country has been much greater, both in absolute amounts and relative to the total volume bank credit, than in any other country.

The London clearing banks, I think, make loans to stock exchanges which are maintained at between 20 and 50 million pounds sterlingrelatively small amounts compared with total loans of these banks. When a London broker wants to borrow from his bank, he puts on his top hat, as one of them explained to me, makes a formal call and arranges a line of credit, just as any other business man would, and that line is not likely to be exceeded without another formal call. When a New York broker wants to borrow, he goes to the money desk in the stock exchange and says, "at what rate is money offered today? I will take" a certain amount. And the only limitation is the amount and quality of his collateral.

Mr. MAPES. Are you able, from your work and studies, to make any reasonable estimate of the percentage of stocks that are sold on the New York Stock Exchange, that are bought outright and paid for?

Mr. THOMAS. No; I never have. I do not know whether I could or not.

Mr. MAPES. If you cannot do that, how are the rest of us going to do it?

Mr. THOMAS. I do not know that it is terribly important. We know how much is carried on the basis of credit, and we know the amount expands very rapidly. We know that brokers' loans, for example, expanded by $3,000,000,000, to a total of $8,500,000,000, in a few months, and then contracted by a corresponding amount in 2 weeks.

Mr. MAPES. I do not know much about it, but it seems to me that the evil is confined pretty largely to the speculative feature that is carried on by the credit end of the business, and it would be interesting to know how much of it is done on credit, and how much for cash.

Mr. THOMAS. But it would be more interesting, would it not, to know how much is held outright by investors and how much is carried on credit? That, we could find out, how much is carried on credit, if we had the figures of the total customers' debit balances with brokers. Those figures we do not have.

Mr. MAPES. Perhaps I do not make myself clear, but I am curious to know what percentage of stock sold is actually delivered to the purchasers.

Mr. THOMAS. Yes. I should say, a relatively small percentage on day-to-day contracts.

Mr. MAPES. Could you make any estimate?

Mr. THOMAS. No.

Mr. LEA. Mr. Chairman.

The CHAIRMAN. Mr. Lea.

Mr. LEA. As to the justification for the Federal Government assuming control of credit on the New York stock market, would it be your judgment that the undue credit permitted there in recent years has been a menace to the security and stability of business in the United States?

Mr. THOMAS. Yes.

Mr. LEA. Do you think there is any doubt about that?

Mr. THOMAS. Not in my mind. That is my personal opinion.

I might say, on the other hand, that a certain amount of credit to the stock market is fully justified. Certainly, from the standpoint of the growth of this country, we have needed the stock market. We have needed to be able to obtain capital very easily and the ability to obtain capital has been an important factor in the growth of the country. The ability to have and to maintain an efficient stock market is very important in furnishing an adequate capital supply.

Mr. LEA. Does not regulation itself imply that it is desirable to protect the beneficial features of credit and, on the other hand, exclude the unwholesome features?

Mr. THOMAS. I should think so, yes, sir; depending upon the nature of the regulation.

Mr. LEA. And is it not also true that speculation on the stock markets in the late years has gone to such an extent that it has been demoralizing to the morals of the people of the United States in the sense that gambline is?

Mr. THOMAS. Yes.

Mr. LEA. That is, the market offers conservative investment, and speculation, and then is it not shown by the records of the last few years, to a large extent, that speculation really was gambling?

Mr. THOMAS. I do not know how much. I would like to limit my testimony to economic matters rather than morals. From an economic standpoint, gambling is not bad, unless it is done on credit and unless there has been a rapid expansion and contraction of that credit. If we do not have a stable amount of credit, it has a bad economic effect.

Mr. LEA. Well, a large amount of credit was advanced to the purchasers, or the purchasers assumed the credit.

Mr. THOMAS. Yes.

Mr. LEA. Where there was no real value in support of it?

Mr. THOMAS. You may be right, yes.

The CHAIRMAN. We will have to adjourn now until 10 o'clock tomoarrow morning.

(Thereupon, at 11:45 a.m., the committee adjourned until 10 a.m., of the following morning, Friday, Feb. 16, 1934.)

NATIONAL SECURITIES EXCHANGES-H.R. 7852

FRIDAY, FEBRUARY 16, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

The first witness this morning is Mr. E. A. Goldenweiser,

You may qualify, Mr. Goldenweiser, by telling us your full name, and your present position.

STATEMENT OF E. A. GOLDENWEISER, DIRECTOR RESEARCH AND STATISTICS, FEDERAL RESERVE BOARD, WASHINGTON, D.C.

Mr. GOLDENWEISER. My name is E. A. Goldenweiser. I am director of research and statistics, Federal Reserve Board, Washington, D.C.

I have been connected with the Federal Reserve Board for 15 years and in my present position for about 8 years. Shall I proceed, Mr. Chairman?

The CHAIRMAN. You may proceed.

Mr. GOLDENWEISER. I am not particularly familiar with the technique of the stock exchanges, and you will have many witnesses before you who can testify along the lines of the special machinery, on the technical provisions of the bill, particularly with regard to that machinery.

One other thing that I want to say, before I proceed, is that while I am connected with the Federal Reserve Board, I appear here entirely as an individual and whatever opinions I may express are my own opinions and not the opinions of the Board, and do not represent their views.

My interest in this legislation is twofold: In the first place, I am interested in the social objective of reducing the swings of business from depression to booms, and from booms to depressions, which are disastrous to the economic and social mechanism. This does not require elaboration, in view of the present situation with which everyone is familiar. Anything and everything that can be done toward improving the stability of business and reducing these disastrous swings is progress and is in the interest of the people as a whole. My other interest is the relation of the stock market to sound banking. The particular phase of the problem that is before this committee and on which I want to speak for a very few minutes is the effect on the business situation and on the rises and falls in business that are

exerted by the very wide swings in the price of securities on the stock markets, and in the volume of activity on the stock markets.

The fluctuations, the wide swings in these prices, the very rapid advances and very rapid declines that occur have unquestionably accentuated the business booms and the business depressions, and that is one of the reasons why legislation that would moderate the swings in security prices is desired.

These swings in security prices have always been a factor in the situation, but they have become a more pronounced factor and a more powerful factor in recent years and have played a greater part in this last boom and last depression than they had before. Partly because of improved communications and better machinery for spreading information, much wider public interest has brought into the picture a larger proportion of the population than has ever been before involved in a stock-exchange boom.

Stock prices which on the Standard Statistics Co. average were about 60 in 1922 rose to 212 in 1929 and brokers' loans during that period increased from a billion and a half to eight billion and a half.

They increased $5,000,000,000 in 3 years, and a billion and a half in the last 3 months before the 1929 collapse.

At the same time, as indicating the increase in the interest of the public, the branch offices of stock exchange firms of which there were about 500 in 1910, increased to 1,600 in 1929, and there were similar increases in the number of ticker instruments, and there were very few States in the country where there were not tickers available for the service of people who wanted to participate in the stock market boom. With this tremendous growth, and one might say, great improvement in the stock exchange machinery, there was a greater concentration on this particular stock exchange boom than there had even been before and it has, as a result, had a greater effect in carrying the boom to its culmination and in carrying the depression to its depth.

When there is prosperity, that in itself encourages stock exchange speculation, because there is a widespread belief that securities which represent participation in industry are going to advance, and so long as a considerable number of people believe they are going to advance, there is a constant stream of people who are scraping together the funds and are availing themselves of the very excellent machinery available for the purpose to borrow funds in order to buy securities for the advance.

The stock exchange, which has an economic function as a place where participation in industrial enterprises can be bought and sold and where capital can be collected from innumerable sources for the purpose of launching new enterprises, has developed in addition as a place where any one who has either a small amount of funds or available credit can gamble in the future of any particular industry or all industries. During a boom the great majority of people who are buying stocks are not buying them for the purpose of investing funds, nor because of their belief in the particular industry, nor even because they are speculating on the course that industry is going to take; but simply in the hope that some one else will think better of the stock a few days later than they do at the time they buy them. When a situation like that developes, it is clear that the stock market has been diverted from its legitimate purpose and has become, for the time being, an instrument that accentuates economic evils.

The excessive facilities for financing stock exchange deals are a very definite factor in making the price of securities rise too high and too fast, and fall too low and too fast.

The machinery of the stock exchange, as Mr. Thomas said yesterday, is extremely efficient. It is extremely efficient, mechanically, to serve the purpose for which it was created; but it is extremely inefficient as a part of our general economic mechanism, because it is. adapted, in addition to serving a useful and legitimate purpose, to serving a very dangerous and disadvantageous purpose in the economic life of the country.

Anyone can borrow money from brokers for the purpose of carrying stocks and the broker has at his command very easy access to the credit supply of the country. Very many of the people who are buying stocks on margin are not even aware of the fact that they are at the same time borrowing money, or that that process involves borrowing money. They think that they are putting up a margin for the broker's safety, and that the brokers carry the stocks. The fact that they are, as a matter of fact, very heavy borrowers on that part of the stock does not occur to them, or very frequently is not brought home to them, and it seems perhaps desirable to give consideration to the possibility of requiring that a note be made out by anyone who is buying securities not for cash, but on a credit.

It is because of this very great efficiency with which the stock exchange operates, the great ease with which anyone who wishes credit can obtain it, and the very great volume in which the brokers themselves can get it in a great hurry, that the stock exchange carries the stock market to what sometimes looks like absurd levels up and down. That in itself has a very great effect on the economic situation, because the facilities of issuing stocks at the time when the stock exchange is booming are excellent and a great many corporations make use of that time to issue securities, and the floating of these securities gives them funds which they use to expand their own plants, so that the stock exchange boom encourages an overexpansion of plant, and on the other hand, it also encourages a large amount of spending by those who are making profits. Those expenditures are more or less concentrated in what we generally know as luxury goods, so that there is overexpansion of particular lines of industry and not of the general line of industry.

On the other hand, after a collapse comes, the capital market dries up, the expenditures of those who had been making profits on the rise decline and there is a very decided slump all around, and the slump is accentuated both by the very extent to which the rise has been carried and also by the fact that the decline spreads throughout the country through various channels.

It is for these reasons that in a broad way one is hopeful to see legislation along the line that this bill proposes enacted; but one other phase of the matter is of interest to me, particularly from the point of view of the administration of credit, with which I am connected.

It is often said that the stock exchange diverts funds from business to the stock market. As a general statement, that statement is not, strictly speaking, correct, because the credit does not stay in the stock market. When brokers borrow money, the proceeds of the money do not remain in the hands of the brokers. They go either