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„ 4. „ « . . . 4 , ' .4 , t » ! . fc X-6544 OOIA^I For release at 2:30 P.M. March 20, 1930. CREDIT Al'TD ITS PR2S3NT RELATION TO BUSIHES Address by R . A . Young, Governor, Federal Reserve B (Topic of talk "before the American Automobile Association, March_20j_JL93p,. as broadcast over'a nation-wide net work of the National Broadcasting Company0 .v / X-5544 M r . Toastmaster and Representatives of the Automobile Association of America: I consider it a great honor to have the opportunity to dine with you today, and also consider it a rare privilege to speak to you. The radio time that has "been allotted to me is limited and, therefore, I am going to attempt to cover as much ground as quickly as I possi"bly can. This country has "been in a "business recession since June of last year and practically all lines of endeavor have been affected. I am not going to try to review all of the factors that contributed to these developments but will simply attempt to point out the relation of credit to the general situation. From September 1927 until October 1929 this country experienced a speculative hysteria that eventually became world-wide in its effects. The Federal Reserve System realized that while this hysteria might be somewhat restrained, it would nevertheless have to ran its course, and the principal thing the System could do daring the interim was to attempt to keep the reserve banks in such order that when the inevitable collapse should come, the System would be in a position to minimize the effects of the crash and at the same time to use its influence towards inducing member banks also to keep in condition to act promptly and decisively when the need arose. To accomplish this result, the Federal Reserve System persistently resorted to the X-6544 -2powers that it had at its command - to wit: - the discount rate, "bill rates, open market operations and direct action. Credit, however, is one of those peculiar instruments which seems to work in opposite directions simultaneously, so that the "benefits secured "by one operation frequently are counteracted "by forces that work in just the opposite direction. During this period the Federal Reserve System attempted in cooperation with the member "banks to restrain the growth of speculative credit and at the same time to assure rates of interest for credit used in production and distribution that would not "be punitive. These efforts halted the growth in stock exchange loans of member "banks, while these banks continued to supply increasing demands from their customers for commercial loans. The demand for speculative credit continued to be so strong, however, and so far exceeded the willingness of the member banks to lend on the exchange, that unusually high rates prevailed in the call loan market for a long period and were an important factor in attracting a large volume of loans from non-banking sources. High call rates, acting either directly or indirectly, affect all other rates, so for a considerable period the high call rates prevailing in New York affected the cost of all credit, not only nationally, but internationally. Money rates were in fact advanced in all principal countries to the disadvantage of business throughout the world. This state of affairs was not only puzzling to the bankers of America, but caused them great concern. That they gave the X-6544 -3matter careful study, and laid definite and positive plans for handling the situation when it should break, is clearly evidenced "by the courageous manner in which the "bankers did handle the situation, particularly in the larger centers, during that critical week of October 23rd to October 30, 1929, and in my opinion; if they had not acted as quickly and courageously • I . as they did, this country would have witnessed one of the greatest panics it had ever experienced* There is always an aftermath to such situations and that is what we have been experiencing during the last four or five months. I do not mean to convey the idea that the crash in the stock-market has "been the only factor in the recession of production, employment and trade, but that it was an important contributing factor, there can be no question. Since last October there have been many remedies suggested some of merit and many without merit. G r e a t stress has been laid upon the importance of credit, and while I am not of that school that believes that credit is a determining factor in such situations, nevertheless, I believe that there is a possibility of its being a contributing factor. That I am not alone in my views is evidenced by the fact that since November of last year every Federal Reserve Bank has initiated a reduction in discount rates - one bank dropping from 6$ to 3 l/2$ in its discount rate and from 5 3/8$ to 3$ in its buying rate on acceptances. Since last October, furthermore, the reserve banlcs have accumulated a large portfolio of Government bonds. X-6544 All such actions have been to lend, the influence of the Federal Reserve Banks towards easing the price of credit, and X ask you to remember that the initiation of these actions was not confined to any one particular group, in any one locality, but was put in operation by 108 directors of the twelve reserve banks in twelve trade areas comprising the whole of the United States. But the•consequences have not been confined to the United States. Central banks in foreign countries which had been obliged to raise their discount rates during 1928 and the larger part of 1929 have since last October seen their way clear to reduce rates again. Discount rates have accordingly been reduced in England, France, Germany, and many other foreign countries, to the advantage of their own people, and since these countries are good customers of the people of the United States easier money abroad is in these circumstances also of advantage to ourselves. During the past five months the Federal .Reserve System has been frequently criticized because it does not always move rapidly enough, but these critics have failed to take into consideration all of the mechanics of regional bank credit, and all that I can say is that I believe the Federal Reserve System has moved, during recent months, as rapidly as the mechanics would permit and I believe as rapidly as the situation has justified. I further realize that there are many people in business that are a bit skeptical of the reality of this program because they have not as yet felt the effects in X-S544 -5their own individual cases, "but unless something unforseen develops, I am confident that the easing influence of. this program will in time trickle into all forms of credit. In fact, to date I am quite agreeably surprised with the results that have "been obtained. There was a time in this country when hankers operating as independent units were interested mainly in high rates, and seldom, if ever, in low rates. However, the experiences of the past ten years have taught a great majority of bankers that active business, with reasonable rates, is far more profitable in the long run, than dull business with high rates. The willingness with which many bankers have modified rates convinces me that they will do their part in the present situation. I again repeat, however, that credit can only be a contributing factor towards reviving business and restoring it to normalcy. There are many other factors that are per- haps just as important, and many of them more so. The men who are engaged in the business of agriculture, industrial production, and wholesale and retail trade sunderstand that they have opportunities and responsibilities in the matter. They all have their own problems to meet, usually in the face of competition, and I have no doubt they are working hard on these problems. Many of them may feel that they have good reasons of their own for hesitancy. ^All I can say is that the Federal Reserve Panics have exhibited no hesitancy and that the Federal Reserve System has expressed X-3544 6itself in an easing program that is clearly evident to everyone. This was not put in operation without overcoming obstacles, and. its initiators were not unmindful of unhealthy factors that might develop, but in any event, they have done what they "believed best to do under the circumstances, and their future action can only be determined by subsequent developments. This is a great country, possessed of many advantages and great natural resources, inhabited with people anxious and willing to work, and its credit structure is one that can and will function. Therefore, it seems to me that others should have more initiative and less hesitancy, and I feel justified in making that appeal to the American people feeling confident'that the experience of 1928 and 1929 will be fresh enough in our minds to preclude any immediate recurrence of such speculative hysteria as we had at that time.
@FedFRASER