Mr. RIEFLER. I think in the existing situation that it is pretty necessary to have it in the law.

You have got to force a break with a type of margin requirement to which the whole exchange machinery is adjusted. They have worked on the basis pretty much of a single margin based pretty wholly on current prices of stock.

Mr. HUDDLESTON. Very good. Suppose we fix that in the law. If the law were passed tomorrow, the Reserve Board could do that, could they not, on that basis?

Mr. RIEFLER. They could, but I think if Congress wants to bring in a longer viewpoint than that, they ought to give the governing body pretty complete direction of their intention in the law.

Mr. HUDDLESTON. What Congress wants to do, as judged from my own small fraction of Congress, is to do the right thing. I have no preconceived ideas on the subject as to how margins should be controlled. What I want to know is the right thing to do, fix it in the law with power in the Reserve Board to change or to leave them to the Board, fix it and make such changes as may appear from time to time necessary. What is the advantage, one over the other?

Mr. RIEFLER. If it were a different type of requirement?
Mr. HUDDLESTON. What is that?

Mr. RIEFLER. If it were a different type of requirement in this bill, I would certainly say that it ought to be left to the governing body to change; but it seems to me that this law gives you flexibility. It sounds rigid, but it actually affords flexibility and it gives flexibility. There are two features of it. There is the initial requirement that applies to rapidly rising securities. Then it would be heavy; but the maintenance requirements are much lighter, and afford a measure of protection against sudden changes in the market conditions, that probably cannot be obtained by using a single margin requirement. Of course, if the governing body should adopt a requirement such as these

Mr. HUDDLESTON. What is the advantage of Congress fixing the basis or formula to start on-initiating the system, and leaving it to the Reserve Board to fix?

Mr. RIEFLER. Simply that it gives the Borad a very clear direction as to the wishes of Congress

Mr. HUDDLESTON. What is that?

Mr. RIEFLER. Simply that it gives very clear direction as to the wishes of Congress to the governing body, a direction as to the intent of Congress.

Mr. HUDDLESTON. Suppose we have no intent, except that they shall exercise their best judgment as to what the margin should be. Mr. RIEFLER. I should say if you passed this act that you would be giving a very clear direction that you did not want securities to increase their borrowing capacity suddenly simply because they had gone up in price in a speculative move.

Mr. HUDDLESTON. The reason was assigned by another witness today that the Reserve Board needed time to study what, if any, the margin formula should be; what changes should be made-1 am wondering if the Reserve Board needs time to study it, why it is that Congress does not need time to study it. Surely the Reserve Board knows more about it than we do, and have the situation better in hand.

I come up here against what appears to be a frozen opinion: We have to take this bill as it is or leave it, seems to be the assumption. From that I dissent. We have not got to take it. This committee is writing a law now, and we want information that will help us to write the right kind of a law. What is the disadvantage, I ask again, between the Reserve Board taking the initiative and fixing the margin formula to start with power to change it at will, and Congress fixing it with power on the part of the Reserve Board to change it at will?

Mr. RIEFLER. The advantage is simply a very direct one and Congress should not do it unless it desires it and understands it. It is a very direct statement that you want this type of credit expansion held in check; that you do not want credit expansion based on individual securities which might suddenly drop again and cause a crash. It is a very definite instruction by Congress.

Mr. HUDDLESTON. Frankly, I get nothing out of that. If Congress is going to control what this margin should be, then we may leave the Reserve Board out of the picture. If we want them to decide it in the light of their experience and knowledge of the situation, then why not them initiate it at the beginning? Some have spoken of 40 percent, and there have been various percentages mentioned. One of them is as good as another to me-10 percent, or a hundred percent. I do not know, and nobody on this committee knows, comparable to what members of the Reserve Board should know, and I cannot understand why it is that we must initiate this formula. If we fix it, then they do not need to be in the picture at all.

That

Mr. RIEFLER. I think what you are fixing is the basic policy of the matter and that you are leaving the details to be worked out. is the way the bill now stands, and your decision there concerns itselt with how far you wish to go in indicating a general policy to the Reserve Board.

Mr. HUDDLESTON. That is the whole issue then?

Mr. RIEFLER. This bill gives a very definite direction of policy. It seems to me, a good one.

Mr. HUDDLESTON. The percent of margin?

Mr. RIEFLER. No. The requirements in this bill are that on new purchases, i.e., loans on new commitments on stocks after the bill goes into effect, shall be based at whatever is higher, either 40 percent of the current price or 100 percent of the lowest price since last July, except that the loan can never be more than 75 percent of the current price.

Now, with most of your securities that will permit 75-percent loans. You will find only a handful of securities where the requirement would be as high as 40 percent at the present time.

Mr. HUDDLESTON. Do you favor such a rigid provision as that? Mr. RIEFLER. That is not a rigid provision.

Mr. HUDDLESTON. What is that?

Mr. RIEFLER. That is not rigid.

Mr. HUDDLESTON. It has a degree of rigidity, certainly. Would you not give more power to the Reserve Board?

Mr. RIEFLER. Collateral requirements always sound rigid, whether they are 80 percent or 70 percent; they always sound rigid. The real question is what they are in terms of. This provision really is quite flexible. It is a rule that will give you a higher lending value on a

stable security, and a greatly lowered lending value on a security that has been going up rapidly. If the security drops, the lending value does not drop automatically.

For example, most of the securities in the market at the present time will be able to come in under the 75-percent requirement. That is, that a buyer would be able to borrow 75 percent and would be required to put up 25 percent. That is extremely liberal at the present moment. If the security drops, a different margin applies. The security drops, could drop 12 percent in all of those 75 cases before there would be any requirement for additional margins or any occasion for calling of loans and the dumping of securities on the markets. This makes for a very stable situation and one in which it would be difficult for the pressure of margins to require the dumping of securities. It would avoid anything like we had in the fall of 1929 when the market broke, for example.

Mr. HUDDLESTON. Would you consider it unwise to lodge in the Reserve Board power to fix the marginal requirements, and change them?

Mr. RIEFLER. I think that you ought to give them all of the power you want to give them. I think that on this particular issue, an instruction to base the requirement on the history of the security as well as its current market price would be extremely desirable, extremely valuable, because you are requesting them to institute requirements that are different from those that have been ruling in the market. When you want to get a change of practice in the market, it is very important to have the will of Congress extremely clearly expressed.

Mr. HUDDLESTON. Is that your way of saying that it would be unwise to give the Federal Reserve Board that power?

Mr. RIEFLER. I think it would be wiser to put the instruction in the bill.

Mr. HUDDLESTON. In other words, we are more capable of saying here in the committee what the formula should be than the Federal Reserve Board is?

Mr. RIEFLER. That is not the question. It is a question of the national will. Congress alone speaks with a clear authority as to policy.

Mr. HUDDLESTON. What is the national will? Where does it come from?

Mr. RIEFLER. It comes from Congress.

Mr. HUDDLESTON. Is it to be the man in the street, who forms. the national will, about these highly technical items?

Mr. RIEFLER. I think the technical features have to be worked out by the governing commission.

Mr. HUDDLESTON. You think that Congress or the commission should pass upon that?

Mr. RIEFLER. The commission can pass upon details, but the direction as to what it is sought to achieve ought to come from Congress.

The CHAIRMAN. You think this Congress should fix the standard? Mr. RIEFLER. Yes, sir.

The CHAIRMAN. And allow the regulations to be fixed between a maximum and a minimum?

Mr. RIEFLER. Yes, sir.

The CHAIRMAN. And be carried between that maximum and minimum operation?

Mr. RIEFLER. Yes, sir.

The CHAIRMAN. Mr. Marland has some questions.

Mr. MARLAND. I would like to ask you, Mr. Riefler, whether your have ever considered that there should be any relationship between the margin requirements and the book value of a stock? There is nothing in this bill that seems to measure margin requirements with book value. Has that ever been considered?

Mr. RIEFLER. Under present practice the value of a security is so likely to vary widely from its book value that I do not think it would be practical to do it. The book value depends usually on past investment in a company, whereas the value of the security in the market depends on an estimate of its future earning possibilities. A security that has a brilliant future will sell very much higher than its book value, even though the book value is very definitely defined according to the best accounting practices. The security of a company which faces an uncertain future will sell very much lower than its book value. So, I do not think fixing margin requirements on book value would work out satisfactorily. It would be much more satisfactory if it were based on these other terms.*

Mr. MARLAND. Another question. If the security market was very high, the 40-percent margin required under this bill might permit a loan many times in excess of the book value?

Mr. RIEFLER. Oh, yes, sir.

Mr. MARLAND. And the book value expresses the opinion of the actual value, the investment cost of that property, does it not?

Mr. RIEFLER. As the accountants have worked it out, yes; but you have to carry your accounting practices much further than they have been carried at the present time to determine that accurately.

Mr. MARLAND. Under this margin requirement it is possible for the borrower to borrow, even at 40 percent, many times more than they actually have invested in the stock?

Mr. RIEFLER. It would be in several companies; yes.

Mr. MAPES. Mr. Chairman

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. I would like to ask a question, for information.

You spoke in the opening part of your statement, about the conditions in 1928 and 1929, the general inflation of values at that time, and the tendency to speculate in stocks, and then you expressed the opinion, as I understood you, that this margin requirement here would tend to prevent that sort of thing.

This bill provides than an amount may be loaned on securities, equal to, whichever is higher, 40 percent of the current market price, or in the language of the bill:

One hundred percent of the lowest price at which such security has sold during the preceding 36 months, but not more than 75 percent of the current market price.

You stated, and I think properly, that under present conditions one could probably borrow more under the later provision than under the former; but if conditions returned to normal or what they were in the twenties, people will be able to borrow more under the first provision, the 40 percent of the current market price provision. If there is an inflationary movement, the speculator will be able to

borrow more, as the price goes up because he can borrow 40 percent of the market price, will he not?

Mr. RIEFLER. Forty percent.

Mr. MAPES. Forty percent. How, therefore will this margin requirement prevent inflationary movements? And if the borrower is required to keep up a margin of not less than 60 percent, if there is a depression, would not that have a tendency to deflate values?

Mr. RIEFLER. No; because if the stock goes down, the margin requirement relaxes automatically; it goes to the 75 percent requirement, as the stock goes down.

Mr. MAPES. It may be a long time before they get down to that point.

Mr. RIEFLER. I think if we do-

Mr. MAPES (continuing). Most investors may have lost their stock before then.

Mr. RIEFLER. No; not comparably to what has occurred under present market practices.

Mr. MAPES. Waiving that feature of it, how will that 40-percent requirement tend to keep people from speculating in as much as they can get, no matter how high the stock goes, they can borrow 40 percent.

Mr. RIEFLER. It works two ways. On the security which has not had a speculative rise, that is, the security whose price has been comparatively stable, a purchaser can borrow 75 percent. The restricted margin requirements begin to apply to securities which have been rising rapidly in price and on those securities there would not be an increase in borrowing power until the securities had risen 250 percent.

Take the security that is selling at 100 today. That is, it is selling in its range since last July, because this 36 months does not apply until the future.

Mr. MAPES. Is not this true, if economic conditions get anywhere near back to what people think are normal, that that 75-percent provision will be practically a dead letter?

Mr. RIEFLER. Oh, no.

Mr. MAPES. And people will be borrowing on 40 percent of the current market price?

Mr. RIEFLER. No; I think not. I think if you go back through the history of the market, even of the big bull market, that you will find that the 40-percent provision would have applied to less than half of the securities. I think probably you would find that half of them even during the bull market, would have had higher borrowing power than 40 percent. So it is not exactly restrictive to 40 percent. What it means is that in individual securities you do not get an increase in lending value rapidly at the beginning of a speculative movement.

Mr. MAPES. I am not a special student of the stock market. I occasionally refer to the reports, but my recollection is that General Motors, for example, was down to below 10, a few months ago. Mr. RIEFLER. I think not.

Mr. MAPES. Perhaps as low as 7. Is that correct?

Mr. RIEFLER. No; I do not think it was.

Mr. MAPES. It was below 7, was it not?

Mr. RIEFLER. I do not think it ever got below 20.
Mr. MAPES. What?