Senator STEIWER. Governor Black, does the Federal Reserve Board desire the function of fixing the regulations as to margin requirements?

Mr. BLACK. The Federal Reserve Board never requested that power. It was, perhaps in the second review of this bill, brought to my attention and the Federal Reserve Board does feel that that power should be given to it because it is credit control. The Federal Reserve Board, together with its other credit control, should have charge of this credit control, and no other department of the Government should have charge of credit control.

Senator STEIWER. And if this bill is enacted into law the Federal Reserve Board would expect then to function in its capacity of control of credit?

Mr. BLACK. Absolutely.

Senator STEIWER. Through the medium of margin requirements? Mr. BLACK. As one of the mediums of credit control; yes, sir. There are a great many.

Senator STEIWER. Perhaps I misunderstood you a while ago. I thought you said the margin requirements would restrict speculation, but would not restrict credit. I now understand you to say that it is the purpose of the Federal Reserve Board under certain circumstances and conditions to restrict credit through this medium if the power is given to the Board.

Mr. BLACK. If I have said something that was misunderstood, I regret it. Of course, in restricting speculation you have to do it through restriction of credit under the provisions of this bill-I mean, so far as the marginal requirements are concerned.

Senator STEIWER. Well, to what extent would you feel justified in restricting credit in order to restrict speculation?

Mr. BLACK. Wherever there is excessive speculation or undue use of credit in speculation.

Senator STEIWER. Has the Federal Reserve Board set up any standard to which it would adhere in the determination of matters of that kind?

Mr. BLACK. It had not had the time to do that, and could no properly attempt to do it until the occasion for doing it was approaching.

Senator STEIWER. I assumed that that would be your answer However, the net result is that if the Federal Reserve Board i clothed with power to restrict speculation through the medium o restriction of credit, the extent to which it would do it would be matter for further judgment.

Mr. BLACK. Precisely.

Senator STEIWER. And from time to time.

Mr. BLACK. Yes.

Senator STEIWER. And Congress could have no way of knowin now, while considering proposed legislation, the extent to which yo might see fit to restrict credit to business of this country.

Mr. BLACK. Well, I would prefer to use the expression: "Restric credit in prevention of undue or unwise or excessive speculation. I would rather leave out, "of the business of the country" I do no think that is comprehended in this bill. Further answering you question, Senator Steiwer, of course the Congress, if it gives th

Federal Reserve Board the power to exercise its judgment in this matter, could not be at this time advised as to what that judgment may be at sometime in the future.

Senator STEIWER. That is necessarily the fact, but I was wondering what your viewpoint was.

Senator TOWNSEND. You do not feel that you have sufficient authority, then, under the Glass-Steagall Bank Act, to do this thing proposed here?

Mr. BLACK. Well, we have very great authority in restricting speculation under the Glass-Steagall bill. We have the right, for instance, to regulate reserves, to increase reserves; we have the right to tell a bank that it cannot make any further security loans. We have the right to fix the amount of security loans that a bank can take. We have the right to take other steps for the prevention of undue speculation in accordance with the wishes of the Secretary of the Treasury. But I think this is another provision.

Senator TOWNSEND. Then this is giving additional power?
Mr. BLACK. Yes, sir.

Senator GORE. In that connection let me ask you if you have reached any conclusion on this point. In 1927 a good many people felt that the rediscount rate was made too low; that it encouraged an over-use of credit, accelerated a misuse of credit, and paved the way for the crisis in 1929 and the depression which followed. Other people felt that the Federal Reserve Board could have raised its rediscount rate in 1928 and 1929 even more than it did, could have then put on the brakes. I rather doubt the latter, but think there is a good deal of truth in the former charge.

Now, Governor Black, what is your conclusion about it, if you have given it any critical thought?

Mr. BLACK. Senator Gore, you are now taking me back to 1927, 1928, and 1929, I believe?

Senator GORE. Yes. When the rediscount rate was very low, in September of 1927, some people alleged that in that action, to get gold, it was not for our own purpose

Mr. BLACK (interposing). Of course, I was not on the Federal Reserve Board at that time, although I am not saying that by way of excuse, and I think they were really doing it to try to spur business in America. And I think in 1928 and 1929 we did everything on earth we could to stop, as far as we could, the drunken debauchery in speculation. But I do not believe any board on earth could have stopped it at that time.

Senator GORE. I doubt it, too. But do you think it is possible to devise any sort of mechanism that can stop the runaway passion for gambling, like that was?

Mr. BLACK. I do not believe at that time it could have been stopped. I think marginal requirements, with stocks going up every day, would not have been effective. They might have been a deterrent. I think the discount rate, when men were making 20 or 30 or 40 percent a day on stocks in gambling would not have stopped it. It might have been a deterrent. But I think we are now coming into saner times, and

Senator GORE (interposing). Well, that is what we always think. Mr. BLACK. Well, I hope so at least.

Senator McADOO. Temporarily, anyway.

Mr. BLACK. I hope so.

Senator GORE. But it takes time for such a gambling passion to accumulate, and yet it does accumulate every time such a situation arises.

Mr. BLACK. I think that is true. I want to say that I went through the gambling in Florida, and that I was there before the stock exchange situation started. So that perhaps I am rather an expert on gambling.

Senator GORE. But you did not sell short down there.

Mr. BLACK. I sold it both ways, and lost at each end. [Laughter.] Senator GORE. Then you qualify as an expert on it.

Mr. BLACK. Yes, sir.

Senator McADOO. I should like to ask two questions: First, in this proposed legislation we establish by statute 40 percent as a marginal requirement. Now, I should like to ask you if you think

Senator GORE (interposing). It is 60 percent here.

Senator MCADOO. Well, 60 percent, or whatever it is. I want to ask you, Governor Black, if you think it wiser to establish an inflexible margin like that in a statute, or to leave it to an administrative board, like the Federal Reserve Board, to regulate that matter from time to time to meet the conditions as they may develop?

Mr. BLACK. Senator McAdoo, my own opinion about that in the beginning was that there should be perfect flexibility in the matter of margin requirements, and that it should be left to the regulatory body. Now, since that time, I have thought about it a great deal. I think the whole purport of this bill is to restrict speculation, to prevent undue speculation, to guarantee fair practices in speculation, and to get undue credit out of the excesses of speculation. And so far as I am concerned as Governor of the Federal Reserve Board, I am perfectly willing for Congress to give expression, and that is what this is meant to be, to what they think the marginal requirements should be. Now, then, there is a further provision in this bill, in the same section, that the Federal Reserve Board under certain circumstances can change the margin requirements. Personally, I would rather that were more flexible. But

Senator KEAN (interposing). In other words, do you mean to say that you would prefer, because this margin business figures out into absurd figures in some cases, to have it left entirely to the Federal Reserve Board?

Mr. BLACK. I would be perfectly willing for the Federal Reserve Board to take the responsibility for that.

Senator GORE. Do you think it could resist the pressure when the flood tide comes? Don't you think the dam would break? This is imperfect, of course, and we appreciate it, but I remember in 1929 when the race was running high, any suggestion by way of raising the rediscount rate provoked a storm of protest, and I do not think any human beings would have been able to withstand it, or at least not any in politics.

Senator McADOO. The rediscount rates attempted to control it, but they did not have either the teeth or the capacity to control it or to properly influence it. I think as Governor Black says a provision for increased reserve requirements would be very much more

effective. But, Governor Black, I should like to get you back, if I may, to the other question, as to whether or not I am correct in my understanding that you prefer to have minimum marginal requirements established in this bill rather than to have a determination of those marginal requirements established through regulation from time to time by the Federal Reserve Board.

Mr. BLACK. Senator McAdoo, I think the wisest course would be for Congress to express its opinion in the bill. And then widen the provision as to flexibility, leaving variations from the expressed opinion of Congress, to the judgment of the Federal Reserve Board. Senator McADOO. Well, that would cover the point. That gives it some flexibility. Are the provisions of the bill such that you do have that flexibility?

Mr. BLACK. The provisions of the bill do not give us that degree of flexibility.

Senator McADOO. You think it would be wise to insert it after the expression of opinion of the Congress in the bill?

Mr. BLACK. If the Congress is in accord with me, with my view about that; yes.

Senator MCADOO. Well, now, one other question: You heard the brief statement made by Mr. Cotton a moment ago about municipal bonds, State bonds, and bonds of political subdivisions. What is your idea about exempting them?

Mr. BLACK. My recollection about that is that they are not listed. as exempted securities, but that the power is vested in the Federal Trade Commission to exempt them.

The CHAIRMAN. That is right.

Senator TOWNSEND. Should that power be vested in the Federal Trade Commission or in the Federal Reserve Board?

Mr. BLACK. In the Federal Trade Commission.

Senator KEAN. That will only leave them subject to every little school district, every little town in the country, having to apply to a bureau of the United States for permission?

Mr. BLACK. So far as I am concerned I would not object to making municipal, county, and State bonds as exempt securities, if that is what you are asking me.

Senator McADOO. Yes; that is what you are being asked.

Senator GORE. It has been suggested that if the margin dropped. down to 59 percent a customer would be sold out arbitrarily. Is that your understanding?

Mr. BLACK. That is as to new loans. As to old loans, they are protected.

Senator GORE. That is, current accounts are exempted?

Mr. BLACK. Yes, sir.

Mr. PECORA. The revised bill modifies that section of the original bill.

Senator GORE. And that was in the original bill?

Mr. PECORA. Yes.

Senator GORE. That was too arbitrary, in my judgment.

Mr. PECORA. That has been considerably modified in the revised version of the bill.

Senator GOLDSBOROUGH. To what extent has it been modified? Mr. PECORA. To the extent that the revision allows for a sag of 20 percent in the market price before▬▬

175541-34-PT 16— -2

Senator GORE (interposing). Well, then, that covers that objection now?

Mr. PECORA. Yes.

The CHAIRMAN. Have you anything further, Governor Black? Mr. BLACK. Mr. Chairman, these gentlemen seem to be especially interested in this matter of the marginal requirements. I have some intensive data on that which is very interesting to me, and if the committee would like to have it

Senator GORE. Yes; let us have it.

The CHAIRMAN. You may go ahead and give it to us.

Mr. BLACK. The principal differences between the margin provisions of the revised bill and those of the first draft are as follows: 1. Loans are permitted up to 100 percent of the lowest value for the preceding 3 years (except as stated in the next paragraph) instead of 80 percent of such value but a maximum limitation of 75 percent of current market value is established in the revised bill. In both bills loans may be in any case at least as much as 40 percent of the current market price.

2. The new bill provides that until July 1, 1936, the lowest price since July 1, 1933, is taken in lieu of the lowest price for the preceding 3 years. The effect of this is to eliminate the extremely low prices of 1932 and early 1933 as limiting factors upon loan values.

3. Provision is made in the new bill for maintenance of credits up to certain points after accounts have become undermargined. For instance, an initial loan of 75 percent need not be closed out in an adverse market as long as it does not exceed 85 percent of the current market price, and an initial loan of 40 percent need not be closed out as long as it does not exceed 60 percent of the current market price. 4. Under the new bill loans outstanding at the time of the enactment of the act are permitted to be continued, with certain restrictions as to substitutions and withdrawals, until January 1, 1939.

5. All loans on "exempted securities" and loans by banks on securities other than equity securities are specifically excepted from the margin provisions of the new bill.

6. Under the new bill, as contrasted with the old bill, banks are not subject to prescribed-margin requirements, except that when a bank makes a loan on an equity security any excess over the amount that a broker could loan is subject to such rules and regulations as the Federal Reserve Board may prescribe to prevent the use of such excess for the purchase or carrying of securities.

7. Under the original bill administration of margin requirements was vested in the Federal Trade Commission, which could increase but not lower margin requirements. Under the new bill, control over margin requirements is placed under the Federal Reserve Board, which may increase margin requirements and, in certain extraordinary circumstances, may also decrease such requirements.

8. The new bill directs the Federal Reserve Board in cooperation with the Federal Trade Commission to study the feasibility of fixing maximum loan values on the basis of earnings, and on other bases, and to submit its recommendations to Congress on or before January 3, 1935.

NOTE: Regulation of short selling is vested in the Federal Trade Commission in both bills. This appears to carry with it the control of margin requirements on short sales.