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Mr. WHITNEY. That is correct.
Mr. PETTENGILL. Which might be 25 or 35.
Mr. WHITNEY, Yes, sir.

Mr. PETTENGILL. Now, what is the advantage, from your standpoint, of having a rigid and arbitrary minimum?

Mr. WHITNEY. As I have tried to explain, because of the safety to the customer, the house, and from the point of view of the borrowing at the bank.

Now, I agree that a rigid minimum is necessary as long as it is proper and reasonable, and above that, to operate so that there might be safety in such loans from all points of view; but my claim is that when you get above what is a reasonable--and I claim that 150 percent is not reasonable—as a minimum, or 100 percent-you are then getting into the realm of wiping out, exterminating, speculation in the market, which I claim gives stability to a market for the interest of the market, that is, those interested in it.

Mr. PETTENGILL. I might thoroughly agree with you there, but it did seem to me a little inconsistent, for you to argue about the flexibility of margins, and at the same time have an inflexible minimum yourself.

Mr. WHITNEY. Inflexible minimum; yes, sir; which we consider is reasonable and based primarily on what is demanded by banks in loans.

In other words, as I think I said earlier, if under the law, under the Glass-Steagall Act, if those in control of the credit system of the country saw fit to lessen the credit extended for speculation, or if they believed that excessive speculation was developing, as I see it, it is then within their power to control that through their control of the credit facilities to lending banks, and that would immediately have its effect upon the brokers, and therefore upon the public that had the speculative craze, and it is that line of reasoning and that necessity of control, I think, is the proper one, and not through the instrumentalities of this bill.

Mr. HUDDLESTON. Mr. Chairman-
The CHAIRMAN. Mr. HUDDLESTON.

Mr. HUDDLESTON. May I ask you to explain how specualtive activities contribute to stability?

Mr. WHITNEY. Yes, sir; I will attempt to answer that.

If speculative activities are eliminated from the market, you then have only investors buying and selling. If we are going to wait in markets for investors to buy and sell, it might cause, if all that we know is correct, that when there is the feeling on the part of the public, or the investors affected, that times are better, that recovery is coming, that prosperity is with us, all of them want to buy, and, vice versa, when depression is with us they all want to sell.

The very term and definition of the word “investor” includes those people who are looking for safety in their investment. They are looking to returns and general stability of their capital. They are not from their very essence, willing to take risks, if we go by the definition.

The speculator is the one that takes the risks. The same reason, as I see it, holds good in other commodity markets, whether the miller, the growers of a commodity, first, the user or the grower, wanted to hedge, it is to the speculator that he sells or buys, and I believe that you cannot have markets without speculation.

There is one particular instance that I think makes my point: In September, September 21, 1931, we heard late Sunday night, the night before, that England was going off the gold standard. Three of us met, the only one we could get a hold of at that time, and decided to advocate to the governing committee the next morning the prohibition of short selling. Why? Because it was our desire and our belief, that a short seller feels if there is a danger of the exchange closing, that his contracts may be eliminated, may be lost, and that he may be put out on the end of a limb, and have no chance to terminate his contract, and we thought by doing so we would bring into the market coverings by short sellers.

We then adopted that rule on the morning of September 21, and in those two following days the short interests did cover to the extent of some 700,000 or more shares; but before one-half hour had elapsed General Motors, United States Steel, American Can, Reading, and many other prominent active stocks were in such a condition because people wanted to buy them that we had to allow those persons on the floor who were willing to sell them to go short in order to prevent a perfectly ridiculous market.

Now, we have never had the situation in this country that shows what the effect of eliminating purchases on margin or speculative buying transactions would be, but it is inconceivable to my mind that the same effect would not immediately obtain as we have experienced in the short selling episode I have recounted to you.

Mr. HUDDLESTON. Your idea is that the prohibition of speculation or discouragement of it would tend to cause sharp and excessive changes in market prices?

Mr. WHITNEY. If I may say so, the prohibition or eliminating of it in the main would tend to eliminate the stability of market prices;

Mr. HUDDLESTON. The adoption of minimum margins, discourages speculation and the higher the margin required, the greater the discouragement to the speculator?

Mr. WHITNEY. Yes, sir.
Mr. HUDDLESTON. Is that correct?
Mr. WHITNEY. Absolutely.

Mr. HUDDLESTON. Taking the converse of the proposition, do you think that speculation should be encouraged?

Mr. WHITNEY. No, sir; I do not. I think it should be kept within all reasonable bounds, but to eliminate it is as I have said, I think, devastating

Mr. HUDDLESTON. You used the expression a few moments ago of excessive speculation. Just what have you in mind?

Mr. WHITNEY. What do I mean by that?
Mr. HUDDLESTON. Yes.

Mr. WHITNEY. I have in mind what happened in 1929, and I have in mind what happened in many stocks in 1933, in the spring.

One, I think, was caused by the cumulative effects on the entire country and the world going on a rampage in a bullish movement,

I think that in the spring of 1933, the movement was caused because the whole country firmly believed we were faced with real recovery and promptly.

yes, sir.

Now, that was an excessive movement, and the great activity downward after the depression, after 1929, was excessive, and we have seen the unfortunate episode since the spring, although the market now is at perhaps a higher level than then.

I think those excesses, sir, can be prevented by the control of the credit to which I have just referred.

Mr. HUDDLESTON. When does speculation become excessive?
Mr. WHITNEY. That I cannot tell you.

Mr. HUDDLESTON. The expression “excessive" seems to be so very elastic that it does not mean much to me.

Mr. WHITNEY. I am quite confident, so far as an exchange is concerned, we are willing to leave that and that interpretation in the hands of those who control he credit system of the country.

Mr. HUDDLESTON. Short selling, of course, is a way of speculation. Mr. WHITNEY Absolutely.

Mr. HUDDLESTON. You would not prohibit it because it would have a detrimental effect on the stabilizing influence of speculation?

Mr. WHITNEY. Yes, sir; I would not prohibit it.
Mr. WOLVERTON. Mr. Chairman-
The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. I was very much impressed with a statement you made just a moment ago, that on September 21, 1931, because of information you had received from England, three members of the stock exchange gathered together and took action.

Mr. WHITNEY. I did not say that, sir; if I may be so bold. I said three gentlemen were together at my house that evening and decided to suggest the action which was taken the next morning by the governing committee.

Mr. WOLVERTON. Yes. How many were present the next morning when the action was taken?

Mr. WHITNEY. I think around 36 to 40 members out of 42.

Mr. WOLVERTON. You felt justified in taking that action to control or protect the market, did you not?

Mr. WHITNEY. To control or protect the people of the United States; yes, sir.

Mr. WOLVERTON. Do you think that control such as you were able to exercise on that occasion should be vested in individuals rather than in a Government agency?

Mr. WHITNEY. Yes, sir. I asked the Government to give me an opinion. I asked every prominent government official down, to give me an opinion as to what we should do, and not one would take the responsibility and placed it upon the New York Stock Exchange at that time exactly as it was placed on the New York Stock Exchange to close in 1914. No one else would take the responsibility except its governors.

Mr. WOLVERTON. I hope that my questions do not create in your mind the thought that there is any criticism on my part toward you for the action that was taken; but I am making inquiry of you as to the matter of policy.

Mr. WHITNEY. I understood that to be so.

Mr. WOLVERTON. Do you feel that power should be lodged in individuals without responsibility other than that which they are willing to assume, or should it be placed in an authority that has responsibility to the people?

Mr. WHITNEY. Why, Mr. Wolverton, I thought I had answered you.

To my way Mr. WOLVERTON. You answered, Mr. Whitney, to the extent of saying that you believed it should be left just as it is; but I would appreciate very much having the reasons that led you to that conclusion.

Mr. WHITNEY. Yes, sir. I would like to give it if I know how to answer you.

As I see it, that responsibility lies on the heads of those that take it in the first place, and lies on the heads of the individuals in control of an operation such as an exchange, who have a far graver responsibility, to my mind, than if it lies upon the heads of a commission appointed under an act.

I cannot conceive by any stretch of the imigination how any commission could have been informed of the facts, could have had time to have gone into the details; in particular, in the technical matter in which I do not believe any administrative body could have the information, or experience, as compared with what members of the governing committee have in order to take such action with the promptness that such action warrants.

As I said, in referring to the close of the exchange in 1914, war was declared, if you remember, at midnight. No one would take the responsibility. We wanted advice. We wanted the advice of someone else and we asked someone else to take it. The same thing happened then as has happened, sir, many other times.

I cited the delayed opening of the exchange the other morning. We had an explosion in 1921. One governor went up to the rostrum and rang the bell in order that hundreds of men, perhaps thousands, including telephone clerks, and pages, should not be killed. He did not know what was going on. But, surely, one could not wait in an emergency like that for an administrative body to act.

Mr. WOLVERTON. Then it is your thought that it would be impossible for any Government agency to be set up that to be as keenly appreciative of their responsibility or have the knowledge that you, as a private member of the stock exchange might have, and that would enable them to act as you acted in that case?

WHITNEY. No, sir; I think that they would be fully as appreciative of their responsibility; and in the second place I have referred to the governors of the exchange, 42 men, as a whole, and not to myself individually.

Mr. WOLVERTON. I did not mean to indicate you personally. I mean you, representing that particular group.

Mr. WHITNEY. That is my opinion; yes, sir.

Mr. WOLVERTON. You do not think, and cannot conceive of any manner in which a Government agency could be set up to exercise that responsibility on an occasion such as you have referred to?

Mr. WHITNEY. Not unless they were at all times resident in the stock exchange and had their representatives resident in there and in all other exchanges of the country.

Mr. WOLVERTON. Suppose you folks had not taken that action? Mr. WHITNEY. I can assure you that we had rather

Mr. WOLVERTON (continuing). Then, there would have been no one to whom those who should have been protected could have looked? Mr. WHITNEY. We would have had to have taken either 1 of 2 actions, other than what we did, the closing of the exchange that morning.

Mr. WOLVERTON. Now, if there had been a governmental agency in Washington, we will say, and information came to you such as did come on that particular night, would it not have been possible for you to have communicated that information to those who composed the membership of the agency and requested them to take the action which you took?

Mr. WHITNEY. I cannot imagine there would have been time or they would have had the actual, intimate knowledge of what the constitution is, the working of the stock exchange, to give an opinion in that time.

Mr. WOLVERTON. So then the people of the nation, then, are absolutely dependent on the good faith of the individuals who control the stock exchange?

Mr. WHITNEY. In such matters; yes, sir.

Mr. WOLVERTON. And there will be no way in which their rights could be preserved except by them depending upon the good intentions and conscience of those who happen to occupy those particular positions?

Mr. WHITNEY. If I understand what you mean by their rights;

yes, sir.

Mr. WOLVERTON. Now, may I just for a moment direct your attention to this further thought, in answer to my questions this morning, I rather gathered that you still had faith in the efficacy of your questionnaire system of obtaining important information from those who are members of the stock exchange, or with reference to the securities listed or to be listed.

Now, I read with some interest this morning Senator Fletcher's statement. I suppose you did likewise. If not, may I direct your attention to the fact that in the statement he said this:

When the Senate committee last summer asked the stock exchange to investigate the collapse of 1933, the stock-exchange authorities conducted an investigation of several months and they reported to us that nothing of importance had been found.

And, continuing:

It was not until we continued our hearing on the subject last week that the stock-exchange authorities, according to their own statement, learned about the price gambling, manipulation, rigging, which took place in 1933, and which our own agents were able to uncover without the aid of and against the assurance of the stock-exchange authorities.

Would you care to make any explanation of that situation, and is it true that the report submitted by the stock exchange authorities last summer in answer to the request of the Senate committee gave to the speculators a clean bill of health, and then last week had conditions revealed to them that the officers of the stock exchange did not know had existed when they made their report to the committee last summer?

Mr. WHITNEY. I would prefer, unless you desire it, and it is the desire of the committee, not to make reference specifically to what Senator Fletcher said.

Mr. WOLVERTON. Then, as to the situation which I have read to you.

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