Fire Hazard

Before Charles Richard Gay was elected president of the New York Stock Exchange last spring, the senior partner in the conservative old Wall Street firm of Whitehouse & Co. had lived his 60 years obscurely in bourgeois Brooklyn. But the very fact that he was a personal unknown made him a likely candidate for the tough job of reselling the Stock Exchange to a suspicious public.

Though President Gay indulged in no spectacular upheavals upon assuming office, he did display an amazing talent for public relations. He went to Washington for a friendly chat with SEC officials. He closed, almost symbolically, the Exchange's ''Washington Embassy," a rented mansion from which his predecessor, Richard Whitney, conducted his futile fight against the Securities & Exchange Act. In his own bailiwick President Gay lifted the cloak of surly secrecy which had always surrounded even the most trivial Exchange affairs. He submitted graciously to innumerable interviews. He stumped the land hammering home his simple thesis: the New York Stock Exchange is a market place, nothing more.

Having in six months established a solid reputation as an able, honest, forthright administrator. Charles Richard Gay stepped out last week as a Public Figure. In a speech before a Manhattan meeting of the American Management Association he took a bold grasp of a nettled question which few politicians--let alone the head of the biggest and most volatile U. S. stock exchange--would dare to handle on a public rostrum. Said he:

''To put it bluntly, the Exchange is concerned with inflation. . . . The same enlightened self-interest which impels a corporation executive to prefer a steady and orderly process of trade to alternating periods of dizzy profits and crimson deficits dictates to the Exchange that its true welfare is to be found in the avoidance both of towering 'tops' and drastically depressed 'bottoms.'

"I am not predicting that stock prices will become inflated. I recognize however, that the stockmarket provides an inviting field. . . . Here we can have inflation in an insidiously pleasant form, under the guise of visible, day-by-day 'profits.' . . . Like a thin spot in a tire casing, the stock-market might conceivably become inflated the more, because of the inflexibility of other parts of the structure to which inflationary pressure is applied.

"The principal danger . . . lies entirely outside of the mechanism of the Stock Exchange. It is to be found in the banking situation, which is characterized by unprecedentedly low money rates and by the greatest surplus reserves ever recorded. . . . Given a sufficient degree of confidence, or perhaps of desperation, or even of reckless boredom over the prolonged idleness of money, a situation could develop which would threaten the gravest consequences through an upward flight of security prices."

At present, Mr. Gay found speculative credit conditions sound and no evidence of market inflation.

"And mind you," he warned warily, "I am not attempting to pass judgment on present market prices."*

Before taking stock of "our financial fire-fighting apparatus," Mr. Gay declared: "I am not an alarmist but we should not close our eyes to the inflammability of the materials we are dealing with and to the fact that inflation, if it should once get started, might sweep through the markets as fire sweeps through a city of wooden houses."

For fighting such a conflagration the New Deal has provided a full fire house of potent measures administered largely by the Federal Reserve Board. That body now has theoretically unlimited power to restrict lending on securities by member banks. It may double reserve requirements which would nearly wipe out the current reserve surplus of $2,800,000,000 --base for ten times that amount of credit. Present excess reserves could also be sterilized if the Federal Reserve banks sold all their Government bonds. And the Federal Reserve may boost stockmarket margin requirements to 100%--cash trading.

Few Roosevelt appointees will be scrutinized by U. S. businessmen so closely as the six governors and a chairman who must be named to the reconstituted Federal Reserve Board before next February. Theirs will be the thankless task of dousing the fire just when it begins to glow with easy money.

But even with SEC as a "policeman whose business it is to watch out for pyromaniacs," Mr. Gay did not have full faith in the new Federal fire department. "Will it. perhaps, break down in the hurly-burly of actual practice?" he asked. ''None of us can have forgotten that the Federal Reserve System ... the embodiment of the best banking thought and experience in the world, did not check the great inflation which culminated in 1929. . . ." And he broadly hinted that the weakest spot in the credit hose was the Treasury with its huge stabilization fund and its moral, if no longer direct, influence over Federal Reserve policy.

"What I wish to emphasize today is that when the stock exchanges have done all that they can; when the member banks of the Federal Reserve have done all that they can; when SEC has done all it can, there still remains this immense outside factor, an abnormal money market with a gigantic volume of excess reserves, the control of which is not in their hands. Only sound Federal Reserve Bank policy and sound Treasury policy can control that. . . . My earnest wish is that through intelligent use of equipment which we have and by keeping our sense of proportion, we may be spared another season of madness."

*The stockmarket promptly passed judgment on its president's speech by darting upward. Wall Street funsters called it the beginnings of the "Great Gay Market."'

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