Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-02-22

allow it to maintain an equilibrium
which would benefit all. Consequently,
| the open market committee" was
| formed to buy and sell securities for the
account of the Reserve banks for the
purpose of influencing the credit SIT
| uation with primary regard to the ac-
commodation of commerce and business
| and to the effect such purchases ana
sales have on the general credit sltua-
| ton"
The banks found that the most eff
fective way to tighten credit when bust
ness and commodity prices showed signs
of expanding too fast, was to sell the
Government securities which they held.
When business and prices were needing
funds they eased credit by purchas-
ing Government securities. This manip-
| u.ation Of the volume of Government
securities held in the Reserve banks
portfolios has undoubtedly played very
| important part in creating the generally
prosperous business conditions which we
have experienced since 1922.
Effect on Bonds.
The principal objection to this plan
Is that it sometimes brings about
difficult situation In the market for
high-grade investment securities. This
has bern particularly noticeable during
the last two years.
In 1927 when the reserve banks eaSed
the credit situation by buying Gov
eminent securities in an effort to re-
distribute our excess gold among Euro
pean countries, the bond prices rose.
Since a sudden change in credit con-
ditions always affects the highest grade
issues most because their interest rate
is closer to the level for open-nlarket
borrowings, the prices OF Government,
municipal and legal rails rose most
sharply. They were followed by more
moderate rises in industrial and public
utility bonds.
Very soon, however, the reserve banks
saw that while their easy-money policy
had been effective in causing large ex-
ports of gold, Federal credit was at
the same time finding its way Indirect
1y into the security markets. They
decided to prevent this diversion of
reserve funds and began to tighten
credit by selling Government securities.
During the first half of 1928 they sold
400 million dollars worth of Govern
ments and bond prices declined sharp
ly. Again highest grade bonds de-
clined most while bonds with higher
yields suffered least. In fact, some
bonds with stock warrants or those con-
vertible into stock, actually rose, fol-
lowing the trend of the stock market.
Fall Recovery.
The bond market saw signs of hope
somewhat later when in September the
reserve banks bought moderate amounts
| of Government securities IN an effort
| to ease credit conditions to take care
| of Fall business requirements. Bonds
/ recovered temporarily from their Mid
| summer lows, but they did not hold
their gains, for credit conditions became
more acute as larger and larger sums
| of credit were being poured into brok-
ers' loans and as business continued 10
| expand.
The reserve banks did nothing to ease
| the credit situation, for their attention
was fixed on the mounting volume OF
| brokers' loans. Finally, on the fourth
J week of January they began to sell
| Government securities again and bond
/ prices declined to the lows reached last
| Summer. But still brokers loans mount
| ed and last week the reserve banks
again began to sell Governments, with
| the result that the prices OF Govern
mert. municipal and legal rails dropped
| sharply below the low levels OF last
Summer. Most public utility, industrial
| and foreign government bonds did MOI
| suffer so much, their yleloS pelng ngnel
and not so sensitive to open market
rates. Many convertibles and bond;
with stock warrants, however, have de-
clined sharply as security prices drop
ped.
Future Bond Prices.
AS long as the reserve banks see fl
to tighten credit by selling Government
bonds in an effort to prevent the flow
of bank credit into brokers loans. de.
Ginning bond prices must be expected
The highest grade bonds will suffer
most as long as this policy is continued
but they will be quickest to recover once
credit conditions become easier. Public
utility, industrial and foreign govern
ment issues will probably not DECLINE
so sharply, for their higher yields maxi
them more attractive to investors. Con
vcrtible bonds, and bonds with warrant
which have advanced sharply with thu
stock market, should continue to follow
the general trend of the stocks. A
long as credit conditions remain tight
however, not much of recovery in tn
general bond market can be expected
(Copyright, 1920