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Thus we may have a situation whereby expansion in the credit supply of the country is purely in response to the speculative enthusiasm of the stock market.

Another aspect of the situation is the expenditure of profits; if a speculator sells his securities and withdraws the profits, he may sell to someone who has borrowed to pay for the purchase. The seller spends his proceeds for automobiles, Park Avenue apartments, Oriental rugs, or whatnot. This buying stimulates a demand for goods, which is based indirectly upon the stock market credit.

When a period is reached at which a large number of people decide to take their profits at once and there are no new buyers, there will be a wide-spread liquidation of securities and declining prices. Everyone who holds securities or has made loans on securities will find his investment is being impaired, and there will be a further rush to liquidate. This will result in a rapid contraction of credit and a decrease in the volume of purchasing power.

For these various reasons, which grow out of the fact that the stock market in this country can obtain such a large amount of credit, the stock market has a considerable influence on the business situation.

Mr. KENNEY. Mr. Chairman.
The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. Would the revival of bills of exchange in this country, in your opinion, make any difference in the situation?

Mr. THOMAS. It has had to a certain extent. We have had an increase in the amount of acceptances, and the banks are now employing a very large amount of funds in acceptances. We notice that in a period of shortage of funds, for example, over the end of the past year when the banks in New York City wanted funds for Christmas and other needs, they turned over their acceptances to the Federal Reserve Bank instead of calling their street loans.

As to whether the volume of acceptances is sufficient to take care of all of the demands of the banks for liquid funds, there is some doubt. It may be that they will need some call loans—$1,000,000,000 or $2,000,000,000 of total brokers' loans is not an excessive amount, if they are kept within that range. It is the expansion and contraction of those loans in a rapid manner which is dangerous.

Short-term Treasury bills—the 90-day bills-also serve the same purpose. There are more of those now available than there were formerly.

Mr. LEA. Could you inform us as to rates under these three methods of loans-as to how the rates of interest compare?

Mr. Thomas. That would vary, depending upon the state of the market. At the present time, I should say that call loan rates are much lower than rates charged by banks of their customers, because there is an abundant supply of short money seeking investment and very little demand for it. In 1929, however, the open-market call loan rate—the rate brokers would pay-was much higher than the rate charged customers on security loans.

I might also say that of course the rate the broker charges his customer is much higher than the official rate which is quoted in the market, which is the rate that the broker pays to the bank. The broker

may charge less than the bank rate on customers' loans when money is easy, but when money is tight he charges considerably more than the banks.

Mr. LEA. You spoke about the diversion of credit on account of the stock market. Do you think that your statement is accurate as it affects the local communities throughout the country?

Mr. Thomas. It may be that in certain local communities, certain particular situations, there are banks or others who might decide to put their money in the stock market rather than make loans. Certainly it does affect rates. There is no question about that. But customers' rates vary very slightly from time to time. They generally remain about the same.

Mr. LEA. When there are many instances, where the banks or their customers send money to the stock market instead of making local investments--do you not regard that as an important feature-economic feature, of the country?

Mr. THOMAS. I should think so; yes.
Mr. LEA. Which have happened the past few years.
Mr. THOMAS. Yes.
Mr. LEA. It has tended to dry up local credit.

Mr. Thomas. Well, that may be. It means that those firms that are able to obtain their funds through the stock market, obtain them very cheaply and very easily, whereas those that cannot go to the stock market for their supplies of money have to pay more. That is true.

Mr. LEA. What would be the method of computing the margin under the terms of this bill, as you understand it?

Mr. Thomas. You mean the two methods? Mr. LEA. You spoke of two methods. Mr. Thomas. That is simply a matter of what you want to call it. The actual margin will amount to the same thing in either case.

Mr. LEA. Do you think, under this bill, that we ought to provide a uniform method?

Mr. Thomas. The bill is very definite about that. It says that the loan can be made only up to the amount of 40 percent of the collateral-40 percent as the basis of the present market price, or 80 percent of the lowest price for the last 3 years, whichever may be the higher, I believe is the provision of the bill. The relation between the loan and the collateral is the same in any particular case, whether you call the margin 60 percent or 150 percent.

Mr. LEA. Would you care to say anything as to the wisdom of borrowing on unlisted securities as collateral?

Mr. THOMAS. As I understand it, the purpose of that provision is to prevent a broker, who is observing the margin on listed securities, from taking a whole bunch of unlisted securities, with some other margin, which would defeat the margin provision of the bill.

Mr. LEA. Who would pass on the sufficiency of that security under those circumstances?

Mr. THOMAS. I think the broker himself does. Of course, if the broker should want to turn over those securities to the bank as collateral for a loan, the bank would pass on it.

I do not know whether there is any provision in the bill whereby the Commission would have any powers over that or not.

Mr. LEA. This bill prohibits the use of unlisted securities as to the bank; is there a necessity for such a provision?

Mr. Thomas. I do not know about that provision of the bill. I take it that a bank could make loans on unlisted securities.

Mr. LEA. That is all.
Mr. MARLAND. May I ask a question?
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. How will this bill, as written, affect the relationship between a bank and its customer, where the bank is lending that customer now 50 to 75 percent of the value of the listed price of the stock?

Mr. THOMAS. This bill, as it is now written?
Mr. MARLAND. Yes.

Mr. Thomas. It would, I take it, make it necessary for the customer to put up more margin, unless there is some provision whereby the Commission could extend the time or make some exceptions, from that, for a period.

Mr. MARLAND. And it is your interpretation of this bill that that reduces the credit rating, general credit rating, of the customer where a bank is lending that customer, we will say, 75 percent of the value of a particular stock, and the customer would be required to put up more money or the bank would be required to insist upon that customer either selling a part of his securities, or furnishing additional security, regardless of the fact that the bank may have been carrying that borrower at the bank for years?

Mr. THOMAS. Yes.

Mr. MARLAND. In your opinion, would that upset the relationship between the banks and their customers, small banks and their customers?

Mr. Thomas. We do not have any information as to the extent to which security loans are now collateraled. There has been quite a decrease in the amount of security loans outstanding by banks. The security loans by banks to their customers are down now to $3,600,000,000, which is the smallest amount outstanding since 1921, so that the effect would not be as great as it would have been a few years ago, when these loans amounted to $7,200,000,000.

To what extent those are collateraled, I do not think anyone knows. Certainly some provision could be made for releasing banks from the necessity of drastic measures. The provision might be made to apply to new loans only or the time of its application to old loans might be extended.

Mr. Marland. You spoke of a different relationship between a bank and its customer and between a stock broker and his customer,

Mr. THOMAS. Yes.

Mr. MARLAND. And that the bank took into consideration the general credit standing of the customer when it made the loan.

Mr. THOMAS. In theory.
Mr. MARLAND. In theory, and in actual practice?
Mr. THOMAS. Yes.
Mr. MARLAND. That is so, is it not?

Mr. Thomas. I think so; yes. I imagine that there are, at any rate have been, some variations from that practice.

Mr. MARLAND. Well, do you not know that there are many small banks in the United States who have been and still are carrying their customers with stock market collateral that even at this time, though stocks have gone up, the loans are still undercollateralized?

Mr. THOMAS. I do not doubt it.

Mr. MARLAND. And the result of the passage of this bill will be to make it necessary for the banks to call those loans.

Mr. Thomas. If the bill passes as it is now worded; yes.
Mr. MARLAND. Yes. That is all.

The CHAIRMAN. I would like to have your opinion with reference to that very question. That is something that the committee has got to determine later. Do you think that on loans outstanding, the same rule should be applied as to new ones?

Mr. MARLAND. As to new loans?
Mr. Thomas. As to new ones?
The CHAIRMAN. Yes.

Mr. Thomas. My. personal opinion would be--and I am speaking entirely personally--that there should be an exception. .

The CHAIRMAN. Yes.
Mr. KENNEY. Mr. Chairman.
The CHAIRMAN. Mr. Kenney.
Mr. KENNEY. What section lays down the rule to which you refer?
Mr. Thomas. You want me to read it into the record?

Mr. KENNEY. No, just refer to the section. What is the number of the section?

Mr. THOMAS. Section 6 (c).
Mr. KENNEY. That is all.

Mr. Thomas. That is with regard to banks; section 6 (b) in regard to brokers and dealers.

Mr. PETTENGILL. Mr. Chairman, I would like to ask the witness what his general view is as to the advisability of Congress telling lenders of money how much security they should have.

Mr. Thomas. Well, I think it might be possible in case it is put as a minimum or a maximum. Congress has, in the case of the Federal Reserve System for example, established certain reserve requirements for banks which are very definite and fixed, whereas the English banking system has no such requirement. English banks use their own judgment.

Mr. PETTENGILL. Is not the lender of the money the best judge as to how much collateral he should have from the customer?

Mr. THOMAS. He might sometimes be, yes; but they have been known to be very bad judges.

Mr. PETTENGILL. Well, what is the evil that is sought to be corrected by requiring, putting in a requirement as to the lender of money, requiring that he have a certain amount of collateral, so far as these securities are concerned?

Mr. Thomas. In my opinion, that involves a question of what you might call credit theory. I think there is a serious question as to whether investment, or stock market speculation, or any form of gambling, should be permitted on the basis of bank credit.

It is perfectly permissible for one to invest his own funds, or gamble with his own funds, but if he is going out and borrowing for the purpose of investment, it is a dangerous thing to do it on the basis of credit. Investments are long-term commitments and depend upon judgment or rather, in the final analysis, depend upon what happens to the general business situation of the country over a very long period of time. The use of credit for investment is dangerous, because the very act of borrowing stimulates business, it increases purchas

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ing power and gives an impression that business is going very well, thus encouraging such investment and speculation as long as credit expansion continues. When, however, it becomes necessary to pay back those loans, or to take the profits which may have been obtained because of rises in prices, money is withdrawn from business and there is a business recession, a decrease in profits, and a general liquidation of values with results that are too familiar.

Mr. BULWINKLE. Mr. Thomas, you have read this bill, studied it?
Mr. THOMAS. I have read it.
Mr. BULWINKLE. Do you approve the bill in its entirety?

Mr. Thomas. I should prefer to limit my testimony to a statement of the provisions dealing with the operation of the credit mechanism. I do not feel qualified to pass upon the manipulative aspects of the bill, or upon the listing and report requirements. My experience has not been in those fields.

Mr. BULWINKLE. Then, what you would say, from your experience, and what you have stated, do you think any amendments should be proposed to that section?

Mr. Thomas. I should not be prepared to propose any amendments. Mr. BULWINKLE. All right.

Mr. Thomas. I would rather have that taken up with the sponsors of the bill.

Mr. COLE. Mr. Chairman.
The CHAIRMAN. Mr. Cole.

Mr. Cole. You are familiar with the rules and regulations of the New York Stock Exchange, are you not?

Mr. Thomas. I have been at times; yes. I have not kept up, very accurately, with the great mass of rules and regulations being issued every day now, except in a very general and superficial way.

Mr. COLE. Do you have any definite criticism of those rules and regulations?

Mr. Thomas. No, sir; they mostly concern the manipulations of the market, with which I do not consider myself qualified to deal.

Mr. MAPES. Mr. Chairman.
The CHAIRMAN. Mr. Mapes.

Mr. MAPES. I should like to ask this one question: Can you tell what percentage of the stock bought on the stock exchanges of this country, or of the New York Stock Exchange, is bought and paid for outright, and what is bought on credit, and how that percentage compares with stocks sold on the London and Paris stock exchanges?

Mr. Thomas. No, sir. There is no information available on that question.

Mr. MAPES. You have no information on that?

Mr. Thomas. I do not, sir. I don't believe that such percentage can be computed for New York, although we have a lot of statistics about the New York market. We have very little information regarding operations in London and Paris. The markets are quite different in the way in which they are operated.

Mr. MAPES. Are you able to make an estimate of how much of the stock is bought outright, that is of the total that is sold on the New York Stock Exchange?

Mr. THOMAS. I can say this, that the total volume of credit extended to stock brokers and for stock market purchases in this

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