A Weekly Dose of Hazlitt: The stock-Market Boom: Whodunit?

The stock-Market Boom: Whodunit?” is the title of Henry Hazlitt’s Newsweek column from March 28, 1955. We see that inflation fueled stock market booms are not a recent phenomena.

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 cheapmoney
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-andcredit
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

This illustrates the confusion we get into when we
define inflation, not as an increase in the money-andcredit
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.

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