Warburg Warns

U. S. bankers have frequently been criticised for failure to proclaim in loud tones that stock market inflation is hurting U, S. business by making credit rates high and borrowing expensive. If the Market is on the way to running over a steep cliff into the sea, why have not the bankers endeavored to cast out its speculative devils? One reason, say cynics, is that the brokers are excellent customers.

Last week, however, one U. S. banker did speak his mind on speculation, flayed not only the Market but also the newly organized investment trusts, which he called "incorporated stock pools." This banker was Paul Warburg, Board Chairman of International Acceptance, which recently (TIME, Dec. 31) merged with Bank of the Manhattan Co. One of the formulators of the Federal Reserve System, a member of the Federal Reserve Board from 1914 to 1918, Mr. Warburg was eminently qualified to discuss stocks and money.

The Federal Reserve Board, said Mr. Warburg (in the course of his annual report to International Acceptance Stockholders) has lost control of the money situation by failure to take decisive action before inflation reached its present strength.

"No central banking system may safely permit its facilities to expand unless it is certain of its determination and ability to bring about contraction when circumstances require," argued Mr. Warburg. He blamed "structural defects" of the Federal Reserve System, rather than the System's personnel. Action of the System, he said, cannot be prompt or decisive when it depends upon 120 men in twelve separate boards working with a central board of eight men "who may be wide apart in their views and bewildered by political influence."

Specifically, Mr. Warburg urged a raising of the Federal Reserve 5% rediscount rate. "When commercial paper commands 3 3/4% and when bankers acceptances sell at 3 3/8%, rediscount rates of 4 1/2% and 5% seem grotesquely impotent and out of line. . . . Conditions such as these call to mind the painful events of the years 1919-1921."

Money Market. There is no argument but that a Federal Reserve rediscount rate of 5 1/2% would be more in keeping with present credit conditions than the 5% rate now obtaining. Last week call money was at 8% to 12%, time loans at 7 3/4%, commercial paper at 5 3/4%, bankers' acceptances (60 days) at 3 3/8%. The Federal Reserve rediscount rate was at the very bottom of the money market, was lagging far behind the general trend toward higher and higher interest rates. Theoretically an index to prevailing conditions, the 5% rediscount rate was actually an exception to them. That is why Mr. Warburg termed the rate "grotesque . . . out of line."

Meanwhile, the Stock Market, though nervous and uncertain, ran up loans to brokers another $140,000,000, to a total of $5,647,000,000, not so far below the six billion total that prompted the Federal Reserve Board's February warning. The increase in loans was mostly from corporations, not from banks, and as long as corporations can lend out their surpluses at up to 12% call money rates, the banks generally maintain that there is no way of keeping money out of Wall St. Mr. Warburg's statement did not much annoy the speculators, who were inclined to take it as an admission that they controlled the situation, however deplorable such control might be from Mr. Warburg's standpoint.

Mellon. The Federal Reserve Board made no reply to Mr. Warburg. Neither did it increase its rediscount rate. During the entire Federal Reserve-Wall Street controversy there has been a strong undercurrent of rumor concerning dissension among Reserve Board Members. It has been claimed that Andrew Mellon, Secretary of the Treasury, has been opposed to any rise in the rediscount rate, that his influence has kept the Board from taking drastic measures. Neither personal nor political reasons are lacking to make such an attitude logical for Mr. Mellon. Not only is the Bull Market an evidence of Republican Prosperity, but rising rediscount rates would make more difficult the flotation of Treasury Loans. Whether or not the Reserve Board is, as Mr. Warburg says, "bewildered by political influence," it is certain that many a speculator considers that in Mr. Mellon he has a friend in the high places.