50 percent of the loan value make pyramiding very slow. The Twentieth Century Fund report, to which I referred the other day, tried to make pyramiding impossible by computing margins, not on the market value of the stock, but on a multiple of the earnings of the stock over 5 years. No matter how fast the stock went up, it had no pyramiding possibilities, because the earnings on a 5-year basis would not increase anywhere near in proportion to market value.

Why do you want to prevent purchasers from going into the market on small margins? For two reasons: first, small margins mean big volume. Brokers are against raising the margin requirements not because they are not concerned with small investors' chance of making money. Everybody in the market knows that on the average the small investor never makes money in the market and keeps it. He always loses.

The broker wants to keep margins as low as possible for commissions. If a customer buys 100 shares on a 20-percent margin, the broker gets the same commission as if the customer buys 100 shares on a 60-percent margin. The broker collects a fixed commission on the 100 shares no matter what the margin figure is.

Mr. HUDDLESTON. What is the purpose of the present stockexchange rule on margins?

Mr. CORCORAN. You mean, what is the purpose of the way of expressing the percentage?

Mr. HUDDLESTON. No; I mean, why have any minimum? Is it for the protection of the investor, or the protection of the broker, or stabilization of the market, or just what is it?

Mr. CORCORAN. Well, as I told you, sir, until very recently there were no fixed minimum margins.

Mr. HUDDLESTON. Now, what is the purpose of it?

Mr. CORCORAN. Well, I think the stock exchange acted in response. to an agitation that there should not be too much trading on thin margins.

Mr. HUDDLESTON. For what reason?

Mr. CORCORAN. Because it is socially undesirable to have people run too thin on a margin and be cleaned out.

Mr. HUDDLESTON. You have just said that the small investor always loses anyhow. What difference does it make with him whether his margin is great or small?

Mr. CORCORAN. It makes a difference to him, sir, that he will not get cleaned out so early.

Mr. HUDDLESTON. That is just what I was going to say. What is the social advantage, to use your expression, of continuing in the market a man who is incompetent to go into the market? The sooner he is cleaned out and done with, and is out of it for the future, the better it is?

Mr. CORCORAN. Well, sir, there are a great many, many people who feel just the way you do, that it is not desirable to permit buyers to go into the market on a margin.

This bill is a compromise between those who think that it is the wiser social policy that the average man should not be permitted to go into the market on margin, and those who think it necessary to compromise with the present practice; that the broker must be left some business; and that if you want a highly liquid market, you have to leave a little borrowed money in it.

As the bill is set up right now, it represents such compromise. However, you heard one witness tell you the other day that he thought no margin trading at all should be allowed, and you will undoubtedly hear representatives of the brokerage houses when they come down here tell you that you ought to leave margins alone. This bill is a compromise.

Mr. HUDDLESTON. If you should require payment in full of the stocks, you would not safeguard against business incapacity.

Not

Mr. CORCORAN. No; but, sir, you lessen the chances of loss. quite so many traders will be cleaned out on larger margins. Mr. HUDDLESTON. Then, what are you trying to do with this bill; is it to keep men, who have not the capacity to go into the business out of it?

Mr. CORCORAN. This bill does try to do that, but at present it is probably impossible to legislate margins out of existence. This bill therefore compromises. It is perfectly understood that the bill does not eliminate the problem, but only lessens the danger.

Mr. HUDDLESTON. The difficulty with me is that I do not see that you are lessening it. You are just prolonging the agony.

Mr. CORCORAN. No; not quite. Increasing the margin requirement has two effects. If a purchaser sees a stock at 100, somebody tips him that the stock is going up to $150, and he thinks he can have a ride for those 50 points' profit by putting up only $25, he will not only want to go into the market with one $25, but with all he has and will sink in the aggregate a great deal more money than if the chances of profit were smaller. If he had to go into that market on a 60-percent margin, he would neither buy so many shares nor risk so much money, because the chances of making a killing would be less.

Mr. HUDDLESTON. Now, those are a lot of speculations.
Mr. CORCORAN. They are pretty well borne out, sir.

Mr. HUDDLESTON. I think there is room for discussion on each of the points you have made. I think that the experience of all of us has disclosed that no uniform line of action can be counted upon to be taken in short, what we are trying to do here is deal with human nature. We want to change human nature by passing a law.

Mr. CORCORAN. Well, sir, that goes back to our lottery bill. Mr. KENNEY. Thank you very much, but that is not what I was about to say. It goes back to whisky pools where the liquor stock went up about 50 points and in a day or two last summer, as I understand, they went down to where the proposed margin here would not have saved the investor.

Mr. CORCORAN. But, a trader might have saved himself if he had had a 60-percent margin. By selling on the first day he might have saved himself a great deal of money. With only a 23-percent margin he could not have saved himself on that first day.

With the 60-percent margin he would have had at least 2 days to turn around and decide what to do.

Mr. KENNEY. Suppose you were in Washington on a code matter? Mr. CORCORAN. Sir?

Mr. KENNEY. Suppose that you were in Washington on a code matter?

Mr. CORCORAN. Well, sir, if you are in Washington on a code matter, you should put your affairs in the hands of a trustee. Mr. COLE. Mr. Chairman, may I ask a question?

THE CHAIRMAN. Mr. Cole.

THE WITNESS. Yes, sir.

Mr. COLE. This bill assumes that it is necessary for the protection of the national banking and Federal Reserve System to impose all of these restrictions.

Mr. CORCORAN. Yes.

Mr. COLE. What assurance do we have, by this law, if a man has $10,000, or has $8,000, and wants to buy $16,000 worth of stock, and the board of directors of several members in a certain bank are interested in the same stock, that in loaning the depositors' money, on listed securities, as collateral, that the stock-exchange requirements as to margin percentage will prevail-in other words, how are we going to protect the bank?

Mr. CORCORAN. The bank examiner.
Mr. COLE. How is that?

Mr. CORCORAN. The bank examiner.

Mr. COLE. Oh, the bank examiner comes around once every 3 or 4 months and maybe twice a year. That has been the trouble in the past. They can loan the depositors' money, on listed securities at most any percentage and often on time notes not liquid when the market on such securities falls.

Mr. CORCORAN. Of course, you cannot be sure.

Mr. COLE. In other words, why is there not some provision in this proposed legislation, if this is essential to protect our bank investments, of the depositors' money, for a reasonable margin; why is there not some legislation to put restrictions upon them as well?

Mr. CORCORAN. Well, it is unlawful to make an undermargined loan, by the terms of this bill.

Mr. COLE. Where is that language?

Mr. CORCORAN. It is in (c), down at the bottom of page 12. It is unlawful for a bank to make a loan at less than

Mr. COLE. That is section (c)?

Mr. CORCORAN. Under section (c).

Mr. COLE. Very well.

The CHAIRMAN. Mr. Cole, you are through?
Mr. COLE. Yes, sir.

Mr. CORCORAN. Whether the law is enforced depends upon outside factors. This bill recites one of its purposes is to protect national and Federal Reserve banks from fluctuations in the stock market that have made so much trouble for the banks, as Dr. Goldenweiser described the other day, You protect the banking system when you protect it from these stock-market gyrations.

Mr. COLE. I presume it is your idea that section (c), of section 6, imposes the same restrictions upon the banks?

Mr. CORCORAN. As to listed securities.

Mr. COLE. As to listed securities.

Mr. CORCORAN. But not on commercial as distinguished from security loans.

Mr. KENNEY. Well, do you think you will get greater fluctuation with higher margins?

Mr. CORCORAN. No; you will get smaller fluctuations, because you will not have the

Mr. KENNEY. Will it not be necessary to run the market up and down, to a greater extent, in order to scare people out that somebody may make a profit?

Mr. CORCORAN. Unless you have volume, you can not run the market up and down. The public just will not buy so many shares of stock, nor risk so much of its money in the aggregate for the smaller profits involved, if the margin rate is higher. That means that you are going to have less volume in the stock market and volume is the essential on which pools thrive.

Mr. KENNEY. But there will be large holders of stock and it will be to their interest to run the market up and down, I suppose. Mr. CORCORAN. Yes.

Mr. KENNEY. So as to get people to unload the stock in order that there may be profits for somebody else?

Mr. CORCORAN. But if you do not make it too easy for the public to buy in great volume, there will be no one on whom the pools can unload. A pool cannot get the market up to a high point, unless it can unload on a lot of unsuspecting traders who bought heavily with small margins when the drop comes the pool cannot drive the market so low either.

Mr. KENNEY. But you will have wide fluctuations.

Mr. CORCORAN. But it will be harder to get wide fluctuations, because it is harder to get the public in or shake it out.

Mr. KENNEY. You do not know that it will work to that end? Mr. CORCORAN. You cannot stop all of it, unless you prohibit margins completely.

I do not say that I do not think the complete prohibition of margin trading would be a good thing. But you are dealing here with the necessity for a compromise between what might be the best theoretical situation, and what can be adapted to the stock exchange system for which you are trying to legislate at the present time, with brokers now operating under the 23 percent margin rule and protesting this bill, because it will cut their volume. Brokers are going to come before you and say that the margin change will affect their commissions, that the drop in commissions will put men out of work. For that reason, this bill is a very moderate bill. It tries to compromise between what is the most socially desirable end, and what we now have.

Mr. COLE. Let me ask you one more question along the line that I asked a moment ago.

Mr. CORCORAN. Yes, sir.

Mr. COLE. You told me that subsection (c), of section 6, applies to our banks?

Mr. CORCORAN. Yes.

Mr. COLE. And that states nothing about banks except that it is unlawful for any person to extend or maintain credit

Mr. CORCORAN. Well, you will notice that it permits

Mr. COLE. Let me finish my answer, just a moment.
Mr. CORCORAN. Yes, sir.

Mr. COLE. In the definitions of the bill, on page 6, paragraph 9, "the term 'person' means an individual, a corporation" and so on. In other words, there is specified the meaning of the word. Why could you not put in "banks"?

Mr. CORCORAN. Well, the definition uses abstract terms to catch everything-but a bank is included.

Mr. COLE. National banks is what we generally say, when we want to designate a national bank.

Mr. CORCORAN. Yes, but a bank is an "association."

Mr. COLE Yes; but you do not refer to banks as associations, do you? Would it not be better to say "banks." If banks, members of Federal Reserve, are to be included, do you not think that that wording should be in there?

Mr. CORCORAN. If necessary to clarify; yes. But a national bank, sir, is included under the term "association." Under the National Banking Act, a bank is called "a national banking association."

One of the necessities to make these margin provisions apply to banks even though you might not want otherwise want them to apply, is that a broker could arrange to have a bank carry securities for customers who wanted better margins than he could give them under the bill.

It is a provision to anticipate evasion of other provisions.

Mr. COOPER. Mr. Chairman, may I ask the gentleman a question? The WITNESS. Yes.

The CHAIRMAN. Mr. Cooper.

Mr. COOPER. Is it your intention to discuss sections 11 and 12 of the bill?

Mr. CORCORAN. Yes.

Mr. COOPER. While I am interested in the regulation of the stock market, I am also interested in those two sections relative to the issuance of securities.

Mr. CORCORAN. We will get there in just a minute, sir, if we may. There is one more

The CHAIRMAN. Let we ask just one more question, Mr. Corcoran, before you leave this.

Mr. CORCORAN. Yes, sir.

The CHAIRMAN. The complaint against business done on these exchanges is that the margins have been so low that a slight fluctuation would shake them out.

Mr. CORCORAN. Yes.

The CHAIRMAN. Now, in response to that, even the stock exchanges have raised the margin, but it remains a fact that they can change them next day, if they want to.

Mr. CORCORAN. Oh, yes, sir.

The CHAIRMAN. And, the reason for this high margin is to protect the man that invests his money from being shaken out on the slightest fluctuation.

Mr. CORCORAN. Yes, sir.

The CHAIRMAN. And that if he could stay in 3 days, he might recover, whereas if he is shaken out the first day he has got no opportunity to recover.

Mr. CORCORAN. That is right, sir. Take the American Commercial Alcohol pool of last summer. The committee ought to follow the Senate investigation on that pool, rather closely, because it throws light on this margin problem.

The alcohol pools of last year demonstrate in a small compass, where you can watch the process in simple operations, every evil that developed on the stock exchanges in the period of 1929.

The discouraging aspect of 1933 is that apparently we learn of nothing from 1929. We went merrily on doing exactly the same thing, 1933 is aslo a good laboratory in which to watch unfortunate effect on business of the gyrations in the stock market, which Dr. Goldenweiser described to you the other day. Last summer a little