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because it would bring home to the person who is doing it a little more distinctly that he is actually incurring a liability, and not simply gambling on the risk.
Mr. KENNEY. Do you think we ought to consider the question of limiting the liability of the purchase of securities to the amount of his cash investment?
Mr. GOLDENWEISER. I am not quire sure that I follow that, but that strikes me as being all wrong, because it
Mr. KENNEY (interposing). Well, you said today, that a great many of the securities are being held under water.
Mr. GOLDENWEISER. Yes.
Mr. KENNEY. Now, if the liability of the purchaser were limited to what he actually invested, would that be a good thing, economically, in a contraction such as we have had?
Mr. GOLDENWEISER. I should say not. That measures the amount he has, not the amount he borrows. If I had $100 and found a broker who would lend me $9,900 more, so that I could buy $10,000 worth of stock—that is an exaggerated illustration-but, if I understand your point, you want my liability to be limited to the hundred. My hundred would go out the minute the stock goes down one tenth of a point, or a point, or whatever it is.
Mr. KENNEY. Would that not impose a duty on the broker, to protect the customer?
Mr. GOLDENWEISER. The broker could sell me out as soon as my margin went down.
Mr. KENNEY. Suppose he did not, there might be a serious liability resulting?
Mr. GOLDENWEISER. Well, I think that would be moving in the wrong direction, because what we want is a greater recognition of the responsibility rather than a smaller one. Your inquiry would indicate that when you buy the stock, if it goes down, the broker should sell. The broker does sell, as a matter of fact, promptly enough. It is very rarely that the broker is caught with inadequate securities, and where the banks are caught, it is usually not in, strictly speaking, speculative transactions. It is more likely to be with customers with whom they have a customer relationship, and when the securities have gone down below the value of the loan, the bank feels there is a customer whose business will pick up and that he will pay that loan. The security is only collateral. It is incidental. The bank might really be lending him on his line of credit. I mean in many cases. And so the banks will carry him over the bad situation. It may be imperfect banking, but I think in a situation of this sort it is a socially desirable thing.
Mr. KENNEY. But, there were a great many cases where the brokers did not sell out in time in the recent past and a great many lawsuits ensued resulting in bankruptcy for many customers?
Mr. GOLDENWEISER. Yes. I suppose even that happens because the situation is so very precipitous that a great many people, in a great many cases, did not act.
Mr. KENNEY. In the light of such instances, do you believe that we ought to consider the limitation of liability--liability of purchaserof securities on margin on stock exchanges?
Mr. GOLDENWEISER. Well, my impression, as I say—I do not feel that I am an expert on this, and I may be overlooking somethingbut, it strikes me that that would be a move in the wrong direction.
The CHAIRMAN. Are there any further questions?
Mr. BULWINKLE. There is another thing that I am interested to know about. I am following up an idea I had just now. I would like to ask you another question. The restriction of credit being within the discretion of the Federal Reserve Board, was that discretion used by the Federal Reserve Board either in 1929 or 1931?
Mr. GOLDENWEISER. If you mean by the discretion, Mr. Bulwinkle
Mr. BULWINKLE. For the restriction of credit.
Mr. GOLDENWEISER. The authority to limit the amount of the proportion of loans that can be made on securities, was not given to the Federal Reserve Board until June 1933. That particular authority they did not have until that time. That is a part of the banking act of 1933. The authority that they did have at that time was primarily authority to put the banks in debt by selling securities and making that debt more burdensome by raising the discount rate.
Now, throughout 1928, the Federal Reserve System was selling Government securities at a very rapid rate, and carrying the indebtedness of the member banks to a very high level; it also raised the rates, both on acceptances and on discounts, and in 1929 it sold practically all of the securities that it had. It also raised the rate to 6 percent, and at the same time, it used direct methods in making banks which were in debt and at the same time lending the stock exchange money, clean up their situation.
So that the Federal Reserve System did use this authority which it is possessed of at that time, for the purpose of restraining the extension of credit.
Mr. MARLAND. Mr. Chairman-
Mr. MARLAND. Regarding margin requirements: Will not the increasing of margin requirements to 60 percent as contemplated in this act have the effect of keeping a great many small buyers of stock out of the market and cheapening stocks for large buyers?
Mr. GOLDEN WEISER. It would have the first effect, unquestionably.
Mr. MARLAND. It has the first, but does not necessarily have the second?
Mr. GOLDENWEISER. Well, it might tend that way somewhat; yes.
Mr. MARLAND. Regarding the soundness of the market, to which you referred, would we not have a sounder market with a thousand small buyers, buying 10,000 shares, on a 50 percent margin, than with one 10,000-share buyer on a 50 percent margin?
Mr. GOLDENWEISER. I find it a little difficult to answer that, but I should be inclined to think that if one person buys a large amount, that is, on a large scale, there is less, or likely to be less, trouble. We are less concerned about what happens to him, because he is very likely a person who knows the game, whereas when there are a thoussand people buying on a small scale, they are buying it blind, and I think our interest, socially, is to protect them against the stock market. That may not be what you had in mind.
Mr. MARLAND. Does not the stock market generally consider when they have a large number of odd-lot buyers in the market, that the market is sounder?
Mr. GOLDENWEISER. I really do not know. That is in a field of market psychology that I am not familiar with.
Mr. MARLAND. I would like to ask with regard to the situation of the Federal Reserve System, during the great gambling orgy of 1928 and 1929.
Is it not a fact that the Federal Reserve furnished most of the gambling money at that time?
Mr. GOLDENWEISER. No, sir.
Mr. MARLAND. The gamblers furnished a small part, and the broker a small part, and the banks the major part?
Mr. GOLDENWEISER. The banks the major part?
Mr. GOLDENWEISER. No, sir; I certainly do not think that the Federal Reserve did. The major part of the credit that went into the market in 1929, and partly also in 1928, did not come from banks at all. It came from very large corporations which had funds in excess of their immediate needs, and they were lending money on the street, because it was the best way to utilize their idle funds in a very profitable way.
You know, they were making loans "for the account of others”, which became a very famous phrase at that time. The loans for the account of others increased during the last year or so of this speculative orgy:
Mr. MARLAND. In 1929, were not the funds from the small banks all over the United States going to their correspondent banks in New York?
Mr. GOLDENWEISER. There was a concentration of funds in New York.
Mr. MARLAND. Attracted there by the high call rate?
Mr. GOLDENWEISER. Yes; that is true. That is true, unquestionably; but the large growth in loans at that time, in brokers' loans, nevertheless was not from the New York banks at all. The New York bank loans did not increase at all. Neither did the out-of-town bank loans increase. I am speaking from memory now 5 years old. I should say, as much as $3,000,000,000 of the growth of that year, or certainly $2,000,000,000 of the growth of that year was loans for the account of others, rather than from banking funds at all.
You are familiar with that, are you not, Mr. Marland?
Mr. MARLAND. I am familiar with that phase of it, but I think that the amount of loans to brokers, from banks in the United States, went up to somewhere about $6,000,000,000 in 1929, did it not?
Mr. GOLDENWEISER. I cannot answer that question offhand. I think probably not, yet that may be right.
Mr. MARLAND. I will ask you to recall your recollection as to this, if it is not a fact that the speculators during that gambling period were required by the brokers to put up about 20 percent?
Mr. GOLDENWEISER. Yes, sir.
Mr. MARLAND. And the broker put up 20 percent, and the banks furnished 60 percent of the gambling money.
Mr. GOLDENWEISER. Yes.
Mr. MARLAND. Is that approximately correct?
Mr. MARLAND. Then, would it be more reasonable to regulate the banks than the brokers, or gamblers?
Mr. GOLDENWEISER. I think that they both ought to be regulated. Your bill proposes to regulate botn, does it not?
Mr. MARLAND. Yes.
Mr. MAPES. I should like to ask one more question, Mr. Chairman. You stated in your opening statement that these brokers loans were used for the purpose of buying stocks, without much reference to their intricate work, but in the hope that some other person would come along the next day and pay more for them.
Mr. GOLDENWEISER. That is right.
Mr. Mapes. I should like to get your opinion as to how far brokers' loans, in so far as they are used for spceulative purposes, and not for permanent investment purposes, serve any good purpose.
Mr. GOLDENWEISER. Why, the broker's loans, insofar as they are used to facilitate the legitimate functions of the stock exchange, that is, the accumulation of capital for the purpose of starting new enterprises, and the liquidity of capital so that any one can buy and sell it for investment, a certain amount of brokers' loans is essential to lubricate that machinery; but as Mr. Thomas pointed out yesterday, machinery of that sort functions quite efficiently with a very much smaller volume of loans of that type, where the custom of granting loans and the rules under which they act are more restrictive as they are in England. England does a large business in stocks, without anything like the volume of brokers' loans we have.
Mr. MAPES. Of course, a great many people, high and low, executives and men and women of all classes and ages, got terribly demoralized in speculating on the stock exchange.
Mr. GOLDENWEISER. Yes.
Mr. MAPES. Is it your judgment that the only legitimate purpose that brokers' loans serve is in connection with the flotation of new securities such as you speak of?
Mr. GOLDENWEISER. No; I would not say that, because I think it is important to have a market.
Mr. MAPES. I should like to have your opinion and have you enumerate the constructive and good features served by brokers' loans, insofar as they are used on the stock exchange.
Mr. GOLDENWEISER. Insofar as I can do it offhand. It is not an easy question you are asking me, but I would say flotation of new securities is one, and making of the property of people liquid in the sense that you can sell it. I mean, if you own a hundred shares of United States Steel, and you find that you want to sell it, because you want to go into other business, or you want to go away, you ought to have facilities for selling. And that makes the property liquid.
Mr. Mapes. That is a legitimate business of the brokers, which does not involve brokers' loans at all, does it?
Mr. GOLDENWEISER. It might very likely involve a loan to the person who is buying it. I mean, facilitates the disposition of the property.
Mr. MAPES. Well, if he is buying as a permanent investment, he can go to his bank and negotiate a loan in the regular way, can he not?
Mr. GOLDENWEISER. Yes. If you mean to do away with brokers' loans, and have all of the borrowing done by the banks, all of the lending on securities done by the banks, presumably that would be not impossible; but it would, I think, make the machinery much less smooth and prompt, and the fact that any one who has recognized securities can sell them very promptly on the stock exchange without having to find the ultimate investor, that there is a broker who will take them off his hands, and that he can always get credit is valuable. I think that those are legitimate functions. I do not believe that needs to be changed. I believe that if you can preserve those functions of brokers' loans, and at the same time limit their excessive expansion arising from speculation, you will probably serve the economic life of the country better than if you become too restrictive and put a Chinese wall around each kind of property.
Mr. Mapes. I wonder if the average investor, if he makes up his mind he wants to invest in the stock of a corporation does not go to the bank and see if he can arrange to borrow the money to purchase a reasonable amount of the stock, provided he does not have the money in the bank, without much reference to brokers' loans.
Mr. GOLDENWEISER. What you are proposing, you see, is that a certain proportion of loans which are made to brokers now should be made direct to customers, and I am not really prepared to say definitely what I think of that, but I am inclined to think that in some respects brokers' loans are preferable. It is a point a little difficult to make in a hurry, but I think it is preferable from the point of view of the banking situation, that security loans that they make should be of the kind that the brokers' loan is where they can actually call them quickly, impersonally, with no customer relationship.
The bank is in a more liquid condition if it has a loan where all it has to do is push a button and it is paid, than if it has a loan to Tom Jones who may be their regular customer and does other business with them and they have other considerations, and therefore won't sell unless there is very urgent reasons for doing so. I think that the unliquid credit loans that accumulate in the hands of the banks are the customer loans and not the broker loans, so that I am not sure that doing away with brokers' loans will help the soundness of the banking situation. It might have the opposite effect.
Mr. Mapes. I am not proposing any principle as far as this bill is concerned as yet.
Mr. GOLDENWEISER. No.
Mr. Mapes. I am trying to get your judgment on some features of the bill. This same condition prevailed in the period of the Florida Florida land boom existed, did it not?
Mr. GOLDENWEISER. Yes.
Mr. MAPES. People from all parts of the country were going to Florida, contracting to buy a lot, with no thought of using it, and had no other purpose than what you have indicated here that somebody would come along next day and pay more for it.