Newark, which is only 8 miles from New York, and it becomes less true the further you get away from New York.

Mr. LEA. To what extent is the standing of a reliable customer given credence by the bank examiners of the country?

Mr. FORT. Not enough; nowhere near enough.

Mr. MERRITT. Not at all, usually.

Mr. FORT. Exactly, sir.

It is because of that fact, Mr. Lea, that I do not want to see the Congress of the United States put market price as the sole criterion of a loan. You are going to put it in the hands of not only the examiner, but of the banker who thinks in terms of speculative factors; you are going to put in his hands a legislative definition that market price is to control, and it has never been there, and it ought not to be. Mr. LEA. But, it accentuates rather than initiates this undesirable situation.

Mr. FORT. Exactly, sir, and it is, after all, as you gentlemen know, through such accentuation and through such emphasis that evils grow.

I would rather see it accentuated the other way. I would rather, if you are going to put a yardstick in here, that, at the worst, you use the yardstick that is used as to real-estate loans-actual value and not price.

Mr. LEA. Of course, I take it that this restriction seeks to protect the individual who is disposed to gamble on the stock market, and also it is an attempt to limit credit from the standpoint of creating business stability.

Mr. FORT. Yes, sir.

Mr. LEA. Now, have you any suggestions as to what this bill can properly contain, looking to those ends?

Mr. FORT. Yes, sir, I have; if I may come to them later.

May I say this, gentlemen: I do not know whether this has been brought to your attention, but there is another thing that this bill does in this 30-day limitation. Let us suppose that I have an account with the broker at an adequate margin today. I must maintain a margin of 60 percent. The broker is not permitted to continue to extend me credit, the moment my margin falls below 60 percent. The market has a sudden collapse. What can I do? I cannot lift the loan and take it to my bank, can I? I cannot say to my bank, "I am an old customer of yours. My credit is good with you You know I pay my debts I need to borrow 50 percent on these securities or else be sold out." The bank cannot make me that loan.

What is going to happen? The broker cannot continue to carry me. The bank cannot lend me anything. I am going to be sold out. Well, now, when I am sold out, John Jones, whose margin is still 61 percent, is going to be sold out, because my selling is going to force the price of his stock down so that he has only 59% percent margin, and he cannot go to his bank and borrow. If the legitimate banker cannot, as a legitimate banking operation, lift the account from the broker, when it becomes impaired, although still a sound bank loan, then you are permitting declines in the stock market to move with tremendous rapidity.

If I were a bear speculator, I would ask for no provision of law that would promise me a more certain profit than that one.

All

that I have got to do is to drive price levels down to a point where men's 60-percent margins become impaired, then they are helpless. They have nowhere to go for relief.

Today, stock market declines, in periods of bear speculation, are held within some kind of reasonable limits solely by the fact that many men can take their securities away from the brokers and borrow on them at their banks.

Mr. LEA. But if the stock market requirements of a margin are impaired, at the present time, it must be maintained?

Mr. FORT. Yes.

Mr. LEA. And so, the margin is impaired the minute it goes below that point.

Mr. FORT. Exactly; but today, the customer can go to his banker and borrow, in many cases. If the minute that the broker calls him, he can arrange with his bank to take over that account and loan him on those securities, he can protect himself.

Mr. LEA. But would not that ordinarily require the production of additional securities?

Mr. FORT. No, sir; because on sound securities the ordinary bank will loan, outside of New York City, around 80 percent of the value. The ordinary broker calls quicker than that.

Mr. PETTENGILL. Of course, there is nothing in 6 (c) to prevent the banks from making a straight loan on the borrower's personal credit, is there?

Mr. FORT. No; but certainly you are not contemplating the dodg ing of your law, by having the bank make the loan to the customer on his individual note and then stick the collateral in the safe deposit box and call it side collateral, instead of actual, are you?

Mr. PETTENGILL. I was not thinking of dodging the law, Mr. Fort, I was just asking the question, if there is anything in 6(c) that prevents or puts an end to the practice, and useful practice, of a bank loaning on straight customer's credit.

Mr. FORT. No, sir.

Mr. PETTENGILL. There ought not to be.

Mr. FORT. Ought not to be.

Mr. HUDDLESTON. Just a moment. May I ask a question?

The CHAIRMAN. Mr. Huddleston.

Mr. HUDDLESTON. Section 6 (c) would produce the ridiculous situation of a bank forbidding to make a loan to a customer secured by collateral, yet permit the bank to make the same loan to the same man without any collateral at all.

Mr. FORT. That is exactly what I said. It is an evasion. It would compel an evasion of the law. That is the only way it could be done, practically.

Mr. COOPER. Mr. Chairman, may I ask a question?

Mr. FORT. Yes, sir.

The CHAIRMAN. Mr. Cooper.

Mr. COOPER. I am very much interested in your statement, because I have never had any experience in banking; but in my own city, we have some very large steel industries, and during the last 3 years of operation they have had tremendous losses. I can name you a company-and there is no secret about it, because it has been published in the papers-which has lost up to $13,000,000, $12,000,

000, and $11,000,000 a year; and another company about along the same lines; but they have been able to keep their plants operating. Now, if I understood you right, the fact that this stock could be sold and the buyer of the stock could take it to the bank and get cash for it, that is what has built up this reserve that is permitting these steel companies to keep operating without closing down and going into bankruptcy.

Mr. FORT. Absolutely in very many cases.

Mr. COOPER. Now, under this law, you say they can only borrow 40 percent on the value of the stock?

Mr. FORT. Yes, sir.

Mr. COOPER. Well, if we had had such a law as that during the last 2 or 3 years, what might have happened to these steel companies, notwithstanding that they have kept them operating, and given some men employment? That is the question that I would like to ask.

Mr. FORT. Well, as I said a moment ago, I believe that the practice of raising capital for corporations through the sale of stock is the reason that we have had so few insolvencies in the past 5 years. Mr. COOPER. Well, if it is limited to 40 percent?

Mr. FORT. It would be extremely difficult for them to raise money, except possibly in times of great speculative booms.

Mr. COOPER. That is the question that I wanted to ask.

Mr. FORT. Now, I can give you gentlemen what I have in mind in this way: Let us take the United States Steel Corporation as the outstanding one in America. Due to the creeping into banking of brokerage practices, the $700,000,000 capital of the United States Steel Corporation in 1929 was attributed a value of nearly $2,000,000,000. The same $700,000,000 of stock of that corporation, in 1931 and 1932, when the price was $21 a share, was attributed a value of $147,000,000. Now, let us assume that the same individual owners owned that business in 1923, who owned it in 1929. If they had been small manufacturers operating as a partnership, their credit at their bank would certainly not have changed in those 3 years in any such proportion as from $2,000,000,000 down to $150,000,000. But, because this factor of market price had become the contolling thing in the minds of the bankers of America, and because of their following of the market down and calling loans, that destruction of market value had happened, and the 100,000 owners of the United States Steel Corporation found that the normal credit they were entitled to from their banks had vanished.

You gentlemen may say that this law does not go that far. I say it does, for this reason, and I keep coming back to it: There is nothing in the banking laws today that makes market price binding on the banker for any purpose. And you know the history of regulation, under any form of bureaucracy in the world, is that the moment you establish a yardstick for any purpose, it becomes the yardstick for all purposes. And the moment you establish the factor of market prices, as the thing that I, as a banker, must look at for one purpose, and when you leave it the only statutory yardstick for any purpose, from then on, you are absolutely fixing on American banking both the atmosphere of the speculative markets and the inability to take proper care of its customers.

There are banks that have not called collateral loans through this depression.

The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. Mr. Fort, the underlying thought of this bill, as it seems to me, is this: A recognition that there had been undue speculation, and that such speculation could not have occurred had it not been possible to get loans from banks for the purpose, therefore an effort is made by the provisions of this bill to curtail speculation.

I appreciate fully, being a director of a bank myself, the stress that you place upon character as a basis for a loan to be considered as well as the security which is offered; but how would you, in any such way as you suggest, curb the speculative opportunity that comes through obtaining loans from banks?

Mr. FORT. By eliminating market price as a factor; by forcing the banker to determine for himself, not today's value of United States Steel common stock, but the reasonably to be expected value of that security-not the speculative value or the value that the examiners put on it as of today, but its real value.

I can give you an illustration where this has been done in regard to unlisted stocks which tie into this thing all through.

Mr. WOLVERTON. Well, if it is true, as you have said, that value should be taken into consideration instead of price, and other bankers would carry out the same policy that you have indicated, namely, in some instances loaning more than what the actual price value was on that particular date, would that not have a tendency to increase the opportunity for speculation rather than decrease it?

Mr. FORT. If you are going to assume that a banker's chief interest is in speculation; yes. If you are going to assume that the ordinary banker's chief interest is in getting his loans paid, maintaining the solvency of his institution and the welfare of his customers; no; because in that case, your banker is going to consider collateral-and this is what is my view of the proper basis-exactly as he considers in normal times the value of a piece of real estate when granting a mortgage as something which must be worth the face of the loan not only today but in the future.

Mr. WOLVERTON. I can see that price does not always indicate real value; but from a banking standpoint I do not know how you can maintain solvency of an institution, liquidity, or ability to answer demands of depositors, unless you do take into consideration the prevailing price as well as value.

Mr. FORT. Well, Mr. Wolverton, I have yet to be convinced that American banking has come through the past 5 years with any greater glory than it came through previous depressions, and in previous depressions and until this one, the custom of making loans on the basis of the stock ticker existed in only one or two of the major banking cities.

In the old days, the old banker refused to follow market price as a sole guide and made his loans largely on the character of the borrower instead-instead of, as he has been doing during the last 6 years, lending any Tom, Dick, or Harry, if Wall Street put a price on his stocks sufficient to cover the loan.

He loaned, in the second place, not with the idea that like a margin clerk in Wall Street, his note clerk must figure daily, daily, daily, what the collateral was worth, to see if the loan still was 80 percent of today's closing price of his collateral, and must send out call letters for more margin, like a broker's clerk sends them out. He

loaned on the theory that a collateral loan, in a majority of cases, was an investment loan exactly as a mortgage loan was. And, in the days when that happened, banking was far better carried through periods of serious depression than it has been in this one, when it followed up the markets-when it followed up the market prices beyond any consideration of real value. Until they got to a point where their customers were bankrupted because they had loaned their customers too much money in excess of the real value of what they owned.

Mr. WOLVERTON. I can follow you in your thought very readily and whole-heartedly, to the extent that loans should be based upon value rather than price when we know price is a way beyond the actual value.

Mr. FORT. Or below.

Mr. WOLVERTON. Having in mind the necessity of preserving at all time the solvency and liquidity of your institution, I cannot follow you when it goes in that direction. Furthermore having in mind that speculation should be curbed, how would you regulate or prevent it? I call your attention to the fact that in addition to the restriction placed by this bill on loans based upon, as you term it, stock-ticker price, there is also further restriction. I refer to the provision in the bill that fixes a price range over a period of 3 years and, on that basis, limiting the loan to an 80-percent basis.

Mr. FORT. Yes.

Mr. WOLVERTON. Eighty percent.

Mr. FORT. Eighty percent of the low.
Mr. WOLVERTON. Yes.

Mr. FORT. May I, before I answer the specific question, Mr. Wolverton, may I suggest this: The provisions you have in this bill are operative as a curb on speculation, chiefly, or at least in their direct influence on the security market, chiefly in a period of declining prices, not in a period of advancing prices.

They will, to some extent, stop pyramiding of purchasing on advancing markets, although they will not stop it entirely, but, as they now are, they will absolutely force the liquidation of securities in a declining market. As they now are, they will speed the decline.

Now, I am no emeny of speculation. It is a very useful form of mental effort, properly conducted. My own feeling is that the bear was a patriot in 1929, and the bull in 1932, because the bear's effort to curb excessive prices prevented the speculation of 1929 running away even further; but I do not want to have you, by implication, justify the bank examiner, if he comes in to me and says, "United States Steel is selling at 21, and you can only loan 16 on it", when, as a banker, I know that in company with other bankers, I would loan to the sole owner of that business, if one man owned it, far in excess of 21 times the number of shares outstanding. And yet, if you put into banking legislation, as you are doing here, the new yardstick of price-because it is new-if you put that into banking legislation, you are going, positively, to compel the banker-through the pressure of examiners, through the psychology of having considered only market price when he made his loans-to force the liquidation of the customer's loans as soon as the decline in the market value, forced by speculative influences, will excuse it.