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I have in mind in that respect a reference to such loans as “bootleg " loans, which will be found in a book called “Brokers' Loans”, written by Profs. Louis H. Haney, Lyman S. Logan, and Henry S. Gavens, of New York University. And some observations with regard to these so-called “bootleg” loans made by these authors in that book, might not be out of place at this time, Mr. Chairman, and if you wish I will read a few statements culled from that book.

The CHAIRMAN. All right. I think they might be in order now so as to give us a clearer idea of that.

Mr. PECORA. Quoting from this book I will read as follows:
The so-called “bootleg” loans.

One of the most important problems connected with brokers' loans is found in that part of such loans which comes from the nonbanking lenders or * others." Such loans have been a disturbing factor and in 1929 developed to extraordinary proportions. It is estimated that at times they constitute a large part of the loans made for the account of out-of-town banks and were probably over one half of the out-of-town bank loans in the fall of 1929.

Loans by “others ” swell to enormous proportions in periods of speculative mania. They are drawn largely from the surplus funds of corporations built up out of past earnings or sales of securities; from funds secured by new investors through far-sighted liquidation of securities; and from foreign sources.

But probably considerable Reserve bank credit is diverted into brokers' loans reported as being made by others", as a result of the inability of the authorities to control the use of credit extended through the rediscount privilege.

When large corporation surpluses exist as in 1928 and 1929, and low yields on securities both invite the sale of stock and retard investment in plant and equipment, the existence of high cail loan rates is bound to cause a strong trend toward a large volume of brokers' loans by others."

These loans, having been subject to little control were long a source of great danger. Not only did they deprive industry and trade of funds at reasonable rates, but they threw fuel on the speculative fire. There comes a time when, the private lenders not having the responsibility of banks, are apt to become panicky and withdraw loans suddenly, thus precipitating a crisis. The experience of 1929 but repeats that of 1907 and other similar periods.

The essence of the situation in this respect is inflation. The higher stocks go and the larger the volume of trading by speculators, the greater the demand for brokers' loans and the higher money rates. There is no limit to the speculative appetite. To argue that loans by “others” relieve the situation by furnishing credit which the banks would otherwise have to supply seems fut.le. It assumes that such credit should be furnished—that it is desirable and connected with a sound condition. This begs the question. It is not a service to throw fuel on a dangerous fire.

Nor do such loans by "others" represent a mere shifting of credit without any disturbance of the relation between deposits and loans. We find in 1928–29 declining deposits and an abnormal volume of loans, largely brokers' loans made for the account of “ others."

As to the argument that these loans by “others” are part of a means which enables corporations to raise capital, it hardly seems that a refutation is needed since our experience in 1929–30. They have been proved to have become but a link in an endless chain of inflation whereby funds were raised which were used not for investment, but to allow speculative purchases of stocks, and were then re-lent to allow speculative purchases of more stock.

The fact is that when speculative funds become relatively so scarce that money rates are bid up to 6, 8, 10, 12, or even 15 percent, the funds supplied by * others” become a causal factor in promoting excessive speculation and preventing effective credit control by the central banking system.

Desirability of control. Loans by nonbanking lenders on a large scale were a new phenomenon in 1928–29. They were called “bootleg loans " and were widely attacked because they were feared and their economic significance not understood. It was argued that they had an unfavorable effect upon our economic structure because:

1. They took away money from “ legitimate business." 2. They brought on the inflation in stocks.

3. If the lenders became frightened by some economic disturbance and withdrew them, a grave panic would follow.

4. They were a liability on the banking system, for banks must be prepared to supplant them in case they should be withdrawn suddenly.

5. They were dangerous because the lenders were not generally competent to function in this field.

6. They were not controlled by banks and were usurping a field not properly belonging to them.

On the other hand, there were many economists who defended every aspect of brokers' loans and denied that they had any unfavorable effect on our economic structure.

Although it is fair to point out that originally such loans were a result of the speculative situation, and that in some cases the lenders had no other equally good outlet for their funds, it is our conclusion that they did become part of a vicious circle in stock-market inflation, and that subsequent events justified much of the fear concerning the rapid withdrawal of funds supplied by irresponsible lenders, with a resulting great burden thrown upon the banks.

The chief point, however, is to prevent the development of the excessive speculation and the runaway stock and money markets which make the occasion for a large volume of loans to brokers by nonbanking lenders.

In late 1929, when the market declined, nonbanking and out-of-town lenders hastily withdrew their funds, forcing the New York banks to expand their loans to brokers in order to prevent an utter credit debacle.

It is to be remembered, however, that even if the loans others called were placed on deposit in New York City as was true only in part, their withdrawal from brokers tending to aggravate the situation, in that for every $100,000 which a nonbanking lender called, the banks could return only $87,000, since they have to keep about 13 percent of their deposits as a reserve.

However, it does seem that when corporations withhold accumulated surplus funds instead of paying them out as dividends, or sell new stock in order to make loans in the call-money market and thereby to some extent make it possible for speculators to carry that very stock, they tend to overstep the boundaries of normality.

I think, Mr. Chairman, those statements are very pertinent and are supported very largely by testimony that has been presented here today with regard to these call loans.

Senator KEAN. Where did those statements come from?

Mr. PECORA. A book written by professors of New York University, Professors Haney, Logan, and Gavens, a book called “ Brokers Loans.”

Among the returns I want to offer in evidence are two of them made on behalf of the American Founders Corporation, the first one dated November 6, 1933, and the second one dated February 21, 1934.

The CHAIRMAN. Let them be admitted.

(Return to questionnaire, dated Nov. 6, 1933, from L. H. Seagrave, president American Founders Corporation, to Ferdinand Pecora, counsel, Committee on Banking and Currency, and supplemental return from L. H. Seagrave to Ferdinand Pecora, dated Feb. 21, 1934, were marked as one exhibit “ Committee Exhibit No. 107, Feb. 23, 1934 ", and they appear in full in the record at the end of today's proceedings.)

Mr. PECORA. Is Mr. George U. Harris here?

TESTIMONY OF GEORGE U. HARRIS, MEMBER BROKERAGE FIRM HARRIS, UPHAM & CO., AND MEMBER PUBLICITY COMMITTEE NEW YORK STOCK EXCHANGE

The CHAIRMAN. You may come forward, Mr. Harris, and be sworn. You do solemnly swear that the testimony you are about to give in regard to the matters now under investigation by this committee will be the truth, the whole truth, and nothing but the truth. So help you, God.

Mr. HARRIS. I do.

Mr. PECORA. Will you give your full name, Mr. Harris, and your address and business?

Mr. HARRIS. George U. Harris, 11 Wall Street.
Mr. PECORA. And what is your business?

Mr. HARRIS. I am a member of the New York Stock Exchange, brokerage business.

Mr. PECORA. Are you connected with any firms?
Mr. HARRIS. Connected with the firm of Harris, Upham & Co.

Mr. PECORA. And how long have you been connected with that firm, Mr. Harris?

Mr. HARRIS. Seven years. Mr. PECORA. And how long have you been a member of the New York Stock Exchange! Mr. HARRIS. Seven years.

Mr. PECORA. Are you an officer of that exchange at the present time!

Mr. HARRIS. No, sir; I am not an officer.

Mr. PECORA. Are you a member of the board of governors of that exchange?

Mr. HARRIS. I am.

Mr. PECORA. How long have you been a member of its board of governors ?

Mr. HARRIS. Approximately 5 years.

Mr. PECORA. Are you a member of any of the committees of the exchange, any of its standing or special committees?

Mr. HARRIS. Yes, sir; I am. Mr. PECORA. Of what committee or committees are you a member? Mr. HARRIS. Business conduct committee, the committee on publicity.

Mr. PECORA. How long have you been a member of the committee on business conduct?

Mr. HARRIS. Approximately 4 years. Mr. PECORA. And how long have you been a member of its committee on publicity?

Mr. HARRIS. Approximately 4 years.
Mr. PECORA. Are you the chairman of the last named committee?
Mr. HARRIS. No, sir; I am not.
Mr. PECORA. Who is the chairman of that committee?
Mr. HARRIS. Mr. James Auchincloss.
The CHAIRMAN. What is your age, Mr. Harris?
Mr. HARRIS. Thirty-six.

Mr. PECORA. What are the functions of the committee on publicity of the New York Stock Exchange, Mr. Harris?

Mr. HARRIS. They pertain to statistical matter mostly that is gotten out by the stock exchange in its various functions.

Mr. PECORA. Well, statistical matter relating to what?

Mr. HARRIS. Volume of transactions and general questions of how the business is conducted on the floor of the exchange.

Mr. PECORA. Do you happen to have with you at the present time copy of the constitution, bylaws, rules, and regulations of the New York Stock Exchange now in force and effect?

Mr. REDMOND. No; we haven't a copy, Mr. Pecora.
Mr. PECORA. I think I have a copy here.
Mr. REDMOND. You are looking for the committee on publicity ?
Mr. PECORA. Yes.
Mr. REDMOND. I can turn right to it.
(Mr. Redmond turned to desired place in book.)

Nr. PECORA. I have before me what purports to be a copy of the constitution of the New York Stock Exchange and rules added by the governing committee of that institution pursuant to the constitution, with amendments to October 10, 1933, and there have also been inserted in this volume changes down to and including January 24, 1934.

Will you look at it, Mr. Harris, and tell me if you can identify it as being a copy of the constitution of the New York Stock Exchange with such rules as adopted by the governing committee and changes made therein down to and including January 24 of this year?

Mr. HARRIS (after examining document). Yes; that is a correct copy. Mr. PECORA. I ask that it be marked for identification.

(Constitution, rules, together with amendments thereto, of the New York Stock Exchange was thereupon marked for identification“ Committee Exhibit No. 108 for Identification, February 23, 1934 ", and the same is filed among the records of the committee.)

Mr. PECORA. On page 23 of this exhibit no. 108 let me read the following paragraph marked“ paragraph 9, article 10, of the Constitution of the New York Stock Exchange which reads as follows [reading]:

Committee of five to be known as the committee on publicity :

It shall be the duty of this committee, under the direction of the president, to keep the public correctly informed concerning matters of public interest having to do with the exchange.

Now, the committee on publicity that is referred to there is the committee of which you are now a member and have been a member for the past 4 years?

Mr. HARRIS. Approximately; yes, sir. Mr. PECORA. And according to the powers, duties, and functions of the committee as contained in this paragraph ninth of article 10 of the constitution of the exchange, the duty of the committee is “to keep the public correctly informed concerning matters of public interest having to do with the exchange."

Do you know of any other power, duty, or responsibility that might not be comprehended within that language that is conferred upon or exercised by the committee on publicity?

Mr. HARRIS. No; I know of no other; no, sir.

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Mr. PECORA. How often does the committee on publicity meet? Mr. HARRIS. There is no regular time for its meeting. At intervals when something that is of importance to that committee comes up a meeting is called. It has no other regular dates. Mr. PECORA. It has no regular stated times for holding meetings! Mr. HARRIS. None. Mr. PECORA. Its meetings are held upon the call of somebody? Mr. HARRIS. Upon the call of the chairman.

Mr. PECORA. And is the president of the exchange ex officio a member of the committee? Mr. HARRIS. He is.

Mr. PECORA. Are there any other officers of the exchange who are ex officio members of the committee?

Mr. HARRIS. There are not any. The CHAIRMAN. How many members are there? Mr. HARRIS. Five. Mr. PECORA. The chairman is James Auchincloss? Mr. HARRIS. Yes. Mr. PECORA. How are the members of the committee on publicity chosen? Mr. HARRIS. They are appointed by the president. Mr. PECORA. Is that true generally of the membership of all the standing committees of the stock exchange?

Mr. HARRIS. That is true of all the committees, standing committees.

Mr. PECORA. Now, can you tell this committee how many meetings have been held by the committee on publicity since the first of this year?

Mr. HARRIS. I believe there has only been one meeting.
Mr. PECORA. How long ago was that held?
Mr. HARRIS. Day before yesterday.
Mr. PECORA. At whose instance was that called ?
Mr. HARRIS. At the instance of the chairman.
Mr. PECORA. Did you attend that meeting?
Mr. HARRIS. I did.
Mr. PECORA. Are minutes kept of the meetings of the committee
on publicity when such meetings are held!
Mr. HARRIS. Complete minutes are kept.

Mr. PECORA. When was the meeting immediately prior to the one that was held the day before yesterday?

Mr. HARRIS. Mr. Pecora, I am not absolutely certain, but I would say some 6 weeks ago. There may possibly have been another meeting since the first of the year, but at the moment it does not come to my recollection.

Mr. Pecora. If you can give it to us by access or reference to any records, I prefer that you do so; but if you have no such records, tell us from your general recollection how many meetings of the committee on publicity were held during the calendar year 1933,

Mr. HARRIS. I cannot even make an estimate as to that. I have no recollection of it. Mr. PECORA. Can't you tell us from general recollection ? Mr. HARRIS. Well, a rough estimate would be maybe 12. Mr. Pecora. Do you happen to have the minute book of the meetings of the committee on publicity with you?

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