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'11i X-6233 FEDERAL RESERVE BOARD STATEli:E:lTT FOR THEl PRESS For release in morning papers .February 7, 1929. February 5, 1929. The Federal Reserve Bulletin for February, 1929, will contain the following state~ent: T'ne United States has during the last six years experienced a most remarkable run of economic activity and p~oductivity . . The production, distribution and consumption of goods have been in unprecedented volume. The economic system of the country has fu~ctioned efficiently and smoothly. Among the factors which have contributed to this result, an important place must be assigned ·· to the operation of our credit system and notably to the steadying influence and moderating policies of the Federal Reserve System• During the last year or more, however, the functioning of the Federal Reserve System has encountered interf~rence by reason of the excessive amount of the country• s credit absorbed in speculative security- loans' The credit situation since the open:ing of the new year indicates that some of the factors Which occasioned untoward developments during the year 1928 are still at work• The volume of speculative credit is still growing. Coming at a time when the country has lost some 500 million dollars bf gold 1 the effect of the great and growing volume of speculative credit has alreadY produced some strain, which has reflected itself in advances of from 1 to 1-1/2 per cent in the cost of credit for. commercial uses. The matter is one that concerns every section of the coantry and every business interest, as an aggravation Gf these conditions may be expected to have detrimental effects on business and may impair its future. The Federal Reserve Board neither assumes the right nor has it any disposition to set itself up as an arbiter of security speculation or values. It is, however, its business to see to it that the Federal reserve barnes function as effectively as conditions will permit. When it finds that conditions are arising which obstruct Federal reserve banks in the effective discharge of their function of so managing the credit facilities of the Federal Reserve System as to ll.ccommodate conn:nerce and business, it is it.s duty to inquire into them <:md to take such measures as may be deemed suitable and effective in the circmnstances to correct them; which, in the immediate situation, means to restrain the use, either directly or indirectly, of Federal reserve credit fadH ties in aid of the growth of speculative credit. In this connection, the Federal Reserve Board, under date of February 2nd, addressed a letter to the Federal reserve banks, which contains a fuller statement of its position: - -2- X-"6233 "The firming tendencies of the money market which have been in evidence since the beginning of the year - contrary to the usual trend at this season - make it incumbent upon the Federal reserve banks to give constant and close attention to the situation in order that no influence adverse to the trade and industry of the country shall be exercised by the trend of money conditions, beyond what may develop as inevitable. The extr.aord~ absorption of funds in speculative security f·1oans w.tnch has characterized the credit movement during the past year or more, in th~ judgment of the Federal Reserve Board, deserv~s parti01;1.lar attention lest it become a decisive factor working toward a still f~rther firmihg of money rates to the prejudice of the country's commercial interests. The resources of the Federal Reserve System are ample for meeting the growth of the country's cor...i!Ilercial needs for credit 1 provided they ate competehtly adciinistered and protected against seepage into uses not contemplated by the Federal Reserve, Act. The Federal Reserve Act does not, in the ,opinion of the Federal :Reserve Board, contemplate the use of the resjources of th'e Federal reserve banks for the creation or. extension of speculative credit • A member bank is not within it~. t'easonab1e claims for redililcount facilities at its FE!lderai reserve bank when it borrows either for the purpose of ruaking speculative loans or for the purpose of maintaining . speculative loans. The Board has no disposition to assume authority to interfere with the loan practices of member banks so long as they do not involve the Federal reserve banks. It has, however, a grave responsibility whenever there is evidence that merr.ber banks are II'.aintaining speculative security loans with the aid of Federal reserve credit. When such is ·the ce.se the Federal reserve bank becomes either a ,contributing or a sustaining factor in the current volume of speculative security credit. This is not in harmony with the intent of the Federal Reserve Act nor is i t condUcive to the wholesome operation of the banking and credit system of the country."
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