The banks not only generated the money for speculation, they became speculators themselves by purchasing large blocks of high-yield bonds, many of which were of dubious quality. Those were the kinds of securities that are difficult to liquidate in a declining market. Borrowing money on short term and investing on long term, the banks were maneuvering themselves into a precarious position.
Did the Federal Reserve cause the speculation in the stock market? Of course not. Speculators did that. The Fed undoubtedly had other objects in mind, but that did not cancel its responsibility.
It was acutely aware of the psychological effect of easy credit and had consciously used that knowledge to manipulate public behavior on numerous occasions. Behavioral psychology is a necessary tool of the trade. So it could claim neither ignorance nor innocence.
In the unfolding of this tragedy, it was about as innocent as a spider whose web "accidentally" caught the fly.
THE FINAL BUBBLE
In the Spring of 1928, the Federal Reserve expressed concern over speculation in the stock market and raised interest rates to curb the expansion of credit. The growth in the money supply began to slow down, and so did the rise in stock prices. It is conceivable that the soaring economy could have been brought in for a "soft landing"—except that there were other agendas to be considered. Professor Quigley had said that the central bankers were not substantive powers unto themselves but were as mari-onettes whose strings were pulled by others. Just as the speculation spree appeared to be coming under control, those strings were yanked, and the Federal Reserve flip-flopped once again.
The strings originated in London. Even after seven years of subsidy by the Federal Reserve, the British economy was sagging
THE GREAT DUCK DINNER 495
from the weight of its socialist system, and gold was moving back into the United States. The Fed, in spite of its own public condemnation of excessive speculation, reversed itself at the brink of success and purchased over $300 million of banker's acceptances in the last half of 1928, which caused an increase in the money supply of almost $2 billion. Professor Rothbard says:
Europe, as we have noted, had found the benefits from the 1927
inflation dissipated, and European opinion now clamored against anytighter money in the U.S. The easing in late 1928 prevented goldinflows into the U.S. from getting very large. Great Britain was againlosing gold, and sterling was weak once more. The United Statesbowed once again to its overriding wish to see Europe avoid theinevitable consequences of its own inflationary policies.1
Prior to the Fed's reversal of policy, stock prices had actually declined by five per cent. Now, they went through the roof, rising twenty per cent from July to December. The boom had returned in spades.
Then, in February of 1929, a curious event occurred. Montagu Norman travelled to the United States once again to confer privately with the officers of the Federal Reserve. He also met with Andrew Mellon, Secretary of the Treasury. There is no detailed public record of what transpired at these closed meetings, but we can be certain of three things: it was important; it concerned the economies of America and Great Britain; and it was thought best not to tell the public what was going on. It is not unreasonable to surmise that the central bankers had come to the conclusion that the bubble—not only in America, but in Europe—was probably going to rupture very soon. Rather than fight it, as they had in the past, it was time to stand back and let it happen, clear out the speculators, and return the markets to reality. As Galbraith put it:
"How much better, as seen from the Federal Reserve, to let nature take its course and thus allow nature to take the blame."2
Mellon was even more emphatic. Herbert Hoover described
Mellon's views as follows:
Mr. Mellon had only one formula: "liquidate labor, liquidatestocks, liquidate the farmers, liquidate real estate." He insisted that,when the people get an inflation brainstorm, the only way to get it out1- Rothbard,
2. Galbraith, p. 181.
496 THE CREATURE FROM JEKYLL ISLAND
