The Stock-Market Boom: Whodunit?

March 28, 1955

The present Senate investigation of the stock market reminds me of one of those whodunits in which it is discovered at the end that the crime was after all committed not by the suspects who were grilled but by the detective in charge of the investigation.

The recent extraordinary rise in the stock market is of course in large part due to the present earnings of corporations, and to confidence in the outlook for business. This confidence is in part the result of the less hostile attitude toward business taken by the present Administration as compared with its immediate predecessors. But a good deal of the stock-market rise of the last eighteen months has been due to the existence of money-and-credit inflation, as well as to the belief that this inflation will continue.

The government increased the money-and-credit supply in 1954 by about $10 billion through cheap money policies. The long-run overall figures speak for themselves. At the end of 1939, the country’s total money supply (as measured by total bank deposits and currency outside of banks) was $64.7 billion. At the end of 1953 it was $205.7 billion; at the end of 1954, $214.5 billion.

Spokesmen for the Eisenhower Administration have argued that there was no inflation in 1954 because wholesale commodity prices stood at an index number in January 1955 of only 110.2, compared with 110.9 in January 1954, while the cost of living in December 1954 stood at only 114.3 compared with 114.9 in December 1953. There are even those who contend, in the face of an increase of more than $24 billion in the money-and-credit supply between the end of 1951 and the end of last year, that there was a “deflation” in that three-year period, because wholesale commodity prices dropped from an average index of 114.8 in 1951 to 110.3 this February.

This illustrates the confusion we get into when we define inflation, not as an increase in the money-and-credit supply, but simply as the rise in commodity prices that is usually a consequence of such an increase. (But a consequence that may sometimes not take place.) The same confusion existed in 1929 and helped to increase the dimensions of that debacle. A standard index of security prices rose from an average of 100 in 1926 to 216 in September 1929. It was argued at the time that this certainly could not be the result of any inflation because the official index of wholesale prices had meanwhile fallen from an average of 100 in 1926 to 96 in September 1929. Yet monetary inflation was in fact going on. Deposits of Federal Reserve member banks rose from $29 billion at the beginning of 1926 to $32.5 billion at the beginning of 1929. By present standards, this overall credit increase may seem moderate. But the inflation was pouring into the stock market. In this respect it is only the developments of recent months that bear any realistic comparison with 1929. In 1929, brokers’ loans were more than $8 billion; today they are less than $2 billion. This illustrates not only the inexcusable discrimination but the absurdity involved in the suggestion of some witnesses before the Senate committee that margin requirements on stocks should be raised by the Federal Reserve Board from the present 60 percent to 100 percent.

It may be, as one witness in favor of the 100 percent margin requirement insisted, that there has been a 54 percent advance in stock prices in the last sixteen months, compared with a 78 percent rise in the sixteen months before the 1929 crash. But when we take longer and broader comparisons this one hardly seems ominous. In fact, whereas compared with 1929, Standard & Poor’s stock-market index shows an increase of 13 percent, the cost of living shows an increase of 56 percent, wholesale commodity prices an increase of 78 percent, and hourly manufacturing wages an increase of 225 percent.

Yet in spite of the fact that security prices have lagged far behind the general price rise, there are outcries from a Harvard “economist” and a former Federal Reserve official for still further discrimination against stocks, so that stocks would become the one thing that nobody was allowed to borrow on at all. Winthrop H. Smith, the managing partner of the country’s largest brokerage house, was one of the few who raised a pertinent question. If we are to eliminate borrowing on securities listed on the national exchanges, why not eliminate borrowing on homes, on all real estate, on motor cars, on furniture, television sets, air conditioners, or whatnot?

The comparison points up the demagogic discrimination to which the government has already resorted. It is now encouraging people to buy houses or almost any consumption goods or luxury on a shoestring margin. But some “economists” and senators want to prohibit people from borrowing at all if they prefer to save their money and invest it in industrial corporations—that is, in the plant and equipment that is necessary to raise the productivity of the country, to increase wages, and create jobs.

Such discrimination has reached a degree that would be comic if it were not disturbing. Installment credit now outstanding exceeds $22 billion. This is being encouraged. Mortgage debt on one-to-four family houses has nearly quadrupled in ten years to an estimated $75 billion. This, too, is being encouraged. But brokers’ loans against stocks are less than $2 billion. And this is so alarming that it calls for investigation and repression!

This so-called “qualitative” credit control is not only dangerous, because it permits the government to dictate just who shall have credit and who shall not, but it is also futile. Even if a man is prevented from borrowing on stocks, what is to prevent him from borrowing on his home or government bonds or his merely personal credit and using the proceeds to buy stock? We cannot flood the country with credit and throw a dike around the stock market.

And so we are back to our starting point. If the present stock-market boom is something that somebody should be blamed for, then the blame rests squarely on the Federal government itself. It is a result of its general policy of credit inflation. So the Senate investigators, if they really want to find the culprit, need not search for him somewhere in Wall Street. They need not go outside of Washington.