The Federal Reserve System and Brokers' Loans

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.