8 COMMITTEE REPORT 
Regerye As to the reserve ratio—that is, the ratio of the total cash re- 
serves to the federal reserve notes and net deposit liabilities com- 
bined—it is an extremely artificial and imperfect test when gold 
holdings are high. Changes in this ratio may not agree either in 
direction or in intensity with the country’s need for more or less 
credit. 
Widespread speculation in any of the markets—real estate, com- 
modity or security—may make such demands upon the credit re- 
sources of the country as to impair their liquidity or dislocate the 
supply available for undertakings involving a normal business risk 
or unduly increase its cost. Speculation in a local or general market 
may arise from causes other than the immediate or prospective 
volume of money or credit. When widespread speculation is attribu- 
table in an important part, however, to an over-abundant supply 
of money or credit, it is clearly of concern to the system, since it pos- 
sesses some power to influence the quantity and cost of that supply. 
On such occasions the system can not avoid seeking or urging such 
adjustments in the credit supply or in the directions of the use of 
credit as will assist in restoring the proper balance between the 
volume of credit used for speculative purposes and that used in ac- 
commodation to business and industry. 
Special interest has been manifested in the security market uses 
of credit. Credit released in security operations is always tending to 
be distributed about the country and, on this account, a growth in 
the volume of brokers’ loans or other forms of security credit may 
not operate to restrict the supply of credit for commercial or agri- 
cultural uses. The volume of security credits will also be affected by 
the particular methods employed by business to finance its projects. 
When, for instance, capital issues, instead of short-term bank bor- 
rowings are relied upon, the growth of security credits does not mean 
that business is being deprived of credit but only that its methods 
of securing this credit have changed. Since capital issues may be 
merely a substitute for bank credit directly obtained, it is not pos- 
sible to determine with as near an approach to accuracy the amount 
required at any one time to service the security markets as it is to 
determine the total supply of credit needed for all purposes. 
There is, however, one respect in which any growth of security 
credits is peculiarly likely to lead to future credit strain. When the 
market for capital issues has been stimulated, business and industrial 
expansion is much more likely to take place at an excessively rapid 
rate than would be the situation if only short-term credit were avail- 
able in liberal quantities. Funds obtained by capital issues may re- 
lieve business managements of any worry about the immediate suffi- 
ciency of their financial resources. 
Speculation 
Credit in 
Security 
Markets 
Effect of 
Stimulation 
of Capital 
[esues 
(Continued on page 20)