Capital v. Credit

A Columbia graduate and onetime medical student made a speech last week and within 48 hours his office had received requests for 40,000 copies thereof.

The speechmaker was Edward Henry Harriman Simmons, who has been President of .the New York Stock Exchange since 1924--longest term in history.*

The speech was defense by attack. Delivered before Chicago brokers and businessmen, it defended the Stock Exchange by attacking the Federal Reserve. Outstanding points:

Loans to Brokers. Since the spring of 1928, the Federal Reserve Board has been to reduce loans to brokers. These were last week about $1,500,000,000 than when the drive upon them Thus the drive obviously was fail Furthermore it was from the begin a lost cause. For almost the entire in loans to brokers came not from Manhattan banks, not from out-of-town but from private corporations. And, although the Federal Reserve could partially control the loans from banks, it could not at all control the loans from corporations. For the loans from corporations were not really credit, but capital--''capital saved by individuals and business firms, a wholly different matter." The Federal Reserve Board may be able to tell banks what they can do with their credit, but it cannot tell individuals and corporations what they can do with their capital. Thus Mr. Simmons on loans to brokers, and soundly thus, in so far as there is undeniably a real difference between loans from banks and loans from corporations. But whether it is legitimate to push that difference so far as to label a bank loan Credit and a corporation loan Capital is a point upon which many a banker would gag, sputter.

Call Money Market. Mr. Simmons's next main contention put upon the Federal Reserve Board the responsibility for the low bond market and the high money rates which usually have been blamed upon the Stock Market. For, said he, the Reserve Board, through its "fear propaganda, warnings, and vague threats," has so filled the capitalists with anxiety, with terror, concerning investments in either stocks or bonds, that this capitalist has put his money not into stocks, not into bonds, but into the call money market-- "the safest form of investment known in this country." Furthermore, the more the Reserve Board scolds and harries the Stock Market, the higher the interest rates on call money go and the more attractive becomes the call money market as a destination for surplus funds. Thus the Reserve Board has, against its own intentions, continually forced money into call loans and away from other employment.

Commodity Inflation. Always attacking, never merely defending, Mr. Simmons next proceeded to argue that to divert "the enormous masses of capital today invested in stock market loans'' into "commercial business" would "produce a huge rise in commodity prices, inflation of inventories, and an artificial business boom . . . which could only end in a colossal smash." In other words, if business in general had the money now in brokers' loans, it would swell up and burst. There is more capital extant "than the country knows what to do with." The safe place for this capital is in the Stock Market, pictured as a kind of financial safety valve in which surplus funds may harmlessly be blown off. Mr. Simmons did not claim, however, that these surplus funds should remain in the call money market. If, said he, the corporations that are lending money on securities would instead buy those securities (that is, if a corporation bought 1,000 shares of stock instead of putting into the call money market $100,000 secured by those 1,000 shares) brokers' loans would diminish, the market would still be supported, and all would be well. But this solution remains impossible as long as the Reserve Board keeps threatening a collapse in security values. On this commodity inflation point, the dissenting banker would probably wonder how it was that money which would dangerously inflate commodities could be made so harmless, so innocent, when applied to Stock Market transactions.

Rediscount Collateral. The fourth and final main argument of Mr. Simmons was the somewhat startling suggestion that the Federal Reserve System (the twelve parent banks) be allowed to rediscount stock market loans. Stock market securities are not accepted as collateral at the twelve Reserve Banks, which must make their loans on government or open market paper. But, maintained Mr. Simmons, the supply of restricted securities on which the Federal Reserve System can make loans is rapidly dwindling. The government is paying off its national debt at the rate of a billion dollars a year, and "in 15 years there may remain no Federal securities for the Reserve bank to purchase or lend upon." Open-market paper, too, has been "shrinking rapidly." Thus the Federal Reserve would sooner or later be forced to rediscount security collateral loans for lack of other loans upon which to exercise its rediscount facilities. It would have to accept stock market collateral or else find itself of small importance and usefulness. Mr. Simmons did not believe that a conservative, careful system of rediscounting security loans would result in an increase in Federal Reserve funds applied to investing or speculating purposes.

*The job is unpaid. Mr. Simmons must keep a substitute on the Exchange floor to represent his firm. Longest previous presidency was that of Henry G. S. Noble (1914-19).