The act provides that the Federal Trade Commission may state that the "security is not based upon sound shares have been sold. Why, gentlemen, that is a state of mind. "sound principles" are today is a state of mind. through four stages of banking. principle" after the What solvency and At first it was a Christian act on the part of a banker to loan money on land. Since the beginning of time to lend money on land, which was the source of wealth of the Nation, was a Christian act. A firstclass mortgage was a good investment. That was changed, and about three years ago it became necessary that a bank instead of being solvent had to be liquid. It had to be liquid in commercial paper. That was a basic change. Then the next change was that instead of being liquid it had to be liquid in Government securities. That was a terrific change, very basic. Finally, a few weeks ago, instead of being only solvent and only liquid and only liquid in Government securities, a bank had to be liquid in currency, if you please, when the Nation could not supply the currency. The banks of the Nation were closed for the first time in history because they were required to be liquid in currency and the Treasury did not supply sufficient currency. Now, are you going to have an act that is going to run the business of the Nation and make it possible for somebody with the same state of mind that we have applied to the banks in this country to say that my business is not sound, that I am insolvent because I own real estate? As a matter of fact I do own real estate and I do not sell securities. I never sold a share of stock of any kind in my lifetime. Everything I own, I own entirely, so I am not affected by this act. I do not intend to sell any securities. But I am speaking of it from the standpoint of having had experience and having been a student of economics and of business. Gentlemen, if paragraphs (e) and (f) on page 13 of section 6 make it possible for somebody in Washington, no matter how wise he may be, to declare that my business is insolvent because I do not happen to be liquid in the particular definition of liquidity which has been applied now to banks, certainly-and I assure you of this as an economist, knowing something about industries-you are going to close two thirds of the industries of this Nation and throw 10 million people out of work the moment that goes into effect, because the philosophy today is a philosophy of liquidity on a currency basis. And that is the philosophy that will be applied. I will go further and give you a precedent. Three years ago those of us who are interested in relief and proposed direct relief, thought that the setting up of the Reconstruction Finance Corporation meant that it was going to aid by accepting the basic principle of determining what the credit of the States of the United States and the municipalities and the counties was. All of you gentlemen know that the Federal Government is only a committee in so far as the matter of ownership of land or of taxable properties. The Federal Government does not own any properties 169692-33- -4 of its own. It only owns what it has taxed people to buy with. The Government buildings in the District of Columbia were all bought by selling part of the territories that were ceded by the State of Maryland and the State of Virginia, and granted by the original owners in George Washington's first administration. The Federal Government sold part of the land and with the proceeds built the Government buildings. In other words, the Federal Government cannot borrow on its own credit. It borrows on the credit of the United States as provided. by the Constitution. It was strange, therefore, to read that the States could not borrow from the Reconstruction Finance Corporation unless they were so reduced and so exhausted that they had no resources. When that happened, I wrote to the late President, Mr. Hoover, and pointed out that if the States of the United States should happen to be so reduced that they had to apply to the Reconstruction Finance Corporation on the basis that they had no other way of getting any credit, then the $20,000,000,000 of Government securities were worthless, because the Federal Government could not do anything except redeem them with the credit of the States. I pointed out that the man power of the United States is the man power of the 48 States, the 3,072 counties, and the 16,598 municipalities; and there is no other man power in the United States. Likewise, I pointed out that the credit of the United States is based on the properties that are within the boundaries of the 48 States, the 3,072 counties, and the 16,598 municipalities. And that is the credit of the United States. Likewise, the national wealth is based upon exactly that. The national wealth is the wealth that is within those States, those counties, and those municipalities. Likewise, the national income, it is the income of the people living in the States, counties, and municipalities. I also pointed out that the national income of the United States is $600,000,000,000 a year and not the $40,000,000,000 which is reported. That is the taxable income that they are talking about, and when they talk about $40,000,000,000 and they talk about the Budget taking 10 percent of the national income, it is not true. It is taking 1 per cent of the national income only to meet the Federal Budget, not 10 percent. You can see that there is a vast difference. With the cooperation of the Treasury Department I made the first survey of the national income ever made, using income-tax returns as a basis. My survey shows that the 4,044,327 individuals and 509,000 business establishments who made income-tax returns in 1929 had a total gross income of about $600,000,000,000. I suggest, Mr. Chairman, that the bill be amended first in section 3, page 4. I propose an amendment there providing that this act shall not be retroactive, so as to avoid the possibility of the application of the principle of liquidity which prevails in these panic-stricken days. Unless that is done, you will close two thirds of the industries of the Nation and depreciate the securities of the shareholders and bondholders by $100,000,000,000. That would wreck those whom you are seeking to protect. Likewise, I would propose an amendment to strike out paragraphs (e) and (f) of section 6, page 13, so the directors of businesses and the stockholders could have the power to determine the destinies of their own corporations. Gentlemen, there are at least 1,000 big business organizations today being reorganized. They could not be reorganized if this proposed act goes into effect retroactively as regards the securities now issued. I will point out to you that the emergency banking act which went into effect on the 9th day of March carries the provision that banks may be reorganized by having new money. This proposed National Securities Act would conflict with that provision. You could not have new money to save business enterprises. I, as a stockholder, could not go in and say, I will put in one dollar for every $5 that I have already invested. The only way to save the Nation and the national industries is to permit the people who are already interested, to invest some more money and try to save their original investment. Senator GORE. I have wondered a good deal, Mr. Chairman, about our national income, because the expenses of government ought to be paid out of the revenue of the people, and it is pretty hard to get at. The CHAIRMAN. Yes. Mr. WOODHOUSE. If at any time hearings are held which make it appropriate for me to present the figures of national income I shall be very glad to present them. Senator GORE. That ought to go before the Finance Committee. The CHAIRMAN. Anything that you send down to us we will look over and see if we can put it in the record and have it apply to this bill. Is there any other question of Mr. Woodhouse? If not, we will excuse Mr. Woodhouse. Are there any people here present who would like to be heard on this bill? Mr. SPRINGER. Mr. Chairman, Durand W. Springer, secretary of the American Society of Certified Public Accountants. I simply want to make that statement for the record and I will file a statement. The CHAIRMAN. Very well. Mr. SPRINGER. That will save some time. The CHAIRMAN. Yes. Then if there is nobody else to make an announcement or a statement, we will adjourn until 10:30 tomorrow morning. (Accordingly, at 12 o'clock noon, the committee adjourned to meet again at 10:30 o'clock a.m. of the next day, Saturday, April 1, 1933.) SECURITIES ACT SATURDAY, APRIL 1, 1933 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The committee met, pursuant to adjournment, at 12:10 o'clock p.m. (at the conclusion of the executive meeting) in room 301, Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Wagner, Barkley, Gore, Reynolds, Byrnes, McAdoo, Adams, Norbeck, Couzens, Steiwer and Kean. Present also: Ferdinand Pecora, special counsel to the committee, and Julius Silver, associate counsel to the committee. The CHAIRMAN. The committee will please come to order. The hearing on S. 875 will be continued. Senator McAdoo has a telegram which he wishes to put in the record. Senator MCADOO. This is a telegram from an investment banker in my State, making certain suggestions about some features of the bill. I thought it might be considered by the committee. The CHAIRMAN. It will be printed in the record. (The telegram presented by Senator McAdoo for the record is as follows:) Senator W. G. MCADOO, Washington, D.C.: SAN FRANCISCO., CALIF., April 1, 1933. While we agree there have been abuses in underwriting field which should be remedied and are in sympathy with main purpose of proposed securities bill I believe care should be exercised to avoid passage of bill which is so rigid or restrictive as to hamper much needed new financing. From superficial information regarding proposed security bill believe there is provision which specified fixed purchase and sale price at time of application. Unless provision can be made for rather prompt consideration of applications changing conditions might necessitate certain latitude. Do not believe there should be any restriction upon retailing blocks of standard securities already outstanding. DEAN WITTER. The CHAIRMAN. I wish to have placed in the record a communication from The Port of New York Authority. (The letter from The Port of New York Authority addressed to the chairman of the committee is here printed in the record as follows:) PORT OF NEW YORK AUTHORITY, New York City, March 31, 1933. Hon. DUNCAN U. FLETCHER, Chairman Committee on Banking and Currency, MY DEAR SENATOR FLETCHER: The Port of New York Authority earnestly hopes that your committee will find it possible to make one small change in section 11 (a) of the proposed Federal Securities Act, S. 875. Section 11(a), on page 20 of the proposed bill, reads as follows: |