View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FED ERAL RESER VE BANK
OF NEW YORK
r Circular No. 3 1 7 7 T
L January 18, 1947 J

SUPPLEMENT TO REGULATION U OF THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Effective February 1, 1947

To all Banks, Members o f National Securities
Exchanges, and Other Interested Persons, in
the Second Federal Reserve D istrict:

For your information we quote below from a press statement issued by the Board of
Governors of the Federal Reserve System and released for publication on January 18, 1947:
The Board of Governors of the Federal Reserve System today amended its Regulations T and
U to reduce margin requirements to 75 per cent, effective February 1, 1947. These requirements will
be applicable both to purchases of securities and to short sales. 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 and short sales required to have 100 per cent margins.

The amendment referred to in the foregoing statement changes the Supplement to Regula­
tion U to read as follow s:
SU PPLEM ENT

TO

R E G U L A T IO N

U

Issu e d b y t h e B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y ste m

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 deter­
mined 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 securities 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.

In addition, the Chairman of the Board of Governors of the Federal Reserve System issued
a statement for the press, released for publication January 18, 1947, the text of which is
reprinted on the reverse side of this circular.
Additional copies of this circular will be furnished upon request.




A

llan

S pr oul,

President.

STATEM ENT FO R TH E PRESS B Y CHAIRM AN 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 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. 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 of '
money was reduced during the year as a result of a substantial decrease o f the Government debt held by
the banking system. This has had a salutary effect. Clearly this policy should be continued. B y combin­
ing continued high levels of 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 bank­
ing system. This would continue to have an anti-inflationary influence depending upon the size of the
surplus.
Notwithstanding industrial strife and other obstacles, the 1946 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. Pull 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 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 of 1946. 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.
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 of credit in the stock market has been substanially reduced
until that used for carrying listed securities is at about the lowest level in the last thirty years. Undoubt­
edly 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. B y its action the Board has restored the 75 per cent level in effect from July 5,
1945 until January 21, 1946.
W hile 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.




FED ERAL RESERVE BANK
OF NEW YORK

January 18, 1947
S U P P L E M E N T T O R E G U L A T IO N T O F T H E B O A R D O F
G O V ER N O RS O F T H E FED ER A L. R E S E R V E SYSTEM

Effective February 1, 1947
To M embers o f National Securities Exchanges and
Brokers and Dealers in Securities in the Second
Federal Reserve D istrict:

For your information we quote below from a press statement issued by the Board of
Governors of the Federal Eeserve System and released for publication on January 18, 1947:
The Board of Governors of the Federal Reserve System today amended its Regulations T and
U to reduce margin requirements to 75 per cent, effective February 1, 1947. These requirements will
be applicable both to purchases of securities and to short sales. 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 and short sales required to have 100 per cent margins.

The amendment referred to in the foregoing statement changes the Supplement to Regula­
tion T to’ read as follow s:
SU PPLEM EN T
I ssu ed

by the

TO R E G U L A T IO N T

B oard o f G over nors o f

the

E ffective F e b ru a ry

F ederal R eserve S y s t e m

1, 1947

Maximum Loan Value for General Accounts.— The maximum loan
value of a registered security (other than an exempted security) in a
general account, subject to section 3 of Regulation T, shall be 25 per
cent of its current market value.
Maximum Loan Value for Specialists’ Accounts.— The maximum
loan value of a registered security (other than an exempted security)
in a specialist’s account, subject to section 4 (g ) o f Regulation T, shall
be 50 per cent of its current market value.
Margin Required for Short Sales in General Accounts.— The amount
to be included in the adjusted debit balance of a general account,
pursuant to section 3 ( d ) ( 3 ) of Regulation T, as margin required for
short sales of securities (other than exempted securities) shall be
75 per cent of the current market value of each such security.
Margin Required for Short Sales in Specialists’ Accounts.— The"
amount to be included in the adjusted debit balance of a specialist’s
account, subject to section 4 ( g) of Regulation T, as margin required
for short sales of securities (other than exempted securities) shall be
50 per cent of the current market value of each such security.

In addition, the Chairman of the Board of Governors of the Federal Reserve System issued
a statement for the press, released for publication January 18, 1947, the text of which is
reprinted on the reverse side of this letter.
Additional copies of this letter will be furnished upon request.




A

llan

S proul,

President.

STATEM ENT FO R TH E PRESS B Y CHAIRM AN ECCLES
When the Board increased margin requirements from 75 per cent to 100 per cent, effective January21, 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 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
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 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 combin­
ing continued high levels of taxation with prudent economy in all Government expenditures, it will be
possible to realize a budgetary surplus whieli can be used to reduce further the public debt held by the bank­
ing system. This would continue to have an anti-inflationary influence depending upon the size of the
surplus.
Notwithstanding industrial strife and other obstacles, the 1946 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 1945 and 1946, together with tax reduction and repeal
o f 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 of 1946. 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.
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 of credit in the stock market has been substanially reduced
until that used for carrying listed securities is at about the lowest level in the last thirty years. Undoubt­
edly 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, 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. B y its action the Board has restored the 75 per cent level in effect from July 5,
1945 until January 21, 1946.
W hile 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.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102