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X-6334 ADDRESS OF CHARLES S. HAMLIN Maine Bankers* Association, Poland Springs, Maine, June 22, 1929. Mr. Hamlin said in part:Let ms state at the outset that what I have to say this evening represents merely my personal views, and that I am not in any sense speak ing for the Federal Reserve Board, Banking developments during the past year have attracted more general attention, and caused more discussion, than at any time since the foundation of the Federal Reserve System, excepting only the years 1920 and 1921. We hear, on the one hand, statements as to unbridled security speculation and inflation, and on the other a denial thereof, coupled with censure of the Federal Reserve System for an alleged desire to "break down the stock market. On the one hand we hear, as I have said, the charge of inflation which must be controlled, and on the other the claim that natural courses should be allowed to take care of the situation. Ihe Federal Reserve System, meanwhile, has confined itse lf to a critical supervision and regulation of the use made by member banks of Fed eral Reserve credit, with a result which most reasonable men w ill admit has been successful, and which has cleared up to a measurable degree a situation fraught with danger if allowed to continue unchecked. I shall not attempt here to characterize present or past conditions as disclosing expansion or inflation, but w ill content myself with stating a few facts which, in my opinion, Justify the firming policy, including direct action, so-called, of the Federal Reserve System in connection with member “bank credit develop ments* I wish, however, first to state that, speaking generally, there X-6334 -2 - is no undue expansion or inflation in commodities. I want also to point out that in considering expansion or inflation, it is not accurate to take one year as a test. In dealing with this matter I will take a period cover ing the years beginning with 1922 through 1927 or 1928, and later consider present conditions in this year. Leaving aside the question of commodity speculation, which, as I have said, can hardly be said to exist today, I want to call attention to the startling growth of security loans, (including speculative loans), com pared with commercial loans, during the period of 1922 to 1928. During this period, security loans of reporting member banks, in cluding in this category so-called speculative loans, increased from 3.6 billions to 7*5 billions, - an increase of 3.9 billions or of over 100$; on the other hand, commercial loans increased from an average of 7.4 billions to 8.7 billions, - an increase of 1.3 billions or only 18$. During the same period, the percentage of security loans to total loans and investments increased from 25$ to 34$, while the percentage of commercial loans to total loans and investments decreased from 51$ to 39$. Member bank reserves during this period increased from an average of 1.7 billions to 2.4 billions in January, 1928, - an increase of 700 mil lions, or 40$. Federal Reserve credit for the whole System was, in December, 1928, over 1.8 billion s, taking daily averages, while the corresponding for the earlier years were: 1922 1923 1924 1925 1926 1927 1928 ----------- 1.3 billions -----------1.2 " ----------- 1.2 " -----------1.5 '» -----------1.4 « -----------1.5 " -----------1.8 ” fig u r e s X-6334 -3 - Prices of 410 stocks combined were 58.7 in 1922, and in January, 1929, had increased to 183.6. Whether or not the above figures can be characterized as expan sion, undue expansion, or inflation, it must he evident that they were made possible by an increase in the volume of credit used for certain pur poses in excess of the amount of things available in these lines, resulting in competitive bidding for a limited supply, thus increasing prices in some cases, at least, to an abnormal extent. It must be evident that such a condition of member bank credit, whether caused by speculative loans, whether in commodities, real estate, or securities, was one demanding careful attention by the Federal Reserve hanks, and one which required control, whether by way of rate increase or by other action. Eow far Federal Reserve credit was responsible for this expansion is an interesting question which I shall not attempt to solve in this con nection, except to express my opinion that the expansion was largely gen erated through gold imports and therefore that Federal Reserve credit, on the whole, was not responsible for i t . There were, however, three periods when the purchase of Government securities by Federal Reserve banks placed money in the market, a material portion of which went into the member banks reserves, and was expanded upon in the ratio of almost 15 to 1. periods were These from February to June, 1922, from April to December, 1924, and from February to December, 1927. If we assume, therefore, that the Federal Reserve System is responsible for the increase in Federal Reserve credit during these three periods, we s t i l l should not forget that agricul ture and business received material benefit from this expansion, and that at the same time it rendered service to Europe in adopting sound monetary X-6334 -4 - policies along the lines of stabilization. During the latter part of 1927 the Federal Reserve System began a firming policy, and ceased to offset gold exports by buying Government securities; daring 1928 the System made three increases of discount rates; it also from time to time sold Government securities, thus further tighten ing the pressure upon credit. Early in this year the total amount of Federal Reserve credit out standing was, as I have before stated, about 1.8 billions of dollars as compared with about 1.5 billions the year before, and many feared that in stead of the customary liquidation after the first of the year there would be further expansion, and that member bank crcdit developments needed care ful supervision and control. I think it will be generally agreed that, apart from speculative loan activities, agriculture and business would be entitled t& a lower rate, rather than to an increase over the present rate of 5$, and that the problem is how most speedily to adjust matters so that in the near future agriculture and business would be getting the benefit of this lower rate. Representations were made that the speediest way to obtain lower rates for agriculture and business would bo to adopt a policy of affirmative rate increases beginning at 6$ and increasing until the speculative use of Federal Reserve credit had subsided, and then reversing the process, gradual ly reducing rates until they could safely be put below the present rate of 5$. Many of those who advocated this view perhaps unconsciously fe lt that it was the duty of the Federal Reserve System to correct the situation on the stock exchange by a series of quick incisive increases of discount rates. This feeling was expressed by the English paper, the Manchester X-6334 -5 - Guartjian Commercial, of March 28, 1929, as follows; nThere appeared at least ponje slender hope that the Federal Reserve authorities were meditating action drastic enough to precipitate the crisis in Wall Street trhich, in the opinion of most monetary students, must come sooner or la te r.H On the other hand, it was claimed that the Board had no duty to make such a direct attack on speculative activity on the stock ex change in this drastic manner, and it was further pointed out that these violent speculative activities in a material degree were dependent upon other factors than Federal Reserve credit* It was finally decided that the real problem Was the prevention of the diversion of Federal Reserve funds into the speculative markets, retaining discount rates sit the ex isting rate of 5$. To this end the Board called upon the Federal Reserve banks and the member banks to cooperate in stopping the growth of speculative credit, thus incidentally setting forces in motion which would probably bring about some reasonable liquidation of existing credits, but no drastic reduction of existing speculative credits was asked for or expected. It was pointed out that many member banks have been frequent or continuous borrowers from the Federal Reserve banks, and that they were iri effect securing, through rediscounts, capital loans taken out of the common fund built up by our member banks, and intended only for use for seasonal or emergency requirements; that capital thus acquired used in competition with the other member banks who were unfrequent borrowers, amounted to what in trade would be called “unfair competition.” The Board pointed out, however, that there wore many occasions whoro banks were in a d ifficu lt position because of crop failures, sudden loss of deposits, or general economic depression, where the above rule against capital borrowing could, not be s t r ic t ly applied, at least for ccnsidera"ble periods, "but the general p rin cip le was la id dov/n. It should "be remembered that while at tention was ca lle d to the growth o f speculative loans which, in part, depended upon Federal Reserve cre d it, the rule would "be the same whether the expansion was "based on commodity or other forms of speculative loans. The "banks, speaking generally, cooperated with the e ffo rts of the Federal Reserve Board and the Federal Reserve "banks, and it is in ter esting to sec the progress since tho f i r s t of this year which has "been ms.de under tho firming p o licy and so -ca lle d " d irect a ctio n .11 Talcing the January, 1929, average and comparing it with June 12; 1929, we fin d that security loans fo r reporting member "banks have decreased from 7.5 "billions to 7.2 "billions, a reduction o f 297 m illion s; commercial loans, on the other hand, fo r the same period, increased from 8.7 "billions to 9.1 "billions, the in crease "being 361 m illion s. Liember "bank reserves, fo r the same period, decreased from 2,387 m illion s, the average of January, 1929, to 2,331 m illions for the week ending June 15th, a decrease of 56 m illio n s. The percentage c f security loans to to ta l loans and investments decreased during th is period from 33.6$ to 32.6$, while the percentage of commercial loans increased from 39.4$ to 41.4$. Taking the figures as to Federal Reserve cred it for tho entire System, we fin d that comparing tho average fo r January and May, 1928, with tho same periods in 1929, that Federal Reserve cre d it had increased in May, 1928, "by 84 m illion s, while taking the same dates in 1929 we find that Federal Reserve cred it decreased 310 m illio n s. While the above decline in Federal Reserve cre d it was brought atcut ch ie fly "by the seasonal return flow o f currency and gold imports, it is never X-6334 -7 - theless true that in the absence of direct pressure, some part of the funds released through the inflow of gold, would have found its way into member banks reserve balances, atod would have formed the basis of further expansion, and that, as shown above, the direct pressure de duced the member bank reserve balances by about 50 million dollars be* tween January 29, 192SJ and the week ending on June 15, 1929. !Ehe Federal Reserve System,therefore, has taken an effective control of tho situation without increasing discount rates, and in the control thus oxcrcisod through the modihm of direct pressure, the System has established a new technique, which shows that diversion of Federal Reserve credit into speculative channols may bo curbed without serious injury to agriculture and business. While it is true that although the Federal Reserve rate has not been increased daring this period, customers’ rates charged by member banks have increased about 1$, it is also true in my opinion that this in crease in customers* rates was brought about by the competition of the high rates offered for funds in the speculative market. It is also true that the firming policy of the Board, including direct pressure, has brought pressure upon speculative loans with three times the force, thus tending to relieve agriculture and business.
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