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Mr. JOHNSTON. Yes, sir.

Mr. PECORA. What is the general nature of the business conducted by that corporation?

Mr. JOHNSTON. It is a holding company for public utilities, oil, and natural gas corporations.

Mr. PECORA. Where is the office or principal place of business of the company?

Mr. JOHNSTON. No. 60 Wall Street.
Mr. PECORA. In the city of New York?
Mr. JOHNSTON. In the city of New York; yes, sir.

Mr. PECORA. Now, Mr. Johnston, in recent years has it been the practice or custom for your company to issue monthly letters addressed to the executive committee

Mr. JOHNSTON. Not since 1929.
Mr. PECORA. Well, did it do so in 1929 and prior thereto?
Mr. JOHNSTON. Yes, sir.

Mr. PECORA. Who was the author of the monthly letters that we have in mind during the year 1928?

Mr. JOHNSTON. Charles H. E. Scheer.
Mr. Pecora. Is he employed by the company?
Mr. JOHNSTON. Yes, sir.
Mr. PECORA. In what capacity?

Mr. JOHNSTON. He has been with us since 1914. He started in as cadet engineer in Denver, and has been developed by the company along engineering and other lines. He has shown an aptitude in regard to economics, and has been employed in that capacity in recent years.

Mr. PECORA. I show you what purports to be an excerpt from one of the monthly letters, so-called, on economic conditions, addressed to the executive committee of Henry L. Doherty & Co., for the month of December 1928. Will you be good enough to look at it and tell me if you recognize it to be an excerpt from such monthly letter?

Mr. JOHNSTON (after reading the paper). Yes, sir.
Mr. PECORA. Mr. Chairman, I now wish to offer it in evidence.
The CHAIRMAN. Let it be admitted.

(An excerpt from the monthly letter on economic conditions to the executive committee of Henry L. Doherty & Co. for Dec. 1928, was marked “ Committee Exhibit No. 83, Feb. 23, 1934 ", and will be found immediately following where read by Mr. Pecora.)

Mr. PECORA. Now, Mr. Chairman, this excerpt just received in evidence as committee exhibit no. 83, reads as follows, under the caption "A Pivotal Element in 1929 ?":

The huge expansion of credit which took place in 1928 was made possible largely by idle funds in the hands of individuals, corporations, and foreign sources which were made available for security speculation through loans to brokers. Had it not been for this unforeseen large supply of credit there would probably have been an actual shortage of credit in 1928 when as it happened nothing more than an increase in interest rates took place. If these sources continue to supply credit in increasing amounts during 1929 all will be well for both the stock markets and business in general. If they merely hold their own or dry up to any degree, it seems highly probable that the driving force for both speculation and business will be found definitely lacking. It therefore seems that for the year 1929 much may depend upon the course of brokers' loans which are classified in banking figures as "for the account of others." This statement without further elaboration may seem to be rather dogmatic and arbitrary; but

its importance warrants mention at the first of the New Year, and the next issue of this letter will devote more space to a detailed discussion of the importance and trend of this factor.

Now, Mr. Johnston, I notice that this monthly letter on economic conditions, from which this extract is taken, was addressed to the executive committee of Henry L. Doherty & Co. What is the relationship between Henry L. Doherty & Co. and the Cities Service Co.?

Mr. JOHNSTON. Henry L. Doherty & Co. are fiscal agents for the Cities Service Co.

Mr. PECORA. Well, as such fiscal agents, what are the functions of Henry L. Doherty & Co.? How do they serve, in other words, the Cities Service Co.?

Mr. JOHNSTON. At that time the funds of Cities Service Co. and certain of its subsidiaries were deposited with Henry L. Doherty & Co.

Mr. PECORA. And what else ?
Mr. JOHNSTON. Henry L. Doherty & Co. also maintained operating

artments and financial advisors. Mr. PECORA. Is Henry L. Doherty & Co. a corporation or is it a copartnership.

Mr. JOHNSTON. It is now an individual. But Mr. Doherty has no part in it.

Mr. PECORA. In 1929 was it a copartnership, firm, association, or corporation, or what was its legal form?

Mr. JOHNSTON. It was an individual doing business under the firm name of Henry L. Doherty & Co., since 1922.

Mr. PECORA. And the the individual who did business under the firm name of Henry L. Doherty & Co. was what person?

Mr. JOHNSTON. Henry L. Doherty.

Mr. PECORA. Now, was he also an officer or director of the Cities Service Co.?

Mr. JOHNSTON. Yes, sir.
Mr. PECORA. What office did he hold in it?
Mr. JOHNSTON. President.
Mr. PECORA. Do you know how long he has been president of the
Cities Service Co.?

Mr. JOHNSTON. Since its organization.
Mr. PECORA. Which took place in what year?
Mr. JOHNSTON. In 1910.

Mr, PECORA. Now, the Cities Service Co. was organized as a hold-
ing company, I believe you said?
Mr. JOHNSTON. Yes, sir.
Mr. PECORA. And has functioned as such ever since its creation?
Mr. JOHNSTON. Yes, sir.

Mr. PECORA. Do you know the utilities companies whose shares are principally held by the Cities Service Co.! Mr. JOHNSTON. Yes, sir. Mr. PECORA, Can you name them?

Mr. JOHNSTON. The Electric Utilities are a group under the Cities Service Co. called the Cities Service Power & Light Co. The Cities Service Power & Light Co. have subsidiaries, and

the principal ones are: Public Service Co. of Colorado, Ohio Public Service Co., Toledo Edison Co., Empire District Electric Co., St. Joseph Railway, Light,

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Heat & Power Co., East Tennessee Light & Power Co., DanburyBethel Gas & Electric Co., and a number of other smaller companies.

The CHAIRMAN. Are they all subsidiaries, do you say, or affiliates, or what do you call them?

Mr. JOHNSTON. Subsidiaries of the Cities Service Power & Light Co.

Senator TOWNSEND. Is the Eastern Shore Gas & Electric Co. a subsidiary of Henry L. Doherty & Co.?

Mr. JOHNSTON. The Eastern Shore?
Senator TOWNSEND. Yes.
Mr. JOHNSTON. No, sir.

Mr. PECORA. Now, Mr. Johnston, I show you a printed document entitled “Monthly Letter on Economic Conditions to the Executive Committee, Henry L. Doherty & Co., January 1929.”

Will you look at it and tell me if you recognize it as being a copy of a monthly letter prepared by Mr. Scheer for the executive committee of the Cities Service Co.

Mr. JOHNSTON. Yes, sir.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(A printed document entitled “Confidential. Monthly Letter on Economic Conditions to the Executive Committee, Henry L. Doherty & Co., January 1929 ", was marked " Committee Exhibit No. 84, Feb. 23, 1934”, and the entire document will be retained with the files of the committee, such portions thereof being read by Mr. Pecora immediately below as he wished to draw to the attention of the witness.)

Mr. PECORA. Mr. Chairman, this monthly letter is captioned or entitled, on the first page beneath the cover, “The Present Troublesome Part of Brokers' Loans. Its Effect on Security Markets and Business.” And the first paragraph of it is as follows:

A new source of credit: Every few years some particular element in the business system takes on new and possibly dominating importance by virtue of its unusual expansions or contraction. In 1920 the climax of unprecedented speculation in commodity markets and expansion of productive activity were dominating factors affecting the subsequent depression. During 1928 the appreciable loss of gold and expansion of speculative credit were the dominating factors. This unusual expansion of credit for us in security markets was made possible largely through loans made to brokers by corporations and individuals. The chart reproduced below shows the rapid growth in brokers' loans over the past 3 years, and in particular the sudden rise in loans for the account of others (corporations, individuals, and foreign) during 1928.

In the last issue of this letter, under the heading "A Pivotal Element in 1929”, it was stated that if this new source of credit merely holds its own or dries up to any degree, it seems highly probable that the driving force for both speculation and business will be found definitely lacking, and that therefore in the coming year much may depend upon the course of that portion of brokers' loans which is classified in banking reports as "for the account of others."

Origin of outside credit: Before discussing definite reasons for this view, it might be well to summarize briefly the origin and development of this new source of credit. As can be seen from the chart on page 5 of the August 1928 issue of this letter, bank credit and its base, gold, expanded rapidly from 1922 to early in 1928. Easy credit conditions during this period, aided by the Federal Reserve policy, and the increasing gold stock, were availed of by real estate enterprises, installment finance corporations, and by what is by far the most important-buyers of securities. Money was most plentiful and corporations took advantage of this and of the great demand for securities to float large amounts of new securities, which were used to build up cash reserves after bank loans were paid off, working capital increased, and some plant expansion taken care of. These cash reserves found employment in the call money market. This condition, in general then, accounts for the source from which money is pouring into the security markets in the form of brokers' loans not originating in the banks themselves.

The above chart shows the astounding rate at which brokers' loans for the account of others (labelled uncontrolled) have advanced during 1928, a year when the United States credit base of gold was narrowed by approximately 500 millions of dollars from a total of approximately 4.5 billions. This outside credit has been termed uncontrolled because bank reserves need not be kept against such loans and because such transoctions are practically as free and unregulated as a personal loan from one individual to another. The other curve on the chart showing the divisions of brokers' loans is labeled controlled and shows the relatively small increase in broker's loans supplied by the banks themselves.

And, Mr. Chairman, the chart on this page shows the astounding rate at which broker's loans " for account of others " labeled controlled” have advanced during 1928, the year that the United States credit base of gold was carried up approximately $500,000,000, or a total of approximately 442 billion dollars. Then under the subheading “ Present Importance of 'Loans for Others ?," I read the following:

The great importance of the present huge amount of broker's loans from outside sources lies in the fact that while the banks are not now directly concerned with loans from others, these loans do represent a potential call on bank credit. Any sudden withdrawal of money from the security markets by individuals, corporations, or through foreign accounts, must be met by the banks if chaos and disrupting gyrations in call money and in the stock market are to be avoided. This is quite clear when the close relationship between brokers' loans and stock prices is observed in the chart on the preceding page.

I might comment here, Mr. Chairman, that the chart to which reference has just been made would seem to show that the trend of stock prices almost parallel the trend of brokers' loans :

It is therefore quite certain that the present stock market cannot proceed further without the aid of a corresponding increase in loans for others. Should the stock market give ground, business would be adversely affected in three ways, although such effects would not be simultaneous or drastic. In the first place, purchasing power gained by the sustained advance in the stock market would be partially curtailed; secondly, the psychological effect in the form of loss of confidence would cause business to be hesitant in making future commitments; and finally, the ease with which new financing could be launched would be seriously affected.

These are briefly the chief reasons behind the following statement made in the December 1928 issue of this letter: "It therefore seems that for the year 1929 much may depend upon the course of brokers' loans which are classified in banking figures as 'for the account of others.'”

Now, Mr. Johnston, let me ask if you agree with the philosophy expressed in this monthly letter I have just read into the record.

Mr. JOHNSTON. In the light of events that have occurred since that letter was written, I think those points were well taken. But at the time I did not agree with them.

Mr. PECORA. Were you a member of the executive committee to whom this monthly confidential letter was addressed?

Mr. JOHNSTON. No, sir.

Mr. PECORA. Who composed the executive committee which received these monthly letters on economic conditions ?

Mr. JOHNSTON. Mr. W. Alton Jones, chairman; Lewis F. Musil, John M. McMillan, Paul R. Jones, Frank R. Coates, H. O. Caster, F. C. Hamilton, T. F. Kennedy, R.'G. Griswold.

Mr. PECORA. Of what corporation were these gentlemen the executive committee?

Mr. JOHNSTON. Henry L. Doherty & Co., not the corporation.
Mr. PECORA. They were the executive committee of this what?
Mr. JOHNSTON. Of Henry L. Doherty & Co.

Mr. PECORA. You stated before that Henry L. Doherty & Co. was simply Henry L. Doherty individually doing business under that name or style, Henry L. Doherty & Co.

Mr. JOHNSTON. Yes, sir.
Mr. PECORA. Well, did he have an executive committee?

Mr. JOHNSTON. As fiscal agents for the Cities Service Co. and its subsidiaries, he had an executive committee.

Mr. Pecora. Can you tell us what the purpose was in the preparation and circulation of these monthly letters back in 1928?

Mr. JOHNSTON. In 1928?

Mr. PECORA. Yes; back in 1928 and 1929 among the members of this so-called "executive committee” of Mr. Doherty's.

Mr. JOHNSTON. To acquaint them with an economist's ideas of the trend of finances and business generally, and also to explain the earnings records of the Cities Service Co. and its subsidiaries.

Mr. PECORA. Now, Mr. Johnston, I want to show you this printed document, and let me ask you if it consists of an excerpt from the monthly letter on economic conditions addressed to the executive committee of Henry L. Doherty & Co. in February of 1929.

Mr. JOHNSTON (after looking at the paper). Yes, sir.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(A paper entitled “Further Developments in Brokers' Loans", was marked “ Committee Exhibit No. 85, Feb. 23, 1934 ", and will be found immediately following where read by Mr. Pecora.)

Mr. PECORA. The paper received in evidence as committee exhibit no. 85 reads as follows, under the caption “ Further Developments in Brokers' Loans":

The importance of the volume of brokers' loans in the present credit and general business situations warrant periodic checking up of the course of these figures.

In the January issue of this letter it was stated that the great importance of the present huge amount of brokers' loans from outside sources lies in the fact that, while banks are not directly concerned with loans from others, these loans do represent a potential call on bank credit. In the first week of the new year this fact was clearly demonstrated. Brokers' loans from outside sources showed a sharp drop at the year end, due to the usual withdrawals made at this time for year-end settlements and requirements. These transactions left a void in brokers' loans of approximately $375,000,000 which the New York banks promptly filled. Since then loans for others have returned in greater volume and the reporting member banks have withdrawn their relief fund.

The brief January drop in the stock market caused almost no liquidation of total brokers' loans. The more severe break in February did force a drop of about $190,000,000 in a total of over 5.5 billion dollars. At the end of February the stock market has fully recovered to a new high and figures for brokers' loans of the last week in February advanced $30,000,000, indicating that liquidation has about run its course for the present movement at least.

Thus we have the picture: Greater speculation, more and more uncontrolled money in brokers' loans, and continuation of the trend toward higher money which has been in process for over a year and a half. The situation is not comforting, from the business point of view.

Now, Mr. Johnston, did you agree with the observations and the philosophy of that monthly letter, or the portion thereof which I have just read!

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