Mr. COTTON. I should like to have State, city, municipal, and political subdivisions exempted.

Mr. PECORA. Without regard as to whether any issues are in default or not?

Mr. COTTON. Yes; because if in default at this time they still have a recognized market and collateral value, for we all feel that they will be all right again, just as soon as the tax situation straightens up a little.

Senator ADAMS. When do you anticipate that will occur?
Mr. COTTON. Do you mean the tax situation?

Senator ADAMS. Yes.

Mr. COTTON. Well, we hope it will straighten out very shortly. No time limit is set by the proponents.

Senator MCADOO. And you do not think you will have to wait for the millennium in that regard, do you?

Mr. COTTON. No.

Senator ADAMS. Well, California seems to be getting about all of the Government money that we have.

Mr. COTTON. Well, we have left that for Senator McAdoo to look after, as he has been rather the chief performer in it. That is, as a money-getter he has been very nice to us.

Senator MCADOO. What about Senator Johnson?

Mr. COTTON. Oh, yes; he has done his part too.

Senator TOWNSEND. I think we will have to agree with you that Senator McAdoo has been pretty satisfactory to his constituents in the matter of getting money for them.

Senator MCADOO. I should like to have put in the record that Senator Johnson is entitled to much credit in that matter.

Senator ADAMS. You want to share the blame with him, do you? Senator MCADOO. I referred to credit and not to blame. Senator ADAMS. Well, that depends upon the point of view. Mr. COTTON. I might suggest that California has more good things to offer than most States.

Senator CAREY. Is the climate still good out there?

Mr. COTTON. The climate out there is a little better than it is in Washington this morning, I can assure you.

Senator COUZENS. How about Florida? I am sure the chairman could tell you something about that.

Mr. COTTON. Well, we are willing to share the good things with the chairman.

The CHAIRMAN. All right, Mr. Cotton, we will consider your suggestion.

Mr. COTTON. And I wish to thank you gentlemen for hearing me. (Thereupon Mr. Cotton left the committee table.)

The CHAIRMAN. Governor Black, we have asked you to come down here this morning. The committee would like to have your views regarding this measure, particularly S. 2693 and H.R. 8720, which is a modification of S. 2693.

3. That exchange credit be properly restrained and the undue use of credit in speculation be prevented.

4. That necessary penalties be enacted to guarantee the accomplishment of these purposes.

The Board is not primarily concerned with the features of the bill with regard to the policing or regulating of the exchange, but feels that these features should be fair and in accord with established American business principles.

If it is desired the Board will be glad to undertake the responsibilities of the bill regarding the fixation of marginal requirements upon loans based upon exchange equities, whether the loans are made by brokers or banks, provided power is vested in the Board to handle this subject in the public interest and to the protection of the investor. This function would usefully supplement the considerable powers vested in the Board under the Banking Act of 1933 to prevent the undue use of credit for speculative purposes and would in the judgment of the Board furnish effective protection against the economic evils of speculation.

During these conferences very many changes in the original bill were recommended by the Federal Reserve staff. These recommendations were followed in substance and changes were made in the bill, and the bill was greatly improved in order to properly effectuate its purpose.

The bill known as H.R. 8720, introduced in the House by Mr. Rayburn, embraces these recommended changes. It is the feeling of the Reserve Board that the revised bill H.R. 8720 is workable, is right in principle, and will accomplish the purpose of regulating national securities exchanges under fair practices and that undue and excessive speculation will be properly curbed, and that exchange credit will be properly restrained and the undue use of credit in speculation be prevented. The Board is therefore prepared to approve the bill as revised.

The Board requests the privilege of making such further constructive suggestions as to the bill as may appear necessary or desirable as the result of the further study of the bill, and this request applies especially to questions affecting technical operations of the exchanges covered by the bill.

Now, Mr. Chairman, I will go into the matter at length if you desire me to do so, or I will answer any questions the members of the committee may desire to ask me. I have stated the position of the Federal Reserve Board.

The CHAIRMAN. Governor Black, there was one provision in the original bill, section 7, paragraph (a) about which there has been some controversy, or some objection raised. I believe there is a modification in the amendment that has been offered. I wanted to ask you about section 7, which provides that it shall be unlawful for any member of a national securities exchange or person who transacts a business in securities through the medium of such member, directly or indirectly:

(a) To borrow on any security registered on a national securities exchange from any person other than a member bank of the Federal Reserve System.

Now, we have modified that provision. Do you think the modification meets the objection that has been made to it? It was pointed out, for instance, that a number of industrial organizations, particularly the larger ones, had large sums out on call loans as much as $20,000,000,000 in 1929, and that their loans were not made through a bank at all, but made to brokers. So the requirement in the original bill' that all such loans must be made through a member of the Federal Reserve System met with some criticism and objection. Now that we have modified that provision I think perhaps it would meet the objection. Is that modification satisfactory to you?

Mr. BLACK. Do you mean that there has been a further modification than is shown in H.R. 8720?

The CHAIRMAN. No. That is the modification I now refer to. Mr. BLACK. The modification shown here is satisfactory to us. The CHAIRMAN. That permits loans other than through a member bank of the Federal Reserve System under certain circumstances and conditions.

Mr. BLACK. That is correct, but it must be in accordance with the rules and regulations of the Federal Reserve Board.

Senator GOLDSBOROUGH. Mr. Chairman, I should like to ask Governor Black a question or two.

The CHAIRMAN. Proceed, Senator Goldsborough.

Senator GOLDSBOROUGH. Governor Black, wouldn't section 6, paragraph (d).

Senator MCADOO (interposing). What page is that, Senator Goldsborough?

Senator GOLDSBOROUGH. Page 13. Wouldn't that section necessitate the Federal Reserve Board figuring out prices each day and publishing them in order that the margins throughout the country could be understood?

Mr. BLACK. Well, would you mind referring me to the page of the bill, Senator?

Senator GOLDSBOROUGH. It is on page 13.

The CHAIRMAN. Do you mean of the bill H.R. 8720?

Senator GOLDSBOROUGH. No. I mean of the bill S. 2693. It is section 6, paragraph (d), which begins on page 13.

Mr. BLACK. I don't see it.

Senator GOLDSBOROUGH. It is section 6, paragraph (d), II.

Mr. BLACK. There doesn't seem to be a section 6, paragraph 2, II.

Mr. BLACK. Well, I think prices of securities are shown every day on the exchanges. I see no reason why the Federal Reserve Board every day would have to figure current market prices of securities.

Senator GOLDSBOROUGH. Then you do not think there is anything in that provision requiring the Federal Reserve Board to publish daily securities prices in order that the margins throughout the country could be properly followed?

Mr. BLACK. I do not think so. I think these would be accepted as current market prices.

Senator TOWNSEND. Governor Black, there has been a great deal of discussion about the margin provisions of the bill. Do you consider the margin provisions, as now written in the bill, workable? Mr. BLACK. Yes, Senator Townsend; I think they are workable. Senator TOWNSEND. You do not think the margin requirement is excessive?

Mr. BLACK. I think Congress has the right to express its opinion by way of enactment of law as to what are proper marginal requirements, and as I understand the situation that is what this bill will do; giving then to the Federal Reserve Board the power, under certain exigent circumstances, to meet the situations as they may arise.

Senator TOWNSEND. Do you feel that the provision as now written would restrict credit?

Mr. BLACK. I think it would restrict speculation.

Senator ToWNSEND. But would not restrict credit?

Mr. BLACK. I do not see why the provisions of the bill should restrict credit. I think they will restrict credit in speculation, and I understand that that is the purpose of the bill.

Senator MCADOO. As to this portion of the provision:

If such security has been traded in for a period less than 36 months, such amount, but not more than 75 per centum of the current market price, as the Federal Reserve Board may by its rules and regulations prescribe as appropriate or necessary in the public interest or for the protection of investor.

Do you think as expressed there the Federal Reserve Board could properly see to the administration of the matter?

Senator GOLDSBOROUGH. Is that found on page 15 of the bill? Senator MCADOO. No. That is on page 14 of H.R. 8720, beginning with line 6 and winding up with line 12.

Mr. BLACK. I think the Federal Reserve Board could fix rules and regulations. I think the law would attend to proper observance of the rules and regulations, because the law fixes a very severe penalty for violation.

Senator MCADOO. I mean, is it practicable, so far as current market prices are concerned, for the Federal Reserve Board to follow these things and police them, see that the requirements are complied with? I am now asking for information and not attempting to express an opinion, as to how you will administer such a provision.

Mr. BLACK. I think the Federal Reserve Board can do that as well as any other control agency. I see no reason why the Federal Reserve Board could not keep itself informed of current market prices in fixing the margin requirements.

Senator MCADOO. Would you have to do anything additional, in particular?

Mr. BLACK. I think we would have to set up a separate department in the Federal Reserve Board to take care of it.

Senator McADOO. You would have to police it?

Mr. BLACK. Yes; so far as margin requirements are concerned. Senator McAdoo. Do you think it is practicable to do that? I am merely looking at it from the administrative viewpoint, as to whether or not it could be actually done without a very large organization and a very expensive one, being set up.

Mr. BLACK. I think it can be done. But it is going to entail some work.

Senator MCADOO. It will require a very large organization, will it not?

Mr. BLACK. Well, it is very difficult to answer that question. It would require a sufficient organization I will say. How large it would have to be I do not know at this time.

Senator McADOO. You understand, Governor Black, that this will apply to the Nation

Mr. BLACK (interposing). Yes.

Senator MCADOO (continuing). Not to the New York Stock Exchange alone, but to all stock exchanges of the country; that they must be policed.

Mr. BLACK. Well, I think the matter of policing is up to the Federal Trade Commission; not up to the Federal Reserve Board. Senator McADOO. Well, whatever the agency may be, it is going to require a very large organization to police it, isn't it?

Mr. BLACK. I think so.

Senator McADOO. There was running through my mind the matter of the practicability of the scheme of trying to see that all transactions on the many exchanges of the Nation are properly policed, or policed to the necessary extent to compel observance of this statute. Mr. BLACK. Well, I would hope that the exchanges would obey the law in very large part.

Senator McADOO. Well, we hope for that in the case of all laws, but whether or not we entertain such hopes, we have to set up police