counsel for the New York Stock Exchange maintains that the Federal Government cannot regulate the security markets because this sort of traffic is not interstate commerce. Permit me to say that he has missed the point-or at least the economic point. The security markets are bound up with interstate commerce far more through the overwhelming influence which security prices exercise on the whole industrial and banking life of the nation. In a myriad of obvious and more subtle ways the transactions in the stock market influence the ebb and flow of commerce.

Let us take but two examples. Commerce depends on credit. Credit for commercial activities depends upon the banks. In 1929 no less than 54 percent of the assets of national banks were in the form of securities the value of which was subject to transactions in the market. Since 1929 the collapse of these values has been an aggravating cause of the closing of at least 6,000 banks in the United States. The effect on commerce can be left to the imagination.

During the year 1929 the $9,000,000,000 loaned to brokers to finance speculation caused an immense shift of credit in our economic organism. Its effect on commerce is past calculation. At least a portion of the proceeds of brokers' loans were spent-by those who sold securities to the speculators-for the purchase of consumers' goods and for the expansion of plant facilities, both of which, in turn, had a direct effect on the flow of commerce between the States.

Gentlemen, the security markets are an essential wheel in the complicated mechanism of our economic life. When this wheel spins too fast or too slow the whole machine is affected. And let me add, the organized exchanges are only one part of the Nation's security markets. Over-the-counter transactions are just as much tied into the economic structure as are those which are carried on in the exchanges. If Federal control is both needed and constitutional in one part of the market it is also needed and constitutional in every other. Mr. HUDDLESTON. Mr. Chairman

The CHAIRMAN. Mr. Huddleston.

Mr. HUDDLESTON. Do you present that as the legal opinion of a layman

Mr. CLARK (interposing). Yes; that is an economic point of view. In the preparation of our report on stock-market control, we had the constant advice and counsel of Noel Dowling, Professor of Constitutional Law, Columbia University. And our conclusions and recommendations are based on that view of the Constitution-with his advice and counsel.

Mr. HUDDLESTON. As I note here, on page 171 of your report, one of the conclusions is that the Federal Government has no constitutional power to regulate the things you are now speaking about.

Mr. CLARK. The point on which we rest our whole case in advocating effective, adequate legislation regulating the markets is the fact that the operations on the securities markets have as intimate an effect on the flow of commerce between the States as any other single factor in our economic lives, and, therefore, it comes within the provision of the Congress to regulate.

Mr. HUDDLESTON. Practically every human activity has an effect upon economic life. Certainly no field should not be exempted from Federal interference, if that argument is sound, and yet the Supreme Court has held that Congress may not intervene to regulate production.

Mr. CLARK. I would rather not be drawn into a constitutional fight, because of the fact that I am not a lawyer; I understand you are going to get the testimony here of Professor Dowling on those points.

Mr. HUDDLESTON. I will be glad to hear it.

Mr. CLARK. Yes.

The CHAIRMAN. I do not know whether there is any prospect that he will appear. We are going to have him, if we have time, tomorrow. Mr. Clark, we are very much obliged to you.

Does any member of the committee desire to ask Mr. Clark any questions this afternoon? If not, he is in a hurry to get away. Mr. MARLAND. I would like to ask him a brief one now.

The CHAIRMAN. Mr. Marland.

Mr. MARLAND. You represent the Twentieth Century Fund? Mr. CLARK. I am the executive director of the Twentieth Fund. Mr. MARLAND. Executive director?

Mr. CLARK. Yes, sir.

Mr. MARLAND. In your opinion, will the passage of this bill now before us have the effect of causing a decline in the security market, a deflation in the security market?

Mr. CLARK. It might have some slight temporary effect in that direction; but, I believe, it is my firm conviction that in the long run the market prices will be so stabilized and we will have such a guarantee against the excessive fluctuations of the past, that the whole business of the markets will be on a sounder basis.

Mr. BULWINKLE. Mr. Chairman, just a minute before we adjourn. Mr. Gordon Battle, of the New York bar, is here representing some constituents. He does not ask for a hearing, but does ask that certain briefs be filed.

The CHAIRMAN. We will be very glad to have him do that.

Mr. HUDDLESTON. I referred a moment ago to the statement contained in your report on page 171. At the bottom of the page I find this:

Only through a Federal incorporation act can the present evils be coped with adequately, insofar as corporations engaged in interstate commerce are concerned. Because of constitutional hindrances, corporations engaged in strictly intrastate business can be reached according to the best prevailing legal opinion, only through State laws.

And so forth.

Mr. CLARK. That is the basis for that statement.

Mr. HUDDLESTON. We have the same right to require a corporation to obtain a Federal charter as we have to regulate, because it is a mere form of regulation. In short, if we can regulate, we can require that they take a Federal license. We may require that they be incorporated, and if we have no power to require such incorporation, we have no constitutional power to regulate.

Mr. CLARK. The constitutional power to regulate the market is based on the influence of the security markets on banks and commerce. Mr. HUDDLESTON. You are advocating by this measure regulations vital to corporation

Mr. CLARK. Yes.

Mr. HUDDLESTON. Without regard to whether they are engaged in interstate commerce or intrastate commerce. It is not merely the regulation of a stock exchange. That is not all that is covered by this bill, by any means.

The CHAIRMAN. We are very much obliged to you, Mr. Clark.

We will have an executive session for about a half a minute.

We will now recess until 2 o'clock, and I think that the members of the committee will be interested in one or two witnesses that we will have this afternoon.

(Thereupon, at 12:03 p.m., the committee took a recess until 2 p.m. of the same day.)

AFTERNOON SESSION

FRIDAY, MARCH 23, 1934.

The committee reassembled, pursuant to the taking of the recess, at 2 p.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

STATEMENT OF WINFIELD W. RIEFLER, CHAIRMAN OF THE CENTRAL STATISTICAL BOARD AND ECONOMIC ADVISER TO THE EXECUTIVE COUNCIL

The CHAIRMAN. Mr. Riefler, you have been asked to come before us today to discuss margins. You may qualify and proceed in your

own way.

Mr. RIEFLER. My name is Winfield W. Riefler, chairman of the Central Statistical Board. I am here speaking solely for myself, because I was requested to come and speak on the margin requirements of the bill.

Mr. MAPES. What is that organization?

Mr. REIFLER. Central Statistical Board. It is composed of the heads of the principal statistical agencies of the Government. We were set up by an Executive order last July for the purpose of coordinating the statistical work of the Government to aid in activities under emergency legislation.

The CHAIRMAN. What have you been doing before, Mr. Riefler? Mr. RIEFLER. I have been with the Federal Reserve Board on the research staff, as an economist, for 10 years.

The part of this bill in which I am particularly interested is the mechanics for preventing a recurrence of flow of credit into the stock market and into speculative secutities, such as we had from 1926 to 1929, that tremendous flow of credit in which securities, simply because they were speculative and had a speculative price, were able to increase their own lending value. This factor contributed in a very definite and important way to the boom in 1929 and the terrific deflation that followed after it, because once that speculative boom cracked, a deflation mechanism was released that nothing could stop. Securities prices broke in the autumn of 1929. The calling of margins to protect prices simply sucked deposits, the funds of customers from all over the country, into the market to make those loans good. It did make the loans good. Brokers' loans were sound, as far as the lenders were concerned and paid out, but it was at a price of deflation of individual holdings, individual deposits, and individual wealth all over the country.

It was a crack that constituted very definitely one of the major factors in the problem we have been facing ever since.

So, it seems to me the most important thing which this bill does, is to attempt to set up a new formula to govern the lending value of speculative securities, a formula which does not base itself solely on the price that the stock happens to have at a certain time-todaybut one which also takes into account the history of the security, its general investment value and prevents the security from rapidly increasing its lending value, just because it has had a speculative rise in price.

Now, these requirements, as I see them, in the first place, meet most of these conditions. Furthermore, they apply to future values. The securities market has not an excessive amount of credit in it at the present time.

Mr. MAPES. You are now discussing the margin requirements of section 6 of this bill?

Mr. RIEFLER. Yes; the margin requirements of section 6 of this bill.

The securities markets have not an excessive amount of credit at the present time. The important thing is to see that as prosperity returns it becomes more stable and that we do not get a repetition of the situation we had before. The requirements are directed solely at new purchases of speculative securities. Existing loans are not touched. They are given until 1939 to qualify under the requirements when they are held by brokers. All loans not made by brokers are left to regulation of the Federal Reserve Board, which will presumably try to bring its regulation into line with its general credit policies. These specific requirements then apply only to listed nonexempt securities and to loans by brokers to their customers on these listed nonexempt securities.

The margin requirements are directed very closely at the thing we ought to try to get at, try to prevent. In the case of these securities furthermore it is very liberal at the present time.

I do not know how the general market would work out, but I should imagine from 50 to 75 percent of the present securities could or would have a loaning value under these requirements, as large or larger than those under the existing margin requirements of the market.

In other words, it does not affect many present securities and there it only affects new purchases, or rather loans on new purchases.

Furthermore, these requirements are in line with an old and conservative banking tradition with respect to security loans, a tradition that has been lost, namely, that the lending value of collateral securities is not governed solely by the prices they happens to have at any one time, but rather by the history, the record, which these securities have had. Instead of calculating brokers loans on the basis of the current market, while to be safe requires also that the broker should be in a position to dump the securities on the market on a moment's notice, the lending value of securities should be based upon their investment record.

We have forgotten this tradition in this country, and permitted loans to be based pretty much wholly on the current prices of the security.

The formula in this bill I think has a very real chance of gathering influence as it is practiced, because it reiterates what conservative lenders have always known, namely, that the lending value of volatile securities such as stocks, ought to be based upon, on their record and

their history, as well as on the prices which they happen to have at any given time on the current market.

Mr. HUDDLESTON. Mr. Riefler, may I interrupt you?

Mr. RIEFLER. Yes, sir.

Mr. HUDDLESTON. I am impressed that the margin requirements may differ, according to the security, and according to time. What would you say to that idea?

Mr. RIEFLER. Yes. I do not see how this could ever create a difficult situation. This is

Mr. HUDDLESTON. May I invite you to leave this bill and to discuss that thought.

Mr. RIEFLER. I think that the lending value of the security should never be rigid in the sense of being based solely on its current price. We have had rigid requirements in the past because they have been based solely on current price.

Mr. HUDDLESTON. I had this thought, that at certain times a certain margin would be entirely proper; under different conditions, an entirely different margin would be proper.

Mr. RIEFLER. You mean as to different prices for the stocks.

Mr. HUDDLESTON. Conditions of the market and state of public opinion. For instance, when prices were rising, and everything buoyant, a certain marging might be proper; when prices are going down, or deflation is going on, an entirely different margin might be proper on the same stock.

Mr. RIEFLER. Yes; that is the basis of these requirements in this

bill.

Mr. HUDDLESTON. I want to ask you to leave this particular bill. Mr. RIEFLER. It is rather necessary to have a formula in law which at the same time has the effect of differentiating between conditions at different times.

Mr. HUDDLESTON. Do you agree with that suggestion that there might be that situation?

Mr. RIEFLER. Yes, sir; the formula has got to be one which will have the effect of imposing tighter margins on highly speculative situations, and easier margins under situations of falling markets, and that is just what these requirements do.

Mr. HUDDLESTON. Again, I ask you to leave this particular provision, this bill to one side, because I am more interested in the abstract than I am in this particular formula that has been set forth here.

I would like to have your point of view as to whether this elasticity in marginal requirements should be under the control of the Federal Reserve Board or of some other authority.

Mr. RIEFLER. I think that it ought to be under the control of the Reserve Board, because the Board has the responsibility under the Glass-Steagall bill of passing upon member bank loans on securities, and of preventing speculative loans and the excessive flow of credit into the stock market.

Mr. HUDDLESTON. Now, should it take the form of allowing the Reserve Board to fix the margins in the first place, and then to make such changes in it as might seem desirable from time to time, or should we provide a rigid margin, in this bill, with power to the Reserve Board to make changes? In other words, should the Board initiate the basis, or should it be initiated by law?