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Federal r e s e r v e Bank O F DA LLAS Dallas, Texas, January 18,1947 AMENDMENT TO REGULATION U To A ll Banking Institutions in the Eleventh Federal Reserve District: There is transmitted herewith a supplement to Regulation U, issued by the Board of Governors o f the Federal Reserve System, effective February 1, 1947, which reduces margin requirements to 75 per cent. The change will restore margins to the levels prevailing from July 5, 1945, to January 21, 1946, at which time purchases were put on a cash basis. In connection with this action and a corresponding amendment to Regulation T, there is quoted below the text o f a statement which was issued to the press by the Chairman o f the Board of Governors for release on January 18, 1947: Statement for the Press by Chairman Eccles “ When the Board increased margin requirements from 75 per cent to 100 per cent, effective January 21, 1946, 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 o f current incomes, the huge backlog o f public wants and needs, and the acute shortage of most goods to sat isfy this demand. Under these circumstances, the Board felt that any growth in the use of credit for the purpose o f buying securities could only intensify inflationary pressures. While 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 o f 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 o f taxation with prudent economy in all government expenditures, it will be possible to realize a budgetary surplus which can be used to reduce further the public debt held by the banking system. This would continue to have an anti-infiationary influence depending upon the size o f the surplus. Notwithstanding industrial strife and other obstacles, the 1946 production o f the economy reached new peacetime levels so that by the end of the year 10 million demo bilized 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 o f industrial peace, the avoidance o f further wage increases that bring about increased prices, and the downward adjustment o f prices which are now out o f line. (OVER) This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 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 bean met and in many other lines are rapidly being overcome. The removal o f various government controls in 1945 and 1946, 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-ofliving index rose from 129.9 in January to 153.3 in December o f 1946. This is approxi mately 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 expendi tures, the intensity of demand has abated considerably. In contrast with the behavior of most prices, stock prices, which had risen sharply for several months prior to January, 1946, 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 per cent. A t the same time, the volume o f 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 o f July 5, 1945, then from 75 to 100 per cent early in 1946. 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 per cent level in effect from July 5, 1945, until Janu ary 21, 1946. While it is evident from a large volume o f 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 op erations. 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 o f economic events.” Banks which are members o f the Federal Reserve System are requested to insert the attached amendment in the ring binders containing Regulations of the Board o f Governors and Bulletins o f this bank. Yours very truly, R. R. GILBERT President SUPPLEMENT TO REGULATION U ISSUED BY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Effective February 1, 1947 For the purpose of Section 1 of Regulation U, the maximum loan value of any stock, whether or not registered on a national securities exchange, shall be 25 per cent of its current market value, as determined by any reasonable method. Loans to Specialists.— Notwithstanding the foregoing, a stock, if registered on a national securities exchange, shall have a maximum loan value of 50 per cent of its current market value, as determined by any reasonable method, in the case of a loan to a member of a national securi ties exchange who is registered and acts as a specialist in securities on the exchange for the purpose of financing such member’s transactions as a specialist in securities.
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