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securities, and thus squarely segregates and divorces the two, requiring a segregation between the business of dealing as a broker on a commission, on the one hand, and the business of buying and selling sécurities, on the other hand.
This same section, by its various provisions, prohibits specialists from executing market orders, and when you read that provision in conjunction with the provision which prohibits the specialist from trading on his own account as a dealer, the substance of it is to eliminate the so-called “specialist” from the exchanges.
I have referred to these particular provisions of the bill because they constitute—these last ones that I have been referring to-express statutory prohibitions on a point where there is some room for a difference of opinion as to the desirability of a flat statutory prohibition in contrast with some discretionary authority to forbid the abuse of a useful practice for improper purposes.
The bill contains a number of prohibitions of practices as to which it is entirely clear that the practice should be absolutely prohibited and which are properly prohibited by its provisions, namely, wash sales and fictious transactions of that kind, matched orders, pools for rigging the market, dissemination of false information, rumors concerning the market, and other practices which are wholly bad and which are properly covered by absolute prohibitions. I have signaled
out for mention these particular provisions of the bill that I have referred to in order to indicate the type of regulation that it applies directly to stock-exchange practices, and also the extent to which it is apparently thought necessary that it should go beyond the regulation of stock-exchange practices, by establishing some control through the Federal Trade Commission over the flow of credit into the security market and over the corporate financial practices of those companies whose securities are traded in.
In these two fields of control over credit and control over the corporate financial practices of the corporations whose securities are traded in, the bill relies on very wide discretionary powers to be exercised by the Federal Trade Commission, while within the field of stock-market practices it relies more directly on flat prohibitions.
I want to refer in a little more detail to the apparent object of the bill and what seem to me to be its probable results in the field of credit control. Here it confers on the Federal Trade Commission a considerable degree of authority in a field which has hitherto been wholly within the regulatory power of the Federal Reserve Board and the banking authorities of the Government, and in which the recent legislation has sought to follow the line leaving that control to the Federal Reserve Board and the banking authorities.
I refer to section 3 of the Glass-Steagall Act of June 15, last, which gives to the Federal Reserve Board power to suspend the use of the credit facilities of the Federal Reserve System by any bank which makes an excessive use of its credit for speculative trading in the security markets, and also to section 7 of the Glass-Steagall Act, which again authorizes the Federal Reserve Board to exercise power in this field by fixing the amount of bank funds which may be represented by loans on stock or bond collateral.
The Federal Trade Commission has not hitherto operated within this field of credit control, and in spite of the very wide range and scope of the present functions of the Federal Trade Commission,
none of these have yet brought within its practice the field of control over credit to the extent that is involved in the provisions of the present till.
While it might be desirable, and is desirable, in my opinion, to strengthen the control over credit for stock market purposes which now exists in the Federal Reserve Board, there is at least a question whether or not such control would be strengthened by setting up a divided authority and granting a portion of control in that field to the Federal Trade Commission, or to any agency in which the Federal Reserve Board is not represented.
For this reason, the report of the Roper committee suggested that when the stock exchange authority, as there proposed, was taking action in a field which involved credit problems, such as the matter of margins, it should do so in conjunction with the Federal Reserve Bank of the district in which the particular exchange affected was located, and I now want to come to this margin provision of the bill and say just a little more about that in detail.
The objective of this provision is apparently to cut down very greatly the amount of the available funds of the country which flow into the security markets, with the idea that that will prevent the degree of speculation that causes violent oscillations, or such a violent oscillation as we experienced 4 years ago.
To accomplish this purpose, the bill would require at all times the maintenance of a margin of 60 percent, except so far as this might be tempered by the 80-percent loan provision.
This flat requirement, of a fixed margin, I think, ought to be considered from at least two points of view: First, its immediate prospective effect; and secondly, its long run desirability. The bill, as it now stands, call for the margin provision to go into effect along with the other provisions by October 1, next.
The gentlemen who, I believe, have drafted the bill, Messrs. Cohen and Cochran, have informed me that they have made a change in this provision, but as that has not yet been embodied in the bill as it stands before the committee, I believe, I want to speak to what seems to me to be the possible results of attempting to put the present margin provisions of the bill into effect by next October 1. Of course, it is difficult to reduce these things to figures, and they cannot be reduced to absolute statistical accuracy; but still, in order to get some conception of what is likely to happen, I believe that we can rely roughly on some of the figures that have been put in evidence here before you gentlemen of the committee.
For example, I notice a statement in the testimony of one of your witnesses, Mr. E. A. Pierce, that in order to bring the margin accounts of his firm into line with the margin provisions of the bill as they at present stand would require that securities now in those accounts should be liquidated to the extent of approximately one third of the total value of the securities now in the accounts, or an equivalent amount of cash must be put in. That, of course, is the experience of only one firm; but in the absence of any better evidence, I think it might supply us with a clue as to what might be expected all along the line. Assuming the total market value of the securities in the accounts of all of the members of the New York Stock Exchange is somewhere around $2,000,000,000, which I believe is the generally
accepted figure, and that somewhere in the neighborhood of 17 percent of that $2,000,000,000, or in other words $350,000,000 of those securities, are unlisted securities, which under section 6 (a) of the bill would be ineligible to remain in the accounts, there would remain in those accounts approximately $1,650,000,000 of listed securities. Applying to these the 334-percent experience of E. A. Pierce & Co., it would mean that approximately $550,000,000 of these securities would have to be sold out, or an equal amount of cash put up, in order to bring those accounts into line with the margin requirements of the bill by October 1, and, in addition to that, we have to take into account the $350,000,000 of unlisted stocks and securities which would no longer be available for margin purposes, and would, to a greater or lesser extent, have to be sold out.
So that we see the apparent extent of the liquidation which would have to follow within the next few months if we were to get around by October 1 to meeting the margin requirements of this bill.
The liquidation in so short a period of such a volume of securities would have a natural tendency to depress the market, and, as the liquidation continued, there would be a progressive necessity of liquidating more securities than would be necessary if values remained at the point where they would stand in the absence of such liquidation.
Whatever might be the desirable thing, therefore, from a long-run standpoint of reducing the amount of funds in the stock market, it is at least a question whether it would be sound economic policy to effect this reduction in so short a period at the present time when the efforts of the Government are in the direction of increasing or at least sustaining values.
Assuming, however, that the bill would be so amended as Mr. Cohen and Mr. Cochran have suggested to me, that the proposed flat requirement, the 60 percent margin requirement would not go into effect for a considerable time, perhaps not until the expiration of a number of years, the question still remains whether the fixing of a flat arbitrary margin for all stocks under all circumstances is an advisable method of protecting the economic structure of the country against the disastrous consequences of excessive speculation. The very simplicity of that method proposed for the solution of a highly complicated problem might raise some question as to its effectiveness or its wisdom. The danger of overspeculation consists, after all, not so much in the total amount of funds in the stock market at any one time as in the excessive expansion and contraction of those funds, and you do not get any control over expansion and contraction by a flat margin which applies equally under all circumstances, no less when the market is bare of funds, on the one hand, than when it is tremendously active and flushed with funds, on the other hand. It is a flat provision which does not operate to check when speculation occurs, and which is just as rigid when there is no expansion.
The control over margin trading would seem to require the application of different standards at a time when speculative practices become excessive, from those which are applied when there is only a small amount of speculation. In the words of the Roper report, liquidity as affected by margin requirements changes in importance from time to time, and it seems hardly desirable to freeze requirements into the provisions of a statute.
If it should be said that a discretionary authority to mold margin requirements flexibly could not be trusted to stand up under the strain of mass pressure at a time when there was a strong Nation-wide popular movement for speculation, it might be considered at any rate whether, under those circumstances, we have any experience which justifies the belief that the rigid paper provisions of a statutory enactment would stand up any more effectively against the mass determination or pressure to speculate heavily. We must remember that strong and justified as is our desire, and should be our desire, to reform the speculative instincts of the country, nevertheless this old custom of margin trading has been an integral feature of our financial system for almost 100 years, and that even if we look forward to its ultimate abolition, it is so tied in with the financing apparatus of our credit structure, with the things that our banks loan money on, and with the practice of our people in purchasing securities, that nay abrupt attempt to restrict it to arbitrarily narrow limits by governmental fiat would be likely to have unforeseen consequences in many directions, which I doubt whether any of us would be able to define in advance.
As a part of the general credit system of the country, control of it can be properly vested only in the agency which is our center of credit control, namely, the Federal Reserve System, which can treat it as it should be treated, as a part of the general credit problem in proper relation to the other parts of that problem.
In connection with any reform which attempts to effect an immediate and violent change by governmental fiat in an established practice which was woven itself into the economic structure of the country, I would simply like to refer to a sentence from the President's speech of yesterday, in which he said:
I have never believed that we should violently impose fiat, arbitrary, and abrupt changes on the economic structure.
Turning now from the provisions of the bill relating to the control of credit, and going on to the provisions which deal with control over listing or registering corporations, and which the bill intrusts to the Federal Trade Commission, I am impressed with the magnitude of the task of administration which these provisions of the bill devolve upon the Commission.
In the first place, the Commission is charged with the task of receiving an initial registration statement from each corporation, public or private, which desires to have its securities listed on an exchange so that they may be eligible as collateral for brokers' loans and for the other privileges which the bill denies to unlisted securities.
After the receipt and examination of this initial registration statement and the admission of the corporation to listing the Commission is then, under section 12, to receive certain reports annually, and also quarterly and monthly reports, from each listed corporation.
The object of the bill, it is to be assumed, is to bring about, so far as practical, the registration and listing of all issues of securities in order that as wide an amount of trading in securities in the country as possible shall come under the control features of the bill.
It is also to be noted that the Commission is, by section 14, given the broadest kind of power over so-called “over-the-counter” trading, or trading which does not go on on the exchanges, and in the
exercise of this power it will no doubt find it necessary to require of the issuers of unlisted securities some form of reports or statements at least analogous to those required in the case of the listed securities.
At the present time there are 1,367 separate issuing corporations whose securities are listed on the New York Stock Exchange. The Analyst's annual supplement for 1934 shows 3,500 issuers with securities listed on other stock exchanges than the New York Stock Exchange. Doubtless there is some duplication between these two lists, but on a conservative estimate, it would seem likely that there are at least 4,000 corporations in the country with securities now listed on some exchange. If it is contemplated that all corporations, so far as possible, whose securities are now traded in without being listed, shall be registered under the provisions of the proposed act, we must look beyond the concerns which have issues that are listed now, and I would suppose that if we turn to Moody's Investment Service, that series of volumes that you are all familiar with, we would probably not find that service giving space to corporations in whose issues there was not likely to be some public trading. The number of corporations listed and analyzed in the various departments of Moody's Manual are as follows: Industrials, 14,000; public utilities, 6,300; railroads, 2,300; banking and finance, 11,400; municipal and local governments, which I repeat, come under the listing and registration requirements of this bill, 10,000, approximately; making a grand total of 44,000 corporations, listed and unlisted, in the various volumes of Moody's Manual.
All of these classes of corporations are potentially subject to the jurisdiction of the Federal Trade Commission 'as defined in the bill, if they wish to have their securities listed, and they have to have them listed if they are to be used as collateral for brokers' loans.
Assuming, however, that not over half of these would be brought under the jurisdiction of the commission, either in connection with the registration requirements, or even in connection with its authority with over-the-counter trading, nevertheless, the task of the Federal Trade Commission in not merely receiving and passing upon the initial registration statements, but also in receiving and making available the periodical monthly and quarterly reports, is seen to be of very great magnitude, if it is to extend more than 20,000 corporations.
This figure, for example, is to be compared with the 2,300 railroads or less, which are subject to the jurisdiction of the Interstate Commerce Commission.
It is to be noted, also, of course, that the Federal Trade Commission under the terms of the bill is not limited to the purely ministerial and clerical function of receiving and making publicly available the returns to be received from the corporations subject to its jurisdiction, but the bill obviously contemplates that it shall examine these for purposes of regulation.
This more clearly appears in connection with the provisions of section 18 (b), which, as already referred to, confers upon the Commission power to prescribe the accounting system of the various corporations, including the valuation of assets and liabilities, I am quoting from the bill
The determination of depreciation and depletion, the differentiation of investment and operating income, and the preparation, where the Commission deems