The CHAIRMAN. The next witness is Mr. Twombly.

Mr. WADSWORTH. Mr. Chairman, before Mr. Twombly makes his statement, may I make a brief statement to my colleagues on the committee?

The CHAIRMAN. Yes, Mr. Wadsworth.

STATEMENT OF HON. JAMES W. WADSWORTH

Mr. WADSWORTH. Mr. Twombly, with whom I have been associated intimately for many months, appears in behalf of H. R. 4344, a bill which I introduced in the House on April 14, 1941, and which suggests a series of amendments to these acts.

The committee has before it a committee print in which is displayed the existing law, the proposed amendments in which the Securities Exchange Commission and the so-called industry agree; and amendments proposed by the industry, in which the Securities Exchange Commission does not agree, or if it agrees it agrees with a reservation. Those different types of amendments are shown in different types of print.

It proved impracticable for us to include in the committee print the amendments proposed in H. R. 4344. To put them in the committee print would have probably lumbered it up so heavily with different types of type that it would have been more confusing than otherwise.

So I merely want to say in advance of Mr. Twombly's statement that the provisions, or the amendments proposed in H. R. 4344 will, I hope, be given equal consideration to the amendments set forth in the socalled committee print.

I realize that these amendments are not up for discussion at this time, but I thought that this was as good a time as any other to explain to the members of the committee the present status of H. R. 4344 in behalf of which Mr. Twombly intends to speak, not in detail just now; but later when the discussion of the amendments themselves are in order.

The CHAIRMAN. You may proceed, Mr. Twombly.

STATEMENT OF EDWARD B. TWOMBLY, COUNSEL FOR COMMITTEE ON REEMPLOYMENT OF MEN AND MONEY OF COMMERCE AND INDUSTRY ASSOCIATION OF NEW YORK, NEW YORK, N. Y.

Mr. TWOMBLY. Mr. Chairman and gentlemen, my name is Edward B. Twombly. I am a partner of Putney, Twombly & Hall, and I am here to make a preliminary statement at the request of your colleague, Mr. Wadsworth. My address is 165 Broadway, New York. I think it is in order for me to explain why I am here to testify today, and the particular connection I have in relation to these hearings.

In the winter of 1939-40, the board of directors of the Merchants' Association of New York, now the Commerce and Industry Association, was alarmed over conditions existing in respect to vast idle private funds, to almost complete stagnation in financing of new and growing industries, and the resulting state of unemployment throughout the country. It believed that there must be reasons for this state of affairs and determined to appoint a research committee

of distinguished men, consisting of both members and nonmembers of the association, to investigate and report. The committee was called the committee on reemployment of men and money and was constituted as follows:

Louis K. Comstock, chairman, 71 Broadway, New York, N. Y., formerly president of the Merchant's Association.1

James M. Barker, vice president, Sears, Roebuck & Co., Chicago, Ill.

Walter G. Baumhogger, president, United Cigar-Whelan Stores Corporation, 215 Fourth Avenue, New York, N. Y.

William C. Breed, Breed, Abbott & Morgan, 15 Broad Street, New York, N. Y.

W. Gibson Carey, Jr., president, the Yale & Towne Manufacturing Co., 405 Lexington Avenue, New York, N. Y.

Herbert L. Carpenter, president, Carpenter Container Corporation, 147 Forty-first Street, Brooklyn, N. Y.

Lionel D. Edie, president, Lionel D. Edie & Co., Inc., 20 Exchange Place, New York, N. Y.

Charles G. Edwards, president, Central Savings Bank in the City of New York, 21000 Broadway, New York, N. Y.

Walter D. Fuller, president, Curtis Publishing Co., Independence Square, Philadelphia, Pa.1

Charles R. Hook, president, the American Rolling Mills Co., Middletown, Ohio.

Fred I. Kent, director, Bankers Trust Co., room 1507, 100 Broadway, New York, N. Y.1

Edmond E. Lincoln, economist, E. I. du Pont de Nemours & Co., Inc., 9136 DuPont Building, Wilmington, Del.1

John Lowry, president, John Lowry, Inc., 630 Fifth Avenue, New York, N. Y.1

Jeremiah D. Maguire, president, Federation Bank & Trust Co., Eighth Avenue and Thirty-fourth Street, New York, N. Y.1

Frank Wilbur Main, C. P. A., Main & Coy, First National Bank Building, Pittsburgh, Pa.

E. V. O'Daniel, vice president, American Cyanamid Co., 30 Rockefeller Plaza, New York, N. Y.1

Russell G. Smith, executive vice president, Bank of America, San Francisco, Calif.

Laurence A. Tanzer, Tanzer & Mullaney, 165 Broadway, New York, N. Y.

Joseph M. Wells, general manager, Homer Laughlin China Co., Newell, W. Va.

Howard I. Young, president, American Zinc, Lead & Smelting Co., St. Louis, Mo.

The initial investigations of the committee led it to believe that some of the chief stumbling blocks to the free flow of private capital into industry were certain features of the various acts affecting securities and, in many respects, the administration of them by the Securities Exchange Commission.

About the middle of March 1940, Mr. Comstock, chairman of the committee, came to me and asked me if I would be willing to serve as counsel for the committee, to which I agreed, believing that a con

1 Members of executive committee.

structive piece of work could be done by this committee from an angle which had never before been appropriately developed.

At about the same time it was learned that your colleague, Mr. Wadsworth, was vitally interested in finding out what business-the issuers, the little business in the sticks, if you please-felt about the problem of raising of money which so many of them sorely needed. A series of conferences followed between Mr. Wadsworth and members of the committee on reemployment of men and money, and a program was worked out whereby the committee and its counsel would function as a research body in conjunction with Mr. Wadsworth. In short the committee and its counsel made their services available to Mr. Wadsworth in making a Nation-wide inquiry.

If I may be permitted to steal a page from Mr. Purcell's book, I should like to review, but only for a moment, the situation which existed at the time of the drafting and adoption of the original Securities Act of 1933. The country was attempting to recover from the greatest panic this generation has known; the confidence of the people of this country in its future prosperity had been shaken to the core; we had come to the last frontier; the future held nothing in store for the pioneer; the value of securities had sunk to unbelievable depths; somebody must be held responsible. Probably the most vulnerable group at that time—and probably justly sc-at least the most popular scapegoat, was the financial fraternity, or industry, as it has been called here. The speculation, the pools, the bears, the specialists, the great bankers, must be legislated into a position where they could not again create a market condition which could once more plunge the country into the depths of financial distress.

That the financial fraternity actually played but a minor part in the great debacle it is unnecessary to develop. The fact is, however, that the part it played was extremely unsavory and that a securities act was badly needed and that the securities markets and the practices which had developed around them needed controlling legislation. An act with teeth in it was needed then, and I doubt if anyone at these hearings feels that it is undesirable to retain and continue a securities act with teeth in it.

In the desire, however, to control the securities markets and the financial fraternity, an act was drawn-and very ably drawn-without too much consideration of business and with very little, if any, consultation with business.

By business I mean small and large business throughout the country, in every town, hamlet, and city. What effect the act, and later the Securities Exchange Act was going to have on business, the free flow of private capital-particularly risk capital-into industry, the growth of new business and the creation of new jobs, was barely considered at all.

In the summer of 1933 the now infamous A-1 form was drafted. As a result, the financing which was done during the ensuing year was done largely by companies which were in extremity and had to finance. Actually so little financing was done during the ensuing 12 months of 1933-34 that Congress amended and liberalized the act in the spring of 1934. Despite these amendments, the Securities and Exchange Commission has reported in a memorandum of June 1941 showing the Sales Record of Unseasoned Registered Securities 1933-39, page 3, as

follows I take it by "unseasoned securities" it is meant securities which had been distributed to the public, securities which were not listed on any exchanges, securities which were then new or privately held family securities, and the like.

It is noteworthy that over a period of approximately 6% years only about $100,000,000 of unseasoned registered securities actually were sold, or an average of around $15,000,000 a year. This relatively small aggregate figure eloquently testifies to the conservative character of the new issue market during recent years.

I may add, it also eloquently testifies to the barrier that parts of the securities acts as written, and their administration as interpreted, have placed in the way of such new issues. It also eloquently testifies to the almost complete discouragement of the financing of new and growing small enterprises, the growth and financing of which, hazardous though it may be, has been the secret of the rapid development of this country and its resources and has been until the last decade the secret of new jobs and steady and recurring employment.

Fifteen million dollars a year, gentlemen, you must admit, is just peanuts. The vice president of a large bank said to me, "you don't mean $15,000,000 a year, you must mean at the very lowest $15,000,000 a month." When I told him no, I gathered he did not believe my memory, but there it is, gentlemen, in the Securities and Exchange Commission's report. Certainly $15,000,000 after the appropriations of the last years must seem "peanuts" to you gentlemen. It seemed, therefore, to Mr. Wadsworth that he should endeavor to learn from business itself in every corner and section of this country what itbusiness-felt about the problem of raising new money, what obstacles, if any, it, business, felt were holding back new financing, what it, business, felt should be done to encourage private funds to flow into private business. After all, on business, labor, and management, its development and growth depends the welfare of this country.

This procedure seemed particularly desirable in view of the fact that in the spring and summer of 1940 it became known that the Securities Exchange Commission and representatives of the Investment Bankers Association and New York stock exchanges, were in conference-a long series of conferences at which business, the party most affected, was not represented. Business was not even asked to "sit in."

Therefore, early in the fall of 1940, Mr. Wadsworth sent out letters and questionnaires to the heads of over 600 industrial companies, widely scattered geographically and diversified industrially. Later, he sent out letters and questionnaires to the heads of over 400 companies which had sold securities privately. Law firms which had represented underwriters and/or issuers in substantial numbers he also questioned, and, finally, he sent out general letters to selected groups and individuals.

It should be noted that none in the financial fraternity were questioned as the indications were that they were being fully represented behind closed doors with the Securities Exchange Commission. A gratifying number of replies-actually over 700-were received by Mr. Wadsworth. Almost without exception the replies contained suggestions and demands for reform in the securit'es laws and their administration. Mr. Wadsworth has made a few extracts from some of the letters received by him, in instances where it was possible

without identifying the company or betraying its confidence. The extracts-71 in number-have been mimeographed and will be furnished to each member of the committee.

I have them here in my hand, and they will be furnished to each member of the committee. It may be well to have them read into the minutes or at least marked as exhibits.

The CHAIRMAN. They will at least be marked for the present. I do not know whether they can be put in or not. We will have to discuss that.

Mr. TWOMBLY. Mr. Chairman, most of these letters are general in character. These are extracts which are general in character. As you know, Mr. Wadsworth sent out the letters with his questions to these various leaders of industry.

The CHAIRMAN They will be identified for the present.

Mr. TWOMBLY. In January 1941 Mr. Wadsworth met with members of the committee. He said he wanted a bill drafted to reflect the demands of industry contained in the answers to his inquiries. I mean business where I refer to industry through this statement. He said he believed a bill should stem from Congress and that while he would appreciate the preparation of a draft, his would be any bill introduced in Congress. And so it was, and is. A month or 6 weeks was spent in preparing a preliminary draft, followed by a series of conferences and revisions, the final revision being made where and by whom it should be made-in Mr. Wadsworth's office by Mr. Wadsworth. At the time of introducing the bill H. R. 4344 in Congress, Mr. Wadsworth prepared and made a statement on the floor of the House which I believe should be spread on the records of this hearing. The statement was as follows:

It is a matter of common knowledge that we have had and still have a serious unemployment problem on our hands. When the extraordinary stimulation of the defense program is withdrawn, as it must be eventually, it is highly probable that the problem will confront us in even more acute form. It is also a matter of common knowledge that during the last 5 or 6 years there has piled up an enormous number of idle dollars, represented very largely in record-breaking bank deposits. The owners of those dollars, the depositors, for some reason or other do not put them to work by investing them in productive enterprises. Obviously, idle dollars mean idle men, for if productive enterprises are not supported financially and enabled to expand healthily there can be no work to do. Our sympathy goes out to those men, and we have been doing our best to carry them along in the hope that with a returning prosperity they will find useful jobs. But we are not doing anything about the idle dollars. Unless we do we may have to abandon the institution of private enterprise and adopt the principle that every man must look to the Government for a living and obey the orders of the Government in the earning of it.

Normally, a large portion of idle dollars are put to work when their owners have a fair opportunity to invest in securities-stocks and bonds-offered to the public by business concerns seeking new capital. Without an adequate flow of capital into industry there can be no expansion of the going concern, nor can new enterprises be started. In other words, we have stagnation, and the man who suffers most is the man who wants a job and can't find it. Why is it that capital is not flowing freely into industry? Until we find the answer to that question, and, having found it, take measures which will help solve the problem, millions of men will remain unemployed and free enterprise in this country will die a slow but certain death by starvation.

Intent upon informing myself as accurately as possible, I made up my mind in the early autumn of last year to embark upon an inquiry which might bring out the facts. I directed my inquiry to a large number of persons associated officially with corporations engaged in business activities, asking them to inform me of their respective experiences in endeavoring to obtain capital through the