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Mr. CORCORAN. Apply only to new accounts.
Mr. PETTENGILL. What do you mean by new accounts?
Mr. CORCORAN. Accounts that are opened up after October 1st.

Mr. PETTENGILL. How about continued accounts started previous to that time?

Mr. CORCORAN. You will have to work out some equitable arrangement in connection with such accounts.

If a man now has a margin account, and has the same account on October 1, you would not want to force him to put up or close out at that time. Whether you want to say that he can't make substitutions after that date, until he has brought his margins up to the new rates, that is, that he can carry the securities he now has but can't switch, is something that needs to be ironed out, but certainly you do not want to require a man carrying securities on an underwater margin on October 1, to sell out his securities, as a result of this new margin requirement.

The matter of new accounts is entangled with the matter of switching securities

Mr. PETTENGILL. Then, it is not plain to me. Would this bill apply to customers in the market before October 1?

Mr. CORCORAN. It would apply to them.
Mr. PETTENGILL. How would you make it apply?

Mr. CORCORAN. We would suggest changing the language to make very certain that the new margins do not apply to any account that such a customer had on October 1, but it will apply to new transactions in that account.

Mr. PETTENGILL. I see. New operations in that account.
Mr. CORCORAN. Or new operations in a new account.

Mr. PETTENGILL. Would you mind calling my attention to the particular provision that you think would cover that?

Mr. CORCORAN. There is no such provision at the present time.
Mr. PETTENGILL. That is what you think should be put in?
Mr. CORCORAN. It should be put in.
Mr. PETTENGILL. At what point?

Mr. CORCORAN. It would depend, sir, how it can fit into the drafting most easily. It could be put in, for instance, somewhere in (c). Mr. PETTENGILL. What page is that?

Mr. CORCORAN. Page 12, section 6 (a), or (b). You might insert language something like this:

It shall be unlawful for any member of a national securities exchange or any person who transacts a business in securities through the medium of any such member, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer on any securities registered on a national securities exchange, which have not been held by such customer prior to October 1, 1933—

Or something like that, and then-
In an amount exceeding at that time.
You can do the same thing in “(c)."

Just exactly where that additional language most artistically fits will be determined by a little playing around with the language of the section; but such language certainly should be incorporated in the bill.

Mr. PETTENGILL. Assuming that the bill becomes operative October 1, do you think that the effect of the bill would be highly deflationary on that date?

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Mr. CORCORAN. No, sir. First of all, changed as suggested it will not affect transactions undertaken prior to October 1, so you will not close out any accounts. In the second place, there will be 8 months in which the brokerage business may become adjusted to the higher margin levels. Since we will have no closing out of accounts on October 1, there will be no deflationary effect.

Mr WOLVERTON. May I ask a question right there, Mr. Chairman? The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. If this bill is not operative until October 1, so far as increased margin requirements are concerned, then in the meantime would there be a tendency to rush into the market?

Mr. CORCORAN. Possibly.

Mr. WOLVERTON. In other words, if margin requirements are to be greater on October 1 than they are at the present time the natural tendency might be for people to get in the market and get their accounts established before October 1, on the basis existing prior to that time?

Mr. CORCORAN. No; I think not. That advantage would work out only for those who figured that they would want to hold practically the same securities after October 1 for a definite length of time.

Mr. WOLVERTON. Well, if they wanted to go into the market then and purchase with the idea of holding the stocks after October 1, they could do so before October 1 on a much more advantageous basis than others who would purchase after October 1?

Mr. CORCORAN. That is true.

Mr. WOLVERTON. Would that have a tendency to create an inflationary effect in the meantime?

Mr. CORCORAN. There might be a little of that in the situation, sir, but you have the necessity to give the administration of legislation like this a chance to get set up.

Mr. WOLVERTON. I am not arguing against it.

Mr. CORCORAN. You have to give the Federal Trade Commission time to set up machinery.

Mr. WOLVERTON. I am not arguing against it. I am asking what the possible effect will be in your opinion, having stated in answer to Mr. Pettengill that it would not result in a deflationary condition after October 1.

Mr. CORCORAN. And whether it might be, necessarily, inflationary before the 1st of October?

Mr. WOLVERTON. Yes.

Mr. CORCORAN. You cannot tell, sir, because so many other factors may influence the market. There would be a tendency on the part of people who thought that they could now pick securities to carry after October 1, to buy such securities now; but at the same time the brokerage houses would probably begin to trim their margin requirements from time to time from now on, to become adjusted to the October 1 levels. Such intermediate risks as you do take are almost necessary risks because you cannot put so complicated a piece of legislation as this into effect the day you pass it. You have to allow time for setting up the machinery and other things.

We come now to one of the last questions-should you fix any rigid requirement in this bill. Many advocate leaving the matter of margins entirely to the discretion of some commission. There was a great deal of talk here at the last session of leaving it to the Federal Reserve banks. The Dickinson report more or less concluded that it would be wise to leave margins completely in the discretion of some administrative body. The Twentieth Century Fund report, as I have told you, worked out a scheme of margins based not on market value, but on earning power, a proposal related to the actual value of stocks rather than market values, which might be difficult to administer at the present time, because of lack of sufficient uniformity in the computations and reports of earnings of companies to permit accurate determination of what the comparative earnings of securities. Companies have their own various methods of reporting and computing earnings.

Even on this earnings basis, however, the Twentieth Century Fund set an absolute maximum loan limit of 60 percent of market value as distinguished from the 40 percent maximum loan value provided for by this bill.

As a matter of administrative policy following out Chairman Rayburn's suggestion that if you left the fixing of margins to the stock exchanges they could change them any day they pleased. The minute you give discretion to a commission that body will have pressure put on it to the very limit, to raise the loan value to the limit of the commission's discretion.

You will remember the pressure put on the Federal Reserve Board back in 1928 and 1929 when there was an attempt to have the Reserve Board cut down the amount of credit available in the market. You remember the storm that came from New York—when Mr. Mitchell told the Reserve Board what he thought of it—when the Board started to stop the speculation in the markets. If you give an administrative commission complete discretion, without any bright line may be regarded as at least a norm, the commission cannot stand up against the applicant asks for a liberalizing ruling. It will be the brokers who have a very heavy interest in commissions volume that will always be before the Trade Commission, or any other administrative body that is administering this law. They will be always wanting to put margins lower.

Unless you give the administrative body a bright line behind which it can say, "Congress told us this is where we stop”, the administrative body is going to be in a hard way all of the time.

You have to give the administrative body some help to resist the pressure.

Mr. KENNEY. Do you think that it ought to be rigid, or should there be some discretion?

Mr. CORCORAN. You might do this. Dr. Goldenweiser talked over this proposition with us before we came down the other day.

At the present time the act says there is a bright line at 40 percent lower value. If conditions get so inflationary that they become dangerous, the Federal Trade Commission can fix even lower-loan values, that is, make even higher margins. But at the present time this bill includes no provision by which the Federal Trade Commission can lower margins.

Now, of course, the pressure is always going to be for lower margins, because of the tremendous organized interest on that side of the fence. Pressure always comes from those who have a dollars and cents interest in the result. In this case those people will be the brokers, who will make the big commissions out of the bigger volume that will come from the lowering of margins.

You might do this. You might keep the 40 percent as the bright line, but empower the Federal Trade Commission, if it is given the administration of this bill to lower the margin below 60 percent (which is the correlative of the 40 percent_loan value), in cases of grave national emergency but only if the Federal Reserve Board joins in the recommendation. Thus you will check the pressure against one board with the pressure against another board.

Mr. KENNEY. Would you recommend such a set-up?

Mr. CORCORAN. I just do not know. In the case of the railroad loans which the Reconstruction Finance Corporation makes, there is a counter check by the Interstate Commerce Commission. The railroad loans have to pass both bodies before the Reconstruction Finance Corporation will make the loan.

As Dr. Goldenweiser suggected the other day, since you want to make it very hard to get beyond 40 percent loan value are going to give discretionary power to exceed such limit, you should if you require it to be exercised by the two bodies, assurance that the decision had been checked pretty well before the limit was lifted.

If you want to be very sure that you are fixing a norm to which the market will once and for all adjust, you had better leave the bright line as it is and say, beyond this there can be no loosening of the general requirement. But if you feel that is too stiff, and there should be machinery to loosen up, you ought to make it hard to loosen up above that line.

Mr. PETTENGILL. Mr. Chairman-
The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. There is one question in connection with the margin. In addition to keeping the fool from being parted with his money, the Bible to the contrary, notwithstanding, is not the major objection the high margin requirement to prevent the diversion of bank funds to the stock market? Mr. CORCORAN. That is one reason.

Mr. PETTENGILL. Would it result inevitably in a small volume of total dollars being in the stock market?

Mr. CORCORAN. Yes; and that is the chief object of it. The other day Dr. Goldenweiser was talking to you about the effect on bank credit of stock-market operations. I do not pretend to be an economist, but I have some experience lately with bank problems. One very interesting result of the stock-market spree of 1928 and 1929 is the effect on the business of local banks. That stock market, with the extreme amount of marginal credit it could reach, employed its machinery for the purpose of floating huge volumes of securities for big listed companies and mergers. With tremendous cost assets so obtained, the big companies bought up or merged smaller corporations, and for their own financing became quite independent of the banking system. As a matter of fact, at one time call loans of those big companies were a more important factor in stock market than bank loans. Now, the financing of small companies operating locally was the chief source of the commercial business of the local banks. As the small units became subsidiaries of the big holding companies, naturally the holding companies tended to finance those subsidiaries not through the local banks as heretofore but through the big banking connections of the holding company or out of the holding company's own resources. The local bank was therefore financing its own loss of customers by financing the buying of securities in the stock market of these big companies which in turn were absorbing the small local manufacturing companies which were the chief customer of the same banks.

As a result the true commercial lending business of the small banks largely dried up. Then they faced a necessity of finding use for their funds in securities purchases for their own account, and in real estate. When the crash came, the local banks did not have a sufficient portion of their funds in diversified commercial loans. Their money was tied up in securities, their so-called “secondary reserves” which went down with the market or in real estate. That curious circle of the relationship credit extended by small banks to enable securities flotation for big companies is one of the reasons why the banks are having such a hard time now. It is also one of the real reasons for the trend toward monopoly about which the N.R.A. is so worried at the present time.

The big companies which obtained large reserves and large resources through flotations in the stock market in 1928 and 1929 are in a position at this minute to buy up and absorb small companies which are having a hard time. You hear a great many prognostications that for that very reason this is going to be the year in which we are going to have the greatest trend toward monopoly we have ever had.

Mr. MAPES. Mr. Chairman-
The CHAIRMAN. Mr. Mapes.

Mr. MAPES. One of the arguments in justification for the stock exchanges is that it enables the flotation of new issues.

Mr. CORCORAN. Yes, sir.

Mr. MAPES. Is it your opinion that it enables the flotation of them too easily, and that in the last few years the savings of the people were absorbed in buying new issues without much consideration being given to the merits of the issues?

Mr. CORCORAN. f course, when you get the ball rolling and you get a continued buying fever which is partly the result and partly the cause of a continued floatation of issues, a great, great deal of capital is wasted because the great distributing machinery built up to help float those securities has to have something to do. It became quite à necessity in 1928 and 1929 for distribution houses to manufacture securities of almost any quality to keep their big machines going.

Whether you think it was a good thing for the stock market to make it possible to float these big issues in 1928 and 1929 with the concentration of industry that inevitably results, depends upon whether you think it is a good thing to have all business in this country in the hands of a comparatively few big companies or whether you think it is a much more healthy-as I do-to have it spread among a great many more small industries.

Mr. MAPES. Would it not have been a good thing if there had been some limitation on the sale of investment trust stocks and of the bonds of companies that were merged and perhaps recapitalized on a fictitious basis?

Mr. CORCORAN. Most people think that it would have been a good

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