You could not have had the disastrous markets of 1930, 1931, and 1932 if the banks had not called the loans. All of Wall Street combined could not have forced the market prices of the basic securities of America down to the ridiculous levels which they reached if they had not been able to induce the banker to sell out the collateral of his customers and throw that much more supply on a market where demand was lacking.

I have seen this thing work, as a banker. I know that in the past 10 years, due to the accentuation of price as the criterion, American banking has become a mere reflection of American speculation, and I am in complete sympathy with any policy that forces a check on speculation. But I am not in sympathy with any policy which attempts to do it by practically saying that the American banker becomes one of what the bill calls "the facilities of the market."

Mr. WOLVERTON. How would you handle the situation?

Mr. FORT. I would handle it by proper amendments to banking legislation, with the jurisdiction and control in the supervisory body over banks. And if you are going to define collateral value at all, define it as involving something other than market price. Just as is done with regard to real estate, actual value.

Mr. WOLVERTON. Whether it be as an amendment to the banking act, or whether it is provided for in this act, what provision would you place in the law to curb undue speculation?

Mr. FORT. Well, now, wait a minute. You mean, as far as bank loans are concerned?

Mr. WOLVERTON. Yes, as that is the only feature you are discussing

now.

Mr. FORT. I think I would. May I say, parenthetically, that I have not attempted to place this in legal form.

Mr. WOLVERON. No, I understand that. I merely want your thought.

Mr. Fort. I think first, that so far as you deal with value at all, as a criterion, which the present banking legislation does not do. Today it is a pure matter of judgment with the banker. I would follow the mortgage rule of making actual value the criterion.

Let us take the mortgage rules, just for example, gentlemen. The market value of real estate, in many sections of this country today, is absolutely nil. You cannot sell it at any price. Would you have your banker limited to making loans on real estate to a percentage of nothing, or would you, as the law now permits him to do, make a loan upon his estimate of the actual value of that real estate?

Now, the stocks of modern corporations are in many cases nothing but bricks or mortar, or the representation of it.

Mr. WOLVERTON. It seems to me that is a distinction without a difference, because while the banker, as you state, may loan on mortgages based on actual value, yet the fact is he does not do so.

Mr. FORT. That is not altogether true. I know of a good many places where they are making mortgage loans.

Mr. WOLVERTON. It is very unusual.

Mr. FORT. There is developing a mortgage market; but again, it is you examiner's confusion of actual value with market value that has interfered with mortgage loans in a great many cases.

Mr. LEA. Is there not this difference, that the value of the stock is a fixed value that is known to the whole world, so far as market

value is concerned, and ordinarily it is the market value we come to, and when it comes to real estate, there is not any place that you can go and find out what the value of that real estate is, except from somebody's judgment, and the bank examiner comes along and says that it is not worth what you have allowed on it and therefore you have to do something about it.

Mr. FORT. You call it a fixed value?

Mr. LEA. That does not necessarily mean that the bank is forced down to what they can go out and immediately sell that land for. The law, I know, in our State does not prescribe that standard. It is under fair conditions of sale, what it will bring.

Mr. FORT. Exactly. And you say that the value of stock is a fixed thing. It is not. It is the most volatile thing in the world, if you are going to take price as meaning value.

Mr. LEA. I do not mean quite that, but there is a market value, a present market value that is definite and certain.

Mr. FORT. For how long?

Mr. LEA. At the hour.

Mr. FORT. United States Steel yesterday opened at 554, at 10 o'clock and was at 52% at 2:30.

Mr. LEA. Of course, you cannot take care of that variation that necessarily occurs in any place and as any class of corporations, but there is a definite present price that the whole world knows of on a listed stock. There is no such standard for real estate or other tangible property.

Mr. FORT. Literal compliance with the terms of this bill, in many cases, would be impossible. You are inferring, in your statement, that there is a fixed value for stocks. It is not unknown on the New York Stock Exchange for stocks to sell five points or more below the previous sale on the next transaction. So far from being fixed, that my customer may come to me in my bank and ask me if I will lend on some stock, under the terms of this bill, $14 a share, we will say, when the market quotation of the stock is $35, and I say yes. And he then goes to his safety-deposit box and gets out the stock, and unless I have called up the stock market in between, it may be selling at 30 by the time I put the loan on my books, and only be worth $12 as a loan.

Mr. LEA. That is true, but the customer puts up more margin, must maintain it. He knows what the stock market is.

Mr. FORT. Do you think that that is sound banking to always force the man to put up more margin or sell out the customer? I do not.

Mr. LEA. Is there not some place where the line must be drawn, as a matter of security? The stock exchange already requires that now, do they not?

Mr. FORT. You are talking about the stock exchange, and I am talking about banking.

Mr. LEA. Of course, I am speaking with reference to this margin requirement.

Mr. FORT. Well, I am speaking of what a banker should do. I say that if my customer comes to me in my bank and says to me, "I want to borrow $50 a share on U.S. Steel," I do not want to have to call up a broker or put my eyes on the ticker to determine whether

I will loan him $50 or not. That is all. I do not think it is sound banking.

I think it puts the emphasis in the wrong place. My point is that the emphasis ought to be put on whether the man who applies to mefor a loan is a man to whom I should loan the sum of money that he seeks, whether or not I think it is wise for him to buy that stock, or whether I think he is a fool, not whether I think that the market today justifies that loan; but whether the market is going to justify that loan, perhaps, if I have to sell it out in 2 years, or he does.

Mr. LEA. It may be true that the banking authorities should con-trol credit by the banks, but I think you could hardly expect this committee, which is passing on such a matter, to authorize a loan in excess of market values.

Mr. FORT. If you feel that way, gentlemen, may I say this, with all respect to the committee and to the legislation you are considering, and this is the basic reason why I am here. In the effort to reach conceded abuses on the speculative exchanges, you are, without the possibility of adequate investigation, attempting to lay down rules for banking. If you are going to attempt to prescribe the collateral value which I am to attribute to a listed security, you should, from all proper and practical viewpoints, consider the collateral value that should be given to unlisted securities.

It is an absurd rule to say to any banker, "You may have your own free will and loan anything you please on the stock, of insurance company A, which is unlisted, for which there is a slower market than exists for insurance company B, which is listed." You may say that, and may I say, parenthetically, the stocks of the insurance companies. in which I am interested are all unlisted-but it would be a perfectly absurd rule that a banker can lend me more on an unlisted insurance stock in proportion to any criterion of its value than he could loan me on the stock of some of the great insurance companies of America which are listed.

The same thing is true of some railroads. The same thing is true of a large number of utility corporation stocks. They are not listed anywhere. Bank stocks, very few of them, are ever listed. You cannot regulate the business of banking in its contact with collateral lending, adequately, properly, when you only reach one segment of the problem.

My own view of the situation is--and was in 1928-that the greatest weakness in the banking structure and in the entire investment picture in America was not on the stock exchange, but was in the loans on unlisted securities, on local securities.

In other words, gentlemen, it seems to me that the fatal defect in this bill is not so much the specific language of its provisions about. bank loans but it is that you are trying to regulate a business which should be divorced from speculation, by applying to it the same rules. that you apply to speculation.

You want to get bankers out of speculation. You want to get them out of speculative loans. And yet, by this legislation, you are saying to American banking, "You are an integral part of the machinery of speculation, and the same rules in major part apply to you, the same supervision must apply to you, that applies to the speculator and the broker", whose sole interest is in the fluctuation of securities, when the banker's sole interest is in their stability..

Mr. LEA. Mr. Fort, suppose this bill is changed to permit unlisted stocks to be used as collateral.

Mr. FORT. That is prohibited only with the broker.

Mr. LEA. Or for any place.

Mr. FORT. Well, it is not prohibited elsewhere.

Mr. LEA. Now, would it not, in your judgment, be necessary, or to be expected, that such stock would pass within the control of the regulatory body?

Mr. FORT. I was looking at the bill, Mr. Lea, as you asked that question. I am sorry I did not hear you.

Mr. LEA. In other words, from the standpoint of the theory of control, standpoint of the public welfare, would it not be necessary to control the unlisted stocks, as well as the listed? In other words, why should not all stocks that are offered to the public for sale be subject to whatever regulation is determined upon?

Mr. FORT. That is an awful job. I have loans on little manufacturing enterprises, manufacturing stock, in my bank. I have had loans in my bank on the stock of a small garage, that is, where 2 or 3 men own it and have incorporated.

Mr. LEA. Well, I said stock that was offered to the public. Does that not necessarily follow, or otherwise is there not complete escape from the regulatory provisions?

Mr. FORT. If you are coming to that, I am only interested from a banking standpoint, sir. If you are coming to that, I want to reiterate what I said a moment ago, approach this legislation as it affects bankers, from a different viewpoint, and a different line of thought from the legislation as it affects brokers.

We have a duty to depositors, and a secondary duty to stockholders. Coming in between those is a duty to feed the community with adequate credit.

The rules that are to affect the New York Stock Exchange or any other stock exchange for the regulation of its brokers are designed for an entirely different purpose than the rules that affects banker in the administration of their credits.

You are trying in your brokerage regulations, gentlemen, to accomplish, first, a diminution of excessive speculation; second, the elimination, if possible, of bad practices in connection with speculation; and third, to protect the general economic welfare of the country because of the direct incidence of speculative abuses upon that economic welfare.

When you come to regulate bank lending, you should consider first the safety of the depositor; second, the provision of adequate loans for the community's needs and the needs of the customer's of the bank; and third, the welfare of the stockholders of the institution.

Now, those are two absolutely divergent purposes or sets of purposes, and the same regulations which may achieve one may prove utterly disastrous to the other. You cannot expect brokers to carry the customer if his stock becomes unmargined. You should expect the banks to, if the loan has been properly made in the first instance. You cannot expect the brokers to concern themselves particularly with the character or ability to repay of their customers, because they do not expect them to repay except out of the sale of their securities.

You should force banks before making any loans to consider the ability of their customers to repay in some way other than through

the sale of their securities. The moment that you put the same set of rules on the loans of a bank which you put on the loans of a broker, you are mixing two divergent functions and businesses in a single trough, and when you get through you are going to have a weaker mold come out than you would have had if you had approached those two problems from their separate and distinct viewpoints.

This point that I am bringing out today, gentlemen, seems to have been overlooked in the discussion of this legislation to date. It is because, as a banker, I do not want to be tied into the stock market; I do not want to be regarded as a piece of the speculative machinery of Wall Street, that I am here. It is because I believe that there is such a thing as real value which is an entirely distinct and separate thing, from market price, that I meet-

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

The CHAIRMAN. Mr. Cole.

Mr. COLE. This may be off the record, Mr. Chairman, if the witness so desires.

(After discussion off the record, the following ensued:)

Mr. KENNEY. Mr. Fort, do you think our purpose would be served if we required a customer to put up a fixed margin on the purchase of stock, and then leave his equity in the stock a matter between him and his banker or broker as the case may be. In other words, if we omitted from this measure any provision for the maintenance of the margin as distinguished from the marginal requirement, we might fix for the purchase of the security, do you believe that we would be providing an adequate safeguard?

Mr. FORT. You mean, now, as purchased by brokers?

Mr. KENNEY. Or banks.

Mr. FORT. Except for the fact that a banker should loan-may I put it this way?

Mr. KENNEY. Yes.

Mr. FORT. A man comes in to me and he wants to borrow $10,000, we will say, and he offers me collateral. I would be willing to loan the $10,000 without it; but as a matter of sound banking, I am that much more secure if I take it.

Now, then, under this bill I could not take it if it exceeded 40 percent of the market price, unless he had owned the security 30 days. Mr. KENNEY. You could, if you had some other security.

Mr. FORT. If you had what?

Mr. KENNEY. If you had some other security.

Mr. FORT. You do not have any.

Mr. KENNEY. You could take his note?

Mr. FORT. What?

Mr. KENNEY. You could take his note, together with the stock as collateral.

Mr. FORT. Yes; but this bill says if I take the note, and take stock as collateral on it, I cannot loan him over 40 percent of the market of the collateral.

Mr. KENNEY. You can take the note and the collateral, and then you can take another note not secured by any collateral.

Mr. FORT. That is just an evasion of the law, gentlemen, if that is what you want me to do, because if that is what this law means, I can do that for anybody on any loan.