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lending more, we will say, than 100 percent of the lowest price that the securities sold for in the past 3 years, when that tabulation changes from day to day. Tomorrow it will be different from what it is today, and the day after that it will be different again.

Mr. PETTENGILL. I think that the broker probably would protect himself with a certain margin, I mean a certain cushion to protect himself from violating the law and thus make a margin requirement which was actually more rigid than that written into the law.

Mr. CASSATT. He would be bound to do that, make it more rigid, because we could not afford to get close to the line at all; but the main difficulty from a practical viewpoint is that the whole list of securities changes every day, because the low price may be today or may be tomorrow.

The CHAIRMAN. Is that all?

Mr. CASSATT. Yes.

The CHAIRMAN. That same argument applies to the Federal Reserve Board, if it fixed the amount, would it not?

Mr. CASSATT. Yes, sir; if they used that formula.

The CHAIRMAN. I think you have said that you would be perfectly willing for them to do it. Now, would you not have the same fear if the Federal Reserve Board did that? You know, a figure is a figure.

Mr. CASSATT. I realize that, but I am relying on the belief that I do not believe the Federal Reserve Board will use the lowest price for the last 3 years in its method of calculation. If they do, we would have to do the best we can with it.

Mr. PETTENGILL. You think that a continuing judgment is apt to be better than a closed judgment?

Mr. CASSATT. Yes, sir.

Mr. PETTENGILL. On matters of this sort?

Mr. CASSATT. Yes, sir.

Mr. PETTENGILL. That is all.

Mr. MARLAND. Mr. Cassatt, as a result of your experience in dealing with securities, is it your opinion that the passage of this act as written would cause a general decline in stock market values?

Mr. CASSATT. Under the same conditions; yes. Of course, I cannot look into the future. They might have a depressing effect for the moment, but there might be a counter action that would cause the stocks to go up. I should say the stocks would sell lower with these margin requirements than they would with the requirements which might be put in effect by the Federal Reserve Board.

Mr. MARLAND. Granting that, what effect would that have on the future Government finances, sale, or future sales of Government securities?

Mr. CASSATT. Well, it would have some effect, as I think Mr. Smith testified the other day. Personally I do not think it would be very

severe.

Mr. MARLAND. Do you think that it would help the sale of Government securities, or hinder their sale?

Mr. CASSATT. Well, if there were

Mr. MARLAND. A decline in the market generally?

Mr. CASSATT. If this bill caused a decline in the stock market, it undoubtedly would affect Government securities.

Mr. MARLAND. HOW?

Mr. CASSATT. Because when all securities are down, naturally the rate the investor gets on his investment rises and the Government like everybody else has to pay a higher rate for money.

Mr. MARLAND. Well, if there were a general decline in stock-market prices would the Government securities sell more readily or sell less readily?

Mr. CASSATT. I think that they would sell less readily.

The CHAIRMAN. Now, we have had a situation for the past several years for securities that have not sold for quite as much as they did in 1928 or 1929. What effect has that had on Government securities? Mr. CASSATT. The effect has been in the last few years that the Government has been borrowing money cheaper than it did before. The CHAIRMAN. Yes; and a man who has some money to invest in times like that, puts his money into Government bonds. Is that not true? And the Government borrows money at a very low rate, and is borrowing money at a very low rate now, is it not?

Mr. CASSATT. Yes, sir.

The CHAIRMAN. Because people do not want to put their money in something that they think is highly speculative in times like these, when they are afraid of practically all stock, right now.

Mr. CASSATT. Yes.

The CHAIRMAN. I do not see how then you think that that is carried down through Government securities.

Mr. CASSATT. I do not think that is inconsistent, sir. There has been a different condition during these years of the depression which we have been through during the last 4 years and people have been afraid of all forms of investments, except what might be called ultra gilt-edged, and that has resulted in greater demand for Government securities, which in turn has reduced the rates; but with normal confidence restored, I think that a good market for all securities is helpful to the Government rather than otherwise.

The CHAIRMAN. Mr. Huddleston.

Mr. HUDDLESTON. The present low rate of interest on Government securities is due not to the low price of other securities, but to the lack of confidence in other securities. Is that correct?

Mr. CASSATT. That is what I was trying to bring out. In the last 4 years there has been a lack of confidence in other securities.

Mr. HUDDLESTON. I want to ask you, Mr. Cassatt, what effect this bill would have on the listing of stocks; would corporations continue to maintain their listings and new corporations list their securities to the same extent as they have heretofore?

Mr. CASSATT. Mr. Huddleston, I must express only a personal opinion there. I should say not, and that is based upon certain conversations I have had with certain corporations who thought they would unlist their stocks if this bill went into effect.

Mr. HUDDLESTON. There are some pretty drastic provisions in this bill relating to the operation of corporations and the liabilities of officers, and accounting, and various otherthings.

Mr. CASSATT. Yes.

Mr. HUDDLESTON. What would be the tendency of those provisions, to encourage listing or discourage it?

Mr. CASSATT. It would certainly discourage listing.

Mr. HUDDLESTON. And what would be their effect upon general business conditions, if a very marked withdrawing from listing and failing to list resulted?

Mr. CASSATT. I think very, very disastrous effect on investors of this country, because if many of the large corporations concluded they did not want to list under this act, their stockholders would be left without a really open market for their securities.

Mr. HUDDLESTON. What effect would that have upon the price of their securities?

Mr. CASSATT. I think it must be downward. I think that the prices must move downward.

Mr. MILLIGAN. Mr. Cassatt, do you believe that there should be some Federal regulation of stock exchanges?

Mr. CASSATT. Yes.

Mr. MILLIGAN. That is all.

The CHAIRMAN. We are very much obliged to you, Mr. Cassatt. Mr. CASSATT. Thank you.

STATEMENT OF HON. EUGENE R. BLACK, GOVERNOR THE FEDERAL RESERVE BOARD

The CHAIRMAN. We will hear Governor Black.

To begin with, Governor, we would like for you to make such statement as you desire, and then the committee would like to ask you some questions on the bill.

Governor BLACK. Mr. Chairman and gentlemen of the committee. I desire to make a brief statement.

The staff of the Federal Reserve Board conferred for a week with representatives of the Treasury and with Mr. Pecora, Mr. Corcoran, and Mr. Cohen, attorneys, in reference to the provisions of the National Securities Exchange Act of 1934. Governor Black participated in some of these conferences, was in close touch with all of them, and kept the 'members of the Board fully advised. During these conferences the attitude of the Board was requested and the following expression of this attitude was given:

The Board is in thorough accord with the following purposes of the bill:

(1) To regulate national securities exchanges to the end that they may operate under fair practices only.

(2) That speculation be properly curbed and dishonest speculation be eliminated. (3) That exchange credit be properly restrained and the undue use of credit in speculation be prevented.

(4) That necessary penalties be enacted to guarantee the accomplishment of these purposes.

The Board is not primarily concerned with the features of the bill with regard to the policing or regulating of the exchange but feels that these features should be fair and in accord with established American business principles.

If it is desired the Board will be glad to undertake the responsibilities of the bill regarding the fixation of marginal requirements upon loans based upon exchange equities, whether the loans are made by brokers or banks, provided power is vested in the Board to handle this subject in the public interest and to the protection of the investor. This function would usefully supplement the considerable powers vested in the Board under the banking act of 1933 to prevent the undue use of credit for speculative purposes and would, in the judgment of the Board, furnish effective protection against the economic evils of speculation.

During these conferences very many changes in the original bill were recommended by the Federal Reserve staff. These recommenda

tions were followed in substance and changes were made in the bill, and the bill was greatly improved in order to properly effectuate its purposes.

The bill, known as "H.R. 8720", introduced in the House by Mr. Rayburn embraces these recommended changes. It is the feeling of the Reserve Board that the revised bill H.R. 8720 is workable, is right in principle, and will accomplish the purpose of regulating national securities exchanges under fair practices, that undue and excessive speculation will be properly curbed, that exchange credit will be properly restrained, and the undue use of credit in speculation be prevented. The Board is therefore prepared to approve the bill as revised.

The Board requests the privileges of making such further constructive suggestions as to the bill as may appear necessary or desirable as the result of the further study of the bill, and this request applies especially to questions affecting technical operations of the exchanges. covered by the bill.

I am authorized to say that that is the attitude of the Federal Reserve Board on this bill.

I will be glad now to answer any questions the committee desires to ask, in respect to the position of the Board.

Mr. WOLVERTON. Mr. Chairman

The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. Governor Black, I interpret your statement to mean that the Federal Reserve Board is satisfied with this bill and that it would not be disastrous to the business of the country?

Mr. BLACK. I do not think it would be disastrous and I do not think the Board thinks so, sir.

Mr. WOLVERTON. And you and your board feel that they can approve it, subject to any changes that you might wish to suggest that would come as a result of any testimony that would be or has been entered here since you gave it consideration; is that correct?

Mr. BLACK. And, for any further study that might develop, Mr. Wolverton, relative to the technical operations required by the bill, not fundamental principles.

The CHAIRMAN. Any further questions?

Mr. MERRITT. Mr. Chairman

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. Governor Black, since the Federal Reserve Board is to take charge of the margin requirements, do you think it would be better to leave in the formula that is in the bill, or give the Board full discretion and let them make their own regulations subject to existing conditions?

Governor BLACK. Mr. Merritt, you remember that this bill as drawn places the right to fix marginal requirements in the Federal Trade Commission.

Mr. MERRITT. I did not get that.

Governor BLACK. I say, you recall this bill as originally drawn fixed, or put the right, to fix margin requirements in the Federal Trade Commission.

Mr. MERRITT. Yes.

Governor BLACK. The bill was redrafted by the time it got to the Federal Reserve Board and under the final redraft it gave these figures as to margin requirements, plus the right in the Federal

Reserve Board to alter those marginal requirements at any time it wanted to in a higher measure, margin, and lower as it might want to in case of extreme national emergency.

The Board was not willing to accept the responsibility under that provision, and so stated. Then this bill as now drawn was prepared, which does give fixed requirements as to margins, as an expression, I take it, of legislative opinion as to what would be a proper marginal requirement under ordinary circumstances, and then does state under exigent circumstances, or words to that effect, the Board may fix the margin requirements in the interest of agriculture, commerce, and industry, and the credit conditions of the country.

The Board is willing to accept the responsibility of doing that under the terms of the act. I personally think that it would be much more scientific for that flexibility of these margin requirements to be left entirely to the Federal Reserve Board; but, I am making no require ment as to that, and what is in the bill now was reached after the study of the different representatives, and the Board is willing to undertake the responsibility under the terms set forth in the bill. I think it would be more scientific to have that matter flexible and the responsibility be on the Reserve Board and to leave it to their judgment. Mr. MAPES. Mr. Chairman

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. Governor Black, I understand you to say in substance that the Federal Reserve Board approves of the bill, subject to the right to make any recommendations in regard to the technical features of it after further study.

Governor BLACK. The technical features of the exchange operations. Mr. MAPES. Yes.

Governor BLACK. Yes.

Mr. MAPES. I am curious to know how material you think that those conditions or exceptions are. In other words, do you think this committee would be justified in acting favorably upon this bill as it is without having the benefit of further studies and recommendations of the Federal Reserve Board?

Governor BLACK. Well, Mr. Mapes, I would not like to give an opinion as to what the committee should or should not do. We have studied it.

Mr. MAPES. We of course are not controlled by your opinion, but personally I would like to have it. If we enact this legislation and this bill became a law, it is the fixed law of the land, and we have got to take the responsibility for it, and I would like to have your judg ment in regard to it.

Governor BLACK. Mr. Mapes, if I were a member of the committee and, unless constructive suggestions were made to me relative to any technical operations of the exchanges, showing that I was wrong in what has been reached here, because this has been reached after very intensive study of those operations, I would feel fully justified in voting for the bill, sir. Does that answer you?

Mr. MAPES. Very largely. I would like to ask you this further question.

Mr. MERRITT. It answers it diplomatically.

Governor BLACK. I would rather answer it directly, if I can.

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