Mr. DICKINSON. Yes, sir. Mr. PETTENGILL. That makes a total of $900,000,000. Mr. DICKINSON. Yes, sir. Mr. PETTENGILL. If we had 100 percent margins, what additional liquidation would we have to have? Mr. DICKINSON. If we had 100 percent margins, it would mean wiping out the entire debit balance. Now, the debit balance of all of the New York Stock Exchange houses at the present time is $1,400,000,000, and that is just in New York. Of course, I may say also, that these figures I gave you yesterday just related to New York. Mr. PETTENGILL. To the New York Stock Exchange. Mr. DICKINSON. To New York only. Mr. PETTENGILL. New York only. Mr. DICKINSON. New York only; yes, sir. Mr. PETTENGILI.. Yes. Mr. DICKINSON. There are no figures available for making anv estimates for the exchanges outside of New York. Mr. PETTENGILL. I asked that question, with reference to testimony given before another committee yesterday, in favor of 100 percent margins. Mr. DICKINSON. Well, the New York debit balance is one billion four hundred and some odd million. Now, that would have to be put up, if you are going to have 100 percent margins, and, of course, the people might have that amount in their banks and be able to put it up. I do not know. Mr. PETTENGILL. Do you agree, Mr. Secretary, to prevent another great speculative boom that it would be desirable for the regulatory body, in cooperation with the governing board of the exchange, to gradually step up margin requirements on the stocks most actively traded in and which, are being bulled up the fastest? Mr. DICKINSON. In a general way; yes. Mr. PETTENGILL. It seems to me that would be highly desirable as a practical matter tending to prevent expensive speculation. Mr. DICKINSON. Yes, sir. Mr. PETTENGILL. Now, when the margin is based on a market price, a speculation grows on its own wind, in a way. Mr. DICKINSON. Yes. Mr. PETTENGILL. And pyramids. or pyramiding is permitted without any brake. Mr. DICKINSON. Yes. Mr. PETTENGILL. Do you think it would be possible to prepare a workable formula on margin requirements that would be based not only on market price, but average earnings and book value, taking those into consideration as factors in arriving at the margin? Mr. DICKINSON. Certainly, I think that dominant weight should be given to those factors. I would hesitate to write a provision of that kind into the statute itself, because it is one of those things that would have to be worked out, I should think, by experience; and, therefore, it was our proposal that sufficiently broad powers be given to the regulatory authority acting in conjunction with the Federal Reserve Board, to work out some such scheme of regulation as would accomplish the purposes that vou have in mind Mr. PETTENGILL. Well, I simply offer it as a thought that margins based on market price not only pyramid, as I say, but are driven forward on their own wind. Mr. DICKINSON. Yes. Mr. PETTENGILL. Do you think, Mr. Secretary, to prevent in and out, daily transactions of members of the exchange on a great bull movement, or to restrain them, put a brake on them-that it would be practical to reach that sort of a transaction through a provision of the income-tax law placing a surtax upon gains made, either long or short, on transactions if opened and closed within a 30-day period? Mr. DICKINSON. Mr. Pettengill, I am not sure that in-and-out trading is of itself an evil. It seems to me that if these people go in in an orderly way, not in the form of speculative pools or by resorting to practices of that kind, but if they go in in an orderly way and are always there in the market, buying and selling, that there is one of the things which makes a market, and that if you attempt to treat that thing as an evil in itself, why, you are not hitting at one of the sources of overspeculation, but you are hitting at one of the normal instrumentalities of the market. Mr. PETTENGILL. I made the suggestion only because it came to me in a letter from the president of a corporation that is known throughout the United States, as a suggestion to prevent expensive speculation by in-and-out traders. I do not know anything about its merits, and that is the reason I did not use it. Mr. WADSWORTH. Mr. Chairman The CHAIRMAN. Mr. Pettengill, have you finished? The CHAIRMAN. Mr. Wadsworth. Mr. WADSWORTH. Mr. Secretary, you presented in a very interesting manner the matter of psychology of the public in a period of what is termed the "bull market." And in reply to some questions, especially by Mr. Mapes, of Michigan, you discussed the suggestions contained in some volume that has been presented here, which I have not read, concerning educating the public to be earnings-minded, with special reference to the attitude to be pursued during a boom, and you have discussed the difficulty of writing into a statute, or the impossibility, perhaps, of writing into a statute any formula governing margin requirements. Most of that discussion has been directed toward the fixing of a formula on margin requirements during a boom, in order to put a brake or a check upon it. Have you anything to say when the public psychology is running in the opposite direction, such as has been the case during recent years? Mr. DICKINSON. Mr. Wadsworth, I think we have seen the necessity during this downward period for what may be called reverse action, particularly in connection with the banks and the insurance companies. It has been necessary, perhaps, in the interest of preventing too violent a downward movement to adopt a somewhat more liberal attitude toward valuations of the assets of banks and insurance companies than would have been desirable in a boom period. If a very strict attitude had been adopted toward those valuations, why, the deepness of the descent would have been increased, and I should say that the same principles would apply to margin requirements. Mr. WADSWORTH. The difficulties are just about as great when the market is running in that direction as when it is running in the other? Mr. DICKINSON. They are in the opposite direction, however. If you want to keep to the middle of the road when the market is moving in one direction, you have to go one way, and when the market is moving another way, you have to lean your back against the wind in the other. Mr. WADSWORTH. Then, you think that we had better leave the formula out of this bill? Mr. DICKINSON. Certainly, that is my own position. Mr. WADSWORTH. And embody a greater degree of flexibility? Mr. BULWINKLE. Mr. Chairman The CHAIRMAN. Mr. Bulwinkle. Mr. BULWINKLE. Mr. Secretary, after reading the Roper report and after hearing the proponents of this bill, and with some study on my part, I have this idea, and I want to see what you think of it: Assuming that, for the purpose of this question, that we have a constitutional right to pass this type of legislation, what could you think of the creation of a Federal board just for the purpose of licensing stock exchanges, and requiring, before that license is issued, that the exchange have its rules and regulations approved by this board, and that in the event of any violation then of any rules or regulations, they would, of course, forfeit their license, because, as set forth in the report, you stated that we should go not very far at this time on any legislation. What do you think about that? Mr. DICKINSON. That certainly, Mr. Bulwinkle, represents the skeleton of the idea on which the Roper report was based. Whether we want to or have to go a little bit further than that in order to accomplish our purposes, I should have some feeling that we might have to. Mr. BULWINKLE. Well, then, if we are to assume that we are to go a little further, now, what board would you say should have this supervisory or regulatory power? Mr. DICKINSON. This body that you are describing? Mr. BULWINKLE. Well, who should it consist of? To my mind, I had the Secretary of the Treasury, the Comptroller of the Currency, the Governor of the Federal Reserve Board, in mind. Mr. DICKINSON. I should think it should include some persons skilled in exchange practices, as well, appointed by the President. Mr. BULWINKLE. How about the Secretary of Commerce? Mr. DICKINSON. He might very well be included, also. Mr. BULWINKLE. And then you would suggest someone skilled in exchanges? Mr. DICKINSON. Yes, sir. The CHAIRMAN. Mr. Secretary, may I ask you this? Do you not think it would be rather unwise to put upon a Cabinet officer duties of this sort, that as busy as you have found them since you have been around here, you know it would have to be given to somebody else? Mr. DICKINSON. Yes, sir. The CHAIRMAN. I was wondering if we admitted an assumption, upon which I think we might go at this time, without further conversation with those that have more control of this than I, if we are to as sume that there is not going to be a separate board or commission set up to administer this law, in what board or in what commission in the Government would it most likely fall? Certainly not the Interstate Commerce Commission; doubtful if within the Federal Reserve Board, or in this Communications Commission we hope to set up, and in all probability the administration of the Securities Act will not be taken. from the Federal Trade Commission, and I was wondering if, that being true, if a division in that Commission appointed by the President, after the act, with its sole duty to supervise this enactment, would not be about the best place we can put it, if we are going to assume there is not going to be a separate commission or board set up. Mr. DICKINSON. Mr. Chairman, the duties of the Federal Trade Commission at the present time are, I suppose, about as multifarious as those of any agency of the Government. That Commission was set up primarily with a view to aiding in the enforcement, along somewhat different lines, of the Anti-Trust Act, and there were added to it certain functions over unfair competition, which related to misbranding and false advertising, and in addition it has certain indefinite inquisitorial powers for assisting the Congress. There has now been added to it the function of administering the Securities Act. If a separate division of the Federal Trade Commission could be set up which would in substance, be a separate body, relieved from the burden of assisting in the enforcement of the unfair competition provisions of the Clayton Act and the Federal Trade Commission Act, why, I should think that so far as such a separate division was concerned, that would in substance take the place of a separate agency, that would be a method of providing for the administration of this act. I am not sure, for myself, that I would differ as strongly as you do on the advisability of giving it to the Federal Reserve Board. It seems to me that in some respects, insofar as one of the central evils that you are dealing with here is the question of overexpansion of credit, that that is a function that cannot be separated from the Federal Reserve Board. If you do attempt to separate it from the Federal Reserve Board, you will build up a division of authority in a field where regulation is admitted to be necessary. Mr. BULWINKLE. And under each, the idea as to who controls, who supervises, as to all intents and purposes, a separate bureau is going to have to be set up to a certain extent. Mr. DICKINSON. Yes, sir; undoubtedly. The CHAIRMAN. That is all. Mr. WOLVERTON. Mr. Chairman The CHAIRMAN. Mr. Wolverton. Mr. WOLVERTON. Is it your thought that this new agency should likewise have supervision of the Securities Act? Mr. DICKINSON. That is a question that did not fall within the purview of our committee. Mr. WOLVERTON. You would not care, then, to express any opinion on that? Mr. DICKINSON. I have not given that question sufficient thought to be willing to express any opinion whatever. Mr. HOLMES. Mr. Chairman, may I ask another question? The CHAIRMAN. Mr. Holmes. Mr. HOLMES. In relation to section 7, which reads: SEC. 7. It shall be unlawful for any member of a national securities exchange or person who transacts a business in securities through the medium of such member, directly or indirectly (a) To borrow on any security registered on a national securities exchange rom any person other than a member bank of the Federal Reserve System; Now, that section there would create a serious injury to mutual savings banks in the Commonwealth of Massachusetts, and I presume all other mutual savings banks. Mr. DICKINSON. Are you referring, Mr. Holmes, to that phrase- Mr. DICKINSON. 66 Person who transacts a business in securities"is that the phrase that you are referring to; because I want to say something about that. Mr. HOLMES. Well, it is page 13, section 7 (a). Mr. DICKINSON. There is a phrase there reading, "person who transacts a business in securities through the medium of such member" Mr. HOLMES. Paragraph (a). Mr. DICKINSON. Paragraph (a). Mr. HOLMES. At the top of page 14 of the bill. Mr. DICKINSON. Well, might I just make an explanation of that phrase, because I am glad that you are reminded me of it. In the present language of that phrase, it seems to me fraught with a high degree of uncertainty and it might very well apply to banks and insurance companies and investment companies, and people of that kind, so that there would be no possibility for them to borrow from a bank other than a member of the Federal Reserve System. However, I might say, by way of explanation, that I did not criticize that phrase yesterday, because Mr. Cohen and Mr. Corcoran, when they came to see me night before last, told me they had changed that phrase, or rather, had put a definition of it into section 2 which would take care of those difficulties, so that I do not think it necessary to refer to what otherwise would, I think, be a very serious ambiguity in the present draft of the bill. Mr. HOLMES. I wanted to hear particularly upon the point as to whether or not it would be a serious handicap to the mutual savings banks. Mr. DICKINSON. They tell me they have put a definition of that phrase into section 2, which would limit it to brokers and dealers who were not themselves members of an exchange; but as the phrase stands now, I think it would create a very serious situation. Mr. HOLMES. That is the point that I wanted brought out. Mr. HOLMES. Yes, sir. The CHAIRMAN. Mr. Pettengill. Mr. PETTENGILL. One more question. It seems to me, Mr. Secretary, there is an argument both for and against the exchange regulatory power being the same body as the body administering the Securities Act. Now, it strikes me there is an argument against it in this respect. I would like to have your views on this. In the Securities Act, by statute, we go just as far as we can to tell the investing public of 45381-34-36 |