Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-02-28
BY KENNETH S. VAN sTRUM.

NEW YORK, FEBRUARY ZS.-Slnce Ile
Federal Reserve Boards initial warning
that it could not countenance the use
Of Reserve bank credit facilities for the
expansion of brokers loans, it has been
sharply criticized for trying to force
stock market liquidation.
Last week, however Others" took
over the responsibility of supplying
enough money not only to keep back
stock prices rising. but to fill the gap
caused by some liquidation on the part
of the banks. The advisability of al
lowing Others" to lend such large sums
In the call money market is becoming
very important question.
If the future trend of security prices
is to be upward the market will ap-
parently be completely at the mercy of
be needed If security prices continue to
rise. and banks probably will refuse fur
Their loans to the market.
Use for Brokers' Loans.
AS every one knows. brokers' loans
include not only loans made against
stocks and bonds, but loans made
against new Issues of securities as well.
In other words brokers' loans are used
not only to buy and sell securities al
ready existing, but also to carry new
securities until investment houses can
sell them to permanent investors. In
either case brokers' loans facilitate the
flow of investment capital into industry.
The opinion is widely held, however,
that loans. made against stocks and
bonds already in existence do not fulfill
quite the same useful function as loans
made against new issues of securities
Since many have felt that there is a
need for conserving our credit resources
it is important to ascertain whether the
rapid increase in brokers' loans during
the past few years has been principally
due TO the increase in new security
issues or because more credit is being
used to carry stock on margin.
Main Influence on Brokers' Loans.
1t is only necessary to compare the
fluctuations of three series Of figures In
order to get good idea of this situa-
ton. Such comparison will show that
there Is much closer relationship be-
tween the trend Of brokers' loans and
the prices Of stocks on the New York
Stock Exchange than there is between
brokers loans and new security issues.
are more closely associated with margin
trading than with new issues of stocks
and bonds
Banking laws have seen fit to give
business protection against possible
absorption of too much credit in the Sc
curly market by refusing to extend to
brokers loans the privileges OF the
Federal Reserve system.
In the past three years, however. a
new development has taken place which
the makers Of our banking laws did not
anticipate. Always before our credit
resources have been placed in COM
mon reservoir in the custody of the
banks. From this source both business
and the security markets received their
loans, preference always being given to
business.
Recently the security markets have
tapped another source Of credit, and Sc
curity prices have mounted to such
levels that many conservative people be-
lieve the general level of security prices
is inflated. Others believe that Amer
progress that securities are entitled to
sell at prices that defy all comparison
with previous levels.
Expansion of Loans.
There can be- no doubt that If the
present level of security prices Is to be
maintained, brokers loans must remain
close to present levels. And If the gen.
eral level of securities Is going still
higher brokers' loans must increase.
The market must turn again to the
principal source from which it has OBJ
tanned loans.
Since 1926 brokers' loans have in
creased $4,000, 100000. About S2,100,-
000,0 has been furnished by Others"
5000, 100000 by out-of-town banks and
5000 100000 by New York banks. Since
further expansion of loans by banks Is
improbable, and contraction more likely
as long as business Is active, ''others"
must supply the funds If the market is
to 60 on.
Others"
The Others" who appear in the week
ly bank statement as large lenders are
corporations, foreign banks, individuals
and investment trusts who have been
lending in the call money market.
Corporations lend when they do not
need money In their own businesses.
This type Of lending would normally be
expected to decline when business IS
good and increase when 1t is poor, I'M
less corporations are lending large cor
porate surpluses In the call money mar
ket. In such an event they are lending
funds which they formerly invested In
bonds and other securities.
Foreign banks have also been lending
large sums in the call money market,
since great deal of money has been
temporarily been placed at their disposal
by the fiotation of foreign loans in this