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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 "be used to reduce further the public debt held 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. - 2 - 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.
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