consideration can be given to all of those questions which those gentlemen brought up. I think that they would apply those further considerations for the protection of their own interest. What you are trying to do here is somewhat different. You are trying to reverse a practice that the stock exchanges have become accustomed tothat is, of basing requirements solely on the current prices of stocks. Those people are lenders and they have found they can protect their loans, even where they are dealing with a volatile stock, a stock that drops very rapidly, because they are in a position where they can dump securities; when they can call for margins or dump.

I think that Congress would say in this bill that that practice protects the lender, but that it nevertheless has a bad social effect. It is bad to have margins called all over the country suddenly and rapidly, as they are under present practices for protecting the value of brokers' loans. What you are trying to do is to protect the country from extreme fluctuations in the stock exchanges fluctuations, which have been brought on as a result of these practices.

Mr. MERRITT. I should not agree with that. I should not agree that that is so. I should say that I think that the stock-exchange authorities are interested in protecting the country, in their own interests.

Mr. RIEFLER. Yes; but in a very different way. They are not charged with the same responsibility.

Mr. MERRITT. The trouble is, if we get mussing into things we do not understand, we may hurt the country when we are trying to protect it.

Mr. RIEFLER. I am very sure that you will approve of this when it becomes effective.

The CHAIRMAN. Mr. Merritt, do you not think that the judgment of the Federal Reserve Board on what will hurt the country will be as good as the stock exchange's judgment?

Mr. MERRITT. I beg your pardon.

The CHAIRMAN. Do you not think that the judgment of the Federal Reserve Board on what might or might not hurt the country will be as good as the board of governors of the New York Stock Exchange? Mr. MERRITT. I think it is entitled to consideration, of course. I think that on a question of this sort, if you give the Federal Reserve Board jurisdiction, it is logical to give them entire control of the situation, and not tie them down to a rigid requirement in law. That is all.

The CHAIRMAN. It is not a rigid requirement.

Mr. MERRITT. What?

The CHAIRMAN. I do not think it is a rigid requirement. I think that the witness stated several times in his opinion this is not a rigid requirement, but was very flexible.

Mr. MERRITT. But we are fixing it in the law.

The CHAIRMAN. Yes.

Mr. MERRITT. Which fixes it.

The CHAIRMAN. In practically every law we pass, we do that. This is merely fixing a standard for the commission. We fix the standard and leave it to the commission to promulgate the regulations, things that are purely administrative.

Mr. MERRITT. I think you control the actions of the Federal Reserve Board by your limitations, do you not?

45381-34-51

The CHAIRMAN. Yes.

Mr. MERRITT. That is the only difference between us.

Mr. MAPES. Mr. Chairman

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. Just for the record, somebody has handed me this note. The lowest General Motors reached in 1932 was 7%.

Mr. RIEFLER. Then that would not apply under this formula.
Mr. MAPES. No; it would not.

Mr. RIEFLER. These requirements start with July 1, 1933.

Mr. MAPES. There are some stocks that are equally good, that were pretty low the 1st of July.

Mr. RIEFLER. I was thinking of what this formula would affect. The formula in this bill would cut that price out of the picture. There was a terrific deflation in stocks in 1932. This formula refers to prices since July 1, 1933.

Mr. COLE. Mr. Chairman, may I ask one question?
The CHAIRMAN. Yes; Mr. Cole.

Mr. COLE. How far can the Federal Reserve go now under the Glass-Steagall bill in imposing on the member banks, let us say, requirements similar to the restrictions we find in this law? Is there such authority in that act for them to do it?

Mr. RIEFLER. I do not know. The Glass-Steagall Act gives the Federal Reserve Board power to fix the total amount of security loans of individual banks.

Mr. COLE. Yes.

Mr. RIEFLER. But, whether it would extend to the requirements of margins on particular securities, I do not know. Of course, it would not affect at all what the broker could lend to the customer. This applies only to what the broker lends to the customer and the authority of the Federal Reserve Board under the Glass-Steagall Act applies to what banks can lend to brokers.

Mr. COLE. Now, the Federal Reserve has never adopted any such formula as this in dealing with the banks since the passage of this act, last June, the Glass-Stegall Act?

Mr. RIEFLER. No.

Mr. LEA. Well, in this case, the effort is to restrict credit by the amount of credit that can be given on the individual transaction.

Mr. LEA. While the restrictions that the Federal Reserve Board now exercised is based upon the volume of credit generally; is it not? Mr. RIEFLER. Yes.

Mr. LEA. Now, is it the idea of the Federal Reserve Board that it is necessary to go to these individual transactions to hold control of credit?

Mr. RIEFLER. You will have to ask the Board that.

Mr. LEA. Or should it be exercised through the general amount of loans?

Mr. RIEFLER. You will have to ask the Board that. I am not testifying for the Board.

The CHAIRMAN. Governor Black will be here around 3 o'clock.

Mr. WOLVERTON. Mr. Chairman.

The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. Are we to understand that you give your unqualified approval of the requirements set up in this present bill?

Mr. RIEFLER. I think the requirements of this present bill are good; yes.

Mr. WOLVERTON. Do you have in mind any other requirements that might improve it?

Mr. RIEFLER. Well, those are always relative questions. I think these are good requirements. I have not seen any others that I would prefer to them.

Mr. WOLVERTON. Do you think any of them might be detrimental? Mr. RIEFLER. No; I think of none. It seems to me, that you give your regulatory commission, and the Federal Reserve Board, power to meet that situation.

Mr. WOLVERTON. As I understood your opening remarks--and I think it is true the purpose of these margin requirements is to stop undue speculation. Is that true?

Mr. RIEFLER. I would say it is a little more than that. It is to stop speculation from feeding upon itself. I mean, to stop securities, speculative securities, from having a higher value simply because they have a higher value. If they go up, or are put up 50 percent; at present you can borrow proportionately more. It is possible, therefore, to pyramid and expand lower prices still higher. I think the requirements on this bill are designed to prevent that.

Mr. WOLVERTON. Well, it is the hope that the margin requirements fixed by this bill will be effective in checking undue speculation. Is that not true?

Mr. RIEFLER. That is true.

Mr. WOLVERTON. Do you think of any other method by which undue speculation might be stopped or checked? Mr. RIEFLER. Oh, yes, sir.

Mr. WOLVERTON. What do you have in mind?

Mr. RIEFLER. When I was with the Federal Reserve Board, i.e., up to last year, I participated in an investigation of the relation of bank loans to the security markets, to markets in general, from the point of view of the legal reserve rquirements of banks We worked

out a complete and flexible plan for making reserve requirements vary with the activity of deposits. That would have a strong influence toward checking undue speculation and also toward stopping undue deflation. I should think that if the committee ever wants to go into that field it would be very profitable for them to make that plan a part of this same picture. That plan has been presented to Congress by the Federal Reserve Board.

Mr. WOLVERTON. Have you given consideration to requiring minimum amounts to be deposited with the brokerage houses?

Mr. RIEFLER. So that the small speculator cannot come in?
Mr. WOLVERTON. Yes.

Mr. RIEFLER. I would be afraid that some other method would grow up by which the restriction could be avoided. I do not know how it would work. It would be so easy for somebody to pool securities and evade the restriction in some way.

Mr. WOLVERTON. Do you think that the prohibition of market trading in odd lots would be helpful?

Mr. RIEFLER. No; I do not think it would. I think our experience has shown that it is just as bad to have the big fellows get in trouble as the little ones. I think that what we want to do is to protect them all.

Mr. WOLVERTON. Do you think that the prohibition against the purchase on margin of any stock selling at less than a certain figure would help?

Mr. RIEFLER. I do not have any strong feeling about that. I do not think it would be very effective in helping the situation.

Mr. WOLVERTON. Has the Federal Reserve, either under the GlassSteagall Act or under this bill, been provided with any means by which they could list stocks for margin requirements?

Mr. RIEFLER. This bill has a distinction between exempt and unexempt securities in which certain securities can be exempted.

Mr. WOLVERTON. Would there be a likelihood of that being carried out; that is, of making a list of certain stocks with their margin requirements?

Mr. RIEFLER. I had not thought of that. I suppose that the language of this bill would permit margin requirements, more restrictive than those imposed in the general provisions, to be worked out in the case of individual stocks. It gives the Federal Reserve power to fix higher margin requirements than these prescribed in the bill if they feel they are necessary and are in the public interest.

Mr. WOLVERTON. Was your advice sought and utilized in the drawing of the margin requirements in this bill?

Mr. RIEFLER. Only slightly. I never sat in on the conferences at all. I talked them over with some of the people who drew the bill. Mr. WOLVERTON. After having given careful consideration to the bill, do you wish to offer anything as an amendment that in your opinion would improve it?

Mr. RIEFLER. No; I do not have any amendments.

Mr. WOLVERTON. That is all.

Mr. MARLAND. Mr. Chairman.

The CHAIRMAN. Mr. Marland.

Mr. MARLAND. As an economist in the Government, in the employ of the Government, do you believe that the passage of this act will have the effect of causing a decline in stock-market values?

Mr. RIEFLER. I do not see how it could.

Mr. MARLAND. What?

Mr. RIEFLER. I do not see how it could.

Mr. MARLAND. You do not think it would?

Mr. RIEFLER. Not from the point of view certainly of the margin requirements. They do not apply to any existing loans; only apply to future loans, and are very liberal on most of those.

Mr. MARLAND. You think that the passage of this bill as written would have any effect on the stock-market values?

Mr. RIEFLER. I would not anticipate any; no.

Mr. MARLAND. That is all.

Mr. BULWINKLE. You have read both bills?

Mr. RIEFLER. Yes. I am rather vague on the old one.

Mr. BULWINKLE. You read the first one and have read this last one?

Mr. RIEFLER. Yes.

Mr. BULWINKLE. In your opinion, which is the best?

Mr. RIEFLER. Oh, this is a very much better bill.

Mr. BULWINKLE. What?

Mr. RIEFLER. This is a very much better bill.

The CHAIRMAN. We are very much obliged to you, Mr. Riefler, unless you have something further you desire to say.

Mr. RIEFLER. No; I have nothing further.

STATEMENT OF ROBERT K. CASSATT, REPRESENTING A GROUP OF INVESTMENT BANKERS IN THE CITY OF PHILADELPHIA, PA.

The CHAIRMAN. Will you give your name and qualifications? Mr. CASSATT. Robert K. Cassatt. Mr. Chairman and gentlemen, I represent the group of investment bankers in the city of Philadelphia who are also, all but one of them, engaged in the brokerage business. That is to say, they are all members of one or more stock exchanges. When the first bill was presented to this committee, or when it was under discussion before this committee, Mr. Newbold came down and spoke for this group before this committee, and with the permission of the chairman I would like to read a brief statement as to certain features of this bill which we consider deserving of further consideration.

The undersigned group of investment dealers, engaged in the business of selling investment securities to their clients in the city of Philadelphia, Pa., were given the privilege of appearing before the House Committee on Interstate Commerce when consideration was being given to House bill 7852. At that time objections were made to ceratin sections of the bill as then drafted, which were discussed with the committee by Mr. John S. Newbold, of Philadelphia, on behalf of this group.

The result of amendments made to that bill has produced a new bill in the form now before this committee, which is H.R. 8720. This bill shows that, as to certain of the sections of the original bill, material relief has been granted, but as to others no substantial change has been made, and for reasons herein stated, objection will now be made to the bill in its revised form in order to show to the members of the committee the need for granting relief to a greater degree than has been afforded.

The attention of the committee is directed to provisions of six of the sections of this bill, and six only, which in the judgment of the undersigned, need further amendment and revision.

The first is section 6, which has been under discussion, and we have this to say on that provision.

This section is still in the form which, if enacted into law, will prove most disturbing to the securities business. It seems to those who have given serious consideration to the provisions of this section, since they desire to aid in properly accomplishing the major purposes of the bill, that the arbitrary and inflexible control over margins and credits is unwise, unworkable and will prove harmful. It is suggested that in place of the section as written, the control over margins and credits should be vested in the Federal Reserve bank of each district, in order that the problems may be met in accordance with the needs of the several sections of this country without imposing upon business generally the burdens which the application of the formula set forth in section 6 will most certainly produce.

And I will say here, gentlemen, that while this recommendation bears some relation to the recommendations made yesterday by Mr. Whitney in his testimony, this brief was prepared before Mr. Whitney testified before this committee.

The CHAIRMAN. Let me ask you a question. Do you want to leave it to the Federal Reserve banks absolutely? Mr. CASSATT. Yes, sir.