Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-02-07
RESERVE BOARD
POWERS LIMITED
Treasury Officials Believe
Much Speculative Credit
Is Beyond Control.


advance of Federal Reserve credit for
speculation. following the warning sent
out last night, great bulk of specula-
ton, in the view of Treasury officials
here, is carried on by money over which
neither the Federal Reserve Board nor
its member banks have direct control.
The wave of speculation against
which the board sounded warning last
night Is believed by high officials to
be running course which eventually
will adjust itself without any per-
mapently serious disruption of the stock
market or of the industrial and eco
nomic system of the country
Meantime the combination of the rise
today in the discount rate of the Bank
of England from Az to 512 per cent
and the Federal Reserve Boards warn
ing had sudden effect on the New York
Stock Exchange, which fell off sharply
this morning, but was recovering some
what at later hour.
individuals Advance Credit.
Steps which the board, or reserve
banks can take, such as advancing the
discount rate, or authorizing the
special reserve system committee to buy
or sell Government securities to effect
the flow of money on the market, are
held by authorities here to be helpful
in curbing speculation, but not highly
effective"
One reason for this belief, 1t was
pointed out today. was the fact that
most of the money used in speculation
IS coming not from member banks of
the Federal Reserve system, but from
individuals and corporations, over whom
the banks exercise no direct control.
One of the big factors in holding
up the market, according to some
official belief here today, has been the
great growth of investment trusts
throughout the country, for the pur-
pose of Investigation of investments.
Such organizations have gone in for
investment generally in sound sec,lri-
ties and are holding these securities
out of the trading. which has created
scarcity in some of the more desir-
able stocks. This absorbing of such
stocks has had the effect of keeping
up speculation among the people, it
was pointed out.
New York Rate Per Cent.
The rise in the Bank of England rate
was seen here as natural development
since the opportunity for using money
to greater earning capacity in New
York had been attracting a flow of
money to New York. Gov. Montague
paper which is offered for security. But
been In the United States for several
days comforting with officials in both
New York and Washington. The New
York Federal Reserve Bank discount
rate is now 5 per cent.
Concerning the steps which the
Federal Reserve Banks can take to curb
~ iaiy hot ho
advance of the discount rate might be
resorted to, but If the profits on the
exchange continued to be large, this
would have temporary effect only, on
the bulk of investment.
In the matter of the Federal Reserve
Banks control over the loans which 1t
makes to member banks, there is a
practical control which can be exercised
in the supervision of the character of
paper which is offered for security. But
1t had been found. according to one
high official, that member banks have
been loaning very little on "specu-
lative" issues on the Stock Exchange.
Cites Gain In Speculation.
Examination of the nature of invest
ments had often revealed the fact that
the investments concerned were not of
tionably speculative. The Federal Re-
serve Bank holds the right to refuse
the discount privilege to a member
bank in case of necessity, but high off,
Gals predicted this would not have to
be resorted to.
In its warning the Federal Reserve
Board said it neither assumed the
right nor had it any disposition to set
itself up as an "arbiter of security
speculation or values" but emphasized
that 1t was, however, its business to
see to 1t that the Federal Reserve banks
function as effectively as conditions will
permit"
The board called attention to the
growth of speculative credit in the last
year. THE resources of the Federal
Reserve system" said the boards
statement. "are ample for meeting the
growth of the country's commercial
needs for credit, provided they are
competently administered and pro-
tected against seepage into uses not
contemplated by the Federal Reserve
act"
During the past year loans to brokers
and dealers have increased from S.
816.000,000 to $5,559, 100000.
Era of Productivity.
The statement of the board read:
THE United States has during the
last six years experienced a most re-
markable run of economic activity and
productivity. The production. distribu-
ton and consumption of goods have
been in unprecedented volume. The
economic system of the country has
functioned efficiently and smoothly.
Among the factors which have con-
tributed to this result, an important
place must be assigned to the operation
of our credit system and notably to the
steadying influence and moderating
policies of the Federal Reserve System.
During the last year or more. how
ever, the functioning of the Federal
Reserve System has encountered inter-
ference by reason of the excessive
amount of the country's credit absorbed
in speculative security loans. The
credit situation since the opening of
the new year indicates that some of
the factors which occasioned untoward
developments during the year 1928 are
still at work. The volume of specula-
tive credit is still growing
Coming at time when the country
has lost some $500 100000 of gold, the
effect OF the great and growing volume
or speculative credit has already pro-
duced some strain, which has reflected
Itself In advances of from l to ~ per
cent In the cost of credit for commercial
uses. The matter Is one that concerns
every section OF the country and every
business interest, as an aggravation of
these conditions may be expected to
have detrimental effects on business
and may impair its future.
Assun,ax No Right A. Arh;tar