Where did this money loaned in New York come from? It came from those parts of the country where money was scarcest. In May, 1920, the word went out over telephones—“The tie-up will come on the 15th.” And it came. Credit was stopped. Payment was pressed. A stream of money, literally squeezed out of the producing sections of the country, began to roll toward New York. Otherwise those giant loans just recorded would have been impossible. It was pressure, Federal Reserve pressure, politely known as deflation, and that is the way it worked. The banks of the West were squeezed dry that the banks of New York might overflow.
“The money was withdrawn from legitimate business in various parts of the country to be loaned at fancy rates in Wall Street,” says the official referred to above.
The speculative banks, it has been discovered, were able to borrow money at six per cent, which money they loaned at as high as 20, 25 and 30 per cent.
Federal Reserve deflation created