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BOARD OP GOYEHNOBS OP THE FEDERAL RESERVE SYSTEM For immediate release January 17, 19U6 Statement for the Press by Chairman Eccles My personal view of the Board's decision to. increase margin re~ quirements to 100 per cent may be summed up sLs follows; By this action, the jBoard has used its authority to prevent the further flow of borrowed money into stock market operations. There is no further recourse left to the Board, so far as restraining speculative activities in listed stocks is concerned, except possibly to order that all existing margin accounts be put on a cash basis and to make some of the administrative provisions applying to banks more rigid. To whatever extent the Board's action will tend to dampen speculative activity, it is desirable, as a preventive step, at this time of strong inflationary pres*sures and until such time as inflationary dangers are passed. As I have frequently sought to emphasize in the past, 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 dis-* posal 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 i?axes and the savings of the public» Credit for stock market as well as other purposes has been curbed all along, but it is a minor and not a major factor in the inflation picture. "While credit curbs are justified for such restraint as they may impose on speculative activities in a time of inflationary danger, they cannot reach the real source of danger, which is the huge amount of money already created through bank credit. Price controls, rationing, allocations, etc., are vitally necessary for holding the line until the danger is past, but they are not designed to prevent the excessive money supply from flowing into speculation in capital assets, such as homes, farms, business properties and securities. The most effective way that I know of to curb speculation in capital assets would be to increase substantially the rate of the capital gains tax, or the holding period, or a combination of both. For a long time I have advocated enactment of legislation to this end as a temporary protective measure applicable to all future purchases. This would not deter the selling of assets held at the time the measure was introduced in Congress, but it would greatly deter buying for the speculative rise after that date. It would not affect the purchase of capital assets of any kind which have been or are being bought for personal use or long-term investment rather than for the speculative rise. - 2 - In addition, 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 funds* The resultant pressure of an increasing money supply and of lower interest rates is bound to have a further inflationary effect upon all capital assets and to increase the difficulty of holding down the cost of living. It is, therefore, imperative that the process qf further monetizing of the public debt through the banking system be ended so that the rate of return on investments would be stabilized and would reflect the supply of savings and investment funds in relation to the demand instead of reflecting an increasing amount of bank credit. This process needs to be stopped not only by bringing about a balanced budget, but also through measures to check further unnecessary expansion of commercial bank holdings of Government securities• Only by a vigorous, comprehensive attack along the entire economic front can the battle be successfully waged against inflationary pressures. Credit curbs are at best supplementary and not basic measures fpr reaching the. underlying causes of these pressures. STATEMENT ON M A H G I N S - January 17, 1946 Treasury Press Room • • • 30 National Press Club .............. .. 25 Press Table .. . 20 Mr. A. w. Strocker ......... 25 Secretary Vinson 1 Mr. Bartelt * . 1 Reference Library, F.R.B. of N. Y . 2 Miss burgess, Reserve Board i-ibrary....... *......... 2 Treasury Press Relations. 1 Louis Spell, Ireasury i^ept 5 Board Members .. 5 Miss Sutler £ Thomas A. Falco, Business *»eek 1 Mr. Mlson 3 Mr. Smead ... 1 . Robert Black ..... 5 Chas. P. Shaeffer. 2 0. E. Loomis 8 Vim. Pinkerton. 1 Chester Bowles 1 Judge Collet 1 Secretary Wallace 1 Harold Smith 1 Seymour Sheriff 1 Cong. Howard H. Buffett 1 A.toall,Cocoa, Florida 1 Fred to. Gardner, U. Louis 1 J. J. DeFraine, Scranton, Pa 1 H9
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