Federal Reserve v. Speculation

Into Congress last week overflowed the financial argument between Federal Reserve Board and Wall Street (TIME, Feb. 18). A mingled outburst of oratory, ethics, provincialism and a little economics was the result. The prevailing sentiment was strongly against the speculator. Since, however, the very Senators and Representatives who were most inclined to view Wall Street as the heart of the money octopus also regarded the Federal Reserve System as at least a tentacle of the same monster, the banker was scolded while the broker was flayed.

Senate. The Senate passed a resolution asking the Federal Reserve Board to lay before it such information as might be "helpful" in securing anti-speculative legislation. It was a mildly-worded resolution, perhaps because it was edited by Senator Carter Glass of Virginia, one of the authors of the Federal Reserve Act (1913). Not mild, however, was the accompanying speech by ponderous Senator Heflin of Alabama. Wall Street, he bellowed, was the hotbed and breeding place of the worst form of gambling that ever cursed the country. The Louisiana State Lottery slew its hundreds but the New York State gambling exchanges were slaying hundreds of thousands. The gambling monster was destroying U. S. homes, was driving U. S. citizens to poverty, to insanity. There must be a stop put to this evil, etc. etc.

More specific was Senator Smith Wildman Brookhart of Iowa, who was born in a log cabin remote from the money-changers. Why, argued Senator Brookhart, quibble about such a detail as prohibiting merely Federal Reserve Banks from making speculative loans to Federal Reserve Bank members? Let us prohibit any loan by any bank to any borrower who might put the loan to speculative purposes. Radical also was the remedy offered by Utah's Senator William H. King, who has ascertained that 85% of speculation is made on margins, and who believes therefore that marginal trading should be abolished. Senator Thaddeus H. Caraway of Arkansas went charging off into the commodity mar kets and proposed to punish trading in cotton and grain futures with fines and imprisonment.

The House considered speculation more calmly, though Pennsylvania's Louis T. McFadden, chairman of the Banking & Currency Committee, announced that at the next session of Congress his committee proposed to go into Federal Reserve discounts, brokers' loans, investment trusts and mergers. Representative Loring Black, a smart sensationalist, attacked the Reserve Board for alleged connivance with Great Britain. He argued that if England needed gold it ought not induce the Federal Reserve to interfere with U. S. prosperity by hampering Wall Street but should sell to the U. S. some of its island possessions off the Atlantic Coast, which possessions are naval bases that threaten U. S. security. Representative Garner, ranking Democrat on the Ways & Means Committee, thought that anti-speculative legislation was a "far-reaching" matter that ought to be "carefully considered."

Wall Street's Prall. Meanwhile the Representative in whose district Wall Street itself is located said nothing at all. It is from the nonfinancial stretches of Staten Island that this Representative comes. He is Anning S. Prall, a perky, bright-eyed, chest-forward Tammany Democrat. The Manhattan financial section chances to be in Mr. Prall's Eleventh District, but skyscrapers do not vote and Mr. Prall does not "represent" Wall Street any more than he represents the Statue of Liberty which is also within his constituency.

Pro-Money, Anti-Money. It is difficult to say what Congressmen might speak for the money power, especially in an argument which lists money against money. Ogden Livingston Mills and James Wolcott Wadsworth were moneymen, but they have departed from the House and Senate, respectively. Senator David Aiken Reed of Pennsylvania, Secretary Mellon's haggard, Princeton-educated protege, might stand as the senatorial moneyman. In the House are New York's Snell, a florid, solid cheesemaker; Rhode Island's Richard S. Aldrich, son of the late great Senator Nelson Aldrich; and Pennsylvania's Harry Estep, a young Mellonite member of the Ways & Means Committee.

The leading anti-Wall-Streeter in the House is Henry T. Rainey, a tall, white-haired old Illinois farmer who has been in every Congress but the 67th since the 58th. In the Senate are Heflin, Norris, Brookhart, Shipstead and many another hinterlander whose eyes are vigilantly cocked for city-bred iniquities.

Upshot. It was doubtful whether anything would result from all the congressional speeches and resolutions, if only because the Federal Reserve Board itself was believed to be aghast at the thought of its delicate and vital functions being subject to congressional disturbance at such a critical moment.

Reserve Rate. Meanwhile Wall Street itself stirred uneasily. The early week market recovery proved to be largely whistling in the graveyard. As the week wore on and the tombstones stood out more clearly in the gathering darkness, the speculators stopped whistling and started to run. Directors of the New York Federal Reserve Bank held a lengthy and private meeting, after which, however, no change was announced in the rediscount rate.

The Advisory Council of the Reserve system (a group of private bankers & businessmen appointed by directors of the twelve Federal Reserve Banks) emphatically endorsed the Reserve Board's warning of last fortnight. The Reserve banks themselves began to tighten money by selling government securities and bankers' acceptances. Member banks beckoned for about $60,000,000 of outstanding call money.

The Market. None of these measures was by themselves particularly drastic (was offset, for example, by failure to raise the rediscount rate), but taken altogether they gave nervous speculators chills & fever. On Friday call money went from 6 1/2% to 10% and the whole market went off in a sharp decline that continued through Saturday's closing. There was nothing resembling a panic but the orderly retreat was rapid, sustained, unchecked by short covering.

The market opened the week, however, with a general rally, caused by the fact that many good stocks had been oversold and that call money eased off to 7%. Coppers and utilities headed the rebound.

Nothing further had come from the Federal Reserve Board except publication of the figures on which its "warning" had been based. These figures showed that in the last twelve months loans to member banks had more than doubled and that Federal Reserve outstanding credit had increased by $250,000,000.

Significance. The outstanding development of the week was the fact that, without taking any radical measures, the Federal Reserve Board, aided by front-page publicity given to bearish conversations in Congress and in the Reserve advisory council, succeeded in scaring Wall Street into a liquidation movement. A definite obituary on the bull market might, however, be a little premature. Mysterious despatches from Washington stressed an alleged division of opinion on the Federal Reserve Board and the existence of a minority party opposed to anti-speculative measures.

A "high official" and an "administration source" were quoted as believing that the Board had gone as far as it was going to go. There were hints and inferences that the official and the source were Secretary Mellon, who is ex officio a member of the Federal Reserve Board.

At the close of the week, Secretary of Commerce Whiting issued a distinctly bullish statement. Said he: "Administration policies have made for a substantial and increasing stability in business for several years. ... If these conservative, constructive policies of the government and of business are maintained, then there would seem to be no reason why the present economic situation should not continue."