By: Charles Sumner Hamlin
Source: Hamlin, Charles S. "Hamlin Memorandum and Diary Extracts, Showing Federal Reserve Board Response to 1927 Recession and Stock Market: July 1, 1927–January 4, 1929." Charles Hamlin Papers, 877–879, 880, 881–883, 888–890, 896–900, 920–921, 932. Reproduced in Prosperity and Thrift: The Coolidge Era and the Consumer Economy, 1921–1929. American Memory digital primary source collection, Library of Congress. Available online at http://memory.loc.gov/ammem/coolhtml/coolhome.html; website home page: http://memory.loc.gov (accessed May 12, 2003).
About the Author: Charles Sumner Hamlin (1861–1938) was born in Boston, Massachusetts, and earned undergraduate, master's and law degrees at Harvard University. He practiced law in Boston and was active in Democratic politics; he ran for state senate twice and Massachusetts secretary of state and governor, each time unsuccessfully. He was assistant secretary of the treasury from 1893 to 1897, and again from 1913 to 1914. Hamlin served on the Federal Reserve Board for over two decades, first as chairman from 1914 to 1916, then on the Board of Governors until 1936, and finally as special counsel until his death in 1938.
Chartered in 1913, the Federal Reserve System created a centralized banking agency controlled by a Board of Governors and twelve regional federal reserve banks. The Federal Reserve Board, in conjunction with these regional banks, was charged with the creation of a more stable, flexible, and responsive monetary system. Financial panic in 1907 had led Congress to investigate the possibility of central banking. The Federal Reserve System, which emerged six years later, had the advantages of a national regulatory agency, but allowed for regional differentiation and therefore alleviated the American public's discomfort with the idea of a concentrated banking power.
As a bankers' bank, or a "lender of last resort," the Federal Reserve banks shaped monetary policy by setting reserve requirements, establishing discount rates, and influencing the cost of credit through the purchase or sale of government securities. Each of these techniques served to tighten or loosen available credit in the economy. But in the 1920s, when the Fed (as the Reserve System is sometimes called) was relatively new and still controversial, it was reluctant to overly manipulate the market. Indeed, some of the regional reserve banks were so strong that the Fed had difficulty dictating monetary policy.
A longtime member of the board, Charles Sumner Hamlin kept extensive diaries that chronicled the work of the Federal Reserve Board.
The Fed struggled to set effective monetary policy during the 1920s, a time of general economic prosperity. The rise in U.S. gold holdings and the Fed's low discount rate combined to lower the cost of credit. This in turn fueled stock market speculation. Brokers' loans (money loaned to purchase stocks) increased by more than 400 percent between 1921 and 1928. The Fed's Board of Governors recognized that excessive speculation could have dire consequences and sought to reduce the volume of credit by raising the discount rate and by selling off hundreds of millions of dollars in U.S. government securities.
This was not enough to stem the speculative tide, however, and the Fed soon realized that it could do little more than call upon member banks to exercise restraint in making speculative loans. When the New York Stock Exchange crashed in the fall of 1929, the Fed was widely criticized: first for having done too little to slow the economy in advance of the crash, and later for not doing enough to ease the Great Depression that followed.
Clearly the Fed had not developed a monetary policy during the 1920s strong enough to ward off economic collapse; but neither had it been granted the authority at its inception to do much more than monitor bank reserves and ensure an elastic currency. Closely managing economic expansion—;and operating as an active player in the marketplace—;was simply outside of its original mandate. Charles Sumner Hamlin's personal diary, which carefully documented the Fed's early history, offers a unique insider's perspective on the board and on the events leading up to the crash of 1929. These excerpts describe how board members, including Hamlin himself, understood the turbulent economic times in which they lived, and how they sought to bring order to the economy as market speculation became ever more frenzied.
Primary Source: "Hamlin Memorandum and Diary Extracts, Showing Federal Reserve Board Response to 1927
Recession and Stock Market: July 1, 1927–January 4, 1929" [excerpt]
SYNOPSIS: These excerpts were culled by Charles Sumner Hamlin, inveterate diarist and longtime Federal Reserve Board member, as part of his effort to write a history of the Federal Reserve Board. In the diary entries, Hamlin refers to himself as C. S. H. Others mentioned in the entries are Treasury Secretary Andrew Mellon, and Senate Banking Committee Chairman Carter Glass. The "governors" are governors of the Federal Reserve Board. The other men mentioned are bankers at Federal Reserve banks in different cities. The excerpts show that the Federal Reserve Board was concerned about stock market speculation but uncertain if they should attempt to control it, and if so, how.
January 6, 1928, Friday
Governor [Roy A.] Young comes up to our room—; he has taken a room at the Lee House temporarily. He said the President in the morning had given out a statement as to the stock speculation situation in New York, stating that he had inquired at the Treasury and was satisfied there was nothing alarming in the situation; that Secretary Mellon told him he could not remember any talk with the President on this matter. Governor Young fears that when this is published tomorrow it will cause another value of speculation.…
January 10, 1928, Tuesday
Governor Young told C.S.H. a reporter told him there was a rumor that the New York Stock Exchange would shortly issue a warning against brokers loans and stock exchange speculation.
This will be a blow at Coolidge. C.S.H. cannot understand how Coolidge could have made such an extraordinary statement. He must have been deceived by stock manipulators. Governor Young also said he thought the New York directors wanted to put up rates and that Hoxton was there saying Richmond wanted to put up rates and that he should advise Richmond to wait until after Open Market Committee.
The consensus of opinion of Board seemed to be that we should first sell securities and we voted to authorize committee to sell from 50 to 75 millions, as Case, for Committee requested.
I fear that nothing short of a rate increase will cope with the situation caused by Coolidge's statement to Press.
January 11, 1928, Wednesday
McGarrah, Woolley and Raeburn of the Federal Reserve Bank of the New York before Board. We discussed rate situation. McGarrah felt time was near to increase rates although he agreed that first we might sell some more securities.
Wooley said there were faint signs of improvement in business from the present recession and that he feared a general increase might retard or kill this growth.
Raeburn believed rates should be increased and that it would not hurt business.
All agreed however that securities should be sold first.
Raeburn said that Coolidge's statement would not deceive professional operators in stocks but that it would encourage small investors to hold or increase these investments; that the statement was most unfortunate.
Governor Young said securities should be sold first; that a change in discount rates does not change the quantity of credit, while a sale of securities does and that this was the better course. Present: Secretary Mellon, Governor Young, C.S.H., [Governor Edward H.] Cunningham and [Governor Edmund] Platt. Board took up recommendations of Committee.…
March 7, 1928, Wednesday
Governor Young, Platt, C.S.H. and Cunningham went before Banking and Currency Committee on the LaFollette resolution on brokers loans. Professor Sprauge of Harvard also was there. C.S.H. got Board's consent to ask Sprague to come down yesterday as he wished to consult him, as did possibly some other Board members, before we testified. C.S.H. told Senator Glass Sprague was to be here and suggested to him to get the Committee to ask Sprague to appear, not as representing Board but as an independent witness—; which Senator Glass did.
Sprague testified first and made a very good impression. The Governor Young testified in general as follows:
- Cannot tell whether brokers loans are unduly excessive or not.
- They seem to be well collateralled and safe from banking standpoint.
- They are not depriving commerce or agriculture of a dollar of credit.
- As a fact the bank loans are less today than in 1922.
- The increase is practically all in money lent on call by those other than banks, e.g. corporations, etc.
- Of the bank loans the New York banks have decreased and out of town banks decreased.
- Today practically no banks which are constantly in debt for rediscounts have large loans on call. The few which are gradually reducing their call loans.
- If banks loan on call to any increasing extent and are perpetual reductions the Federal Reserve Board would admonish them as it has in the past (1925) and will in the future.
- Federal Reserve rediscounts are in general not being used to obtain call loan funds.
- No new legislation is considered necessary as the Federal Reserve Banks can cope with the situation under present law.
- If speculative loans increased so as to react on general business or to encourage business speculation the Federal Reserve Banks can put up rates and sell securities in open market.
Governor Young did not say that the recent rate increase and sales of securities were for purpose of reducing brokers loans, but put it largely on ground of gold movements.…
C.S.H. was called to testify. He said Governor Young had covered the case completely and his testimony would be largely cumulative so he had nothing to add but would be glad to answer any questions. The hour was late, the Committee was tired, and no questions were put to C.S.H.
Cunningham then read a statement to the Committee. He did not seek to justify brokers loans in any way but agreed they were not now depriving any farmer or business man of credit.
C.S.H. would approve an increase of rates and selling securities to control stock market speculation only when such speculation was interfering with agriculture or commercial credit or exciting similar speculation in business even then C.S.H. would regret necessity of putting up rates for the farmer and business man generally because of stock gambling on Wall Street or speculation on commodities among some business men. This would be so especially at a time when crops were moving.…
April 16, 1928, Monday
Received letter from Governor [W.P.G.] Harding. Directors oppose putting up rates on collateral notes. Executive committee willing to put up discount rate to 4-1/2%. Asks Board to let him know today what action Board would take if rate increased. Says no particular need of increase so far as Boston district is concerned but Reserve ratio is low enough to justify increase.
If executive committee votes to increase will not be because of any specific local condition but merely expression of willingless to help out general situation.
C.S.H. at once talked with Platt. Platt called up New York—;Case said was selling considerable amount of securities, hoped Boston would increase. Platt saw Mellon. Mellon did not object to increase. Said would not cause any disasterous break in market but might slow it up.
In P.M. Miller came in—;Governor Harding had just talked with him. Said discounts had greatly increased and proceeds were being used in stock market and he thought rate should be raised (not consistent with his letter to me).
Miller at first thought we ought to act at once and have meeting and tell Harding so. Later he veered around and felt we ought to ask Governor Harding at least to wait until directors meeting Thursday—;that putting up rates would chill business, etc.
Finally we agreed to ask Governor Harding not to act through executive committee tomorrow but to wait at least until Board meeting Thursday.
April 17, 1928, Tuesday
Board received application from Boston for increase in all rates from 4 to 4-1/2%. No quorum present. Only Platt, Miller, James and C.S.H. Curtiss called up C.S.H. and said the directors were unanimous; that their decision was based entirely on local conditions; that their earning assets had increased 40 millions since Saturday; that their reserve percent was 56; that they feared further trouble and hoped Board would decide Case at once. All this C.S.H. reported to Board. C.S.H. read Governor Harding's personal letter to him dated Saturday, April 14 and said conditions had changed and matter had become a purely local one. He said that to refuse the application on ground that New York should take care of it by further sales of Government securities would be equivalent to saying that New York was the Central Bank of United States.
Miller, who on Monday told Platt and C.S.H. we should promptly approve, now turned a somersault and said that to approve it would be to announce formally that Board would try to control speculation on stock exchange through discount rates.
C.S.H. replied that Governor Harding and Curtiss said the proceeds of the discounts were being used for speculative loans; that theoretically, the Federal Reserve Bank could decline to rediscount under such conditions; that this, of course, was impracticable as all the banks were involved and it would be equivalent to splitting up the Federal Reserve Bank; that if the Bank could refuse altogether it could put up rates to discourage such transaction. Miller said if the Bank should refuse to rediscount it would be a great stroke. James agreed with Miller. C.S.H. said the Federal Reserve Bank of Boston could not sell securities as could New York and that rate increase was its only practicable remedy; that it would be monstrous to say to Boston—;New York cannot or does not sell enough securities, therefore, Boston must suffer in silence.
James said he thought the pressure at New York was producing results and was forcing borrowers to borrow at Boston. C.S.H. said if this was so it would be absurd to refuse to allow Boston to protect itself by rate increase. James did not answer this.
Secretary Mellon was tied up with Farm Loan Board and could not come in to make a quorum, therefore, we adjourned until tomorrow.
April 18, 1928, Wednesday
Board met. Present Secretary Mellon, Miller, Platt, James, and C.S.H. C.S.H. moved to approve Boston rate.
Discussed from 10 to 12, Miller talking almost incessantly against it. Tried to have matter go over until Friday for full Board meeting or until Monday. Miller said he was satisfied New York was putting pressure on market which might settle question before Friday if Boston would wait. Said he could never vote to control stock speculation by increasing discount rates etc., etc. C.S.H. reminded him that in fall of 1925 he earnestly favored advance in New York rate to control speculative activity; that New York Bank said it had it in hand through direct pressure that Cunningham moved to put in an increase (from 3-1/2 to 4%) in New York over the heads of the New York directors and though defeated by Board, Miller voted for it with Cunningham.
C.S.H. said Miller's arguments would have some force if we were a central bank at Washington and Boston a branch, but that Boston is an indispensable bank and unanimously asked for increase because of increasing rediscounts and falling reserves, its present reserve—;about 57%—;being the lowest of any Reserve Bank; that he, C.S.H., would not hesitate to vote to increase rates where a speculative movement was interfering or threatening to interfere with business, commerce and agriculture; that he felt this condition was at hand.
Finally Board adjourned until 2:30.
At 2:30 reconvened. Same members present. Miller said he had just been talking with Case in New York; that Case was discouraged and said the situation was getting out of hand; that money was coming into New York for speculative purposes and that he could identify 50 millions as coming from Boston.
Secretary Mellon who had patiently listened to Miller all the morning, answering all his argument, said he did not feel Board could overrule the Boston directors who expressly based their decision on the local situation, and he called for a vote.
Miller said he felt impelled to change his morning vote (a tie, C.S.H. and Platt Yes. Miller and James, No. Secretary Mellon for present, not voting) and vote Aye.
The vote was taken and stood. Aye—;Secretary Mellon, Platt, C.S.H. and Miller. No—;James.…
September 28, 1928, Friday
Meeting of Federal Advisory Council. Discussed the rate question. Governor Young said the Board might possibly soon have before it two requests: to increase rates at Chicago from 5 to 5 1/3; to reduce rates at Cleveland from 5 to 4 1/2%; that the Board would satisfying itself to grant both. The Council seemed generally to oppose both, taking ground that to lower Cleveland rate to 4 1/2 would be construed as a change of policy of the System which would start up stock exchange speculation.
Mr. Goebel of Kansas City said that if total conditions warranted a lower rate at Cleveland it should be put in.
The consensus of opinion was that the 5% rate was not injuring business. Mr. Alexander said that the fact that business men had to pay at least 6% was depressing.
He agreed with Governor Young that the discount rate at the present time was a national question but said he believed all rates should go down to 4 1/2%; that this would stimulate business. He said the general feeling was that the Federal Reserve System was trying to control stock exchange speculative rates and that in his judgement speculation could not be controlled by discount rates. He favored a 4 1/2% rate to show the country that the System was not trying to regulate the stock exchange. He said he did not agree with those who claimed that lowering rates from 4 to 3 1/2% in August 1927, was a mistaken policy but that we might have gone back to the 4% rate a little sooner than we did.
He said he was extremely puzzled at the speculation in New York and felt we could not control it. He said liquidation or a break was certain to come but he could not say when nor understand why it had not come before this; that even if a 4-1/2% rate might further encourage speculation it would in the long run correct itself; that many of the booming stocks were not so overvalued as the country seemed to think.
He was asked what would happen if the corporations, etc. suddenly withdrew, say, 500 millions of the money now on call. He said there would have to be a liquidation and that the banks would not take over these loans. Governor Young said in such case we might have a panic. Later, Alexander qualified this statement and said the banks would help as far as able and the system also must do its part.…
December 31, 1928, Monday
Miller put in a resolution to effect that the present spread between Federal Reserve and stock market call loan and other speculative loans tends to tempt member banks into pushing Federal Reserve credit into stock exchange market, and asking the banks what they are going to do to correct this in 1929.
Governor Young vigorously objected saying that resolution meant that banks having call loans should be refused rediscounts. On vote:
Aye—;Miller; C.S.H.; James; Cunningham; and Platt.
No—;Governor Young. Not voting, Comptroller.
C.S.H. said he voted Aye on the interpretation that resolution was not intended to mean that the Board believed that speculative loans were necessarily illegal; nor that a bank should be refused rediscounts to make good reserves when the deficiency was in part due to speculative, loans, but that it merely pointed out a danger and asked banks how they proposed to meet it in 1929.…
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