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ber of insolvencies but the record of the members of the exchange in this regard is certainly an outstanding one and if the committee is interested in these statistics I will submit for the record a tabulation showing in comparative form the number of insolvencies of members of the exchange and of national banks and State banks.

The third subdivision of section 7 prohibits a member of a national exchange or a person engaged in the securities business through such a member from using his capital, if he be acting as a broker, to carry or finance securities for himself or for any partner or employee. It is not quite clear whether this prohibition is intended to prevent a broker from investing his own capital in securities or from contributing capital to his firm in the form of securities. If this subdivision should be given any such broad interpretation, it would operate most unfairly and would, in effect, require a broker to use in his business only cash capital.

In any event, violations of these provisions should not be made criminal offenses, because as soon as such a penalty is attached any person lending money to a broker might find himself involved in a criminal act.

Subdivisions (d) and (e) of section 7, which deal with the hypothecation of customers' securities, are the same as the existing law of the State of New York and the rules of the New York Stock Exchange. Subdivision (f), which deals with the lending of a customer's securities without consent, makes effective another ruling of the New York Stock Exchange.

Mr. BULWINKLE. Mr. Chairman

The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. I wonder if you could furnish the members of the committee with copies of the rules of the New York Stock Exchange? Mr. WHITNEY. Gladly, sir, all of them; yes. I will be pleased to do so.

Mr. PETTENGILL. Mr. Chairman

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. I understood that you have no objection to paragraphs (d) and (e).

Mr. WHITNEY. No, sir; none at all.

Mr. MAPES. Mr. Chairman, as long as the witness has been interrupted, I should like to ask a question for information.

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. You spoke about restrictions on brokers and the provisions in the bill requiring brokers to make all of their loans from Federal Reserve banks. Would that prevent brokers loaning to one another? And is that a very extensive practice?

Mr. WHITNEY. At times; yes, fairly extensive. I would say it varies. It is very extensive at times.

Mr. MAPES. Is it customary for a broker to put up collateral when borrowing from another broker?

Mr. WHITNEY. Yes, sir; those loans are made at what is called the money desk on the exchange, where demand borrowers go in and where offerings are furnished, both from brokers, members, and also from clearing house banks and others, and at such times as the two may meet, and the broker's money may be loaned out, or the bank's money, as the supply and demand applies.

At times, it is fairly extensive.

Mr. MAPES. I missed a part of your statement, after the recess of the committee. If you have touched upon this, I do not care to have you go over it again, but I was curious in regard to the margin requirement of the stock exchange. How do you adjust the margin from day to day or week to week, after a loan is once made and the 30-percent margin, which the stock exchange requires, is met on the making of the loan, if the stock goes up or down, what or how do you adjust the margin?

Mr. WHITNEY. If the stock goes up, unless the customer calls for a part of his margin, then the situation remains as it is, unless what we call real excess margin becomes the situation in the account, and then that must be placed in segregation in another box of the broker, and labeled in the name of the customer.

If the margin, the price, declines and the margin is under 30 percent, then a call must be sent by the broker for additional margins, and give a reasonable time for the customer to present additional margins. After that reasonable time, the account must be sold out.

In other words, that is the maintenance of the margin.

I would like to ask

Mr. MAPES. I want to ask you--
Mr. WHITNEY. I beg your pardon.

Mr. MAPES. If you are not through, I do want to interrupt.
Mr. WHITNEY. I can add it later.

Mr. MAPES. You spoke this morning about customers being allowed a reasonable time to meet the demands of the brokers for further margins, and you have just spoken about a reasonable time in this connection. In looking over the rules of the exchange, if I read this one rule correctly, it seemed to me that the "reasonable time" is very limited as I understand the rule, that if a broker calls for additional margin at 2 o'clock, or before 2 o'clock, in the afternoon, that the customer has to come across with it, before 2:30. Is that correct? Mr. WHITNEY. No, sir; no, that is not correct, not that I have ever known of. A reasonable time naturally has got to have leeway, depending upon where the customer is and the many circumstances surrounding each and every particular case.

Mr. MAPES. Perhaps you know what I am referring to. There is some such regulation as that in the bylaws or the constitution of the stock exchange, is there not?

Mr. WHITNEY. That is not, sir; between customers and brokers. That is between brokers.

Mr. MAPES. That is between brokers.

Mr. WHITNEY. Yes, sir.

Mr. MAPES. If one broker calls upon another before 2 o'clock in the afternoon for additional funds, the other broker must produce those funds before the close of the stock exchange at 3 o'clock?

Mr. WHITNEY. With relation, sir, to existing contracts between those brokers. The same thing applies to banks, on the part of banks, who have loans to brokers. The custom is to give notice, as I understand, before 11 o'clock in the morning, and unless that additional collateral is put up on the bank loan, the bank will sell it out before the day is through.

The other point that is more specifically, perhaps, referred to a little while ago by Congressman Lea was with regard to our minimum requirements. I am sorry I have not got the rules right here.

Our minimum requirement is 30 percent. That is on active stock, sir. We demand, as I told you, that each and every account must stand on its own footing. Our rule goes also into the fact that inactive securities and unlisted securities may have no regular market. On those, further and additional margins must be required. And certain classes of stocks are not allowed as margins, because they will not stand on their own footings in bank loans.

Then, last July, at the exchange's request, the banks in New York got together and on volatile stocks, those that had big ups and downs, set a definite loan value. Prior to that time most of them had that, but not with any cohesion between them. In July they got together and agreed then, and have ever since, on what were the volatile stocks and the setting of uniform loan value at which at stock could be put into a loan and the 30-percent margin taken off from that.

Each and every broker upon inquiry either at the business conduct committee or from any of the banks, can find out what those prices are, and he will find it out if he tries to put in loans at higher prices anywhere, and he is forced by the exchange to carry on that loan value price to his customers, and again operating under the rule that the customer's account must be capable of banking itself. Am I at all clear, sir?

Mr. LEA. The volatile character of the stock is established by a rule, is it?

Mr. WHITNEY. No, sir; that is established by the representatives of the banks in consultation with the representatives of the business conduct committee, and it is established, I would say, by the previous action of the particular stocks that are in that category.

Mr. LEA. So you require higher margins in those cases than on the ordinary stocks?

Mr. WHITNEY. Yes, sir. In other words, I am trying to carry out what I said to you about the flexibility and necessity of the margin section.

Mr. PETTENGILL. Mr. Chairman

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. On that point, it is not quite plain to me whether your objection goes to the amount of the margin or the fact that it is rigid and arbitrary. Your present 30 percent requirement is a rigid and arbitrary rule, is it not?

Mr. WHITNEY. As a minimum.

Mr. PETTENGILL. As a minimum.

Mr. WHITNEY. As a minimum on accounts having collateral of usual activity and stability; yes.

Mr. PETTENGILL. So, as between that or 40, or 50, or 60 percent, on the question of rigidity, there is no difference in principle, is there? Mr. WHITNEY. No; but if I may be so bold as to say so, it is 30 percent, as against 150 percent.

Mr. PETTENGILL. I appreciate that. I say in the principle involved. I wish to ask you whether your real objection is to the amount of the margin in this bill, or the rigid feature of this provision?

Mr. WHITNEY. Both.

Mr. PETTENGILL. But you do not object, in fact, you see the necessity of having the rigid arbitrary minimum?

Mr. WHITNEY. Yes.

Mr. PETTENGILL. Which you fix?

Mr. WHITNEY. That is correct.

Mr. PETTENGILL. Which might be 25 or 35.

Mr. WHITNEY. Yes, sir.

Mr. PETTENGILL. Now, what is the advantage, from your standpoint, of having a rigid and arbitrary minimum?

Mr. WHITNEY. As I have tried to explain, because of the safety to the customer, the house, and from the point of view of the borrowing at the bank.

Now, I agree that a rigid minimum is necessary as long as it is proper and reasonable, and above that, to operate so that there might be safety in such loans from all points of view; but my claim is that when you get above what is a reasonable and I claim that 150 percent is not reasonable as a minimum, or 100 percent-you are then getting into the realm of wiping out, exterminating, speculation in the market, which I claim gives stability to a market for the interest of the market, that is, those interested in it.

Mr. PETTENGILL. I might thoroughly agree with you there, but it did seem to me a little inconsistent, for you to argue about the flexibility of margins, and at the same time have an inflexible minimum yourself.

Mr. WHITNEY. Inflexible minimum; yes, sir; which we consider is reasonable and based primarily on what is demanded by banks in loans.

In other words, as I think I said earlier, if under the law, under the Glass-Steagall Act, if those in control of the credit system of the country saw fit to lessen the credit extended for speculation, or if they believed that excessive speculation was developing, as I see it, it is then within their power to control that through their control of the credit facilities to lending banks, and that would immediately have its effect upon the brokers, and therefore upon the public that had the speculative craze, and it is that line of reasoning and that necessity of control, I think, is the proper one, and not through the instrumentalities of this bill.

Mr. HUDDLESTON. Mr. Chairman

The CHAIRMAN. Mr. HUDDLESTON.

Mr. HUDDLESTON. May I ask you to explain how specualtive activities contribute to stability?

Mr. WHITNEY. Yes, sir; I will attempt to answer that.

If speculative activities are eliminated from the market, you then have only investors buying and selling. If we are going to wait in markets for investors to buy and sell, it might cause, if all that we know is correct, that when there is the feeling on the part of the public, or the investors affected, that times are better, that recovery is coming, that prosperity is with us, all of them want to buy, and, vice versa, when depression is with us they all want to sell.

The very term and definition of the word "investor" includes those people who are looking for safety in their investment. They are looking to returns and general stability of their capital. They are not from their very essence, willing to take risks, if we go by the definition.

The speculator is the one that takes the risks. The same reason, as I see it, holds good in other commodity markets, whether the miller, the growers of a commodity, first, the user or the grower, wanted to

hedge, it is to the speculator that he sells or buys, and I believe that you cannot have markets without speculation.

There is one particular instance that I think makes my point: In September, September 21, 1931, we heard late Sunday night, the night before, that England was going off the gold standard. Three of us met, the only one we could get a hold of at that time, and decided to advocate to the governing committee the next morning the prohibition of short selling. Why? Because it was our desire and our belief, that a short seller feels if there is a danger of the exchange closing, that his contracts may be eliminated, may be lost, and that he may be put out on the end of a limb, and have no chance to terminate his contract, and we thought by doing so we would bring into the market coverings by short sellers.

We then adopted that rule on the morning of September 21, and in those two following days the short interests did cover to the extent of some 700,000 or more shares; but before one-half hour had elapsed General Motors, United States Steel, American Can, Reading, and many other prominent active stocks were in such a condition because people wanted to buy them that we had to allow those persons on the floor who were willing to sell them to go short in order to prevent a perfectly ridiculous market.

Now, we have never had the situation in this country that shows what the effect of eliminating purchases on margin or speculative buying transactions would be, but it is inconceivable to my mind that the same effect would not immediately obtain as we have experienced in the short selling episode I have recounted to you.

Mr. HUDDLESTON. Your idea is that the prohibition of speculation or discouragement of it would tend to cause sharp and excessive changes in market prices?

Mr. WHITNEY. If I may say so, the prohibition or eliminating of it in the main would tend to eliminate the stability of market prices; yes, sir.

Mr. HUDDLESTON. The adoption of minimum margins, discourages speculation and the higher the margin required, the greater the discouragement to the speculator?

Mr. WHITNEY. Yes, sir.

Mr. HUDDLESTON. Is that correct?

Mr. WHITNEY. Absolutely.

Mr. HUDDLESTON. Taking the converse of the proposition, do you think that speculation should be encouraged?

Mr. WHITNEY. No, sir; I do not. I think it should be kept within all reasonable bounds, but to eliminate it is as I have said, I think, devastating.

Mr. HUDDLESTON. You used the expression a few moments ago of excessive speculation. Just what have you in mind?

Mr. WHITNEY. What do I mean by that?

Mr. HUDDLESTON. Yes.

Mr. WHITNEY. I have in mind what happened in 1929, and I have in mind what happened in many stocks in 1933, in the spring.

One, I think, was caused by the cumulative effects on the entire country and the world going on a rampage in a bullish movement. I think that in the spring of 1933, the movement was caused because the whole country firmly believed we were faced with real recovery and promptly.

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