Finger Shaker

Said a top Federal Reserve Board official last week: "We thought we had an obligation to warn the elevator operators that it is one thing to buy stocks for cash and another thing to use borrowed money." With that, FRB suddenly announced a boost in margin requirements: investors would have to put up 60% cash to buy stocks instead of 50%.

FRB's unexpected action scared the stock market into the biggest sell-off since the start of the Korean war. As prices dropped, the high-speed reporting tape fell as much as 15 minutes behind floor transactions. Sitting in their boardrooms, brokers could only guess, from a few scattered "flash prices," what was happening on the floor at any given moment. By day's end volume hit 4,640,000 shares. General Motors, which only two days before had hit a new high of 107 3/8 on rumors of a stock split, and then lost seven points when the rumor proved false,* dropped another 3 5/8. General Electric lost two points, to 48; Du Pont was off 3 1/8, to 167 1/8. The Dow-Jones industrial average, which was at a new high at week's beginning, cracked 8.93 points, to 397.24.

"Very Dangerous." At the opening next day, the battering continued. Again the tape fell behind as sell orders were touched off all over the nation. Volume hit 5,300,000 shares, biggest since four days after World War II started. Later in the day the market steadied; the maximum lost in the Dow-Jones industrials was cut from more than seven points, to 5.35.

Next morning the encouraged bulls went on the rampage. The market went up almost as fast as it had declined, made up 40% of the preceding day's losses. Amid continuing reports of good business, good dividends and good earnings, prices jumped all through the list. The most spectacular gains were made by the railroads, which were cashing in on the business upswing; they had their best day in 21 years. New York Central was up 3 1/8 points for the week, to 36 5/8; Pennsy was up 3/4, to 24 1/2. The Dow-Jones rail average soared 4.03 points in one day, to 144.34; the industrials rose 3.71 points, closed at 395.6 for a week's loss of 13.29 points.

In Washington Arkansas' Democratic Senator William Fulbright helped push the market down by announcing that his Banking and Currency Committee "probably will make a study" of the market's recent sharp rise. Said Fulbright: "The situation looks very dangerous to me. It is too reminiscent of 1929." Committee Member A. Willis Robertson, a Virginia Democrat, disagreed, said that FRB and the Treasury Department were capable of watching the market without the help of any Congressional investigation. Added Alabama's John Sparkman: "I have never felt that we were at the top of the market's rise . . . I don't feel that yesterday's break shows that we have reached that top."

No Alarm. On Wall Street the market break was calmly interpreted as a long-overdue technical reaction after an almost uninterrupted rise of 15% in the past two months. Said President Edward T. McCormick of the American Stock Exchange: "In my opinion none of the basic economic indices justify alarm over the present level of the market . . ."

Actually, that was about the way the Federal Reserve Board felt about things. While it had noted that credit in the market rose 31% in ten months, to $3.2 billion, FRB did not think that credit was getting out of hand. Its margin boost was meant to be a finger-shaking warning that FRB was ready to step in if necessary. "If we thought it was dangerous," said an FRB official, "we would have raised the margin requirements to 75%, or even higher." Nevertheless, the boost was a symptom of a far more important switch in basic credit policy, aimed not merely at the stock market but at nipping any possible new inflation. FRB has taken the "active" out of its policy of "active ease," is tightening credit generally. FRB has let the interest rate on short-term Government bills run up, anct allowed free excess bank reserves to run down slightly. But FRB does not intend to try anything more drastic at the moment, lest it slow the nation's burgeoning economic recovery.

*G.M. instead announced plans for a new $325 million stock issue, largest in corporate history and equal to about one-fourth of all common-stock financing done by U.S. industry in 1954. G.M. shareholders will be given the right to buy the stock at less than the market price on the basis of one new share for every 20 held.

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