The Federal Reserve System and Stock Speculation

Report Outline
The Bull Market of 1924–29
Federal Reserve Policies During Five-Year Bull Market
Current Federal Reserve Policy and the Credit Situation
Special Focus

In the four months that have elapsed since the Federal Reserve Board issued its warning of February 6, 1929, that an excessive amount of the country's credit was being absorbed in speculative security loans, there has been a net reduction of $348,000,000, or 6.8 per cent, in loans to brokers reported by New York City member banks of the Federal reserve system. During this four-month period there were two sharp reactions in stock prices on the New York Exchange, the first in the latter part of March and the second in the latter part of May, both of which were attributed to the Federal Reserve Board's credit policy. The closing prices on June 6, 1929, of fifty representative stocks averaged $244.47 a share. The average closing price of these shares on February 5, the day before the Federal Reserve Board's credit warning was issued, was $247,44 a share. In its statement of February 6, the Board said:

The Federal Reserve Board neither assumes the right nor has it any disposition to set itself up as an arbiter of security speculation or values. It is, however, its business to see to it that the Federal reserve banks function as effectively as conditions will permit. When it finds that conditions are arising which obstruct Federal reserve banks in the effective discharge of their function of so managing the credit facilities of the Federal reserve system as to accommodate commerce and business, it is its duty to inquire into them and to take such measures as may be deemed suitable and effective in the circumstances, to correct them; which, in the immediate situation, means to restrain the use, either directly or indirectly, of Federal reserve credit facilities in aid of the growth of speculative credit.

The trend of brokers' loans since the Federal Reserve Board's warning was issued is shown in the following table.