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.Theynaturally have a high failure record in their district.In amajority of districts the standard of performance as judged bygood banking standards is disgracefully low among reserveexecutive officials.The policy of the Federal Reserve Bank ofPhiladelphia is known in the System as the Friends andRelatives Banks."It was while making war profits in considerable amounts that someoneconceived the idea ofusing the profits to provide themselves with phenomenally costly buildings.Today the ReserveBanks must keep a full billion dollars of their money constantly at workmerely to pay their ownexpenses in normal times."The best illustration of what the System has done and not done is offered bythe experiencewhich the country was having with speculation, in May, 1929.Three yearsprior to that, thepresent bull market was just getting under way.In the autumn of 1926 agroup of bankers, amongthem one of world famous name, were sitting at a table in a Washingtonhotel.One of themraised the question whether the low discount rates of the System were notlikely to encouragespeculation." Yes , replied the famous banker, they will, but that cannot be helped.It isthe price we mustpay for helping Europe."It may well be questioned whether the encouragement of speculation by theBoard has been the 158price paid for helping Europe or whetherit is the price paid to induce a certain class of financiers to help Europe, butin either caseEuropean conditions should not have had anything to do with the Board sdiscount policy.Thefact of the matter is that the Federal Reserve Banks do not come into contactwith the community."The small man from Maine to Texas has gradually been led to invest hissavings in the stockmarket, with the result that the rising tide of speculation, transacted at ahigher and higher rateof speed, has swept over the legitimate business of the country."In March, 1928, Roy A.Young, Governor of the Board, was called before aSenate committee. Do you think the brokers loans are too high?", he was asked." I am not prepared to say whether brokers loans are too high or too low,he replied, but I amsure they are safely and conservatively made."Secretary of the Treasury Mellon in a formal statement assured the countrythat they were nottoo high, and Coolidge, using material supplied him by the Federal ReserveBoard, made a plainstatement to the country that they were not too high.TheFederal Reserve Board, charged with the duty of protecting theinterests of the average man, thus did its utmost to assure theaverage man that he should feel no alarm about his savings.Yet the Federal Reserve Board issued on February 2, 1929, aletter addressed to the Reserve Bank Directors cautioningthem against grave danger of further speculation."What could be expected from a group of men such as composed the Board,a set of men whowere solely interested in standing from under when there was any danger offriction, displaying a 159bovine and canine appetite for credit and praise, while eager only to stand inwith the big menwhom they know as the masters of American finance and banking?"H.Parker Willis omitted any reference to Lord Montague Norman and themachinations of the Bank of England which were about to result in the Crashof 1929 and the Great Depression. 160CHAPTER TWELVEThe Great DepressionR.G.Hawtrey, the English economist, said, in the March, 1926 AmericanEconomic Review:"When external investment outstrips the supply of general savings theinvestment market mustcarry the excess with money borrowed from the banks.A remedy is controlof credit by a rise inbank rate."The Federal Reserve Board applied this control of credit, but not in 1926,nor as a remedial measure.It was not applied until 1929, and then the ratewas raised as a punitive measure, to freeze out everybody but the big trusts.Professor Cassel, in the Quarterly Journal of Economics, August 1928, wrotethat:"The fact that a central bank fails to raise its bank rate in accordance withthe actual situation ofthe capital market very much increases the strength of the cyclical movementof trade, with all itspernicious effects on social economy.A rational regulation of the bank ratelies in our hands, andmay be accomplished only if we perceive its importance and decide to go infor such a policy.With a bank rate regulated on these lines the conditions for the developmentof trade cycleswould be radically altered, and indeed, our familiar trade cycles would be athing of the past."This is the most authoritative premise yet made relating that our businessdepressions are artificially precipitated.The occurrence of the Panic of 1907,the Agricultural Depression of 1920, and the Great Depression of 1929, allthree in good crop years and in periods of national prosperity, suggests thatpremise is not guesswork.Lord Maynard Keynes pointed out that mosttheories of the business cycle failed to relate their analysis adequately to themoney mechanism [ Pobierz całość w formacie PDF ]
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.Theynaturally have a high failure record in their district.In amajority of districts the standard of performance as judged bygood banking standards is disgracefully low among reserveexecutive officials.The policy of the Federal Reserve Bank ofPhiladelphia is known in the System as the Friends andRelatives Banks."It was while making war profits in considerable amounts that someoneconceived the idea ofusing the profits to provide themselves with phenomenally costly buildings.Today the ReserveBanks must keep a full billion dollars of their money constantly at workmerely to pay their ownexpenses in normal times."The best illustration of what the System has done and not done is offered bythe experiencewhich the country was having with speculation, in May, 1929.Three yearsprior to that, thepresent bull market was just getting under way.In the autumn of 1926 agroup of bankers, amongthem one of world famous name, were sitting at a table in a Washingtonhotel.One of themraised the question whether the low discount rates of the System were notlikely to encouragespeculation." Yes , replied the famous banker, they will, but that cannot be helped.It isthe price we mustpay for helping Europe."It may well be questioned whether the encouragement of speculation by theBoard has been the 158price paid for helping Europe or whetherit is the price paid to induce a certain class of financiers to help Europe, butin either caseEuropean conditions should not have had anything to do with the Board sdiscount policy.Thefact of the matter is that the Federal Reserve Banks do not come into contactwith the community."The small man from Maine to Texas has gradually been led to invest hissavings in the stockmarket, with the result that the rising tide of speculation, transacted at ahigher and higher rateof speed, has swept over the legitimate business of the country."In March, 1928, Roy A.Young, Governor of the Board, was called before aSenate committee. Do you think the brokers loans are too high?", he was asked." I am not prepared to say whether brokers loans are too high or too low,he replied, but I amsure they are safely and conservatively made."Secretary of the Treasury Mellon in a formal statement assured the countrythat they were nottoo high, and Coolidge, using material supplied him by the Federal ReserveBoard, made a plainstatement to the country that they were not too high.TheFederal Reserve Board, charged with the duty of protecting theinterests of the average man, thus did its utmost to assure theaverage man that he should feel no alarm about his savings.Yet the Federal Reserve Board issued on February 2, 1929, aletter addressed to the Reserve Bank Directors cautioningthem against grave danger of further speculation."What could be expected from a group of men such as composed the Board,a set of men whowere solely interested in standing from under when there was any danger offriction, displaying a 159bovine and canine appetite for credit and praise, while eager only to stand inwith the big menwhom they know as the masters of American finance and banking?"H.Parker Willis omitted any reference to Lord Montague Norman and themachinations of the Bank of England which were about to result in the Crashof 1929 and the Great Depression. 160CHAPTER TWELVEThe Great DepressionR.G.Hawtrey, the English economist, said, in the March, 1926 AmericanEconomic Review:"When external investment outstrips the supply of general savings theinvestment market mustcarry the excess with money borrowed from the banks.A remedy is controlof credit by a rise inbank rate."The Federal Reserve Board applied this control of credit, but not in 1926,nor as a remedial measure.It was not applied until 1929, and then the ratewas raised as a punitive measure, to freeze out everybody but the big trusts.Professor Cassel, in the Quarterly Journal of Economics, August 1928, wrotethat:"The fact that a central bank fails to raise its bank rate in accordance withthe actual situation ofthe capital market very much increases the strength of the cyclical movementof trade, with all itspernicious effects on social economy.A rational regulation of the bank ratelies in our hands, andmay be accomplished only if we perceive its importance and decide to go infor such a policy.With a bank rate regulated on these lines the conditions for the developmentof trade cycleswould be radically altered, and indeed, our familiar trade cycles would be athing of the past."This is the most authoritative premise yet made relating that our businessdepressions are artificially precipitated.The occurrence of the Panic of 1907,the Agricultural Depression of 1920, and the Great Depression of 1929, allthree in good crop years and in periods of national prosperity, suggests thatpremise is not guesswork.Lord Maynard Keynes pointed out that mosttheories of the business cycle failed to relate their analysis adequately to themoney mechanism [ Pobierz całość w formacie PDF ]