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P
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EMIL SCHRÄM
President

NEW YORK STOCK EXCHANGE
Eleven Wall Street
Mew York 5, N . Y .

October 2 3 , 1947

Dear Marriner:
Your concern and that of the Board about inflationary developments
is certainly shared by m e . You have urged greater production, to which I
agree whole-heartedly, as the one way of effectively combatting inflationary
tendencies. Since a substantial increase in the hours of labor seems t o be
out of the question from a practical standpoint, your attitude must lead to
the conclusion that additional plant capacity is required to make this greater
output possible. To be perfectly frank, it seems t o me that whether or not
business should enter upon capital expenditures is for business alone t o
decide.
We have been studying the effects of new financing on the capital
markets and, as you can see from the attached tabulation, the common stocks
of even the largest and soundest companies suffer almost invariably when
equity financing is attempted. If the financing is t o be done entirely
through bank loans, because of the unwillingness or inability of investors
to take up these new capital issues, it means that we are committed to a
policy of financing through debt alone.
Bank loans, according to the latest weekly statement of the
banks in ninety-four leading cities, for the purchasing or carrying
rities other than United States Government obligations, amounted to
$486 million and similar loans made t o brokers and dealers amounted
$536 million. These classes of loans are about the only ones which
risen very materially in t h e past twelve months.

member
of secuonly
to but
have not

With reference t o the statement that this is not the time to encourage
the growth of credit or expansion in the money supply, I must confess that
unless the Board believes that business will not make loans — and this is
not in keeping with the facts - its policy in reality is fostering additions
t o credit and the money supply. I sincerely believe that the authorities
are chasing rainbows in their attacks on the various symptoms of present-day
inflation. You cannot draw an iron curtain around each and every sector of
inflation in an effort to isolate one segment of the economy thus affected
from another. It is m y contention that drastic margin requirements have
driven an important degree of speculation, which is inherent in our system,
from the common stock markets into our more volatile markets, directly increasing the cost of living to the masses of this country.




October 23> 1947«

Honorable Miarriner S . Eccles

With any increase in equity financing, loans to underwriters and
dealers would increase, but such loans are generally made only for the
very short period between the time the underwriters pay the company for the
issue and the time of sales of the equity securities to the public.
Personally, I do not see any objection t o any such temporary increases in
bank loans.
Lower margin requirements, by encouraging equity financing, in m y
judgment, may lead to the use by investors of part of their savings, thus
diminishing the need for bank credit.
Historically and logically, I 11do not believe that a 50 per cent
margin requirement can be termed •'low . If the Board wishes to attempt to
curb inflationary pressures by qualitative credit controls, it would appear
that other markets and industries obviously need more attention than the
capital markets, but this is a matter of central banking policy and beyond
my field.
With kindest personal regards, I am
Yours sincerely,
(Signed)

Honorable Marriner S . Iccles,
Chairman of the Board of Governors,
Federal Reserve System,
Washington, D . C .




Imil

Comment on Tabulation Enclosed in M r . Schraia's
Letter of October 23, 1947.

This tabulation is quite im-a&terial. A similar exhibit could
be prepared for certain time3 before margin requirements were subject to
any Governmental regulation. Some issues of new stock have not been well
received of late, but there is no reason to believe that they would have
looked much better to people who might have been willing to borrow 50
per cent on them than they did to people who were buying with their own
money or perhaps borrowing 25 per cent. In each instance, the reasons
currently set forth by investment analysts for the fate of an issue have
not included mention of the prevailing .aargin requirements.
In any event, the tabulation does not give effective support
for M r . Schrais*s contention. The failure of the share prices of certain
companies offering additional shares to behave as well as the Bow-Jones
averages cannot logically be attributed to u&rgin requirements, because
the new-issue shares are no more restricted by margin requirements than
the shares comprised in the Bow-Jones averages. In fact, many of them
are less restricted because & 50 per cent loan value was established in
1
the regulations last December 1 for stockholders purchases under subscription rights* There are, no doubt, many reasons why some of the
examples M r . Schram selected did not perform as well as the averages, but
his tabulation tends to prove, if anything, that this difference in
behavior was not caused by the present margin requirements—because these
apply to both groups of shares.




STOCK MARKET
PER CENT

MILLIONS OF DOLLARS

200

2000

150

1500

00

1000

50

500
CUSTOMERS* DEBIT BALANCES
END OF MONTH FIGURES
k

VOLUME OF TRADING

4

4

N. Y STOCK EXCHANGE, AVERAGE DAILY VOLUME

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1935




1936

1937

1938

1939

1940

1941

1942

1943

1944

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1945

1946

1947

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November 3, 1947.

» Y

Dear Bail:
While it is fruitless to undertake to carry on a debate by
letter over margin requirements, and the chief points in your letter of
October ¿3 have already been pretty well covered by previous correspondence, there are a few eon.ie.rts that I feel I should i^ke if only to keep
the record straight.
I do not wish to be understood as contending that additional
plant capacity is feasible or desirable at this time. Even if it were
possible at this juncture to find the ~abor and materials to ex:«.nd <:lant
capacity to any significant extent, it would not be desirable to do so.
It would be a serious mistake to overbuild plants in an attempt to fill
rapidly the abnormally swollen demand for goods and services.
It would be far better to restrain the demand now, as far as
po sible, by putting the braxes on further credit expansion, than to try
to bui d ^iore plants on today's inflated markets. More borrowed money
to buy stocks, More competition for labcr and materiais now would aaxe
a bad situation worse.
The isargin requirements, in my opinion, have little or no influence on whether business decides to float stock or to borrow ut banks,
For one thing, there is often reluctance to dilute equities by issuing
sore stock« For another, bank interest rstes are lov and the interest
can be charged off under the tax laws* In ay opinion, these considerations ha*e such more to do with the decisions than the fact that people
can borrow only £5 cents—instead of 50 cents, as you propose—out of
every dollar they use to buy listed stocks.
The stock market is the healthiest spot in the picture. When
the long postponed shaxedown comes, as it ultia tely must, the ¿tock
market will not have to go through another ruinous liquidation as it did
after 1929 when It was largely built on credit instead of on cash as is
now the case.
Our staff people have studied the figures you enclosed and
derive from the» a conclusion directly the opposite of y urs. They think
that if the statistics prove anything of relevance to the subject, it is
that margin requiresaents have no influence whatever in deterring stock
offerings. I enclose a copy of a staff memorandum on this point.
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M r . M i l Schräm

—2-

Finally, without attempting to cover the many points in your
recent Pittsburgh speech with which I strongly disagree, I do want to
remind you that margin requirements are determined by the Board of Governors—not by ae alone. Congress, by statute, has placed the responsibility for these margins on a Board—not u .on the Chairrnan alone. In
your speech yon-repeatedly referred to "Eccles" doing this, or thinking
that. Even if the purpose is not to single me out for personal attack
such personalizing of the matter gives the public a wholly false and
misleading impression. So far as I am aware, opinion within the System
is unanimous, except for one individual, in supporting the present
margins, as Allan Sproul specifically did in his latest annual report,
as President of the Federal Reserve Bank of Hew York. In fact, the
position of the Board and the System is approved, I am certain, by all
those in Government who are concerned with combatting the current inflation, from the White House on down. In all fairness, Imil, I think
public questions of this kind s h i l d be debated on the merits of the
issues involved, and not by dragging in personalities.
There is one more thing I feel that I should say. I did not,
in ay talk to the State Bank Supervisors, advocate that the bonks increa.se
their risk assets, as you contended in your Pittsburgh address. What
I said was that if banks do in fact Increase their risk assets they
should also increase their capital. In a word, any expansion of credit
at a tiae like this adds to the already dangerous inflationary forces.
If banks could be required to increase their capital ratios as they increase risk assets, it would tend to stop further credit expansion.
¥ith kind regards,
Sincerely yours,
Enclosure
M r . Rail Schimm, President,
Mew York Stock ¿xchange,
Eleven Wall Street,
Sew York 5, lew York.
i rm




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