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by Emil



























ECAUSE of renewed interest in the securities market, as evidenced
by the revival of activity after a prolonged period of dullness, a
number of questions are being raised today as to the significance of the
increasing demand for the securities of our publicly-owned enterprises
such as those listed on our Exchange. The question uppermost in the
minds of most people today revolves around the problem of inflation.
There is a belief in the minds of some that the stock market is largely
responsible for inflation. It is my intention today to examine some of
the realities of this subject.
It is quite clear that the erroneous belief that the stock market is a
primary source of inflation is being deliberately fostered. Certain public
officials in Washington have professed to be alarmed over the "psY'
chological factors" contributing to inflation. According to a Washington dispatch published in The New York Times of January 30, these
officials have ascribed the existence of a "psychology of inflation" to
rising prices in the stock market. Now I have no intention of apologizing for the behavior of the stock market in the face of conditions which,
unless corrected, make inevitable a more dangerous form of inflation
than we are now witnessing.
True, the market is registering the apprehensions of the American
people. And, under the system of price publicity which the New York
Stock Exchange long ago established, these apprehensions cannot be
hidden any more than can the performance of a weather vane or of a
I do not for a moment underestimate the psychological factors in a
situation such as that which is developing, but if these influences are
to be neutralized we must concern ourselves less with outward manifestations than with policies which have sown and are still sowing the
seeds of inflation. Many people are putting money into securities because present national policies, or lack of policies, are tending to under-

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mine their confidence in the future value of the dollar. Only the Government can preserve the people's confidence in the integrity of our
Please do not misunderstand me. The fear of inflation is by no means
the only element in the current interest in securities. A great many
people feel that we are passing through a temporary phase of readjustment and that this country will, in time, work out of its difficulties as
it always has in the past, and that American common sense again will
assert itself for the lasting benefit of this country and the world. Mind
you, I am expressing no opinion as to whether the market is right or
wrong in its estimate of present conditions and future prospects.
The stock market records each day, for all the world to see, the ebb
and flow of the country's hopes and fears with respect to our economic
well-being. Our market is constantly exposed to the spot-light, as a
free market should be. All of us recognize that realized profits,
whether in securities, real estate or any other property, enlarge the
inflationary potential—a fact which no one can deny. But when this is
conceded, the fact remains that the advance in stock prices and the
activity in the market, to the extent that inflation is a motivating consideration, are no more than symptoms. If we are to check inflation, we
must attack the basic causes, which are far removed from the surface
reflections of the stock market.
Being the very sensitive index that it is, the market is obviously
registering the opinions of large numbers of people with respect to the
stresses and strains that are apparent everywhere as we attempt to make
the great adjustment from war to peace.
It is all too plain that a substantial amount of inflation already has
taken place. The power to prevent a further extension of inflation rests
with the Government and only sound governmental policies can save
us from approaching danger. I can offer no panaceas, no painless
methods to avert this danger. Nor can anyone else.
The danger, though great, is susceptible of control. To prevent
runaway inflation will require resolute steps by Congress and the executive branch of Government in various directions. The Government has
yet to come to grips realistically with the kind of fiscal policies which
the times demand. The same is true with respect to the relations between labor and management and also with respect to the procedures

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for lifting unnecessary controls that will release our great productive
capacity in order that it may supply the needs and wants of our people.
It is a function of the securities market to reflect the concern which
these difficult problems are causing. It is absurd to blame the market
for giving expression to the anxieties that are in the public mind.
In a moment I shall recall to you the words of Marriner S. Eccles,
Chairman of the Federal Reserve Board, when he announced^some
time ago, a Reserve Board ruling that securities must be paid for in cash.
This action of the Reserve Board was an unblushing discrimination
against a form of property owned by many millions of American
citizens. It is not my purpose at this time, however, to discuss this
discriminatory action, except to point out its futility as a brake on
Under the powers conferred by law upon the Reserve Board, that
body was expected by Congress to use its authority to prevent the
excessive use of credit. The Reserve Board was well aware of the fact
that only a comparatively small amount of credit was being used at the
time it decided to make securities, for market purposes, valueless as
collateral. The Board could have had little, if any, concern over a
possible excessive demand upon our credit resources. The purpose,
obviously, was to reduce the volume of dealings in securities. And it
could have been under no illusions even as to the effectiveness of its
action in curtailing such dealings.
Events subsequent to the decision of the Board to place the stock
market on a cash basis have illustrated eloquently the fact that this was
no more than an empty gesture. Judging by what has happened, I should
say that the Reserve Board's ruling has had the effect merely of fanning
the flames of inflation. This ruling was interpreted as official notice
from the highest authority that inflation was upon us. The ruling was
also interpreted by many unthinking people as a genuine effort to
control inflation.
In the light of the frank and realistic appraisal of the situation by
Mr. Eccles, we cannot fairly accuse the Reserve Board of an attempt to
make a culprit of the stock market. Nevertheless, the Board's action did
focus public attention upon the market in such a way as to lead many j
people mistakenly to believe that the Government was taking vigorous f
steps to control inflation; that the stock market was an obstacle to such

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control. This is most unfortunate for unless the American people are
awakened to the underlying conditions tending to create inflation, the
necessary remedies may be delayed too long. To admonish the stock
market may have a temporary diversionary effect in taking the heat off
of Washington, but it will require stronger and more courageous
measures to save this country from the blight of inflation.
With refreshing candor, which other public officials in Washington
would do well to emulate, Mr^Eccles said:
"The primary source of the inflation danger which overhangs the
domestic economy on all fronts is the vast accumulation of currency and
bank deposits at the disposal of the public as a result of the fact that
far too much of the cost of the war was financed through the creation
of commercial bank credit and not enough was financed out of taxes
and the savings of the public. * * *
"It is important to point out that so long as the public debt continues
to be monetized through the purchase of Government securities by the
banking system the supply of money will continue to increase, thus
tending further to reduce the interest rate on savings and investment
The policy of financing the war on a low and stable level of interest
rates has had a large measure of public approval, but the further
decline in rates over the past year, and particularly since the Victory
Loan, is both a symptom and a source of mounting danger. It is a
symptom of danger because it reflects expansion of credit and purchasing power at a time when goods are scarce and when one of our main
problems is the control of inflation. It is a source of danger because
declining interest rates aggravate the tendency for government debt to
pile up in the banks and thus add to the inflation of credit.
While low interest rates may cheapen the cost to the taxpayer of
carrying the Federal debt, they are a levy upon everyone who saves.
They affect millions of people by making insurance more costly, by
cutting the yield of savings deposits, trust, and pension funds, and by
reducing the income of charitable and educational institutions. They
contribute to a general lowering of investment standards and practices
as investors search for income. They discourage individual thrift and
are definitely inflationary in encouraging the flow of money into stocks,
real estate and commodities. And when people cannot get a reasonable

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return on sound investments they turn to riskier ones. Those in the
securities business see every day money going into highly speculative
stocks that ought to be going into government bonds. The longer
this continued driving down of interest rates is countenanced and
accelerated by official policies, the more trouble we are storing up for
ourselves in the future.
Our generation has witnessed the evils of extreme inflation and
deflation. We could hardly devise a more certain way than a repetition
of either to insure the desertion of the middle class—the stabilizer of our
society—from its loyalty to our traditions.
Those responsible for the policies which are inviting inflation must
be aware that the danger can best be minimized by increased production
of goods. To discourage production because of doubt over the exact
profits that might result could precipitate further maladjustments,
because consumers in a buying mood will buy.
Our present tax structure has developed piecemeal and reflects
attempts to meet emergencies. Specifically, the tax system seems to be
geared toward the penalizing of venture capital in its treatment of
interest, profits, and dividends, as well as capital gains. Our tax system
has encouraged the constant tendency to invest funds directly, or
through financial institutions, in fixed interest obligations. But interest,
in the end, must be paid from the results of economic activity, and the
activity will not be undertaken unless the risk-takers have some
If I were asked to list the prerequisites to the establishment of a
sound and healthy economy, I would put them down in this order:
1. Assurances of a balanced Federal budget and the end of deficit
financing. And I would like to see some old-fashioned bookkeeping
practices used when the balance is computed.
2. A definite program of debt retirement.
3. Tax legislation that would encourage the flow of capital into
productive enterprise.
4. A national labor policy under which the employer and employee
would be treated as equals.
5. The development of a friendly attitude on the part of Government
toward business.
A prosperous nation will assure to our Government abundant federal

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revenues. In turn, adequate revenues and reasonable economies in
government are our best assurances of sound government credit. Prosperity is geared to quantity and quality production of goods—the natural brake on rising prices. It is in the fertile field of production and
profits that we plant the seed that encourage the orderly creation of
wealth and thé broadening of the invested capital base of the nation.
Upon these cornerstones rest a healthy and vigorous economy.
In conclusion, may I leave one thought with you on the subject of
inflation as it relates to the securities market. It is my opinion—and I
realize that it conflicts with that of a great many people—that investment in common stocks and other securities is sound only to the extent
that the dangers of inflation are avoided. Nothing that is bad for the
economy of this country is good for securities and anything that is
good for America is good for the shares in American industry. Sound
values in business rest on a healthy national life. In the event of disastrous inflation, the stock market will provide no storm cellar of
protection and American corporations will suffer along with the rest
of the American people. That is why we are so anxious that intelligent
measures for the prevention of further inflation be adopted without
Now a final word about the New York Stock Exchange. We are
constantly driving home this fundamental principle—that, although
access to the market is open to everyone, its facilities should not be
abused. There is no easy road to wealth—in the investment of money
or in any other legitimate activity. The desire to get ahead, to create
a competence, is one of the most commendable of American traits. But
to try to get rich quick is not commendable. Moreover, it is extremely
dangerous and it is a reflection upon the intelligence of those who
attempt it. Facts are the only trustworthy guide in the buying and selling of securities. Facts are available as to the financial condition of the
companies listed on our Exchange. Those who are unwilling to rely
upon facts in judging values, and those who cannot afford to take
risks, should stay out of the market. I invite the assistance of this group
in spreading that message. It will redound to the benefit of us all.

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