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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.

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Mr. GOLDENWEISER. Yes.
Mr. MAPES. Is there any way to prevent that sort of thing?

Mr. GOLDENWEISER. I do not know whether you can altogether eliminate the gambling instinct in the people by a banking or stock exchange or commodity exchange, or any other kind of legislation; but I think that you can, and I think we are making progress, in the direction limiting the available bank credit for these purposes.

Mr. MAPES. Now, you have enumerated evil conditions which most everybody I think will agree ought to be eliminated.

Mr. GOLDENWEISER. Yes.

Mr. Mapes. Personally, I do not get a very clear idea as to just how you would remedy them.

Mr. GOLDENWEISER, Well, sir; I feel that you are remedying them to a very considerable extent by this bill, by setting up control over the amount of credit that may go into that business.

The banking act of 1933 did some other things in limiting the amount that can be loaned, amount of participation of the banks, and by putting new powers into the Federal Reserve System. I think that gradually we are closing in on the extent to which bank credit can be used for those purposes; but those of your Florida example, who had funds, who may have mortgaged their homes and sold their all, and robbed the baby's bank to go down to Florida to buy lots under water, there is no way of saving them, except preventing fraudulent advertising. That is another field. There you get far beyond the field of this particular bill.

I would like to say just one thing, that it was not my purpose here to propose remedies for existing economic evils. It was chiefly to state the reasons why I am in sympathy with the objects of this bill.

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

Mr. PETTENGILL. My recollection is that during 1928 and the early part of 1929, statements were issued by the Federal Reserve Board to the effect that the stock market was not overcapitalized, securities were not too high, and brokers' loans were not overextended. Is that not correct?

Mr. GOLDENWEISER. Well, sir; no, I think it is not correct.

I think that what you have in mind is, the only thing that I can recall, that would bear out your statement, is that early in 1928, Governor Young, who was then governor of the Federal Reserve Board, appeared before a Senate committee that was considering brokers' loans, and said that in his opinion, the brokers' loans were liquid. He did not say that there were not too many of them. He just simply said, what the future has demonstrated is true, so far as the brokers' loans were concerned, they were liquid.

Mr. PETTENGILL. That is always true.

Mr. GOLDENWEISER. That is always true. And he said that, but he was not, I am sure, understood, and the newspaper men misrepresented that as being a statement of endorsing the volume and the practice of brokers' loans. That is the only way, if my recollection is correct, in which the Federal Reserve in any way indicated anything in the nature of an endorsement of the things.

In the June 1928 Bulletin, the Federal Reserve issued a warning against overextending of speculative credit on securities and, of

course, in February 1929 it issued a very vigorous warning, followed up by an attempt to limit it.

Mr. PETTENGILL. My memory, of course, after 4 or 5 years may be at fault.

But as I recall, Secretary Mellon himself issued statements that were construed, and I think that the public had a right to construe them as ever, that the basis of the market speculation was not unsound.

Mr. GOLDENWEISER. That may be true. I was speaking of the Federal Reserve Board and not of the Secretary of the Treasury.

Mr. PETTENGILL. He is ex officio, a member.

Mr. GOLDENWEISER. Of course, he is an ex-officio member. I generally think of the board as the appointive members.

The Secretary of the Treasury, if he made any such statement, made it not as a member of the board, but as an individual and as the Secretary

Mr. PETTENGILL. To pursue it just a little further, do you not recall a statement that came from the White House in January 1929?

Mr. GOLDENWEISER. I believe I do.

Mr. PETTENGILL. To the effect that there was nothing to fear from the stock-market situation.

Mr. GOLDENWEISER. I believe that there was some such statement.
Mr. LEA. Mr. Chairman-
The CHAIRMAN. Mr. Lea.

Mr. LEA. Have you any statistics to show the percentage of business on the New York Stock Exchange that consists of the small broker purchasers?

Mr. GOLDENWEISER. No, sir; I do not have any. I do not know whether the stock exchange has any such statistics or not; but I am not familiar with them.

Mr. LEA. Do you not know if any such records are available?

Mr. GOLDENWEISER. I do not know. I do not know off hand; no, sir.

Mr. LEA. As I understand it, from your testimony, there is no need of legislation to protect the lender in connection with transactions on the exchange.

Mr. GOLDENWEISER. I think that that is right.

Mr. LEA. So that the need for this legislation must be found in the protection of the purchaser of the stock or else in defense of the stability and security of the business structure of the country.

Mr. GOLDENWEISER. Yes, sir.

Mr. LEA. I take it also that there is no necessarily harmful thing about the broker's loan, but like all other forms of security it has its good and may be used for its bad purposes?

Mr. GOLDEN WEISER. Yes, sir.

Mr. LEA. There would be no sensible reason for trying to prohibit the broker's loan when it has some useful purposes.

Mr. GOLDENWEISER. That is right.

Mr LEA. What is your judgment about the advisability or necessity of prohibiting the use of unlisted stocks for collateral loans?

Mr. GOLDENWEISER. To be perfectly frank with you, I have not made up my mind what I think about it. I can see the object that it serves in that it will avoid the possibility of circumventing the law by lending say 100 percent on the unlisted stocks and then staying within the limitation on the listed ones. I mean, it is a way of closing the door toward evasion, but various repercussions it may have or whether or not it is desirable, or ought to be modified, I am not prepared to say today.

Mr. LEA. Anyway, I take it, if any restriction on credit is necessary, if we can place restrictions on the purchaser of the stocks, then we have done all that it is necessary, probably placed all of the restrictions that are needed.

Mr. GOLDENWEISER. If I understand that, I think that that is right. I am not quite sure that I get your point.

Mr. LEA. What I attempted to bring out is if there is any overextension of credit it is solely to the purchaser of stocks.

Mr. GOLDENWEISER. That this control should be through the purchaser rather than through the seller.

Mr. LEA. And if you control the loan to the purchaser.
Mr. GOLDENWEISER. Yes, sir.
Mr. LEA. If you control the loan to the purchaser, you control the
whole situation.

Mr. GOLDENWEISER. Yes, sir.
Mr. LEA. So far as overextension of credit is concerned.

Mr. GOLDENWEISER. Yes. Of course, the transaction is a twosided transaction. You can control it at either side. If you control the credit on the part of the purchaser, you have controlled it.

Mr. LEA. In this case, we are setting up an arbitrary standard of control. Would that appeal to you as being as desirable, or would you prefer that some discretion be vested in some place to determine the amount of collateral required?

Mr. GOLDENWEISER. My inclination on that would be to have a certain amount of flexibility and discretion, because it is very difficult to change legislation, and situations do arise where a rigid rule might turn out to be not in the public interest. If you can find the proper authority to whom you wish to entrust the discretion, I think it would be a better procedure.

Mr. LEA Have you any suggestions to make as to where such discretion should be vested?

Mr. GOLDENWEISER. I should rather not make a suggestion today.
I am not clear on that.

Mr. PETTENGILL. Mr. Chairman-
The Chairman. Mr. Pettengill.
Mr. PETTENGILL. I want to ask one more question.

You have stated that in your opinion the effect of the 60 percent margin requirement would be to either keep the so-called "little fellow out of the market or at least restrict him.

Mr. GOLDENWEISER. Yes.
Mr. PETTENGILL. If that is true, who gains from that operation?

Mr. GOLDENWEISER. I think among other people, he gains. The little fellow gains by being kept out of the market. He has found that his trips to the market are pretty disastrous kinds of trips, and I think in addition to him, the economic situation gains, because it eliminates one element that whoops the things up, and also that demoralizes a great many businesses and communities.

Mr. PETTENGILL. Well, I will go as far as the next man in putting n end to the outrageous frauds and window dressing that lures the

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"little man" to destruction, but having done that, if that is possible, then is the 60 percent margin requirement justified on the ground that it keeps the little man out of the market, who might want to try to recoup some of the losses he has had? That is, will the anticipated profits of the next big boom in the stock market go only to the wealthy class?

Mr. GOLDENWEISER. That is a very technical subject, but I should be inclined to disagree with you, on the ground that, while it is true that if these little fellows go into the market when it is low, and if the market rises, and if they buy securities that do rise, why, of course, they will recoup; but that is a very special set of conditions, having a very special set of conditions in mind, which very rarely coincide, and, broadly, I think that the little fellow has a better chance of recouping his losses by playing the races rather than by playing the market.

The CHAIRMAN. Is not this true, that the margin requirement acts in proportion against one just the same as the other; acts against the big purchasers the same as it does against the little fellow?

Mr. GOLDENWEISER. Yes, I think that it acts worse against the little fellow, because he is not as familiar with it.

The CHAIRMAN. I am not talking about that. I am talking about the proportion.

Mr. ĜOLDENWEISER. The proportion?
The CHAIRMAN. Yes.
Mr. GOLDENWEISER. Generally, I would say yes.
The CHAIRMAN. It is the same thing, is it not?
Mr. GOLDENWEISER. Yes.

The CHAIRMAN. The same proportion would apply to the big man as well as the little one.

Mr. GOLDENWEISER. Yes.

The CHAIRMAN. If he has to put up a larger margin, he would not buy as much.

Mr. GOLDENWEISER. That is right.
Mr. WOLVERTON. Mr. Chairman.
The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. You have just said that you thought that the little fellow would have a better chance betting on the horses than he would in the stock market.

Mr. GOLDENWEISER. Yes.

Mr. WOLVERTON. Would that observation lead you to the thought that we would be justified in providing in the bill, a provision that would keep the little fellow out of the market, so that he would have a chance to leave something to the family when he dies?

Mr. GOLDENWEISER. I think that the bill tends that way, and it is one of the reasons why I am in favor of the bill. It would tend that way.

Mr. WOLVERTON. In other words, you think he would have a better chance of leaving something to the family, if he stays out of the market?

Mr. GOLDENWEISER. Yes, sir; without any doubt.

The CHAIRMAN. We are very much obliged to you, Mr. Goldenweiser.

Mr. GOLDENWEISER. Thank you.

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