ARGUMENTS IN THE NEGATIVE 
and of the supplementary means of credit policy that has been completely justified by 
ts results. 
“The federal reserve system has been criticized for its reduction of the rate of 
discount to 314 per cent in August, 1927. It has been said that the system thereby 
zave the first stimulus to the great period of stock exchange speculation. The business 
of the federal reserve system is, however, to supply the country with means of payment 
to such an extent that the general level of commodity prices is kept as stable as possible. 
“Now in the summer, 1927, the price index had come down to 94 and it was the 
obvious duty of the federal reserve system to take measures to bring back the price level 
in the neighborhood of the normal figure of 100. With more reason the system may be 
criticized for not having reduced the discount rate in March when the downward 
movement of the price index was already manifest enough. However, the effect of the 
reduction of the discount rate was a rise of the general level of prices. 
“During 1928 the rise proved so strong that it was necessary to raise the bank rate 
repeatedly. In July, 1928, the New York Federal Reserve Bank raised its rate to 5 
percent, and this rate was sufficient from October onward to keep the commodity 
price index between 96 and 98. Thus on the whole the credit policy of the federal 
reserve system has proved to be correct. 
“No doubt it may be said that the aim of the system has not been to stabilize the 
general level of commodity prices but rather to fight the stock exchange specula- 
Hon. Banking policy, however, should be judged according to its results rather than by 
aims that may have been expressed by its leaders. As a matter of fact, the federal 
reserve system has proved, for the first time in economic history, that a central bank has 
the supply of means of payment sa completely under its control that it is perfectly able 
ro prevent a rising tide of industrial prosperity from causing any inflation of the 
currency. By this very remarkable accomplishment the federal reserve system has not 
only done a great service to present American economy but also set an example whicl 
will prove to be of the highest value for all countries and for all future times. 
“In comparison with this great achievement it is of secondary importance that 
the attitude of the federal reserve system with regard to stock exchange speculation 
has been a mistake. It is fundamentally a mistake of a central bank to try to regulate 
stock exchange business. A central bank has no other function and should never for a 
moment contemplate taking over any other function than that of keeping the purchas 
ing power of its currency in regard to commodities at the highest possible stability. 
“Any attempt to do anything more must either result in failure or lead the policy 
of the central bank in a false direction. In the present case the attempt to regulate the 
stock exchanece has failed in the most manifest manner ¥% % ** 
The Committee in effect proposes that federal reserve authorities 
in cooperation with member banks should attempt to discriminate 
among the uses to which credit is put. This should not be a function 
of the reserve system, the task of which is to see that there is a proper 
volume of sound credit and not to direct the uses to which it is to 
be put. 
When credit is made available by the reserve system and the banks in amounts 
greater than are proportionate to the needs of industry and commerce, the excess is 
very likely to find employment in the securities market, in the various forms of opera 
tion for which the securities market exists and for the performance of which it has 
very efficient mechanism. There are students and economists that maintain the federal 
"Continued on page 37) 
Rediscount Rates 
Banking Policy 
Judged by Results 
qttitude Toward 
Stock Market 
Speculation 
Origin of 
Soreculation