634
APPENDIX
buying of securities which represent a part ownership in our national
wealth and our national industry; our great industrial concerns all
over the country that are, in part at least, dependent on the ready
sale of their securities in the money market.”
In the hearings on the La Follette resolution (p. 51), Dr. 0. W. M.
Sprague stated: “I suppose we shall all agree that a considerable
volume of bank credit is properly employed, first, in financing the
marketing of new issues of securities, and in the second place, in
making a market for outstanding issues. Now a market for outstand-
ing issues is impossible in the absence of a certain amount of specu-
lation,” and again (p. 53): “ . . I should hold that bank credit
is legitimately employed in connection with dealings in the securities
market . . . insofar as such transactions are necessary and de-
sirable in order to create a market for outstanding issues of securities.
The point at which it may be said that undesirable speculation is
reached is that at which the volume of credit is such that it permits
and accentuates dealings on the exchange which give rise to prices of
large numbers of securities which are not reasonably justified by
the earning power of the company.”
(XIm) One of the most typical instances of the behavior and
function of stock market loans in a business cycle, occurred during
1918-21. The intense though short-lived post-Armistice boom caused
stock market loans by Federal Reserve member banks to rise from
$770,293,000 on November 15, 1918, to $1,518,266,000 on November
7, 1920; at the same time all loans and investments of all reporting
federal Reserve member banks rose from $13,917,244,000 on No-
vember 15, 1918, to $15,570,591,000 on November 7, 1919.
But on November 7, 1919, stock market loans reached their peak,
and thereafter declined, while all loans and investments of Federal
Reserve member banks contihued to expand. On October 1s, 1920,
the latter reached their peak at $17,283,996,000, but by that time stock
market loans of Reserve members had declined to $923,074,000. Thus,
over the period of November 7, 1919, to October 15, 1920—the critical
period financially—$545,192,000 had been deflated from stock market
loans and reloaned to merchants, farmers and manufacturers, along
with $1,168,213,000 additional—accounting for the rise of $1,713,-
405,000 in Reserve members’ total loans and investments during this
period. Thus the stock broker and his customers began to be deflated
almost a year before the general contraction in banking credit began.
That the agricultural districts of the country obtained additional
funds in this way and at this time was conclusively established by the
cestimony of former Governor Benjamin Strong of the Federal Re-
