Evening star. [volume] (Washington, D.C.) 1854-1972, 1919-10-18
News and Comment Relating to the Financial World

WHNnII IOUOuvu
MILLIONS OF CASH.
Credit of Federal Reserve
System Strained-Specu-
Iators Fear Income Taxes.
From the N. Y. Evening Post Financial Bureau.
NEW YORK, October 1S.-Probably
no one in Wall street will deny that
the money market had some influ-
ence this week. on the action of
speculative stocks. How far that sim
it is not so easy to say.
One perfectly familiar phenomenon
in a prolonged and overdone stock
indifference of the spectators to an
advance in money rates. In every
market of the sort the speculator is
reckoning in his own mind on profits
of 10, 20 or SO per cent. If these are
insured, he is very likely to scott at
the idea of the whole movement being
upset because people carrying stocks
on q margin have to pay Is per cent
Ter annum on the money borrowed
for the purpose, instead of 5 or per
cent.
He is holding. let US say, 800, 900
worth of stocks. Fifteen per cent in
terest for year would cost him
$4,000, a sum which could be re-
couped only by eventually realizing
a profit of something like Is per cent
on his stocks. But this is Offset by
the further consideration, which ap-
the money rate will not remain SO
high during SO long period; that he
will not have to hold his stocks for
twelve months; that his Is or SO per
cent profit on the price of the shares
may be obtained in a single week. All
this being SO. why worry at tight
money?
Recognize the Argument.
Every one at all acquainted with
the stock markets past history will
recognize this argument, and will re-
member that it usually became most
confident when the Wall street specu-
lation itself was in it's last stages.
The inference drawn by experienced
people from such episodes is that the
sigI 'ficance of the rise in money rates
did 1t lie at all in the curtailing of
the net profits of the speculator, but
in its plain reflection of financial
symptoms.
Persistence Of abnormally high money
on -~Wall street. especially when
the movement extended into loans
with fixed maturity. meant that the
New York banks were approaching
the limit of their accommodation to
the spectators.
sions when even this patent fact was
treated with Indifference
In the prolonged speculation of the
rise in 1905 and 1906. for instance, the
leaders Of the movement relied first
on the contribution by interior banks
of their resources to help out the
volume of Wall street loans. If this
recourse came to an end the New
York market could borrow from Eu-
rope and Europe had its own central
banks on which to draw The result
in the period referred to was that
at a point these very European GEN.
trail banks openly took measures to
stop the use of credit facilities for
Reserve Loans Expanding.
Nowadays Wall street does not help
itself out through borrowing from
Europe. We now have our own CEN
trail bank and on this institution di-
rect1y or indirectly the stock ex-
change leans for the safeguarding of
it's speculative position.
This past week, however, there have
come into sight the quite unmistak-
able signs that even the federal re-
serve was being drawn upon too
heavily.
Its reserve ratio falls to much the
lowest percentage on record. II 1t is
to follow the rule and precedent of
prudent central banking 1t would ap-
the nae fedepa1 a. reserve .sSs today. like the
Bank of England and the Bank of
Germany in the past decade. will be
forced to take active measures
against the absorption or retention
imitation of stock exchange prices.
The possible fact that the reserve
banks liabilities have been expanded
more by legitimate commercial Dor
rowers than by speculative demands
y not at all to the purpose. That
would simply mean that the il1egiti-
mate demands on general credit must
be crowded out for the benefit of the
legitimate.
Dread the Income Tax.
Speculative Wall street has, how
ever still another counter argument.
If large holders of these industrial
shares were to sell out at the present
abnormal prices their profits would
be subject to the present heavy in
come tax. plus whatever supertax
might be involved. Therefore they
will not sell. The argument has I'M
doubted force as a partial explana-
ton of the persistent maintenance of
the speculation.
But granting all it's differences,
what is presumably hereafter to be
the course of action adopted by such
holders? Will they hold the stock
indefinitely?
That supposition Wall street knows
to be absurd. If they mean to sell at
some not very distant date. what hour
of settlement would be selected?
Herein lies wide ground for conjec-
fture. IT.. every such holder were
merely to await the end of the pres
emit year with the purpose Of exclud-
ing his speculative profits from his
1913 income tax return, then some
what peculiar situation would exist at
the opening of 1920. The two quite
obvious alternative suppositions are
that he would continue his specula-
ton in the hopes of still higher prices
or that he would tighten his load sub
stantially. before he was likely to find
too much company in the process.
after December 81.
IT Ac nTpD ATnAD DApTNEp