We also have a résumé that our economist has made up from these various documents, which I am having sent here, and will be placed before you and the committee, if that is your desire.

Mr. PETTENGILL. I will be very glad to have it.

Mr. WHITNEY. Shall I proceed, sir?

The CHAIRMAN. Yes, sir.

Mr. WHITNEY. I am now considering section 6 of the bill and subdivision (a).

The evident purpose of this provision seems to have been to discriminate between brokers and other lenders of money in the amount of credit which can be advanced upon unlisted securities, but it is capable of another interpretation which would have even more serious consequences. As I have pointed out, a person who transacts a business in securities through the medium of a member who transacts a business in securities through the medium of a member of an exchange is likewise included in the prohibition of this subsection. If banks buying and selling securities for their own account or as agent for their customers should be held to be persons transacting a business in securities, then this prohibition would make all unlisted securities worthless as collateral even in bank loans.

There is one other important point in regard to this section which requires clarification. The definition of the term "security", which is contained in section 3, subsection 10 (which appears on page 6 of the committee print), excludes from the definition any "direct obligation guaranteed as to principal or interest by the United States." For the purposes of the bill, therefore, Government bonds are not securities and will not have to be registered on an exchange and therefore, brokers may extend credit on Government bonds on such margins as they may elect. If this interpretation is sound, then section 6 does not prevent brokers extending credit against real property or any form of personal property other than a "security as defined by the act. This is obviously improper because it is well known that real estate and such personal property are not normally as liquid as securities and should not, therefore, be the basis of this type of credit. The New York Stock Exchange has long recognized this fact and in determining the financial condition of members, our committee on business conduct does not place any value upon real estate holdings, furniture and fixtures, equipment of offices or even upon stock exchange memberships. We have felt that it was necessary to exclude these items, which, although of undoubted value, are not capable of being turned quickly into cash, if we were to be sure that the capital of our member firms was adequate to protect the accounts which they were carrying for their customers.

Subdivision (b) of section 6 makes it unlawful for any member of an exchange or person who transacts a business in securities through a member of an exchange to extend or maintain credit to any customer on securities registered on a national exchange in an amount which at any time exceeds (1) 80 percent of the lowest price at which such securities have sold during the preceding 3 years or (2) 40 percent of the current market price, whichever is the higher. This subsection further provides that the Federal Trade Commission may fix lower loan values during any stated period of time or in respect of any specified class of securities.

The minimum margins established by this subdivision have naturally been one of the features of the bill which has evoked the greatest amount of public discussion. Few people, however, seem to understand how this provision will operate. As I see it, the amount of margin which will become the minimum depends upon the course of prices more than upon the percentages set forth in the bill. For instance, a security selling at $100, and which has not sold for less than $100 during the preceding 3 years, can be carried in a margin account at 80 percent of its current market price, because its current market price and the lowest price reached within 3 years happen to be identical. If a broker advances 80 percent of the current market price of such a security, he will have only 25 percent margin against the actual debit balance. He will be advancing $80 against every $100 of value and the leeway or margin between the amount which is owed him and the current value of the collateral will be $20 or 25 percent of the sum which is owed him. Many people have become confused in discussing this question of margins and it is sometimes said that a margin should represent a certain percentage of the value of the collateral for the loan. This method of computing margins. completely disregards the essential nature of a margin.

When a person borrows money and pledges securities as collateral he normally computes the amount of the margin as a percentage of the amount owed. For example, if I borrow $10,000 and give as collateral $15,000 of Government bonds, I feel, and so does the lender, that he has a margin of safety equal to 50 percent of the amount owed him. In brokerage accounts the amount owed is commonly called the "debit balance" and, therefore, in determining the amount of a customer's margin, this figure is used as the basic one just as a bank, in determining the margin for a loan, uses the face amount of the loan as its basic figure. In either case, a percentage of margin must mean a percentage of the amount owed.

This subdivision might in certain circumstances permit securities to be carried on a 25 percent margin which is less than the New York Stock Exchange now requires its members to demand and maintain. If, however, we imagine a different set of circumstances, the provisions of the bill will have not an over liberal but an almost prohibitive result. For example, if a security like General Motors, which has within 3 years sold at approximately $4 a share and is today selling for approximately $40 per share, should be presented to a broker as margin after the effective date of the proposed act, the broker could only lend $16 per share upon this stock because the 80 percent provision would be rendered nugatory by the low price which General Motors reached at the worst period of the depression. In this case, the broker would have 150 percent margin, i.e., he would advance $16 against a stock selling at $40 and the difference between these two or $24 would represent one and one-half times the amount owed him by his customer. It is obvious that margins of 150 percent are not necessary for the purpose of insuring the safety of a customer's account and that should be the sole purpose of a margin provision. Such a margin requirement would have the immediate effect of eliminating a great part of the speculative activity on which the stability. and useful function of the market depends, to the great detriment, of course, of all investors and stockholders.

The effect on margins of this subdivision will depend upon the course of prices. In periods of stability or of declining prices it will permit overliberal margins and in periods of rising prices it will fix prohibitively high margins. As a practical matter, and because most securities reached very low prices within the last 3 years, the immediate effect of this subsection would be to increase enormously the margins which brokers would have to demand from their customers. At the present time the total debit balances carried by members of the New York Stock Exchange for customers is approximately $1,390,000,000. It is certain that a large part of this total has been advanced against securities which sold at very low prices within the last 3 years, and, therefore, the margins which existing customers will be called upon to put up if their accounts are to meet the requirements of the bill will, of necessity, be very substantial. I am sure that many customers will find it difficult if not impossible to provide the required amount of margin and will therefore be compelled to liquidate a large part of their holdings at a time when no market capable of absorbing such liquidation may exist.

The real difficulty with these proposed margin requirements is that they attempt to set up a rigid formula for a subject which, by its very terms, requires a very flexible rule.

The CHAIRMAN. Mr. Whitney

Mr. WHITNEY. Yes, sir.

The CHAIRMAN. Are you now referring to stock already outstanding, or loans?

Mr. WHITNEY. I am coming to the question of the loans, where the security has been bought for a period of 30 days or more. The CHAIRMAN. That is pledged now?

Mr. WHITNEY. Yes, sir.

The CHAIRMAN. I think it is common knowledge that we are not going to do that, not close out a contract that already exists, like bankers, or where a customer has up stock as collateral with the banks at the present time.

Mr. WHITNEY. Yes, sir.

The CHAIRMAN. I do not think we are going to go back of that, if that is what you are talking about.

Mr. WHITNEY. It is a very common experience, insofar as brokers are concerned, sir, the very common practice is that loans are made and may continue for days, weeks, months, or longer, but substitutions are made in those loans, from a broker's point of view, because his customers are buying and selling those various securities. They might go out of his office and new ones come in, and as we interpret the rule, the provision as to such loans, if any substitution was made would bring such loans under this requirement from the point of view of the banker.

The CHAIRMAN. If it is a new matter, of course, it will, if the bill is passed. I am talking about outstanding loans, and I thought that was the very point you were on, about calling these people at a time when they could not pay.

Mr. WHITNEY. That is with regard to brokers; yes, sir; but the broker acts as the agent for borrowing money to carry those loans, for the purchaser of the security in a margin account, and if there is any shift there, then, as we see it, those loans come under the provision of the bill and have no reference to the 30-day clause.

The CHAIRMAN. Do you think there ought to be a margin requirement?

Mr. WHITNEY. Do we?

The CHAIRMAN. Yes.

Mr. WHITNEY. Yes, sir; and we have them.

The CHAIRMAN. How long have you had it?

Mr. WHITNEY. Why, ever since I can remember as a governor of the exchange. Certainly since 1932, when the questionnaire was originated.

The CHAIRMAN. Not before that?

Mr. WHITNEY. I do not think from the point of view of the exchange there was any definite understanding as to the margin requirement. That was 1922. I beg your pardon, when the questionnaire was originated.

The CHAIRMAN. You think that there ought to be a flexibility, then?

Mr. WHITNEY. I do, sir. I think it is absolutely necessary to be flexible.

The CHAIRMAN. You do not think that there should be any standard set?

Mr. WHITNEY. If a basic standard is possible of setting, naturally there could be no objection. I think there is grave question whether a basic standard can be set. I am touching upon that in my state

ment.

The CHAIRMAN. Well, let me ask you right here, what your margin requirement now is. Somebody said that it was 23 percent. Mr. WHITNEY. It is 30 percent of the debit balance.

The CHAIRMAN. How much was it in 1922?

Mr. WHITNEY. In 1922 I think it was 20 percent, raised to 25 percent, and at times during the 1929 period, I believe it was placed at 30. That was from the point of view of the exchange. Many, many brokers demanded additional margins and the underlying rule of the exchange is that every account must be capable of handling itself; of banking itself.

Now, in that regard there have been certain stocks, over certain periods, high priced, when the banks would take arbitrarily 100 points off of the stock, selling for 300, and they would only loan on it at 200 a share, and take 25 percent off of that as a margin, in addition. That was demanded by the exchange to be passed on to customers, so that each and every account would stand on its own feet in being banked.

Mr. LEA. Mr. Chairman

The CHAIRMAN. Mr. Lea.

Mr. LEA. As I understand it, the exchange has a minimum margin requirement; is that right?

Mr. WHITNEY. It has a minimum margin requirement, sir, with regard to debit balances, what is loaned; yes.

Mr. LEA. Is it a fixed standard?

Mr. WHITNEY. It is a fixed standard, and besides, what I have just stated to the chairman, that each and every account must stand on its own feet is so far as the securities in the account will carry the account, if banked.

Mr. LEA. Well, this bill fixes a standard of minimum margins, as I understand it, but the margin is computed under a different method than that followed by the exchange. Is that not a fact?

Mr. WHITNEY. That is true. It is computed on the current market price, thereby at the present time giving a margin requirement as computed on the debit balance of 150 percent.

Mr. LEA. So it has the effect in the main of permitting a lower margin than the bill would permit.

Mr. WHITNEY. I do not understand.

Mr. LEA. I say, the margin permitted by the New York Stock Exchange in the main is smaller than the margin required by this bill. Mr. WHITNEY, Yes, sir.

Mr. LEA. Do you know what the practice is of the other exchanges in the country as to their margin requirements?

Mr. WHITNEY. I cannot speak of that. I do not know.

Mr. LEA. Well, the main difference is a question as to what margin should be required, is it not, between the New York Stock Exchange and this bill?

Mr. WHITNEY. Yes, sir.

Mr. LEA. And you believe that the minimum margin required here is too large; is that the main objection?

Mr. WHITNEY. If I can explain, this margin is so large that, to my way of thinking, it will eliminate the carrying of accounts, presumably on a margin. It will do away with the speculative feature in the carrying of stocks, entirely, because 150 percent margin on the debit balance will, as I see it, take away the ability of those who may wish to buy stocks on margin, to the extent that they are practically paying for them in full.

Mr. LEA. What is the object of imposing a minimum margin, by the New York Stock Exchange?

Mr. WHITNEY. A minimum?

Mr. LEA. Yes. What is the purpose, what is the justification for it? Why are you requiring a margin, in other words?

Mr. WHITNEY. Safety in the account from the point of view of the investor and the point of view of the house; and therefore in its relation to it from the point of view of the individual customer; from the point of view of the house in its relationship to all other customers because if such operations are carried on with the money borrowed from banks for the consummation of such trades. The banks in New York demand the same margin, 30 percent, on the amount owed.

Mr. LEA. Where do you not think that margin control should be exercised also from the standpoint of its effect upon fluctuation in the market, and business stability in the country, and the general public interest, marketing and business?

Mr. WHITNEY. It should be in the credit situation.

Mr. LEA. Yes.

Mr. WHITNEY. Yes, sir; I do; and I think that should be vested in the control of a board that has the credit structure system of the country in its control.

Mr. LEA. I presume that one reason for the control of margins proposed by this bill is to discourage stock investments that are unduly speculative, the feeling that too liberal granting of credit promotes gambling on the stock market and contributes to the unwholesome fluctuation of stock-market prices.

What is your viewpoint about that?

Mr. WHITNEY. Under the Glass-Steagall Act, the power to control the use of credit in speculative pursuits is granted, as I understand,