STATEMENT OF HENRY WOODHOUSE, EDITOR SCIENTIFIC AGE, CHAIRMAN OF THE NATIONAL RECOVERY COUNCIL, 280 MADISON AVENUE, NEW YORK CITY

The CHAIRMAN. I will say before Mr. Woodhouse begins that the representatives of the investment bankers have decided that they would rather come before the committee on Tuesday. We are going to have a session on Tuesday and as they have to appear before the Senate on Monday, it will be convenient for them to come before us then.

Mr. Woodhouse, the committee is able to give you 10 minutes. Will you please proceed and qualify.

Mr. WOODHOUSE. My name is Henry Woodhouse. I am editor of Scientific Age, and a scientific economist, chairman of the National Recovery Council, and the author of various works on economics and financial matters. My address is 280 Madison Avenue, New York City, or the Willard Hotel, Washington.

When I came here this morning, Mr. Chairman, the purpose of my appearing was to state the broadest scope of this bill provided certain amendments were made to it.

In the course of the discussion there appeared to be matters discussed upon which there did not seem to be a clear understanding. For instance, as was, I believe, brought out by the members of this committee, there is a liability on the part of the directors. Well, I have been and am a director or trustee or official of 38 organizations, and I have never found it possible to evade my duties or my liabilities by merely resigning after assuming the obligations. The law would not allow me to do so.

I believe somebody brought up this morning that it was possible for a board of directors to declare vacancies in a board. I submit to you that that is not the law. The law is that if I became a director, I am liable for a year for my acts as a director. Such is the case in New York. If, within that time, I assume any obligations in the name of the corporation or merely act as a director, even if I do not appear, I am liable for having been a director.

Of course, if it were different, a board of directors would get together today, assume liabilities or vote the assets out of the corporation and resign and leave an empty shell. That would not be equitable.

As to that point, if you will permit me, I will just leave those remarks with you.

Another point that was brought up was the liability of the directors as signers, as provided in section 9, page 19. The question was, can a director act by proxy in effect? If he is not present, he acts by proxy in effect. Personally, I made it a rule in 20 years of public life not to accept any directorships without attending meetings.

However, I happen to know that most corporations run their business by having a firm of attorneys who prepare the minutes in advance, state all the proceedings that are to take place in the meeting of the board or the stockholders, and they are just put through. At times the principals are not even present. That is the custom today as to most corporations.

Of course, this act is going to make it possible to place an obligation on the part of directors to not merely be figureheads and collect a

$10 gold piece for attendance at meetings, which they will not be able to do, anyway, under the banking act at present.

As a director of corporations, I am very much concerned as to the revocation clause of this act. If I am a director of a corporation and this corporation in good faith has been financed, an application has duly been made for certification of the securities, and the securities have qualified and the corporation is being run, I do not think that it is proper to permit a commission, no matter how intelligent a commission, no matter how Christian a commission, to determine how my business shall be run and then make me liable for the acts of the commission.

For instance, if you have the act with the revocation clause, it means this, that after the commission has passed upon the securities the commission promptly resolves itself into an administrative body, and it tells my corporation-I believe the wording states specifically that it may tell my corporation-that its affairs are in an unsound condition and make it insolvent by depreciating the value of its securities to nothing.

The act provides that the Federal Trade Commission may state that the "security is not based upon sound principle" after the shares have been sold.

Why, gentlemen, that is a state of mind. What solvency and "sound principles" are today is a state of mind. We have just gone through four stages of banking.

At first it was a Christian act on the part of a banker to loan money on land. Why, since the beginning of time to lend money on land, which was the source of wealth of the Nation was a Christian act.

That requirement was changed, and about three years ago it became necessary that a bank instead of being solvent had to be liquid. 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 were 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 part of the United States is only an association formed to promote the welfare and provide for the defense of the Nation. That is, 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 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.

Lo and behold, all at once we read that the States cannot 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, 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, as I pointed out yesterday before the Senate committee, which is always represented to Congress

The CHAIRMAN. What about this bill, Mr. Woodhouse? You have already had more than 10 minutes.

Mr. WOODHOUSE. May I complete that sentence, Mr. Chairman? The CHAIRMAN. Yes.

Mr. WOODHOUSE. 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 percent 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.

Now, I will return to the bill. 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, as I pointed out, 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.

The CHAIRMAN. Have you any other amendments you want to suggest?

Mr. WOODHOUSE. Yes. Another broader amendment is this: I would amend, page 5, section 3, paragraph (a), to provide that the issuers of securities, acting as fiscal agents for foreign governments, do not come under the exemption provided here. As it is now, any bank issuing any securities to a fiscal agent for a foreign government may claim exemption.

Under this act, the banks will claim exemption as fiscal agents of governments. If you do that, you exclude J. P. Morgan and all the other big private banks.

That will defeat the purpose of the act in the worst way possible, as it will leave unchecked the export of American capital to foreign countries while restricting investment of American capital in American industries.

Between the two evils, the exportation of the capital to foreign countries after selling securities to the American public is the worse, since it takes the funds out of the United States.

The American investor who buys American securities and loses has the consolation that his money is contributing in some way to the welfare of the United States through the purchasing power of those who got his money. But he has no such consolation if his money was sent to foreign countries.

At this point, Mr. Chairman, I hope that the Federal Securities Act will prevent the continuation of the circulation of fraudulent statistics regarding the percentage of the national income derived from foreign countries from exports.

One of the most depressing and destructive factors, which have kept the United States from recovering and reestablishing prosperity has been that the United States have been flooded with untrue and fraudulent statistics in which it was claimed that 10 percent of the national income of the United States was derived from exports to foreign countries.

As a matter of fact the gross income from exports to foreign countries never was as much as 1 percent of the gross income of even that small part of the population of the United States that makes income

tax returns.

For instance, the income tax returns of only 4,044,000 out of the 123,000,000 inhabitants of the United States, and only 509,000 out of about 2,000,000 business establishments of the United States, had in 1929 a gross income of about $600,000,000,000.

Against that we find that the gross exports for the banner year of 1929, including the exports to the Philippines, Hawaii, and the other United States Territories, and the exports of raw products to American factories abroad, and the purchases of Americans abroad amounted to only $5,241,000,000 for all.

That was less than 1 percent of the gross income of the 3 percent of the population and 25 percent of the business establishments that made income-tax reports.

It is, therefore, a misleading untruth to state that the national income has been derived from exports in the amount of up to 10 percent. It never was and is not likely to be.

Such misstatements have been designed to make the American public feel that it must invest in foreign securities as a means of getting 10 percent of the national income of the United States.

They have done more damage than that. They have induced the United States to wait to do something definite for the restoration of prosperity until something could be done to restore the 10 percent mythical purchases of foreign countries. A million burglars let loose upon the Nation could not have done as much damage as those misrepresentations did.

Another amendment I suggest, which may provide security for investors and we all want that is this: To provide that all issuers of securities shall make not less than three reports a year as to their liabilities and assets, as is provided in the National Banking Act for national banks. If that is done, instead of the Commission having to assume jurisdiction over your business and run it for you and declare when you are solvent and not solvent, your own report will show in the records; the records of your company will show so that