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tional language is suggested. And, often after discussion, our suggestions were not accepted.

Mr. PETTENGILL. Then, in the next sentence, where you say, "I believe, that for the most part, matters about which we were principally concerned, had been corrected by the exchanges."

Mr. Smith. The answer to that is that you cannot operate without drawing blood, as I have said before. Of course, we cannot foresee all of the possibilities, all of the consequences of this act.

Mr. PETTENGILL. Exactly. Neither can we.
Mr. Smith. That is correct.

Mr. PETTENGILL. And our responsibility in this matter is as great as yours.

Mr. Smith. Yes.

Mr. PETTENGILL. Certainly no responsible person would want to do anything that would adversely affect the financial structure of the Nation.

Now then, with reference to that statement of yours that it is “our belief that for the most part these matters have been corrected", do you still retain in your mind some suggestions which, as an individual, you would have us put in the bill?

Mr. Smith. Of any consequence?
Mr. PETTENGILL. Yes.
Mr. Smith. No, sir; I would not be here testifying if I did.

Mr. PETTENGILL. Well, of course, I do not know but what your views were representing some compromise that you felt

Mr. Smith. We could not compromise on matters of any importance.

Mr. PETTENGILL. Then, the next paragraph where you say that you think that the provisions of the bill have been so revised as to mimimize the dangers which you infer existed in the original draft of the bill with reference to the business recovery of the Nation. Now, the language “mimimize this danger”; does that imply that you think that there is still some danger?

Mr. Smith. Well, there is a certain degree of danger. It is a matter of degree. There is bound to be in a measure of such magnitude as this, and

Mr. PETTENGILL (interposing). Can you point out to us at this time any provisions of the bill which, in your judgment, do contain dangers to the financial recovery of the Nation?

Mr. Smith. I think none in the part we reviewed; none of any consequence. But when you are tampering with the stock exchanges of this country and the dealer-broker relations and banking relationsbank's relations with its customers, while we think we have interfered as little as possible with the banking business of this country, there is bound to be some interference. For instance, the bank of the future, in making its collateral loans, will be governed by the requirements of this law.

Mr. PETTENGILL. Do you think, sir, that the margin requirements in the bill will have the effect of depressing security prices?

Mr. Smith. I have explained several times that I did not consider this subject.

Mr. PETTENGILL. But, if it did have that effect, then with reference to Government securities, it would have an adverse effect; is that a fair statement?

Mr. Smith. That is a hypothetical thing again.

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Mr. PETTENGILL. I say, if the margin requirements of the bill tended to depress security prices generally, it would also tend to make Government financing more difficult and to depress Government bonds?

Mr. Smith. I think if there is anything in this bill, in the part that we have studied, or outside of the parts that we have studied that injures the country, of course, it will interfere with Government financing. That is true in general.

Mr. PETTENGILL. But, you express no opinion as to whether it will have that effect. You have answered my hypothetical question, yes. But, you do not express any opinion as to the margin requirements in the bill?

Mr. Smith. The reason I stay away from that is because we did not consider it, that same question has been asked a number of times, and the one thing that we want to do, is to be perfectly frank with each other so that there could be no misunderstanding as to our positions.

Mr. PETTENGILL. Exactly.
Mr. Smith. Because the Treasury was called in on this.
Mr. PETTENGILL. I understand, but I wanted to get an expression

Mr. Smith. And we will be glad to do anything we can. We are at your service in any connection. We are not advocating this measure, We are-and, above all, I am answering you in order that there may be no misunderstanding about our position--we are anxious to do what we can, and when you mention the margin subject, that is a subject that we have not studied.

Mr. PETTENGILL. Of course, our responsibility is to adopt a bill that will not retard honest and legitimate business recovery in this Nation.

Mr. Smith. Certainly; but please do not ask us to express an opinion about something about which you have not consulted us.

Mr. PETTENGILL. Our responsibility will not be saved by any saving clauses, such as are outlined in your formal statement.

Mr. Smith. That is correct.

Mr. MARLAND. Do you not think that the Treasury should be consulted?

Mr. Smith. It seems to me that this committee should answer that question, Mr. Marland, if I may say so.

The CHAIRMAN. I will state, in order that there may be no misunderstanding, the President, at my suggestion, asked the Treasury and the Federal Reserve Board for their opinions and assistance in the working out of this bill of the things that they are supposed to know about. I did that, because I thought that was what the committee wanted. I do not see why Mr. Smith should be an expert on stock-exchange regulations, as such. Of course, I do not imagine that he has ever been engaged in that business.

Mr. WOLVERTON. Mr. Chairman.
The CHAIRMAN. Mr. Wolverton.

Mr. Wolverton. I can appreciate, so far as the Treasury is concerned, that there are certain matters that are particularly in their knowledge. The same applies equally to the other Departments, to the Federal Reserve, the Comptroller of the Currency, and the Re

construction Finance Corporation. It would seem to me, however, that after each department has passed on the questions which are particularly within its knowledge, then there should have been a bringing together of those departments, to discuss between themselves the effect, one upon the other, so that when this bill came before us, that these representatives could come and state, “We, after study of the bill by our own particular department, and in consultation with those in other departments, are unqualifiedly in favor of the bill.” That would be reassuring to the country, and certainly would be helpful to this committee, in my opinion.

The CHAIRMAN. Are there any other questions?
Mr. Smith, do you have anything further to state to the committee?
Mr. Smith. I have nothing further.
Mr. WADSWORTH. Mr. Chairman, may I ask just one question?
The CHAIRMAN. Mr. Wadsworth.

Mr. WADSWORTH. I have observed that the witness has emphasized his concern and that of the Treasury Department on the stability of the financial structure of the country. Do not the margin requirements, as expressed in percentages, have a very direct effect upon that problem?

Mr. Smith. That is a question that is entirely outside the subject of our review.

Mr. WADSWORTH. Should it not be?

Mr. Smith. I cannot answer that for the committee, Mr. Wadsworth. I cannot answer that for

you. .
Mr. WADSWORTH. All right.
Mr. Holmes. Mr. Chairman, may I ask just one question?
The CHAIRMAN. Mr. Holmes.

Mr. HOLMES. In relation to section 3, page 8, paragraph 13. The term "exempted security” or “exempted securities”-I will read a part of the bill:

The term "exempted security" or "exempted securities” shall include securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States.

Were you asked to make any observations on whether or not in exempted securities you would allow States and the subdivisions thereof, the same privilege as the Federal Government?

Mr. Smith. Well, the provisions of the bill are that United States Government bonds shall be exempted.

Mr. HOLMES. That is true,

Mr. SMITII. And the Federal Trade Commission may exempt other securities. Now

Mr. HOLMES. You do not give them the latitude that you do the Federal Government?

Mr. SMITH. No, sir.
Mr. HOLMES. What is the reason for that; have you any?
Mr. SMITH. Well-

Mr. Holmes. Is it not going to be more difficult for the States and municipalities to finance their obligations when they are not included in the same category?

Mr. Smith. I think it is reasonable to believe that the Federal Trade Commission will make a study of this question of exempted rcurities and set up certain definitions, and I would say that about

the first bonds they would exempt will be State bonds. Now, you can go just a certain distance in legislating details, and for that reason we felt that the Federal Trade Commission could be relied upon to take satisfactory action in that matter.

Mr. Holmes. Well, insofar as State obligations are concerned, why should not they be included in the bill?

Mr. Smith. It is a matter of degree. The Federal Trade Commission will be called upon to make certain securities exempt, and I think it is perfectly obvious that the first name on the list would be the proper kind of State bonds. Of course, there might be some kinds of State bonds, you know, that would not be exempted. You could not exempt State bonds in their entirety.

Mr. HOLMES. My opinion is that the State bonds ought to be exempted.

Mr. SMITH. All of them?
Mr. HOLMES. That they should have the same rights.
Mr. SMITH. All?
Mr. Holmes. Yes; practically all of them.

Mr. Smith. Then, they had better correct their practices, some of them.

Mr. HOLMES. Of course, that is true. No one knows where we are headed at the present time.

Mr. Smith. You would not want to exempt them, with some of the States in default, as some of them.

Mr. HOLMES. That may be, as to some of the States. But, not many of the States are not in that position. I think that may be applied to all securities all down the line. There are many securities in default.

Mr. Smith. Then, you would not want to exempt them, I should think.

Mr. HOLMES. Well, the bill works both ways.

Mr. Smith. Our feeling was that we might rely on the Federal Trade Commission to properly classify the exempted securities.

Mr. HOLMES. Well, that is true, but I am worried about the States and municipalities that have always enjoyed exceptionally good credit, and I can see, unless they are included in this bill, allowed the same latitude as the United States Government, that they are going to have difficulties in their financing; it will be more difficult and more costly for them.

Mr. COLE. Mr. Chairman, may I ask one question?
The CHAIRMAN. Mr. Cole.

Mr. Cole. Mr. Smith, I understood you to state that you have given a great deal of study to section 6 and section 7, very important provisions of the bill. With those two sections before you I want to ask you this question: Do you understand that under section 7 (a) a broker and/or dealer may borrow from a member bank of the Federal Reserve System and other members and/or brokers or dealers in accordance with such rules and regulations as the Federal Reserve Board may prescribe under the same credit conditions as brokers and/or dealer is permitted to extend to his customers under subsection C of section 6 and, if so, can the lender accept the statement of the borrower that the amount of loan requested is in accordance with subsection C of section 6?

Mr. Smith. That is correct.

Mr. MARLAND. Mr. Chairman-
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. I want to make a statement rather than ask a question. It is my opinion that paragraph – of this act, as drafted, , will have a very serious effect on future Government financing. I believe that the Treasury Department should study this bill with that possibility in mind and give this Committee their opinion on this subject.

The CHAIRMAN. Do you have anything further?
Mr. Smith. I have nothing further to say.
The CHAIRMAN. We are very much obliged to you, Mr. Smith.
Mr. Smith. Thank you.

The CHAIRMAN. The Committee is now going to have to go into a short executive session.

(Thereupon, at 11:25 a.m., the committee proceeded to the consideration of other business, after which it adjourned to meet the following morning, Thursday, March 22, at 10 a.m.)

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