiS-
ing their rates of discount. THIS. TOO
was designed to discourage heavy bor~
rowinas and check the market rise 10
inflationary status. But with people
making so much money by the con-
tinued rise in market prices, me dlIier.
ence In the rate Of interest To De PAD
for borrowed money was no cheek
What rocked a stock trader OF diner
ence of few points In the rate OF IN.
terest If. with money In hand. ne could
twa f9PnfttN in fhH rise III
stock prices?
Since last September exports OF goiu
from the United States have amounted
To $400, 900 900. This, also. In ordinary
times would check credit extension,
What Is shown by the figures is that
the prosperity of The country Is SO
Great that three primary factors---large
Withdrawals of cash by Federal Re-
serve banks through sale OF securities
In the open market, increases IN redls-
coaut rates by those banks, ana neavy
exports OF gold-have been unable TO
check the wave Of stock market trad
ing, l. .,a,
while all this WAS going on, the de-
posits of member banks increased by
81, zoe. 600 900
Tax Reductions Count,
There are different explanations lol
the phenomenon. One OF the princi-
pal ones Is the reduction OF Federal
taxes With less money to pay TO the
Government, the public has more to
use for productive purposes. Money
Dait TO government never Is produc~
tive Of wealth, II merely represents
the consumption o. so much money
Wlth only the intangible return OF pro-
leciion afforded by the Government
snd without which business would be
unable 10 function Tire tax money left
~ the hands of the people represents
nor. than its actuai amount THIS
money, unpToduetive Ia the hands OF
The Government, In turned 10 produes
i've use when In private hands There
fore the gain has worked two ways.
While II would like 10 be able TO
exert little more direct control. the
Federal Reserve Board Is not alarmed
over the situation The situation, the
b0arC SAWS will automatically adjust