Mr. MARLAND. And the result of the passage of this bill will be to make it necessary for the banks to call those loans.

Mr. THOMAS. If the bill passes as it is now worded; yes.

Mr. MARLAND. Yes. That is all.

The CHAIRMAN. I would like to have your opinion with reference to that very question. That is something that the committee has got to determine later. Do you think that on loans outstanding, the same rule should be applied as to new ones?

Mr. MARLAND. As to new loans?

Mr. THOMAS. As to new ones?

The CHAIRMAN. Yes.

Mr. THOMAS. My personal opinion would be-and I am speaking entirely personally-that there should be an exception.

The CHAIRMAN. Yes.

Mr. KENNEY. Mr. Chairman.

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. What section lays down the rule to which you refer? Mr. THOMAS. You want me to read it into the record?

Mr. KENNEY. No, just refer to the section. What is the number of the section?

Mr. THOMAS. Section 6 (c).

Mr. KENNEY. That is all.

Mr. THOMAS. That is with regard to banks; section 6 (b) in regard to brokers and dealers.

Mr. PETTENGILL. Mr. Chairman, I would like to ask the witness what his general view is as to the advisability of Congress telling lenders of money how much security they should have.

Mr. THOMAS. Well, I think it might be possible in case it is put as a minimum or a maximum. Congress has, in the case of the Federal Reserve System for example, established certain reserve requirements for banks which are very definite and fixed, whereas the English banking system has no such requirement. English banks use their own judgment.

Mr. PETTENGILL. Is not the lender of the money the best judge as to how much collateral he should have from the customer?

Mr. THOMAS. He might sometimes be, yes; but they have been known to be very bad judges.

Mr. PETTENGILL. Well, what is the evil that is sought to be corrected by requiring, putting in a requirement as to the lender of money, requiring that he have a certain amount of collateral, so far as these securities are concerned?

Mr. THOMAS. In my opinion, that involves a question of what you might call credit theory. I think there is a serious question as to whether investment, or stock market speculation, or any form of gambling, should be permitted on the basis of bank credit.

It is perfectly permissible for one to invest his own funds, or gamble with his own funds, but if he is going out and borrowing for the purpose of investment, it is a dangerous thing to do it on the basis of credit. Investments are long-term commitments and depend upon judgment or rather, in the final analysis, depend upon what happens to the general business situation of the country over a very long period of time. The use of credit for investment is dangerous, because the very act of borrowing stimulates business, it increases purchas

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ing power and gives an impression that business is going very well, thus encouraging such investment and speculation as long as credit expansion continues. When, however, it becomes necessary to pay back those loans, or to take the profits which may have been obtained because of rises in prices, money is withdrawn from business and there is a business recession, a decrease in profits, and a general liquidation of values with results that are too familiar.

Mr. BULWINKLE. Mr. Thomas, you have read this bill, studied it? Mr. THOMAS. I have read it.

Mr. BULWINKLE. Do you approve the bill in its entirety?

Mr. THOMAS. I should prefer to limit my testimony to a statement of the provisions dealing with the operation of the credit mechanism. I do not feel qualified to pass upon the manipulative aspects of the bill, or upon the listing and report requirements. My experience has not been in those fields.

Mr. BULWINKLE. Then, what you would say, from your experience, and what you have stated, do you think any amendments should be proposed to that section?

Mr. THOMAS. I should not be prepared to propose any amendments. Mr. BULWINKLE. All right.

Mr. THOMAS. I would rather have that taken up with the sponsors of the bill.

Mr. COLE. Mr. Chairman.

The CHAIRMAN. Mr. Cole.

Mr. COLE. You are familiar with the rules and regulations of the New York Stock Exchange, are you not?

Mr. THOMAS. I have been at times; yes. I have not kept up, very accurately, with the great mass of rules and regulations being issued every day now, except in a very general and superficial way.

Mr. COLE. Do you have any definite criticism of those rules and regulations?

Mr. THOMAS. No, sir; they mostly concern the manipulations of the market, with which I do not consider myself qualified to deal. Mr. MAPES. Mr. Chairman.

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. I should like to ask this one question: Can you tell what percentage of the stock bought on the stock exchanges of this country, or of the New York Stock Exchange, is bought and paid for outright, and what is bought on credit, and how that percentage compares with stocks sold on the London and Paris stock exchanges? Mr. THOMAS. No, sir. There is no information available on that question.

Mr. MAPES. You have no information on that?

Mr. THOMAS. I do not, sir. I don't believe that such percentage can be computed for New York, although we have a lot of statistics about the New York market. We have very little information regarding operations in London and Paris. The markets are quite different in the way in which they are operated.

Mr. MAPES. Are you able to make an estimate of how much of the stock is bought outright, that is of the total that is sold on the New York Stock Exchange?

Mr. THOMAS. I can say this, that the total volume of credit extended to stock brokers and for stock market purchases in this

country has been much greater, both in absolute amounts and relative to the total volume bank credit, than in any other country.

The London clearing banks, I think, make loans to stock exchanges which are maintained at between 20 and 50 million pounds sterlingrelatively small amounts compared with total loans of these banks. When a London broker wants to borrow from his bank, he puts on his top hat, as one of them explained to me, makes a formal call and arranges a line of credit, just as any other business man would, and that line is not likely to be exceeded without another formal call. When a New York broker wants to borrow, he goes to the money desk in the stock exchange and says, "at what rate is money offered. today? I will take" a certain amount. And the only limitation is the amount and quality of his collateral.

Mr. MAPES. Are you able, from your work and studies, to make any reasonable estimate of the percentage of stocks that are sold on. the New York Stock Exchange, that are bought outright and paid. for?

Mr. THOMAS. No; I never have. I do not know whether I could or not.

Mr. MAPES. If you cannot do that, how are the rest of us going to do it?

Mr. THOMAS. I do not know that it is terribly important. We know how much is carried on the basis of credit, and we know the amount expands very rapidly. We know that brokers' loans, for example, expanded by $3,000,000,000, to a total of $8,500,000,000, in a few months, and then contracted by a corresponding amount in 2 weeks.

Mr. MAPES. I do not know much about it, but it seems to me that the evil is confined pretty largely to the speculative feature that is carried on by the credit end of the business, and it would be interesting to know how much of it is done on credit, and how much for cash.

Mr. THOMAS. But it would be more interesting, would it not, to know how much is held outright by investors and how much is carried on credit? That, we could find out, how much is carried on credit, if we had the figures of the total customers' debit balances with brokers. Those figures we do not have.

Mr. MAPES. Perhaps I do not make myself clear, but I am curious to know what percentage of stock sold is actually delivered to the purchasers.

Mr. THOMAS. Yes. I should say, a relatively small percentage on day-to-day contracts.

Mr. MAPES. Could you make any estimate?

Mr. THOMAS. No.

Mr. LEA. Mr. Chairman.

The CHAIRMAN. Mr. Lea.

Mr. LEA. As to the justification for the Federal Government assuming control of credit on the New York stock market, would it be your judgment that the undue credit permitted there in recent years has been a menace to the security and stability of business in the United States?

Mr. THOMAS. Yes.

Mr. LEA. Do you think there is any doubt about that?

Mr. THOMAS. Not in my mind. That is my personal opinion.

I might say, on the other hand, that a certain amount of credit to the stock market is fully justified. Certainly, from the standpoint of the growth of this country, we have needed the stock market. We have needed to be able to obtain capital very easily and the ability to obtain capital has been an important factor in the growth of the country. The ability to have and to maintain an efficient stock market is very important in furnishing an adequate capital supply. Mr. LEA. Does not regulation itself imply that it is desirable to protect the beneficial features of credit and, on the other hand, exclude the unwholesome features?

Mr. THOMAS. I should think so, yes, sir; depending upon the nature of the regulation.

Mr. LEA. And is it not also true that speculation on the stock markets in the late years has gone to such an extent that it has been demoralizing to the morals of the people of the United States in the sense that gambline is?

Mr. THOMAS. Yes.

Mr. LEA. That is, the market offers conservative investment, and speculation, and then is it not shown by the records of the last few years, to a large extent, that speculation really was gambling?

Mr. THOMAS. I do not know how much. I would like to limit my testimony to economic matters rather than morals. From an economic standpoint, gambling is not bad, unless it is done on credit and unless there has been a rapid expansion and contraction of that credit. If we do not have a stable amount of credit, it has a bad economic effect.

Mr. LEA. Well, a large amount of credit was advanced to the purchasers, or the purchasers assumed the credit.

Mr. THOMAS. Yes.

Mr. LEA. Where there was no real value in support of it?

Mr. THOMAS. You may be right, yes.

The CHAIRMAN. We will have to adjourn now until 10 o'clock tomoarrow morning.

(Thereupon, at 11:45 a.m., the committee adjourned until 10 a.m., of the following morning, Friday, Feb. 16, 1934.)

NATIONAL SECURITIES EXCHANGES-H.R. 7852

FRIDAY, FEBRUARY 16, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

The first witness this morning is Mr. E. A. Goldenweiser,

You may qualify, Mr. Goldenweiser, by telling us your full name, and your present position.

STATEMENT OF E. A. GOLDENWEISER, DIRECTOR RESEARCH AND STATISTICS, FEDERAL RESERVE BOARD, WASHINGTON, D.C.

Mr. GOLDENWEISER. My name is E. A. Goldenweiser. director of research and statistics, Federal Reserve Board, Washington, D.C.

I have been connected with the Federal Reserve Board for 15 years and in my present position for about 8 years. Shall I proceed, Mr. Chairman?

The CHAIRMAN. You may proceed.

Mr. GOLDENWEISER. I am not particularly familiar with the technique of the stock exchanges, and you will have many witnesses before you who can testify along the lines of the special machinery, on the technical provisions of the bill, particularly with regard to that machinery.

One other thing that I want to say, before I proceed, is that while I am connected with the Federal Reserve Board, I appear here entirely as an individual and whatever opinions I may express are my own opinions and not the opinions of the Board, and do not represent their views.

My interest in this legislation is twofold: In the first place, I am interested in the social objective of reducing the swings of business from depression to booms, and from booms to depressions, which are disastrous to the economic and social mechanism. This does not require elaboration, in view of the present situation with which everyone is familiar. Anything and everything that can be done toward improving the stability of business and reducing these disastrous swings is progress and is in the interest of the people as a whole. My other interest is the relation of the stock market to sound banking. The particular phase of the problem that is before this committee and on which I want to speak for a very few minutes is the effect on the business situation and on the rises and falls in business that are