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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
For release in morning newspapers
of Saturday, January '

1Q| n

January 1/, 1 ^ 7

Statement for the Press by Chairman Eocles
When the Board increased margin requirements from 75 P e r cent
to 100 per cent, effective January 21, 19U6, accumulated and prospective
inflationary pressures had reached dangerous proportions because of the
vast expansion of the country's money supply resulting from war financing,
the rising level of current incomes, the huge backlog of public wants and
needs, and the acute shortage of most goods to satisfy this demand. Under
these circumstances, the Board felt that any growth in the use of credit
for the purpose of buying securities could only intensify inflationary
pressures. 1/Vhile it was recognized that margin requirements would have
only a minor influence in combating general inflation, the Board nevertheless felt that it should do what it could to curb inflationary developments
brought about by speculative activity in the stock markets.
In the intervening year economic conditions and prospects have
altered materially. The supply of money was reduced during the year as a
result of a substantial decrease of the Government debt held by the banking system. This has had a salutary effect. Clearly this policy should
be continued. By combining continued high levels of taxation with prudent
economy in all Government expenditures, it will be possible to realize a
budgetary surplus which can " e used to reduce further the public debt held
b
by the banking system. This would continue to have an anti-inflationary
influence depending upon the size of the surplus.
Notwithstanding industrial strife and other obstacles, the 19U6
production of the economy reached new peacetime levels so that by the end
of the year 10 million demobilized veterans, together with millions of
those who had jobs in war industries, had been largely absorbed in peacetime production. Full and sustained production depends on an extended
period of industrial peace, the avoidance of further wage increases that
bring about increased prices, and the downward adjustment of prices which
are now out of line.
The supply of goods and services is now more nearly in balance
with demand than was the case a year ago. Shortages in many important
lines have been met and in many other lines are rapidly being overcome.
The removal of various Government controls in 19U5 a*id 19^6, together with
tax reduction and repeal of the excess profits tax, ushered in a sharp rise
in prices during the year just ended, so that the cost-of-living index rose
from 129*9 in January to 153*3 i n December of 19U6* This is approximately
as much as the rise in prices during the four preceding war years. As a
result of higher prices and of the narrowing margin between individual incomes and expenditures, the intensity of demand has abated considerably.




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In contrast with the behavior of most prices, stock prices, which
had risen sharply for several months prior to January 191+6 and continued to
rise somewhat further after that time, subsequently declined materially.
The level now is about the same as that existing when margin requirements
were increased to 75 V e r cent. At the same time, the volume of credit in
the stock market has been substantially reduced until that used for carrying listed securities is at about the lowest level in the last thirty years.
Undoubtedly the rise in stock prices and the subsequent fall would have been
much greater if the Board had not increased the requirements, first from 50
to 75 per cent as of July 5, 19¿+5» then from 75 to 100 per cent early in
191+6.
It now appears that inflation has largely run its course, assuming that fiscal, labor and management policies, such as I have indicated,
are pursued» Accordingly, some readjustment in margin requirements is appropriate at this time. By its action the Board has restored the 75 P e r
cent level in effect from July 55 19U5 until January 21, 191+6»
While it is evident from a large volume of correspondence which
has come to me that there is a strong public sentiment against margin
trading under any conditions, it should be remembered that the mandate which
Congress gave to the Reserve Board applies only to listed securities and
specifies that margin requirements shall be imposed for "the purpose of
preventing the excessive use of credit" in such stock market operations.
The Board is not authorized to impose a permanent ban on margin trading.
As I said in discussing this subject several months ago, this is
not a one-way street. The present adjustment to changed economic conditions is restrictive without being prohibitive. Further action will depend
upon the course of economic events.