Credit Policies of the Federal Reserve System

CHAPTER VI

INTERNATIONAL CO-OPERATION

The part played by the Federal Reserve system in the restoration and maintenance of currency stability in Europe has received comparatively little attention from the American public, not necessarily because it is less important than other issues or has played a smaller part in the decisions of Federal Reserve authorities, but because it is an issue too new, and from the standpoint of most Americans too remote and theoretical, to arouse widespread interest.

The co-operation of central banks is a striking development of post-war economic history. The Genoa Economic Conference of 1922, meeting at a time when the United States was the only leading country which maintained the gold standard, recommended that all European currencies should be put on the gold or the gold exchange standard, and that national banks of issue should be established in all countries which did not already have them. It also recommended that the maintenance of exchange stability and of price stability be made primary objectives of the policy of these banks. Resolution 3 adopted by the Conference is of particular interest:

Measures of currency reform will be facilitated if the practice of continuous co-operation among central banks of issue or banks regulating credit policy in the several countries can be developed. Such co-operation of central banks, not necessarily confined to Europe, would provide opportunities of co-ordinating their policy without hampering the freedom of several banks. It is suggested that an early meeting of representatives of central banks should be held with a view to considering how best to give effect to this recommendation.1

The meeting of central banks suggested in the resolution has never been held, but there has been a constant interchange of views between authorities of the leading central banks and many cases of co-operative action, sometimes in connection with the establishment of stable currencies and sometimes with respect to policy in controlling movements of credit and of gold between the leading countries themselves.2 The most recent developments in this story are the creation of the Bank for International Settlements, and the co-operation of central banks in connection with the financial collapses which occurred in Austria and Germany in 1931. However, the events of the last half of 1931 gave a severe setback to the cause of central bank co-operation; the long feared scramble for gold materialized to a very marked degree, and control of international financial relationships largely ceased to be exercised, even nominally, by central banks.

The aims of central bank co-operation during the decade which ended in the summer of 1931 included the control of gold movements, the minimizing of exchange fluctuations, and assistance in the maintenance of currency stability. Such co-operation was to some extent motivated by a fear that if the pre-war system of free competition were restored, the result would be a scramble for gold which would result in credit contraction and price deflation in strong countries, and in a return to unstable credit currency in weaker countries.

This fear arose in part from the recency of attainment of the gold standard in most countries; in part from the disturbing effect of the huge international payments on account of reparations and debts; and in part from the fact that the mass of free funds which might move readily from one national money market to another was much larger than before the war. One of the major portions of this increased fund consisted of the secondary reserves of central banks; another was made up of the holdings of investors who were unwilling to tie up their funds in long-time permanent investments because of recent experience with bad currencies and bad loans. Moreover, the great increase in the volume of government bonds which had a world market enlarged the field of international credit movements.

The part played by the Federal Reserve system in the co-operative efforts of banks of issue to restore and maintain the gold standard would probably have been small if the Reserve Banks had not been faced, as soon as the deflation movement of 1920-21 was over, with problems arising from a tremendous influx of gold—gold which came for reasons almost entirely independent of the needs of American business and which threatened to take the control of the credit situation in this country entirely out of the hands of the Reserve system.3 This affected our foreign relations in two ways:

First, the excess of gold above legal reserves gave the Reserve authorities much more room for the exercise of discretion than they would have had under more normal conditions. Freedom of the Reserve authorities from pressure to maintain their required reserves gave rise to a demand that they co-operate to a greater degree than would otherwise have been possible, just as it has given rise to demands from domestic sources that they direct their energies to tasks which no one would have expected them to accomplish if they were working with narrow reserve margins.

Second, the existence of these excessive gold stocks has created a presumption in the minds of foreign observers that the United States has the power, by “releasing” this gold, to create easier credit conditions throughout the world. There exists in Europe a widespread, and quite baseless, notion that the world is short of gold, and that the shortage is accentuated by a bad distribution of existing stocks. The downward trend of prices which began in 1925 and culminated in the collapse of 1930 is believed by many theorists, especially in England, to be at once the result and the proof of this shortage.4 Naturally, this point of view suggests that those nations which have excessive gold stocks, especially France and the United States, have a peculiar responsibility to co-operate with other countries in the maintenance of the gold standard, and in supporting the price level.

The international contacts of the Reserve system have taken four principal forms.5 First, there are service relationships, such as the purchase for foreign correspondents of bills which are endorsed by the Reserve Banks; earmarking of gold; and the exchange of services in connection with the organization of statistical departments. Second, direct aid has been given to various European countries through the Reserve Banks’ participation in stabilization loans. Third, on a few occasions bills payable in foreign currencies have been bought for the avowed purpose of supporting the exchange of the countries concerned. Fourth, it is claimed that indirect aid has been given by keeping discount rates at levels which facilitated the maintenance of gold reserves in Europe. The evidence on this point requires scrutiny, and will be considered below.

The most important international service relationship of the Federal Reserve Banks is the purchase of bills for foreign correspondents. As is shown below,6 a very substantial proportion of the outstanding bank acceptances in the United States market are held by the Federal Reserve Banks for the account of foreign correspondents, with the endorsement of the Reserve Bank. In maintaining this relationship with foreign correspondents (chiefly central banks) the Reserve system accomplishes two purposes. First, as is shown more fully in Chapter XII, it opens up an important source of support for the American bill market; and second, it facilitates the maintenance of reserves of dollar exchange by European central banks.

Direct aid in the stabilization of European currencies has been extended through actual gold loans and through agreements to furnish gold on demand. In 1925 secured loans were made by the Reserve Banks to the Bank of Poland and to Czechoslovakia. In the same year the stabilization of the currency of England was underwritten by an agreement to extend credit on demand. In succeeding years similar arrangements were made with Belgium, Italy, Rumania, and Poland.

The arrangement with the Bank of England, which involved much the largest amount, was as follows: The Federal Reserve Bank of New York agreed to sell gold to the Bank of England at any time within two years, up to a limit of 200 million dollars, taking in exchange an equivalent deposit credit in sterling in the Bank of England. For this “credit” the Bank of England was to pay interest.7 No part of this credit was actually used.

The Reserve Banks have occasionally bought acceptances payable in foreign currencies for the purpose of supporting the value of those currencies. Ordinarily the total holdings of foreign bills of all the Reserve Banks are in the neighborhood of a million dollars—a completely negligible element in total investments of from one to two billions.8 On three occasions, however, holdings have been materially increased for the avowed purpose of aiding foreign central banks to maintain the value of their own currencies. In the summer of 1927 about 10 to 11 million dollars worth of sterling bills was carried for about four months. In the summer of 1929 about a million dollars was invested for a short time in Hungarian pengos “in co-operation with central banks of England, France, Belgium, and The Netherlands, to strengthen the position of the National Bank of Hungary in dealing with Hungarian foreign exchanges.”9 Later in the same year about 16 million dollars of sterling was bought “to relieve some of the pressure on sterling exchange and to help stay the flow of gold from London to the United States.”10 Again in the autumn of 1930 sterling was bought, the amount held in December running over 30 million dollars. Concerning the expansion of holdings of foreign bills in these three years the Federal Reserve Bank of New York says:

. . . We purchased foreign exchange at a time when it was weak and we were threatened with the importation of gold. We sought to support exchange by our purchases and thereby not only prevent the withdrawal of further amounts of gold from Europe but also, by improving the position of the foreign exchanges, to enhance or stabilize Europe’s power to buy our exports. In fact our efforts to support exchange were undertaken in the autumn during our heaviest export season when the foreign exchanges are normally under pressure, and these operations were liquidated when the seasonal strain had passed, our goods had been moved, and the position of the foreign exchanges had improved.11

It is to be noted that even at the maximum these holdings are a very small item in the London discount market. The total amount of foreign deposits and bills held on foreign account in that market ran, in 1929, in the neighborhood of two billion dollars.12

Bills were bought again as a result of the European financial crisis of the summer of 1931. On June 24 the Federal Reserve Bank of New York, in association with other Federal Reserve Banks, agreed to purchase commercial bills from the German Reichsbank on request, up to an amount equivalent to about 25 million dollars. This agreement was made in co-operation with the Bank of England, the Bank of France, and the Bank for International Settlements, as part of a credit which aggregated approximately 100 million dollars. This agreement was repeatedly renewed and has not yet been liquidated in full.

On August 1 the Federal Reserve Bank of New York announced that in association with other Federal Reserve Banks it had agreed for three months to purchase bills from the Bank of England, as requested, up to approximately the equivalent of 125 million dollars. This arrangement was made in co-operation with the Bank of France, which agreed to take the same amount of bills. On expiration of the contract it was renewed in the amount of 75 million dollars.

Detailed data as to the amount of bills purchased under these agreements has not been made public, but the total amount of bills payable in foreign currencies held at the close of the month exceeded 35 million dollars only twice. On August 31 the total of such bills was 145 million dollars; on September 30 it was 49 million. These figures are to be compared with 36 million held at the close of 1930, when no such emergency agreements were in force.

Indirect aid may have been extended by keeping money cheaper in America than it would have been otherwise. It is impossible to make a definitive statement on this point because one cannot separate the international factor in Federal Reserve policy from other influences which worked in the same direction, and the direct official evidence is scanty. In a statement prepared in 1924 Governor Strong included the international situation among the reasons for the pursuance of an easy money policy in that year.13 It was stated in the annual report of the Reserve Board for 1925 that the credit arrangements with the Bank of England involved no commitment as to the policies to be pursued by either Bank in dealing with domestic credit conditions or with changes in discount rates. In 1927 the Reserve authorities cited both the international situation and the depressed state of business as reasons for their decision to make heavy purchases of securities.14

In May of that year, a conference was held at New York between representatives of the central banks of England, France, and Germany, and the Federal Reserve Bank of New York. No statement was given out at the time as to the business transacted at this meeting,15 but it seems probable that definite commitments were made by Governor Strong as to the discount policy which he would urge upon the Federal Reserve system. There is no reason to believe, however, that any such commitments were made by the Federal Reserve Board; indeed it appears that the representatives of foreign central banks did not confer with the Board as a whole, or with its members, except in a very informal and casual way.16

Since that date there has been close contact between the Federal Reserve Bank of New York and the leading central banks of Europe. Governor Norman of the Bank of England made several trips to America, and representatives of the Federal Reserve Bank of New York have frequently been in Europe. Very little information concerning these conferences is made public. Hence our conclusions as to the influence on our policies of the needs and desires of European banking authorities must be inferred from a scrutiny of the record of the administration of Federal Reserve credit.

Nothing was heard of international co-operation in connection with discount or open market policy in 1922, 1923, 1925, or 1926, and it is patent that the policy pursued in 1928-29 ran directly counter to the wishes of most foreign banking authorities. The tightening of the market in the last half of 1931 was also clearly an act of self-protection against European policy rather than of co-operation with it. The cases which are cited as evidencing a regard for European needs (an undue regard or a due regard, according to the point of view of the commentator) are the policies of 1924, 1927, and 1930-31. These, it will be noted, are the three outstanding cheap money eras. Co-operation, so far as American co-operation is concerned, always means a policy directed toward inflation. When we pursue a cheap money policy it is easier for European countries to keep gold at home or to draw it from us, and such action is interpreted as evidence of international co-operation.

Let us examine the three cases with a view to determining whether they can reasonably be explained on any other basis than that of international co-operation. For it is to be expected that in the course of ten years there will be some periods which conform, if only by chance, to the requirements of almost any theory. In 1924 there was a very sharp decline of business activity in the United States. The decline was of such short duration that its severity is not generally recognized, but none more precipitate occurred in any similar period since the war, not excluding 1930-31. The British situation furnished a supporting argument with which to defend a cheap money policy but a dear money policy was hardly thinkable. Again in 1927 a cheap money policy was adopted at a time when domestic employment was receding and production and prices were falling, though not so sharply as in 1924. Had there been no thought of international co-operation, the Reserve system policy would undoubtedly have been directed toward easing the money market, but it is probable that in this instance a smaller amount of credit would have been poured into the money market.

Finally, in 1930-31, it is obvious that domestic rather than international considerations have been the primary factor justifying the cheap money policy, though the exact time and extent of some of the rate reductions of 1930 may have been influenced by the European situation. In short, the three “co-operative” eras, 1924, 1927, and 1930-31, are precisely the periods when the domestic situation, interpreted in the light of the avowed standards of the Federal Reserve system, was such as to indicate a policy of easy money, whether we wished to co-operate or not.

The other notable thing is that the British case for cheap money was just as cogent when American rates were being raised in the autumn of 1925 as in 1924 and 1927, and was still more cogent in 1929. Whenever domestic policy has seemed to call for a tightening of the money market, no attention has been paid to evidences of distress in foreign money markets. It appears, therefore, that European advice and European needs and desires have at most been influential in regard to the degree of inflationary or deflationary effort; they have not led the Reserve authorities to try to move the money market in a different direction from that toward which pressure would otherwise have been exerted.

We conclude that there is a great deal of exaggeration in current reports as to the amount of attention which has been given to international considerations in determining the policy of the Federal Reserve system. Governor Strong was an ardent advocate of the idea that there should be extensive co-operation between central banks, and for several years he was probably the most influential person in the system. But it is not a one-man System, and the indications are that the majority of those who are responsible for the determination of the System’s policy have never taken the international arguments very seriously. When it is necessary to defend a past action, all the arguments which support it are marshalled, and at times the international situation has been a convenient element in the structure of “reasons.”

Appraisal of the merits of the international phase of Reserve policy must be tentative for the same reason that our statement of the facts is indefinite. We are not informed fully of the facts of the international relationships of the Reserve Banks; still less do we know as to the detailed representations which have led to the adoption of such and such policy. However, two or three generalizations may be ventured.

First, as to the participation of the Reserve system in stabilization loans: The importance of the objective aimed at in these arrangements must be conceded. The stabilization of the exchanges in the leading countries of Europe was a matter of primary importance to the world and if the Reserve authorities had put it ahead of minor considerations of domestic policy, their action would have commended itself to intelligent public opinion.

The primary purpose of a credit granted in connection with a stabilization program is to create confidence. No matter how sound a basis the budgetary and trade situation may afford for the establishment of the gold standard in any country, an essential step in stabilization is the creation in the public mind of a habit of thinking of the currency unit as the equivalent of a definite amount of gold or gold exchange. The co-operation of other banks, especially of central banks, can be a powerful agent in the creation of such confidence.

The fact that the stabilization credits extended to Europe were not used is an indication that the countries to which they were extended had already succeeded in putting their financial houses in good enough order to justify acceptance of their credit currency at its face value; the fact that the credits were available may well have been an essential step in educating the public to this fact, and a necessary safeguard against excessive demands for redemption of currency before the relatively sound conditions of the budgetary and trade situation became apparent.17

Let us consider next the general credit policy. As we have indicated, the evidence suggests that the Federal Reserve system has not actually co-operated in this way to anything like the extent that is generally assumed. Probably the only significant case is the pursuit in 1927 of an easy money policy somewhat more vigorous and prolonged than would otherwise have been the case. Assuming, however, that the Federal Reserve system has been influenced to a greater extent than we have indicated, is such action to be worthy of endorsement or condemnation?

The merits of the first objective mentioned on page 100—the support of the bill market—will be given consideration in Chapters XII and XVII and need not be reviewed here. The second objective, facilitation of the maintenance of dollar exchange reserves by foreign banks, I am disposed to endorse, but without enthusiasm. The question involves the merits of the gold exchange standard as it developed in Europe after 1924.

The common post-war practice of carrying reserves in the form of deposits and short-time bills in foreign stable currencies has obvious advantages. The accumulation of such reserves makes possible a paper showing of greater strength than would be possible if a nation’s currency rested only on the amount of gold which it was able to accumulate in its own vaults. Given existing traditions as to desirable reserve ratios, the gold exchange standard is a method of economizing gold. It is particularly valuable in tiding over the period of acute distrust which accompanies the period of the initiation of a stable currency. But as a permanent system it offers serious disadvantages. Reserves of foreign exchange make the position of any one banking system which uses them stronger than it would be if they were wiped out and nothing else was changed. But from the standpoint of the whole complex organization of banking and currency of the Western World, they are a source of great weakness. They make possible smaller gold reserves in the countries which hold the foreign balances, but they necessitate bigger gold reserves in the countries in which the balances are held. Moreover, they are a potential source of international friction, and are a very uncertain resource when the need for liquidation arises.

In the gold exchange standard, the world has revived in international finance a system which was thoroughly tried in American domestic finance before 1914, when we used inter-bank balances, pyramided on the New York reserves, as reserves for the country banks. The impossibility of realizing on these reserve balances in times of great pressure was a prime weakness of the earlier American banking system; the same weakness pervades the world organization of banking and currency today.

This, however, is not a serious criticism of the decision of the Reserve authorities to co-operate to the extent involved in acting as an agent for the purchase of bills for foreign central banks and the acceptance of the nominal risk involved in their endorsement. When the practice began, the most urgent need was the establishment of stable currencies. It might have been better as a long-run policy to establish them with smaller nominal reserves, all held in the form of actual gold, but this decision was not for the Federal Reserve system to make. Given the existing system, the co-opera-tion of the Federal Reserve in handling sight exchange and bills for foreign banks has been a useful service.

Finally we come to the most important phase of the question: How far ought the discount and open market policy of the Federal Reserve system to be “co-operative”? Should we agree with the position taken by Governor Schacht of the Reichsbank in 1927,18 that the best plan is for each country to pursue the policy indicated by its own internal situation and let other countries govern themselves accordingly? Or, is it better that each should seek the common good of all?

In answer it is to be emphasized first that, as was noted above, the plea of the internationalists has at all times since the issue arose been a plea for cheap money. And basically the international arguments for cheap money have been the well-worn arguments for cheap money at home—relief to debtors and stimulation of business enterprise. True, the case has been phrased in the post-war era largely in terms of the maintenance of the gold standard, whereas in former times it has often taken the form of an attack on the gold standard. But the ease or difficulty of maintenance of a metallic standard is in large part a question of cheap money versus dear money. If money is made cheaper in one country than it is in others,19 the standard is harder to maintain in that country. For the maintenance of the gold standard in a given country requires that that country, unless a gold producer, shall not meet its foreign payments year in and year out by gold shipments. It must meet them either with goods and services, or by continually increasing its debt. Low discount rates at a central bank and liberal open market policy lead domestic borrowers to satisfy their need for funds out of the proceeds of domestic credit expansion rather than by borrowing abroad, and thus cut down the “favorable” balance of international payments; cheap money diverts floating balances to competing money markets, and encourages imports and discourages exports. The balance of payments becomes adverse, and gold moves out. Thus every central banking system which yields to domestic pressure for cheap accommodation is likely to find difficulty in maintaining itself on a gold basis.

This foreign pressure on the gold reserve is an automatic check on inflation, but if all countries expand credit together, the check does not operate. Hence a country with a weak gold standard if it can instigate a credit expansion abroad can postpone or avoid the necessity of curtailing credit at home. International co-operation to support the gold standard (except in so far as it involves a temporary support during the transition from an unstable to stable currency, or during some subsequent emergency which causes a run on reserves) is the maintenance of a cheap money policy in order that foreign countries may also pursue a cheap money policy without suffering the loss of gold.

Central bank action calculated to help foreign central banks to tide over emergencies, like central bank action designed to carry domestic business through a seasonal or other temporary strain, may be extremely helpful. But central bank expansion designed to alleviate chronic pressure on the exchanges of any country, like central bank expansion designed to effect a continuous inflation of domestic prices, is a substitution of stimulants for sustenance.

Continuous pressure on the exchanges of one country is an indication that some change is needed in the policies of that country. Continuous support of the currency by other nations may mean simply that it will be possible to carry further the policies which are reflecting themselves in a weakening of the exchanges. The weakness may consist of a disposition to lend excessively abroad; it may be a central bank credit policy which results in demand for credit in excess of the savings capacity of the country; or the trouble may center in a bad trade situation which may arise from either political or industrial conditions in competing countries, crop conditions, a wage level too high for the productive capacity of the country, and so on. Any or all of these causes may give rise to a condition which is beyond the power of any bank policy to cure; to disregard them and attempt to maintain a money market rate structure based on pre-war traditions is to make certain that the exchange will be under continuing pressure.

The crux of the problem in recent years has been the situation of Great Britain. For reasons which cannot be analyzed without carrying this discussion too far afield, the actual financial position of London in the years from 1925 through 1930 was much less strong than it was before the war. London’s psychological strength had also been lessened by the recent break in its long tradition of an absolutely free gold market. Whenever open market money rates were higher in New York than in London, bills moved eastward and soon gold began to move westward. England was not drained of gold, but she kept practically none of the new gold which flowed to her from the mines of South Africa. From the time of her currency stabilization in 1925 the gold reserves and the earning assets of the Bank of England showed remarkable stability, as did also the deposits of the principal commercial banks.

In accordance with British tradition, the gold reserves were protected by maintaining discount rates at a level sufficiently high to attract foreign balances and keep down any tendency to credit expansion. The credit of London was so high that it proved to be possible to attract enough floating capital to maintain stability of the exchange for six years without precipitating an internal deflation. The level of interest rates in Great Britain relatively to that of other countries was higher than it had been before the war, but not high by the standards of the United States. But even such a moderate use of the discount rate was distasteful to a large section of the public. There is in Great Britain widespread acceptance of the idea that business prosperity is highly dependent on the level of money rates. As there has been serious and persistent depression in key industries ever since 1921, there is powerful opposition to every increase of the discount rate. A very important element of public opinion was opposed to the restoration of the gold standard in 1925, favoring the idea of a “managed currency,” that is, an irredeemable paper currency kept stable in value by regulation of its quantity, without regard to gold movements.

It is obvious that the same result which was sought by holding up discount rates might be attained by a lowering of the rates in America and in France. The new philosophy of central bank co-operation made it possible to attack the problem from this angle by diplomatic effort (exercised through financial, not official diplomatic, circles). For America to “co-operate” in credit policy meant in general that the Federal Reserve system should make it possible for England to stay on the gold standard without protecting its currency by interest rates as high as would have been necessary if American policy were based solely on domestic considerations.

I do not believe this would have been a sound line of policy from the standpoint either of Great Britain or of the United States. It would have been an attempt to correct the mistake made in 1925 by stabilizing the pound at a level out of line with the price and wage level of the country, not by reversing that action or by bringing the internal price level into a more appropriate relationship to the value of the pound, but by a dangerous credit inflation in America and in France.

Finally, there is the question of technique. If it is desired to support and stabilize the foreign exchanges and protect the gold reserves of European countries, the logical device for the purpose seems to be the purchase of bills drawn in those currencies. Bills payable in foreign currencies are an important asset of most foreign central banks and are eligible for purchase under the Federal Reserve Act, but as we have noted, the amounts held by the Reserve Banks have ordinarily been negligible, and even when they have been expanded for the purpose of supporting the exchange of foreign countries, the purchases as a rule have been very small in proportion to the size of the markets which they were supposed to influence.

It would seem a better policy to put credit directly into foreign markets than to pour it out into our own in the expectation that a part of it will overflow into the foreign markets which it is desired to support. The discount and open market procedure which was used in 1927 was effective only with a time lag, and its collateral results on the domestic financial situation were more conspicuous than the effects which it was desired to produce abroad.

The conclusions of this chapter may be summarized as follows: International co-operation has been a less important factor in Reserve system policy than is generally believed, and it is well that this is so. Aside from the relatively unimportant service relationships and the more significant participation of the Reserve Banks in stabilization loans (in which the prestige of the lenders was of more importance than the actual advance of funds), the pressure to co-operate has been pressure to pursue an unsound policy, in order to shield other nations from the consequences of their own unsound policies. So long as “co-operation” is conceived in these terms, the less we have of it the better.

“To render what assistance was possible by our market policy toward the recovery of sterling and the resumption of gold payment by Great Britain.” (69 Cong. 1 sess., Stabilization, Hearings on H.R. 7895 before Committee on Banking and Currency, Part 1, p. 336.)

• 1The distinction between “banking policy” and “credit policy” is taken from Annual Report of the Federal Reserve Board, 1928, pp. 9-10.
• 2Compare pp. 132-40.
• 3This is, of course, in substance the position of the Banking School in the British banking controversy of the early nineteenth century.
• 4“. . . When increased credit demands can be met only by recourse to the Federal Reserve Banks, the volume of Reserve Bank lending is a sensitive indicator of credit conditions. . . .” (Federal Reserve Bulletin, 1923, Vol. 9, p. 411).
• 5Annual Report of the Federal Reserve Board, 1923, p. 10 (quoted below, pp. 79-80); Federal Reserve Bulletin, 1928, Vol. 14, p. 6.
• 6The omission of reference to price changes in the text is intentional and without prejudice. I believe that there is need of a thorough reexamination of the orthodox statement of the influence of gold movements on price changes and the extent to which in pre-war days changes in price levels were caused by gold movements and operated to check the gold movements.
• 7For fuller discussion of these points, see Chap. IX; compare also B. H. Beckhart, The Discount Policy of the Federal Reserve System, Chap. II.
• 8The cash balance carried in the United States Treasury was occasionally drawn upon to meet seasonal or crisis demands, either through the depositing of funds in banks or through the purchase of bonds by the Treasury, but the device was very crude and there was no continuity of policy in its management.
• 9Compare chart, p. 35.
• 10The possibility of temporary nullification of a central bank’s control through the mobilization of fresh resources is illustrated by an action of the Midland Bank, which in 1927 bought securities so heavily as to lower its own reserve ratio by several per cent. The amount involved was small enough so that the Bank of England was able to offset it. The net result was simply to increase the earning assets of the Midland Bank and decrease those of the Bank of England; not to ease the market.
• 11Compare p. 231.
• 12Annual Report of the Federal Reserve Board, 1927, pp. 10, 16.
• 13See pp. 104-05.
• 14Annual Report of the Federal Reserve Board, 1927, p. 11.
• 15The 4 1/2 per cent rate was charged on all maturities of less than 90 days, such paper making up the great bulk of the transactions.
• 16As reported by the New York Stock Exchange.
• 17At least such a policy was promulgated by the Board. It is difficult to say how far the Reserve Banks went in carrying it out. Apparently the New York Bank did not give much heed to it; alleging, truly, that New York banks were not loaning heavily in the stock market. Compare p. 133.
• 18Indexes of Standard Statistics Company.
• 19This increase is not altogether due to the rate change, as the supply of acceptances is always increased by autumn exports. The increase in 1929 was much more than seasonal, however.