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R O B E R T A. T A F T
COMMITTEES:
OHIO
LABOR AND PUBLIC WELFARE:,
CHAIRMAN
FINANCE
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L JACK MARTIN
SECRETARY
WASHINGTON. • . C.
November 28, 1947
Honorable Marriner S. Eccles,
Chairman, Board of Governors,
Federal Reserve System,
Washington, D. C.
Dear Marriner:
I wish .to say how much impressed I was
with the careful presentation you made before our
Committee* Certainly, I shall give every possible
consideration to your forthright recommendations.
May I inquire about two other matters which
were not covered? A suggestion has been made that we
sterilize gold which is coming into the country. We
had two billion dollars of this gold sterilized in the
stabilization fund which was turned loose on the world
through the International Fund. Would it not be helpful in preventing inflation to build up again -a fund
of perhaps two billion dollars to replace what we had?
Is this practicable?
I have received several complaints from the
Stock Exchange people regarding a 75% margin on stocks
as compared to other property. It is claimed that this
prevents the sale of stocks and so leads to the
financing through borrowing which is more inflationary.
I should be glad to have your views on that point.
RT:o
With best wishes,
Sincerely yours,
Ill
'V'
December 5, 19U7Dear Bob:
I very much appreciate your comment on my presentation
before your committee, and X as glad to have an opportunity to
answer the two questions in your letter of Hovember 28.
I do not think it would be praotioable to build up again
a fund, say, of 2 billion dollars to replaoe what was taken from, the
so-oalled stabilisation fund. That fund, as you will reoall, was
created out of thin air; that is, it was derived from narking up the
price of gold to $35*00 an ounce. This fund was not used to sterilise
gold.
Beginning at the end of 1936 the Treasury for the better
part of the next two years sterilised gold by selling enough Government securities to the banks, which then had large amounts of excess
reserves, to offset the gold purchased by the Treasury and held in
an inactive account. In effect, the additional reserves created fay
the gold inflow were absorbed by the Government securities which, as
I recall, were chiefly Treasury bills.
The situation now is very different. The banks do not have
excess reserves and the Treasury, as you know, is paying off bank-held
public debt out of its cash surplus. To the extent that this budgetary
surplus was used instead to sterilise gold there would be that muoh
less available to retire Government debt held by the banks, which is
just as effective an anti-inflationary measure as sterilising gold*
And as debt is paid off interest costs to the Government are thereby
reduced. The most practical way, in ay opinion, to get at the problem
is through the Boardfs proposal for a special reserve requirement which
could be gradually increased to absorb future gold acquisitions, leaving
the entire budgetary surplus available to pay off debt.
lith regard to your other question about the 75 P®r cent
margin on stocks, the Board has heard a good deal about this from Bail
S oh ram. It is, of course, a stiff margin requirement. The stock market
however, is one sector of the econoay which will not have to go through
the wringer if we have a deflation. The market is not inflated on borrowed dollars as it was in the late 20fs. I think that is very salutary
though of course I can quite understand the contrary feeling of brokers
who are interested in volume, from which they derive commissions, and of
speculators whose wings are clipped when they cannot borrow more for
their operations. Our margin requirements do not prohibit borrowing on
listed stocks for any purpose except for buying more listed stocks.
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2
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In a recent letter to me, Mr. Sohram contended that the 75
per cent margin was discouraging equity issues for necessary production
and was driving business to borrow from the banks instead of from investors • His argument in effect was tfrat the production was needed to
combat the inflation and that borrowing fross banks is per se inflationary. the trouble with his line of reasoning is that, in the first
place, it overlooks the acute scarcities of labor and Materials. Any
further borrowing of funds at this time, whether from investors or from.
banks, would lead to intensified oosipetition for scarce labor and materials and would manifestly serve only to drive prioes up still higher.
It overlooks further the faot, however, that if the margins
were reduced to 50 per oent, as he advocates, it would be equivalent
to an open invitation to the general public to use additional bank
oredit in order to participate in equity financing, fo the extent that
bank oredit would thus be expanded the effect would be even more inflationary than direct loans to business by banks, because a lot of it
would be used for other purposes and only a small part would reach business through increased equity financing* Unquestionably there are times
when equity financing and expansion of credit to call forth new production would be in the public interest. Unfortunately, this doesn't
happen to be one of those times.
Fran considerable inquiry into the subject I have concluded
that business in most instances at least would be more likely to borrow
from the banks even if the margins were reduced than to go through the
process of floating equity securities. For one thing, the flotation of
more stocks dilutes and ohanges the proportion of stock holdings* For
another — and I think this is important — business can deduct interest
charges under the corporate tax laws. Then, too, interest rates on business loans by the banks have been at exceptionally low levels.
I could elaborate further on these two matters, but possibly
this will suffice to answer what you have in mind. If not, I certainly
hope you will let me know. Let me also reoiprooate your best wishes.
8inoerely yours.
The Honorable Robert A* Taft,
United States Senate,
Washington, D. C.
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