The Federal Reserve System and Brokers' Loans

February 25, 1928

Report Outline
Stock Market Activity and Brokers' Loans
War-Time Experiment in Credit Control
The Federal Reserve System and Stock Speculation
Special Focus

During the past year brokers' loans have increased by approximately one billion dollars. Each successive high level has been regularly noted in the financial columns. The maximum expansion was reached February 8, 1928, when the loans amounted to $3,835,020,000. A slight recession occurred during the week ending February 15, following upon the advance of Federal Reserve rediscount rates, and a marked recession during the week ending February 21, when there was severe liquidation in the stock market. On February 21, however, the total of brokers' loans was still above the level of the latter part of December and was $966,162,000 larger than the total of the corresponding week of last year. It is too early to tell whether the recessions of the last two weeks mark the beginning of a persistent decline, although a further reduction during the current week appears to be expected in Wall Street.

Brokers' loans represent the credit furnished to the speculative market through the medium of fifty-one New York City banks, members of the Federal reserve system. The funds which are advanced to brokers and dealers in securities by the New York banks are the surplus funds of banks in every section of the country. Interior banks may receive interest on their balances maintained in New York or they may instruct their New York correspondents to place loans in the collateral loan market for their account. Either time loans or call loans may be made. Time loans are made for a specified number of days, while call loans are subject to demand for immediate repayment. Since these out-of-town funds represent a kind of secondary reserve for the depositing bank, they must be readily available in case of need. The necessary liquidity is obtained in the collateral loan market. Security for these loans, both call and time, is usually stocks and bonds, immediately salable on the Stock Exchange, and the prodeeds are used largely for stock market operations.

The Public Interest in Brokers' Loans

The rapid rise in brokers loans up to a fortnight ago, the increase in speculative activities, and recent discussion of the abundance of funds in the New York money market have given rise to considerable criticism in other parts of the country. The accumulation of funds in New York - the result of concerted action by thousands of interior banks - has been regarded in many quarters as a diversion of funds from industrial needs to the speculative market. Since member banks of the Federal reserve system in New York supply over three and a half billion dollars of credit in the form of brokers' loans, and the Federal Reserve Board inaugurated the reporting of the amount of the loans, the system is frequently held responsible for the situation as well as for the publication of the facts.

ISSUE TRACKER for Related Reports
New Deal, Great Depression, and Economic Recovery
Feb. 20, 2009  Public-Works Projects
Jul. 25, 1986  New Deal for the Family
Apr. 04, 1973  Future of Social Programs
Nov. 18, 1944  Postwar Public Works
Apr. 12, 1941  Public Works in the Post-Emergency Period
Mar. 08, 1940  Integration of Utility Systems
Feb. 26, 1938  The Permanent Problem of Relief
Jun. 08, 1937  Experiments in Price Control
Jan. 05, 1937  Credit Policy and Control of Recovery
Nov. 27, 1936  New Deal Aims and the Constitution
Oct. 16, 1936  Father Coughlin vs. the Federal Reserve System
Sep. 25, 1936  Roosevelt Policies in Practice
Feb. 11, 1936  Conditional Grants to the States
Dec. 11, 1935  Capital Goods Industries and Recovery
Sep. 25, 1935  Unemployment Relief Under Roosevelt
Jul. 17, 1935  The R.F.C. Under Hoover and Roosevelt
Jul. 03, 1935  Six Months of the Second New Deal Congress
Jun. 04, 1935  The Supreme Court and the New Deal
Mar. 05, 1935  Public Works and Work Relief
Feb. 16, 1935  Organized Labor and the New Deal
Dec. 04, 1934  Rural Electrification and Power Rates
Oct. 26, 1934  Federal Relief Programs and Policies
Jul. 25, 1934  Distribution of Federal Emergency Expenditures
Jul. 17, 1934  Debt, Credit, and Recovery
May 25, 1934  The New Deal in the Courts
Mar. 27, 1934  Construction and Economic Recovery
Mar. 19, 1934  Price Controls Under N.R.A.
Feb. 15, 1934  Federal Promotion of State Unemployment Insurance
Jan. 10, 1934  Government and Business After the Depression
Jan. 02, 1934  The Adjustment of Municipal Debts
Dec. 12, 1933  The Machine and the Recovery Program
Dec. 05, 1933  Winter Relief, 1933–1934
Nov. 11, 1933  Power Policies of the Roosevelt Administration
Oct. 28, 1933  Buying Power under the Recovery Program
Oct. 19, 1933  Land Settlement for the Unemployed
Sep. 20, 1933  The Capital Market and the Securities Act
Jul. 18, 1933  Public Works and National Recovery
Jul. 01, 1933  The Plan for National Industrial Control
May 03, 1933  Economic Readjustments Essential to Prosperity
Apr. 26, 1933  Government Subsidies to Private Industry
Mar. 25, 1933  Rehabilitation of the Unemployed
Feb. 17, 1933  Federal Cooperation in Unemployment Relief
Nov. 16, 1932  Systems of Unemployment Compensation
Nov. 09, 1932  Policies of the New Administration
Aug. 18, 1932  Emergency Relief Construction and Self-Liquidating Projects
Dec. 28, 1931  Relief of Unemployment
Aug. 01, 1931  National Economic Planning
Jul. 20, 1931  Dividends and Wages in Periods of Depression
Feb. 19, 1931  Insurance Against Unemployment
Jan. 19, 1931  Business Failures and Bankruptcy Administration
Jan. 01, 1931  Federal Subsidies to the States
Dec. 08, 1930  Federal Relief of Economic Distress
Sep. 25, 1930  The Extent of Unemployment
May 16, 1930  Politics and Depressions
Dec. 20, 1929  The Federal Public Works Program
Jun. 08, 1929  The Federal Reserve System and Stock Speculation
Apr. 14, 1928  The Federal Reserve System and Price Stabilization
Feb. 25, 1928  The Federal Reserve System and Brokers' Loans
Financial Institutions