Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-02-07
CURB
|. COURSE POWDERED
Question of Whether Reserve
Board or Congress Will
Act Is Raised.
BY DAVID LAWRENCE.

The power of the Federal Reserve
board to influence directly and indi-
rectly the credit situation throughout
the country is now being demonstrated
The board through its statement
Wednesday warned that high money
rates were interfering with the leeiti-
mate needs of business. Construction
which depends on low money rates is
receding from previous months. The
cost of borrowing is rising and the
business man is complaining.
For many months the board has
struggled with the problem, trying as
it did last Summer to issue warnings
that the loans for speculative purposes
being made by member banks of the
Federal Reserve system were fundamen-
tally wrong, and that the amount bor-
rowed for such purposes should be cut
down.
But the banks themselves appeared
unwilling to heed the warning and
large corporations with surplus funds
were able to use their funds indirectly
for speculative purposes, too, by lending
1t out at call.
Board Calls Halt.
Now, however, the Federal Reserve
Board has called halt. Just what
measures it can take to enforce its
views is matter of much conjecture.
The board has tenuous hold on
member bank policies. 1t can, of
course, bring about the raising of the
rediscount rate, but that in turn may
hurt business borrowing even more. 1t
could begin a process of differentiation
between loans for speculative purposes
and loans for commercial reasons.
That is q hard thing to do, too. and
last Summer when investment bank
ers were confronted with the high
money rates there was talk OF making
a. distinction between money borrowed
for business expansion and money to be
used in the stock market. Nobody,
however has been able to devise a plan
that would do what the Federal Re-
serve Board asks the banking world
itself to do.
So far as the board is concerned, 1t
does not view the broker loans them
selves as dangerous, because they are,
of course, secured, but the diversion of
funds to speculative channels which
ought to be available for the normal
needs of the country, especially IN har-
vest seasons and in periods OF necessary
construction activity is regarded as a
menace to the whole economic Struc-
ture.
Not Discussing Situation.
There is no serious talk as yet of
legislation to give the Federal Reserve
banks power to enforce the views of the
board, but that is because members Of
Congress have not yet begun to hear
of the adverse effects of high money
rates. The Federal Reserve board Is
discussing not a situation that Is az
the moment damaging business SO much
as contingency certain TO arise ana
affect business adversely If the specu-
latiye trend is not definitely and effec-
lively checked.
Much of the speculation is done with
borrowed money In most commercial
loans banks seek to know definitely the
purposes for which the funds borrowed
are to be used. In the case of borrow
ings in the speculative market there is
no objection offered. In other words,
the distinction between constructive
purposes and speculative activity Is not
drawn and never has been.
The question now is whether the Fed
eral Reserve Board, having expressed it
self fully in warning the speculative
element. will go forward with enforce
ment measures of its own by indirectly
influencing the member banks CT
whether it will reluctantly turn the
problem over to Congress TO handle. IN
deed, the problem may be tackled there
anyhow very soon II money rates Tor
commercial purposes continue 10 TIC
or are not diminished materially
(Copyright, 1929