percent per annum meant nothing to a speculator, or to a person who thought he was a speculator, whereas he probably was simply throwing his money away, and yet he thought he was putting his money into a market where it might increase 15 or 20 percent in a day, and therefore paying 15 or 20 percent a year for the money he required was of very little concern to him.

But all this bidding up of the price of money had many consequences in the way of making certain lines of activity, the more sober and quiet activities throughout the country more difficult, because funds were not available for them inasmuch as people were able to draw such large rewards in the money market.

In addition, this bidding up of the price of credit had the effect of attracting a very large amount of funds from abroad. Foreigners sent money here, both for the purpose of getting the benefit of the high rates of interest available for short time money in the market and in the hope of participating in the speculative advances in securities.

The accumulation of short-time foreign funds at one time reached the staggering sum of $3,000,000,000, and that was another factor that accentuated our difficulties, because after England went off the gold standard in 1931, and again in the spring of 1932 there were enormous withdrawals of those balances in gold, and that created panicky conditions and contributed to the domestic hoarding movement, and therefore to the whole cycle of difficulties, including the bank failures and other consequences.

So that to sum up from the credit point of view, the difficulty in the first place is that an accumulation of loans, on the scale that it was accumulated during our boom period, is very dangerous, because when the turn comes and security values drop very rapidly, they are being dumped, and that affects a great many institutions that are anything but speculative; on the contrary, institutions that constitute the backbone of the country's economic life, insurance companies, banks, savings banks, trust companies, and so forth, you can see what it means.

In the second place, the situation is dangerous because it results in an over-issue of securities, and in a diversion of credit from a great many small industries, into a few large industries, and particularly into industries manufacturing luxury goods.

In the third place, it is dangerous because it tends to attract funds from all over the world, which in the conditions that existed then. became mortgages upon our gold, because they were withdrawable in gold, and resulted in enormous runs on our gold, runs that shook the foundations of our economic and financial structure.

It is for all of these reasons, both because of the effect on banking, which I have outlined in some detail, and because of the effect on business stability, and because of the social desirability of protecting the public from stock-exchange manipulation, that this bill appears to me to be in the right direction and to represent a social advance toward better-controlled economy.

That is all that I wish to say, Mr. Chairman.

The CHAIRMAN. Any questions by members of the committee? Senator KEAN. I should like to ask a few questions, if everybody else is through.

The CHAIRMAN. Go ahead, Senator Kean.

Senator KEAN. I should like to ask you, Dr. Goldenweiser, whether you were familiar with conditions in Germany before the World War?

Mr. GOLDENWEISER. Not intimately, Senator.

Senator KEAN. Well, during their industrial development just before the World War, isn't it true that money in Germany was bringing, say, 10 to 12 percent?

Mr. GOLDENWEISER. During their industrial development?

Senator KEAN. No. Just before the World War, wasn't money in Germany for industrial purposes bringing, say, 10 to 12 percent?

Mr. GOLDENWEISER. I am not very certain about that. That sounds very high to me, but I would have to look it up in order to be sure about it.

Senator KEAN. If you will look it up you will find that every exchange house in the United States was sending money to Germany in order to loan it at those rates.

Mr. GOLDENWEISER. Do you mean before 1914?
Senator KEAN. Along about 1912.

Mr. GOLDENWEISER. Germany was undergoing a very rapid industrial expansion, and presumably the demand for capital was great, but the height of the interest rate surprises me.

Senator KEAN. It was something like 10 or 12 percent, I think. Are you familiar with the Paris Bourse?

Mr. GOLDENWEISER. Again, not intimately. I do not even know the New York Exchange intimately.

Senator KEAN. You know, do you not, that on the Paris Bourse a large number of the seats are owned by the Government?

Mr. GOLDENWEISER. Yes.

Senator KEAN. They control the Paris Bourse.

Mr. GOLDENWEISER. Yes.

Senator KEAN. And, owing to their control of the Paris Bourse, there is an outside market which is larger than the Bourse market, is that correct?

Mr. GOLDENWEISER. I think that is correct.

Senator KEAN. But owing to the control of the Government over the Paris Bourse, the outside market is bigger than the Bourse market.

Mr. GOLDENWEISER. Yes.

Senator KEAN. I just wanted to get that into the record. As far as brokers go, do not nearly all of them require that the customer shall sign an agreement by which they are allowed to pledge the securities for the difference between the amount he puts up and the amount of the value of the securities?

Mr. GOLDENWEISER. I think there is such a requirement, but it is one that has been complied with more universally in recent years than it was before 1929, and also one that is very frequently in a very inconspicuous place on the slip that the customer signs.

Senator KEAN. I think it is printed in pretty large letters.

Senator BULKLEY. Does it not go even further than that and permit them to rehypothecate generally?

Senator KEAN. Yes.

Senator BULKLEY. Not merely for the difference.

Senator KEAN. To rehypothecate for the difference. That is all they are entitled to borrow.

Mr. GOLDENWEISER. As I say, I am not fully familiar with the details of the exchange operations.

Senator KEAN. That is notice to the customer, is it not?

Mr. GOLDENWEISER. It is notice to the customer.

Senator KEAN. He must read that circular, or thing that he signs? Mr. GOLDENWEISER. Yes.

Senator KEAN. And that is a notice to him that they are going to hold him liable for that whole amount, is it not?

Mr. GOLDENWEISER. I think you are right, Senator. I would agree with you in everything except the verb. I think you say he must. I think he should. I think he very frequently does not.

Senator CAREY. How does he sign it when he wires in or telephones in to sell a certain stock?

Senator KEAN. He would probably wire it from a correspondent, and that correspondent has those forms, and he signs it.

Mr. GOLDENWEISER. He signs it at the time he makes his commitment, but he does not sign it over again when he increases his commitment, and it is not a vital part of his understanding of the situation. Of course, when I say "his" I do not mean everyone, because there are no doubt a great many people who are wise to the whole situation. But I think it is a fair statement that a great many do. not know.

Senator KEAN. Witnesses who have testified here on behalf of several large corporations have testified that they loaned very large amounts. They also testified-I think I am correct in the statement-that they did not lose a dollar; is that correct?

Mr. PECORA. That is my recollection.

Mr. GOLDENWEISER. I think that sounds right.

Senator KEAN. So that I do not believe, as far as I know, that any bank or trust company lost a dollar on brokers' loans during all this depression.

Mr. GOLDEN WEISER. I think a statement as absolute as that probably could be contradicted, but I think that it is certainly correct

in essence.

Senator KEAN. There is one other question I would like to ask, and that is this: Many people believe that an important factor was the income tax allowing people to take profits and losses on their profits or losses in the stock market. In 1929, when they had large profits, they refused to sell, which they otherwise would, and a large part of the floating stock was absorbed by people who were speculating in it, but who refused to sell because their profits were so large that they would not sell, and that gave other people an opportunity to put up the prices to the roof. Do you agree to that?

Mr. GOLDENWEISER. I agree to the fact that it was a factor. I have always been told it was a factor. I think it probably was a factor, but I should say, on the basis of my own opinion, that it was not a major factor in the situation.

Senator KEAN. Many people that I know regard it as a major factor.

Mr. GOLDENWEISER. Yes. A great many people have considered it as a major factor, and they may be right. But in my humble opinion it is relatively a small number of people who were in that class, and in the wave of speculation that swept the country at that time

this particular factor was not of major importance. It does not mean that there may not be some defect in the tax machinery that ought to be corrected. I am not a tax expert, either.

Senator GORE. It works just the other way when the market goes into reverse. They sell to take their losses.

Mr. GOLDENWEISER. It may emphasize sales, and it may emphasize purchases. It certainly has resulted in breaks toward the end of the year, when people sold to establish losses, but I think, on the whole, two things about that, Senator, if you will bear with me. One is that in the situation of the country as a whole, I feel that is relatively minor, an dalso that it hits people mostly of the type who are much better able to take care of themselves than the rank and file of the little folks that lose their money in the market.

Senator KEAN. Yes; but the point of the thing is this: They refused to sell when the market was going up.

Mr. GOLDENWEISER. Yes.

Senator KEAN. Then, when the market started to go down, they were obliged to sell, and that increased the pressure of sales on the market.

Mr. GOLDENWEISER. Yes.

Senator KEAN. And if it had not been for that income tax, you would have had them selling all the way up, and blocking the market from going so high, and, on the other hand, they would not have had anything to sell when the market dropped.

Mr. GOLDENWEISER. That is right. It was a factor, unquestionably. Senator WAGNER. How did the market go down, except that there must have been a wave of selling?

Senator KEAN. Yes.

Senator WAGNER. You said they refused to sell.

Senator KEAN. They refused to sell when the market was going up, and they were forced to sell when the market went down.

Senator WAGNER. Did not the market go down because there was less demand for the commodity than there were securities offered for sale?

Senator KEAN. It carried it very much further.

Mr. GOLDENWEISER. You mean, why did it start to go down at all? I suppose Senator Kean would not claim that that caused it to turn, but when it turned for other reasons, this accentuated the rapidity of the decline.

Senator KEAN. That is what I mean exactly.

Mr. PECORA. Dr. Goldenweiser, do you know to what extent new securities were issued and absorbed by the market in 1929 prior to October?

Mr. GOLDENWEISER. The volume of security issues?

Mr. PECORA. New issues; yes.

Mr. GOLDENWEISER. Quoting entirely from memory, I think that year there were 10 billions.

Mr. PECORA. Of new issues?

Mr. GOLDENWEISER. Yes, sir.

Mr. PECORA. Prior to October 1929?

Mr. GOLDENWEISER. Yes; 10 billions of new issues.

Senator WAGNER. That means that that 10 billions went into expanding facilities for production, probably.

Mr. GOLDENWEISER. Yes. I think that needs to be modified, Senator, because some of it went into brokers' loans. People issued securities and made money, and then used that money to lend on the stock exchange, because there was a good opportunity to issue securities, and then they had idle funds, and they placed them on the stock exchange. In the very last lap of that expansion, the securities issued were those of investment trusts, which were not using it for any purpose other than to buy other securities. In other words, there was a pyramiding, and sucking in. I could not say offhand what proportion, but I do know that the last heights were reached through securities that were not issued for any productive purpose, but were issued either for the purpose of benefiting by the easy money, or for the purpose of forming security companies, investment companies. Senator WAGNER. And during that period was there not investment of a great deal of excess profits in securities which went into the expansion of production facilities?

Mr. GOLDENWEISER. Yes, sir. That is right.

Senator WAGNER. That was one of our difficulties, was it not? Mr. GOLDENWEISER. Oh, yes. I am not minimizing that. I just wanted to say that that was not all. There were also other factors. Mr. PECORA. As I recall, officers of certain of these nonbanking corporations who testified before this committee last Friday stated how much money they loaned out on call loans during 1929, and they stated that they got a good deal of that money through the sale of securities which they issued.

Mr. GOLDENWEISER. Yes.

Senator GORE. That was the inducement at the time, in order to make call loans. I have been told this, Doctor-and I would like to get your reaction-that that group was among the first and the worst to withdraw these brokers' loans when the danger signals appeared.

Mr..GOLDENWEISER. Of course. The so-called "loans for account of others", the loans by corporations, were all withdrawn almost overnight when the turn came. It is different from bank money, in that it has a complete lack of responsibility toward the market, and has its entire responsibility toward its stockholders. It was perfectly good, straightforward business for a corporation to float securities and get money while it could get it cheap, because it thought that some day it might need it, and in the meantime it could get 10 or 12 percent by loaning it on the market. But when the market turned that corporation quite naturally tried to get all that money out just as soon as possible, so that almost overnight billions of dollars were withdrawn, and the New York banks had to step in and carry the loans in order not to let the market go into an even worse collapse than it had.

It was a very critical situation, and the banks had to borrow from the Federal Reserve, and the Federal Reserve had to help them, because when all those billions started out of the market in that hurry, it had to be supported. I think, with regard to these loans for account of others-I refer to them by the technical name. Partly because they are entirely irresponsible money, irresponsible from the point of view of the money market, they are a very vicious

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