dr. andrew brimmer, former member of the federal reserve, why gold alarmed the fed. dr. mer, in 1931, foreign investors were pulling their gold out of american banks. reserves were being depleted. what does that do to a bank? what does the reserve do to try to combat it? for the banking system as a whole, if there's a significant reduction in reserves, from whatever source, it has to cut back on loans and the extension of credit unless it can get some relief. only the federal reserve, acting as a central bank, can provide more relief. so, in 1931, as the gold flowed to europe and so on, that was a loss in reserves the central bank had to make it up. the fed would not stand by. it raised its scountate to force banks to increase the rate of inrest paid to depositors. the result--foreign investors earned more interest and left their money in u.s. banks. that ended the gold drain. but raising thdiscount re had other, less fortunate, consequences. if the federal reserve raises the discount rate, that transmits a message to banks and the money market that it wants to be restric