Shot in the Arm

The war against inflation was officially declared won last week. Said Marriner Eccles, cautious chairman of the Federal Reserve Board: "Inflation has largely run its course. Shortages in many important lines have been met and in many other line? are rapidly being overcome." Now it was time to wage the war on deflation.

The Board shot off the first round by lifting the ban on margin trading on the stock exchange. Instead of requiring stock buyers to pay cash in full for stocks, they will soon be permitted to buy stocks on 25% margin--i.e., pay 75% cash, borrow the rest from brokers. This did not satisfy Wall Streeters. New York Stock Exchange President Emil Schram grumbled that margins should have been set at 50%. But everyone agreed that the failing market needed a shot in the arm.

In the seven months of the bear market, stocks have fallen so much and trading has been so dull that many a company has not been able to float new security issues, get cash needed for expansion. Four days before the FRB announcement, the market had its worst sinking spell in nearly two months. Stocks fell one to ten points; the Dow-Jones industrial averages dropped 2.76 points to 172.49. The day after the announcement, the market, which had recovered somewhat, bounced up, even though margin trading would not actually start till February 1.

The FRB action was of more significance than a mere change in trading technicalities. During the war the market, the consensus of guesses on the financial future, went steadily up as 1) speculators bet on more inflation to come and 2)some of the inflationary cash went into the market because there were no goods for it to buy. The FRB steadily cut down trading on margin until a year ago, when Chairman Eccles decided that inflation had reached "dangerous proportions." To brake the market, he put trading on a cash basis. Now, Marriner Eccles was finally recognizing what the collapse of the big bull market had foretold. Prices were too high and were bound to come down in short order. Last week, they were coming down fast (see Prices).

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