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Reserve System, p. 344.
160 America s Great Depression
its policy in the spring of 1928, and tried to halt the boom. From
the end of December 1927, to the end of July 1928, the Reserve
reduced total reserves by $261 million. Through the end of June,
total demand deposits of all banks fell by $471 million. However,
the banks managed to shift to time deposits and even to overcom-
pensate, raising time deposits by $1.15 billion. As a result, the
money supply still rose by $1.51 billion in the first half of 1928, but
this was a relatively moderate rise. (This was a rise of 4.4 percent
per annum, compared to an increase of 8.1 percent per annum in
the last half of 1927, when the money supply rose by $2.70 billion.)
A more stringent contraction by the Federal Reserve one
enforced, for example, by a  penalty discount rate on Reserve
loans to banks would have ended the boom and led to a far
milder depression than the one we finally attained. In fact, only in
May did the contraction of reserves take hold, for until then the
reduction in Federal Reserve credit was only barely sufficient to
overcome the seasonal return of money from circulation. Thus,
Federal Reserve restrictions only curtailed the boom from May
through July.
Yet, even so, the vigorous open market sales of securities and
drawing down of acceptances hobbled the inflation. Stock prices
rose only about 10 percent from January to July.40 By mid-1928,
the gold drain was reversed and a mild inflow resumed. If the Fed-
eral Reserve had merely done nothing in the last half of 1928,
reserves would have moderately contracted, due to the normal sea-
sonal increase in money in circulation.
At this point, true tragedy struck. On the point of conquering
the boom, the FRS found itself hoisted by its own acceptance pol-
icy. Knowing that the Fed had pledged itself to buy all acceptances
offered, the market increased its output of acceptances, and the
Fed bought over $300 million of acceptances in the last half of
1928, thus feeding the boom once more. Reserves increased by
40
Anderson (Economics and the Public Welfare) is surely wrong when he infers
that the stock market had by this time run away, and that the authorities could do
little further. More vigor would have ended the boom then and there.
The Development of the Inflation 161
$122 million, and the money supply increased by almost $1.9 bil-
lion to reach its virtual peak at the end of December 1928. At this
time, total money supply had reached $73 billion, higher than at
any time since the inflation had begun. Stock prices, which had
actually declined by 5 percent from May to July, now really began
to skyrocket, increasing by 20 percent from July to December. In
the face of this appalling development, the Federal Reserve did
nothing to neutralize its acceptance purchases. Whereas it had
boldly raised rediscount rates from 32 percent at the beginning of
1928 to 5 percent in July, it stubbornly refused to raise the redis-
count rate any further, and the rate remained constant until the end
of the boom. As a result, discounts to banks increased slightly rather
than declined. Furthermore, the Federal Reserve did not sell any of
its more than $200 million stock of government securities; instead
it bought a little on net balance in the latter half of 1928.
Why was Federal Reserve policy so supine in the latter part of
1928? One reason was that Europe, as we have noted, had found
the benefits from the 1927 inflation dissipated, and European
opinion now clamored against any tighter money in the U.S.41 The
easing in late 1928 prevented gold inflows into the U.S. from get-
ting very large. Great Britain was again losing gold and sterling
was weak once more. The United States bowed once again to its
overriding wish to see Europe avoid the inevitable consequences of
its own inflationary policies. Governor Strong, ill since early 1928,
had lost control of Federal Reserve policy. But while some disci-
ples of Strong have maintained that he would have fought for
tighter measures in the latter half of the year, recent researches
indicate that he felt even the modest restrictive measures pursued
in 1928 to be too severe. This finding, of course, is far more con-
sistent with Strong s previous record.42
41
See Harris, Twenty Years of Federal Reserve Policy, vol. 2, pp. 436ff.; Charles
Cortez Abbott, The New York Bond Market, 1920 1930 (Cambridge, Mass.:
Harvard University Press, 1937), pp. 117 30.
42
See Strong to Walter W. Stewart, August 3, 1928. Chandler, Benjamin
Strong, Central Banker, pp. 459 65. For a contrary view, see Carl Snyder,
Capitalism, the Creator (New York: Macmillan, 1940), pp. 227 28. Dr. Stewart, we
162 America s Great Depression
Another reason for the weak Federal Reserve policy was politi-
cal pressure for easy money. Inflation is always politically more
popular than recession, and this, let us not forget, was a presiden-
tial election year. Furthermore, the Federal Reserve had already
begun to adopt the dangerously fallacious qualitativist view that
stock credit could be curbed at the same time that acceptance
credit was being stimulated.43
The inflation of the 1920s was actually over by the end of 1928.
The total money supply on December 31, 1928 was $73 billion.
On June 29, 1929, it was $73.26 billion, a rise of only 0.7 percent
per annum. Thus, the monetary inflation was virtually completed
by the end of 1928. From that time onward, the money supply [ Pobierz całość w formacie PDF ]