into the hands of the corporation issuing the securities, and are used by them in their business, or they go into the hands of those who have made profits, and are used for their expenditures and purchases.

It is, however, true, that the stock exchange diverts credit from small industries throughout the country into the large corporations. It takes funds from everywhere, where anybody thinks he can increase his money by putting it there, and is then distributed among a relatively small number of larger corporations which are in a position to issue securities.

And, as I have mentioned before, the expenditure of the money is concentrated on luxury goods rather than on the wide variety of staples that the country needs.

In the 1927 to 1929 boom in the stock exchange, in addition to drawing funds in that way, in the way I have described, from the country, it also drew a very large volume of funds from abroad, because foreigners were also drawn into that speculative situation both by the high interest rates prevailing and by the possibility of profit on speculative rises, so that we had a very large accumulation of foreign balances in this country which at one time exceeded $3,000,000,000, and when the slump came, and the depression started, in 1931, and 1932, when these funds were being withdrawn from the country, that outward movement was an important contributing factor to the unfavorable development in our banking situation. This concentration of credit into large industries, into the luxury goods, and the attraction of funds from all over the country, and from abroad, is evidently not in the social interest nor in the interest of economic stability.

The relationship of stock exchanges to sound banking is another phase of it in which I take a great deal of interest. The record of security loans as an investment by banks is, I think unequaled by any other class of loans in the sense of the individual bank being able to collect the loan. The bank is always amply protected. Well, that, of course, is an exaggeration to say that the bank is always amply protected, but I mean that the bank is much more generally protected when the loan is on securities than when it is on any other class of collateral; but even so, the great effect of the very rapid growth of brokers' loans on the banking situation is not in that the loans for the individual bank are bad, but because of the effect it has on the general situation.

I heard one of the members of the committee ask Mr. Thomas yesterday why it is desirable for Congress to protect the lender by providing how much collateral he should have. The fact is that in my judgment, from that particular point of view, there is no object and Congress would possibly be the last to be interested in seeing that the man who makes the loan on securities should be very sure of getting it back. The difficulty is not that. The difficulty is that while the individual loans are good and while all of the banks are making them freely and on a very large scale as I have indicated a minute ago, the brokers' loans grow from a billion and a half, to eight and a half billion.

When the turn comes, and the banks begin to call loans, because there has been a turn in the situation, the calling of the loans, in such enormous quantities, causes a very bad situation. It spreads, because as one group of banks calls the loans, the price of securities begins to

go down, and then that brings other groups under water, and other groups begin to sell, and the thing accumulates speed on the descent as it had on the ascent-in fact, the descent in this particular instance, as is likely to be the case, was faster than the ascent.

Then, the fact that the banks are all dumping securities in order to protect their loans makes all security values go down, and that has an effect not only on these loans, but it has a very grave effect on the security holdings of the banks, on the bond holdings of the banks, so that a large number of banks find their capital is being impaired, as a result of the decline in value of those securities which they have legitimately acquired, and that spreads through the banking system and contributes to what we have now all been familiar with, this enormous spread of bank failures, and it increases the hoarding movement on the part of the public, because it loses confidence in banks.

That, in itself, again brings a lot of banks under water, and we have the enormously wicked slide which we have just witnessed.

In the earlier part of 1931 there was clear evidence that business was about to turn up and there were signs of some advances when the bank crisis developed and delayed the recovery for at least a year and possibly a year and a half.

So that the extent to which the excessive amount of credit goes into the stock market and the excessive facilities of the stock market for offering credit and the height to which these facilities have carried stocks has unquestionably disastrous effects when the turn comes and when all this excellent machinery functions in the reverse.

It is from the point of view then of greatest economic stability, and from the point of view of sounder banking in the service of the business of the country, that I am interested in this legislation.

I feel that those sections of this bill that put the extension of credit by bankers on securities and by brokers on securities under more reasonable control are in the direction of limiting the stock exchange more nearly to its legitimate function and moderating or eliminating altogether those activities of the stock exchange that have been definitely injurious and undesirable from the social point of view, and the economic point of view.

That is all, Mr. Chairman.

The CHAIRMAN. Do you think, from your study of this situation, and your observation, and your connection with the Federal Reserve System, that some legislation for the control of these abuses should be enacted by Congress?

Mr. GOLDENWEISER. Yes, sir.

The CHAIRMAN. And you think that this bill, as introduced to serve as a basis for consideration by this committee and in the hearings, contains many of the things that you would like to see enacted into law?

Mr. GOLDENWEISER. Yes, sir.

The CHAIRMAN. Any questions by the members of the committee? Mr. HUDDLESTON. Mr. Chairman

The CHAIRMAN. Mr. Huddleston.

Mr. HUDDLESTON. In July 1931 it developed and became known to the financial world that the Federal Budget was out of balance. Immediately following that information there came a lack of confi

dence in the dollar and the withdrawal of foreign investments, so that a sort of banking crisis developed in August and September.

I wanted your opinion as to whether there was any connection between those developments.

Mr. GOLDENWEISER. It is very difficult to say definitely whether there is any connection or not; but it is unquestionably true that in 1931 there were very important developments abroad that contributed to the uncertainty. That was the time when the big credit institution in Austria had failed; when a run on Austria spread to a run on Germany. In June of that year there was an enormous run on Germany, and then it gradually spread into a run on England, and when runs of that sort develop, the confidence in currency is shaken, and the developments go on from bad to worse.

In the autumn months there were withdrawals of a billion and a half or more, if I remember correctly, from England, which ultimately forced England in September of that year to abandon the gold standard. There were some big international developments during that year, so that it is very difficult for me to say whether the position of our Budget was an important factor in it or not. I should be a little inclined to say no, if I were to make a guess.

Mr. MAPES. Mr. Chairman

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. You have spoken about the foreign investments that were made in this couutry, and the foreign money that was drawn from this country during the depression, about $3,000,000,000, I believe you said.

Mr. GOLDENWEISER. That is right, Mr. Mapes.

Mr. MAPES. What relationship have they to the brokers' loans you have been speaking of, if any?

Mr. GOLDENWEISER. A considerable part of that money was in brokers' loans, but what I had in mind is that they were short-time funds that had come to this country. Some of them went directly into brokers' loans and others went into the banks on deposit, and the banks were able and willing to pay very high-interest rates on those loans, because they were able in turn to place them as brokers' loans at high-interest rates, so that those short-term funds were attracted to this country unquestionably both by the high-interest rate here, directly and indirectly, and were attracted by the possible speculative profits. And, those are the funds which in September of 1931, after England went off of the gold standard, and again in June 1932, were being drawn from this country in gold in hundreds of millions a week. Mr. MAPES. Have you any information as to the source of those funds, these foreign funds?

Mr. GOLDENWEISER. You mean by source, the countries from which they came, or do you mean

Mr. MAPES. The countries from which they came.

Mr. GOLDEN WEISER. I do not know anything in detail about them; no, sir. I just know that they were floating liquid funds which were available, at the disposal of a lot of people to place where they thought they would be safe, where they had a good return, and where they had an opportunity of speculative profit. That is as much as I know.

Mr. MAPES. Have you any idea what percentage of that $3,000,000,000 was sent here for the purpose of permanent investment and not for speculative purposes?

Mr. GOLDENWEISER. I have not any statistical information on that, sir, but I should say that those funds were short-time funds, and were not sent here for permanent investment. Money sent here for investment is usually not kept as short-time funds. These were all funds subject to call, and therefore they were not investment funds. Mr. MAPES. Have you studied this bill in detail?

Mr. GOLDENWEISER. I have read it in detail, sir, but I would hardly say that I have studied it. I have not had an opportunity to study it in detail.

Mr. MAPES. Have you any constructive or destructive criticism to make as to any particular provision in this bill?

Mr. GOLDENWEISER. I very much prefer not to say anything about it specifically, because I do not feet that I am competent to do so. I think if there are any special points that might develop in the study of it, we would be glad to give them to the committee when they consider it in detail, but I do not feel that I am in a position to make any suggestions as to the provisions of the bill at this time.

Mr. MAPES. That seems to be the general attitude of the witnesses, but sooner or later the committee has got to pass upon the particular language.

Mr. GOLDENWEISER. Yes.

Mr. MAPES. And, upon the paragraphs and sections of this bill, and personally I should like to have the help of some one like you in arriving at a conclusion.

Mr. GOLDENWEISER. I should be bery glad to to do whatever I can to help you; but frankly, I do not feel prepared to do it this morning, and I think that is something that can be better done, if we sit down around the table, rather than on the witness stand, because it is a matter of detail.

Mr. BULWINKLE. Mr. Chairman

The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. I was going to ask Mr. Goldenweiser this question, but he has already answered it in reply to Mr. Mapes' question, and that is what portion or paragraph, or section, of this bill should not be enacted into law; but you have already answered. Mr. GOLDENWEISER, Yes, I think I have.

Mr. BULWINKLE. Now, then, I want to ask you this: How far, in your opinion, should Congress go in restricting credit in a bill of this kind, regulating exchanges; rather, regulating the stock exchanges?

Mr. GOLDENWEISER. I think that is one of the dangers to be avoided. I think this is not a good time to restrict credit. I think that I might go on the basis of what I know now of the bill, and say that some modification of the bill, in order to avoid that, would be desirable. If I may just venture a bit beyond what I really feel very sure of, because of my scant study of it, I should say that the margin provisions as drafted are likely to result in considerable restriction of credit, because, as was pointed out here yesterday. there are loans under water at the present time which it would not be desirable to force to be liquidated.

My judgment on that section is that it ought to be modified so as to apply to future loans; ought to be modified so as to apply only to loans at the time they are made and not necessarily throughout the life of the loan, with some safeguards against abuses.

And there ought to be a little less regidity and a little more discretion in the administration of that section, so as not to make it a section that intended to restrict credit or disturb credit, or accentuate the difficulty of credit contraction during the depression.

Mr. BULWINKLE. And all of that is a restriction which can be controlled under the powers of the Federal Reserve?

Mr. GOLDENWEISER. Restriction of the Federal Reserve?

Mr. BULWINKLE. Yes.

Mr. GOLDENWEISER. I do not quite understand you.

Mr. BULWINKLE. Within the discretion of the Federal Reserve, I mean; that is, within the discretion of the Federal Reserve.

Mr. GOLDENWEISER. You mean the Federal Reserve now has authority

Mr. BULWINKLE. Yes, to restrict credit.

Mr. GOLDENWEISER. It has broad authority under which it is at the present, owing to a great many developments in the money market, not in a position to exercise, and it also has, under the bank act of 1933, authority to limit the percentage that can be in security loans, but, of course, those are things the Federal Reserve, during the period of bank liquidations and contraction, is not likely to enforce.

I am not quite sure I am answering your question. I may have misunderstood it.

Mr. KENNEY. Mr. Chairman

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. You suggested perhaps the purchasers of securities ought to be required to make a note for the balance of the purchase

price.

Mr. GOLDENWEISER. Yes, sir.

Mr. KENNEY. That is for the difference between the price of the stock and the actual amount of cash actually paid in.

Mr. GOLDENWEISER. I said that might be worth considering; yes. Mr. KENNEY. Well now, that would have the tendency to increase the liability of the purchaser of the stock, would it not?

Mr. GOLDENWEISER. I think not. He is liable now. The only thing is he does not always know it.

Mr. KENNEY. Well, what form would you have that note take? Mr. GOLDENWEISER (continuing). Because when the securities are sold, why do they sell the securities? They sell them because they want to collect his loan. He thinks possibly-I do not know-but, a great many of them think that the brokers out of viciousness and lack of consideration dump their securities, and throw them out on the street, but as a matter of fact they have actually borrowed the money.

If you have a certain amount of securities and you want to borrow at the bank, you go to the bank and the bank, by itself, gives you the loan value, and you sign a note, and you know perfectly well you owe that bank that much money, and if your securities go down you either have to increase the collateral, or they will sell you out, and you take that as a matter of course; but you go to a brokerage office, and put up $1,000, and then buy $10,000 worth of securities. It does not occur to you, I mean by "you" to a great many of those who do it, that they really are doing the same thing as the other fellow who goes to a bank. They are really borrowing the money, and the reason that I said it might be worth while to put it down on that basis is