efore undertaking any criticism of Telser's paper, we would like to note that B there is one point of substantial agreement between Telser and us. That is, in private, unregulated financial markets, equilibrium margins-the ratio of collateral in the form of liquid assets to the financial liability that one may incur by entering into a futures contract or by taking out a substantial loan-will be positive and will vary directly with the perceived degree of risk involved. There might be exceptions, of course. For example, there are tens of billions of dollars worth of credit card loans outstanding that are not collateralized. But then these loans tend to be comparatively small, and their existence does not seem to pose much of a threat to Telser's main argument. His point is borne out in such a wide variety of circumstances that no reasonable person would argue otherwise.
In addition, Telser raises a number of points that we think deserve further exploration. For example, he argues that the precipitous stock price decline in late 1929 was not responsible for the Great Depression. In doing so, he goes farther than Friedman and Schwartz ever did, but the argument is an interesting one and merits serious consideration. Also, he argues that an increase in minimum margin requirements such as those imposed by the Federal Reserve Board on those who borrow against stock as collateral may serve to increase price volatility, which seems possible if it reduces market liquidity, although somewhat implausible.
Based on these propositions, Telser goes on to assert that he has made a strong case against federal regulation of margin requirements. We do not agree.
Our principal disagreement with Telser is that the existence of positive margins in a competitive, unregulated financial market provides no assurance that such margins are socially optimal. Indeed, the entire theory of financial market regulation is based on the major tenet that the amount of risk involved in contracts that are privately optimal may well be greater than is best for society. For example, because deposit insurance shelters bank shareholders from exposure to substantial losses in the event of bank failure, it is felt that without the constraints imposed by federal bank regulators, banks would choose to assemble portfolios that were too risky.