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For R e l e a s e on Delivery

Statement of Wm, McC. Martin, J r .
Chairman, Board of Governors of the Federal R e s e r v e System,

at hearings on the study of the stock market
before the
Senate Committee on Banking and Currency,
Monday, March 14, 1955.

Mr. Chairman and Members of the Committee, as you are aware
the Federal R e s e r v e System has responsibility for regulating the general
flow of credit and money with the objective of contributing to a healthy
growing economy.

In the Securities Exchange Act of 1934, the Board of

Governors of the Federal R e s e r v e System was given special responsibilibility for preventing the e x c e s s i v e use of credit for the purchase or c a r r y ing of s e c u r i t i e s .
Let me say at the outset that this responsibility of the Board of
Governors relates to stock market credit and not to the price of stocks.
The Congress rightly, in my judgment, did not place on the Board r e s p o n s i bility for trying to determine the level at which stocks should s e l l . Even
if all credit were eliminated from the stock market, cash purchases could
bid up the prices of stocks to high l e v e l s .

Regulation can restrain the use

of credit for stock market purposes, but it cannot s e r v e as a guarantee against
all speculative e x c e s s e s .
When Congress was considering the Securities Exchange Act in
1934,the country was concerned with two major p r o b l e m s .

One was to

foster economic r e c o v e r y and get the millions of unemployed reemployed.
The other was to prevent recurrence of the situation which brought about
:he unemployment.

An important factor in that situation was that stock

purchases were pyramided on the basis of credit extended on very thin

As a result, a break in stock market p r i c e s , that in any event

-2would have been s e v e r e , was magnified into a disastrous financial crash
for the whole country.
The Securities Exchange Act was not formulated to r e s t r i c t the
natural operation of the stock market, but to rid the market of such evils
as manipulative practices and inadequate d i s c l o s u r e of information vital
to investors.

Thus the market could better perform its basic investment

The margin requirement provision of the Act was not designed

to deny the use of credit to the stock market; its explicit objective was to
prevent the e x c e s s i v e use of credit.

This legislation was designed to

help create a healthier securities market as part of a strong, vigorous
free enterprise economy.
Organized stock exchanges are designed to function so as to encourage growth in equity ownership rather than debt, with resulting benefit to
the economy.

For business to r a i s e equity capital through the issuance

of common stock, it is important to have active and orderly markets for
The exchanges s e r v e the economy by providing continuous, ready
markets for securities that constitute an important proportion of the a s s e t s
of many individuals and b u s i n e s s e s .

Individuals, to make purchases of

goods or s e r v i c e s , frequently have to s e l l or borrow on their s e c u r i t i e s
to obtain the n e c e s s a r y cash.

Furthermore, b u s i n e s s m e n often s e l l

their securities or pledge them as a basis for loans to meet payrolls or

-3to obtain other capital.

Sales or borrowing transactions of these kinds would

be far more difficult without market centers where i n v e s t o r s , traders,
brokers, and dealers are brought together.

Sales of new s e c u r i t y i s s u e s

by business corporations would also be more difficult if buyers did not
know they could later dispose of such a s s e t s readily.
In my judgment, a properly functioning stock market is important
to the attainment of a high standard of living and steady growth of employment opportunities for all the people.

We could not today have our s y s t e m

of mass production and distribution if it were not possible for corporate
enterprises to a s s e m b l e through the securities markets varying amounts
of individual savings into large aggregates of capital.

A major distinction

between highly developed and industrialized economies and underdeveloped
economies is the lack in the latter of effective markets for mobilizing the
individual savings of their people.
The task of the Board, as I s e e it, is to formulate regulations with
two principal objectives.

One is to permit adequate a c c e s s to credit

facilities for security markets to perform their basic economic functions.
The other is to prevent the use of stock market credit from becoming

The latter helps to minimize the danger of pyramiding credit

in a rising market and also reduces the danger of forced s a l e s of
securities from undermargined accounts in a falling market.

-4Regulation T applies to loans made by brokers and dealers in
securities to their c u s t o m e r s .

It p r e s c r i b e s loan values—that i s , s e t s

margin requirements--on securities that are r e g i s t e r e d on a stock exchange.
Except for specific exemptions, it altogether forbids brokers to make loans
to customers to purchase or carry s e c u r i t i e s where no collateral is
offered, or where the collateral offered consists of securities unregistered
on a stock exchange.

The securities exempted from this prohibition are

obligations of the Federal, State, or local governments and some instrumentalities thereof.

Only on these exempted s e c u r i t i e s are brokers

permitted to establish their own loan v a l u e s .
The loan values for the purchase or carrying of registered s e c u r i ties which have been imposed by this regulation have been consistently
small by historical standards, i . e . , margin requirements have been high.
Most of the time under the regulation margin requirements have ranged
between 40 per cent and 75 per cent, with one brief period of 100 per cent.
During the twenties, margin requirements imposed by individual brokers
were customarily 25 per cent or l e s s , with 10 per cent margins not
Over the life of Regulation T, loans on securities by brokers to
their customers, as measured by customers 1 debit balances, have been
as low as 500 million dollars and as high as the present figure of
2.6 billion.

F r o m the autumn of 1953 through February of this year they


rose from 1.6 billion dollars to 2.6 billion, which is the highest figure
since 1931 when the statistical s e r i e s on customer borrowings from brokers

Comparable figures for the twenties are not available, but borrow-

ings by brokers and d e a l e r s , which are generally smaller than brokers 1
loans to c u s t o m e r s , ranged from 1.5 billion dollars to 8 f 5 billion between
1923 and 1930.

It is estimated that borrowings by brokers and dealers

currently do not exceed 2 - l / 2 billion dollars, excluding those against
U. S. Government s e c u r i t i e s .
In Regulation U, relating to security loans made by banks, the
Board is faced with a different problem.

F i r s t , the law reaches only to

bank loans for the purpose of purchasing or carrying registered s t o c k s .
It exempts loans which are secured by bonds and those which are not for
the purpose of purchasing or carrying r e g i s t e r e d s e c u r i t i e s .

Second, the

nature of the banking business itself makes the problem different.
Whereas brokers confine themselves largely to making loans for
the purpose of purchasing or carrying s e c u r i t i e s , banks make loans
against security collateral for a wide variety of purposes, personal as
well as b u s i n e s s .

Banks also make loans on a wide variety of other

collateral and on the general credit worthiness or financial standing and
established character of b o r r o w e r s , and the funds made available from
these loans may, without knowledge of the banks, be used by customers
for various purposes.

-6In view of this wide diversity of bank lending operations, the Board,
in formulating Regulation U, has sought to avoid the effect of unduly burdening the extension of credit through the banks for all of these p u r p o s e s .


is chiefly for these reasons of law and practice that the Board's margin
regulations applicable to banks relate only to loans which are secured by
registered or unregistered stocks and are used for the purpose of purchasing or carrying registered stocks.
F r o m the beginning, the Board has realized that regulations
applicable to this intricate lending p r o c e s s ran the risk of leaving loopholes through which bank credit might leak into stock market speculation.
This was a calculated risk which was believed to be preferable to detailed
rules that would impose a greater impediment to constructive financing
than could be justified by avoidance of any leakage that could result from
the existing regulation.
The amount of credit extended by banks to customers other than
brokers and dealers for the stated purpose of purchasing or carrying
securities (excluding U, S. Governments) is estimated to be about 1-1/2
billion dollars today, around three-fourths larger than in the late thirties
and no doubt much smaller than in the late twenties . The amount of bank
loans to brokers and dealers on such s e c u r i t i e s is estimated currently
not to exceed 2 - 1 / 2 billion d o l l a r s .

This amount is roughly three times

as large as that in the late thirties and about the s a m e as that in the late
twenties, when brokers were obtaining a large part of their borrowing

-7from nonbank s o u r c e s .

The volume of bank credit extended to brokers and

dealers over much of the period of the regulation has fluctuated within a
relatively narrow range, although it has generally followed an upward path
since the end of 1948,

F r o m the autumn of 1953 to early this year, bank

credit to brokers and d e a l e r s , which includes underwriting credit, r o s e
about 1 billion dollars.

At no time since the regulations were adopted in

the mid-thirties has the total amount of bank credit for the purpose of
purchasing or carrying securities been a large proportion of c o m m e r c i a l
bank loans and investments.
On the basis of a recent survey requested by this Committee and
covering 271 banks in selected large cities which make most of the loans
collateraled by s e c u r i t i e s , we estimate that early in February all member
banks had outstanding 7 , 2 billion dollars of loans on s e c u r i t i e s , including
loans against U. S. Government s e c u r i t i e s .

About 4 . 2 billions of this

total were estimated to be loans made for the purpose of purchasing or
carrying s e c u r i t i e s .

Of purpose loans, almost 2 . 9 billion were to brokers

and dealers and about 1.3 billion were to others.

The remaining 3 billion

dollars represented all security loans made by banks to individuals and
businesses for other purposes than the purchase or carrying of s e c u r i t i e s .
Even though s o m e leakage of bank credit into stock market u s e s may occur
through the avenue of loans not designated for the purpose of purchasing or
carrying s e c u r i t i e s , the relative amount of such leakage cannot be large
in the aggregate.
1/ Currently total loans and investments of all c o m m e r c i a l banks amount to
156 billion dollars, of which 70 billion represents loans and 86 billion i n v e s t 
ments .

-8A more likely and l e s s easily discovered avenue of leakage of
bank credit into stock market u s e s is through loans secured by collateral
other than stocks or unsecured,

This is a type of credit that could be used

speculatively by "empire builders" in their attempts to acquire financial
control of corporations.

This kind of credit may not be large in relation

to total bank credit, but it certainly could be important in individual

However, the problem of preventing an e x c e s s i v e flow of credit

into the stock market through this avenue is an extremely difficult one
with which to deal from a regulatory standpoint without interfering unduly
with normal banking activities.
Although the volume of stock market credit since Regulations T
and U were imposed has not been large by historical standards, a c o n siderable percentage of total trading by the public has been based in
part on credit.

This does not mean that borrowed funds have financed a

corresponding portion of stock trading. Margin customers have had to
observe the margin requirements and to use their own funds for a large
part of the financing.

There is little doubt that the use of credit in stock

transactions adds to total demand for s e c u r i t i e s but this is true of all
use of credit.

For example, use of instalment credit, which today totals

in e x c e s s of 22 billions, has added to the demand for consumer durable

Similarly, residential mortgage credit, currently aggregating

more than 75 billions, has added to the demand for housing.

- 9-

It is important to look at the whole picture of credit outstanding
in the economy in order to see in correct perspective the over 4 billion
dollars of direct stock market credit and the 3 billion of other security
loans by banks.

Total credit in the economy since the end of 1946 has

increased from about 400 billion dollars to around 600 billions.

Of the

increase of nearly 200 billion dollars, about 80 billion was in business
long-term and short-term credit, over 60 billion was in urban mortgage
credit, 20 billion was in consumer credit, 20 billion in State and local
government debt, and the balance was distributed among other s e c t o r s .
The increase in loans for purchasing or carrying securities probably did
not exceed 2 billion dollars over this period.
As I have emphasized, the statute enjoins "excessive use of
credit1' in stock markets.

It is difficult to define what constitutes

"excessive use of credit" in stock markets, or for that matter in any

It is largely a question of judgment and not m e r e l y a statistical


So far as stock markets are concerned, however, it s e e m s

to me that there are certain signs or symptoms of unhealthy tendencies
when businessmen or the public generally become unduly preoccupied with
stock markets and stock p r i c e s .

An unsound speculative psychology may

then develop that can have adverse effects throughout the economy.
Margin requirements are a comparatively new device in the
arsenal of central banking.

As I indicated at the outset, they are not and

cannot be c u r e - a l l s for stock market e x c e s s e s or abuses.

-10An inquiry such as this Committee is conducting is useful and

It sheds light on important aspects of the economy and

its functioning.

It enables the Congress to ascertain how regulatory

measures are operating and whether they are adequate or need modification.
Finally, it s e e m s to m e , it s e r v e s to remind us all that the underlying
strength of the nation depends not only on wise laws and regulations but
upon enlightened leadership and good m o r a l s in the market place.