Business & Finance: Warburg Warns

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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 3¾% and when bankers acceptances sell at 3⅜%, rediscount rates of 4½% 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 5½% 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 7¾%, commercial paper at 5¾%, 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."