Economics and the Public Welfare, by Benjamin Anderson

"Early in 1942 a Swiss banker in New York said that he could not understand his American friends. They had thought that he was very foolish in 1929 because he was not willing to borrow money at eight percent in order to buy stocks yielding two percent, and in 1942 they thought he was very foolish because he wanted to borrow money at two percent to buy stocks yielding eight percent."

Page 212: (Late 1920s)
"Investment banks had been for decades intermediaries between the railroads and the industrial corporations, on the one hand, and the investing public, on the other. They had underwritten billions of dollars' worth of securities, which had placed billions of dollars from the American investing public into sound and profitable uses in building up the railroads and industries of the country. They had been critical of the credits they extended. They had insisted upon sound policies on the part of the corporations for which they were obtaining investors' funds. They had been concerned about their reputations. They tried hard not to put unsound issues, if only because they wished to be able to sell other issues in later years to the same investors. They had done their work well. But with the great flood of cheap money, and with insatiable demand for stocks and bonds, their perspective and their credit standard began to relax as early as 1925. And with the renewal of cheap money in 1927 perspective was badly lost and credit standards suffered a great deal."

Page 224: (late 1929)
"The stock market crash demonstrated that fundamentally wrong policies had been pursued. It was surely time for a slowing down and a change of policy. The evidence was particularly clear (a) that the policy of cheap money and rapid expansion of credit was a fallacious one, and (b) that high tariffs interfering with the movement of goods and preventing our European debtors from paying their debts with goods was a fallacious policy. But to have recognized these things would have meant humiliation for the political party in power.

Would Have Involved Severe Readjustment
If we had taken our medicine in 1929 and early 1930, we should have had a severe depression. There were a good many unsound points in the credit structure, and they would have had to be liquidated or readjusted...

...But there were weak points in the banking system where there were excessive holdings of illiquid bonds, or where there were large loans to customers on collateral inadequately diversified, liquidation of which would break the market. There were weak points in the real estate mortgage situation based on very exaggerated real estate prices. Many smaller banks later fell into grave difficulties because they had bought such mortgages in too great volume and too uncritically when they had excess funds and didn't know how to use them. A great deal of water had to be squeezed out of the sponge."

Page 229: (around 1930)
"An examination of the curve for production shows a strong upward movement following the open market purchases of government securities by the Federal Reserve banks in 1924, as well as a strong upward movement in the stock market, and the same thing is true in 1927. In 1930, however, although the stock market and the issue of new securities responded to the renewal of cheap money, the curve for production makes no response at all. It moves downward steadily through the whole year 1930, dropping from a level of 105 at the beginning of the year to 84 at the end. The jaded economic organism could no longer respond to financial stimulus"

Page 231: (late 1930)
"The rate on bankers' acceptances went under two percent in the third quarter and declined further at the year end, while the New York Federal Reserve Bank discount rate dropped to two percent as the year end came. But the cheap money magic was over. Declining interest rates were a feeble candle in the midst of growing gloom.

Quality of Credit Questioned - Foreign Bonds and Mortgages
The real forces which governed business and markets were of a different character. Exports and imports were declining. The curve of industrial production moved steadily downward. The level of commodity prices moved rapidly downward. Questions were being raised regarding the quality of credit, and particularly, regarding foreign bonds and real estate mortgage bonds. Real estate values were being questioned, and the market for second mortgages and third mortgages (documents which multiply in a real estate boom) became demoralized in the extreme."

Page 234: (1931)
"The later part of 1931, however, saw a new and ominous political factor in the United States. The Congress which assembled on December 4, 1931, was an angry Congress, grimly determined to investigate and to punish the banking community, which it blamed for the disaster."

On Friday, September 18, Doctor Vissering, head of the Netherlands Bank, phoned Governor Montagu Norman of the Bank of England to inquire if it were safe for him to continue to hold sterling, and received unqualified assurance that England would remain on the gold standard. He held his sterling.
Impending collapse of sterling was definitely signaled to New York on Saturday, September 19, as the Bank of France, concluding that the matter was hopeless and wishing to save as much as possible, gave orders to each of six New York banks by cable to sell a million pounds sterling, a total of six million pounds. These orders, coming to New York near the end of the short Saturday trading day, broke the price of sterling exchange in New York by over two cents...
...On Sunday, September 20, the announcement was made that England would abandon the gold standard, and Sunday conferences were hurriedly called in New York with respect to banking policy next day...

The Netherlands Bank was severely blamed by the Netherlands government. It meant personal shipwreck for Doctor Vissering, who was a fine person and an able and upright man. The Netherlands government made good half of the capital of the Netherlands bank by turning over government securities to it, but with a severe warning against a repetition of the occurance. Governments could no longer trust governments in financial matters, and the confidence of central banks in one another was gravely shaken. An immense world asset was destroyed when the Bank of England and the British government broke faith with the world. Years later, after we in the United States had also broken faith with the world, the head of the national bank of one of the Scandinavian countries said, "I have lost money in sterling. I have lost money in dollars. I have never lost money by holding gold."

...It was this consideration which made not a few responsible men in the Federal Reserve System apprehensive of the renewal of artificially cheap money which came in 1930. Late in December 1929 one found the conviction among them that monetary ease would have to wait for a substantial liquidation of the volume of bank credit outstanding, secured by stocks and bonds. We were strong enough at that time to have gone through an orderly liquidation. But early in 1930 Federal Reserve policy quickly veered in the other direction, and the purchase of government securities was resumed. The Federal Reserve System was gambling, using dangerous devices to stave off an unpleasant liquidation, and hoping for a return of the prosperity which was "just around the corner."...