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UNXTID n a m SWATS . Washington, D. 6. Movaabar 28, 1947 Honorabla liarrinar 8. Seelaa, Chatraan, Board of Oorarnora, Fadaral Staaarva £y«t«m, Vaabingfcon, D. G. Baar Marrinart I wiab to aay ham auab i«pro»««d I was with tha earaftal praasntatiaft foa aada bafora <mr Goaadttaa, Cartalnly, I a&all glra w r y poaaibla eenaidaratlan to jrcmr forthright racomaaodations * *ajr I inquira about t«o othar nattara wara not covaradf A aufgaatloo baa base nada that i n a t a r l l i t a gold ahich I t ooning Into tha country* * • lwd t m billion dollara of this geld aUriliasd I n the atabilixatiaa fend ^ i e h was turnad looaa «n tha world t h r o a t the IntarM U « a | l h a d . lonld i t not ba halpfttl in pravwtiiig inflation to build W 4f«lB * fund of parhaps two billion dollar* to raj&aoa idiat wa bad? X* thia practieablat I m t i M d i sararal coaplaiata froa tha Stock lxchango paoja* regarding * f j j l nargln m stocks m #enparad to othar proparty. I t la clalatad that thia proirasfea tba aala of stoeka and ao laada t « tha financing through borrowing which ia nora inflationary. X ahonild bo glad to hava jrnr viawa on that point* l i t h boat wieh«s, J&nearaly yours, (Slgnad) Bobart A* Taft Saeaabar 5» 1947* S M T Bob I X vary «ach appreciate your coaaant on ay preaeotatlon before yoar ooaaittee, i s d l M glad t o have an opportunity to n m r the too queetiona in your letter of Moveaber 28. X do not think i t would bo practicable to build up again a fund, » / ( of 2 billion dollar* to replace what waa taken froa too eo-called etabiliaatian fund. That fund, ao you w i l l recall, waa created out of thin a l r j that i a , lb waa derived froa narking up the price of fold to $55*00 an ounce. thia fund was not ueed to ateriliae gold. Beginning at tbo and of lf36 tho treaeury for tho better part of the next too yeara otorHlsod gold by tolling enough Oovernaant aeeurltiea to tha banka, wbleh than bad larga aoounta of exceea reeervea, to offaet tbo gold purchased by tbo treaoury and bold In an inactive account. Xn effect , tbo additional rooerve* created by tba gold inflow wara abeorbed by tba Government eeeurltiea which, aa X recall, vara chiafly Treasury blUa. Ibe eituation now ia vary diffarant. tha banka do not have areata roeervee Mid tha treaaury, aa you know, ia paying off bank-bold publio dobt out of i t a caah aurplua. t o tba extent that thia budgetary aurplua woo uead inataad to atariliao gold thoro would bo that snob laaa available to ratira Goveroaent dobt hald by tba banka, which la juat a* effective an antiinflationary measure aa aterllising gold. And ao dobt ia paid off intaraat ooota to tho Governaant aro tboroby reduced. tbo aoet practioal way, in ay opinion, to got at tba problaa ia through tbo Board1 a propoaal for a apaclal reaerve requirement which eould ba gradually ineraaaod to aboorb futura gold aoquialtione, leaving tba entire budgatary aurplua available to pay off dabt. Kith ragard to your other queetlon about tha 75 par cent aargin on •tocko, tbo Board hao hoard a good doal about thia froa toil Schram, I t l a , of couroe, a o t l f f margin requirement. tha atock market, however, ia ono oootor of tha econoay which w i l l not have to go through tha wringer i f .we have a donation, tho aarkat ia not inflatad on borroood dollar* ao i t waa in tho lata 20'a. X think that ia vary aalutary, though of eourao I can quite under*atand tha contrary fooling of brokara who ara intereated in volxiae, fro® which tbay derive coaaieeiane, and of apaeulatora whoae winga ara eUppod when thoy eaanot borrow aora for th#lr operations. Our aargin requirements do not prohibit borrowing on H a t ad atooka for any purpoae except for buying aora llatad atoeka. Xn a raeant letter to ao, Mr* Sehrea cootsndod that tbo 75 par cent aargin was diaeouraging equity issues for nooooaary production and waa driving bnainaaa to borrow froa tbo banka inataad of froa invectora. Hia argument in offaet waa tbat tha production waa naadod to coafeat tho inflation and tbat borrowing froa banka l a par ao inflationary, tba trouble with h i t llna of raaaoain* l a that, In tha f i r s t placa, i t ovorlooka tha acuta acarcitiaa n f labor and aafcarlala* Any furthar borrowinf of funda at thla tlna* ahafchar from invaatora or fro* banka* *©uld li«A to izxt w a i f lad earn* patltlon for aoarea labor and aatariala and would nanlfaatly aarva only to drlva prieoa up at i l l hl£i ar» I t overlooka furthar tha fact* howavar, that i f tha marglna wara raduoad to SO par cant* aa ha adrooataa* i t would ba aquiralant to an opan invitation t o tha ganaral public to uaa additional bank oradit In ordar to ] > n i i e j | i i i in oqpilty financing, To tha astant that bank oradit would thua ba dj^andad tha affaot would ba avan ®ora inflationary than diraot loana to bualntaa by banka* baoanaa a l o t of i t would ba uaad for othar purpoaaa and only a a a a l l part would raaoh bualnaaa through Inoraaaod a q u i t y financing. Onijuaationably thara ara tinaa than aquity financing agpanalon of oradit to o a l l forth new production would bo in tha pt&lia lntaraat* Unfortunately, thla doaan't happen to ba mo of thoaa tlaaa* froai oonaidarabla inquiry into tha aubjaot X hava concluded that bnainaaa i n aoat inatanoaa at laaat vould ba aore l i k e l y to borrow froat tha bant?* aran i f tha nargina ware raduoad than to go through tho proceaa of floatinc a*julty aecuritiea. For one things tha flotation of nora atoeka dilutee and ehangta tha proportion of atook hold!nge* for anothar and X think thla l a important — bualnaaa oan deduct lntaraat chargea undar tha oorporata tax lawa# Ihan* too* lntaraat ra&aa on bualnaaa loana by tha banka h*ire bam at a&eeptionally low levela. X oould alaborata furthar on thaaa two mattera, but poaalbly thla w i l l auffloa to anawar ttiat you hava i n *ind, I f not* X certainly hopo you w i l l l o t m know* !*#t oa alao raolprooata your baat wiahee. Sincerely youra, tha Bonorahlt Robert A. f * f t » United Statea Senate, Washington, D. C*
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