"Hot Money"

On President Roosevelt's mind last week was the Roosevelt Bull Market, now running into its 19th month. To the White House he summoned the two men the New Deal has charged with responsibility for the stockmarket's behavior, Chairman Marriner Stoddard Eccles of the Federal Reserve Board, which controls margins and credit, and Chairman James McCauley Landis of the Securities & Exchange Commission, which has the police powers. On leaving the White House, Chairman Landis said nothing. Chairman Eccles reiterated the well-known fact that the long rise has been largely a cash affair--a pronouncement which in another Administration might have been taken as a bullish tip straight from the White House. But the official attitude toward the stock-market was characterized in Washington last week as sternly "vigilant."

Greatly heartened in this vigilance was SEC by the Roosevelt victory. It meant a clear path for the investment trust regulation which SEC will recommend to the next Congress. It was a full-speed signal for SEC's plan for segregating the function of broker and dealer, conferences with the reluctant New York Stock Exchange on that subject being scheduled for this week. And it was apparently considered a general order to SEC for brisker performance on its regular beat patrolling the U. S. securities business.

Down cracked SEC last week with a restraining order on eight individuals for alleged manipulation of Suburban Electric Securities Co. on the Boston Stock Exchange. Down cracked SEC on the big New York Stock Exchange house of W. E. Hutton & Co. and an Oakland (Calif.) partner of William Cavalier & Co. for alleged manipulation of Atlas Tack, a luckless stock whose gyration once attracted the attention of the New York Attorney General (TIME, Jan. 1, 1933). In that operation Atlas was strong-armed from a Depression low of $1 per share to a 1933 high of nearly $35, only to relapse the same year to $1.50. Last winter Atlas climbed rapidly from $9.50 per share to about $30, a rise which SEC says it ''has reason to believe and does believe" was not spontaneous.

Bitterly resenting the fact that the defense was not given a hearing before the charges were broadcast to the Press, James M. Hutton Sr., head of the 50-year-old Cincinnati firm, cracked back in a flat denial: "It [the stock] went up purely because of the ancient law of supply and demand that has been in effect much longer than the law under which the Securities Commission operates."

But it was not to discuss such station-house matters as Atlas Tack that President Roosevelt summoned Messrs. Landis & Eccles last week. As was later revealed at a White House press conference, President Roosevelt was deeply concerned over the amount of foreign capital now invested in the U. S., particularly the large sums of timorous money which have sought temporary refuge in Manhattan and might be repatriated at an embarrassing rate should confidence be restored abroad. Both SEC and the Federal Reserve Board, said the President, were studying how to control this "hot" money by legislation.

The President was at pains to avoid implying criticism of the present state of the stockmarket, confining his speculation to possible effects on monetary stability and foreign exchange. Nevertheless, the deadly parallel between 1914 and Europe's present state was inevitably drawn. At the start of the War foreign holdings of U. S. securities were between $2,000,000,000 and $3,000,000,000. As foreign markets swiftly closed, the New York Stock Exchange became the only possible place in the world where securities could be turned into cash on a large scale. At 9:30 A. M. on the last day of July the Governors bravely announced they would stay open, come what might. But the flood of foreign orders mounted so high in the next half hour that the Governors quickly changed their minds. The Exchange was not re-opened for four months, and then only on a restricted basis. Not until April 1915 was normal trading restored.

While the deflationary effects of sudden liquidation of the $7,000,000,000 worth of U. S. investments now owned abroad would be terrific, the inflationary effects of incoming capital is the Government's immediate problem. The money not only goes into the stockmarket in the form of cash but also goes as gold into the credit base, where it has ten times as much effect, a dollar of gold supporting at least $10 worth of credit. U. S. gold stocks are already at the incredible figure of $11,100,000,000, over one-half the world's monetary supply. To sterilize some of this potential credit the Federal Reserve Board upped bank reserve requirements last August, a move which reduced excess bank reserves from about $3,000,000,000 to $1,800,000,000. Since that date, however, nearly $450,000,000 worth of gold has been landed in the U. S., and excess reserves have mounted approximately the same amount. A continuation of gold imports at that rate for any length of time would boost excess reserves to such a figure that they would be beyond reach of the Reserve Board's present instruments of control.

Vague though the talk of "hot money" control was last week, brokers at home and abroad gave it the darkest interpretation. In London, where "hot money" is called "funk money" and any interference with international trading is deplored, a thoughtful broker declared: "It appears that Mr. Roosevelt once more is striving to achieve a reputable objective without regard to its effect on the world situation." In Wall Street a feeble attempt was made to brush the problem aside on the ground that part of what appeared to be foreign investment was in fact buying by U. S. citizens through foreign banking houses, whose margins are lower than those demanded in the U. S. But discussed with perfect seriousness was the possibility of a ban on importations of investment capital, something which no nation has ever seen fit to do in all history.

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