Speculation, Gold, and Bank Policy

Abstract

W E are familiar with the grow-th of the volNIAurume of spec-ulation in recent years, the growth of brokers' loans, the gradual rise of interest rates, the attempt of the Reserve banks and Imember banks to check the absorption of credit, the successful appeal of the market for funds from outside the banks, and the increasing pressure of this dernand upon all the money markets of the world. We have noted also the resulting movemnent of gold to the United States $200,000,000 in the first nine months of this year; the action of Canada and Argentina, establishing embargoes upon the export of gold from those countries to the United States, although such action meant a partial abandonment of the gold standard; the a] arm in Europe over the rising value of gold; the general advance of discount rates in Europe, and finally the action of the Bank of England in raising its discount rate to the alarming figure of 61/ per cent, followed by the rapid withdrawal of European funds from New York, and the dramatic collapse of the stock market, with a shrinkage of $2,500,000,000 in stock exchange loans. An astonishing amount of reputable support was given to such ideas as that the Reserve authorities were paying too much attention to the market, that they had no supervisory powers over stock prices or brokers' loans, and that in defending their own reserves they were culpably making money tight. If the reserves had not thus been defended, what reason is there for thinking that they would not have been completely drawn into use, before the uttermost ends of the earth were ransacked. It is surprising that so many people should have forgotten the experience of the Reserve system in the crisis of I920-2I. The Reserve banks were forbidden to make loans for the purpose of buying stocks, bonds or other investment securities, excepting United States Government bonds. Under this exception they became the principal agency of the Treasury in financing its needs during the war, and when the war ended they were loaded to the guards with rediscounts secured by Liberty Bonds. Then came the great deflation of prices and credits, which was followed by a storm of criticism of the Reserve banks for their failure to render in that crisis the assistance that was expected of them. But how could they assist anybody? They were in the situation up to their necks themselves. The strength of a Reserve bank is in its reserves, and these institutions had no reserves. They were in the same condition as the other banks that were looking to them for help. They had nothing to put into the situation, but were under the necessity of collecting some of their outstanding credits before they could grant new ones. In view of this experience, so comparatively recent, what possible defence would have been available to the Reserve authorities if they had allowed Reserve credit to become an important factor in the increase of brokers' loans from $3,000,000,ooo to $8,500,000,000 in the last two and one half years, and how much worse might the situation have been in the last week of October if it had been known that the Reserve banks already had made use of their reserves? But while the case for the restrictive Reserve policy thus seems perfectly clear, nevertheless certain objections were raised which are entitled to further consideration. Membership in the World Association of Gold Standard Nations, although an informal relationship, implies certain mutual obligations. The monetary systems of all the member nations, their credit structures, the wage and price systems, the relations between debtors and creditors in short, all of the complicated relations of modern, highly organized, society are dependent upon the common gold basis. It is not an absolutely firm and immovable basis for any of them. In a sense it is a liquid basis, a movable, shifting basis. Gold distributes itself around the world in response to the demands for it, and under normal conditions it may be assumed that each country will get the share which corresponds to its participation in trade and will best maintain stability not only in international value relationships but in domestic value relationships as well. On the other hand, irregular and abnormal conditions anywhere affecting the international movements of gold may disturb the sensitive equilibrium