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STOCK EXCHANGE PRACTICES

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-SECOND CONGRESS
FIRST SESSION

O
N

S. Res. 84
A RESOLUTION TO TH OROU GH LY IN VE STIG ATE PRACTICES
OF

STOCK E XC H A N G E S W IT H RESPECT TO THE
B U Y IN G AND SELLING A N D THE BOR RO W IN G
A N D L E N D IN G OF LISTE D SECURITIES
TH E VALUES OF SUCH SECURITIES
AN D THE EFFECTS OF SUCH
PRACTICES

PART 1
APRIL 11. 12, 18, 21. AND 22. 1932

Printed for the use of the Committee on Banking and Currency

UNITED STATES
GOVERNMENT PRINTING OFFICE
119852




WASHINGTON : 1932

COM M ITTEE ON BANKING AND CURRENCY
PETER NORBECK, South Dakota, Chairman
SMITH W. BROOKHART, Iowa.
PHILLIPS LEE GOLDSBOROUGH, Maryland.
JOHN G. TOWNSEND, Jr., Delaware.
FREDERIC C. WALCOTT, Connecticut.
JOHN J. BLAINE, Wisconsin.
ROBERT D. CARET, Wyoming.
JAMES E. WATSON, Indiana.
JAMES COUZENS, Michigan.
FREDERICK STEIWER, Oregon.




DUNCAN U. FLETCHER, Florida.
CARTER GLASS, Virginia.
ROBERT F. WAGNER, New York.
ALBEN W. BARKLDY, Kentucky.
ROBERT J. BULKLEY, Ohio.
CAMERON MORRISON, North Carolina.
THOMAS P. GORE, Oklahoma.
EDWARD P. COSTIGAN, Colorado.
CORDELL HULL, Tennessee.

J u l i a n W. B l o u n t , Clerk
H o b a c e R . J a c k s o n , Assistant Clerk

CON TENTS
Testimony o f :

Pace

Brush, Matthew C., New York City____________________________ 288
Cravath, William B., Phoenix, Ariz____________________________ 361
Rockefeller, Percy A., Greenwich, Conn------------------------------------ 321
Whitney, Bichard, president New York Stock Exchange, New York
City-------------------------------------------------------- 2,32,61,107,143,183,217
m




STOCK E X C H A N G E P R A C T IC E S

MON DAY, A P R IL 11, 1932
U
C o m m it t e e

on

n it e d

B

S tates S e n a t e ,
C urrency,

a n k in g a n d

'Washington, D. C.
The committee met, pursuant to call, at 10.30 a. m., in Room 301,
Senate Office Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough, Townsend, Walcott, Blaine, Carey, Couzens, Steiwer, Fletcher,
Glass, Wagner, Bulkley, Morrison, Gore, and Costigan.
Present also: Senators Copeland and Coolidge, and Claude
Branch, Esq., temporary counsel to the committee.
The C h a i r m a n . The committee will come to order. The committee
was called together this morning for the purpose of beginning hear­
ings under S. Res. 84, which is as follows [reading] :
Resolved, That the Committee on Banking and Currency, or any duly
authorized subcommittee thereof, is authorized and directed (1) to make a
thorough and complete investigation of the practices with respect to the buy­
ing and selling and the borrowing and lending of listed securities upon the
various stock exchanges, the values of such securities, and the effect o f such
practices upon interstate and foreign commerce, upon the operation of the
national banking system and the Federal reserve system, and upon the market
for securities of the United Stales Government, and the desirability o f the
exercise o f the taxing power of the United States with respect to any such
securities; and (2) to report to the Senate as soon as practicable the results
o f such investigation and, if in its judgment such practices should be regulated,
to submit with such report its recommendations for the necessary remedial
legislation.
For the purposes of this resolution the committee, or any duly authorized
subcomittee thereof, is authorized to hold such hearings, to sit and act at such
times and places during the first session of the Seventy-second Congress, to
employ such experts, and clerical, stenographic, and other assistants, to require
by subpoena or otherwise the attendance of such witnesses and the production
o f such books, papers, and documents, to administer such oaths, and to take
Buch testimony and to make such expenditures, as it deems advisable. The cost
o f stenographic services to report such hearings shall not be in excess of 25 cents
per hundred words. The expenses o f the committee, which shall not exceed
$50,000, shall be paid from the contingent fund of the Senate upon vouchers
approved by the chairman of the committee.

Senator C o u z e n s . Mr. Chairman, might I suggest that the resolu­
tion adopted by the committee on Friday afternoon be inserted in
the record at this point ?
The C h a i r m a n . That is a very proper suggestion. It is as fol­
lows [reading] :
R

e s o l u t io n

of

the

C o m m it t e e

on

B a n k in g
A p r i l 8,

m ou sly,

and

Currency, A

pproved

U n a n i­

1932

That the Committee on Banking and Currency of the United States hereby
instruct the chairman or acting chairman o f the committee to issue a subpcena




1

STOCK E X CH A N G E PRACTICES

2

requiring the appearance of Mr. Richard Whitney upon Monday, April 11. 1932,
at 10.30 a. in., and that he bring with him all records necessary to provide the
following information:
(1 ) A list of all corporations in whose stock there is a short account in
excess o f 10.000 shares at the close of business on April 8; (2) the total number
o f shares of such stocks in which there is a short interest in each such cor­
poration; (3) a list o f all stock exchange members through whom such stock
was traded; (4) the names of all clients for whom such stock was sold, and
the number of such shares sold for each client in excess o f 200 shares; (5)
a list of all persons and/or corporations from whom such stock or .stocks were
borrowed and the amount or amounts so borrowed in numbers of shares.

The C h a ir m a n . The first witness will be Mr. Whitney, president
of the New York Stock Exchange, who will now be sworn. Please
stand and hold up your right hand: You do solemnly swear that
you will tell the truth, the whole truth, and nothing but the truth,
regarding the matter now under investigation by the committee, so
help you God.
Mr. W h i t n e y . I do.
TESTIMONY OF RICHARD WHITNEY, PRESIDENT NEW YORK
STOCK EXCHANGE, NEW YORK, N. Y.

The C h a i r m a n . Mr. Whitney has been asked to appear before the
committee and answer certain questions. I f there are no questions
by any member of the committee, he may now make his own state­
ment.
Mr. W h i t n e y . Mr. Chairman, I should like to ask if I might make
a very brief statement regarding the information requested in the
subpama ?
The C h a i r m a n . You m a y proceed.
Mr. W h i t n e y . I am appearing before the committee to-day in
response to the subpoena conveyed to me by a telegram which I re­
ceived at my house in New York about 8 o’clock Friday evening last.
I immediately replied, accepting the telegram as service of the
subpoena.
'In view of telephone communications had with one of the mem­
bers of this committee on Friday morning and Friday afternoon
which incficated that the committee might request information in
regard to short selling, I asked the committee on business conduct
to have the members of the exchange submit to it certain additional^
data, beyond that already required in their answers to the ques­
tionnaire, as to the position of the short accounts held in theit
offices. On Saturday further communications were sent to all mem­
bers so as to secure the data necessary to answer the specific ques­
tions contained in the telegraphic subpoena. As the members of the
exchange have offices in practically every State of the Union, it takes
several days to collect any information or data requested by the ex­
change. I mention this to explain why the information requ ested
by you and in turn by us of our members will not be available to the
exchange for compilation until noon on Tuesday.
We have had a large force of men working, on both Saturday
and Sunday, on such data as has already been received and, start*
ing to-day, the entire available force of the Stock Clearing Corpora­



STOCK EXCHANGE PRACTICES

3

tion will be assigned to the compilation of the information requested
by the committee. I am advised that the mere sorting of the twenty
or thirty thousand individual reports which will be received from
the members of the exchange will require one full working day for
a force of at least 175 men. The tabulation of the data, after the
sorting is complete, will require the services of 25 trained men for
three full business days. I regret, therefore, that I can not assure
the committee that the answers to the questions asked in the sub­
poena will be in your hands before Friday of this week but I promise
that we will use every endeavor to hasten this work.
I am going into these details so that you may understand that
the delay in furnishing you with the statistics is due solely to the
time required to collect and tabulate the necessary information. I
can assure you that it is my desire to furnish to the committee all
information which we have available or can possibly secure.
In this connection there seems to have been, in some quarters,
a misunderstanding of the position of the exchange in regard to
furnishing information to this committee. Because of the fiduciary
relationship which exists between its members and their customers,
the exchange has always taken the position that it could not volun­
tarily furnish information about the private affairs of the customers
of its members. We have always recognized, however, the right of
the committees of Congress to secure such information as is neces­
sary or relevant to their legislative work and we have never in any
manner indicated that we would refuse to give such information.
In view of the short time available I have not been able to prepare
a formal statement covering the numerous points that are involved
in the matter of short selling. I shall be happy to answer, of course,
any questions that you may care to put to me here to-day, or at any
other time, in so far as I have personal knowledge to give you. On
the broader question of the economic aspects of short selling I would
like to present as a matter of record, a copy of the hearings before
the committee on the Judiciary of the House of Representatives on
February 24, 1932, at which I appeared. This contains not only
my prepared statement in regard to the bills regulating short selling
then pending before the committee but also the questions asked and
the answers made by me along these lines. I would also like to
file with you the brief submitted by our counsel at the request of
the committee as to the constitutionality of those bills.
I trust that at some appropriate time in the course of the hearings
on Senate Resolution No. 84 I will be given an opportunity of sub­
mitting a more comprehensive statement on all of the numerous sub­
jects referred to in the resolution.
I have already explained my inability to produce this morning
the detailed information called for by the subpoena. In orded to
make perfectly sure that we may furnish to the committee the exact
information which it desires, I would like to take up the different
sections of the subpoena.
The first section asks for a list of all corporations in whose stock
there is a short account in excess of 10,000 shares at the close of
business on April 8. I have brought with me the most recent statis­




4

STO C K E X CH A N G E PRACTICES

tics showing the short position in every stock listed on the exchange.
These figures are complete down to the opening of business on April
5, 1932. I might say in this connection that part of this informa­
tion, and particularly the first volume of statistics, has been given to
the public. Commencing in January we have, monthly, made pub­
lic the day-to-day figures of the total short position. We have in
addition furnished detailed information to Government officials. As
I have just told you, as soon as the reports for April 8 can be
compiled we will furnish the information requested by this first
question.
The second section asks for the total number of shares of such
stocks in which there is a short interest. The information we will
furnish in response to the first section will show the actual short
interest in each stock and will, therefore, I am sure, constitute a
complete answer to the second question.
The third section asks for a list of all stock exchange members
through whom such stock was traded. I f the information sought
by this question is a list of the members of the exchange who, to­
day, have on their books short accounts for customers, the question
can be answered by having the reports received from members
specially sorted. This will require at least an additional 24 hours
and will delay by that length of time the receipt of the information
by the committee. If, however, the information sought is a list of
the members of the exchange who originally executed the selling
orders of the stock now held in short account, I am afraid that it
will be almost impossible to answer the question. Many short posi­
tions have been in existence for long periods of time and these ac­
counts may have been moved from the house which originally exe­
cuted the order to some other firm. Furthermore, many selling
orders are made by one firm for an account which exists in an­
other firm. To trace back the original selling order on every short
position would require an examination of the books of the individual
members of the exchange and would necessarily consume several
months.
The fourth section asks for the names of all clients for whom such
stock was sold and the number of such shares sold for each client in
excess of 200. Am I right in believing that in answer to this sec­
tion the committee would like to have a list showing each customer
of the stock exchange houses who, at the close of business on April
8, 1932, had a short account in excess of 200 shares ? I f this is the
information which the committee desires, the reports which the ex­
change will receive must be sorted by stocks in order to secure the
answers to the first two sections and then resorted in alphabetical
order so that the total short position held by each person, whether it
be in one or more stock exchange houses, can readily be determined
A fter this second sorting which would require, as I have said above)
about 24 hours, we can have the results typewritten on schedules.
This latter work, however, would consume about three days and
therefore, if the committee is anxious to have this information a
*
the earliest possible moment, may I ask whether it will be satisfied
by having a photographic film which will show each report in alpha­




STOCK EXCHANGE PRACTI€ES

5

betical order by names of customers? I had inquiries made on Sat­
urday and find that it is possible to have such a photographic record
made very rapidly and I believe that no delay will be occasioned
by using this method.
The last or fifth section asks for a list of all persons or corpora­
tions from whom stocks were borrowed and the amounts so bor­
rowed in numbers of shares. I am frank to say that I believe this
question is ambiguous. Nevertheless the exchange, using the exact
w
rords of the committee, has asked its members to make reports and
when this information is received it will be tabulated and the results
submitted to the committee.
The C h a i r m a n . I s Mr. Branch here ?
Mr. B r a n c h . Yes, Mr. Chairman.
The C h a i r m a n . Any questions. Senator Walcott?
Senator W a l c o t t . Not at this time.
The C h a i r m a n . Any questions, Mr. Branch ?
Mr. B r a n c h . Mr. Whitney, have you an extra copy of the state­
ment which you just gave the committee so that you could let me
have it?
Mr. W h i t n e y . I have given it to the clerk of the committee.
Mr. B r a n c h . I wondered if you had another copy that I might
have before me.
Mr. W h i t n e y . I think I have another copy, Mr. Branch. Do you
mean for your present use ?
Mr. B r a n c h . Yes; and for my permanent use.
Mr. W h i t n e y . Here is an extra copy. There are some correc­
tions, possibly, that should be made on it.
Senator B l a i n e . Very well, but the record of our hearing will
disclose that.
Mr. B r a n c h . Yes.
Mr. W h i t n e y . All right.
Mr. B r a n c h . Mr. Whitney, I think you said you had with you
some lists of corporations in whose stock there was a short account
at the close of business on April 8, 1932.
Mr. W h i t n e y . No, sir: but as of the opening on April 5.
Mr. B r a n c h . April 5, 1932.
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . Will you produce that list, please?
Mr. W h i t n e y . Here it is.
Mr. B r a n c h . Have you another copy? I f so, please hand one to
the committee reporter and one to me.
Mr. W h i t n e y . Might I also at this point, in response to the re­
quest, submit as exhibits the other data referred to m the statement
that you have before you?
Mr. B r a n c h . Yes; if you will do that. I will ask the committee
reporter to assign a number to each one of the statements as pre­
sented by Mr. Whitney and then hand it over to me so that we may
be able to identify it by number in the future.
Mr. W h i t n e y . Y ou will appreciate that you have the only copy
of each statement that I have here, so that if you interrogate me
about it I will not have a copy before me in order to testify as to




6

STOOK EXCHANGE PRACTICES

what it contains, except from memory, perhaps, as to some individual
details.
Mr. B r a n c h . Do you mean as to the first paper, Exhibit No. 1,
that has just been handed to me?
Mr. W h i t n e y . Yes; that is the only copy that I have with me.
I think there are only three in existence, as you may see by the list.
Mr. B r a n c h . I f there is necessity we will allow you to consult this
Exhibit No. 1 during your examination.
Mr. W h i t n e y . All right; thank you.
Mr. B r a n c h . And I would suggest that in future, if possible,
enough copies be made so as to avoid any delay. You may now go
ahead and present the other tabulations which you have.
Mr. W h i t n e y . Then, as your Exhibit No. 2 I hand you a printed
copy of the hearings before the Committee on the Judiciary of the
House of Representatives.
Senator B l a i n e . It is not necessary to insert that in our record.
We have or can get copies of the printed hearings of the Judiciary
Committee of the House of Representatives.
The C h a i r m a n . Then, that may simply be identified as Exhibit
No. 2.
Mr. W h i t n e y . Here is a printed copy of my brief submitted to
the Judiciary Committee of the House of Representatives on behalf
of the New York Stock Exchange, which I understand will be
marked Exhibit No. 3.
Mr. B r a n c h . As you present these papers will you state for the
benefit of the record what they are ?
Mr. W h i t n e y . Certainly.
The C h a i r m a n . That contains what?
Mr. W h i t n e y . It is described in the statement I have just made
to the committe.
The C h a i r m a n . What has been described?
Mr. W h i t n e y . What has already gone in has been described in my
statement. What I am now going to put in, with the exception of
what Mr. Branch has there before him, I now will describe.
The C h a i r m a n . All right.
Mr. W h i t n e y . This next tabulation, which is your Exhibit No. 4,
contains statistics in regard to short selling compiled by the New
York Stock Exchange as to each and every stock in which a short
interest appeared between May 25, 1931, and November 30, 1931,
inclusive. I will state that this data has been sent to anybody who
has requested it; it has been given in full to the press and has been
furnished to any interested party.




STOCK EXCHANGE PRACTICES
E

1931

M ay 25.
June 4__
June 17.
June 26.
July 3 ..
July 10.
July 17.
July 24.
July 31.
Aug. 7 ..
Aug. 14.
Aug. 21.
Aug. 28.
Sept. 4.
Sept. 11
Sept. 18
Sept. 21
Sept. 22
Sept. 23
Sept. 24
Sept. 25
Sept. 28
Sept. 29
Sept. 30
Oct. l . .
Oct. 2 ..
Oct. 5...
Oct. 6 .O ct. 7 ..
Oct. 8 ..
O ct. 9 ..
O ct. 13.

x h ib it

N o. 4

Num ber of
stocks in
Number of
which a
shares of
short inter­
short
est was
interest
reported
589,700
948.260
384,474
978,149
634.261
770,569
645,982
718,218
038,850
374,200
342,500
271.800
408,100
338,000
480,400
241.300
961.300
162,813
929,295
949, 412
987, 385
985,088
063,203
036,928
814,935
643,170
612,414
597,898
173.800
243,535
163, 771
182,197

616
670
606
593
597
571
578
588
565
524
512
515
520
508
517
517
518
493
477
471
449
467
473
476
461
450
450
462
446
454
451
453

7

Number of
Xumber of stocks in
which a
shares of
short
short inter­
est was
interest
reported
Oct. 14.
Oct. 15.
Oct. 16.
Oct. 19.
Oct. 20.
Oct. 21.
Oct. 22.
Oct. 23.
Oct. 26.
Oct. 27.
Oct. 28.
Oct. 29 _
Oct. 30.
N ov. 2..
Nov. 4..
N ov. 5..
Nov. 6..
N ov. 9..
N ov. 10.
N ov. 11.
Nov. 12.
N ov. 13
N ov. 16.
N ov. 17.
N ov. 18.
N ov. 19.
N ov. 20.
N ov. 23.
N ov. 24.
N ov. 25.
N ov. 27.
N ov. 30.

2,254,370
2, 254, 676
2, 246,874
2,241,968
2, 239, 700
2,239,200
2, 243, 327
2, 300,320
2,328,972
2,440,169
2,540,943
2,652,127
2, 676,649
2,764,959
2,816,934
2,846,236
949, 402
2,897,874
2,925,417
2,988,446
3,020,601
3,013,807
3,104,185
3,131, 796
3, 237,159
3,364, 776
3,429, 228
3,537,787
3, 584,161
3,568,538
3,690,795
3, 745,642

%

431
427
463
420
456
540
550
554
546
541
540
516
524
524
531
546
534
547
560
555
554
551
551
550
561
560
563
568
572
558
562
556

Senator C o u z e n s . Mr. Chairman, might I ask a question right
there ?
The C h a i r m a n . Certainly.
Senator C o u z e n s . Mr. Whitney, I should like to ask you this ques­
tion: In explaining that exhibit you stated it covered any stocks
wherein short selling appeared. Is there any short selling where it
does not appear?
Mr. W h i t n e y . Not that we know of.
Senator C o u z e n s . Have you ever examined into that matter ?
Mr. W h i t n e y . We asked certain data from our members, as com­
prehensive in scope as we could get in an effort to cover every point
that we believed would bring out the information you requested.
I f any member failed to give that information to us he is subject
to expulsion. I know of no greater effort that could be exerted on
our part to get the necessary information, and I believe it is exact.
Senator C o u z e n s . So when you stated that that is all of the short
selling that appeared, you are confident there is no short selling other
than what appears in the record ?
Mr. W h i t n e y . That is my belief, in so far as our members are
concerned.
Senator C o u z e n s . Have you any knowledge as to what other sell­
ing could occur, I mean outside of your members ?
Mr. W h i t n e y . I have not.




8

STOCK EXCHANGE PKACTKJBS

Senator B l a i n e . Let me ask this question: The short selling as
to which you have just reported is short selling as defined by the
New York Stock Exchange, is that right \
Mr. W in t n e y . Yes. sir.
Senator B l a i n e . And t h e r e m a y b e o t h e r f o r m s of short selling
which could be used to cover up short selling as defined by the New
York Stock Exchange, is that correct?
Mr. W h i t n e y . I do not know.
Mr. B r a n c h . N o w , m a y I a s k Mr. W h i t n e y a q u e s t io n 1
?
The C h a i r m a n . One minute. Senator Fletcher wishes to ask a
question.
Senator F l e t c h e r . Mr. Whitney, might I ask you to bring that
statement down to date?
Mr. W h i t n e y . The statement is brought down to date.
Senator F l e t c h e r . H o w was that?
Mr. W h i t n e y . I say, the statement is brought down to date.
Senator F l e t c h e r . But it is not here?
Mr. W h i t n e y . Yes, sir; it is here.
Senator F l e t c h e r . But you said that statement was from May
25 to November 30, 1931.
Mr. W h i t n e y . That is correct, Senator Fletcher, but these fur­
ther exhibits that I am going to present bring it down month by
month from that time to this, when taken together with your
Exhibit No. 1, which is merely for the first three days of April.
(See appendix.)
Senator W a g n e r . Mr. Whitney, did I understand you to say that
these statements have been heretofore given to the press ?
Mr. W h i t n e y . The first statement that I presented, from May 25
to November 30, 1931, has been given in full to the press.
Senator W a g n e r . Do you remember about when that was?
Mr. W h i t n e y . On December 16, 1931.
Senator G l a s s . What percentage of the newspapers do you think
understand it ?
Mr. W h i t n e y . Having great respect for the press, Senator Glass,
I presume that they all do, or those that take an interest in studying
it. Some papers throughout this country made very exhaustive
tabulations and conclusions from those figures.
Senator B l a i n e . That statistical abstract is dated December 15,
1931*
Mr. W h i t n e y . Yes, sir. That was when it was finally com piled
and given out.
Senator C o s t ig a n . Why did you give that statement to the press?
Mr. W h i t n e y . Because we desired to put fully before the minds
of the people o f the entire country the facts that existed with regard
to short selling and in order, as we saw it, to prove that the exaggera­
tions with regard to it were absolutely ridiculous.
Senator B r o o k h a r t . Mr. Whitney, it was represented to this com ­
mittee that there was a list, or a combination rather, of big bear
dealers who were selling on Friday last a large quantity of stocks
short, and that they had planned to make a black Friday out of
Saturday, and that you had the names or knew who they were but
refused to disclose that information. Can you tell us about that ?
Mr. W h i t n e y . I h a d no knowledge, Senator Brookhart, of auT
bear raid beyond what was conveyed to me over the telephone with




SS'O O K - E X CH A N GE PRACTICES

9

particular regard to United States Steel by Senator Walcott. And I
have no knowledge now of any bear raid. Our investigations made
as a result of the request of Senator Walcott into the operations
in four specific stocks, United States Steel, American Telephone &
Telegraph, Public Service of New Jersey, and Consolidated Gas of
New York, showed no bear raiding, but did show great liquidation
for long account.
Senator B b o o k h a r t . Will you explain to us the difference be­
tween a bear raid and liquidation?
Mr. W h i t n e y . A bear raid is an illegitimate attempt on the part
of someone by selling stocks to demoralize the market.
Senator B r o o k h a r t . Well, when you say u an illegitimate at­
tempt ” do you mean it is a violation of law ?
Mr. W h i t n e y . It is a violation of the rules of the New York
Stock Exchange. And it does not take place.
Senator B r o o k h a r t . Then you mean nobody violates those rules
any more ?
Mr. W h i t n e y . I would not say that, Senator Brookhart, but if
we find such a violation we have penalties to inflict which are
conclusive.
Senator B r o o k h a r t . Well then, what do you mean by liquidation
such as you have described in the case of these four stocks?
Mr. W h i t n e y . Liquidation is the selling of securities, or any other
article owned by an individual, that he owns outright or on margin.
Senator B r o o k h a r t . What is the margin at the present time on
those stocks ?
Mr. W h i t n e y . On what stocks?
Senator B r o o k h a r t . Well, those four stocks. Is the margin differ­
ent on different stocks or the same thing all the way round?
Mr. W h i t n e y . The average margin demanded by brokers is 25
per cent of the purchase price.
Senator B r o o k h a r t . And what would it be on those four particu­
lar stocks ?
Mr. W h i t n e y . Presumably the same.
Senator B r o o k h a r t . Were those stocks that were liquidated held
on margin or owned outright?
Mr. W h i t n e y . Both.
Senator B r o o k h a r t . Have you any idea of the proportions?
Mr. W h i t n e y . No, sir.
Senator B r o o k h a r t . Have you any way to determine the pro­
portions ?
Mr. W h i t n e y . N o ; except that these shares in general—I mean
all shares held on margin to-day—have dropped to a very low figure,
and therefore the preponderance of selling and liquidation through­
out this period' has been from the boxes of investors throughout tnis
country.
Senator B r o o k h a r t . You mean by that answer that they owned
the stocks outright?
Mr. W h i t n e y . Presumably.
Senator B r o o k h a r t . And they didn’t hold them on margin.
Mr. W h i t n e y . Presumably.
Senator B l a i n e . At this juncture, Mr. Chairman-----The C h a i r m a n (interposing). I suggest that those tabulations
that Mr. Whitney has betore him should now be put into the record
as exhibits.




10

STOCK EXCHANGE PRAGTIOJBS

Senator B l a i n e . At this juncture there is another matter which I
think ought to be put into the record. There was a telegram re­
ceived by Senator Walcott on last Saturday, as I recall. It is not a
telegram that is now available to us, and I think in fairness to
the committee, as well as to those who may testify before the com­
mittee, we ought to have that telegram read into the record.
Senator G l a s s . Mr. Chairman, might I suggest that in view of
the fact there are members of the committee who did not see that
telegram, that the question raised by Senator Blaine be considered
in executive session?
Senator B l a i n e . Well, I saw the telegram, and I expect to base
some of my examination upon it. Now, I submit that it would be
hardly fair-----The C h a i r m a n (interposing). I f there is objection to taking it
up at this time I suggest that we will have an executive session later
to consider it.
Senator B l a i n e . Well, can there be any objection to our knowing
here from whom that telegram came, so we may identify it?
The C h a i r m a n . In the circumstances I am not sure that we should
ask a member of the committee to produce it here now, but doubtless
he will be willing to have you go into it when we can have an
executive session.
Senator B l a i n e . I was going to examine Mr. WTritney about it.
The C h a i r m a n . Well, when the Senator furnishes it he can be
examined.
Senator B l a i n e . I meant to examine Mr. Whitney about the mat­
ter, in which case we would need the telegram.
The C h a i r m a n . I f you insist on the point we will have it passed
upon. It is a matter for the committee to determine.
Senator G l a s s . I should like to ask Mr. Whitney one question
right now.
The C h a i r m a n . Y ou may proceed.
Senator G l a s s . Mr. Whitney imputes to me as a newspaper man
vastly more knowledge than I have as a United States Senator.
Mr. Whitney, I want to know what you mean by illegitimate short
sales. And in the same connection I would like you to explain to
me why any short sale should be any more illegitimate than what
you term a bull transaction? In other words, if there be any ques­
tion of irregularity, or immorality as some people contend, in the
selling of the markets short, why isn’t the same thing involved in
selling the market up to an exaggerated figure ?
Mr. W h i t n e y , Do you wish me to answer that now, Senator
Glass ?
Senator G l a s s . Yes; I want to know.
Mr. W h i t n e y . In answering Mr. Brookhart I was not conscious
of stating anything about short selling in reference to bear raids.
I f I did, it was just by way of passing. Bear raiding may be short
selling and may be long selling. I said it was illegitimate because
it sought and did demoralize the market.
Senator G l a s s . Well, that does not necessarily mean that the
thing is illegitimate because it demoralizes the market. I think the
market is frightfully demoralized when it is carried sky high and
beyond all intrinsic values.



11

STOCK EXCH AN GE PRACTICES

Mr. W h i t n e y . I was going to add that the rule of the stock ex­
change to which I referred, with regard to demoralization or giving
a fictitious value to the members’ shares, applied both on opera­
tions for appreciation of values as well as for depreciation.
Senator B u l k l e y . Does illegitimacy depend upon intent as well
as the effect?
Mr. W h i t n e y . Both.
Mr. B r a n c h . N owt, Mr. Chairman, shall we proceed with the
introduction of the documents?
The C h a i r m a n . If the members of the committee do not desire
at this time to propound any more questions, you may proceed.
Mr. B r a n c h . Mr. Whitney, have you still some documents which
have not been marked?
Mr. W h i t n e y . Yes, sir: four, Mr. Branch.
Mr. B r a n c h . Will you hand them to the committee reporter, and
as you present each one will you designate what it is, please?
Senator B l a i n e . Will the committee reporter insert the number
of the exhibit before the description of the document ?
Mr. W h i t n e y . The next is Exhibit No. 5, Mr. Branch, and is a
compilation or the setting forth of statistics for the month of
December, the next month following those just put in, and ending
with November 30, 1931.
Mr. B r a n c h . In other words, that gives the same information
for the month of December as has been given for previous months,
I mean in the compilation which has been marked “ Exhibit No. 4.”
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . It is merely a continuation of Exhibit No. 4 but
bringing it down to what date ?
Mr. W h i t n e y . Down to including December 31, 1931. Please
understand that all dates used are as to the opening of the market
on that day.
Mr. B r a n c h . Thank you. Now that is put in.
(The statistics for December. 1931, marked “ Exhibit No. 5,” are
as follows:)
E

x h ib it

N o. 5
' Total num-

Num ber of
shares of
total short
interest

Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.

l.
2.
3.
4.
7.
8.
9.
10

11

14
15

3,667,067
3, 665,152
3,736,577
3,662,800
3, 594,468
3,553,345
3,594, 720
3, 767, 236
3,698,320
3,559, 707
3,404,039

1931

N r £ r f°fl ^ s ° fa
sr
o which in
interest
mterest

Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.
Dec.

16
17
18
21
22
23
24
28
29
30
31

3,181,031
3,138,802
3,134,456
2,909,672
2,874,224
2,862,146
2,891,885
2,888,854
2,888,648
2,858,928
2,842,072

short in, terestw a s
! reported
620
614
608
613
618
616
608
610
614
603
597

Mr. B r a n c h . Y ou may proceed with the exhibits, Mr. Whitney.
Mr. W h i t n e y . Exhibit No. 6, Mr. Branch, is a carrying of these
figures forward in every way similar to what has already been de­
scribed for preceding months, but for the month of January and
down to January 31, 1932, inclusive.



STOCK EXCHANGE PRACTICES

12

E x h ib it N o. ♦
>

1932

Jan 11

Jan. 18------------------ -------

N um ber of
shares of
total short
interest

Total number of
stocks in
which a
short interest was
reported

2, 962,127
3, 122, 915
3,092.929
3, 087,616
3,072,601
3,076,399
3, 137,369
3,152,366
3,121,243
3, 068,026
3, 064, 761

596
589
590
598
591
589
587
594
577
572
556

N um ber of
shares of
total short
interest

Total num­
ber of
stocks in
which a
short in­
terest was
reported

3,069,649
3,136, 766
3,145,087
3,171. 568
3,266. 739
3,327,471
3, 277. 702
3, 463,342
3, 536, 207
3,600, 265

579
584
586
580
571
580
574
579
575
590

i
I
|
j
!
!
i

1932

! Jan. 19___________________
I Jan. 20........... .....................
I
j
Jan. 22___________________
Jan. 25_________ __________
j Jan. 26..................................
1
J a n .29___________________
Feb. 1______ ____________
j

Mr. B r a n c h . All right. Proceed with the next exhibit.
Mr. W h i t n e y . Exhibit No. 7 is for the month of February, from
February 1 to February 29, 1932, inclusive.
E

x h ib it

N o. 7

\

1932

N um ber of
shares of
total short
interest

Feb. 1....................................
F e b .2....................................
Feb. 3...................................
Feb. 4— .................... .......
F eb. 5.......... ........................
F eb. 8................... ...............
Feb. 9 . .............................. .
Feb. 10........ ............. ...........
Feb. 11............- ....................
Feb. 15................... .............

T otal number of
|
stocks in !
which a
short in­
terest was
reported

3,600,265
3,636,435
3,688,934
3,685,682
3,700,119
3, 754,942
3,842, 241
3,931,885
3,965,142
3,437,833

590
587
590
586
577
580
589
590
590
599

1932

I N um ber of
, shares of
; total short
! interest

3, 363,727
3, 234, 068
3,177, 712
3,192, 702
2,996, 691
2,964,016
2,983, 014
3,049, 978
3,081,914

Feb. 16
Feb. 17
Feb. 18
Feb. 19
Feb. 23
Feb. 24
F e b -25
Feb. 26
Feb. 29

Total num­
ber of
stocks in
which a
short in­
terest was
reported

593

596
600
586
583
581
587
583
578

Mr. B r a n c h . You may proceed.
Mr. W h i t n e y . The next is your Exhibit No. 8— I mean that is
your number—being a tabulation for the month of March, 1932,
from March 1 to March 31, inclusive.
E

1932

Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.

1..
2..
3.
4..
7..
8..
9_.
10
11.
14
15




x h ib it

Number of
shares of
total short
interest

Total num­
ber of
stocks in
which a
short in­
terest was
reported

3,102,876
3,096,316
3,018,470
3,100,862
3.096.178
3,131, 776
3,164,725
3,163,632
3,133,629
3,107,484
3.131.179

687
583
571
575
594
591
589
596
587
587
597

N o. 8

1932

Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.

16
17
18
21.
22.
23
24.
28.
29.
30
31

Number of
shares of
total short
interest

3,162,712
3,240,304
3,242,247
3,465,818
3,422,258
3,560,231
3,479,756
3,427,664
3,315,913
3,305,253
3,299,268

T otal num­
ber of
stocks in
which®
short in­
terest was
reported
592

601
601

600

56
8
5
#
5»
5»
5#

STOCK EXCHANGE PRACTICES

13

Mr. B r a n c h . I s that all ?
Mr. W h i t n e y . Yes. Exhibit No. 1, I mean your number, is the
one you first received, Mr. Branch, for the few days of April, 1932,
as to which figures have been already received and compiled by us.
Mr. B r a n c h . I do not seem to have that exhibit before me.
Mr. W h i t n e y . It was just handed over to you there, and has not
a blue binder on it as these other exhibits have.
Mr. B r a n c h . Yes, here it is. That was for the month of April,
1932.
r ’
Mr. W h i t n e y . No, sir; it was for a few days as shown thereon.
Without looking at it I could not tell you offhand how many days
are included.
Mr. B r a n c h . I mean up to the time when you stopped with the
other exhibits, and beginning with April 1, 1932.
Mr. W h i t n e y . Might I ask in connection with that question
whether for April, it was the 1st, 4th, and 5th? I f you will look at
the list of dates on that statement you will see.
Mr. B r a n c h . I see it is April 4, 5, and 6.
Mr. W h i t n e y . April 4 , 5, and 6, 1932. All right. That is as to
the opening of the market on those particular days.
Mr. B r a n c h . Then these exhibits which you have given to us give
all that information beginning with May 25, 1931, and ending with
April 6, 1932; is that correct?
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . Now, have you any other documents with you which
you wish to present to the committee?
Mr. W h i t n e y . No, sir. That is all unless you request some other
things that I might have. I have not any other documents to pre­
sent; no.
Mr. B r a n c h . Have you any other compilations of figures pre­
pared in response to the subpoena, I mean with you at the present
time ?
Mr. W h i t n e y . Not directly in that connection. I have an infinite
number of papers showing statistics of one sort and another, and
depending upon how the hearing progresses and what questions are
propounded, I may have to refer to these papers, and then if you
desire me to file them with you I will be glad to do so.
Mr. B r a n c h . I think for the present we better confine our atten­
tion, then, to what papers have already been marked. Have yon a
copy of any one of these statements before you? 1 think you will
need a copy to refer to in order to answer my questions.
Mr. W h i t n e y . I have not a copy of any of them here.
Mr. B r a n c h . I will hand this one to you, which is committee’s
Exhibit No. 8. I am not at the present tune going into the figures,
but I am desirous o f understanding just what is included in the
figures shown in the exhibit, and in other exhibits similar to it cover­
ing other periods. Will you explain, then, and you will see it in the
first part o f the statement, just what those figures are, what they
include?
Mr. W h i t n e y . In the first place, there is listed the names of cor­
porations, and the shares o f the corporations in which, during the
period under review, any short interest of any amount appeared.

119852—32-----2




14

STOCK EXCHANGE PRACTICES

Mr. B r a n c h . That is, any short interest which appeared as of the
date designated in the column you have reference to.
M r . W h i t n e y . I w a s g o i n g to s a y th a t , b u t t h a t w a s n o t w h a t I
a tte m p te d to sa y th en .
Mr. B r a n c h . Will you explan it, then ?
Mr. W h i t n e y . First, as I say, there is

a description of them—
not in the first column but in the second column—of the particular
stocks of corporations in which during any time during the month
there was any short interest. Before that is shown-----Mr. B r a n c h (interposing). Might I interupt you for a minute
there? You say in which there was any short interest at any time.
Mr. W h i t n e y . During the month.
Mr. B r a n c h . Yes. Suppose a short sale was made and was cov­
ered during the same market day, would that be reflected in any
way in this statement ?
Mr. W h i t n e y . No, sir. This is our net short position.
Mr. B r a n c h . Then the next information which has been given
to us would contain figures including that kind of short sales ?
Mr. W h i t n e y . N o, sir; because the sale is made and the covering
of that sale is made on the same day, thereby absolutely offsetting
each other, certainly in so far as the net position is concerned.

Mr. B r a n c h . Has the stock exchange compiled or attempted to
compile any figures showing these amounts of such short sales either
in the aggregate or in regard to any particular security ?
Mr. W h i t n e y . Yes.
Mr. B r a n c h . Have you such figures before you?
Mr. W h i t n e y . There appear in these compilations the number of
shares sold and covered the same day, and the percentage of those
sales and covering purchases to the total number of transactions on
that particular day. It is not broken down, however, into particular
stocks.
Mr. B r a n c h . The short interest appearing at the close of business
on each day is broken down into particular stocks showing the net
short position?
Mr. W h i t n e y . Showing the net short position in each stock; yes,
sir.
Mr. B r a n c h . It would be possible, of course, to break that down
in regard to the short sales which were covered during any par­
ticular day, wouldn’t it?
Mr. W h i t n e y . It would.
Mr. B r a n c h . Has that been done as a matter of fact in regard
to any particular security ?
Mr. W h i t n e y . I think it has been done since the period in Sep­
tember in every security.
Mr. B r a n c h . But you have no compilation of those figures with
you here?
Mr. W h i t n e y . N o, sir.

Mr. B r a n c h . Have you or has any other officer of the stock ex­
change or any employee of the stock exchange a compilation of
such figures?
Mr. W h i t n e y . D o you mean here?
Mr. B r a n c h . N o ; anywhere.




STOCK EXCHANGE PRACTICES

15

Mr. W h i t n e y . Oh, as to those figures I think we can readily get
them in New York; yes, sir.
Mr. B r a n c h . At your next appearance before the committee will
you please bring such a compilation or compilations for as late a
period as you may have them ? And I take it, it will not be neces­
sary to serve a new subpoena on you for them.
Mr. W h i t n e y . It will be entirely unnecessary. But I should like
to get your specific request so that I may fully understand it, and
it may be done at some future time in case you do not care to give
it to me now. That is another stupendous job. I have not that data
in complete form over a period but just day to day. And only
rough work has been done along that line. There was no suggestion
o f that iri the subpoena, so we have not started upon any such full
-compilation of it.
Mr. B r a n c h . I think we could discuss the details of that later.
Mr. W h i t n e y . You can.
Mr. B r a n c h . I merely wanted to know what information was
available. And it is merely a question of preparing something from
what you already have, it is not?
Mr. W h i t n e y . Yes; that we have day by day. I would point
out to you that—take March 1 that you referred to, there were
40,800 shares sold that day and covered the same day.
Mr. B r a n c h . Are you now referring to some specific security ?
Mr. W h i t n e y . No, sir; the total number of shares sold and cov­
ered the same day were 40,800 on March 1. That refers on any date
to the transactions on that particular day, whereas the short posi­
tion refers to a time as of the opening of that particular day. We
can have a list of these transactions broken down into the amounts
of particular stocks, the addition or totaling of which makes 40,800
shares.
Senator G o r e . Might I ask a question right at that point ?
The C h a ir m a n . Proceed, Senator Gore.
Senator G o re . Mr. Whitney, do you figure that these daily trans­
actions of sales and purchases do not have much reaction on the
prices of the stocks involved?
Mr. W h i t n e y . W e do not.
Mr. B r a n c h . Might I interrupt in order to be sure I understand
the answer? Mr. Whitney, will you make us a further statement
in regard to that, for I fear your answer, as it stands on the record,
might be interpreted two different ways.
Hr. W h i t n e y . Is it not self-evident that when 100 shares of stock
are sold, and then later on in the day purchased again, that the
transactions are exactly offsetting?
Mr. B r a n c h . And do you contend that no transactions of that
kind could possibly have any effect upon depressing prices?
Mr. W h i t n e y . “ Possible ” is a very large word, but in my opinion
the result is not that of depressing^ prices.
Mr. B r a n c h . That is your opinion of the matter.
Mr. W h i t n e y . Yes.
. Senator G o re . Mr. Whitney, have you ever checked to see whether
it averages out, that the short seller during these daily transactions
takes a loss and makes a profit? Have you checked it at all?




16

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . N o , s ir . We have never checked it.
Senator G ore . But it would naturally share in the fluctuations of
the market ?
Mr. W h i t n e y . Yes, sir.
Senator G o r e . And sometimes it would be one way and sometimes
another ?
Mr. W h i t n e y . Yes, sir. And if a man is wrong he takes a loss,,
and if he is right he makes a profit. The short seller is exactly in
the same position as the man who purchases on margin, the two can
not be dissociated. The man who buys on margin buys because he
expects to make a profit on appreciation—in increase in the price of
the shares, and the man who sells short is the direct inverse.
Senator G o r e . I thought maybe the man who sold and got out
on the same day got a little nervous and thought he had made a
mistake.
Mr. W h i t n e y . Well-----Senator G ore (continuing). And maybe he had to get out at a.
little higher price than he got in.
Mr. W h i t n e y . He v e r y l i k e l y does make a mistake. None arein f a l l i b l e .

Senator G l a s s . Well, it is astonishing to learn that there have
been any mistakes.
Mr. W h i t n e y . Senator Glass, I am referring in this c o n n e c t io n
to the people of the entire United States, not only to brokers.
Senator G l a s s . Oh, yes; and so am I. I think mistakes is what
is the matter with the country right now, the entire country.
Senator B l a i n e . Mr. Whitney, you refer to those whom Mr.
Hoover described in 1912 as the idiots who come in and get stocks,
after they have been pushed up to almost unknown heights, the
public, are you not?
Mr. W h i t n e y . I have no knowledge of and have never seen any
statement made by the President with regard to that.
Senator B l a i n e . Then you ought to go over to the Congressional
Library and see the London Mining Journal, I believe of May, 1912.
It might be very useful to the New York Stock Exchange.
Mr. W h i t n e y . I do not doubt it. But we have a great many
other things to do at this time.
Mr. B r a n c h . Have you finished, Senator Blaine?
Senator B l a i n e . Yes.
Mr. B r a n c h . To continue with these exhibits which you have pre­
sented, Mr. Whitney: Do they show anywhere the sales or short
positions against long positions in the same stock where definite
instructions have been given to deliver over the stock c e r t ific a t e s ?
Mr. W h i t n e y . They do not.
Mr. B r a n c h . You do not consider that short selling?
Mr. W h i t n e y . I do not—or am I asked that question?
Mr. B r a n c h . Yes.
Mr. W h i t n e y . The man who sells stock, so-called against the box.
is not a short seller, the distinction being that he at any time has the
entire power in his own control to deliver that stock, because he h«s
it, whereas the short seller must at some time buy that stock bac*
and has no stock to deliver without buying back against his contract




STOCK EXCHANGE PRACTICES

17

Senator C o u z e n s . What the lender of these stocks usually makes
is his profit in the transactions, if a profit there be?
Mr. W h i t n e y . Senator Couzens, I am afraid I do not understand
your question. Will you repeat it?
Senator C o u z e n s . I understand that the lenders of these stocks so
as to cover on the part of the short seller, or in some cases where there
is a profit that there is a division of the profit, and that in other cases
where there is a loss, the broker has to pay the lender for the stocks
that are sold short. Have you any knowledge as to how that is
handled ?
Mr. W h i t n e y . There is no division of profit there between broker
and short seller.
Senator C o u z e n s . I am talking now about the lender of stock, the
lender of stock in order to make good the short seller’s sale, he gets
a profit for lending his stock, does he not ?
Mr. W h i t n e y . In some cases, where the availability of the stock
for lending is slight, where there is a stringency, where there is too
great a demand for the borrowing of stock. But in the case of the
587 issues referred to here as of March 1, in which there is a short
interest, I do not think any appreciable amount of this, or any large
percentage of these, were lending at a premium.
Senator C o u z e n s . - Well, I understand that the investment trusts
who hold large portfolios of stocks make a practice of lending stocks
in their portfolios to brokers who sell short, and obviously they get
a profit for so doing. I wondered if you had any knowledge of the
extent of that.
Mr. W h i t n e y . I have no knowledge.
Senator B r o o k h a r t . Is that a violation of the rules of the stock
exchange ?
Mr. W h i t n e y . What, Senator Brookhart?
Senator B r o o k h a r t . T o make loans of stocks and divide up the
profit in the way Senator Couzens suggested.
Mr. W h i t n e y . I s it not a violation of the rules of the exchange
to make loans of stocks. But, quite frankly, I am not clear as to
what Senator Couzens had in mind with regard to dividing up some
such premiums as might be paid on those loans.
Senator B r o o k h a r t . I t is quite plain that the suggestion is that
banks or investment companies that hold stocks for lending purposes
want some compensation for the loan of stocks, and the suggestion is
as to how they pay them. Now, I wanted to know whether it is a
violation of the rules of the exchange for a broker, a member of the
stock exchange, to deal in that kind of business.
Mr. W h i t n e y . I have not heard, Senator Brookhart, at this hear­
ing or at any other time, proof that investment trusts or banks loan
stock in that way. I can not, therefore, answer. As I see it-----Senator B r o o k h a r t (interposing). Assuming that they do it
w°uld be a violation of the rules ?
Mr. W h i t n e y . Whether it would be correct for a lender of stock
to receive from the broker he loaned it to a part of the premium;
yes.




STOCK EXCHANGE PRACTICES

18

Senator B r o o k h a r t . D o you say that would not be a violation
of the rules of the exchange?

Mr. W h i t n e y . I said it would not be a violation if it was done.
Senator B r o o k h a r t . N o w , I have not had enough information
yet about this bear raiding business. Will you give us an illus­
tration of how a bear raid can be conducted? Run one for us a
little while and let us see what it is like.
Mr. W h i t n e y . I never have.
Senator B r o o k h a r t . Y ou know how fellows run them that d
orun them, don’t you?

Mr.

W

h it n e y .

No, sir.

Senator B r o o k h a r t . Y ou do not even know what a bear raid is?

Mr. W h i t n e y . Yes; I know what a bear raid is from the point
of view of an officer of the stock exchange, in the matter of its
effect, and I can tell you what is my presumption as to how a
particular bear raid, as an instance, might be attempted, if that is
what you desire.
Senator B r o o k h a r t . That is what I should like to get.
Mr. W h i t n e y . An individual who wishes to demoralize the mar­
ket would give an order to sell, let us say, 1,000, 2,000, or 10,000
shares of stock as quickly as possible, and in as demoralizing a
way as possible, in order to depress that particular stock.
Senator B r o o k h a r t . Would he be selling them short or selling
his own stock?
Mr. W h i t n e y . That I do not know. Both might be done. But
that act is not allowed by the regulations of the New York Stock
Exchange, and I think, sir, it does not take place on the New York
Stock Exchange to-day.
Senator B r o o k h a r t . Did it occur at the time of the panic in 1929?

Mr. W h i t n e y . I doubt it.
Senator B r o o k h a r t . Well now, you are not a member of Morgan
& Co. yourself, are you? You are not a partner in the firm of Mor­
gan & Co. ?
Mr. W h i t n e y . Do you mean J. P. Morgan & Co.?
Senator B r o o k h a r t . Yes.
M r . W h i t n e y . N o , s ir .
Senator B r o o k h a r t . There

is a Whitney who is a partner in that
firm, isn’t there?
Mr. W h i t n e y . There is.
Senator B r o o k h a r t . Is he related to you?
Mr. W h i t n e y . He is my brother.
Senator B r o o k h a r t . Do you do business for the Morgan Co»
yourself ?
Mr. W h i t n e y . I am delighted to do any business for them, sir,
that I may be given by them.
Senator B r o o k h a r t . I s that the principal business of your firm?
Mr. W h i t n e y . It is not.
Senator B r o o k h a r t . Did you have anything to do with the U n ited
Corporation that was organized by the Morgans ?
Mr. W h i t n e y . Anything to do with it?
Senator B r o o k h a r t . Yes.




STOCK EX CH A N G E PRACTICES

19

Mr. W h i t n e y . May I ask you to be more specific. Senator, be­
cause I own some of its stock and my children do, which was bought
at prices averaging around 50, selling about 5.
Senator B r o o k i i a r t . What was the total value of that as it
started ?
Mr. W h i t n e y . I b e g your pardon?
Senator G o re . That was a mistake, was it, Mr. Whitney?
Mr. W h i t n e y . A grave mistake.
Senator B r o o k h a r t . That company started at $105,000,000, did
it not, in 1921?
Mr. W h i t n e y . I do not know", Senator Brookhart. Various ques­
tions were asked by Congressman LaGuardia of me at the meeting
of the House Committee on the Judiciary. The questions and such
answers as were made by me are in the testimony that I have already
presented for the record. The facts as stated by Congressman La­
Guardia have been pointed out to me since that time as being quite
contrary to fact.
Senator B r o o k h a r t . I want to know what the exact facts are.
Mr. W h i t n e y . I do not know. I have been too busy since that
time to find out those very details, although they have been compiled
for me.
Senator B r o o k h a r t . Y ou answered the Congressman that you
handled these stocks as a specialist, specialty, or something of that
kind, did you not ?
Mr. W h i t n e y . I said that a partner of my firm was a specialist
in that stock on the floor of the New York Stock Exchange.
Senator B r o o k h a r t . And now that started, according to the min­
utes I have, at one hundred and five million; and how was that stock
made up? Where did it come from?
Mr. W h i t n e y . I understand that those figures, sir, are not correct.
Senator B r o o k h a r t . What are the correct figures?
Mr. W h i t n e y . I do not know. I will get them for you.
Senator B r o o k h a r t . What is it you understand about it, then?
Let us have that.
Mr. W h i t n e y . I understood that the figures presented were as to
what the stock of the company w selling for in relation to the net
ras
worth of the stocks held by the company and that the amount of
issued stock was very much in excess of the value of the stock held
by the company.
Senator B r o o k h a r t . That was in 1921?
Mr. W h i t n e y . When it was issued. I have been told that those
ngures are grossly incorrect.
Senator B r o o k h a r t . Was that 105,000,000 what it sold for then
m 1921?
Mr. W h i t n e y . That may be, but I have-----Senator B r o o k h a r t (interposing). Yes. Now it is selling for
on®hundred and seventy-five million—is that about right?
Mr. W h i t n e y . I f you say so, sir. I can not answer these ques­
tions, because I have not those figures before me.
Senator B r o o k h a r t . In 1929 it sold for a billion and four hun­
dred million, did it not ?




STOCK EXCHANGE PRACTICES

20

Mr. W h i t n e y . I have not the facts before me.
Senator B r o o k h a r t . We will have to bring Mr. Morgan himself
down to find out about that ?
Mr. W h i t n e y . I think there are a lot of people that can tell you.
I would have been delighted to if you had told me that was infor­
mation you wanted.
Senator B r o o k h a r t . Well, since your firm was a specialist in it,
I thought maybe we might get some information out of it anyhow.
What I want to ask you is: Assuming that the stock started at
one hundred and five million and was put up to one thousand
four hundred million or a billion four hundred million-----Mr. W h i t n e y (interposing). By whom, sir?
Senator B r o o k h a r t . What is it?
Mr. W h i t n e y . By w h o m ?
Senator B r o o k h a r t . That is what I want to know—b y whom
and how?
Mr. W h i t n e y . By the public, in their desire to buy stock that
they believed to be worth the prices at which they purchased it.
Senator B r o o k h a r t . Who got them to believe that?
Mr. W h i t n e y . That I do not know.
Senator B r o o k h a r t . Did your firm put out prospectuses of this
stock ?
Mr. W h i t n e y . My firm?
Senator B r o o k h a r t . Yes.
Mr. W h i t n e y . N o, sir.

I do not sell stocks to the public.

Senator B r o o k h a r t . What do you mean by your partner hand­
ling it as a specialist, then?
Mr. W h i t n e y . He executes orders that are given to him by the
public of the United States and they come to our firm in buying
and selling stocks on the floor of the exchange. There are other
specialists there.
Senator B r o o k h a r t . You have some way of advertising yourselves :
to that public to get that business, do you not ?
Mr. W h i t n e y . But we do not advertise ourselves to the public
in any way. I f you mean by advertising using the press, we do not
advertise.
,
Senator B r o o k h a r t . Y ou do not make statements to the stocK
exchange ?
Mr. W h i t n e y . I b e g your pardon?
Senator B r o o k h a r t . Y ou make no statements to the stock exchange
itself ?
Mr. W h i t n e y . I have made some speeches, if that is what you
mean.
Senator B r o o k h a r t . Well, I mean statements about business. 1
realize you could make a good speech all right.
Mr. W h i t n e y . N o, Senator Brookhart. I have not made state­
ments. We do not sell stock, my firm. We are purely brokers,
nothing else.
Senator B r o o k h a r t . Well, you take orders and sell it for some­
body else?
Mr. W h i t n e y . Or to buy it; yes, sir.




STOCK E X CH A N GE PRACTICES

21

Senator B r o o k h a r t . And you sold this for the Morgan company,
or rather the United Corporation which was organized by the
Morgan firm?
Mr. W h i t n e y . We did not sell it for the United Corporation.
Senator B r o o k h a r t . Whom did you sell it for ?
Mr. W h i t n e y . Nobody except customers who sent orders on the
floor of the exchange after they owned it.
Senator B r o o k h a r t . Y ou simply bought it then instead of sell­
ing it?
Mr. W h i t n e y . Both. We are brokers, sir. We buy and sell stock
on the floor of the exchange, or bonds. We execute orders entrusted
to us for execution on either side of the market.
Senator B r o o k h a r t . What I would like to know now is how you
got that market up from one hundred and five million to one
thousand four hundred million. What kind of a raid was that?
Mr. W h i t n e y . I do not know, sir. I had nothing to do with it.
Senator B r o o k h a r t . Y ou mean the president of the Stock Ex­
change has no idea then at all how these stocks are inflated in those
gigantic proportions.
Mr. W h i t n e y . I did not say that, or I did not mean to give that
impression. I had no part in making that stock go up or down. I
have never tried to manipulate it.
Senator B r o o k h a r t . Well, whether you did or not, I would like
to know how it got up there.
Mr. W h i t n e y . Presumably, as was the case with all shares during
1928 and 1929, the public thought they were worth more than
they were selling at, and there were more buyers than sellers.
Senator G l a s s . Mr. Whitney, right on that point may I ask you
a question: What percentage of the public is speculating in stocks
of the stock exchange understand the real intrinsic value of the
stocks in which they deal ?
Mr. W h i t n e y . I know of no figures, Senator Glass, to answer
your question.
Senator G l a s s . I know there are no figures. I am asking you for
your best conjecture.
Mr. W h i t n e y . The services put out by stock exchange firms as
to statistical informations, as to research into facts with regard to
corporations, the services maintained by the Corporation Trust Co.
of New York and New Jersey, Standard Statistics, Moody’s Man­
ual, Poor’s, and hundreds of others that exist are at the disposal
°ffi
W sPecu^
^°
ate or wish to invest and ready at hand in the
offices of every member of the exchange, I think, who does that
particular type of business.
Senator G l a s s . What percentage of the public ever examines
those statistics-----M r . W h i t n e y . I h a v e n o id e a , s ir .
Senator G l a s s . In order to ascertain what is the intrinsic worth
\i s^o c k b o u g h t o n m a r g i n ?

Mr. W h i t n e y . I have no idea, sir. The facts are before them.
. Senator B r o o k h a r t . In this particular corporation, did those
institutions put out facts that would sustain that one billion four
hundred million value?




22

ST O C K E X C H A N G E PRACTICES

Mr. W h i t n e y . I think you stated that in the issuance of a stock
it was worth a million dollars.
Senator B r o o k h a r t . The note I have was one hundred and five
million to start with.
Mr. W h i t n e y . One hundred and five million.
Senator B r o o k h a r t . And then in the boom of 1929 it climbed
tip to one billion four hundred million.
Mr. W h i t n e y . I have no knowledge with regard to those figures,
Senator.
Senator B r o o k h a r t . That would be a bull raid, would it not, that
put the stock up like that ?
Mr. W h i t n e y . Indulged in by 120,000,000 people of the United
States; yes.
Senator B r o o k h a r t . Led b y the New York Stock Exchange?
Mr. W h i t n e y . I deny that, sir.
Senator B r o o k h a r t . It does not lead anything?
Mr. W h i t n e y . It is a market place.
Senator B r o o k h a r t . It takes their money and lets them go.
Mr. W h i t n e y . The New York Stock Exchange does not take any­
body’s money, sir.
Senator B r o o k h a r t . Well, the members do. It is all the same
thing.
Mr. W h i t n e y . They are paid for executing orders, just as you are
paid for being a real-estate broker or a banker or whatever it may be.
Senator B r o o k h a r t . I have never got any pay in that line.
Mr. W h i t n e y . As Senator, sir.
Senator B r o o k h a r t . Well, I do not get a commission in that way.
After this reached the 1,400,000,000 peak and dropped back down to
175,000,000, that would be the bear raid, would it not?
Mr. W h i t n e y . Then again, as I say, in the control of the 120,000,*
000 of this country.
Senator G l a s s . What I am trying to know is what percentage of
the 120,000,000 had any knowledge whatsoever of the intrinsic value
of the stocks in which they were investing, to use a polite term ?
Mr. W h i t n e y . Senator Glass, I know of no corporation that has
been more in the forefront in presenting absolute facts and all facts
than the United Corporation. I f the people of this country, inves­
tors or speculators, do not choose to make a study of those facts
which are available to them throughout this country, I do not know
that either the corporations or the members of the brokerage fra­
ternity are to be blamed. I can not answer your question specifi­
cally, because I have no knowledge of it.
Senator F l e t c h e r . Mr. Whitney, people who were buying this
stock then were buying on margin, were they not? They were just
buying the stock on margin with no intention of having the stock
actually delivered or the transaction actually completed? Was that
the situation?
Mr. W h i t n e y . That is a double question. I have no knowledge
that the people who bought United Corporation—you are referring
to it?
Senator F l e t c h e r . Yes; or any of this stock.




STOCK EXCHANGE PRACTICES

23

Mr. W h i t n e y . I have no knowledge and no one has knowledge as
to whether that stock is bought for investment or speculation in any
case or any stock.
Senator F l e t c h e r . But, as a matter of fact, in October, 1929,
and also 1930, when there was this tremendous slump of some twentynine billions in security values in 1929 and some twenty billions m
1930, were not those slumps due to speculation in Wall Street on
the stock exchange by people who were simply putting up margins
with no intention whatever of completing the transaction?
Mr. W h i t n e y . I want to go back to that last part of this question
and your other. No purchase made on the New York Stock Ex­
change, either on margin or for investment, is done without the
necessity of receiving and paying for the stock bought. In each and
every case he buys and pays for the stock he contracts to buy and
pay for.
Senator F l e t c h e r . You mean the intention of the speculator - or
the man buying or selling was to acquire or to sell or to own the
stock actually that he dealt in?
Mr. W h i t n e y . He h as to.
Senator G l a s s . Y o u mean the broker has to?
Mr. W h i t n e y . The individual acts. The broker acts as his agent.
The individual borrows from the broker the money to buy, but the
stock is delivered and has to be paid for.
Senator G la s s . T o the broker?
Mr. W h i t n e y . I know no distinction, Senator Glass, in that case
as between your using an agent for any other purpose.
Senator G la s s . D o you mean to say that the principal in specula­
tive transactions^ on the stock exchange always receives the stock
he buys on margin?
Mr. W h i t n e y . Always?
Senator G la s s . Yes: that he always consummates the trade?
Mr. W h i t n e y . On the New York Stock Exchange?
Senator G l a s s . Yes: the in d iv id u a l.
Mr. W h i t n e y . Yes; always through his broker.
Senator G la s s . Yes; through his broker. In other words, the
broker has to have the stock in his possession.
Senator B l a i n e . Mr. Chairman, I would like to ask Mr. Whitney
three questions.
Senator F l e t c h e r . Otherwise that would simply be a gambling
transaction, would it not?
Mr. W h i t n e y . Otherwise-----Senator F l e t c h e r (interposing). Would it violate the laws of the
State of New York?
M r. W h i t n e y . I can n o t answ er th at. I do n ot know the leg a l
point.

Senator F l e t c h e r . I f a man simply puts up margin with no in­
tention of completing the transaction, is that not a gambling trans­
action?
Mr. W h i t n e y . Perhaps I can best answer that by saying that
bucket shops are against the law o f the State of New York so far
I know. It would certainly be against the laws of the New York
Stock Exchange.
Senator B l a i n e . Mr. Whitney, are there not many psychological
0rs in any stock boom?



24

STO C K E X C H A N G E PRACTICES

Mr. W h i t n e y . Possibly.
Senator B l a i n e . And is not one of those factors the creation of
the speculative fever?
Mr. W h i t n e y . Possibly.
Senator B l a i n e . And is not that speculative fever created by those
who have large holdings of stock, who desire to make a great profit
on them by feeding that stock into the market; whether by collusion
or combination or understanding, the stock gradually rises and rises,
keeps going up and up and up, until that speculative fever is on, and
then the public is drawn in and makes their purchases because they
see this rise in the stock; they feel then that they can make some
money—isn’t that correct? Is that not one of the psychological
factors in these booms?
Mr. W h i t n e y . You are speaking of psychology and conjecture,
Senator Blaine. You, if I understood you correctly, imply the pos­
sibility of fictitious transactions, and therefore, because I deny that
fictitious transactions----- •
Senator B l a i n e (interposing). Let me correct you there. I do not
imply fictitious transactions. I imply a deliberate plan of unload­
ing on the market—I will use the word “ unloading,” but say selling
on the stock exchange so that there will be no implication, and grad­
ually feeding that stock through with the constant rise in price.
Those who are interested in having the price increased, of course,
make bids. They may be legitimate or they may be illegitimate; I
am not concerned. But in the creation of the speculative fever that
is one of the factors, one of the methods by which they drag in the
unsuspecting public, the public being led to believe that stocks are
going up and up and up, and the fever is on. Do you not have that
situation ? Did you not have it in 1929 very keenly ?
Mr. W h i t n e y . Bringing the unsuspecting public into what, sir—
into buying securities?
Senator B l a i n e . Into the purchase of stocks.
Mr. W h i t n e y . I can not believe that, if anybody wished to float
an issue of shares, he would not, in the information given out, give
facts and figures that could be fallen back upon to show that he was
justified in selling that stock, either by direct representation or
through a market operation, to the public.
Senator B l a i n e . Yes. That is one factor.
Mr. W h i t n e y . That is nothing to the detriment of the public.
Senator B l a i n e . Yes. That is one factor. Now, the other factor
is: Take, for instance, the split shares that were sold on the m a rk e t;
reorganization of corporations and those enormous issues of stock
were fed in and through the stock market, gradually going up and
up and up, the public buying, at first nibbling, and then buying?
and then swallowing it all—that is the way I would put it—and
they were the ones who were dragged in because of this speculative
fever that had been created through—I presume some of them might
be legitimate sales; most of them are fictitious ?
Senator G l a s s . Senator, it does not mean that they were d rag ged
in. They rushed in.
Senator B l a i n e . Well, I mean they were rushed in, yes. They
were dragged in and rushed in by force of speculative fever.
can characterize it as either being dragged in or forced in or rushed
in.



STOCK EXCHANGE PRACTICES

25

I would like you to discuss that factor of the speculative fever
that is developed in these upturns in stocks.
Senator W a g n e r . Senator, do you mean wash sales in the early
stages ?
Senator B l a i n e . No, no. I am not implying anything, Mr. Whit­
ney. I am just getting at if that is not one of the factors that causes
the upturn in stocks and did it in 1929.
Mr. W h i t n e y . You particularly referred to the split-ups of
corporations.
Senator B l a i n e . Well, I used that only as an illustration.
Mr. W h i t n e y . It is an excellent illustration. I have stated pub­
licly that the amount of money received by the corporations of this
•country listed on the New York Stock Exchange from the beginning
of 1929 until the panic, was greater, that the attracting of capital
of the people to the corporations of our country, than the total in­
crease of brokers’ loans for speculative purposes through that particu­
lar time. And I do not see how the desire of corporations to get
additional capital by a perfectly righteous split-up of their shares
or additional issuance of shares can be considered as anything that
was wrong or how any blame may be imputed to them or placed at
the feet of brokers and those who may sell those shares for them.
Senator B l a i n e . I am not implying anything from that. You
do not answer my question. Now, let me state it in the words of
President Hoover—and using President Hoover I do not imply
anything, and I am not criticizing; but when he wrote his article to
which I refer he used this language, after referring to the specula­
tive fever:
In such cases 99 per cent of the capital raised comes from persons who buy
shares not on any knowledge o f the enterprise beyond its market nickname,
hut because o f the fullness of hope that they may resell the shares to some
other outsider on the following morning at a higher price.

He was referring to the outsiders—the public. Does not th&t
state the situation about as it is on these booms, demonstrates what
a speculative fever does ?
Mr. W h it n e y . A s best I can, Senator Blaine, I think I covered
that question in my answer to Senator Glass. The information is
there for any that desire to have it, and more so to-day than ever
before in my knowledge, which is not for so many years. I f the
public does not wish to use that knowledge, I personally can not
understand why they do not want to use it.
Senator B l a in e . I think there is no use pursuing that any further.
Senator B r o o k h a r t . Mr. Whitney, pools are formed sometimes for
°M*n^ s*ocks in the exchange, are they not?
Mr. W h i t n e y . I imagine they can be or may be.
Senator B r o o k h a r t . Sometimes they indulge in what we call
wash sales ” to create a market, do they not ?
Mr. W h it n e y . Not on the New York Stock Exchange.
Senator B r o o k h a r t . You think they do not buy their own stuff
sometimes to create a market?
Mr. W h i t n e y . I do not think they buy their own stuff sometimes
create a market. It is against the law of the State of New York,
j , ^ or. B r o o k h a r t . H o w do they start a market? There are
ots of things against the law that get by, you know.



26

STOCK EXCHANGE PKACTICES

Mr. W h i t n e y . But it is also against the regulations of the ex­
change, and has very close attention on our part. That is one of
.
the most-----Senator B r o o k h a r t (interposing). You think nothing can get
by the regulations of the exchange ?
Mr. W h i t n e y . N o ; I did not say so, Senator Brookhart. That is
a fictitious transaction.
Senator B r o o k h a r t . H o w do they make the market ?
Now. Mr. Whitney, there is one other matter I want to inquire
about.
Senator W a g n e r . I do not know whether this would be the place
to interrupt, but what I desire to say seems pertinent at this point.
I think Mr. Whitney remembers that when I was on the bench there
did come a case before me in which the stock exchange did expel an
individual for attempting wash sales. As I recall, I upheld the
action of the exchange.
Senator G l a s s . It is of such a singular nature that you distinctly
recollect it.
Senator B r o o k h a r t . Mr. Whitney, I want to call your attention
here to a Federal reserve chart gotten up by the Federal reserve bank
of prices of common stocks, industrials. This chart goes back, as
you will see, to 1872. Well, 1875 is this year here. 1872 is there.
This chart shows the ups and downs of speculative stock value
through all these years.
Mr. W h i t n e y . Only speculative stock value?
Senator B r o o k h a r t . Well, all values. This is a chart of the av­
erage value of industrial stocks, the whole list of them. But I want
to call your attention to howTmany ups and downs we had during
all these years, up to 1915, when the war inflation began and we have
the chart rising then. We find a considerable rise in what is called
the 1914 level, but it is still below that 50 line on this chart.
Then it jumped well above during the war period of speculation
and in 1921 dropped down just below the 50 line, and then we can
see from this chart that something happened, and look where it went
to in 1929.
There is nothing in all these 60 years of history to compare in any
degree with this inflation of 1929. How do you explain that ?
Mr. W h i t n e y . Because, there is nothing in the 45 years of history
prior to 1917, taking the same period you refer to, that compared
to the efforts of the United States Government in interesting the
country in securities, Liberty bonds, and since that time, that interest
and that greater knowledge of the use of securities, the purchase
of securities has increased or become more acute, and I think—along
the very lines that I have stated to Senator Glass—that the country
to-day has more knowledge and more interest in the ownership, by
equity or otherwise, of the stocks of our great corporations.
Senator B r o o k h a r t . You do not claim Government bonds inflated
anything like those stock values, do you ?
Mr. W h i t n e y . No.
Senator B r o o k h a r t . I can not see, and I can not figure out ho^
you can lay that stock inflation onto Government bonds. They de­
preciated some. How much was it? They were about 85 at the
lowest, were they not?
Mr. W h i t n e y . In 1929, no, sir.



STOCK EXCH AN GE PRACTICES

27

Senator B r o o k h a k t . Not in 1929 but in 1921.
Mr. W h i t n e y . Yes, sir. So was the market down then.
Senator B r o o k h a r t . About 85. And then the bonds went up as
the market went up; is that right ?
Mr. W h i t n e y . Well, bonds never follow the fluctuations to the
same degree of common stocks. But bonds have recovered from that
price; yes, sir.
Senator B r o o k h a r t . If I understood your proposition, you meant
this extraordinary rise here was due to inflation.
Mr. W h i t n e y . I did not say that at all.
Senator B r o o k h a r t . And that inflation was caused by the sale of
Government bonds ?
Senator G l a s s . No, it was due to a superior knowledge of the pub­
lic as to how to invest in them.
Senator B r o o k h a r t . After talking to the New York Stock
Exchange ?
Mr. W h it n e y s But the point I was trying to make, Senator
Brookhart, is that before the w there was a billion dollars of debt
rar
of the United States Government, and they sold approximately
twenty billions of bonds to the people of this country, and therefore
engendered in those people a knowledge of securities which they have
maintained to this day, an interest in securities.
Senator G l a s s . Mr. Whitney, do you think the average patriotic
American citizen who bought a bond of the Government to carry on
the war to liquidate after the war—do you think it gave him any
superior knowledge of Investment securities or any greater interest
m them ?
Mr. W h i t n e y . Yes; a greater interest.
Senator G l a s s . I am talking about the average man now’ ; I am
not talking about you gentlemen who are professionals and who un­
derstand the machinations and nomenclature of stock transactions.
l|o you think the average man who bought his stock upon the patri­
otic appeal of the Government really went to school in the matter of
Se\}rity Purc^ases an(l sales?
Mr. W h i t n e y . I think that his interest as to securities unquestion­
ably was heightened. And you talk about the liquidation of those
Purchases: Then, already having made a purchase of Government
nus, presumably he looked around to where he would invest the
proceeds of the sale of those bonds. I certainly think that great
interest was created in the people of this country by their partici­
pation m Liberty loans.
senator B r o o k h a r t . And you claim the whole 120,000,000 men,
in°New Y ^ k ? ^ ren are indulging in this speculative game there
h i t n e y . N o , sir; I d o n o t .
senator B r o o k h a r t . You have used that 120,000,000 over and
M Ewm * Ascribing that.
n
nr *' VVh i t n e y . Not entirely, sir, as regards speculation. I have no
1
Jkat each and every one of those of that 120,000,000 with
have not at one time or another bought securities.
B
ey? °r ^ LAS8* What is your definition of investment, Mr. Whit-

Mr. W

c o Z WmTNET' That is a broad question, Senator Glass. I would
er an investment a purchase of something, whatever it may



28

STOCK EXCHANGE PRACTICES

be, with the intent of the purchaser to derive income from his invest­
ment.
.
.
Senator G l a s s . From the profit of the security or of the piece of
real estate or whatever it is?
Mr. W h i t n e y . N o , sir; not from the profit, from the income de­
rived from the security or piece of real estate.
Senator G l a ss . How may you derive an income from anything
except it is at a profit? In other words, when the average man
buys a stock or a bond he does it, does he not, with the expectation
to derive a dividend from the earnings of the corporation which
the stock represents?
Mr. W h i t n e y . That is what I said, Senator Glass. He buys it
for the income to be derived from his investment.
Senator G l a ss . That is an investment, I agree.
Mr. W h i t n e y . That is what you asked me.
Senator G l a s s . Yes. No man has to stand at a ticker who makes
an investment of that kind to find out whether a half an hour later
he can sell it at a profit, does he ?
Mr. W h i t n e y . I think the individual, when he enters an invest­
ment, basically depends upon the fact that a liquid market exists
in that particular security in which he has invested. He may not
wish to use that market to sell, but he wishes, fundamentally and
absolutely, to have the market available to him in case he wants to
sell.
Senator G l a s s . I am not inveighing against the market now. Do
not understand that. I am trying to make a distinction between
an investment and a gamble, and I accept your definition of an in­
vestment. A man invests with some knowledge? he thinks at least,
of the real, of the intrinsic value, of the thing m which he has in­
vested. That is an investment. A man gambles in a security when
he stands on the side lines, as 9 0 per cent of them in my ju d g m e n t
do, and simply bets as to what the market price is going to be the
next day or the next week. That is a distinction that I make between
an investment, a legitimate investment, and a gamble.
Senator S t e iw e r . M r . Whitney, of what value is a liquid market
to an investor when that m arket is constantly being depreciated!
Mr. W h i t n e y . What advantage is it to the investor?
S en ator S t e iw e r . T o have a liquid m arket th a t is constantly
g o in g d o w n !
M r . W h i t n e y . S o th at d u rin g th a t tim e a liq u id m arket, yofl
stated-------Senator S t e iw e r (interposing). I used the phrase because yo«

used it just a moment ago.
Mr. W h i t n e y . S o that during that time that investor, if he cares
to do so, may sell. We can not blame our lack of judgment in sell'
ing at the right time on the market, but the fact that that market
at any time exists wherein an investor in shares or securities of othej
sorts may sell, it is vital to him; and inversely, there are millions oj
people throughout this country, literally, that during this period
depression have been buying shares and paying for them and putting
them in their boxes.
Senator S t e iw e r . And are they benefited by any operati08
through the so-called liquid market as it existed, we will sav, durinl
the last 12 months?



STOCK EX CH A N G E PRACTICES

29

Mr. W h i t n e y . I referred to that, Senator, a minute ago. I can
not believe that the investor is going to put his money into stocks
or securities unless he believes a liquid market exists in those stocks
or securities that he can use for sale, in case he may want to. I
grant there are many securities in this country issued where there
may not be markets.
Senator S t e i w e r . Are there not many securities in the smaller
institutions that are not listed at all %
Mr. W h i t n e y . Yes; that is true.
Senator S t e iw e r . And are not investments made in those secur­
ities ?
Mr. W h i t n e y . Yes; that is true.
Senator S t e iw e r . And in many cases are not the people who made
the investments in those better off than those people who had this
liquid market up there to dispose of them?
Mr. W h i t n e y . No; because, as I see it, in real estate and securities
of that type there is no market, and the only place that people come
to is the place where they can raise cash, when they can not raise
it on anything else, and that is to the organized security markets
of this country, of which the New York Stock Exchange is one.
Senator S t e iw e r . Y ou think, then, that a liquid market is advan­
tageous, even though it is being constantly depressed ?
Mr. W h i t n e y . I think it is vital. We have some five billions to
six billions of loans held by our banks throughout this country on
collateral security listed on the New York Stock Exchange. I f the
stock exchange did not have a liquid market, if that market was
closed, as would, in my opinion, happen with the prohibition of
short selling, those five to six billions of collateral loans would be
frozen, and the gravity of the effect on our banking situation I do
not think can be estimated.
Senator S t e i w e r . Was not the market closed during the war for
two months or so?
Mr. h i t n e y . But an entirely different situation then existed.
Senator S t e iw e r . Did it hurt the banks any?
Mr. W h i t n e y . The banks asked that the market close and made
certain agreements as to the freezing of their loans, being in a con­
dition to do so. But in a time of depression, of liquidation through­
out, of deflation, the banks must have, as I see it, a ready market
or the securities on which they are loaning money.
t S
teiwer.
this constant deflation is to proceed, would
n° J^ebanks of this country be better off now, to-day, to have their
assets frozen, than to have them sold at these constantly decreased
anj* depressed prices?
th f A W *y. I think }r are predicating that idea perhaps on
ou
oth y 1
*kQ e banks or investing institutions did not sell at
S
a(i f r times when it would have been wiser to have done so. I f you
essa^ t’ S ’ a morat°rium for the United States and think it nec^
tori^
wight agree with you. I can never believe that a moraI am °r eeZ]^ ° f the assets of our banks is anything but chaos,
”1
ne
believ E mem^er
‘
the New York Stock Exchange. I therefore
is notVar^d necess^
a mar^et. I hope that my point of view
Senator G l a s s .

There

119852—32-___3



is

no market now,

is

there ?

STOCK EXCHANGE PRACTICES

30

Mr. W h i t n e y . There is a tremendous market now, sir; yes, sir.
Senator G l a s s . There is?
Senator M o r r is o n . Mr. Whitney, as I understand you then, you
think that this inflation that reached its peak in 1929 was caused
by the public and not by anything the Brokers on your exchange did?
Mr. W h i t n e y . I think it was caused by the public. I grant that
our brokers are part of the public.
Senator M o r r is o n . Yes.
Mr. W h i t n e y . I am not trying to say that they should or do
stand on a higher plane than other individuals, but that it should
be blamed solely upon brokers or members of the New York Stock
Exchange is not my belief.
Senator M o r r is o n . Would you mind giving us your opinion of
why the public did that? I am inclined to believe that they did
it. Why did they go so wild?
Mr. W h i t n e y . We are stepping, sir, into economics. To-day the
earnings of every corporation—I have charts here if anybody is
interested. Here is the stock prices index. This heavy line is the
earnings of 'certain corporations listed on the exchange. The stock
prices have even held up in relation to the earnings of the corpora­
tions. Throughout the country there has been deflation in every
way. Why, in these times, with bad earnings, prices should not fall.
I do not see.
And in like manner if the 1928-29 period or before, terrific earn
ings were being made by our corporations throughout this country,
terrific earnings. All business was on the road to inflation. I can
not think that it is fair to merely arraign stock prices or what th
e
market did. All business was on an inflation basis.
Senator S t e i w e r . In what period, Mr. Whitney ?
Mr. W h i t n e y . Why, I think we can make it from 1926 up to 192&
Senator S t e i w e r . D o you include agricultural prices in that char­
acterization ?
Mr. W h i t n e y . N o.

Senator S t e i w e r . Why didn’t you?
Senator B r o o k h a r t . On that proposition, let me ask—this chart
I have just shown you here coming up to about the 15th of March
shows these stock values still about 40 per cent above the 1914 level
of stocks in value, whereas agricultural products at that time were
about 45 per cent below. How do you explain that ?
Senator M o r r is o n . Well, now Senator-----Senator B r o o k h a r t . Wait; let me have an answer.
Senator M o r r is o n . I f you will excuse me, I was trying to get. afl^
very much desired it, M r . Whitney’s opinion of why this gre®1
inflation with a climax in 1929 took place. I f we would let "hi®
finish that answer I am very much interested in his telling us th
atand then I wanted to cross-examine him, and you too, when he get5
through with it.
The C h a i r m a n . May I suggest to the members of the commits
that quite a number of Senators desire to go over to the Senate
Chamber. They are under the impression that the calendar is beifl?
called, starting at 12 o’clock or shortly after. I was about to Sugg*5
5
1
that we recess pretty soon and reconvene here at 2.30.



STOCK E X CH A N G E PRACTICES

31

Senator M o r r is o n . That is all right, Mr. Chairman, but I wanted
to get—and I think the country would be interested in it—the Sen­
ate—Mr. Whitney’s opinion as to why the public—he says the public,
including the brokers as part of the public—why they went so crazy
in 1929 and caused this terrible inflation that has contributed, in my
opinion, to the wreck of things. I wanted to get his opinion about
it if the Senators would let him give it to us.
Mr. W h i t n e y . I think I almost finished my answer to it, sir.
During that period—I do not think I would confine it to 192S-29,
because the first signs of deflation in the earnings of companies or
the ability to make money or to do business had started perhaps in
March or July of 1929—but 1926, 1927, 1928, and 1929, the corpora­
tions’ business as a whole throughout this country—and I farm also,
Senator, and I have never found it very successful, and I did not
include it in business because I looked upon agriculture as another
form of business from that we were just referring to.
Senator G ore (interposing). Do you make money enough as a
broker to run your farm?
Mr. W h i t n e y . No, sir: not t o - d a y .
It was the earnings of the corporations, teriffic earnings, too. I
haven’t those figures here, but they can be easily obtained. Those
facts were prevalent throughout the country. The papers carried it.
Senator M o r r is o n . But did not prices reach a place that they
exceeded any businesslike estimate of the value of the stocks, based
on earnings?
Mr. W h i t n e y . Yes, sir; the pendulum swung that way too far,
just as I believe to-day the public is trying to give this United
States of ours away.
Senator M o r r is o n . Well, now, M r . Whitney, the charge is made
that the brokers were doing that and leading the thought of the
country to make money out of it; but the influence of other people
who have the attention and the confidence of the public boosting
things could contribute to that inflation as much as anything the
brokers said, could it not ?
Mr. W h i t n e y . Unquestionably, sir. I believe that those others
jou refer to, whoever they may be, have far more influence or have
more standing in their utterances than what may be said by brokers.
Senator M o r r is o n . Yes. I f the President of the United States
should in such a situation make the boosting statements, Secretary
of the Treasury should make the boosting statements, and other
great leaders of public thought, it would tend to carry that thing
on* i t not, just as much as some broker saying it?
M r. W h i t n e y . Yes, sir.
Senator C a r e y . Didn’t these high-powered salesmen have a great
eal to do with running prices up. that were selling the securities
over the country?
influe ^ riIITNEY’ 1 think they had an influence, like many other
Senator G or e . Mr. Whitney, I have a theory that human nature
as a tendency and the average man has a tendency to buy on a rismarket and sell on a falling market, and that there is the tap°°t of the trouble. I would like your view on that point.




STOCK EXCttAUGE PRACTICES

32

Mr. W h i t n e y . That may be fear on both sides. In a rising mar­
ket individuals may be impressed by stories that they may hear at
dinner or when they are having tea and some other things that are
prohibited, and people tell about how they made money in the stock
market and buying this and that—mind you, all articles, whether
they were securities, pretty nearly everything, was on its way up—
I think as a result of that, people did go in and perhaps had no
intention of doing so before, ana when a market is falling the fear
of not being on the bandwagon in the first case and the fear that
their securities or what they held were worth nothing in the defla­
tionary market.
Senator G o re . And the fear of getting caught entirely, is that
right ?
Mr. W h i t n e y . Yes.
Senator M orrison . About that time the whole country had about
reached the state of mind that they thought poverty was about to
be abolished in our country forever, had they not?
Mr. W h i t n e y . Yes, sir. A new era was with us.
Senator M orrison . And great public men were leading the coun­
try to think along that line, were they not, as well as brokers ?
Mr. W h i t n e y . Yes, sir.
Senator M orrison . And the whole public thought the days of hard
times and anything like poverty had passed away forever and the
high-powered salesman was being tremendously aided by the highpowered political agent of prosperity, was he not?
Mr. W h i t n e y . Yes, sir.
S en ator G l a ss . Y ou gentlem en are referrin g to “ a chicken in
every p o t.”
Senator M orrison . We did not mention it, Senator, but we had it

in mind.
Senator B l a i n e . Mr. Chairman, is not this a good place to take
a recess until 2.30?
The C h a i r m a n . The committee will take a recess until 2.30 and
meet in this room.
(W h e re u p o n , at 12.20 o ’clock p. m ., a recess was taken u n til 2.30
o’clock p . m . o f the sam e d a y .)
after recess

The committee resumed at 2.30 o’clock p. m., at the expiration of
the recess.
The C h a i r m a n . The committee will come to order. Counsel to the
committee may resume his examination of Mr. Whitney.
TESTIMONY RESUMED OF RICHARD WHITNEY, PRESIDENT NEW
YORK STOCK EXCHANGE, NEW YORK, N. Y.

Mr. B r a n c h . In regard to the numbers on the exhibits offered this
morning by Mr. Whitney, I want to make a change. We have marked
as Exhibit No. 1 the statistics for the first few days of Apr il. In
order that these statistics may follow consecutively I would like to
change that Exhibit No. 1 to read Exhibit No. 9, and I will ask the
committee reporter if he will change it on the exhibits.




STOCK EXCHANGE PRACTICES

33

I will also ask the committee reporter if he will mark as Exhibit
No. 1 the statement which Mr. Whitney read this morning, a copy of
which he gave me. That will give us a complete list of exhibits num­
bered from 1 to 9 both inclusive.
The C h a i r m a n . You may proceed, Mr. Branch.
Mr. B r a n c h . Mr. Whitney, I am referring generally to these e x ­
hibits which are entitled “ Statistics in regard to short selling,” and
I am not now referring to any particular date but just to the general
composition of these statistics. Do they show sales against the b o x ?
Mr. W h i t n e y . They do not.
Mr. B r a n c h . A s a matter of fact have you taken any steps, and
by you I mean any one in authority in the New York Stock Exchange,
to obtain information about such sales by brokers from their
customers ?
Mr. W h i t n e y . We have not, because we do not consider them short
sales, as I think I explained to you this morning.
Mr. B r a n c h .. Wouldn’t it be possible for a person to accomplish a
depression in price by making sales against the box?
Mr. W h i t n e y . D o y o u m e a n i n t h e w a y o f b e a r r a i d i n g ?
Mr. B r a n c h . Yes.
Mr. W h i t n e y . That, as I stated to you this morning, would be con­
trary to the rules of the exchange, and how it could be done to-day I
do not see. It does not exist.
Mr. B r a n c h . Mr. Whitney, are you prepared to swear on your
oath that there is no bear raiding, or rather that there has been no
bear raiding during the present year ?
Mr. W h i t n e y . T o swear on my oath that there has been none is
something I can not do, but in so far as our constant investigations
have shown, bear raiding does not exist to-day.
Mr. B r a n c h . What investigations have been made during the last
year?
Mr. W h i t k e y . Countless investigations. I will cite an instance
of what happened on last Friday, and again on Saturday, and again
to-day: The business conduct committee themselves, and m communi­
cation with other governors of the exchange, together with the spe­
cialists of the exchange, reported to the business conduct committee
all sales of 500 shares or more. This was on a suggestion that was
communicated to me. We found upon looking into this matter, and
having them report to us, that there were no bear raids, that there
w practically no short selling, and that the selling that did take
.as
place was liquidation or sales ior long account. I have just been
m communication with the chairman of the business-conduct comnutee to-day, and asked him what he had found, and that same
answer was made to me—very little short selling, no bear raiding, and
% ui(*ation with a falling market,
in 9 *i~^ANCH- How do you distinguish short selling and bear VaidoALl , ^ are the earmarks of bear raiding as distinguished from
i
short selling?
^Mr. W h i t n e y . I thought I answered that question fully this momB r a n c h . Well, will you answer it again now?
loarket Pitney. That bear raiding is an effort to demoralize the




34

STOCK EXCHANGE* PRACTICES

Mr. B r a n c h . And do you mean to say that during the past year
you have been able to find no evidence of anything of that kind ?
Mr. W h i t n e y . I can not depend upon my memory over a period
of a year, but since October 6, 1931, when a rule was put out by the
business conduct committee that brokers must be acquainted as to
Lwhether selling orders were for long or short account, and the inter­
pretation of that rule, which has been lived up to, that sales may not
be made for short account at a lesser price than the last sale, has
{prevented conclusively a demoralization of the market by bear
/raiding.
Mr. B r a n c h . Do you mean to say that that necessarily is an abso­
lute preventive of bear raiding?
Mr. W h i t n e y . Well, evasion and avoidance of rules might take
place in any organization or in any place in this world, but so far
as we know, bear raiding has been prevented.
Mr. B r a n c h . Well, do you mean to say that if the rule was
observed, there could not be bear raids carried out ? That an observ­
ance of the rule would absolutely prohibit bear raiding?
Mr. W h i t n e y . I believe that our members have observed the rule
in every way possible.
Mr. B r a n c h . That is not my question, sir. My question is: Do you
believe that an observance of the rule would make bear raiding
absolutely impossible ?
Mr. W h i t n e y . Mr. Branch, your question includes, as I see it,
whether or not the New York Stock Exchange could control acts by
persons outside of their control. It would be foolish for me to say
that they could, but in so far as it lies within our power I believe that
rule has been observed, and we have certainly enforced its observance.
Mr. B r a n c h . I am not now asking you whether the rule has been
observed. I am trying to get at the efficacy of the rule. I am not
asking as to what may be done by persons not members of the ex­
change. My question is t h i s : Will you please answer this question,
and I will try to make it clear to you: Do you think that an observ­
ance of that rule which you have just mentioned would prevent
members of the exchange from participating in bear raids ?
Mr. W h i t n e y . Yes.
Mr. B r a n c h . Absolutely? In other words, do you mean to say
that bear raids and an observance of that rule are absolutely incon­
sistent and impossible?
Mr. W h i t n e y . I f there is total adherence to that rule by all con­
cerned my answer is, yes. And, Mr. Branch, you will understand
that I am not trying to evade your question but it is on the edg8
of—or I will say, beyond the edge of our control. It is self-evident
that the New York Stock Exchange can not control what individuals
may do outside of their dealings through our members.
Mf. B r a n c h . Well, Mr. Wnitney, I think you have made Jpuf
position clear, and I think I have made my position clear, so
we can go on to something else. I am not trying to get you to answer
about anything that is beyond your knowledge of your control’
And if I propound any questions that you can not answer please
so frankly.
Mr. W h i t n e y . I will gladly do so.
Mr. B r a n c h . I am asking from time to time for your opinion
well as for an expression o f statements of fact. Now, to go back *



STOCK EXCH A N GE PRACTICES

35

the question of your investigation of bear raids: You mentioned an
investigation which was made a day or two ago. Can you recall
any other investigations of alleged bear raids which have been made ^
Mr. W h i t n e y . I think possibly you misunderstood me. I said we
T
looked and have been looking to see whether any acts constituted
bear raiding. I will specifically tell you of an instance that hap­
pened approximately a week ago and perhaps it will be an answer
to your question. We have told that a sale of some stock on the
exchange, a seller contract, was suspicious, and it occurred approxi­
mately at 11.30 in the morning. By 1 o’clock our accountants re­
ported to us, after going into the office where this occurred, that
although the proof was not conclusive it seemed to be an attempt
by the execution of a seller contract below the market, or it looked
as if it was a short sale in order to depress and demoralize prices.
Mr. B r a n c h . When was that?
Mr. W h it n e y . It was within—now, let me see-----Mr. B r a n c h . Just approximately.
Mr. W h it n e y . Within two weeks.
Mr. B r a n c h . And w h a t did your investigation disclose?
Mr. W h i t n e y . Our future investigation proved that an order had
been received by a customer and executed-----Mr. B r a n c h (interposing). You mean that an order had been
received from a customer?
Mr. W h it n e y . Yes, from a customer, and executed on the floor of
the exchange, a seller contract, below the price for regular shares, and
that it was a short sale. We immediately informed the house—and
I should explain that no partners, no stock exchange men knew the
facts, no members of the stock exchange knew the facts, that this was
a short sale. But there was something of a collusion between the
customer and an office partner. We immediately declared, which is
our only power in such a case, that that firm was an undesirable part­
nership, and the offending man had to get out, and the firm was
dissolved.
Mr. B r a n c h . Was the member of the exchange suspended or
expelled?
Mr. W h it n e y . He was not. He had no part or knowledge in this
transaction.
Mr. B r a n c h . What was there about that transaction that violated
the rules of the exchange ?
Mr. W h it n e y . The very fact that the sale was made some threequarters or more of one per cent below the sales of stock which were
taking place as regular transactions.
Senator B r o o k h a r t . And what stock was this?
Mr. W h i t n e y . American Telephone & Telegraph.
Senator B ro o k h a r t . And what firm was it?
Mr. W h it n e y . The firm called Phillips & Solomon.
Mr. B r a n c h . Was the price for which that stock was sold in vio­
lation of the rules of the exchange?
Mr. W h i t n e y . Stock was selling at the time of those sales, if I
Remember rightly, around 115% in the regular way, the ordinary
®iarket. Those sales, if I remember r i g h t l y , were made at 115 seller
15 days flat, and another at 114% seller, being short sales with the
evident purpose to depress the market, to make sales appear on the
tape below the regular price of that stock.



36

STOCK EX CH A N GE PRACTICES

Senator B ttlkley . What was the amount of those transactions ?
Mr. W h i t n e y . Two hundred shares each.
Mr. B r a n c h . Was that the only case in which you have discovered
anybody violating the rules of the exchange in regard to what I have
been calling bear raids or short selling, if you can recall ?
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . D o you mean to say that during all of last year the
only case you can remember where you have ascertained that anybody
is doing anything to depress prices was that one case ?
Mr. W h i t n e y . There was another occasion but it was not since
October 6. I can not tell you just when it was but it was within the
last year or year and a half. I do not truly remember just when it
was, but it was where an order was given to sell stock. It was dis­
covered before any execution was made, and the chairman of the
business conduct committee prevented that sale at that time being
made. It did not occur, but it was an attempt. That was the onl;y
other case that occurs to me.
Mr. B r a n c h . In all of last year, during all that period, you can
recall only those two cases where there was even any suspicion o f
bear raids going on?
Mr. W h i t n e y . I won’t say that. There have been frequent cases
where we have had suspicions because of the way in which orders
were executed that perhaps the desire behind them was to depress and
demoralize the market. But investigation has shown in those cases
that it was stock sold for long account.
Mr. B r a n c h . Approximately how many investigations of that
kind have been made by the exchange, we will say in the last year ?
Mr. W h i t n e y . I suppose 2,000 or 3,000, or 5,000.
Mr. B r a n c h . I did not understand you.
Mr. W h i t n e y . I supposed 2,000 or 3,000, or 5,000. I haven’t any
idea.
Mr. B r a n c h . Five thousand different investigations?
Mr. W h i t n e y . We have 20 accountants, trained men who know
the brokerage business absolutely, that work primarily for the business-conduct committee and certain other committees of the stock
exchange. They are continually going into offices on cases referred
to the business-conduct committee to see whether or not violations o f
our rules have taken place.
Mr. B r a n c h . And they have discovered only one case in which a,
violation has taken place within the last year?
Mr. W h i t n e y . T o the best of my memory; yes.
Mr. B r a n c h . Does the ticker in any way show whether a sale which
is reported on the tape is a short sale or a long sale?
Mr. W h i t n e y . It does not.
Mr. B r a n c h . It would be perfectly possible to indicate that by
simply the use of the letter “ S,” or something like that, wouldn’t it
Mr. W h i t n e y . It would be possible; yes.
Mr. B r a n c h . And brokers have that information, have they not,
or at least they are supposed to have it; are they not
Mr. W h i t n e y . An individual broker who executes the order has
that information, only him.
Mr. B r a n c h . Yes; and would it not be fair to the public in general
to give that information on the ticker in the case of each sale?




STOCK EXCHANGE PRACTICES

37

Mr. W h i t n e y . I can never divorce in my mind the absolute cohe­
sion between marginal purchasing and short selling. They are the
two parts that make up speculation ; and speculation and investment
make up the market. I have never seen any reason why a short sale
should be so designated on the ticker and a long purchase not desig­
nated on the ticker.
Senator B r o o k h a r t . Why shouldn’t they both be designated *
Mr. W h i t n e y . I do not think anything would be gained. I^hav'e
no idea that because short sales were designated by the letter “ S ” and
long purchases designated we will say by the letter “ L ”—and we
might have to put the letters “ LS ” in order to designate them, in
many instances—but as I say, I do not know what is to be gained
thereby.
Senator B r o o k h ar t . That “ L ” and “ S ” would be wash sales,
wouldn’t they?
Mr. W h i t n e y . No, sir; not at all. Let us say that I am selling
short and you are buying on margin. That would be a stock bought
for long account and sold for short account. It is not a wash sale at
all. Necessarily I will deliver the stock to you and you will pay me
the money as you have to pay it.
Senator B r o o k h a r t . Why shouldn’t both the “ L ” and the “ S ’
be on there in the case of that kind of deal ?
Mr. W h i t n e y . I do not see any advantage to be gained.
Mr. B r a n c h . Mr. Whitney, wouldn’t an intelligent broker or an
intelligent investor who is familiar with the technique of the stock
market be very glad to know whether the selling is being done as
short selling or not ? Wouldn’t that be likely to affect his judgment
as to whether it was a good market in which to buy or sell ?
Mr. W h i t n e y . It might, but not necessarily.
Mr. B r a n c h . At least that is one element that the broker would
be very glad to know, is it not?
Mr. W h i t n e y . From the point of view that in ordinary times, let
jis say, when a man knows there is short selling, he would be more
inclined to buy; I mean in the case of the practical, trained stock
market, operator.
Mr. B r a n c h . As a matter of fact the men who are on the floor
the exchange are familiar with these things and do have some
\r w^ether the selling is short selling or not, don’t they ?
Mr. W h i t n e y . D o y o u m ean som e actual idea?
Mr. B r a n c h . Y e s .
Mr. W h i t n e y . Not that I know of.
.
B r a n c h . Don’t they know as a matter of fact if a big amount
volum? Se^ n* *s taking place that there is short selling in some
=
W h i t n e y . Not that I know of. One of the most common
Pj*ctices on the exchange at certain times is when a person or pertW f*re * £
a block o f stock that they wish to liquidate, to give
thf
to a notorious, let us say, short seller to execute* the order,
daf
it appear that it is not long stock that is being hqui*s short selling which does not in normal tim^ have tne
, . upon the standing of the market as would rpal liquidation for
1 important group.
,1




38

STOCK EXCHANGE PRACTICES

Mr. B r a n c h . I did not mean to indicate that there was anyone who
had perfect information as to the whole situation. O f course I
suppose there isn’t anyone. But as a matter of fact the people on the
floor of the exchange who are following things do know when there
is a general current of short selling, do they not ?
Mr. W h i t n e y . Mr. Branch, it is possible that they may know, but
I do not know that they know it.
Mr. B r a n c h . You are not a floor member yourself? That is, I
mean you are not on the floor of the New York Exchange yourself,
are you ?
M r . W h i t n e y . Well, X am a member, but X am not there very
frequently now.
Mr. B r a n c h . Don’t you know as a matter of fact that those general
trends, those general movements are known to those who are skilled
and who are continually on the floor of the exchange ?
Mr. W h i t n e y . That might be their private opinion as to what a
man is doing, whether he is selling short or selling for liquidation,
or whether he is buying for investment, the long pull, or on margin
as a speculative purchase. He may see these things and make up
his private opinion on the matter, but I have no idea that such m
en
actually know it to be a fact. And that same information might
be available to anybody that inquires, through the medium of his
own opinion.
Mr. B r a n c h . The general public does not know about these things
except as the information may come from these men, do they ?
Mr. W h i t n e y . I should think that would be true.
Mr. B r a n c h . And if each sale were marked as has been suggested,
with an “ S,” the general public would know that very important
fact, wouldn’t they ?
Mr. W h i t n e y . D o you mean whether it was a short sale or not?
Mr. B r a n c h . Yes.
Mr. W h i t n e y . The general public would know if it were so ear­
marked.
Mr. B r a n c h . Don’t vou think it would be desirable for the general
public to have that information ?
M r . W h i t n e y . Not any more than I think it would be desirable
for the general public to know whether it was an investment purchase
or a speculative purchase. Frankly I see nothing to be gained by
so marking sales. I do not understand what gooa it is going to do.
I should like to know what good you think it might do and perhaps
that might change my opinion.
Mr. B r a n c h . Then you don’t think an investor who was following
market quotations would be a bit interested in knowing whether any
big wave of selling was due to short selling or to liquidation?
Mr. W h i t n e y . It might interest him very much, but it also
might have the effect of scaring him away from buying. You si*
speaking of investing now?
M r. B ranch . Y es.

Senator G ore. Mr. Chairman, may I ask: Do you expect to finish
with Mr. Whitney this afternoon? I ask that question because I
want to leave the committee room pretty soon.
The C h a i r m a n . I am entirely unable to answer that question)
Senator Gore.




STOCK EXCHANGE PRACTICES

39

Senator G ore . Mr. Branch, w i l l y o u permit m e to ask two or three
questions so I may go ?
Mr. B r a n c h . Certainly.
The C h a i r m a n . Proceed, Senator Gore.
Senator G o r e . Mr. Whitney, I should like to ask you some ques­
tions on two or three points. I am trying to get at the causes that
brought about the results we have seen, if I can. V h e n anybody
V
sells short that moment they become a potential buyer, do they not.
Mr. W h i t n e y . Absolutely. They are not only potential buyers
,
but must necessarily-----Senator G o r e (interposing). And sooner or later they become
actual buyers?
Mr. W h i t n e y . Yes, sir.
Senator G o re . They must become actual buyers m order to g e t
out?
Mr. W h i t n e y . Yes, sir.
, Senator G o re . In order to cover ?
Mr. W h i t n e y . Yes.
Senator G ore . So I will assume that people who play the mar­
ket using that phrase, take account of these potential interests and
sooner or later they become an actual purchasing power m the
market?
.
Mr. W h i t n e y . Yes, sir. That is often referred to as the techni­
cal position of the market.
Senator G o re . I am not at all familiar with the technical terms
of the operations of the stock exchange, but there are one or two
points I want to clear up now, at least in my own mind if I cap •
When a person makes a sale long of stock that rids him of the
stock and he is not a potential buyer in the future, or at least not
necessarily so, as I understand it.
Mr. W h i t n e y . In no way.
Senator G ore . So that that kind of stock sale is just a weight on
the market, isn’t it?
Mr. W h i t n e y . Absolutely.
Senator G ore . It has a depressing effect or is a depressing factor
01 the market.
1
Mr. W h i t n e y . A far more depressing factor than a s h o r t sale.
Senator G ore . That is the point I am coming to because I have
® rd that stated. That is the reason why a short seller h a s got
&
i
“ is way out sooner or later. The long fellow gets rid of
unloads it on the market, and he is done,
indued HITNET‘ ^ es> he never has to buy again unless he is so
tK t o r G o r e . Then a long sale has a more depressing effect on
^
naarket and on prices than a short sale ?
”^ 5'ney* That is my opinion.
h
.
wWk j
^ Well now, then, as this market has been declining,
due.to short selling or not, as prices went down they would
% ° m n toueh off stop-lSss orders?
W n n N E Y . Yes, sir.
oonld F „ 0Ri~ <A as those orders were forced on the market it
jnd

Mr w * " 6* f0rced ^ ^ atiem ?
^ • Whitney. Yes, sir.



40

STOCK EXCHANGE PRACTICES

Senator G ore . N o w take the case of bank loans secured by collat­
eral. When prices decline, whether due to short selling or not, and
the margin or safety gets too narrow, banks sell collateral security,
isn’t that true?
Mr. W h i t n e y . I have been told that they do sometimes, and 1 also
have been told that they do not.
•
Senator G ore. Well, if they do, that is a species of forced liquida­
tion, isn’t it?
Mr. W h i t n e y . Yes, sir.
Senator G ore. What I am trying to get at is which has the greatest
potential effect, short selling as a depressing influence, or long selling.
I can see now how when short raids are on, they may be designed
or the result was to drive prices down below the stop-loss orders and
below the margin of safety in the matter of bank loans, if they had
any knowledge of them, and thus forced people to unload, or forced
long sales, that would of course be a contributing factor in driving
prices down, isn’t that true?
Mr. W h i t n e y . Yes. In our regulations, and their interpretation
on the floor at the exchange, as to short sales below the last sale, we
•have made it perfectly clear to our brokers that no stock may be
j stopped for a sale that is a short sale. In other words, only long
f stock may have the advantage of being stopped, in order to give long
stock that advantage. So that short sales-----Senator G ore (interposing). Do you mean on stop-loss orders?
Mr. W h i t n e y . On so-called stop-loss orders.
Senator G o re . Yes.
Mr. W h i t n e y . In answer to the other part of your question, Sena­
tor Gore, I will say I have not had figures arrived at since November
30, but from May 25 to November 30,1931, the net short transaction^
taking those figures in the first exhibit of statistics on short selling,
they showed that less than 5 per cent of all transactions on the stock
exchange were for short account, and that in excess of 95 per cent
were the liquidation of holdings of American securities by their
owners.
Senator G ore. I have seen the statement-----Mr. W h i t n e y (continuing?). And I have no reason to believe that
that general percentage ration has in any way changed since that
date.
Senator B u l k l e y . For what period?
Mr. W h i t n e y . May 25 to November 30, inclusive, o f 1931.
Senator G ore. I have seen the statement that forced liquidation
was really responsible for the severe shakedown of the market rather
than short selling. I am trying to get at the truth of the matter »
that is possible with reference to that, and you may not want to
press an opinion on this because it would be more a matter of opinion
I take it, but after the moratorium last summer stocks rallied, a j»
n
after the passage of the Reconstruction Finance Corporation act th#
winter, and the Glass-Steagall Act, prices rallied, and I belief*
United States Steel went up to 52%, and from there it went down*®
32^g recently. I have wondered whether those two rallies were ^
to the action of investors who really thought there had come ft tm*
m the tide and it was a good time to buy before stocks went up m0 ®
1*
or whether it was due to the short interest being out of the
ana bringing about, you might say, an artificial or extraordinary bnf



STOCK EXCHANGE PRACTICES

41

ine power into the market on those occasions. Now, Mr. Whitney,
as I say, if you care to express an opinion as to which is the major
factor, longbuying or buying to cover short interests, all right, and
if you do not care to answer, all right.
Mr. W h i t n e y . I think I can answer you by not expressing any
opinion, perhaps by deduction and not an opinion.
Senator G ore. All right. I will be glad to have either pn e*
Mr. W h i t n e y . Following those events you have mentioned, Sen­
ator Gore, there was unquestionably, if I remember rightly, according
to our records, a covering by the shorts, or by some shorts. It is a
time-honored phrase I think that the time to sell is when the good
news is out. Proof of that saying lies in the fact that during this
period steadily from the panic o f 1029 brokers’ loans, speculative
stock held on market, have been declining; and that at the time of the
very events you cite, brokers’ loans continued to decline, and in some
cases more sharply. Therefore, showing the liquidation as typified
by brokers’ loans,"and also it would probably be true of people who
own securities outright and hold them in their possession—that when
there was the ability to sell, when the market broadened and there
was something o f a buying power and desire to purchase stocks, that
was the time to get out if they wanted to get out, which they did.
Senator G ore. D o you mean that the short interests would buy
out at that time?
Mr. W h i t n e y . N o , sir: that the long interests would sell.
Senator G ore. Oh! You mean on those rallies?
Mr. W i i i t n y . Yes, and that they did sell.
Senator G ope. I have the idea, although I do not know about it,
that, one trouble with the market was when there came a rally the
banks were not quite satisfied with the market and would take advan­
tage of the rallies to get out.
Mr. W h i t n e y . That is what I tried to signify. It is one of the
elements.
Senator G ore. Your theory as I gather it is that men borrow
^ e y t o buy long and borrow stock to sell short; is that it?
Mr. W h i t n e y . I beg pardon, but I did not get your question?
Senator G ore. That the speculator borrows money to buy long and
borrows stock to sell short, and that it is the reverse of the operations,
is that it?
Mr. W h i t n e y . The margin purchaser borrows money to buy
stocks, and he goes short o f money and long o f stocks. The short
8 ler goes long o f money and short of stocks.
6
®0RE* That is what I am trying to work through my mind,
tat it is rather hazy.
Mr.WHrrNEY. Credit is involved in each instance.
senator G ore. And you have a rule that short sales can not be m ade
JK than the last preceding long operation.
ss
.
* hitney. At less than the last sale o f stock. That is the
• of the interpretation o f our rule: yes.
speak?
^ W it h e r the last sale was long or short, so to

hi&w

Yes; and that is not known.
, .
. Gore. And do you mean that nobody can buy stock at a
pnce than the last transaction?




42

STOCK EXCHANGE PRACTICES

Mr.

W h itn e y .

Oh, yes; he can buy. We gladly greet such cus-

t0 Senator G o re . But h e can not b u y at a higher price than somebody
is offering stock at—do you have that rule?
Mr. W h i t n e y . Yes, sir.
,
1 1 4 . 1
Senator G o re . I know that the produce exchanges have that rule.
Mr. W h i t n e y . Yes.
.
S en ator G ore. A n d h e can n ot sell at a lesser price th an somebody

is bidding.
Mr. W h i t n e y . That is right.
Senator G o re . N o w , one other point, Mr. Chairman, and I must go,
is the reason I am taking your time now. Mr. Whitney, can vou in a
few words, or would you rather do it later, explain the difference
between our cash-sale operations and the term settlement as used m
the case of European exchanges?
Mr. W h i t n e y . What was that?
Senator G o re. What I want to get is the difference in the matter
of actual operation or methods used, and which is the better in the
abstract, and if it is better in the abstract what are the practical
difficulties in this country in the matter of instituting that better
system?
#
_
Mr. W h i t n e y . Senator Gore, that is a pretty wide subject, but 1
can attempt to answer it, although it would take considerable time.
I should a great deal rather-----Senator G o r e (interposing). Would you rather submit that by
way of a written statement later on?
Mr. W h i t n e y . Yes; I would.
Senator G o re . Well, I think it would be better for all of us.
Mr. W h i t n e y . I am perfectly willing to attempt to do it now, but
it would take some time.
Senator G o re . Well, I realize that that would require some time
and I will not take the time of the committee now for it. I thank
you, Mr. Chairman.
The C h a ir m a n . All right, Senator Gore. You may proceed, Mr.
Branch.
Mr. B r a n c h . Mr. Whitney, I understood you to say that you felt
your rule which prohibited short sales at a smaller price than the
last sale that had been made, prevented bear raids tending to depress
prices, is that correct?
Mr. W h i t n e y . That is correct.
Mr. B r a n c h . W ouldn’t it be possible for a speculator who desired
to depress the market through short selling, to sell a small block of
stock, say 100 shares, at a certain price way below the market, and
then to sell a much larger block short at that same price ?
Mr. W h i t n e y . H o w is he going to sell the first 100 shares o f stock
way below the market, which were your words?
"fr * . B
. Well, if the market is at a certain price is it n o t
possible that the market will be dropping?
Mr. ^ h i t n e y . It seems very possible that the market may t®
W
o
dropping, but nevertheless I do not know concretely what you are
speakmg about. For purposes of illustration let us take Unite}
States Steel and say it is 33^. Nobody could sell 100 shares at 38
if the bid is 33, and that would be to my mind what would constitute
selling way below the market. It can not be done.
r a n c h




STOCK EXCHANGE PRACTICES

43

Mr. B r a n c h . I mean that he can sell United States Steel lower
an eighth or a quarter, can’t he ?
Mr. W h it n e y . For short account?
Mr. B r a n c h . N o ; for long account.
Mr. W h it n e y . He could if he were long o f the stock.
Mr. B r a n c h . But I mean by making that kind of sale, of a com­
paratively small block of stock, that would be the way for him to
sell at the same price a much larger block short, wouldn’t i t .
Mr. W h it n e y . I f he desired to do so; yes.
Mr. B r a n c h . And that sort of strategy might very well result m
depressing the price, might it not ?
Mr. W h i t n e y . It might. But if we found that our members
knew that type of strategy was being exercised by any person not a
member, we would take immediate action against our member.
Mr. B r a n c h . Have you made any investigations of any such prac­
tices as that, or has that practice never come to your attention?
Mr. W h it n e y . That practice concretely has not come to our atten­
tion. I have already described to you that our accountants regularly
and all the time are going through the offices of members, always
with the idea to see that the rules o f the stock exchange are adhered
to, and particularly just now, and for some time past, in reference
to the particular question you are talking about, along those lines.
Senator G la s s . Mr. Whitney, I am beginning to wonder what we
are here for. What culpability is involved in selling short?
Mr. W h it n e y . To make the distinction, if I understand your
question, Senator Glass, as to what we consider selling short legiti­
mately we know of no culpability. But bear raiding, we are most
antagonistic against, and-----Senator G la s s (interposing). I may understand—but at least I
do not—but I may understand why you abhor bear raiding, and yet I
want to know what there is culpable in it. You talk about de­
moralizing the market. As I conceive it, the market could be more
dangerously demoralized by being bet way up than it might be by
short selling.
‘
Mr. W h it n e y . That may be.
Senator G la s s . Why do you make rules against demoralizing the
market in short selling and put no restrictions upon betting the
market up?
o
r
Mr. W h it n e y . Perhaps I failed, Senator Glass, to impress upon
you just that point this morning when I stated that our rules were
p* both directions, that our rules covered absolutely any demoraliz­
ing of the market or depressing of the market and giving a tendency
toward fictitious prices. I will quote from the constitution o f the
exchange if we have it here. I do not find it. Anyway it is in a
®^gle paragraph. The effect of the rule is to prevent d o in g someyill demoralize the market or create the impression of
ctitious prices whether it be by bear raiding or bull raiding, as you
describe it.

Senator G la s s . I am trying to determine, if I can, why one is j*ny
a®1® than the other, and why the newspapers were saying the other
®
7 that we were here to investigate short selling.
.
,
Mr* W h i t n e y . I do not think the one is any worse than the otner^ naJi2r G l a s s . Well, I think both of them are bad.
W h i t n e y . I agree w ith y o u .



STOCK EXCHANGE PRACTICES

44

Senator B u l k l e y . Was there any unusually large short account on
last Friday?
Mr. W h i t n e y . N o , sir.
Senator B u l k l e y . Was there any unusually large short account on
the opening of business on last Friday?
,
,
Mr. W h i t n e y . Senator Bulkley, I do not know how to answer
that question because I do not know what you mean exactly.
Senator B u l k l e y . I am asking if the net short account outstanding
was unusually large at the opening of business last Friday.
Mr. W h i t n e y . The total net short position?
Senator B u l k l e y . Yes.
Mr. W h i t n e y . I would not say so; no.
#
Senator G l a s s . Well, whence these reports that we had m the
offing, so to speak, of organized bear raids on the market ?
Mr. W h i t n e y . W h e n c e ?
Senator G l a s s . Yes.
Mr. W h i t n e y . I know nothing about that except what I stated
this morning.
Senator W a g n e r . Y o u heard nothing of it in New York?
Mr. W h i t n e y . N o , sir.
Senator G l a s s . I am wondering why we have you down here. We
were told that there had been organized a concerted bear raid on the
market.
Mr. W h i t n e y . That there had been or was to be ?
Senator G l a s s . That there had been organized and that it was to
be precipitated on Saturday of last week, on Friday or Saturday of
last week.
Mr. W h i t n e y . I know nothing about it, Senator Glass, other than
what I have said, and nothing that we could find would prove that
such a bear raid had taken place.
Senator F l e t c h e r . Mr. Whitney, do you know anything about any
foreign influence being exerted in that direction ?
Mr. W h i t n e y . I do not, Senator Fletcher.
Senator F l e t c h e r . From your statement made here about the short
position at the close of March it appears that it amounted to 3,279,398
shares as against 3,102,876 shares at the end of February, an increase
of 178,522,1 believe. Is that correct ?
Mr. W h i t n e y . Yes, sir. But there is a footnote to that statement
as to the figures for March 31—making me remember something if 1
could see the paper and which I should tell you—showing there was
a hedge in Kreuger and* Toll stock of 136,000 shares, appearing as
snort but actually being a hedge against stock that was long and
which was perfectly properly and legally sold. The fact that it was
reported as short was because the stock had to be borrowed, and B
so appeared. So the net position between those two dates, instead of
increase.°f 178,000 shares, was, as I remember it, about
40,000 shares net increase. Since that time there has been a very
material decrease in the short position.
Mr. B r a n c h . To come back now to the statistics which the stock
exchange has m regard to short selling. When did you first require
mSely ? ma n °n
S■
su^®cfc ^rom your members, just approxi'
ri^htiyWmTNET' S° me time in the spring of 1917, if I remember



STOCK EXCHANGE PRACTICES

45

Mr. B r a n c h . What information in a general way did you ask for
then, or am I going back too far for your memory ?
Mr. W h i t n e t . Y o u are going back quite a little distance now.
But if I remember rightly, it was at the request of the Federal reserve
system or Federal reserve bank so as to find out possibly well, we
were reporting to them the money used for brokers’ loans, and if I
remember aright, it was when we first started doing that. Perhaps
Senator Glass can correct me on this, but if I remember rightly it
was desired to find out what the balance in the short interest was
in view of that inquiry. That was the first time, if I remember
rightly, that it was put out.
Mr. B r a n c h . And did you continually get the information from
then on, or was that just a*sporadic movement ?
Mr. W h i t n e y . That continued for—and again I can not be sure of
my dates, but for some time, and then was given up. I may be
wrong but I think the next time we did it, which was for all members
to report in the matter o f all stocks where a position of short interest
existed, was November 12,1929.
Mr. B r a n c h . Have you required such reports daily ever since?
Mr. W h i t n e y . No ; we h ave n ot.
M r. B r a n c h . H o w freq u en tly h ave y o u requ ired it ?
Mr. W h i t n e y . That continued for a period of time.

I want to
point this out, that at various times, as far back as I can remember,
we have asked for total positions, long and short, in particular stocks
where something was happening or appeared to be happening in that
stock about which we wanted full information. That has happened
year after year regularly at various times.
We are talking, however, about asking for the short position of
*1 stocks. That was discontinued in November or December, 1929,
1
•nd the figures were not again asked for, if I remember rightly,
nntil some time in the autumn o f 1930, when they were asked for
from June 10 until that date, to give us an idea of something to
study. It was not until May 25,1931, that we inaugurated a system
o* reporting about weekly which continued until September 21, when
STS6
or as
every clearing day o f the stock exchange.
\r w Xcir‘ Saturday is not a clearing day ?
Mr. W h i t n e y . No, sir; Friday and Saturday normally are
grouped together, as you will see by the notations. You gentle­
men, however, will receive as of Friday alone, separate from Satur.
in
of your request, although that is not usually asked for
■“£<compiled by us.
5
L ®RAN H Beginning with May, 1931, you have required daily
G *
Xr ix/0 1 brokers o f the short interests?
11
Sent* ^ jHITNEY* Weekly, if I remember rightly, about weekly until
M r. B r a n c h . A n d sin ce th en d a ily „ _> n tion s as m entioned.
M r. W h i t n e y . P ra ctica lly d a ily w ith th e __ P
^he to ta l sh ort
M r. B r a n c h . A n d th ose re p o rts sh ow n , . , th e r e is a s h o r t
interest but also th e sp ecific secu rities in
interest and the am ount o f sh o rt in terest in
;n these various.
M r. W
exhibits h i t n e y .
ts.

119852— 32


Y e s, sir;

a ll p u t

b e fo r e y o u

in

40

STOCK EXCHANGE PRACTICES

Mr. B r a n c h . What was the reason for asking for that additional
information at that time?
,
Mr W h i t n e y . I d o not truly remember. There had been, of
course, a great deal of talk about the effects of short selling, and I
rather presume that we wished to find out for our own information
whether these statements were true or not, and our investigations
have proved that the statements that short selling had been the cause
of this depression and deflation were not true.
Mr. B r a n c h . D o you feel, Mr. Whitney, that you have compiled
all of the data you can that will throw any light on that situation
for the period since September, 1931 ?
Mr. W h i t n e y . I think so, Mr. Branch.
Mr. B r a n c h . Y o u do n ot th in k th a t it w o u ld aid at a ll in deter­
m in in g th a t question to-------Mr. W h i t n e y (interposing).
Mr. B r a n c h . The question as

Determining what question?
to the effect o f short selling on prices,
to include in short selling sales against the box?
Mr. W i i i t n e y . I do not, because it is not a short sale. _
Mr. B r a n c h . Regardless of whether it may be technically a shoit
sale or not, would it not be just as possible to depress prices under
unusual circumstances, such as some bad news about a corporation
by selling against the box as by what is technically a short sale?
Mr. W h i t n e y . I f you will explain to me the difference between
u selling against the box ” and selling outright, I can answer you
Otherwise I do not know the answer.
Mr. B r a n c h . Well, what do you call “ selling against the box ” 1
Mr. W h i t n e y . I direct my broker to sell so many shares which I
own, and I direct him to borrow them against delivery o f the contrad
which he has entered into for me. That is selling against the b o i
Senator B u l k l e y . What is the motive of that? Why not deliver
your own shares?
Mr. W h i t n e y . There may be various reasons, Senator. A man
does not care to have his name known at that time or until the entire
sale has been effected. A man may own 50,000 shares of stock. He
may possibly be an officer in a corporation whose shares he is selling.
He may think that might have a very bad effect, and he may sell it
and borrow, and so, therefore, to let it be delivered after the trans­
action has taken place.
Mr. B r a n c h . Are sales against the box included in these short
sales the summary of which you have given us ?
Mr. W h i t n e y . N o , sir; we do not consider them short sales becaus®
the shares are delivered on the contract which he has entered inti
for me.
*
.
.
B r a n c h . Then that means that he must inform himself each
time on that?
Mr. W h i t n e y He is ordered b y the New York Stock Exchange to
so inform himself.
Senator W a l c o t t . That transaction would not come under the New
0
f. e law whereby it is illegal for a director or officer of *
corporation to sell stock m that corporation short?
M r . W h i t n e y . That I can not answer, Senator Walcott. I will
b7a lawyer” anSW
Gr’




iS * legal matter* I << not pretend to
*>

STOCK EXCHANGE PRACTICES

47

Senator W alcott . Y ou do recall that being the law ?
Mr. W h i t n e y . I do recall .somethin" to that effect. In other
words, as I understand you, that would make it entirely correct
for that officer or director to sell it in that way.
Senator W alcott . I f it is not a short sale.
Mr. W h it n e y . It is not a short sale.
Senator B r oo k h ar t . What do you call the buyer in a short sale ?
Mr. W h it n e y . The buyer who enters the market and purchases
stock does not know, Senator Brookhart, whether he has bought from
a person who owned that stock or a person who is selling it short.
Senator B r oo k h ar t . He is not any different from anv other buyer,
then?
Mr. W h it n e y . N o , sir.
Senator B ro ok h ar t . And what is the seller in a long b u y ?
Mr. W h it n e y . I do not know. I never heard that term before.
Senator B r oo k h ar t . He is just a seller, no different from any
other seller.
Mr. W h it n e y . I f he exists he is just a seller; I do not know.
Senator B r o o k h a r t . Y o u mentioned now several short sales where
you punished somebody, those A. T. & T. sales. What became o f
tnose sales after the punishment? Were they canceled or what hap­
pened to them*
Mr. W h it n e y . They were not canceled. The purchaser had per­
fect justification in buying those stocks.
senator B r oo k h ar t . He kept the stocks, then?
sir F i ™ ? 1* ^ * e n they were delivered to him the next day, yes,
*
w en ,,ey were delivered to him in fulfillment of his contract,
fnr
^ ^ r contract. So therefore he did not have to deliver
o a&ys, as I remember the situation.
hnvtkt! l®®00khar t * Then in the meantime the short seller had to
ir w
80
could return them?
the 15 (yQ
HITNET1
k®d to buy them back before the expiration o f
or e^ borrow that stock to deliver against his contract
se
to
T

1< 1j*
R *)K ART* So he could buy it back or borrow in order

w
i ! ? t0 % feU ow h e borrow ed it fr o m ?
g r . W h it n e y . H e cou ld.

investfo^L+u°°KHARF ^ ou mentioned this Krueger stock. Do vou
*
t o w ^ i hese s ocks b efore th ev are liste d ?
i

ge w h it n e y . Yes, sir.
r>
? R00KI^ r t -

Complete.

in v estig a tio n d o y o u m a k e?

vou |«eaTl k „R ° k h a ? t * W e l l , w h a t are som e o f th e d eta ils o f w h a t
«
w
y com Plete ” ?

It goes j,?®*?**
c°rp°ration has a listing application with us.
torporatinn of * material assets, lists all the material assets of the
have alreadv _ • * S directors, states what distribution the shares
j
easily set
’ an^ hundreds o f other points which I can very
ments in tii«f ^
, ?ommittee by presenting them with our requireand which I h
10n but which are most intricate and detailed
Senator
no^
in my head or a large amount in my head.
°r Br° okhart. Is it in writing?




STOCK EXCHANGE PRACTICES

48

Mr. W h i t n e y . It is in writing and signed and attested to by
officers of the corporation.
.
Senator B r o o k h a r t . Do you investigate the values behind th
e
stock issue?
Mr. W h i t n e y . W e do not.

Senator B r o o k h a r t . Y ou investigate the earnings?
Mr. W h i t n e y . The company states to us.
Senator B r o o k h a r t . Y ou take their statement?
Mr. W h i t n e y . A s of a period of time; yes, sir.

Senator B r o o k h a r t . Y ou took a statement of the Krueger stocks
as to the values and earnings and everything ?
Mr. W h i t n e y . We d id .
Senator B r o o k h a r t . Were those statements true?
Mr. W h i t n e y . It has been stated that perhaps they were not
true as of certain dates.
Senator B r o o k h a r t . It might be that a good many of these state­
ments might be exaggerated in the same way ?
Mr. W h i t n e y . It might be. I do not believe it.
Senator B r o o k h a r t . Does not the big inflation of 1929 and th
en
the present value prove that they were ?
Mr. W h i t n e y . No, sir.
Senator B r o o k h a r t . Y ou still think that present value is too
low?
Mr. W h i t n e y . I have never so stated that that I know of.
Senator B r o o k h a r t . Well, that is an important point with mfThe chart I showed you shows that present value still to be 30 or 4
0
per cent above the 1914 level and the 1914 level was 33 per cent above
the 1904 level.
Mr. W h i t n e y . Have you taken into consideration the hundreds of
instances where there have been mergers and additional stock issued
and split up of stock ?
Senator B r o o k h a r t . Well, the statisticians took that all in consid­
eration in making up this chart. While those stock values r e m a in u
p
in the air, as I put it, 30 or 40 per cent above 1914, which was a high
level, commodity prices are below 1914 and agricultural prices are 4
5
per cent below 1914. Does not that indicate that things are still ou
t
of joint badly in the United States?
Mr. W h i t n e y . I can not answer that question, Senator, because!
do not pretend to be an authority on agricultural questions.
Senator B r o o k h a r t . Is that the reason now prices have gone so
low, because the stock exchange pays no attention to us and gives u
s
no chance in values?
Mr. W h i t n e y . Agriculture has never that I know of organize^
itself in a business way comparable to what the other industries of
this country have done, and since 1914 at the beginning of the w»r*
due to the necessity for munitions and other goods, I think there h«s
been or was a perfectly tremendous stimulation of industry at that
time. I think that is one of the very important reasons why to-dftf
we find corporations in the position that they are.
Senator B r o c k h a r t . The corporations inflated stocks in boon1
times to compare to the boom earnings and even beyond that,
they not ?
*




STOCK EXCHANGE PRACTICES
M r W h itn e y .

They did not.

I

can

not

49

understand how it is an

inflation of themselves by corporations to issue^stock and ge cas .

That i« an asset of the most virulent kind and is not inflation.
Senator

B eo o k h a rt.

I f they can fool someb° dy n.t? 1

at an exorbitant price more than they are worth, that is an inflation,
is it not ?
.
Mr. W h it n e y . I do not see why, sir.
„
Senator B r o o k h a r t . Y

ou

th in k th a t is p e r fe c tly leg itim a te -

Mr. W h it n e y . Well, who is to prove as to the worth of the com
TjgHy’g
^
Senator B r o o k h a r t . There is one general proof that is
able. That is the earning of American capital altogether, the aver­
age of all of them, production of the American People, all labor, all
capital, unearned increment and everything else added toge e ,
which is a little less than 4 per cent a year w h e n w e rub out cvcies
and get to as near level as possible. Now, then, if blocks 01 stocK are
capitalized and taken out of this 4 per cent pool, or more than that,
somebody else is going to lose, is he not ?
Mr. W h it n e y . Not if that is earned by the corporation.
Senator B rookh art . But it is impossible for all these corporations
to earn 10 or 15 or a hundred per cent when there is only 4 per cent
to be earned ?
Mr. W h it n e y . Nevertheless, certain o f the corporations that we
discussed this morning were earning 10, 15, 20, 35 per cent.
Senator B roo kh art . The reason they earn 10 or 15 per cent is
because they charge the farmers and the laboring people o f the coun­
try an exorbitant price for their products and beat down the price
of the farmers’ products w h ich th ey use fo r ra w m a te r ia ls ; is th a t
not true?

. Mr* W h itn e y . Not that I know of, sir. I f I may cite a homely
instance: Supposing a farmer, which has often happened with me,
sold me a cow at a good round price, and what he and I thought it
w worth at that time. I f a week or two or a month t h e r e a f t e r
as
deY
el°Ped tuberculosis, although she was tested and proved
oot to have it at the time o f purchase, or she develops garget or vari^ other ailments of that sort, can I blame that farmer who sold
tkl + cow ^
•
and I both knew she was correct in every way at
her? 6 PUrc^ase and if a good, high, round price was paid for

^ can. no^ see that there is any great distinction from that to
* ^fporation who sold its stock or the people who sold the stock
r!!lu?I^)0ra^on
a time when the corporation had great assets,
great earnings, and at a time when the prospect o f still
was immediately ahead.
.
diaij. i
B r ookhakt . The only comparison you make then is witn
j**seacattle. You do not make any with the healthy ones,
this wYwvar^BY‘ * would rather think that business conditions un
^ m in g ly are also diseased.
brie* I ® ro o k h a b t . Well, now, let us see something about this
h*v 8rm
compared to stocks and industrial products,
yidtiafcinfi® P^tective tariff system that gives us a price *evel To
Products above the world level, nave we not?



STOCTK EX C H A N G E PRACTICES

49

Mr. W h i t n e y . They did not. I can not understand how it is an
inflation of themselves by corporations to issue stock and get cash.
That is an asset of the most virulent kind and is not inflation.
Senator B r o o k h a r t . I f they can fool somebody into buying them
at an exorbitant price more than they are worth, that is an inflation,
is it not ?
Mr. W h i t n e y . I d o n o t see w h y , s ir .
Senator B r o o k h a r t . You think that is perfectly legitimate?
Mr. W h i t n e y . Well, who is to prove as to the worth of the com­
pany’s stock?
Senator B r o o k h a r t . There is one general proof that is quite reli­
able. That is the earning of American capital altogether, the aver­
age of all of them, production of the American people, all labor, all
capital, unearned increment and everything else added together,
which is a little less than 4 per cent a year when we rub out cvcles
and get to as near level as possible. Now, then, if blocks of stock are
capitalized and taken out of this 4 per cent pool, or more than that,
somebody else is going to lose, is he not ?
Mr. W h i t n e y . Not if that is earned b y the corporation.
Senator B r o o k h a r t . But it is impossible for all these corporations
to earn 10 or 15 or a hundred per cent when there is only 4 per cent
to be earned?
Mr. W h i t n e y . Nevertheless, certain of the corporations that we
discussed this morning were earning 10, 15, 20, 35 per cent.
Senator B r o o k h a r t . The reason they earn 10 or 15 per cent is
because they charge the farmers and the laboring people of the coun­
try an exorbitant price for their products and beat down the price
of the farmers’ products which they use for raw materials; is that
not true ?
Mr. W h i t n e y . Not that I know of, sir. I f I may cite a homely
instance: Supposing a farmer, which has often happened with me,
sold me a cow at a good round price, and what he and I thought it
was worth at that time. I f a week or two or a month thereafter
that cow developed tuberculosis, although she was tested and proved
not to have it at the time of purchase, or she develops garget or vari­
ous other ailments of that sort, can I blame that farmer who sold
me that cow if he and I both knew she was correct in every way at
the time of purchase and if a good, high, round price was paid for
her?
And I can not see that there is any great distinction from that to
the corporation who sold its stock or the people who sold the stock
for the corporation at a time when the corporation had great assets,
was making great earnings, and at a time when the prospect of still
further earnings was immediately ahead.
Senator B r o o k h a r t . The only comparison you make then is with
diseased cattle. You do not make any with the healthy ones.
Mr. W h i t n e y . I would rather think that business conditions in
this country to-day seemingly are also diseased.
Senator B r o o k h a r t . Well, now, let us see something about this
price of farm products compared to stocks and industrial products.
We have a protective tariff system that gives us a price level for
industrial products above the world level, nave we not ?




50

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . I believe so, but I do not pretend, Senator Brookhart, to be conversant with this general subject you are now dis­
cussing.
.
Senator B r o o k h a r t . Yes. In agriculture there is about 10 per
cent of our products that are exported to foreign countries on aa
average; about 50 per cent of cotton and 20 per cent of wheat, but it
is less than 1 per cent of corn, the biggest crop, and less than 1 per
cent of oats, and only 7 or 8 per cent of livestock products. It
averages less than 10 per cent for all of them. But that 10 per cent
breaks down the tariff rates and protection on farm products, floods
over into the free-trad^ markets of the world, is sold in competition
with all the world in the price fixed by that sale. Then it is cabled
back in a few days by the board of trade or the cotton exchange aiid
the products, the other 90 per cent at home, the price runs along with
the free-trade world price. Whereas, when the farmer comes to buy
something he has to buy in the highly protected level of the Amer­
ican market.
Can you see any disadvantage to agriculture in that?
Senator G l a s s / No; you do not see any, because when the next elec­
tion comes on you vote for the same protective tariff. [Laughter.]
Senator B r o o k h a r t . I f the Senator will look for the record, h
e
will find I voted against the protective tariff.
In this matter now, if agricultural prices are driven down to 4
5
per cent below the 1914 level, which would put them all below 1904
even, that destroys the buying power of agriculture, does it not?
Mr. W h i t n e y . Depending upon what it costs agriculture to pro­
duce those products.
Senator B r o o k h a r t . Y o u do not think agricuture ever got more
than cost of production even with its best prices, do you?
Mr. W h i t n e y . I do not know what it has done, Senator. I believe
that it might be able to.
Senator B r o o k h a r t . How? I would like to know that ?
Mr. W h i t n e y . By using more businesslike methods possibly in the
production of agricultural products.
The C h a ir m a n . Like Helena, Mont., tried. Did you help finance
them?
Mr. W h i t n e y . I d id n o t, sir.
The C h a ir m a n . Your friends did.
Senator B r o o k h a r t . Y o u would like to have the farms then
changed into corporation farms and sell their stock up on the stock
exchange ?
Mr. W h i t n e y . Oh, no. No.
Senator B r o o k h a r t . Well, you know che agricultural plant is i®
full operation in the United States and has been since 1900, do yo«
n o t?

Mr. W h i t n e y . I presume so.
Senator B r o o k h a r t . And you know that the agricultural p*°*
duction has been declining in comparison to population since thi*
date and the surplus in getting smaller instead o f larger?
Mr. W h i t n e y . I do n ot know those fa cts, Senator B roo k h art, <®
*
n ot pretend to.
Senator B r o o k h a r t .

That is one thing I am complaining about
Here you are in the financial center o f the country ana the world fifl®
do not know about the biggest, most important situation in our couO'



STOCK EXCHANGE PRACTICES

51

try with reference to this depression. Agriculture is about a third of
the buying power o f the whole country, and that buying power has
been reduced and cut down since 1920 and the credit of agriculture
almost entirely destroyed, and for that reason agriculture can not buy
the necessities o f life at this time. It is in a bankrupt condition;
nearly 2 ,0 0 0,00 0 farmers have lost their homes or their life savings,
and that does not seem to concern you down in Wall Street at all.
Mr. W h i t n e y . It concerns us vitally, but you are going into details
that I say I do not know.
. . .
v
Senator B r o o k h a r t . That is what I am complaining about. You
ought to know that.
Sir. W h i t n e y . What good would that do ?
Senator B r o o k h a r t . Y ou talk about better business methods. Are
you going to cure this depression with a third o f the American people
driven down into peasantry or bankruptcy ?
Air. W h i t n e y . You are not accusing me, Senator Brookhart, of
being able to cure this depression, are you ?
Senator B r o o k h a r t . Yes; I think you and the crowd that boss
you could.
Mr. W h i t n e y . I did not know I was bossed.
Senator G l ass . Mr. Whitney.
Mr. W h i t n e y . S ir ?
Senator G lass . The New York Clearing House has adopted some
regulation, has it not, against what is technically known as “ loans
for others” ?
Mr. W h i t n e y . I believe so.
Senator G lass . Y ou are not familiar with the regulations though?
Mr. W h i t n e y . I am familiar with the general regulation, not
with its details, Senator Glass. I know in general, yes, that they
have put on some such regulation of loaning for individuals or cor­
porations other than out-of-town banks.
Senator G lass . I hope you are intimately acquainted with the
reflation, but I want to ask you how comprehensive it is, what
effect it would have on the stock market. Would it lessen the operatS? 0n
s^
oc^ market—the regulation that was adopted?
W h i t n e y . That would be purely conjecture on my part to
answer. It would certainly give to the banks seemingly far greater
power than they have had in the past as to where they would grant
JkTl*l
y°Vr question is whether I believe it is a proper thing
at the granting and extension o f credit should lie in the banks, I
certainly do think so.
G lass . Y ou th in k th en th a t corporation s th a t are n ot
artered o r licensed to b e m o n e y len ders o u g h t n o t to be p erm itted
engage in th a t so rt o f bu sin ess?
to be *

HXTNEYt ^ th in k it is better f o r a ll concerned fo r th em n ot

J j ? nator W a g n e r . Mr. Whitney, in answer to Mr. Branch a little
to no* a ° . y ° u
i
that y o u had conducted over 2 ,0 0 0 investigations
ertain any effect of possible so-called bear raids. I take it that
fictit;^nVes i^
ns a^ are as vigilant to determine i f there
so
a S S y 8 ? 1*008 attempted to be made through wash sales and other
methods to increase prices?




52

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Senator Wagner, I do not mean to give the im­
pression that those investigations that I spoke to Mr. Branch about
were only in reference to bear raids.
Senator W a g n e r . That was my impression.
.
Mr. W h i t n e y . I stated that the 20 accountants were continually
going into and making investigations of this question or another,
and there had been a tremendous amount of investigations, I said
two or three thousand or 5.000 even over a long period of time, within
perhaps the last two or three years. They are continually going on.
It is the regular function.
As to specifically inquiring as to bear raiding, that is something
that is being done by them when they are so instructed and when
they are investigating an office, if they see anything that would tend
to disclose such facts, they immediately report them. I meant to
give the impression that either the business conduct committee or the j
accountants under the business conduct committee are forever inves-;
tigating our firms to see that they adhere to the regulations of the
exchange. Mr. Branch gave me somewhat the impression that h
e
had in mind that we did not use those efforts.
Mr. B r a n c h . I did not mean to convey that impression. I was
asking for information, sir. May I ask you for further informa­
tion, and I am not trying to convey any impression at all one way
or the other; have you—and by you I include of course employees
under your supervision—made any charts showing the relation
between short selling and prices?
Mr. W h i t n e y . Yes, sir.
M r . B r a n c h . C an you tell m e w h at, i f an y, such charts h ave been
prepared ?
Mr. W h i t n e y . We have made a chart that shows the price of

stocks, those given by the Standard Statistics Co., beginning with
January, 1931, down to date, or practically date, to April 4 or 5. I*
also shows the total number of shares composing the short interest,
starting fr o m May 25, 1931, and the Federal Reserve report of New
York members’ Street loans, what is commonly known as brokers
loans, from January, about the 7th, 1931, to date.
M r . B r a n c h . Is th at the chart th at you have in you r h a n d , sir?
Mr. W h i t n e y . I am reading from i t ; yes.
Mr. B r a n c h . I do not mean to interrupt you. Have you finished
your designation ?
Mr. W h i t n e y . There have also been put upon this chart at the
dates on which they occurred world-wide and country-wide happen*
ings, so that anybody who wishes to compare the indexes of the chart
may see when these particular happenings of international or
least national consequence took place with relation to what happened
m vr Erice of stocksi *he brokers’ loans, and the short interest.
B r a n c h . I should like to have that and have it marked
hibit 1 0 .”
(The chart under discussion is here printed in the record in full, a
s
follows:)




*o

!
■
n

EXCHANGE

PRACTICES

150
140
^
C
5.0

N

u m ber
the

S

or

S

hort

hares

In t e r e s t

*£
85

S S
&
la g 1

1,600

130
'

4 .5

total

o m p o s in g

V

1,400

120
S t a n d a r d S t a t is t ic s D a ily
S t o c k P r i c e In d e x - 9 0 S t o c k s

F e d e r a l R e s e r v e or
N e w Y o r k M e m b e rs ’ S t r e e t L o a n s

10
1

1,200

3.5

1,000

100

3.0

STOCK

4 .0

800

90

2 .5

600

80

2 .0

400

70

200




A/\>

M /
A

’

eo
so

54

STOCK EXCHANGE PRACTICES

Senator B l a i n e . Mr. Wliitnev, before you pass that over, will
you give the last item on that chart that you regard as a national
happening?
Mr. W h i t n e y . I will. Senator Blaine, the last article on that
chart is April 1, “ The House passes tax bill.”
Senator B l a i n e . What was the result on the stock market?
Mr. W h i t n e y . The result on the stock market—or I leave to your
opinion the result—the stock market declined at that time, as did
the short interest.
Senator B l a i n e . What was the world or national happening at
the next prior decline in the stock market to April 1 ?
Mr. W i i i t n e y . I beg pardon ?
Senator B l a i n e . I say what was the next nearest stock decline
comparable with the April 1 decline? What happening, what
national or international happening, occurred ?
Mr. W h i t n e y . May I read from1 January 1 the various items!
(Reading:]
January 11. Senate passes Reconstruction Finance Corporation act.
January 22. Original Glass bill text announced.
February 11. Glass-Stegall bill text announced.
February 15. Glass-Stegall bill passes house.
February 10. Glass-Steagall bill passes Senate.
February 27. Glass-Steagall bill signed by the President.
March 17. Resubmission of Glass bill.
April 1. House passes tax bill.

Those are all the occurrences that we have put down for 1932.
Senator B l a i n e . The market fluctuated up and down during that
period ?
Mr. W h i t n e y . The market has fluctuated during that period, y®Si
sir, as has the short interest.
Senator B l a i n e . So that during none of this time from January
1 has any of these happenings, world or national, had any permanent
effect on the stock exchange?
Mr. W h i t n e y . That remains to be seen.
Senator B l a i n e . Well, I mean from your map regardless of w
hM
happened?
M r . W h i t n e y . Perhaps it goes up and down with direct relation
to what happened.
Senator B l a i n e . That is on January 1 when the Senate passe®
the Reconstruction Finance Corporation act stocks went down.
Mr. W h i t n e y . No, sir; stocks rose.
Senator B l a i n e . N o ; the number of shares composing the short
interest began to rise but not very rapidly. In fact, they did
rise for several days, and then they went up when the Glass-Steap1
bill was passed. Then they took a sharp decline to the point befa*
the passage of the original Glass bill..
Mr. W h i t n e y . They took a sharp decline-----Senator B l a i n e (interposing). Or before the announcement
the original Glass bill.
Mr. W h i t n e y . They took a sharp decline, sir, from the annoufl**'
ment of the Glass-Steagall bill until it was signed by the Preside®’
The short interest I am talking about. Are you talking about ^
price of stocks?
*




55

STOCK EX C H A N G E PRACTICES

Senator B l a i n e . I am talking about the short interest. They
■were at a high point when the Glass-Steagall bill was signed or
passed by the Senate.
Mr. W h i t n e y . When it was announced.
Senator B l a i n e . That was the final passage. Then there was a
very abrupt decline.
Mr. W h i t n e y . That is right.
Senator B l a i n e . And there was no increase in the number of
shares composing the short interest until March IT when there was
resubmission o f the original Glass bill.
Senator G l a s s . Well, to show you how absolutely mythical all this
variation on the stock exchange because of the Glass-Steagall bill
Is’ Mr. Whitney, would you be able to tell us how many applications
for loans have been made under the Glass-Steagall bill which was
signed by the President six or seven weeks ago?

Mr.

W

h it n e y .

No, sir.

Senator G l a s s . I will tell you—just one—just one. And now why
the stock market should have gone up or down on account of the
Glass-Steagall bill is just one o f those unsubstantive things that are
constantly occurring on the stock exchange.
Mr. W h i t n e y . My only purpose in compiling this chart is with
relation to the stock market, or vice versa, the relation of the short
interest to the stock market prices. That is all of my purpose of
having this compiled, which I did not have compiled for this com­
mittee ; I have had it for some long time. And also to show that the
so-called brokers’ loans representing, by and large, the long interest,
have steadily been declining since the beginning o f this compilation,
with a few fluctuations.
Senator B u l k l e y . This chart shows a pretty steady drop all o f
last week. You would say that the selling was pretty heavy and per­
sistent last week, would you not ?

Mr.

W

h it n e y .

Senator
Senator

It has been dreadful.

B u l k l e y . What do you attribute that to ?
G l a s s . Not to the Glass-Steagall bill, I hope.
W h i t n e y . I attribute it to liquidation, Senator

,

Mr.
Bulkley, and
that liquidation has been caused by many things. The enlargement
o f withdrawals of gold from this country. The statements of de­
creased earnings. There have been statements to the press by one
o f our firm’s auditors, Price, Waterhouse & Co., that tne Krueger &
Toll figures back as far as 1930 have been falsified, and if I may say
so, the proposed tax on security transfers has been one which in my
opinion naturally has created great concern in investors throughout
this country.
Senator B u l k l e y . So you think the decline has been accounted for
sufficiently by actual reasons without looking to any conspiracy?
; Mr. W h i t n e y . Or short s e l l i n g ; y e s , s ir .
Senator F l e t c h e r . Can you give us any figures as to what this
great amount o f gold withdrawal amounts to?
Mr. W h i t n e y . I heard it is approximately twenty millions in the

last day or two.
Senator B r o o k h a r t . Does not that mean that foreign securities
are being sold; that is, holders o f our securities in foreign countries,
are selling them and withdrawing the gold?




56

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . I do not know, Senator Brookhart. It is perhaps
the desire o f foreign countries to receive back their gold which
they had on deposit here. I am sure the Treasury Department
or the Federal reserve system can give advice that I am not capable
of giving on that.
Senator B r o o k h a r t . There are still great holdings of our securi­
ties in foreign countries, are there not ?
Mr. W h i t n e y . I f you are sure of that, sir, it may be so. I think
they have diminished tremendously.
Senator B r o o k h a r t . I have one report of one of these confidential
agencies that reported to big business saying it is about three tim
es
the amount of gold we have in this country.
Senator G l a ss . Do you participate in the view, Mr. Whitney, w
it is fair to ask you, that France is undertaking to embarrass this
country by precipitant withdrawal o f earmarked gold ?
Mr. W h i t n e y . I have no knowledge of that, Senator Glass, what­
ever.
Senator B u l k l e y . D o I interpret this chart correctly that during
the very time of this pronounced liquidation the net short position
had gone down, that there are less people short than usual ?
Mr. W h i t n e y . Yes; Senator Bulkley. The short position on
April 1 . the date on which the House passed the tax bill, was, if I
remember, 3,279.000 shares. Mr. Branch, you have got to correct
me now. You have got my figures. And the last figure as of th
e
opening of April 6 was 3,059,000 shares, a drop of 220,000 shares.
Senator B u l k l e y . Then the big decline last week was in spite o>
short covering; was it?
Mr. W h i t n e y . It was in spite o f short covering; yes, sir.^ From
September 1 1 , 1931, to October 9, 1931, the market was consistently
going down, and fast. That was the time that England came off th
f
gold standard. I think our lowest prices were October 5 during th t
a
period, and yet during that period the short interest decreased, de­
creased by 2 .2 0 0 ,0 0 0 shares. I can not see the argument that tbt
short interest causes the declines from those two points.
Mr. B r a n c h . Mr. Whitney, have you or any of the employe*5
of the stock exchange under you prepared any charts or graphs i®
regard to the selling price of specific securities and the short intere*
in those specific securities?
Mr. W h i t n e y . I believe our economist has prepared certain charts
along that line, Mr. Branch, but I am not conversant with w
hrf
they may be.
Mr. B r a n c h . At your next appearance—I do not mean to-mor­
row-----Mr. W h i t n e y (interposing). We will be glad to give you an
y­
thing you want.
Mr. B r a n c h . When you have an opportunitv will vou subn$
everything of that kind which you have available?
W h i t n e y . Prepared since when? We have an economist ^
has a large office and is a hard worker. You do not want all the*
prepared on every subject, do you? You can have it. We will *
glad to give them to you.
Mr. B r a n c h . That goes back for some period.




57

STOCK E X C H A N G E PR A CTICES

Mr.

W h itn e y .

Fifteen or twenty years lie has been preparing

C Mr!’BKANCH. No; I meant merely in regard to short selling and
h
the prices of specific securities.
.
„• j
Mr. W h i t n e y . Oh, well, whatever on that we have for a period
of six months or a year?
Mr. B r a n c h . Yes.
Mr. W h i t n e y . Very good.
.
Mr. B r a n c h . I will leave it to your judgment whatever i s relevant.
Mr. W h i t n e y . I will leave it to your judgment, whatever you

W fc
ftn

Mr.

B ran ch .

Senator

I f you have more than we want we will let you

B rook h a rt,

I would like to have that which shows the

inflation too in 1928 and 1929.

«

*

m

v.

By the w a y, ju s t t o k e e p th e r e c o r d s tr a ig h t , S e n a to r Lrlass Has

jumped onto me twice now about this tariff business. I want to can
his attention to the fact that the tariff bills would not have passed
if five Democrats had not voted for it.
Senator G la s s . I am not in favor o f the five Democrats who did
vote for it.
Senator B r o o k h a r t . But neithfer am I.
^
.
Senator G la s s . I do not think that was a very creditable exhibi­
tion of democracy, if you want to know my opinion.
Senator B r o o k h a r t . I will agree with that; but your D e m o cr a ts
declared for a protective tariff and took the issue out o f your comP*ign in your own State.
,
Senator G la ss. You will go up next November and vote for the
highest protective tariff the Republicans present perhaps.
.Senator F l e t c h e r . The question there was largely whether the
1930 bill was an im p r o v e m e n t o v e r th e 1922 b ill.

Senator
that.

G la s s .

Senator
Senator
democrat.

B r o o k h a r t . Oh,
G la s s . Because

aiJ*nator

B rook h a rt.

Senator

O f course, I do not mean anything personal m
certainly not.
,
I think you have been a pretty good

Much better than some on your side o f the

Mr. Whitney, does any o f the data that you
give the volume o f the sales o f the most active stocks

B u lk le y .

last Friday ?

Mr. W h i t n e y . N o , Senator, w e haven’t got those figures, you see.
«m. na^0r B u l k l e y . Can you give us the volume traded in, say, the
r^corcf ac^
*Te stocks last Friday? I would like to have that m the

M.W
r
sir.

h it n e y .

I ca n ° e t th a t
g

f o th e sh eets o f o a nwppr
rm
f r m e s a e;
-

Senator W a g n e r . Y es; the newspaper will give y o u that.
^nator B u lk ley. I would like to have it in our r e c o r d , MrMr
^ *s n ° t asking too much. Then it w ill be o fficia lly in .
inform 0+ HlTXKY‘
last figures I have o f w h a t I r e fe r r e d t o ^
on we had already compiled for all sto ck s th a t w o u ld




58

STOCK EXCHANGE PRACTICES

swer Nos. 1 and 2 sections of your subpoena—the latest figures I have
are as of the opening of April 6 .
#
. .
Senator B u l k l e y . I am not at all sure that this has anything to
do with the question in the subpoena, but I would like to have it
appear in our record, the volume of sales with respect to the 30 m
ost
active stocks last Friday.
Mr. W h i t n e y . It is my understanding of your question ot tne
most active stocks traded in or wherein there was the largest short
interest?
Senator B u l k l e y . No; the total trades.
Mr. W h i t n e y . I haven’t that with me, but, of course, that can be
easily gotten.
Senator B u l k l e y . Yes; thank you.
Senator B l a i n e . Mr. Whitney, do you match orders sometimes
to cover either long sales or short sales? Is it possible, I mean?
Mr. W h i t n e y . I f I understand you correctly, what we consider
as a matched order is more or less of a wash sale and therefore abso­
lutely against the rules of the exchange.
Senator B l a i n e . A wash sale as affecting a long-----Mr. W h i t n e y (interposing). A wash sale is a fictitious transac­
tion and it is against tne law of the State of New York and abso­
lutely against our regulations.
Senator B l a i n e . I am not familiar with the terminology of th
e
stock exchange. But a match sale we will assume to be an order to
sell on the part of some individual and then an order to buy. That is
reported on the stock exchange, as I understand it?
Mr. W h i t n e y . And those two people met with deliberate intent!
Senator B l a i n e . No; I would leave out the deliberate intent.
Mr. W i i i t n e y . Then I do not quite know what you mean.*
Senator B l a i n e . A s I understand, where there is an order to buy
and an order to sell the same stock, we will assume U. S. Steel
40. 5000 U. S. Steel at 40, and an order to sell U. S. Steel at 40, an
d
the ticker shows the bid at 40.
Mr. W i i i t n e y . The ticker will not show the bid, sir, at all.
Senator B l a in e . Will not show the bid ?
Mr. W h i t n e y . The ticker w ill not show it except on rare occasions*
Senator B l a i n e . H o w does the stock exchange report those rraiis*
actions? As long as there is some control on the stock exchange!
assume that the type I have described can not be transacted?
Mr. W h i t n e y . I f you want to buy 5,000 shares of steel and I want
to sell it. we give our orders ta a broker and he goes into the stew
crowd on the exchange, and both the brokers go in with no p«j
knowledge that the other broker has the opposite order, and he in*
execute his order as he best may in that crowd.
Senator B l a in e . And report it on the stock exchange?
Mr. W h i t n e y . When executed, report it, and it will go on the tap&
I f we found that those two brokers had matched their orders and M
prearrangement gone on the floor of the exchange, one buying fr°*®
and the other selling to each other, and if that in anv way affected
fictitiously the market, we would consider that a direct violation
the rules of the exchange.
Senator B l a in e . But assuming the traders, the ones who hold tb
®
stock or who are selling or buying the stock did not inform tb«




STOCK EXCHANGE PRACTICES

59

brokers. Might not that be used as a method to cover up long or
short sales as the case may be ?
Mr. W h i t n e y . Not that I can see; n o, sir.
Senator B l a i n e . It seems to me that it would.
Mr. W h i t n e y . Then I may not understand your question.
Senator B l a i n e . I may not understand the proposition.
The C h a i r m a n . I suggest we are not going to get through to-day
anyhow and we should like a short executive session before we recess*
and we will meet again to-morrow morning at 10.30 in this room and
Mr. Whitney will continue to be with us, and everybody is excused
now except the members of the committee and the reporter.
(Thereupon, at 4.05 o’clock p. m., the committee adjourned the
hearing of further testimony until 10.30 o’clock a. m. the next day,.
Tuesday, April 12, 1932, and proceeded to executive session.)




STOCK EXCHANGE PRACTICES

TUESDAY, APRIL 12, 1932
U
C o m m it t e e

S tates S e n a t e ,
B a n k in g an d C urrency,

n it e d

on

'Washington, D. C.

The committee met at 10.30 a. m., pursuant to adjournment on
yesterday, in room 301 Senate Office Building, Senator Peter Norbeck
presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Walcott, Blaine, Couzens, Fletcher, Glass, Wagner, and
Bulkley.
Present also: Senator Copeland and Claude Branch, Esq., counsel
to the committee.
The C h a i r m a n . The committee will come to order.
Mr. Branch will proceed.
TESTIMONY OF RICHARD WHITNEY, PRESIDENT NEW YORK
STOCK EXCHANGE, NEW YORK, N. Y.— Resumed

Mr. B r a n c h . I should like to make a statement as to my idea of
the future conduct of this matter. I f the committee does not agree
with this I suppose they will let me know. I have very few more
questions which I contemplate asking this morning.
Mr. Whitney’s statement was that it would take him several days
to get the information which the subpoena calls for, and it seems to
me it would be better to defer the most of the examination until those
figures and statistics are forth coming. There will undoubtedly be
other statistics that we will require in the future and which were
not mentioned in the subpoena.
Mr. Redmond, it may interest you to have an answer to those
questions which Mr. Whitney suggested in his written statement
and, of course, I am giving merely my ideas and I assume that if the
committee disagrees with me about the matter they will so state at
the present time.
Mr. Whitney said in regard to the third section that if the informa­
tion sought is a list of the members of the exchange who originally
executed the selling orders of the stock now held in short account he
was afraid it would be almost impossible to answer the question.
It does not seem to me that at the present time it is worth while
going into that. Unless the committee dissents I think you may
assume that that information will not be required at the present
time.
M r . W h i t n e y . And that you merely desire to know in what firms
the short accounts now reside.
Mr. B ranch. That is, we do not need to go back to the previous
accounts at the present time. That was the point you made, was it
not, Mr. Whitney?

110882—32-----5




61

62

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Yes.
Mr. B r a n c h . Then, in regard to the fourth section of the request,
Mr. Whitney cited that a compilation of typewritten schedules would
consume several days, and he asked whether we would be satisfied
with having a photographic film which would show each report in
alphabetical order by names of customers. My answer to that is
that that will suffice tor the present.
I think, Mr. Redmond, that answers the questions which Mr.
Whitney asked in regard to the subpoena. With these explanations
I understand you will be prepared to furnish all the information
requested in the subpoena at your earliest convenience, which will
probably be several days hence.
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . It is for that reason, it seems to me. we could pro­
ceed better if the most of this investigation waited until we got those
figures, which were what we called for originally and which could
not be produced within the limited time.
Now, Mr. Whitney, you produced on yesterday a compilation of
statistics in regard to short selling covering the first few days of
April—April 1 , 4, 5, and 6 . That was marked originally our Ex­
hibit No. 1 and changed to Exhibit No. 9. I understand that since
yesterday you have some figures showing the number of shares of the
total short interest for April 7. Is that correct ?
Mr. W h i t n e y . That is correct.
Mr. B r a n c h . And that number is 2,849,895 shares.
Mr. W h i t n e y . That is right.
Mr. B r a n c h . And that shows a decrease of 214,033 shares from
the previous market day.
Mr. W h i t n e y . That is right.
Mr. B r a n c h . And as I understand it, you have no figures for
any day subsequent to that, at the present time I mean.
Mr. W h i t n e y . N o, sir. Might I touch on that subject?
Mr. B r a n c h . Certainly.
Mr. W h i t n e y . Senator Bulkley on yesterday asked me to produce
the 30 most active stocks in transactions and trades on April 8 , 1932.
I have that information here, and it was derived from the quotation
sheets published by Francis Emory Fitch (Inc.). I should like to
put that in as requested as an exhibit.
(Exhibit No. 11 is as follows:)

Thirty most active stocks on April 8, 1932
Alaska Juneau---------------------- 25,300
Allied Chemical & Dye----------39,300
American Can----------------------- 51,700
American Telephone-------------- - 64, 200
Anaconda----------------------------- ’ 27, 700
Auluu'n_____________________ 28,000
Case________________________ 30,400
Columbia Gas & Electric_____ 33,500
Commonwealth & Southern__ 27,400
Consolidated Gas------------------- 29,400
DuPont_____________________ 39,300
General Electric-------------------- 48,700
General Motors------------------- 100,500
International Nickel-------------- 23,800
International Telephone & Tele­
graph_____________________ 54,400



Kreugev & Toll----------------- 30,400
National Dairy Products_____ 18, 500
New York Central___________ 18, 800
North American_____________ 38,900
Paramount Publix___________ 18,400
Radio----------------------------------- 19,100
Sears Roebuck_______________ 20, 300
Socony Vacuum_____________ 19,300
Standard Oil of New Jersey_ 36,200
Union Carbide______________ 39,600
United Corporation.,_________ 21,600
United Gas Improvement_____ 37,900
United States Steel__________ 56,400
Westinghouse Electric_______ 27,900
Wool worth____________ _____ 19,200

STOCK EXCHANGE PRACTICES

63

The foregoing information was derived from the quotation sheets published
by Francis Emory Fitch, Incorporated.

In that connection I should like to point out, as I said on yester­
day, that the total short interest as of April 1 was 3,279,000 shares,
and that as of the opening of April 7 it was 2,849,000 shares, or a
reduction in the short interest of 429,503 shares since the close of
business on March 31, to the opening of business on April 7, during
which period a very drastic decline has taken place in the stock
market.
I have also gathered the figures of all stocks as of-----Senator B la in e (interposing). Mr. Whitney, if that paper has
not already been marked as an exhibit and made a part of our rec­
ord, I should like to have it done.
Mr. W h it n e y . I believe the committee reporter has already
marked it Exhibit 11, and doubtless he will make it a part o f the
record as you request.
Senator B l a in e . And what was that paper?
Mr. W h it n e y . The 30 most active stocks on April 8 , 1932, as
requested by Senator Bulkley.
Mr. B r a n c h . In order that I may understand, is that the docu­
ment which Senator Bulkley has in his hands now ?
Mr. W h it n e y . Yes, sir. Now, I had taken off, or rather I took
off myself last evening, the stocks in which there were transactions
of 1 0 ,0 0 0 shares or more, in line with the questions in the subpoena,
occurring on April 6 . the last day for which we have the total short
figures, our figure being as o f the opening of April 7, but including
transactions of April 6 , in the trading of which day there was a
reduction in the snort position of 214,000 shares.
There are 48 stocks in which there were 1 0 ,0 0 0 shares or more
traded in on April 6 , the day I am speaking about. I have picked
out 12 of those stocks: O f General Motors there were traded 116,600
shares, with a net loss for the day of three-fourths of one point. O f
Kreuger and Toll there were 116,500 shares traded in, with a net loss
of one-eighth of one point, but the final price was three-eighths of a
point. American Telephone and Telegraph, 93,900 shares at a net
loss o f $1. United States Steel, 92,000 shares with a net loss of $1.25.
General Electric, 76,400 shares with a net loss of one-half a point.
United Corporation, 58,500 shares with a net loss o f three-fourths o f
one point. Consolidated Gas, 49,200 shares with a net loss of two and
one-fourth points. North American Co., 46,600 shares with a net loss
of three-eighths of a dollar. DuPont, 45,400 shares were traded in
with a net loss of one and three-eighths. Commonwealth & South­
ern, 43,000 shares were traded in with a net loss o f three-eighths of a
point. American Can, 37,900 shares were traded in with a net loss
of $1.25. Auburn Automobile, 35,100 shares were traded in at a net
loss of $1.50.
I have taken these 12 stocks out of the 48, being the 12 most active
during that day in the transactions of the 48; and in each and every
stock there was a small or a considerble net change loss, during which
identical period the short interest decreased 214,000 shares.
Senator B u l k l e y . Mr. Whitney, do you mean that the short inter­
est decreased as to each of those stocks you just mentioned ?



STOCK EXCHANGE PRACTICES

64

Mr. W h i t n e y . N o, sir; I do not. We have not broken it down
by stocks yet, but the total short interest decreased that day 214,000
shares. And the 48 stocks, Senator Bulkley, that we gathered for
that day shows hardly an instance where there was not a loss, but I
have merely given you the most active of them.
Senator C o u z e n s . The imprint being that short selling had nothing
to do with the decrease in price ?
Mr. W h i t n e y . Quite. And it was because of that situation which
prevented a greater loss.
Senator F l e t c h e r . What day of the week was that?
Mr. W h i t n e y . Wednesday.
Senator F l e t c h e r . Why do you select April 6 , 1932?
Mr. W h i t n e y . Because it is the last day for which we have the
final net short position.
Mr. B r a n c h . I should like to ask you a few questions in regard to
that.
Mr. W h i t n e y . But may I first submit this as an exhibit.?
The C h a i r m a n . Yes. Let it be made a part of the record.
(The paper which was marked “ Exhibit 1 2 ” was made a part of
the record, as follows:)

Transactions

of 10,000 shares or more

on April

6,

Net
Volum change
e
Alaska Juneau (50%)— . . . ----Allied Chemical & Dye (6)-----American Can (15)----- - - - - - - - American Telephone & Tele­
graph (9)_________- ...............
American Tobacco B (16).........
Anaconda..................................
Auburn (4)— - ........................
Bethlehem Steel........................
Canadian Pacific (1)4)----------Case (J. I.) Co..— ...................
Chesapeake « Ohio..............
Chrysler (1)------------------------Columbia uas & Electric (1H).
Commonwealth & Southern—
Consolidated Qas (4)---------DuFont de Nemours (4)----First National Stores (2>$)..
Oeneral Electric (1).............
Oeneral Foods (3)................
Oeneral Motors....................
Gillette Safety Razor (1).—
International Nickel______
International Tel.................
Ken. Copper........................
Kresge, 8. S. Co. (1.80)..............

22,400
22,700
37.900
93.900
7,800
12.900
35,100
10,500
28,600
11,900
43,000
49,200
45,400
76,400

zk
-4 !
-H
- IK

- 2 )4

-IN
-H

116,600
10,600

'- li

Volume
Kreuger & Toll......................
Montgomery Ward...............
Nash (2).................................
National Dairy Products (2.60).
New York Central.....................
North American Co. (10 % St.).
Packard Motor......................
Paramount Publix................
Radio....................................
Sears Roebuck (2H)............
Socony Vacuum (1).............
Standard Brands (1.20).......
Standard Oil of New Jersey (2).
Texas Corporation (1)...............
Texas Oulf Sulphur (2).............
Tide Water Association OF----Union Carbide & Carbon Cor­
poration (2).............................
United Aircraft......................... .
United Corporation..................
United Gas improvement (1.20)
United States Steel (2). - - .......
Westinghouse Electric & Manu­
facturing (1)...........................
Woolworth Co. (2.40)...............

Net

change

1 1 3 , 5 00

18.700
28.700
46,600
17,000
16,500
13,100
15.300
11.300
12,700
6.400
29,400

zk
-0*

-X
- l

H

58.500
16.900
92.000
28, H
00
23.000

Mr. B r a n c h . Mr. Whitney, you have no information as to the
decline or rise of short interest in these particular stocks, as I under­
stand you?
Mr. W h i t n e y . No, sir; not at hand. But it is now being compiled.
Mr. B r a n c h . That would give a more complete picture of the
situation, would it not?
Mr. W h i t n e y . It would give a more complete picture; yes.
Mr. B r a n c h . And it is perfectly possible, is it not, that the short
interest in those particular stocks rose although the total short inter­
est of all stocks declined?
I Mr. W h i t n e y . No, Mr. Branch, it is not perfectly possible. I
iiave no belief that the short position in the most of these 4 3 stocks



STOCK EXCHANGE PRACTICES

65

will not show a decrease. Any such amount as 214.000 shares would
naturally be reflected in the more active stocks.
Mr. B r a n c h . But you do not know now. do you. what short sales
were made in those particular securities which were covered during
that day?
Mr. W h i t n e y . No, sir.
Mr. B r a n c h . And that compilation of course does not consider in
any way sales made against the box. does it ?
M r . W h i t n e y . N o. sir.

Mr. B r a n c h . Don’t you think it would give a more accurate pic­
ture of the situation if you had statistics showing sales against the
box on that day ?
Mr. W h i t n e y . No. sir.
Mr. B r a n c h . Why n o t?
Mr. W h i t n e y . Because I do not think that in any way, shape, or
manner, can a sale against the box be construed as a short sale.
Mr. B r a n c h . As a matter of fact, any sale against the box means
the seller usually borrows stock to fulfill his order, does it not ?
Mr. W h i t n e y . There are hundreds o f reasons for borrowing—or
perhaps not hundreds, but 10 or 2 0 reasons for borrowing stocks
as against sales in which cases there is no short sale occurring.
Mr. B r a n c h . Well, if he did borrow stock, although he had it in
his box. it would be in effect the same thing as a short sale, wouldn’t
it?
Mr. W h i t n e y . N o , sir.
Mr. B r a n c h . Why not?
Mr. W h i t n e y . Well, let us say I am a resident of California. X
own 500 shares of Union Carbide and I have that stock in my safe
deposit vault in San Francisco. I give my broker in San Francisco
an order to sell 500 shares of Union Carbide. It is sold. By no
stretch of the imagination could those 500 shares constitute, and we
will say presumably they are in five certificates, an actual delivery
the next day before 2.15 p. m. to the broker in New York for delivery
against m^ contract. Therefore, my broker in New York has to
borrow 500 shares of Union Carbide to deliver against that contract
under the rules of the New York Stock Exchange. My stock is
shipped from San Francisco by air mail, or however it may be
shipped, and when received by my broker in New York he returns
that stock to the broker or wliomovov he borrowed from. .And that
is only one of many instances where the borrowing of stock is neces­
sary m order to fulfill contracts of sales which in no way possible
could be construed as short sales. And I hold that contention to
absolutely apply to sales against the box.
Mr. B r a n c h .* Well, that is only one kind of sale against the box,
is it not? Are not sales against the box often made where the reason
for making the sale is not necessarily delay in making delivery but the
fact that the seller has no intention of delivering his own certificates
but intends to borrow ?
Mr. W h i t n e y . Mr. Branch, I can not set myself up as having
knowledge of the intent of all the people in the United States who
wish to adopt that particular practice.
Mr. B r a n c h . Don’t you know as a matter of fact that that is a
co m m o n practice ?
Mr. W h i t n e y . I believe it is done for one reason or another.



STOCK EXCHANGE PRACTICES

66

Mr. B r a n c h . Yes.
,
Mr. W h i t n e y . But I know of many instances also where the socalled sale against the box has been wrong in the estimation of the
individual; I mean wrong in so far as the price is concerned, and
that individual has either bought at a higher price, and possibly d id
buy back that stock, or has delivered the very shares he had in his
box against his contract.
Mr. B r a n c h . That is quite possible, but isn’t it true that as a
ractical matter there are many sales made against the box which
ave exactly the same effect as the typical short sale?

E

M r. W h i t n e y . N o, sir.

Mr. B r a n c h . Let us suppose that I have some securitiM, and that
I am an officer of a corporation, and that because of the requirements
o f New York law, or for any other reason, I do not wish to have a
sale of that particular stock shown; I wish to remain the holder o f
record of that stock on the books of the corporation. May I n ot
make a sale of an equivalent number o f sales of stock without desig­
nating that it is a short sale although I never intend to deliver that
certificate, but intend to borrow another certificate in order to fu lfill
the contract?
Mr. W h i t n e y . I quite agree with you that that may be an instance
o f what an individual may intend, but I still firmly Relieve that that
is not a short sale. As I stated on yesterday, that individual at all
times has in his power the right to deliver the stock that he has in
his box against the sale. The mere fact that in the interim he is b o r ­
rowing I do not think affects the question. And as I also said on
yesterday, that individual at no time has to buy any stock back ,
whereas the short seller at all times must eventually buy that stock
back. And that is the real definition and distinction that we fe e l
exists between a short sale and a sale against the box which we do n ot
consider a short sale.
Mr. B r a n c h . But you do know that the kind of sale against th e
box which I have just described is very common practice, do you n o t !
M r . W h i t n e y . I do not, sir.
Mr. B r a n c h . You do not believe that that has been done in antconsiderable volume?
Mr. W h i t n e y . I did not say I did not believe, but said I did n ot
know. That it may be done I will grant you as a matter of y o u r
knowledge, but I do not know.
Mr. B r a n c h . Have you no information from current conversation
around the New York Stock Exchange as to whether that is the
common practice?
Mr. W h i t n e y . One hears of it being done; yes. But as to a com­
mon practice, or a practice that is having any vital influence on th«%
market, I have no knowledge.
M r. B r a n c h . Y ou have n o know ledge one w a v or the o th e r.

Mr.

W

h it n e y .

N o,

sir.

M r. B r a n c h . Y ou can n ot say it has n ot been done in
q u a n tity in the last few m onths, can you ?

Mr. W h i t n e y . I can not say it has not been done in great quantum
but I do not know of it.
*
1 auClty,



STOCK EXCHANGE PRACTICES

67

Senatoi C o u z e n s . Would the information be valuable to the stock
exchange if it were collected?
Mr. W h i t n e y . It might be valuable to this committee, but in my
opinion it is not valuable to the exchange.
Senator C o u z e n s . You say it is not valuable to the exchange ?
Mr. W h i t n e y . We do not think it is any of our business. It
does not constitute a short sale.
Mr. B r a n c h . Had you finished, Senator Couzens?
Senator C o u z e n s . Gro ahead.
Mr. B r a n c h . A s I understand it, the stock exchange has no sta­
tistical data at all 011 sales against the box?
Mr. W h i t n e y . N o , sir.
Mr. B r a n c h . And there has been no effort made to collect any such
data up to the present time ?
Mr. W h i t n e y . No, sir. I know that in our questionnaire as to
reporting short sales we specifically told our brokers that we did
not wish those facts sent in because we did not consider that a short
sale.
Mr. B r a n c h . I s it not true th a t the b u lk o f the sellin g against the
box has been done b y p o w erfu l b a n k in g g ro u p s?
Mr. W h i t n e y . Mr. Branch, how can I answer

that question when
I have just made my previous answer ?
Mr. B r a n c h . I am not asking for your absolute knowledge but
for the best information you have as to it.
Mr. W h i t n e y . I am not willing to acknowledge any intimation
in that direction because I have no knowledge.
Mr. B r a n c h . Y ou do not even kn ow w hat the current opin ion on
it is?

Mr. W h i t n e y . I do not.
Mr. B r a n c h . We will come now to the chart which you presented
on yesterday at the end of the session, the one marked Exhibit 1 0 ,”
of which I think you have a copy before you there.
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . I want to make this statement at the outset because
I think it may avoid explanations. I do not understand that this
chart, or any chart, would show that in every case the increased
short interest was accompanied by a decline in price. I realize that
you can point out a large number of days probably where that was
not so, and maybe where the direct contrary was the fact. Conse­
quently I am not attempting to get you to make an inclusive state­
ment because I realize that this chart does not warrant any such
statement. But I am asking you about the general situation.
Wouldn’t you say that this shows that, generally speaking, a rise in
price is accompanied by a -decline in the short position, and the
contrary, although I am not asking you to say that one is dependent
upon the other? I am merely asking whether those two situations do
not usually exist during the period that both of those facts are
displayed upon this chart.
Mr. W h i t n e y . My answer is 110. I appreciate that no chart along
the very lines you have mentioned is very conclusive in almost any
way. But I believe that the majority of instances here taken up in
connection with a consideration of the events rather tend to show that
when the market was declining the short interest was also declining.



STOCK EXCHANGE PRACTICES

68

Mr.

B r a n c h . Well, if you will start with me now. You begin to
the total number of shares composing the short interest as o f
about the beginning of June, 1931, do you not?
Mr. W h i t n e y . That i s right.
Mr. B r a n c h . And at that time there was a very large short inter­
est, was there not, something over five and one-half million shares!
Mr. W h i t n e y . That is right
Mr. B r a n c h . And at that time the price index of those 90 stocks
shown by the Standard Statistics list was at its low for the year up
to that time, was it not?
Mr. W h i t n e y . Yes; and going down.
Mr. B r a n c h . Very well; and it reached a new low, did it not, in
the early part of June, 1921?
Mr. W h i t n e y . Yes; at which time the short interest was steadily
declining.
Mr. B r a n c h . You haven’t anything showing whether the short
interest had declined prior to May 25, have you?
Mr. W h i t n e y . No, sir. But I am only taking what is on the chart
and trying to answer you as you request.
Mr. B r a n c h . The short interest went down very abruptly from the
latter part of May to the latter part of June, did it not?
Mr. W h i t n e y . That is true.
Mr. B r a n c h . It went down nearly to 3,500.000 shares according to
this graph.
Mr. W h i t n e y . During which time the market was also goin<?
down, and then it went up slightly.
&
Mr. B r a n c h . Well, isivt it true that the market index for those
stocks on the 1st day of June, by the line indicating the total number
of shares composing the short interest, was in the neighborhood o f
1° 8 ?
v
.
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . It was 108.
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . And the short interest declined very precipitously
but on or about June 26, or I will say 25, the price index o f those
90 stocks had mounted to somewhat over 1 2 0 , had it not ?
Mr. W h i t n e y . I won’t quibble with you as to prices.
Mr. B r a n c h . I am not trying to get the exact price.
Mr. W h i t n e y . Approximately; yes.
Mr. B r a n c h . Then it is true that during that period of about a
month the short interest constantly declined but the price index rose
after some fluctuations pretty constantly?
Mr. W h i t n e y . That is true. But from the beginning of the tim e
which the chart shows the price index declined and then went u p .
Mr. B r a n c h . Yes; but taking the period of a month. That xvas
only for a day or two, was it not ?
Mr. W h i t n e y . I am taking the period of a month.
Mr. B r a n c h . Taking the period of a month it is true that the s h o r t
interest declined drastically and the price index went up materialItt
did it not?
Mr. W h i t n e y . It went up approximately 10 points.
Mr. B r a n c h . Which is somewhat over 10 per cent of the previous
index figure.

sh ow




STOCK EXCHANGE PRACTICES

69

Mr. W h i t n e y . Yes.
Mr. B b a n c h . S o that in that month at least it is true that there
Was a great decline in the short interest and a material rise in the
index price?

Mr. W h i t n e y . I th in k th a t is so.
Mr. B r a n c h . And then to take the next period----Mr. W h i t n e y (continuing). Pointing out to you, Mr. Branch, that
at that time, June 2 0 , there was the commencement of the moratorium
on debts.

Mr. B r a n c h .
didn’t it?

Y e s ; an d the short interest declined at th a t tim e,

Mr. W h i t n e y . It declined.
Mr. B r a n c h . And isn’t it generally true that the short interest
declines at a time when things are going well or when there is good

new s?

Mr. W h i t n e y . It is apt to, yes; naturally, for that is human
nature.
Mr. B r a n c h . Yes, of course. And isn’t it a fact that the short
interest was very lowr during the period of great inflation in 1929?
Mr. W h i t n e y . S o far as we know. May I also point out to
you-----Mr. B r a n c h (interposing). May I stick for a minute to 19*29,
although I am not trying to hedge you off, but would now like to
consider that.
Mr. W h i t n e y . S o far as we knew. But we had no comprehensive
data for any long period of time.

Mr. B r a n c h . S o you can n ot tell us
ing had at th e tim e when the m arket
peak.
Mr. W h i t n e y . At the panic ?
Mr. B r a n c h . Yes.
Mr. W h i t n e y . O r at the peak?
Mr.

B ranch.

w h at, i f a n y , effect short sell­
started to go dow n a fter the

Yes; commencing from July of 1929.

Mr. W h i t n e y . Commencing from July of 1929 and well into
November of 1929 we have no figures on the short interest.
Mr.

B ranch.

Yes.

Mr. W h i t n e y . But what I wanted to say there was that during
that very period you have just pointed out to the committee, as I stated
on yesterday, the long interest as shown by brokers’ loans showed a
steady decrease from approximately $1,600,000,000 to $1,400,000,000,

or $2 0 0 ,0 0 0 ,0 0 0 in values of shares.
Mr. B r a n c h . Y o u will understand, Mr. Whitney, that I am not
saying the decline in the short interest is shown by this chart or any­
thing else to be the main reason for those things? But I am asking
whether as a matter of fact this does not show that usually that
situation exists, that where there is a decline in the short interest
there is a rise in the price, and vice versa, during the period covered
by this chart.

Mr. W h i t n e y . That was not your question put to me. It was the
reverse o f that as I understood it.
Mr. B r a n c h . Maybe I suffered a slip o f the tongue.
Mr. W h i t n e y . It is m y understanding that yo u in the beginning
asked m e if I felt that when stocks were declining in price the short



70

STOCK EXCHANGE PRACTICES

interest was not necessarily declining at the same time. My answer
was, no; because I think the preponderance of what is shown on tHis
chart signifies that the short interest in declining markets rather is
following that of prices in the decline. Now, I also prefaced that
by saying that I do not believe charts are conclusive in their p ro o f,
but it has been pointed out that the contrary existed, and hence th is
chart.
Mr. B r a n c h . Well, we will leave the chart to speak for itself. I
am not going through the thing day by day because I realize there
are exceptions, and if the members of the committee desire to see it , I
will pass it around the table. I have it here if any Senator wants to
see it. But it seems to me that generally it does show that a rise in
price is accompanied by a decline in the short interest, and vice
versa, although there are some exceptions. But I understand y ou
do not draw that inference from this chart.
Mr. W h i t n e y . I do not draw that inference from this chart.
And I think you are failing to point out situations that took place
at those times that would induce a short seller or somebody w ho
thought the market was going down, to sell stocks short, it bein g
his opinion when he looked at the shares of a particular corporation
that they were not worth buving but rather selling because they were
going down, and therefore he sold, and the result showed his ju d g ­
ment was better than that of the other man. But his judgment was
predicated upon things of one sort and another that were not o p ti­
mistic. What I pointed out to Senator Bulklev to-day and on yester­
day was that in spite of very serious announcements coming o u t in
the last week or two, or three weeks, which would naturally cause
the market to go down, that during that period, strange to relate,
the short interest also went down.
Mr. B r a n c h . And the short interest has been going down fo r
the last week.
Mr. W h i t n e y . Yes, sir; and for the month of March there w as
an increase of 40,000 shares only net.
Mr. B r a n c h . I do not want to quarrel with you any longer as
to what this chart shows. It is here and anyone can draw his ow n
conclusions, and we have your views which we wanted to get.
Mr. W h i t n e y . And I will say that I explained this chart in detail
in my appearance before the Committee on the Judiciary o f the
House o f Representatives.
Mr. B r a n c h . And that was introduced then in evidence as X un­
derstand it.
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . We do not need to go into that again here.
Mr. W h i t n e y . All right.
Mr. B r a n c h . I understand that you have also a chart which shows
the stock price index as compared with the actual-earnings index for
the period beginning in the early part of 1929 and going down to
latter part of 1931.
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . I do not think that has been marked as an exhibit
by the committee reporter. Let us have that done.
Mr. W h i t n e y . I do not remember having submitted this a s m
exhibit, but I did casually refer to it.




71

STOCK EXCHANGE PRACTICES

Mr. B r a n c h . Well, let it be marked.
(A graph designating actual-eamings index, earnings index cor­
rected for seasonal variation, and stock price index from the begin­
ning of 1929 to the end of 1931 was identified by being marked
“ Exhibit No. 13,” and is inserted at this point.)

'• 2 9

‘*30

»9 *»

Mr. B r a n c h . Mr. Whitney, I am now going to ask you a few mis­
cellaneous questions for the sake of information. Members on the
floor of the exchange are not supposed to be told by specialists what
buying or selling orders the specialists have on their books, are they ?
M r . W h i t n e y . D o you m ean specifically as fo r w h o m ?
Mr. B r a n c h . Are the specialists supposed to give any information

at all about such matters to members of the exchange on the floor ?
Mr. W h i t n e y . Well, if a member asks what the market is up and
down in a reasonable way, to find out the breadth of the market,
there is no reason why that information shall not be given. But
specialists may not give information as to stop orders. And if a
specialist has any idea or thought that the information he is asked
to give is going to be used in a detrimental way, then of course he
may not give that information and would not give it. But he is
there telling brokers that inquire how the market is, he may say 30^
to a i/>, or if 500 shares are wanted, that he would say yes. I f he
were asked whether there was a fairly full market down and up he
would answer, but always with the idea in mind that he was not
giving information that was going to be acted upon in a detrimental
way. And if acted upon in a detrimental way, the specialist would
report that to the governors.
Senator B a r k l e y . I s a specialist permitted to trade for his own
account ?
Mr. W h i t n e y . Yes: but with very great regard as to his duty to
the customer. He may not trade at a price for his own account for
which he has orders for customers. They must be executed first.
The same thing would apply to the execution of a market order for
a customer.
Mr. B ranc h . But he can use for his own advantage knowledge that
he has if other orders were standing there?



72

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Yes.
Mr. B r a n c h . Has the committee in charge of such matters ever
investigated specialists giving information improperly, or reported
to have given information improperly?
Mr. W h i t n e y . Yes; I think so.
Mr. B r a n c h . Do you recall whether any specialist has ever been
disciplined for an improper giving of information ?
Mr. W h i t n e y . I do not now remember any such case. I b e l i e v e
there have been cases where individuals have been disciplined fo r
such acts; but it is something I can look into and let you have.
Mr. B r a n c h . A very serious situation might arise from specialists
violating their duties with regard to withholding information about
stop orders? I am not now asking whether it has arisen, but whether
it might not be the result if a specialist revealed the fact that he h ad
a great many stop orders at a certain point.
Mr. W h i t n e y . Yes.
Mr. B r a n c h . That would be a very serious matter, would it n o t ? '
Mr. W h i t n e y . To answer your question that it might be, I will say
yes.
M r . B r a n c h . Do y o u know w hether or not any specialist has
d iv u lg e d such in form ation im p rop erly ?
Mr. W h i t n e y . That I do not know.
Mr. B r a n c h . Have any reports that

they have done so come to
your attention?
Mr. W h i t n e y . Do you mean have there been complaints, or have
there been rumors at times, as rumors are rife as to one thing an d
another ? There are rumors about almost everything.
Mr. B r a n c h . And there have been rumors about that?
Mr. W h i t n e y . Not specifically as to specialists, but that t h e r e are
large stop orders. I have not heard that lately, but that was one
o f the things in the early days of the decline.
Mr. B ra n c h . Were any complaints made about it ?
Mr. W h i t n e y . No, sir.
Mr. B r a n c h . You have never had any complaint about it?
Mr. W h i t n e y . Not that were ever proven; no, sir.
Mr. B r a n c h . N o w , I want some information as to the lending Q
f
stock to a short seller. I f a broker-----Mr. W h i t n e y (interposing). Are you willing to make that as a
question separate and distinct, because they are not absolutely allied
as I tried to tell you this morning. The lending of stock is a neces­
sity in many instances outside of and distinct from where a short
seller operates.
M r . B r a n c h . Well, let us confine this just to the case where i t jg
a short sale.
Mr. W h i t n e y . O. K.
Mr. B r a n c h . And if the answer applies to other cases, well a n d
good, and if it does not I should like tor you to explain it.
Mr. W h i t n e y . All right.
Mr. B r a n c h . I f a broker loans his customer stock, there may
a
premium paid for the use of that stock, m a y there not ■
Mr. W h i t n e y . There may be.
Mr. B r a n c h . And som etim es it is done ?
Mr. W h i t n e y . Yes, sir.




STOCK EXCHANGE PRACTICES

73

Mr.-B r a n c h . I>oes the customer get the benefit of that premium\
Mr. W h i t n e y . It all depends. In the case of some houses it is
allowed, and in the case of some other houses it is not. I think the
most common practice is not to allow the premium because the
broker is assuming ail of the risk. In some cases where the premium
is allowed or a part of the premium, the customer has to assume the
risk and not the broker.
Mr. B r a n c h . Are there any rules of the stock exchange governing
that matter ?
Mr. W h i t n e y . No, sir.
Mr. B r a n c h . That is left entirely for the customer and the broker
to arrange?
Mr. W h i t n e y . Entirely.
Mr. B r a n c h . And up to about the 1st of April the broker ordi­
narily got the right to lend stock by virtue of some stipulation printed
on the original sale note or something of that kind, didn’t lie ?
Mr W h i t n e y . No; not something of that kind at all.
Mr. B r a n c h . What was it ?
Mr. W h i t n e y . The broker got that permission from the customer
by reason of the agreement, which is sometimes called a consent
card or customers* agreement. It was a separate paragraph in every
instance that I have ever seen, specifically allowing the broker to
loan as well as to pledge securities in carrying the customer's account.
Mr. B r a n c h . What do you mean that was m ? Was it in an agree­
ment that was signed relating solely to that matter or was it in some
other document ?
Mr. W h i t n e y . In the document that relates to the customer’s
account, in general and specific language.
Mr. B r a n c h . That document had no relation to anything except
the terms under which the account was to be carried.
Mr. W h i t n e y . Yes, as I remember it and understand it.
Mr. B r a n c h . That was changed as of April 1, wasn’t it ? I mean
the method of giving consent.
Mr. W h i t n e y . The method of giving consent was not changed as
I understand it in its wording at all. It was made at the instigation
o f the exchange a separate document so that the right that always
existed and solely existed in the hands of customers as to whether
or not their stock should be loaned, but for the benefit of those wha
did not understand, little words for little fingers, should have it
put before them so that they would know absolutely that only the
people who own stocks have it in their power to say whether or not
they should be loaned.
Mr. B r a n c h . But you felt it was fairer that that matter should
be specifically called to their attention rather than be incorporated
in with a lot of other provisions of the contract.
Mr. W h i t n e y . Not fairer, because that has been in existence for
as long a time as I can remember, but there was misunderstanding
as indicated by a great many complaints, from a great many pieces
of information that arrived at the exchange, and we thought it would
be wise to forcibly, if you will, put before the public their rights,
rights which they have exercised, but there has been no change what­
ever in the actual situation as to the borrow and loan market.
Mr. B r a n c h . And that took effect as of April 1, I mean that
change, didn’t it?



71

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Yes, sir; and it was announced some time in
February.
Mr. B r a n c h . But as a matter of fact that doesn't seem to have
affected the supply of stock available for loans, does it i
Mr. W h i t n e y . No, sir. I f anything, I think it has increased the
supply of stock, because people realized more particularly.
Mr. B r a n c h . I understand you to have expressed the opinion that
this step has not tended to decrease the amount of short selling.
Mr. W h i t n e y . I am not conscious of ever making such a statement.
Mr. B r a n c h . Well, what is your opinion on that ? Have you any
opinion on it as to whether that step has had any effect upon the
volume of short selling?
Mr. W h i t n e y . That step never was intended to have any effect
upon the volume of short selling, and I do not think it has had any
effect upon it, no.
Senator C otjzens. Let me ask the witness a question right there.
The C h a i r m a n . Proceed, Senator Couzens.
Senator C o u z e n s . Just what is the relation between a broker and
his customer that gives the broker permission to use his property at
will?
Mr. W h i t n e y . What is the relationship?
Senator C o u z e n s . Yes. Say I am dealing with a broker.
Mr. W h i t n e y . Just why does an individual deal with a broker?
Senator C o u z e n s . I am just wondering what the customer gets
out of it. I f I order an agent to buy a piece of property I do n ot
necessarily consent that the agent may use that property at will.
I wondered just what developed the practice about that relationship
between broker and customer.
Mr. W h i t n e y . Y o u do not necessarily allow an agent to use your
property at will, no; and neither need a customer of a brokerage
house agree to this. But they seem to have done so.
Senator C o u ze n s . That is what I am trying to find out. W h a t
brought that about? What is the history of that matter whereby
a broker or agent may at will use his customer’s stock without w r it­
ten permission?
Mr. W h i t n e y . Oh, no, Senator Couzens. They always have w rit­
ten consent or permission.
Senator C o u z e n s . It is mostly oral, is it not ?
Mr. W h i t n e y . No, sir. It is signed, sealed, and delivered as a
document always.
Senator C o u z e n s . And he does it without compensation, just in
order to give the broker that power?
Mr. W h i t n e y . No, sir; there is a real compensation in it. That is
one of the ways of financing the carrying of stocks by the broker f o r
the customer. I believe, Senator Couzens, that it is only in these
days, where the finger has been pointed at short selling, that there has
ever been any question on this point. Mind you, if I borrow stock
from you for delivery against contract, whatever it may be, short
selling or otherwise, I pay you at that time the full market value in
cash and you pay me a rate of interest or you get the money flat, o r I
may even have to pay you a premium for that stock.
Senator C o u ze n s . For the use of the stock?
Mr. W h i t n e y . The borrower.
Senator C o u z e n s . The lender gets the premium ?



STOCK EXCHANGE PRACTICES

75

Mr. W h i t n e y . Yes, sir.
Senator C o u z e n s . And prior to this new arrangement which went
into effect on April 1 what was the agreement usually between bor­
rower and the lender of stocks—what kind of agreement did they
have?
Mr. W h i t n e y . There is no essential difference between the present
agreement made between customer and broker than existed in the
past. Your question is, what was the agreement between lender and
borrower. That agreement is a contract which is made through the
rules and under the regulations of the New York Stock Exchange,
which we see is fulfilled.
Senator C o u z e n s . That is what I am trying to get at. What is
the usual arrangement made between a broker and a customer whose
stock is borrowed ?
Mr. W h i t n e y . That, sir, is the customer’s agreement or consent
card that I referred to, giving the broker the right to loan or pledge
the customer’s stocks, and that agreement or that type of agreement
has been in effect for 15 or 20 years, I believe.
Senator C o u z e n s . Yes; but the form that is now being executed
does not detail the relationship between broker and customer because
I have seen the card, I mean as to the terms. Now, what I am trying
to find out is, if you know, what are the usual terms between broker
and customer.
Mr. W h i t n e y . D o you mean the usual consent card that is giv en
to th e customer to sign ?
Senator C o u z e n s . Oh,

no. The usual relationship that exists be­
tween broker and customer when the broker was permitted to loan
the customer’s stock, prior to the signing of the card which is public
property.
Mr. W h i t n e y . Well, I am sorry, and I may be very stupid, but I
do not understand you, Senator Couzens.
Senator C o u z e n s . Well, perhaps I do not speak good English. But
prior to April 1 you required no filing of any consent as I understand
it, between the broker and his customer.
Mr. W h i t n e y . That is correct, although those consents were always
on file, and have to be or it would be a violation of the laws of the
State of New York.
Senator C o u z e n s . Then what happened to bring about this new
order that was put into effect on April 1 ?
Mr. W h i t n e y . Well, I just tried to tell Mr. Branch, there were
many complaints made by those who did not understand their rights,
many letters came in, or there was a feeling on the part of our bro­
kers more particularly that their customers did not understand the
whole situation. Therefore, in order to make it perfectly clear, we
insisted upon this separate agreement, in order to call "the matter
directly to the customer’s attention.
Senator C o u z e n s . Prior to that time what kind of contract existed
between broker and customer? That is what I am trying to find
out. Is that plain?
Mr. W h i t n e y . A contract existed setting forth certain agreements
on the part of the customer to the broker in the handling of the
customer’s account by the broker.
Senator C o u z e n s . N o w , that is what I was getting at. What kind
of agreement was it?




76

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Well, I would have to get one of those f ov y°U in
order to answer properly.
Senator C o u ze n s . Are they uniform?
Mr. W h i t n e y . I think they are very nearly uniform.
Mr. B r a n c h . I think I have such an agreement here.
Mr. W h i t n e y . We could send out to some brokerage bouse and
get some.
Mr. B r a n c h . I s this paragraph that is marked the m a tte r you are
speaking about, Mr. Whitney?
Senator C o u z e n s . While Mr. Whitney is reading that paragraph,
it has come to my attention that it is quite possible for the broker
to use his customer’s stock to depress the value of the customer’s
stock, and I wondered what kind of an agreement existed between
a broker and his customer which gave the broker the opportunity
of selling short and depressing the value of his customer’s own stock,
Mr. W h i t n e y . Senator Couzens, I deny it.
Senator C o u z e n s . Deny what?
Mr. W i i i t n e y . I den y th at.
Senator C o u z e n s . Deny what?
Mr. W h i t n e y . That a broker may use his customer’s stock in
depressing the market. No broker under our regulations may sell
stocks short and use his customers’ stock or may he sell stock in any
way for his own account and use his customers’ stock. That is
an absolute violation of our rules.
Senator C o u z e n s . H o w do you detect that when that happens ?
Mr. W h i t n e y . When it happens?
Senator C o u z e n s . Yes. On, it does happen. No use to be s o
innocent about it.
Mr. W h i t n e y . I am not innocent about it, I regret to state. The
last case I remember was E. W. Wagner & Co. of Chicago. They
were short in their own account some 300,000 shares of stock which
they had taken from their customers’ accounts for delivery. It was
nothing more nor less than a bucket shop operation, and we expelled
them promptly from the New York Stock Exchange.
Senator C o u ze n s . When was that?
Mr. W h i t n e y . Some time in 1920 or ’2 1 , some time around there.
Senator C o u z e n s . And since that they have been able to obscure
ail those transactions from the observations of the New York Stock
Exchange?
Mr. W h i t n e y . I do not think those transactions take place. That
is bucketing.
Senator C o u z e n s . Y ou contend that there is no bucketing in the
New York Stock Exchange?
Mr. W h i t n e y . I contend there is not bucketing in the members,
on the part of the members of the New York Stock Exchange, yes.
Senator C o u zen s. At least you do not know of it. You could not
say whether it happened?
Mr. W h i t n e y . We have twenty and odd men, Senator Couzens,
going into every office throughout this whole United States contin­
uously, and you imply that the books are manipulated. "We can not
find it out, and I think we have the only accountants in the world
that accurately know brokerage accounting from bottom to top.




STOCK EXCHANGE PRACTICES

7r

Senator C o u z e n s . Going back to that agreement again, does the
agreement that Mr. Branch handed you just now specify the detailed
relationship between the broker and his customer (
Mr. W h i t n e y . Yes, sir; in general.
Senator C o u z e n s . What are the terms that are usually included m
that agreement?
Mr. W h i t n e y . Shall I read the whole agreement? Some are far
longer than this.
Senator C o u z e n s . What I was trying to get at is not so much the
“ whereases ” and the lending of the stock as what is the financial
relationship, if any, between the broker and his customer when the
broker is authorized to use the customer’s stock to make good on sales.,
Mr. W h i t n e y . It states, amongst other things:
All transactions are subject to the rules, regulations, and customs of the
exchange or market, and its clearing house, if any, where executed by you or
your agents.
Whenever I am indebted to you, and/or whenever you have entered into
any open commitment for me, and/or whenever I have a short position with
you, all securities, now or hereafter held by you, or carried by you in any
account for me (either individually or jointly with others), or deposited to
secure same, may, from time to time and without notice to me, be carried in.
•your general loans and may be pledged, repledged, hypothecated or rehypoth­
ecated, or loaned by you either to yourselves as brokers, or to others, separately
or in common with other securities for the sum due to you thereon or for a
greater sum and without retaining in your possession or control for delivery
a like amount o f similar securities.

Then it goes on as to the protection—
Whenever you shall deem it necessary for your protection to sell any or all
of the securities which may be in your possession, or which you may be
carrying for me—

That is a matter of selling out of an account when the customer
may not possibly be reached by the broker.
Senator C o u z e n s . Does that only apply when the stock is bought
on margin?
Mr. W h i t n e y . O h , yes, s i r ; en tirely .
Senator C o u z e n s . It does not apply if the customer has paid in
full for the stock which the broker is folding for the customer?
Mr. W h i t n e y . N o ; and he may not loan that stock under an\
circumstances without the express permission of the customer.
Senator C o u z e n s . S o that the consideration that the customer gets
out of that agreement is the consideration of a broker carrying the
loan?
Mr. W h i t n e y . That is right.
Mr. B r a n c h . I think it would be a good idea to have that agree­
ment made a part of the record, and I will ask the reporter to mark
it Exhibit No. 14.
(The document referred to was thereupon marked “ Exhibit 14
M. D. R. April 12,1932,” and is here printed in the record in full,
as follows:)
E x h i b i t 14, M . D . R . A p r i l 12. 1932

In consideration of j'our acting as my brokers in the purchase and sale of"
stocks and securities (hereinafter collectively referred to as securities) antf
opening the account in which they will be recorded, whether designated by nani^
or number or otherwise, I agree as follow s:
119852— 82------ 6




STOCK EXCHANGE PRACTICES

78

All transactions are subject to the rules, regulations, and customs o f the e x ­
change or market (and its clearing house, if any) where executed by you or
your agents:
. ,
Whenever I am indebted to you, and/or whenever you have entered in to
any open commitment for me, and/or whenever I have a short position w ith
you, all securities, now or hereafter held by you, or carried by you in a n y
account for me (either individually or jointly with others;, or deposited to
secure same, may, from time to time and without notice to me, be carried in
your general loans and may be pledged, repledged, hypothecated or rehypoth­
ecated or loaned by you either to yourselves as brokers, separately or in c o m ­
mon with other securities for the sum due to you thereon or for a greater su m
and without retaining in your possession or control for delivery a like am ount
o f similar securities:
Whenever you shall deem it necessary for your protection to sell any or a ll
o f the securities which may be in your possession, or which you may be c a r r y ­
ing for me (either individually or jointly with others), or to buy in any se c u ri­
ties of which my account or accounts may be short, such sale or purchase m a y
be made according to your judgment and may be made at your discretion on
the exchange or other market where such business is then usually transacted,
or at public auction or private sale, without advertising the same and w ith o u t
notice to me and without prior tender, demand, or call o f any kind upon m e—
it being understood that a prior tender, demand, or call, or prior notice o t th e
time and place of such sale or purchase, shall not be considered a w aiver o f
your right to sell or buy any securities held by you, or owed you by me, at a n y
time as hereinbefore provided.
Whenever in your opinion circumstances require it, you may apply a n d /o r
transfer any o f or all my equities interchangeably between all my said accou nts,
without notice to me in the premises.
In case o f the sale o f any security by you at my direction ami your in a b ilit y
to deliver the same to the purchaser by reason o f my failure to supply y o u
therewith, then and in such event, I authorize you to borrow any secu rity
necessary to make delivery thereof, and I hereby agree to be responsible, f or
any loss which you may sustain thereby, or by reason o f any loss you m ay s u s ­
tain by your inability to borrow the security sold.
This agreement shall continue until revoked by me in writing and a ll m y
open accounts and/or contracts for my account have been closed.
Dated, New Y ork, --------- .

Mr. B r a n c h . I ’ll show you, Mr. Whitney, a card which I under­
stand to be the form of agreement relating to this matter, which, is
now used.
Mr. W h i t n e y . Mind you, I do not agree that that is the only i orn i
Mr. B r a n c h . Oh, yes; a typical form.
Mr. W h i t n e y . It is a possible form.
Mr. B r a n c h . Yes; and is this a fo r m w hich is now used [ h a n d i n g
docu m en t to Mr. W h it n e y ] ?
g
Mr. W h i t n e y (a fte r perusing d o cu m en t). I believe s o ; y e s , M r
B ran ch .
Mr. B r a n c h .

I ask that that be made a part of the record a n d
mark it Exhibit 15, and I will read that for the benefit of the com
mittee. I f the Senators would like to hear it, this is the form o f
agreement that is used now. I do not suppose this is the only fo r m
but it is a typical form. There is nothing on this agreement, b y the
way, gentlemen, except what I am reading. I am loading the \vh0 le
thing except the date and signature, of course [reading]:
E x h i b i t 15, M . D . K . A p r ii . 12, 1932

Date --------The undersigned, the customer, agrees w ith --------- the broker, tliat any a n a
securities from time to time carried in any marginal account standing in
customer’s name or in any marginal account carried by the broker fo r



79

STOCK EXCHANGE PRACTICES

customer, or any and all securities deposited by the customer to protect the said
marginal accounts, may be loaned by s a id --------- to themselves as brokers or to
others, either separately or together with other securities, either for the sum
due thereon or for a greater sum, all without further notice to the customer.
This agreement may be cancelled and rescinded by the customer at any time
upon written notice sent to the broker by registered mail.

Customer

Senator C o u z e n s . May I ask Mr. Whitney one other question
there: Is there any percentage or range of percentage that a customer
owes his broker when he signs that agreement ? Does he pay 50 per
cent on his stock or 75 per cent or 10 per cent, or what does he pay?
Mr. W h i t n e y . As margin?
Senator C otjzens. Yes.
Mr. W h i t n e y . The minimum margin indicated as good business
b y the New York Stock Exchange is 25 per cent margin.
Senator C otjzens. And do they oftentimes or do they occasionally
go higher than that?
Mr. W h i t n e y . Yes, sir.
Senator C o t j z e n s . Pay a h i g h e r p e r c e n t a g e ?
Mr. W h i t n e y . Yes, sir. It is not a rate; sir.
Senator C otjzens. I mean percentage 011 the principal.
Mr. W h i t n e y . Yes; a deposit. Particularly in 1929 during the
summer, some of our brokers, intentionally to curtail and to stop
speculation, went as high as 50 per cent margin.
Senator C o u z e n s . A.nd do they ever go less than 25 per cent ?
Mr. W h i t n e y . Not if we know it; sir.
Senator C o u z e n s . That is your rule, is it?
Mr. W h i t n e y . Absolutely.
Mr. B r a n c h . A s a matter of fact, Mr. Whitney, though, brokers
would take a margin account without an agreement in substantially
the form shown by the two exhibits which we have just mentioned?
Mr. W h i t n e y . I do not think that is so, Mr. Branch; no.
Mr. B r a n c h . Y ou th in k th a t brokers som etim es d o take m a rg in
accounts w ith o u t g e ttin g such an agreem ent ?
Mr. W h i t n e y . Not without the first agreement,

without his con­
sent to loan. I think brokers are glad to get accounts now under
any circumstances with this agreement.
Mr. B r a n c h . Without the loan agreement?
Mr. W h i t n e y . Without the loaning agreement. That is loaning,
not pledging—loaning.
Mr. B r a n c h . So that it is a fact that that is not necessarily
required by the broker?
Mr. W h it n e y . I answered your question and I meant what I
said, that I think brokers would take accounts without that second
agreement.
Mr. B r a n c h . Have banks any right to lend the collateral of their
customers ordinarily? I am asking you, I suppose, as to what the
agreements are, but you know what is customary in case a bank
lends money secured by collateral.
Mr. W h i t n k y . Well, I do not think that perhaps they loan securi­
ties, no, but I know I sign some very comprehensive agreements
with the banks when I want day loans and things of that sort.




30

STOCK EXCHANGE PRACTICES

Senator F le t c h e r . Do you read the agreement?
Mr. W h i t n e t . Yes, sir.
Mr. B r a n c h . What d o they say in regard to such a matter ?
Mr. W h i t n e y . You mean as to the loaning?
Mr. B r a n c h . Yes.
Mr. W h i t n e y . Well, from what I remember they have the r i g h t
to do pretty nearly anything with my securities.
Mr. B r a n c h . It is a fact, is it not, that you can not r e m e m b e r
what all those terms are?
Mr. W h i t n e y . That is right. I know at the time. That -was
some time ago, that I last read it. N o; I do not grant that, not w ith
that last agreement. I f a man or person can not read that loan agree,
ment as put out by the exchange to start as of April 1. he is a
fool.
Mr B r a n c h . Oh, y e s ; I am speakin g about the a g r e e m e n t, t h e
form that was in vogue prior to that.
The C h a i r m a n . Are the m a jo r ity o f those on the market fools ?
Mr. W h i t n e y . No, sir.
The C h a i r m a n . That lo st their money?
Senator G l a ss . They are fools or there would not be so much dis­
aster in stock speculation.
Mr. W h i t n e y . May I poin t out one thing in that connection,
Branch?
Mr. B r a n c h . Certainly.
Mr. W h i t n e y . I do not want to disagree that perhaps a lo t o f
people may not have seen or paid any attention to the old consent
card with particular reference to loaning of stocks or pledging o f
those stocks. However, this hue and cry, perhaps helped b ytethe
entlemen of the press, with regard to the loaning of customers’ stocks
as been in vogue throughout this land for the last two years, and
certainly with that knowledge being put on record in that way, I can
not believe that the customers of the brokerage houses did not k n ow
did not remember, did not know about the paper they had sign ed ?
and I think that my opinion there is backed up by the fact, w h en it
was specifically put in front of their noses, there was no change in
their desire or the situation.
Mr. B r a n c h . Well, you understand there is no criticism f o r w hat
you have done. I think there is nothing but praise for this p artic. ular thing. But is it not a fact that you did feel that it w ou ld be
an improvement to require brokers to get a specific agreement cover­
ing this single matter?
Mr. W h i t n e y . For the reasons as I have stated.
Mr. B r a n c h . Yes. And y o u do feel that the present m e t h o d
fairer than the old method, ao you not?
Mr. W h i t n e y . It is certainly more pointed; yes.
Senator C o u z e n s . And certainly anybody who signs the
ment now held in the hands o f Senator Copeland seems to me nvnS
have been a goat, if I understand the consideration that was giv en t
the customer for signing such an agreement.
10
Mr. W h i t n e y . It is under that agreement, Senator Couzens o a
only under that, that a broker may use the securities of the custom

g




STOCK EXCHANGE PRACTICES

81

to carry them for him. A broker is not a banker. He goes out and
borrows the money to carry them. He is an agent.
Senator G l a s s . I f not a goat, he may be a scapegoat.
Senator C o u z e n s . Well, you can add as many adjectives as you
choose, but that agreement there seems to absolutely put everything
in the power of the broker without any auditing or checking or con­
sideration by a speculator or securities purchaser, whichever you
choose to call him.
Senator B r o o k h a r t . Let me ask some questions on that. Will the
brokers after getting these agreements use these stocks against their
own clients?
Mr. W h i t n e y . Against their own clients \
Senator B r o o k h a r t . Yes.
Mr. W h i t n e y . I do n ot know w h at you m ean, sir.
Senator B r o o k h a r t . Well, supposing their client is a buyer. He
will want the market to advance. They will sell him short then
expecting the market to decline.
Mr. W h i t n e y . No, sir; they can not. The broker may not sell
short and deliver stock against his contract belonging to his clients.
Senator B r o o k h a r t . I do not sec anything in the contract pre­
venting that.
Mr. W h i t n e y . I never said there was, Senator Brookhart. That
is a rule of the exchange which is over and above any contract signed
by any customer with any broker. There are certain things in these
contracts, in this contract that Senator Copeland has, that are there
in order to conform with the law of the State of New York. There
are certain rules, however, of the exchange that will not allow a
broker to go as far as that permission grants him to go. It says
that he may use his customer’s entire account, the securities in it,
for pledging purposes. We do not allow a use of those securities
more than is necessary to borrow from the bank the money to carry
the actual securities of that particular customer.
Senator C o u z e n s . When it may be pooled under that agreement
then there is no possibility of the broker pooling all the securities
that he owns with all of his customers’ with which he has that agree­
ment, for any kind of a loan? In other words, that is the way I
understand that agreement.
Mr. W h i t n e y . He may perhaps under that agreement seemingly,
but not under the rules of the exchange. He may not use in his
loans or use securities of his customers more than in an amount neces­
sary to procure money to carry those securities for his customers.
Senator C o u z e n s . D o I understand the exchange checks up each
one of those transactions ?
Mr. W h i t n e y . Absolutely. We have a questionnaire from our
firms at least twice a year, sometimes far more often. Each one o f
those questionnaires is checked by our accountants, and besides that
our accountants will go into the offices of our members to check that
those questionnaires are correct in comparison with the books of the
firm.
Senator C o u z e n s . That questionnaire that you get requires the
statement of every single transaction that occurs between the time of
the questionnaires; is that right?




STOCK EXCHANGE PRACTICES

82

M r. W h i t n e y . N o , sir.

Senator C o u zen s. Well then, there may be many transactions th at
happen between the times of the questionnaires that are not dealt
with, and in those cases— Mr. W hitney (interposing). In the questionnaire.
Senator C ou zen s. That in those cases the auditors do not check,
as I understand ?
Mr. W h i t n e y . The auditors do not check every transaction during
that period, they may not inspect the questionnaire answer, but they
are at all times going into brokerage offices, members of the exchange,
not necessarily at the time of the questionnaire at all, merely fo r a
call to see that our rules are adhered to.
Senator C o f z e x s . At the time o f that call every transaction is
checked by your auditors?
Mr. W h i t n e y . All transactions then existing at that time, yes.
Senator C o u z e n s . And so at some time or other all brokers are
checked ?
' Mr. W h i t n e y . Yes, sir.
Senator C o u z e n s . H o w many times a year I
Mr. W h i t n e y . I woidd say two, three, four times a year, Senator.
Senator C o u z e n s. Something on the same order as the checks by
the bank examiners?
Mr. W h i t n e y . I think more frequently.
Senator F l e tc h e r . H o w many members have you, Mr. W hitney?
Mr. W h i t n e y . One thousand three hundred and seventy five.
Senator F l e t c h e r . H o w many in New York ?
Mr. W h i t n e y . Y ou mean members or firms, sir ?
Senator Fletcher. Well, members. I am referring to members
as shown by your records. For instance, if you have one member
of the firm, does that mean the whole firm are members?
Mr. W h i t n e y . Yes. One member of the stock exchange i n m
partnership makes the firm a member for all purposes and intents
o f the exchange. Some firms have 4 01* 5, 8 , 10 members o f the
exchange, as partners. I believe there are something like 480 to
520 stock exchange firms located in New York City. I would say
that the actual members of the exchange are probably a thousand
who have their place of business in New York City or thereabouts.
Senator F l e t c h e r . N o corporations are members?
Mr. W h i t n e y . N o, sir.
Senator F l e t c h e r . Y ou confine it to individu als or p a r t n e r s h ip s ?
M r. W h i t n e y . Y es, s ir ; confined to individu als entirely.

Senator B r o o k h ar t . H o w many are on the governing board?
Mr. W h i t n e y . There are 40 governors. Senator Brookhart*
making up the governing board, including the president and the
treasurer.
Senator B r o o k h ar t . Where do they reside?
Mr. W h i t n e y . Y ou mean their actual residence?
Senator B ro o k h ar t . Yes.
Mr. W h i t n e y . New York State, New Jersey, and one in P en n ­
sylvania.
Senator B r o o k h ar t . H o w many are in New Jersey ?
Mr. W h i t n e y . Oh, I think half a dozen, 1 0 , 1 2 . possibly.




STOCK EXCHANGE PRACTICES

83

Senator B r o o k h a r t . Some in Philadelphia and the balance of
them in New York?
Mr. W h i t n e y . Yes.
Senator B r o o k h a r t . How many agencies do they have over the
country?
Mr. W h i t n e y . Branch offices?
Senator B r o o k h a r t . Yes.
Mr. W h i t n e y . I think they run through into the many thousands.
Senator B r o o k h a r t . They are extended to almost every commu­
nity in the United States?
Mr. W h i t n e y . To every State of the United States, I believe. I
would not say their own branch offices are in every community.
They may have correspondents in most communities.
Senator B r o o k h a r t . What prospectuses or advertisements or state­
ments do they put out to induce people to engage in business with
them on the stock exchange ?
Mr. W h i t n e y . The common practice is to advertise in the news­
papers, their card, that they are members of the New York Stock Ex­
change, and may say they carry accounts or will accept accounts on
margin or that they are dealers in stocks and bonds.
Senator B r o o k h a r t . How long have you been president ?
Mr. W h i t n e y . Since early May, 1930.
Senator B r o o k h a r t . And were you on the board of governors
before that ?
Mr. W h i t n e y . Yes, sir.
Senator B r o o k h a r t . H o w long there ?
Mr. W h i t n e y . Since early May, 1919.
Senator C o u z e n s . Will the Senator permit an interruption just a
moment?
Senator B r o o k h a r t . Yes.
Senator C o u z e n s . May I ask the chairman if he is going to have an
executive meeting this morning?
The C h a i r m a n . I thought we should, Senator.
Senator B r o o k h a r t . Just a few more questions.
Senator C o u z e n s . But I was wondering how long we were going
to run. I have an appointment. I would like to be here during the
executive session.
Senator B r o o k h a r t . I will be through in a moment, I think, and
then I will let you go.
Now, in 1929 when did you, if at all, foresee the overinflation of
values that would result in a panic later?
Mr. W h i t n e y . I do not know, Senator B r o o k h a r t. I th o u g h t I
saw it at some periods, and then I got discouraged because I seemed
wrong and thought I saw it again, but I was carried away like every­
body else.
Senator B r o o k h a r t . So during all the time you continued to do
business with your clients and advise them just as you always had?
Mr. W h i t n e y . I did not. I do not advise my clients, Senator
Brookhart.
Senator B r o o k h a r t . Y ou do not advise them at all. And you did
not give them any warning that there was a panic ahead as a result
of this overinflation, did you ?




§4

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . No, sir; because I think my clients know m o r e
about conditions than I.
Senator B r o o k h ar t . You do not have any clients, except the s m a r t
•ones, then?
_
Mr. W h i t n e y . That is very kind of you, but that is not what I
said.
Sen ator B r o o k h ar t . D id a n ybody in the exchange a d v ise th e
country in any w a y th at the panic was im p en d in g as a result o f t h a t
overinnation ?
Mr. W h i t n e y . I think, frequently. I will not go so far as to say

a panic was impending, but certainly that we would have to pay for
the orgy of inflation. I pointed out, I think, to Senator Couzens
a minute ago that during that period of 19*29, the summer-spring
even, our brokers felt that terrific inflation had taken place ana
raised their margin requirements from a customary 2 0 per cent
which existed prior to that time to anywhere between 35 and 50 per
cent, putting drastic rules into effect in their dealings as to certain
stocks for which they would demand almost 10 0 per cent.
Senator G la s s .. Were you not encouraged to believe from d o w n
here in Washington that you were mistaken in the idea that t h e r e
was too much inflation?
Mr. W h i t n e y . No, Senator Glass, I would not say so. I felt t h a t
the Federal reserve bank in New York certainly was "doing its u t m o s t ,
as I could see it, to tighten money and to impress people that con d i­
tions were not quite as they should be.
Senator Glass. I did not say anything about the Federal reserve
bank. That is a confession without an accusation.
Mr. W h i t n e y . Then you want m e to answ er so m eth in g ? Because
I do not quite understand. I will try to.
Senator G la s s . I simply asked the question if you were not some­
what encouraged to believe by notable utterances here in W ashington
that the stock market was not beyond a reasonable limit.
Mr. W h i t n e y . Well, I do not truly remember.
Senator B r o o k h a r t . Was it not true that statements were p u b­
lished by the econonnsts and others all of the time to the effect that
we had reached a new economic level and that prices never w ould go
back? Was that not the information that emanated from a good
many sources?
Mr. W h i t n e t . Certainly, Senator Brookhart.
Senator B r o o k h a r t . And that is what the stock exchange e n c o u r ­
aged, that kind of scientific opinion?
Mr. W h i t n e y . Not at all; no, sir. There were some of t h e most
worthy economists and organizations, I believe notably the N ational
Industrial Conference Board, that issued a warning in 1929 in
March, I believe, o f most dire character, and there were many others.
I do not say or grant that the stock exchange was promoting or a d v o­
cating or stating that a new era was in effect.
Senator B r o o k h a r t . You can not name any other except the
National Industrial Conference Board, can you?"
Mr. W h i t n e y . Right off, no; but I can name a great many men
who were warning.




STOCK EXCHANGE PEACTICES

85

Senator B r o o k h a r t . I can name you quite a n u m ber, I th in k , th a t
said the opposite.
.l
Mr. W h i t n e y . But did they have necessarily anything to do with
the New York Stock Exchange?
Senator B r o o k h a r t . Well, that is what I would like to know.
Mr. W h i t n e y . I will tell you, sir, if you will give me their
names.
Senator B r o o k h a r t . The fact is that the Now York Stock Ex­
change, the whole operations, promoted that inflation in every way
it could and that was the intention, was it not ?
Mr. W h i t n e y . It w as not.
Senator B r o o k h a r t . Did they find out, did they know when the
thing was coming on anyway, when that turn backward would take
place?
Mr. W h i t n e y . I think the governors of the New York Stock Ex­
change were exceedingly fearful during that entire period o f what
was going on. The business-conduct committee, of which I hapened to be chairman, was meeting three and four and five times a
ay on questions involved.
Senator B r o o k h a r t . But you did nothing to stop the volume o f
business or stop the inflation?
Mr. W h i t n e y . That is, as I have always maintained, Senator
Brookhart, none of our business. We are a market place in which
we endeavor, under the most stringent rules and regulations, to offer
a place of trading to those who wish to trade, in this country and
throughout the world. We are not evaluators of securities.
Senator B r o o k h a r t . You mean by that that you want the market
to move either up or down and you do not care much which way,
so it moves?
Mr. W h i t n e y . I grant that we like activity in the market, but I
can show you some staggering figures as a result of the deflation and
depression upon brokers contrary to many statements that have been
made.
Mr. B r a n c h . Just a few more questions, Mr. Whitney, and I will
be through for to-day.
Senator F l e t c h e r . May I ask Mr. Whitney there about the com­
mission charges of brokers generally on sales and purchases and what
they amount to? Do they vary at all?
Mr. W h i t n e y . They vary according to price, Senator Fletcher,
running from approximately one-sixteenth o f 1 per cent up to around,
if a stock is selling at 2 0 0 shares or more, a quarter of 1 per cent. So
far as I know, they are the lowest commissions charged for any trans­
action involving the exchange o f money.
Senator F l e t c h e r . That applies to sales as well as purchases?
Mr. W h i t n e y . Yes, sir.
Mr. B r a n c h . T o com e back to tran saction s in w h ich brokers len d

S

customers’ stock on short sale, som etim es y ou sa id there w as a p re­
m iu m p a id fo r the use o f the stock, som etim es a stock is loaned flat,
as it is called, is it not ?
Mr. W h i t n e y . Yes, sir; meaning that the lender of the stock pays

no interest to the borrower of the stock for the use of the borrower’s
money.




86

STOCK EXCHANGE PRACTICES

Mr. B r a n c h . In case such is the situation what is the practice
among brokers in regard to charging their customers interest on the
loans? They continue to make the same charges as they did before,
do they not?
Mr. W h i t n e y . On the carrying of the account?
Mr. B r a n c h . Yes.
Mr. W i i i t n e y . I believe so.
Mr. B r a n c h . Although in that case the broker would have the use
of the money or short seller who borrowed his customers’ stock,
would he not?
Mr. W h i t n e y . He w ould.
Mr. B r a n c h . And that would not inure in any way to the benefit
of the customer, would it?
Mr. W i i i t n e y . Except in this way, Mr. Branch: It is the custom
of a brokerage house to charge its customers at the end of each month
a reasonable amount or rate of money for carrying the accounts.
That charge is arrived at by the broker upon the cost to him of money,
and if he by chance is loaning any large amount of stock flat that would
be reflected in the price or rate made to his customers for the cost ot
money to him during that particular month.
Mr. B r a n c h . The customer would not necessarily get the full
benefit of that situation, would he?
Mr. W i i i t n e y . No, sir; but there is risk involved and bookkeep­
ing and a good many other factors, and if you work it down into
dollars and cents, Mr. Branch, it is exceedingly small.
Mr. B r a n c h . A s we haven’t any particular transaction befor©
us, I do not know how we can do that. Now, I am going to ask
one or two questions which certain persons have wanted information
on.
What steps in general does the New York Stock Exchange take
to protect investors by requiring statements of corporations whose
securities are listed?
’S t . Nt
V S
is soiueVhm^ I toh\ Senator llrookhart yes­
terday I would be delighted to answer by getting from our commit­
tee on stock list any and all of their requirements, which are in
printed form, for the listing of securities. We have different re­
quirements, different in that foreign securities must be listed under
one situation. We have others for bonds than we have for stocks.
They are many pages in volume, containing countless questions that
have to be answered, as I said, over oath by an official of the com­
pany, and I shall be very happy to submit that and any other
information with regard to the listing of securities, at your pleasure.
Mr. B r a n c h . What I had in mind was just an outline. You do
require every corporation whose stock is listed to submit a state­
ment at least annually of its position, of its assets and liabilities?
Mr. W i i i t n e y . At least annually, and where possible, quarterly.
Mr. B r a n c h . B u t some o f th em only annually ?
Mr. W i i i t n e y . Some of them only annually. Please remember
that many of the railroad companies were listed on the New York
Stock Exchange in the late or middle 1800 figures; that at those
times neither we nor perhaps anybody else in the world felt the
necessity of the strict requirements aiid regulations that we now




STOCK EXCHANGE PRACTICES

87

have, and an agreement, for which actual money was paid in con­
sideration, was made between the New York Stock Exchange and,
let us say, the Reading Railroad, and that was to report once a year.
Senator C o u z e n s . Mr. Chairman, I would like to make a motion.
The call of the Senate has just been made. I would like to move, Mr.
Chairman, that the committee adjourn these hearings until 10.30
next Monday and give us the balance of the week to consider the
Glass bill, and that during that time we go into executive session to
take up the subject matter that we contemplated taking up after these
hearings.
The C h a i r m a n . I did not hear the last part of it, Senator Couzens.
Senator C o u z e n s . I say, I move, Mr. Chairman, that these hear­
ings be adjourned until 10.30 next Monday morning, in view of Mr.
Whitney’s statement that the records will not be ready until Friday,
and that in the interim we take up the (Hass bill and postpone the
executive session that we contemplated at the end of this meeting
to-day for consideration during later in the week.
The C h a i r m a n . Y ou have heard the m otion .
Mr. W h i t n e y . May I, Mr. Chairman, be allowed to make one more
statement? It is very brief. It is in view of a question asked
yesterday.
The C h a i r m a n . If there is no objection, the motion will be carried.
Senator F l etc h er . That is, when we do adjourn.
The C h a i r m a n . We will adjourn until Monday at 10.30.
Senator F l e tc h e r . Not that we adjourn now?
The C h a i r m a n . N o ; i f there are no objection s.
Mr. B r a n c h . I think I can be through in five minutes.
Senator C o u ze n s . I understand that my motion was carried?
The C h a i r m a n . Yes; the motion was carried unanimously.
Mr. W h i t n e y . The point was raised by various Senators in the
•committee, I think by you too, Mr. Branch, yesterday, and certainly
to-day, with regard to selling against the "box. Senator Walcott
made some reference to the New York State law. This is what I
wish to insert in that connection, which confirms Senator Walcott’s
understanding, I believe.
I am advised by counsel that the law of the State of New York
referred to yesterday by Senator Walcott is section 664 of the New
York Penal Law of the State of New' York, which reads in part as
follows:
An officer or director of a stock corporation who sells or agrees to sell or is
directly or indirectly interested in the sale o f any share o f stock o f such cor­
poration or in any agreement to sell the same, unless at the time o f such sale
or agreement he is an actual owner o f such share, is guilty o f a misdemeanor.

I am advised by counsel that this statute, although passed in 1892,
has never been interpreted by the courts. In view of the fact that
it is a penal statute and must therefore be strictly construed, our
counsel is of the opinion that no officer or director would be guilty
of a crime under this statute unless the aggregate amount of stocks
sold by him exceeded the aggregate amount of stock which such
officer or director owned.
Mr. B r a n c h . Does that answer your question, Senator Walcott?
Senator W alcott . Yes: it does. Thank you.




88

STOCK EXCHANGE PRACTICES

Mr. B r a n c h . I do not want to go into a long discussion of this
matter, but is this not a correct summary of the matter that 1 was
asking you about; that the requirements in regard to furnishing re­
ports oi any corporation whose securities are listed on the board is
dependent upon the agreement made at the time of the listing ?
Mr. W h i t n e t . And subsequent listings, yes.
Mr. B r a n c h . Yes. Now, you do require statements quarterly as
a rule, do you not, in any new listing?
Mr. W h i t n e y . Dependent, sir, upon the facts with respect to
each corporation. There are some corporations with branches or
operations throughout every country of this world. Of necessity
they could not answer quarterly statements. They could not gather
it, or if they could it would cost them millions of dollars to do it.
M r . B r a n c h . Y ou do require a statem ent at least once a y e a r fr o m
every corporation whose stock is listed?
Mr. W h i t n e t . We d a
Mr. B r a n c h . And from some corporations as many as four state­

ments annually?
Mr. W h i t n e t . Yes, sir.
Senator F l e t c h e r . What is generally required to make them eligi­
ble for listing, just a general statement, not the details of it, to make
a corporation eligible?
Mr. W h i t n e t . That it is a company of standing; that it has back­
ground, not only of earnings, but of standing in the community as a
whole; that its directors are men known to be men of standing and
integrity, and its officers, and a very thorough explanation is required,
Senator Fletcher, in the answers made on the application to the
exchange.
Senator F l e tc h e r . And of course it must be held to be solvent and
responsible ?
Mr. W h i t n e y . Exactly. It must be also of sufficient size in its
capital issue or its stock issue so that no question of a corner may
arise. In other words, if it were but of a tew shares or a few thou­
sand shares, we would not list it, for fear that some advantage might
be taken ox that situation. There are a great many essential facts
that we must have information on before we will agree to list.
Senator B r o o k h a r t . Does not that rule encourage the watering of
stocks and enlargement o f the number of shares beyond reason ?
Mr. W h i t n e t . No, sir.
Mr. B r a n c h . Mr. Whitney, it may be, in fact it seems probable,
that we will want to get a picture of the transactions in certain issues
for certain vital days, to find out what sales were made at what times,
whether they were short sales or not, and get a complete running
picture of that day. I understand that is something that would
be rather difficult to reconstruct for any particular day now, would
it not?
‘
Mr. W h i t n e y . Impossible. I will say that it would be impos­
sible.
Mr. B r a n c h . Of course, the ticker tape is kept.
Mr. W i i i t n e y . But that has no reference to whether it is a short
sale or not, Mr. Branch.
M r . B r a n c h . N o , but have you n ot some w ay o f loo k in g u p a ll o f
the sales show n on the ticker to show w hether th ey are sh o rt sales




STOCK EXCHANGE PRACTICES

89

or not? The tickets or something of that knid, would they not show
that?
Mr. W h i t n e y . Only by asking 5.00 or 600 houses all over the coun­
try that fact.
Mr. B r a n c h . Does not the stock exchange have a record as to
whether each sale made is a short sale or not?
Mr. W h i t n e y . No, sir. The broker has.
Mr. B r a n c h . And the broker is required to leave no record what­
ever with the stock exchange?
Mr. W h i t n e y . No, sir, except announcing to the exchange at the
end of every day the short position in every stock that occurs or is
occurring, that occurs in his office.
Mr. B r a n c h . H o w do you compile these figures showing the trans­
actions during the day on which short sales were made and covered
during the day?
Mr. W h i t n e y . The same way, by answers from our members from
every part of this United States and abroad, as to what they had
done during that day. One of the reasons, sir, why I assured you
of the necessity of delay in compiling what you asked for.
Mr. B r a n c h . Then if we should start to reconstruct the picture
as to what happened to any particular stock during any particular
day, there would not be sufficient records in the possession of the
stock exchange at the present time to do it ?
Mr. W h i t n e y . And I believe, Mr. Branch in the possession of
no soul in the world at the present time, unless you took a very recent
dav.
Mr. B r a n c h . I f you took a very recent day could you not by send­
ing to the brokers who handle those transactions to get sufficient
information, with that that the stock exchange has, to do what I
have indicated?
Mr. W h i t n e y . To reconstruct sale by sale the transactions in a
million shares for a day?
Mr. B r a n c h . No, in a particular stock, I say.
Mr. W h i t n e y . Ah, but how are you going to pick that out of the
tape as it goes along? We will try. We will do anything in the
world that you gentlement want us to do.
Mr. B r a n c h . Maybe we better not take the time of the committee
to go into that, but I did want to let you know that we have some­
thing o f that kind in our mind and I have no doubt that you will
cooperate.
Mr. W h i t n e y . Absolutely. We will try.
Mr. B r a n c h . That concludes my questions.
Senator B l a i n e . Mr. Chairman, I would like to ask Mr. Whitney
some questions to ascertain just what records the New York Stock
Exchange has for practical purposes. Take sales where an operator
sells short and covers his position the same day; that is, the type of
short sale which involves short position for one day only, where a
sale is made early in the session o f the market and tnen covering his
position before the close. Does the New York Stock Exchange nave
a record of that type of sale?
Mr. W h i t n e y . Of all, Senator Blaine, since September 26, 1931.
Senator B lain e . I s that type of sale earmarked?




90

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . When?
Senator B l a i n e . At a ll, any time?
Mr. W h i t n e y . Y ou m ean a t the tim e o f m a k in g ?
Senator B l a in e . I do not care when. Is it earmarked? In other
words, can this committee send an auditor to the New York Stock
Exchange and go into your books and ascertain the number o f that
type of sales?
Mr. W h i t n e y . Yes, sir. Well, Mr. Branch asked for the submis­
sion of, or was going to discuss with us-----Senator B l a in e (interposing). I can hasten things along. I want
to get what we can do. An operation which involves a position in
which the seller actually owns the stock but goes short on it o n a
margin account at some brokerage office, and where at the beginning
of the operation a seller is actually short that stock on a margin
account and at the end of the operation the seller has to cover his
commitment—are those sales reported on the Exchange ?
Mr. W h i t n e y . Senator, that has ^ot to be reconstructed, that
sentence, because you stated in the beginning that he was long o f the
stock and went short of it. That is an impossibility.
Senator B l a in e . No; you may commonly term it selling against
the box. Now have you a record of that type of transaction?
Mr. W h i t n e y . I f your question is have we a record of sales com­
monly called “ against the box.” my answer is no.
Senator B l a in e . I am speaking of an operation which involves a
position in which the seller actually owns the stock, he owns it I
assume in the box, then goes short on it on a margin account at a
brokerage office. Now, at the beginning of the operation the seller
is actually short of the stock on the margin account. At the en d of
the operation he has to cover his commitment. Is that character of
transaction reported?
Mr. W h i t n e y . No, sir; and he never has to cover his com m it­
ment.
S en ator B l a i n e . I w as n o t askin g fo r th a t. I ju st w a n ted t o g et
w h a t w e m a y use.
M r . W h i t n e y . Let me point out something.
Senator B l a i n e . You ao not need to go on.

I am not acc\i«nn<r
you o f anything.
^
Mr. W h i t n e y . Now I want to make it plain to you. Your question
I can answer doubly, if I understand you. I f the'person individually
owns stock, owns it, has it in his box, if he goes to a brokerage office
and then says “ Sell 1 0 0 shares of stock short for me,” and the
broker has no knowledge that he owns that stock but merely h a s re­
ceived the order to sell it short, that transaction we will have.
Senator B l a i n e . Thank you. Now, another transaction: I f
a customer has gone short to the extent o f 150,000 shares, he’ a ^ ? n
goes short to the extent of 1 0 ,0 0 0 shares, additional shares, which
successfully drives the market down, o f course, and at one tim *T S
buys 1 0 ,0 0 0 shares, then immediately sells 1 0 ,0 0 0 shares again k «v
ing 40,000 shares, and so forth, until he completely covers his
short account, will these sales from time to time be reported
xV
T
Stock Exchange?
1
0 ,1 the
Mr. W h i t n e y . Yes. I f I understand your question corr«w*i„.
yes; because, as long as the short position exists we would have i




STOCK EXCHANGE PRACTICES

91

record of it. If, however, his covering cleaned up his short position
in a particular stock, then no longer would we nave any record of
that. I am not granting about the-----Senator B l a i n e (interposing). I understand.
Mr. W h i t n e y . Of course, I do not agree with your expression
that it forced the market down or that it may so operate.
Senator B l a i n e . I do not want a constant defense being made,
because I am making no accusation. I am entitled to find out just
what the stock-exchange records, and the committee will determine
whether or not they are characteristic of short sales. I think the
committee ought to go into the books of the stock exchange.
Mr. W h i t n e y . We have no books, please understand. These are
merely reports and slips sent by members.
Senator B l a i n e . Records of the stock exchange to ascertain what
are in fact short sales, and then ascertain from that same record what
the committee may understand to be the transactions that have the
same effect as short sales, and that is why I am asking you these
questions.
Senator G la s s . May a transaction such as you describe take place
in the course of a day’s trading?
Senator B l a i n e . Well, Mr. Whitney says that they have a record
of those transactions. I am simply laying a foundation for this
committee to make a real investigation if it intends to proceed, and
not asking Mr. Whitney as to what the stock exchange does. I am
trying to get at what records the stock exchange has.
Has the stock exchange any record whereby a customer borrows
securities off the exchange, then comes to the exchange and completes
what would be known as a regular sale for liqidations'?
Mr. W h i t n e y . No, sir.
Senator B l a i n e . Is it possible for a customer to do that?
Mr. W h i t n e y . Possible. It is not possible for the exchange to
have any record of it.
Senator B l a i n e . I just want to get the fact. Would the respec­
tive brokerage firms who handle those stocks have a record?
Mr. W h i t n e y . No, sir; there is no possible way that they would
get it unless the customer voluntarily told the broker.
Senator B l a i n e . Well, the broker would have the name of the
customer would he not?
Mr. W h i t n e y . Who delivered stock to him for sale?
Senator B l a i n e . Yes; and the broker may or may not know what
the fact is, but the customer would know ?
Mr. Whitney. Presumably, yes, absolutely.
Senator B l a i n e . Now is it possible for him to furnish the com­
mittee, that is, is it possible for the New York Stock Exchange to
furnish the committee, with an analysis of the lenders of stock for
the activity of shorts or for stock transactions ?
Mr. W h i t n e y . I do not understand your question.
Senator B l a i n e . I s it possible for your exchange to furnish the
committee with an analysis of the lenders of stocks or the names of
the lenders of stocks for any activity on the stock exchange, whether
for shorts or otherwise?




STOCK EXCHANGE PRACTICES

92

Mr. W h i t n e y . Along the lines of section 5, yes, and which I under­
stand is what the committee wanted according to Mr. Branch. Yes,
along that line we can.
Senator B l a i n e . Will your records disclose what percentage of
loaned stocks comes from banks and large corporations ?
M r. W h i t n e y . N o, sir.

Senator B l a i n e . Y ou have no record? Have you any record that
will state approximately what percentage of the total of some out­
standing issues, such as United States Steel, the American Telephone
& Telegraph, American Can, outstanding issues, which are or have
been held by lenders of stocks during that crucial period just prior
to the break in the stock market? I am asking you whether you
have any records that will show that in your stock exchange.
Mr. W h i t n e y . What do you refer to as the crucial time of the
break ?
Senator B l a i n e . October, 1929.
Mr. W h i t n e y . We have no records along any of these lines as of
that time.
Senator B l a i n e . Would your members have records ?
M r. W h i t n e y . N o, sir.

Senator B l a i n e . Where could the committee obtain information
on that proposition?
Mr. W h i t n e y . I do not want to seem to defend anything, but I do
not believe it can be done from any source.
Senator B l a i n e . I am not asking you-----Mr. W h i t n e y (interposing). I do not think it could be done, Sena­
tor Blaine.
Senator B l a i n e . But is there any place where the committee may
find some information respecting that situation?
Mr. W h i t n e y . Not that I know of.
Senator B l a i n e . It can not be found from the records. Can it
not be found from the investment houses that were making loans?
Mr. W h i t n e y . Making what kind of loans?
Senator B l a i n e . For stock transactions.
Mr. W h i t n e y . You mean making collateral loans?
Senator B l a i n e . Yes.
Mr. W h i t n e y . But that would not prove anything along the lines
you speak of. Why, there may be a record of the particular bank at
which I borrowed money in October, 1929, and put up collateral to
secure that loan. That record will exist probably in my office too.
Senator B l a i n e . Yes; that is personal. I am not speaking of you
personally.
Mr. W h i t n e y . I am a broker, that is all.
Senator B l a i n e . Any broker. Brokers obtain their loans on col­
lateral through the large financial institutions?
Mr. W h i t n e y . Possibly.
Senator B l a i n e . Some through investment houses?
Mr. W h i t n e y . Possibly some, yes.
Senator B l a i n e . And mostly through banks?
Mr. W h i t n e y . Mostly through banks, I believe.
Senator B l a i n e . Banks that were members of the Federal reserve
system ?




STOCK EXCHANGE PRACTICES

93

Mr. W h i t n e y . That I do not know. Presumably, yes.
Senator B l a in e . Do any comparative number of small holders o f
stock lend their stock?
Mr. W h i t n e y . H o w do y o u m ean, co m p ara tiv ely sm a ll h olders?
Senator B l a i n e . Well, what would you state to be a small holder?
Mr. W h i t n e y . I will answer your question-----Senator B l a i n e (interposing). No; you asked me a question and I
want you to answer mine. I am not familiar with the stock ex­
change business. What do you consider to be a small holder of
stock? O f course, we all know that a man who has one share is a
small holder, but m the language of the street, in the language of
the exchange rather, what do you consider to be a small holder of
stock, 50 shares, 100, such a matter?
Mr. W h i t n e y . Our unit of trading is 1 00 shares. I think it is
the language o f the street that a lot of shares less than 100 shares is
considered the smaller unit.
Senator B l a i n e . That is what I am getting at. Do a very large
number of those holders lend their stock to the shorts?
Mr. W h i t n e y . It is my understanding, Senator, that those indi­
viduals, just as the individuals who have a hundred or a thousand
or ten thousand shares on margin, have signed these agreements
allowing their stock to be loaned.
Senator B l a i n e . N o w I want to ask you for an opinion.
Senator F l e t c h e r . Senator, may I ask there, is this matter de­
termined by the number of shares without regard to their par value ?
Some may be worth $1 0 0 ; maybe some shares are worth $1 0 , and
others $ 1 0 0 a share.
Mr. W h i t n e y . In what connection, Senator Fletcher?
Senator F l e tc h e r . Any transaction.
Mr. W h i t n e y . Y ou mean this agreement to lend?
Senator F l e tc h e r . Yes.
Mr. W h i t n e y . Any transaction on margin ?
Senator F l e tc h e r ." Without regard to the value of the shares, iust
the number.
Mr. W h i t n e y . Just as to the shares held in the account for a par­
ticular customer, that particular customer signs an agreement.
Senator F l e tc h e r . I understand that.
Mr. W h i t n e y . Presumably, from what we have heard, he signs
an agreement along the lines of that one.
Senator F l e t c h e r . Y ou spoke of small holder and large holder
of shares and you base it altogether on the member.
Senator B l a i n e . Well, as to the number; I was speaking of the
number.
Senator F le tc h e r . Yes.
Senator B l a i n e . N o w , Mr. Whitney, with your large experience
in banking circles, stock exchange, you may be able to throw some
light upon the proposition.
Mr. W h i t n e y . I am no banker. I haven’t that honor.
Senator B l a i n e . I accept the amendment. In periods such as the
present is it your belief that banks as large lenders on securities
stand to gain control over particular corporations?
Mr. W h i t n e y . Seek to? Certainly not.
119852— 32------ 7




94

STOCK EXCHANGE PRACTICES

Senator B l a i n e . I s i t the tendency?
Mr. W h i t n e y . Certainly not.
Senator Blaine. You think that the present situation is not going
to bring about the control of corporations by and through banks
and financial institutions?
Mr. W h i t n e y . Through stock ownership? Certainly not. A bso­
lutely not. There is a mass of data and figures to indicate the
other direction.
Senator B l a in e . N ow vou
“ th rou gh stock ow nership.”

m odified

you r

answer

by

saying

Mr. W h i t n e y . I had in mind, sir, where a corporation failed and
became insolvent owing money to a bank and the bank had to
reorganize and put the corporation on its feet. That is one question.
But you were talking about shares and I wanted to be specific, or
attempted to be.
Senator B l a i n e . Banks and large investment houses, primarily
banks, may contain a larger control over corporations through
the holding of securities of the corporations, stocks, and bonds?
Mr. W h i t n e y . They may.
Senator B l a i n e . That is, the theory being that the man w h o is
the lender has certain powers. They may determine the p o l i c y
of industry, the policy of railroads, the policy of all business a c t i v i t y ,
because they have a hand on the financial stability or i n s t a b i l i t y
of the institution.
Mr. W h i t n e y . By paying good dollars for ownership o f those
shares, just as I, if I have enough dollars, may go out and buy every
corporation in the world.
Senator Blaine. Or by loaning money on those securities, the shares
and bonds, thereby not only receive interest but also a control or
substantial control?
Mr. W h i t n e y . You mean by loaning money on them to brokers or
to individuals?
Senator B l a i n e . To individuals.
Mr. W h i t n e y . My answer is no, not in any way does that give
them control, and the proof or the real answer, as I see it, to your
question, sir, may be entirely found in the stock records of our lar^e
corporations, railroads, communication companies, etcetera, an d &
I
think you will find a situation to exist, an instance of which I ^
tell you: Take the 69 largest and leading corporations of the U nited
States of America, all listed on the New York Stock Exchange
roughly, January, 1930, they had 4,453,000 stockholders, and
uary, 1932, they had 6,700,000-odd stockholders, an increase of alm ost
50 per cent during that period, which to my mind shows eonclusivelv
that the ownership is going into the hands o f the people of this coun
try and not into the hands of large corporations, banks, those to which
you referred.
'
Senator B l a i n e . This large number of people of the countrv tliAv
have lost substantially all of those securities?
^
Mr. W h i t n e y . N o, sir; they have not lost them at all. Thev
got them in their boxes. They paid for them right in the last
or two.
year
Senator B l a i n e . They are not putting them on the market«




STOCK EXCHANGE PRACTICES

95

Mr. W h i t n e y . They are not putting them on the market and they
are not putting them in loans.
Senator B l a in e . And they are not receiving any income from
them ?
Mr. W h i t n e y . Oh, yes, from some, Senator.
Senator B l a in e . Oh, ves. from some. But let me call your atten­
tion to a recent fact. The Reconstruction Finance Corporation
loaned a very large sum of money to a railroad for the purpose of
paying J. P. Morgan & Co. its loan. Now. J. P. Morgan & Co. had
the power to threaten and the power to not onlv threaten but to actu­
ally accomplish the receivership of that railroad. The Reconstruction
Finance Corporation, of course, advanced the money. I am speaking
of that control by large investment houses, large financial institutions,
large banks, having the power and control over industry and trans­
portation.
Mr. W h i t n e y . To my mind—our m:nds may not be as one on this—
I have always held that there is justification in expecting the debtor
to pay his debts. Your statement indicates that you believe a mora­
torium would be wise, particularly perhaps with regard to the rail­
roads of this country, if they owe money, that they should not be
made to pay.
Senator B l a i n e . No; I choose to state my own opinion, Mr. Wlrtney.
Senator G l a ss . Do you think it is sound economics to tax the Amer­
ican people to pay the money for the railroads that do not choose to
pay?
Mr. W h i t n e y . That, Senator Glass, is something to be decided
by those in power.
Senator G l a ss . I am asking your judgment upon that point.
Mr. W h i t n e y . Without specifically answering the question as to
a particular railroad, I think it would be a catastrophe of the utmost
import if the railroads of the United States all stopped turning
their wheels, and I think it is up to the-----Senator G lass (interposing). But do you think it proper for the
United States Government to tax you and me to pay J. P. Morgan
& Co. for a debt owed to it by a railroad ?
Mr. W h i t n e y . I hardly see that that is the argument. My feel­
ing is that a debt should be paid.
Senator G l a s s . Yes, but I am talking about who should pay it.
Mr. W h i t n e y . The railroads should pay it.
Senator G l ass . Yes, but the railroad did not; the taxpayers paid
it.
Mr. W h i t n e y . I understand. I thought that the railroad did pay
their debts but they got it from the Reconstruction Finance Corpo­
ration.
Senator G l ass . Well, that is one way around. I am going di­
rectly to the point. Where did the Reconstruction Finance Corpo­
ration get the money?
Mr. W h i t n e y . I understood that they borrowed it from the people
of the country. I do not know quite what railroad we are talking
about. It may be that soon they will pay back to the Reconstruc­
tion Finance Corporation.




96

STOCK EXCHANGE PRACTICES

Senator G lass . Any railroad company, I am talking about.
Senator B l a in e . Just one other question, Mr. Whitney.
Senator G lass . Do not misunderstand me. I voted for that un­
economic transaction, but all the same it is not right.
Senator B l a in e . Mr. Whitney, do you know a Mr. M. J. Meehan?
Mr. W h i t n e y . I do.
Senator B l a in e . With what brokerage firm is he ?
Mr. W h i t n e y . M. J. Meehan & Co.
Senator B l a in e . Was he a specialist in the stock of the RadioKeith-Orpheum Corporation?
Mr. W h i t n e y . One of his partners, yes. When? I judge you
mean now ?
Senator B l a in e . Well, during the period covered by Exhibit 4.
Mr. W h i t n e y . I think so, yes, one of his partners.
Senator B l a in e . And did he handle it personally around the post
of the Radio-Keith-Orpheum Corporation on the floor of the ex­
change, or did he do it through assistants employed by him ?
Mr. W h i t n e y . A partner, not an assistant.
Senator B l a in e . Not an assistant?
Mr. W h i t n e y . And to the best o f m y knowledge not himself
either.
Senator B l a in e . Do you recall that Radio-Keith-Orpheum Cor­
poration went through what we might call voluntary liquidation?
Mr. W h i t n e y . I do not.
Senator B l a in e . Do you know that that followed immediately
upon the large number of short sales that were made in their stock?
Mr. W h i t n e y . No, sir.
Senator B l a i n e . I think the records will disclose that, Mr. W hit­
ney.
Mr. W h i t n e y . Perhaps they w ou ld , Senator.
Senator B l a in e . I just want to call it to your attention.
Mr. W h i t n e y . Would you care to have me look up that fact and
present the facts as we round them? Because I would be glad to
do so.
Senator B l a i n e . I think I have the facts and I expect to put them
before the committee later on. I just wanted to identify Mr. M ee­
han. That is all, Mr. Chairman.
Senator F l e t c h e r . Mr. Whitney, may I ask you whether or not
in your judgment, in your opinion, there was an organized raid on
the market that Drought about that catastrophe in October, 1930
when there was a shrinkage in value of securities o f $29,000,000 0 0 0 *
I believe? Was that effort an organized effort to break the market^
Mr. W h i t n e y . Y o u mean 1929, Senator Fletcher?
Senator F l e tc h e r . 1930, 1929 and 1930 both, I believe.
Mr. W h i t n e y . Absolutely no.
Senator F l etc h er . How did it all happen so quickly, that depre­
ciation in the value of securities, $29,000,000,000? I think
1929, October 1929.
was
Mr. W h i t n e y . Well, I think it was like being out at the end o f &
limb and no way of getting back. Everybody held the securifi J*
When people decided they wanted to sell them, suddenly, all at cmnT
there were insufficient buyers, and so there was this terrific




it

panic

STOCK EXCHANGE PRACTICES

97

Senator F l e tc h e r . It all happened in a few days, did it not?
Mr. W h i t n e y . Verjr few days, from October 2 G approximately,
,
to November 13 when it stopped—the panic.
Senator F le tc h e r . You think there w as no organized movement m
that direction?
Mr. W h i t n e y . T o depress the m a rk et?
Senator F l e t c h e r . Yes.
Mr. W h i t n e y . Absolutely not.
Senator F le tc h e r . That is all.
Senator B u l k l e y . Was the Sinclair Oil stock recently struck off
the exchange?
Mr. W h i t n e y . It was stricken, but an amalgamation took its
place, Senator Bulkley, which is Consolidated Oil Corporation.
Senator B u l k l e y . It was a consolidation of the Sinclair with some
other interest?
Mr. W h i t n e y . And then the merged company called Consolidated
Oil Co. In other words, on these short figures on page 2 0 as of
April 1 a short position snows in Sinclair Consolidated Oil Corpora­
tion common and the preferred, stricken from the list that day, and
beginning on April 4, the next day of compilation, the figures will
appear, similar figures will appear, in Consolidation Oil Corpora­
tion common, and preferred.
Senator B u l k l e y . So that if anyone was short of Sinclair on the
1 st of April it would simply be carried forward and he would be
considered as being short of the Consolidated Corporation ?
Mr. W h i t n e y . Yes; with adjustments; yes. I do not know what
the merger consisted of. I am not acquainted absolutely on that,
but in effect, yes.
Senator G oldsborough . Mr. Whitney, I would like to ask one ques­
tion, please. I f short sales are legitimate, if they have merit, do they
not have their proper place in periods of prosperity and not in times
of depression?
Mr. W h i t n e y . N o , sir; I do not think so. I would liken that
situation to the unfortunate man that has but one leg. He has lost
his equilibrium to a large extent and his general stability. I have
tried to point out here, and I will do so perhaps more fully in my
next appearance, that the market for securities—and that is all we
are, a market for securities; we do not value securities or attempt to
do so—that is left to the people that desire to do so. To make up a
security market we must have investment, investment buying and
selling. We must have speculation, speculative buving and selling,
or marginal purchasing, and short selling. Now, m speculation or
in investment what happens is a trend in markets up or down. We
have unfortunately, been through one down. That may have af­
fected our point of view. But speculation, short selling, marginal
purchasing, as some one wisely said, “ may smooth out the waves, but
it never affects the tides.” The tides are the trends. They go with
general world-wide or national conditions.
But you can not, as I see it, afford an unbalanced market, or you
have no market, and we might as well close. To get a balanced mar­
ket, as I see it, you must have speculation and you must have the two
legs of speculation to give that difference ot opinion to a market
and its stability.



gg

STOCK

exchange

p r a c t ic e s

And may I, with the best of grace, call to the attention of you gen­
tlemen that the United States of America is in the hands o f t w o
parties, and it is their divided opinion which results in the l a w s
under which we are governed. Take away one party and our govern­
ment machinery certainly would be entirely changed. ^ And I c a ll
particularly to your attention the simile between the United States
Government of two parties and the government of a security market
by the two sides, represented by the speculative element particularly,
let us say here, marginal purchases and short sellers. We must have
both to give balance.
Senator B r o o k h a r t . N o w , on that government business: A s a
usual thing only two parties, the standpatters of both parties, get
together, and then they do something and there is no difference in
them. You can not tell the difference between a standpatter in one
party and another with a microscope when you analyze them. S o I
can not see anything in your analysis.
Mr. W h i t n e y . Perhaps, Senator Brookhart, I was referring to
the theoretical points or the economic points of party government.
Senator B r o o k h a r t . Well, it is theoretical, and w h y is not a l l
your speculation theoretical?
Mr. W h i t n e y . Because it is actual, sir.
Senator Brookhart. You brought this country to the greatest
panic in human history. There never was such an economic failure
in the history of mankind as your outfit has brought upon us right
at this time, and it is due to this same speculation that you are defend­
ing here more than any other one thing.
Mr. W h i t n e t . We have brought this country, sir, to its standing
in the world by speculation. I claim that this country has been built
by speculation, and further progress must be in that line. And it is
not gambling.
Senator Brookhart. I have another chart of 50 years of this busi­
ness over here. I would like for you to take a look at that, and you
will find that in the whole 50 years we have not been 30 minutes on a
normal line. And that chart is not made by me; it is made by Coi.
Leonard P. Ayers, the greatest statistician at this time. The black
chart at the bottom of the page over there shows it, and we are first
up in a speculation and down in the ocean o f depression, and it has
been true for 50 years here under this speculative system o f business
of yours.
Now, there is business going on in the world that does not have
those ups and downs, and it does not have any speculation, either.
Mr. W h i t n e y . I did not know that there were any, sir.
Senator B r o o k h a r t . Well, you have got something to learn, sir.
Mr. W h i t n e y . Agriculture is certainly not in that condition.
Senator B r o o k h a r t . Agriculture is a victim of this speculation.
Mr. W h i t n e y . In stocks?
Senator B r o o k h a r t . And has been all the time. But the coopera­
tive organizations of the world wherever they have been developed
and where they fix the earnings of capital and take out all the s p ^ « I
lation, do not have these ups and downs, and are the soundest systems
of business in the world to-day. Take the English system, forW»
stance, if you are familiar with it.
”




STOCK EXCHANGE PRACTICES

99

Mr. W h i t n e y . I thought we were talking about America and I
confined my remarks to that.
Senator B r o o k h a r t . I thought you had never heard of it.
Mr. W h i t n e y . We have seen as great speculation in England as
we have in America.
Senator B r o o k h a r t . Well, I have got a chart of that. I did not
bring it in, but I will show you that we have not had one-fourth the
speculation in England because this cooperative system along beside
the speculative has held it down and has prevented these wild orgies
that you promoted up in New York.
Mr W h i t n e y . I am sorry. I thought there had been great specu­
lation in the commodities, the grain commodities, and we have
nothing to do with that. It seems to me I heard of wheat at large
prices and at very low ones.
Senator B r o o k h a r t . Yes; we have another little bit of a side
show over at Chicago called the board of trade that runs about like
your stock exchange does in New York.
Mr. W h i t n e y . Y ou think you can affect the conditions of the
world by changing the rules or regulations of a stock exchange or a
board of trade? Wheat is grown elsewhere and stocks are bought
and sold.
Senator B r o o k h a r t . Yes; we can change them by abolishing the
board of trade and stock exchange both so far as speculation is
concerned.
Mr. W h i t n e y . And then the people of the United States will go
to Canada and Europe to do these very things and pay their taxes
there.
Senator B r o o k h a r t . Well, I remember the Louisiana Lottery went
to Mexico a while, but it did not last long.
Mr. W h i t n e y . Y ou are then accusing the 20,000,000 of investors
or more in this country of being mere gamblers and lottery players.
Senator B r o o k h a r t . I am not accusing any investor of being a
gambler, but I am accusing every margin dealer and every gambler
of being a gambler.
Mr. W h i t n e y . But you want no markets to exist in this coun­
try-----Senator B r o o k h a r t (interposing). Not for gamblers; no.
Mr. W h i t n e y . ------for the investors?
Senator B r o o k h a r t . I want to outlaw every gamblers’ market.
Senator G l a ss . It would be interesting to me, because I have been
studying it for 10 years, if Mr. Whitney would define the difference
between “ speculation ” and “ gambling.*’ I f we can ever reach that
definition we might do something.
Mr. W h i t n e y . I have always felt, Senator Glass, that speculation
as against investment—I am going to get to gambling—but as
against investment, is the desire of the individual who speculates
to purchase something and by an increased price on that something
to derive a profit, and as I said yesterday, the investor purchases
something to derive an income therefrom and not depending upon
the rise of price for profit.
Senator G l a ss . In one of his questions to you a while ago Senator
Blaine described the case of a man owning 150 shares in a box and




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STOCK EX CH A N G E PRACTICES

then selling short, either with or without the knowledge o f his
broker, and then buying back all in the course of an hour or two.
What would you call that, investing ?
Mr. W h i t n e y . No; I call that speculation.
Senator G lass . Well, you are polite, I call it gambling.
Mr. W h i t n e y . Senator, some of the finest horses in the world are
raised in your State. When one bets on the races that is a gamble.
Senator G la s s . Yes. *
Mr. W h i t n e y . Whatever you bet you may lose.
Senator G la s s . My bishop says that is not a gamble because-----[great laughter].
And my bishop contends that the element of acute knowledge is
involved in betting on a horse race; that you may look up the records
of the horse and determine for yourself something about his stamina
and you may ascertain whether or not the jockey has been bribed
and so on and so forth, and that, therefore, it is not a gamble; it is
a speculation.
Mr. W h i t n e y . Well, Senator, I need your bishop right beside me
to explain this point.
Senator G l a ss . But you have not explained yours.
Mr. W h i t n e y . I consider that the placing of a bet on the races is
gambling. I do not condone it, but I think it is gambling.
Senator G la s s . Well, I am not reprehending gambling, though I
do not indulge in it myself. I am not an uplifter like my bishop.
What I am trying to do is to reach a difference between investment
and gambling, and it seems to me that Senator Blaine’s question in­
volved a very accurate definition of what I call gambling. T hat
person was not investing. He was not buying any stock with any
intention on earth of deriving a dividend from that stock. H e had
not the remotest knowledge, I assume, as to the intrinsic worth o f the
stock, as to the productive character of the corporation represented
by the stock, as to the personnel or integrity of its officers. H e was
simply betting that at a certain hour of the day or at a certain day
the market price of that stock would be somewr
hat different from the
market price of it when he began his operations. Is that not so ?
Mr. W h i t n e y . That was his opinion, but I can not grant th at
necessarily that individual has no knowledge of the situation, the
earning power and the business ability and acumen of the directors
of that company.
Senator G l a ss . Well, if he had not, was it not a sheer gamble?
Mr. W h i t n e y . In a sense, I agree, but I think you are using the
word or perhaps you are using the word “ gambling ” to denote an
act that is unethical. Now, I do not grant-----Senator G l a s s (interposing). I grant you the New York Stock
Exchange has made it ethical. I am not talking about that though
I am talking about what it is.
Mr. W h i t n e y . Speculation exists, not only in stocks but in A\
\
branches of business.
Senator G la s s . Oh, my, m y; that is a story that we have learned
long ago.
Mr. W h i t n e y . But it is true.
Senator G lass . Over and over and over again. I f that is n o t *
gamble, I do not know what constitutes a gamble. It is just as




STOCK EXCHANGE PRACTICES

AU1

much a gamble as my betting on a horse race and not knowing any­
thing about the horses or the jockey or the owner of the horse,
every bit as much. And I am not decrying, you understand. I f
the New York Stock Exchange or anybody else wants to engage
in that sort of business, all right. The only purpose of my life
now is to prevent people who do engage in that sort of business
using the deposits of people in banks for that purpose. In other
words, using Federal reserve banking facilities for the purpose of
promoting transactions of that description.
Mr. W h i t n e y . Then you think it is wrong for an individual to
borrow money for any purpose that may be construed speculative?
He may not borrow money on a house or 011 an apartment building ?
Sen ator G l a s s . I th in k it is u tterly w ro n g fo r a com m ercial ba n k
to loan a m an m oney fo r g a m b lin g p u rposes, w hether it be on stocks
or horse races o r a n y th in g else. I do n o t th in k p eop le deposit th eir
m oney in banks to be used fo r purposes o f th a t k in d .
Mr. W h i t n e y . People deposit their money in banks,

however,
expecting the return of that money to them whenever they ask for it,
and they expect the officers of that bank to safely loan it.
Senator G l a ss . Yes; and they would despair of ever having it
returned to them if they knew that at the time of deposit it was
going to be used for gambling purposes, and they would not deposit
it either.
Mr. W h i t n e y . Senator, I know of no call loan made to members o f
the New York Stock Exchange on listed collateral that has ever failed
of being paid.
Senator G l a s s . Oh, I am not talking about securities. What do
you suppose the proponents of the Federal reserve act meant when
they expressly said that the facilities o f the Federal reserve banking
system, which was a commercial banking system, should not be used
for the purpose of purchasing or carrying investment securities,
stocks, or bonds, other than the obligations of the United States?
What did they mean by it ? It simply meant that we were institut­
ing a commercial banking system, textually, for the benefit of agri­
culture, commerce, and industry, and that its facilities should not be
used for speculative purposes.
Mr. W h i t n e y . Then, if my knowledge is correct, in the last few
years, perhaps many years, industry that sought money from banks,
instead of, as in the past, receiving that advance of credit on their
own note, would now be unable to get it because the practice has
grown up of having collateral security of one sort or another as
backing that advance of credit. We have had as high as eight bil­
lions of loans on collateral by banks, not including collateral loans
to stock brokers, and I venture to say, a very, very high proportion of
those loans were made to industry with securities put up as collateral.
Senator G l a s s . That does not g o to the question at all. That does
not go to the question of using the facilities of a commercial reserve
banking system for stock speculative purposes or any other specula­
tive purposes. They were not intended to be used that way. The
affirmation, as well as the negatives, of the act show unmistakably
that they were not intended to be used that way; that they were
prohibited. And yet they were used that way in 1929 and constituted




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102

a very grave contribution to the collapse and to the situation in winch
the country finds itself now. But all that is foreign to this inquiry.
Mr. W h i t n e y . Yes, sir.
Senator F l e t c h e r . Y o u do not approve, Mr. Whitney, o f t h i s
large amount of call loans, $8 ,0 0 0 ,00 0,00 0 ? Is that sound economic
business ?
Senator B r o o k h a r t . Brokers’ loans.
Senator F l e t c h e r . Brokers’ loans.
Mr. W h i t n e y . I claim that a call loan is the safest type o f loan
that I know of if its record can be used. I know of no call loan on
listed security collateral that ever failed of being paid.
Senator F l e t c h e r . D o you think it is a good thing to have this
large amount of brokers’ loans ?
Mr. W h i t n e y . They dfd exist, Senator Fletcher. They were up
to eight billions five hundred millions, and if I remember correctly,
one billion seven hundred millions was liquidated and paid off w ith­
out a loss to any bank in one week of 1929.
Senator B r o o k h a r t . There are some of those call loans that did
not get called, though, when they were in condition so they would
not pay, did they?
Mr. W h i t n e y . T o the brokers?
Senator B r o o k h a r t . Yes.
Mr. W h i t n e y . I know of no such instance, Senator Brookhart.
Senator F l e t c h e r . What do those loans amount to now ?
Mr. W h i t n e y . About five hundred millions.
Senator G l a s s . Security—you know perfectly well, Mr W h itn ey,
that security is not the sole element of commercial banking?
Mr. W h i t n e y . It is a precious important part of it, if I a m goin g
t o le n d th e m o n e y .

Senator G l a s s . Liquidity is just as important as security?
Mr. W h i t n e y . True, but the liquidity of what lies back o f the
loan, its collateral, is just as important, and that is why I claim a
market for securities must exist to give collateral on loans a liquid
market.
Senator G l a s s . I am not contesting your contention about a m ar­
ket having to exist. It is going to exist whether we want it to exist
or not, so far as that is concerned.
Senator F l e t c h e r . Was there not a commission appointed b y the
Governor of New York, Governor Hughes, now Chief Justice, to
investigate this question of marginal transactions and differentiate
between speculation and gambling?
Mr. W h i t n e y . Yes, sir.
Senator F l e t c h e r . And did they not make a ruling on that s u b
ject?
Mr. W h i t n e y . Yes, sir.
Senator F l e t c h e r . D o you remember w hat that w as?

Mr. W h i t n e y . T o the effect that the transactions on the New
York Stock Exchange were not gambling.
Senator F l e t c h e r . D o you remember what year that w a s?

Mr. W h i t n e y . 1909,1 think, Senator Fletcher.
Senator G lass. Who said that?
Mr. W h i t n e y . The Hughes commission in New York State so
called. The same thing has been stated with relation to grain con


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103

tracts, I believe, in the last year by a commission headed by Sir
Josiah Stamp in looking into the Winnipeg operations.
Senator B r o o k h a r t . That was a little like the Wickersham Com­
mission, was it not?
The C h a i r m a n . Mr. Whitney, I would like a little information.
Some times in your testimony you referred to 120,000,000 people as
being the speculators or the investors, who were using the market.
Some times other figures were given. Are there fairly definite fig­
ures available, for instance, as to how many individuals were on the
market at a certain time or at a certain year?
Mr. W h i t n e y . My reference to the 120,000,000 was to the popula­
tion of these United States who had the power to enter the market at
any time, and it was their opinion of conditions that by and
large constituted the tides that made the market one way or the
other. It is variously estimated that the investors of this country
amount to between 2 0 and 60 millions of persons, owning shares of
stock. Now these may be stocks listed on one exchange or another or
listed on no exchanges. I advocate, contrary to Senator Brookhart,
that it is far greater wisdom to buy stock that is listed on an organ­
ized exchange where regulations are made for the benefit of the
holder of those stocks.
The C h a i r m a n . There are not 60,000,000 adult people in the United
States. So that figure can not be accepted for much value.
Mr. W h i t n e y . That figure probably not, no, except, of course,
where an estate holds stock or a fiduciary holds security for heirs
that might be largely added to it.
The C h a i r m a n . What is your best judgment, as to how many were
on the market in 1929 ?
Mr. W h i t n e y . When you use the words “ on the market,” then I
do not understand you.
The C h a i r m a n . On the exchange.
Mr. W h i t n e y . That own their own securities that are listed on the
New York Stock Exchange?
The C h a i r m a n . Rather that dealt in securities on the exchange.
Mr. W h i t n e y . That is an impossible answer. I would not guess.
The C h a i r m a n . Then take the other, following your suggestion,
that owned securities that were listed on the exchange ?
Mr. W h i t n e y . That owned or dealt in secuirties, I would think
between fifteen and twenty millions.
The C h a i r m a n . Would that cover all s e c u r it ie s , o r w o u l d t h e r e
b e other secuirties? Is New York about the only security market?
Mr. W h i t n e y . Oh, no. I think there are 78 stock exchanges
throughout this country.
The C h a i r m a n . That is the point I am getting at. Would there
be a considerable number of stocks listed on other markets that would
not be on the New York market?
Mr. W h i t n e y . Yes, sir; a tremendous amount.
The C h a i r m a n . To what extent would that swell your number
that you estimate?
Mr. W h i t n e y . I do not know, Mr. Chairman. I do not know.
There are a lot of corporations listed on other stock exchanges where
the stockholders are very small in number, a few hundred. So how




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STOCK EX CH A N GE PRACTICES

much it would swell, I do not know. But some figures, for instance,
the American Tel. and Tel. Corporation, has of, I believe, March 1 ,
in excess of 640,000 shareholders alone, that one company. O f that
amount more than 95 per cent held less than a hundred shares each
and 58 per cent, if I remember rightly, held less than 10 shares each.
Senator G l a s s . Do you think that any proportion of the 95 per
cent either understands or takes any abiding interest in the opera­
tions of the New York Stock Exchange ?
Mr. W h i t n e y . I think a very large proportion do. Senator Glass,
because I claim that any investor, whether he wants to use it or not,
wishes to know that a market exists for his security so that i f he
wants to sell his security he may do so. I think that is the vital
interest to the investor of this country.
Senator B r o o k h a r t . Henry Ford never wanted a market for his
securities, did he?
Mr. W h i t n e y . I do not know about Henry Ford. I can not
conjecture.
Senator B r o o k h a r t . I thought you did not, because he did not
need any market. And I know several other sound lines of busi­
ness that are really sound that do not need any market for their
securities. The unsound ones get their securities marketed up in
that speculative market.
Mr. W h i t n e y . It is very strange that Henry Ford has had s o m e
of his subsidiary companies listed throughout this country and
abroad.
Mr. B r o o k h a r t . What ones are they?
Mr. W h i t n e y . Ford of Canada, Ford of England, and others.
Senator B r o o k h a r t . That is not an American company.
Mr. W h i t n e y . Subsidiaries of the Ford Motor Co., though.
Senator B r o o k h a r t . Yes. I noticed that somebody had some of
his stock listed against his will up there.
The C h a i r m a n . Now, to pursue this matter a little further, what
would be your estimate as to the number of people, 25 or 30 m illion ?
Mr. W h i t n e y . Total?
The C h a i r m a n . Yes.
Mr. W h i t n e y . I should think 25, personally, was the top, but I
may be away off.
The C h a i r m a n . And the shrink in the value of these stocks
amounted to how much?
Mr. W h i t n e y . Well, in the last week stocks and bonds have shown
a shrinkage of about 6 ,0 0 0 ,0 0 0 ,0 0 0 of dollars, in the last week or tw o.
The C h a i r m a n . Well, the total shrink from the peak down?
Mr. W h i t n e y . Oh, I do not know. I have not followed th&c.
Senator B r o o k h a r t . About 43,000,000,000.
Mr. W h i t n e y . Somewhere in that neighborhood—tremendous.
But within the last two or three weeks the decline has been as drastic
as at any other time.
The C h a i r m a n . More than $1,500 for every shareholder in
United States?
trie
Mr. W h i t n e y . It may be.
Senator G lass . You mean, Mr. Whitney, that 25 or 30 millions o f
people who own investment securities, who own stocks. You do not




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105

mean to say that there are 25 or 30 millions of people who have any
intelligent comprehension or appreciation of the processes and opera­
tions of stock exchanges, do you ?
Mr. W h i t n e y . They may not have complete knowledge, no. I
think they have, a great majority of them, a knowledge of their
own corporations, what those corporations are doing and their activi­
ties. I do not mean to say that I think any amount like 20 or 25
million are speculating in the market. I do not mean that. I mean
that they are the investors and the speculators.
Senator G l a s s . I did not think you could mean that. I did not
think that a man of your intelligence and environment could be that
credulous.
The C h a i r m a n . I f there are no further questions, the committee
will adjourn to meet Thursday at 10.30 to take up the Glass bill,
and Mr. Whitney will be subject to call when needed. Be here
Monday morning at 10.30 as understood.
(Whereupon, at 1.05 o’clock p. m., accordingly, the hearing on this
subject was continued until 10.30 o’clock a. m., Monday, April 18,
1932, and committee adjourned to meet and consider the so-called
Glass banking bill at 10.30 o’clock a. m., Thursday, April 14, 1932.)







STOCK EXCHANGE PRACTICES

MONDAY, APRIL 18, 1932
U
C o m m it t e e

n it e d

on

B

S tates S en ate.
C urrency,

Washington, D. G.

a n k in g a n d

The committee met at 10.30 a. m., pursuant to adjournment on
Tuesday, April 12,1932, in room 301, Senate Office Building, Senator
Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Walcott, Blaine, Carey, Watson, Couzens, Fletcher, Wagner, Bark­
ley, Gore, Costigan, and Hull.
Present also: Claude Branch, Esq., temporary counsel to the com­
mittee, and William A. Gray, Esq.
The C h a i r m a n . The committee will come to order. Mr. Branch,
who was employed as temporary counsel to the committee, is still
in charge. He has brought as his assistant, William A. Gray, of
Philadelphia, who will act as associate counsel and help in the
examination. Mr. Whitney is on the the stand, and counsel may
proceed.
TESTIMONY OF RICHARD WHITNEY, PRESIDENT NEW YORK
STOCK EXCHANGE, NEW YORK, N. Y.— Resumed

Mr. G r a y . Mr. Whitney, you have been called upon frequently
in the last year or two either in public speeches or before com­
mittees of Congress to defend short selling and other phases dealing
with the stock exchange, have you not?
Mr. W h i t n e y . T o e x p l a i n s h o r t s e l l i n g ; y e s , Mr. Gray.
Mr. G r a y . Why do you use the word “ explain” ? As a matter
of fact, has it not been because of the criticism of short selling
on the New York Stock Exchange that you have been called upon
to speak upon the subject?
Mr. W h i t n e y . Partly, y e s ; but more particularly because of the
ignorance existing as to it.
Mr. G r a y . In other words, what you mean is that the public do
not quite understand the situation with respect to short selling on the
stock market and, therefore, they are liable to get ideas with respect
thereto that are not in accordance with yours.
Mr. W h i t n e y . That are not in accordance with the facts; yes,
sir.
Mr. G r a y . And where have y o u made speeches in the last year or
two upon that subject?
Mr. W h i t n e y . Weil, I think I have probably touched upon that
subject in all speeches I have made, Mr. Gray, and in the last year




107

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or two I think that would be in New York, Chicago, Philadelphia,
Hartford, and Syracuse, if I remember rightly.
Mr. G k a y . And then when certain bills offered in the House of
Representatives were before the committee here in Washington for
the purpose of investigation you testified before a House committee,
didn’t you ?
Mr. W h i t n e y . Yes, sir; and presented to them a brief.
Mr. G r a y . And I understand that you have testified before this
committee for a period of several days.
Mr. W h i t n e y . A day and a half, I believe.
Mr. G r a y . I wish you would state now, Mr. Whitney, if you will,
your views on the subject of short selling and its effect upon general
market conditions.
Mr. W h i t n e y . Mr. Gray, I have stated my views on that subject
before this committee both on Monday and Tuesday of last week.
What I might state now would be a mere reiteration of those points.
And at that time I presented for the record
this committee the
testimony and the brief I presented on February 24 before the House
Committee on the Judiciary. I think I have pretty fully covered my
views and the points. But if you desire-----Mr. G r a y (interposing). That brief was on the question of the
constitutionality of certain House acts.
Mr. W h i t n e y . Oh, no. It was far fuller than that.
Mr. G r a y . I should like for you to state on the record on this
occasion why you think short selling is of advantage to the market.
Mr. W h i t n e y . Very well. I believe that short selling is an ad­
vantage to the market because it is an integral part of speculation,
the other part being marginal purchasing; that speculation together
with investment makes up the markets, whatever they may be, of this
world, but with particular reference here to the security markets.
To take away one part of speculation or one part of in v e s tm e n t
would leave the remainder like, as I said here last week, and I think
on Tuesday, a man with but one leg who has lost his equilibrium and
stability.
Mr. G r a y . You don’t consider short selling a part of the invest­
ment market, do you?
Mr. W i i i t n e y . I did not so state. I said it was a part of the spec­
ulative market, and that speculation was a part of the whole market,
the other part being investment. I have stated here that I believed
short selling and marginal buying were essential to a stock market,
that they tended to smooth the waves of fluctuation but do not go
against the tides which are the trends based on large economic con­
ditions.
Mr. G r a y . Do you believe short selling goes with the trend of a
downward market? That is to say, that it would decrease as the
market goes down ?
Mr. W i i i t n e y . Not necessarily, but of recent days it has.
Mr. G r a y . What do you mean “ o f recent days” ? Do you mean
within the last two or three days or the last several months, or for
what period of time?
Mr. W h i t n e y . The last two or three weeks, or the last week or
two, to be exact.




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109

Mr. G r a y . Y ou have not made clear to me. and I do not know
whether you have to the members of the committee, just why you
believe—although you have said something on that, and said you
believed short selling, as you have expressed it heretofore, is an aid
to market conditions when the market is being depressed. In what
way does it aid?
Mr. W h i t n e y . I tried to say that just a minute ago, that both
marginal purchasing and short selling make up speculation.
Mr. G r a y . Yes.
Mr. W h i t n e y . And it is only by the activity in the market whereby
stability may be occasioned. I do not pretend to state that short
selling is going to prevent the market going down or prevent the
market going up. Trends take care of that. Nor inversely do I
pretend to state that marginal buying is going to make the market
go up or prevent its going down. The trends take care of that, the
idea existing that these two make up speculation as a whole, and
without speculation and without investment, markets could not exist.
And therefore no part of these two should or could be taken away
if you are going to have markets exist.
Mr. G r a y , I should like to have a direct answer as to why you
believe short selling aids the market when the market is on a decline.
You have so stated. Why ?
Mr. W h i t n e y . A s one part of the whole situation, the whole ques­
tion, short selling gives to the market its only compulsory buyers.
The short seller must buy. No other person entering the market must
buy, except the short seller. That is an aid.
Mr. G r a y . In other words, you have expressed the idea before in
some of your speeches and before the Judiciary Committee of the
House, that when the market is going down there is someone that
must buy at some stage.
Mr. W h i t n e y . Yes.
Mr. G r a y . And that that would have the effect of steadying the
market to some extent.
M r . W h i t n e y . T o som e exten t. W e h av e in voked th a t necessary
bu yin g on one occasion.
M r . G r a y . As a matter of fact, is it not true that short selling

in general doea not begin until there is an indication in the market
that a decline is about to take place ? And when I say an indication
in the market I mean to those who study the market and who under­
stand the signs.
Mr. W h i t n e y . I have not record that proves that.
Senator B a r k l e y . Mr. Chairman, is it permissible for members
of the committee to ask questions while this examination is in
progress?
Mr. G r a y . Certainly, at any time, so far as I am concerned.
The C h a i r m a n . Yes; you may proceed, Senator Barkley.
Senator B a r k l e y . Mr. Whitney, I should like to ask you whether
it is true that, when there is a situation which makes it necessary
for someone to buy, it also makes it necessary for somebody to sell?
Mr. W h i t n e y . Senator Barkley, if anybody buys, quite naturally
someone must sell to him; but I do not see the question of necessity
there; no, sir.
119852— 32------ 8




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Senator B a r k l e y . Y o u were speaking about the creation o f a
short interest, a large number of men or women who have sold s h o r t .
Mr. W h i t n e y . A ll right.
Senator B a r k l e y . And, of course, if they do not have w h a t they
sell, it makes it necessary later on for them to buy.
Mr. W h i t n e y . Yes, sir; t h e y m u s t b u y b a c k .
Senator B a r k l e y . And if the market goes down, of course, th e y
make more profit in buying back what they have previously s o ld .
And as the market goes down, doesn’t it also create a c o m p u lsio n
on the part of many nolders of stocks to sell what they have p r e v i­
ously purchased?
Mr. W h i t n e y . That may be so, but it seems to me that i s predi­
cated upon the fact that the short seller is always right. And again
I say I know o f no record that is proof of any such contention—
that the short seller is always right in his judgment.
Senator B a r k l e y . That is quite true. The short seller may make
a bad guess and his stock may go up and he may have to pay more
to get it back than he received when he sold it short. But at any
rate that was not his intention.
Mr. W h it n e y . No; nor is it the intention of the marginal p u r ­
chaser to have the market go down when he buys.
Senator B a r k l e y . Quite so. Can you tell me what proportion of
the short sellers are able to buy back at a lower price than they sold
for?
Mr. W h i t n e y . I have no possible idea. I know of no way that
that information could be arrived at.
Senator B a r k l e y . You d o not know whether the proportion is
larger or smaller than of those who buy back at a higher price?
Mr. W h i t n e y . No. I could only cite the common adage that no
bears have died rich. I do not know.
Senator B a r k l e y . And not very many b u l l s have died rich
recently, either.
Mr. W h i t n e y . Perhaps not.
Senator B a r k l e y . That is all. I do not want to get into a g e n e r a l
discussion of the matter. ^
Senator Gore. Mr. Whitney, that would turn more on the general
trend, would it not, as to the percentage of shorts with a profit or
the percentage of bulls with a profit?
Mr. W h i t n e y . Presumably. We can only look at this question
from the point of view of trends. I think perhaps there is a great
deal of attitude predicated upon the present trend, or the past trend
as we hope it is, that is, that the market and everything has been
going down. But I feel we have to look at any such subject as this
from the point of view of the trends, both ways, up and down.
Senator Gore. But short sales primarily are made because the
seller calculates the price is going down and not primarily fo r the
purpose of forcingit down, is that it?
Mr. W h i t n e y . Exactly.
Senator Gore. Although I suppose one might contribute to the
other.
Mr. W h i t n e y . In that case it is the short seller’s point o f view
and judgment that bv selling short he will make money because he
thinks the market will go down, just as the marginal purchaser buvs
stock because his judgment dictates that the market is going up.



STOCK EXCHANGE PRACTICES

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Senator G o r e . But he does not buy to put it up? He buys be­
cause he thinks it is going up, is that it?
Mr. W h i t n e y . Exactly.
Senator F l e t c h e r . Isn’t it a fact that short selling does force
liquidation?
Mr. W h i t n e y . N o ; I do not think so. I think there is much more
fo r c in g of liquidation by those who are liquidating for reasons of one
s o r t o r another, because of people liquidating securities. The secur­
ity market has been probably, and so far as I know, the only market
o f great importance where cash may be got immediately, or the next
d a y , for what one holds, and so it is that the security markets have
been the medium of tremendous liquidation for that one purpose.
A m an who has bank stocks, who has real estate, who has one thing
o r anoth er on which he can not get cash, can not realize cash, if he
h a s securities, has gone to the market where he could instantly
rea lize cash. And I think it is that liquidating o f securities that has
fo r c e d the market down.
Mr. G r a y . And in that, Mr. Whitney, aren’t you opposed to the
opinions that are held by a great many intelligent, clear-thinking
people, who know as much as can be known, as much as any others,
about market conditions? In other words, aren’t there many people
who take the opposite view, that short selling causes liquidation
rather than liquidation causing selling? And isn’t this the view of
people of intelligence, people who are supposed to know what they
are thinking about?
Mr. W h i t n e y . Mr. Gray, I have never denied that intelligent
people might not have a different opinion than I ; but in this I would
say they are wrong.
1^ . G r a y . Isn’t it a fact that a great many people who have
studied the subject, members of your own stock exchange, have voiced
the opinion that snort selling is the cause of liquidation?
Mr. W h i t n e y . Perhaps so, but I do not know that that is a fact.
At the same time I say, perhaps it may be true that that is the view
held by some persons.
Mr. G r a y . You say “ perhaps ” but that you do not know it to be
a fact. As a matter of fact don’t you know, and I am not referring
to any particular individuals in putting this question to you, or to
any particular firm, but don’t you know that members of your own
stock exchange have indicated they thought that short selling brings
about liquidation, and that some members of your own exchange are
against the maintenance of the practice of short selling in the
market?
Mr. W h i t n e y . To-day?
M r . G r a y . Yes, to -d a y .
Mr. W h i t n e y . Not that I know of. No; I think-----Mr. G r a y (interposing). You use the word “ to-day.” What
limitation do you intend to put upon the matter of time by using the
word ‘to-day ” ? Are you speaking o f this year or of last year or
o f the last few years.
Mr. W h i t n e y . I think it may be true that there has been a dis­
cussion at various times perhaps by certain members of the stock
exchange as to whether this or that should not be done in a time of




1 12

STOCK EXCHANGE PRACTICES

great emergency, and perhaps relating to a banning of short selling^
and particularly let us refer to the time when England went off the*
gold standard.
Mr. G r a y . I am going to come to that, but will ask you more
immediately about this if you don't mind. We will stick to this
general subject for the moment. Of course these discussions are
brought about as a usual thing when something occurs in the way o f
a great emergency, a terrific depression, a steady decline, or some­
thing of that kind, that brings such discussions about. That is when
they arise, is it not ?
Mr. W h i t n e y . Presumably.
Mr. G r a y . And when those occasions do arise you discuss very f r e ­
quently the subject whether or not these practices are not bad g e n e r ­
ally, don’t you?
Mr. W h i t n e y . Yes; if that is what you are discussing-----Mr. G r a y (interposing). And, Mr. Whitney, if I interrupt your
answer I wish you would go ahead and conclude, because sometimes
I speak up quite quickly.
Mr. W h i t n e y . I f that is the question involved, the general ques­
tion of short selling, I will say I have no knowledge o f members o f '
our exchange believing it would be wise to prevent the practice
of short selling.
Mr. G r a y . D o you think these things or these views, I mean, a r e
only entertained by members of your exchange in times of g r e a t
eDMr? W h i t n e y . These views may have been discussed, or these
points may have been discussed in times which might have occurred,
to them as periods of great emergency; yes.
Mr. G r a y . Now, I will come to tliis matter of September 21 a
little bit later. When Senator Barkley started to ask his questionswe were discussing the problem of whether or not short selling doesn’t
usually begin, although of course it occurs at all time, but doesn’t
it usually begin in its greatest strength and power at a time w hen
there is a declining market? I think you indicated that you did not
know that to be true. I am now directing your attention to October
of 1929, just prior to the peak market in that year. Isn’t it a fact that
your short interest was at the minimum almost? In other words,
that it was almost negligible or nil at that time?
Mr. W h i t n e y . After the market had dropped 40, 50, 100, 150.
points?
Mr. G r a y . I am not talking about afterwards but before it reached,
its peak.
Mr. W h i t n e y . No one knows.
Mr. G r a y . D o you mean to say that the stock market or the
stock exchange can not determine that fact?
Mr. W h i t n e y . They could have done so at the time, but I d a
not think they could do so now; no, sir.
Mr. G r a y . I will ask you about that in a minute. What is you r
opinion upon the subject? Your are, of course, familiar with the
conditions as of that time?
Mr. W h i t n e y . As to my opinion in regard to the volume o f the
short interest, I have no opinion. But I am perfectly confident that
during the rising market, from 1924 up to 1929 and into 1029. there




STOCK EXCHANGE PRACTICES

113

~were? or it is my opinion that there were, large short interests
^existing.
Mr. G r a y . What is your opinion with respect to the short interest
•that existed, we will say, in September o f 1929 and the early part
of October? Do you think it was a large short interest?
Mr. W h i t n e y . I have no means of guessing. And-----Mr. G r a y (interposing). Well, Mr. Whitney-----Mr. W h i t n e y (continuing). May I say something more right
•there?
Mr. G r a y . Yes; Mr. Whitney, stop me if I interrupt your answer.
Mr. W h i t n e y . I will say that we guessed at various times, those
•of us who thought we knew something about the situation in the
stock market, guessed as to the short interest as it would appear on
several occasions during the time we have been making these com­
pilations. And in no case that I remember have the most of us
been correct in estimating the short interest. We have almost uni­
versally been wrong. Where we thought it would have an increase
by reason of a circumstance, it did not increase; and where we
thought it would decrease because o f a circumstance, it did not
decrease. I have no way o f knowing what the short interest was
before the crash in 1929.
Mr. G r a y . Well, now, I am going to press the question, and you
can call it your opinion or a guess, whichever you want; but I am
speaking 01 it relatively, that is, with respect to times we will say
since October of 1929, isn’t it a fact that just prior to the peak
market in October, 1929, the short interest was quite small?
Mr. W h i t n e y . I do not know, Mr. Gray. I f you want m e to
grant it as m y opinion, I will do so.
Mr. G r a y . I a o n o t w an t y o u to g r a n t a n y th in g a t a ll th a t you
do n o t en tertain as a definite o p in io n o f y o u r o w n .
Mr. W h i t n e y . Well, I do not know. The short

interest as of
November 13 and in this period of panic-----Mr. G r a y (interposing). I will come to that later. I am now
talking about before October of 1929?
Mr. W h i t n e y . That the short interest was s m a l l ?
S e n a to r G ore. L e t m e ask a question r ig h t th ere.
The C h a i r m a n . Proceed, Senator Gore.
Senator G ore. I am only a layman and do not

know anything
about the matter. But, I take it, Mr. Whitney, the public generally
are more inclined tQ buy on margin, for instance, than they are
to sell short. They are not familiar with the technique of the
matter, and that is the general tendency so far as I know, although,
as I say, I know verv little if anything about it. Have you an
opinion on that point?
Mr. W h i t n e y . Yes. I believe from the facts we have at our
command that in normal times, or perhaps at any time, the marginal
purchases exceed in number and m volume of dollars the amount
involved in short selling.
Senator G ore. And it is more the professional traders, if there be
such a category, who take part in short selling than in long buying?
That is, they participate more generally in short selling, the spe­
cialty dealers, than the public.
Mr. W h i t n e y . Senator Gore, that is a common statement. W e
hear that, that the professionals are the short sellers.



114

STOCK EXCHANGE PRACTICES

Senator G ore. Yes, sir.
Mr. W h i t n e y . But I truly do not know of any facts that s u p p o r t
that contention.
Senator G ore. My point is that Tom, Dick, and Harry, i n t h e
street, the average man, does not take much part in short selling.
Here is what I am coming t o : It looks to me like this peak in 1929
was a sort of speculative debauch, and the judge and the j a n i t o r
and the waitresses and everybody was buying on margin, and w e r e
buying without any reference to intrinsic value, if there be s u c h a
thing, and without any reference to the earning power of the c o m ­
panies whose stocks they were dealing in. That sort of situation,
it looks to me like, would prove that the professional short was o u t
of the market, because he could not calculate on what the man w h o
had no experience was going to do. The market was not running
according to the rules of the game, and he had to get out o f t h a t
storm. I have always figured, although knowing nothing a b o u t i t ,
that it was unfortunate there was not a larger short interest w h e n
that skyrocketing took place.
Mr. W h i t n e y . That very well might be true. Allow me to point
out to you, Senator Gore, with regard to this group of professionals
operating on the short side of the market, that the last time we com ­
piled those figures there wese some 10,663 short accounts, occurring
in every State of the Union except two. The District of Columbia
had some, Hawaii, Canada, and 13 foreign nations were included.
Take California and there were 709 short accounts in that State.
I can not believe that there are 709 professional operators on the
stock market in California. I believe there are a lot of the public
constituting those 10,663 short accounts.
Senator G ore. N o w , Mr. Whitney, how many long accounts were
there at that time?
Mr. W h i t n e y . We have no idea, but we reckon—well, we h a v e
no figures as of that date, Senator Gore. We have reckoned t h a t
at various times there are approximately 50,000,000 shares held on
margin, and I have no idea of what the average amount o f t h e
separate account is.
Senator G ore. I just figured that the short seller, when we were
going through that wild period of speculation and advance and
who thought that stocks were too high, was yet a place to sell be­
cause people were buying without any reference to actual values or
earning power. He could not base any calculation on what t h a t
kind of people would do.
Mr. W h i t n e y . I think that very well may be so, as I have said
But if the short seller is a professional operator, then
he has the capital to support his judgment.
^
Senator G ore. Y ou mean under ordinary circumstances, w h e n
he can calculate what people who know nothing about the m nrW
would or would not do.
Mr. W h i t n e y . True.
Senator G ore. People were buying then without anv r e f e r * ^
to what it would do, but just expecting that it would go un
Mr. W h i t n e y . True.
‘
Senator B a r k l e y . Doesn’t a sudden rise in any stock attract •
group of short sellers because of the thought that there w ill k I
reaction m that stock and they can cash out with a profit?
a



presumaKlv

STOCK EXCHANGE PRACTICES

115

Mr. W h i t n e y . That may be true and that would be the very
thing, as I say, that might prevent such a rise, and necessarily with
a stock going to a price that was wrong or to a ridiculous figure,
that is the very effect that the short sellers would have upon that
stock.
Senator F l e t c h e r . The bigger bears never sell short during a
boom, do they?
Mr. W h i t n e y . I do not know, Senator Fletcher. I f I knew as
much as I am expected to know about the operations of so-called
bears I would tell you. I do not know. I am not trying to evade
anything, but I just do not know.
Senator F l e t c h e r . Doesn’t the record show that the bigger bears
never sell short during a boom? Have you that record?
Mr. W h i t n e y . I have not the actual record, so I can not tell you.
But if we are going to class bears as wise men, just as we may class
bull operators as wise men, then I will say their attempt certainly
will be to buy at the bottom and sell at the top.
Senator F l e tc h e r . I am not classifying them but speaking of the
actual practice.
Mr. W h i t n e y . And as to that I truly do not know.
Mr. G r a y . Mr. Whitney, I am going to take up Senator Fletcher’s
questions for a moment. You have been a broker for how long?
Mr. W h i t n e y . For approximately 2 0 or 2 2 years I will say.
Mr. G r a y . And you have been the president of the New York
Stock Exchange since 1919, have you not?
Mr. W h i t n e y . N o ; 1930.
Mr. G r a y . Only since 1930?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And you have been on the board of the stock exchange?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Since when?
Mr. W h i t n e y . Intermittently since 1912.
Mr. G r a y . And you told Senator Fletcher that you did not know
whether or not professional short traders did not avoid buying in a
boom.
Mr. W h i t n e y . I never said anything about buying, Mr. Gray.
Mr. G r a y . I meant selling. I used the wrong word there, Mr.
Whitney ; you are correct.
Mr. W h i t n e y . Will you repeat your question ?
Mr. G r a y . Yes. You told Senator Fletcher that with your experi­
ence back of you you did not know that professional short sellers in a
market like that which was reaching the peak in October of 1929 did
not avoid selling short at that period.
Mr. W h i t n e y . At the top or the boom?
Mr. G r a y . I am not talking about the top of the boom but in the
boom as it goes along. They may exercise bad judgment and step
in at the wrong time, may they not?
Mr. W h i t n e y . I will admit that, but isn’t it a fact that the pub­
lic-----Mr. G r a y (interposing). My question is the other way; that they
wait until peak prices have been reached and until the market
definitely starts to show a decline before they step in.
Mr. W h i t n e y . I think I have answered that question before to
you this morning, Mr. Gray.



116

STOCK EXCHANGE PRACTICES

Mr. G r a y . I think not.
Mr. W h i t n e y . I have no knowledge of that. I know of no records
that prove it. I can only say, and you may be taking it as an infer­
ence from me that I do not mean, that I do not know. I should like
to point out to you that I happen to be a bond broker also and not a
stock broker.
Mr. G r a y . D o you mean that your concern does not handle stocks?
Mr. W h i t n e y . Only in the execution of orders.
Mr. G r a y . But you must admit or profess to have a very full
knowledge of the subject.
Mr. W h i t n e y . I admit some knowledge of the subject, but a s to
the details you are asking, whether bears sell on a boom, I can not
tell you. Presumably a bear is going to try to get the top price, a s is
the bull going to try to get the bottom price. I do not pretend, how­
ever, to state that either does it.
Mr. G r a y . My question was not whether the bears sell on a boom.
I asked you whether or not your knowledge of stock-market condi­
tions would not cause you to say that the professional bear traders
will not as a usual thing sell short on a rising market, but whether
they won’t wait until they think the peak has been reached and the
decline starts, and they let that decline get a fairly good start before
they step in and try to sell. Isn’t that the general practice ?
M r W h i t n e y . T h a t I c a n n o t a d m it b e c a u s e I d o n o t k n o w .
M r! G r a y . Y o u d o not k n ow ?
Mr. W h i t n e y . N o. But I do know that people selling short are

selling and have sold during a market’s rise. They may have b e e n
wrong.
Mr. G r a y . And because they thought it had reached its top.
Mr. W h i t n e y . Quite right, just as I was trying to tell you-----Senator C o u z e n s (interposing). Mr. Whitney, did you ever sell
short?
Mr. W h i t n e y . Yes, sir.
Senator C o u z e n s . Y o u have sold stocks short?
Mr. W h i t n e y . Yes, sir.
Senator C o u z e n s . H o w recently?

Mr. W h i t n e y . That I do not know, Senator Couzens, but I do
not think in the last nine months or so.
Senator C o u z e n s . During the last nine months or so I u n d e r s t a n d
that you have not sold short.
Mr. W h i t n e y . Not that I remember. I f you wish me to find out
I will do so.
Senator C o u z e n s . Does your name appear in the list o f short
sellers that has been submitted to the committee ?
Mr. W h i t n e y . I do not think so but I am not positive. I d o not
think so. I did sell short in the spring of 1929, thinking that the
market was entirely too high. But I was wrong.
Senator B a r k l e y . Well, you do not mean that you were wrone* tVko*
it was too high?
s
Mr. W h i t n e y . I was wrong in wliat happened to the market
thereafter.
Senator B a r k l e y . It might have been too high then, but i t <aH11
went up some more.
Mr. W h i t n e y . Yes, sir.




STOCK EXCHANGE PRACTICES

117

Senator C o u z e n s . Mr. Whitney, from your own experience in short
selling it seems to me you could answer Mr. Gray's question. 1 our
own experience would indicate what the general practice is among
short sellers or bear raiders.
Mr. W h i t n e y . I have just given the explanation that when I
wanted to sell short I did so and was proved to be wrong.
Senator C o u z e n s . That is only once. How many times have you
been proven to be right?
Mr. W h i t n e y . Very seldom. I do not operate on the short side
of the market except very occasionally.
Senator C o u z e n s . A man may operate on either side of the market
at any time, may he not?
Mr. W h i t n e y . Yes, sir; and he may be right or wrong as his judg­
ment is proved.
Senator C o u z e n s . I mean a short seller is not necesarily always a
short seller.
Mr. W h i t n e y . Oh, no.
Senator C o u z e n s . S o that bears o r bulls change th eir attitude.

Mr. W h i t n e y . They may.
Senator C o u z e n s . And they do in fact, do they not ?
Mr. W h i t n e y . I p r e s u m e s o , y e s . I t h i n k s o m e d o .
Senator C o u z e n s . Y o u are a broker so you must know from your
own experience whether you do or do not stay on the bear or the
bull side.
Mr. W h i t n e y . Yes, sir.
Senator C o u z e n s . I wanted to bring that up because it seems to
me you could answer Mr. Gray’s question from your own experience
and without trying to make a statement as the cumulative experience
of all brokers.
Mr. W h i t n e y . I have tried to answer Mr. Gray’s question, but it
is difficult to answer. I do not know the specific details he asks
about.
Senator C o u z e n s . Don’t you know as applying to your own exper­
ience, whether it applied to the experience of* other brokers or not?
Mr. W h i t n e y . Yes. But Mr. Gray’s question was whether in my
knowledge bear operators do not always or almost always refuse to
sell short until they were sure a decline had taken place, or had
started, and as to that I do not know. I know of specific instances
to the contrary.
Senator C o u z e n s . It may be that Mr. Gray can direct his questions
more to your own experience than to the general experience of
brokers.
Mr. G r a y . I might, Senator Couzens, but I thought it was the
general practice on the subject that would be more important,
because as Mr. Whitney says we might all make mistakes, and he
may in one particular instance have made a mistake, although I
would hardly give him credit for making as many mistakes as he
would indicate.
Senator C o u z e n s . On that matter I think you wil lhave to leave
something to the judgment of the members of the committee.
Mr. G r a y . Mr. Whitney, with all your experience back of you do
you mean to say that what I said is or is not the practice ? And I
D elieve your answer is that you do not know.



118

STOCK EXCHANGE PRACTICES

Mr. W h it n e y . My answer is that I can not specifically answer
the detailed points of your question because the record does not show
it.
M r . G r a y . It is not detailed.
Mr. W h it n e y . I beg your pardon but it is detailed. You asked
me what bear operators do. 1 stated that what you suggest is not
necessarily so. I have no knowledge that it is so, and I have no
record that proves it is so.
Mr. G r a y . I will show you some charts later and will then ta k e
this matter up with you. I now want to come back to October 29.
You said you did not know that the short interest-----The C h a ir m a n (interposing). Mr. Gray, you said October 2 9 .
Did you mean October 29th or October of 1929?
Mr. G r a y . I meant October o f 1929. I beg pardon. Mr. Whitney,
I am now directing your attention to your testimony given before
the Committee on the Judiciary of the House of Representatives,
page 105, and wish to ask you if you did not state this, referring
to the same subject that you have been discussing here:
Just how Important this is can best be illustrated by what took place in the
opening days of the panic of 1929.

And that was the peak, of course, or the opening o f the decline:
At that time the short position was relatively small, and when the panic
started there were comparatively few persons who had sold short at higher
levels and were ready and willing to buy stocks.

That was your statement, was it not?
M r . W h it n e y I b elieve so , i f y ou h av e it th ere.
Mr. Gray. And you tell tnis committee that you can not by any
records ascertain the position o f the shorts at that time, and 1 p r e ­
sume you would say immediately thereafter. Do you mean that y o u r
exchange did not start to get records of those short sales until May
25 of last year; is that correct?
Mr. W h it n e y . That is not correct. It was November 13, 1929.
Mr. G r a y . It was November 13,1929?
Mr. W h it n e y . Yes, sir.
Mr. G r a y . Prior to that time and now you have a stock-clearing
house operating, have you not?
Mr. W h it n e y . A stock-clearing corporation; yes, sir.
Mr. G r a y . And that acts in connection with the members o f tiie
stock exchange the same as a clearing house in banking circles a c ts
with bank members?
Mr. W h it n e y . Yes, sir; on cleared stocks and bonds.
Mr. Gray. And that clearing house has coming before it a memo­
randum of the loans of the various brokers of stocks?
Mr. W h it n e y . No, sir.
Mr. G r a y . You h av e w h a t you call a loan account th a t g o e s b e ­
fore it.
Mr. W h it n e y . No, sir. Do you m ean of stocks?
Mr. Gray. Yes.
Mr. W h it n e y . No, sir; o f money borrowed.
Mr. Gray. O f money; and the stocks are set forth, are they
not?
*
Mr. W hitney. No, sir. In the paying off of loans, lists of stocks
or bonds, not loaned but pledged, are recited to them.



STOCK EXCHANGE PRACTICES

119

M r. G ra y . Is there an account in it that is handed in b y the
variou s brokers to the stock-clearing house, in d ica tin g the stocks
th a t th ey have loaned to sh ort sellers, and the am ount o f m oney
th a t has been raised b y them f o r those loans ?
M r. W h i t n e y . D o you mean specifically?
M r. G r ay . Y es.
M r. W h it n e y . N o . W ill you let m e exp lain th a t?

Mr. G r a y . Certainly.
Mr. W h i t n e y . I f a broker loans stock to another broker it is
more than possible, and I believe in most instances, that that appears
and goes through the stock-clearing corporation records, but it does
not specifically record as to whether it is a sale of stock or a loan of
stock.
Mr. G r a y . All right. While it does not distinguish on its face
as to whether or not it is a sale or a loan, is it not possible for the
members of the stock clearing house, or the members of the board
of the stock exchange who have access to those records, to determine
by virtue of the amount which is loaned on certain stocks whether
or not they are short sales?
Mr. W h i t n e y . Why, it might be, Mr. Gray, if we looked for that
specific thing and compared it each day with the number of shares
that were transacted on the floor of the exchange, and looked into
the other details. I f w© were looking actually tor it then it might
be possible to detect large loans as against the transactions for tnat
particular day. But we do not look for those figures, and we have
no records of them.
M r. G r a y . H aven ’t y o u a statem ent th a t goes b e fo r e th e stock
clea rin g house in d ica tin g the clearings o f loan s un der loa n agree­
m ents?

Mr. W h i t n e y . With banks, sir.
Mr. G r a y . Only with banks?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And not with each other?
Mr. W h i t n e y . With banks, trust companies, and loaning institu­
tions.
Mr. G r a y . And not with the different brokerage houses?
Mr. W h i t n e y . It may be where they were borrowing money, but
only then.
Mr. G r a y . What I am seeking to ascertain is whether or not there
isn’t on these loaning agreements an indication in the amount that
is loaned on stock which would tell you whether or not it was short?
Mr. W h i t n e y . No. air.
Mr. G r a y . All right.
Mr. W h i t n e y . N o , sir.
Mr. G r a y . All right.
Mr. W h i t n e y . I fear you have a totally wrong impression as to
what records we have there.
Mr. G r a y . I may have. I am asking you about it, and I may
show you later such a loan agreement and indicate what I mean.
Mr. W h i t n e y . A ll right.
Mr. G r a y . Now, Mr. Whitney, you may have before this indicated
just what process takes place in connection with a short sale, but
will you please indicate it for this record again?



120

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . The mechanics of a short sale?
Mr. G r a y . Yes. Assume that we know nothing about short sell­
ing and what it means. Will you tell us?
Mr. W h i t n e y . Yes; I will try to do so.
Mr. G r a y . All right.
Mr. W h i t n e y . An individual makes up his mind with regard
to the stock of a particular corporation, that it is selling at too high
a price as warranted by the earnings of that corporation or any
other data that he may have bearing upon the shares of the corpora­
tion, the direct inverse perhaps, in the forming of his judgment, o f
what a marginal purchaser comes to. The short seller, or the man
who makes up his judgment that the price of the stock is too high,
will give his broker an order to sell 1 0 0 shares, let us say. Tnat
order is sent to the floor of the exchange. The broker of the member
receiving that order is advised whether or not it is for short or long
account, and he then goes to the particular post where that stock,
let us say, United States Steel, is traded in. I f the market is 3 3 i/2~
3 3 % and the last sale was 33%, he will sell that 100 shares at 3 3 ^
and report it back to his house, who in turn will advise the shortseller that he has sold 100 shares of United States Steel at 33y2~
Thereafter the broker will borrow that 100 shares of stock for the
short seller either from another broker or from some customer o f
his who has given him permission to loan his stock.
Senator B r o o k h a r t . H o w does he know he can borrow that stock?
How can he always know that? How is it possible that he can
know in advance that he can borrow ?
Mr. W h i t n e y . It sometimes happens that he is wrong in his
estimation and he can not borrow the stock. Then it has to be
bought back as against delivery the next day, to the detriment o f
the short seller. But by reason of the activity in the borrow and
loan market ho forms his judgment whether or not it may be
borrowed. He borrows that stock and the next day makes delivery
of that 1 0 0 shares of United States Steel through the Stock Clearing
Corporation to the broker who purchases it from him. Thereafter
at some time that short seller must buy back the 1 0 0 shares o f
United States Steel in order that his broker may return it to the
person from whom he borrowed.
Senator B a r k l e y . Does that mean an actual delivery of the cer­
tificates, or is it a fictitious transaction?
Mr. W h i t n e y . It is an actual delivery of the certificates which
the broker borrows, as I have just stated. And in borrowing from
the other broker he has to give to him the full market value o f that
stock as of that time.
Senator B a r k l e y . In cash?
Mr. W h i t n e y . In cash; or probably by check which represents
the cash.
Senator B a r k l e y . Is it a real loan or does he hold the ch«v*k
against the delivery of the stock?
Mr. W h i t n e y . $ o , s i r ; h e d e p o s it s t h e c h e c k .
Senator B a r k l e y . Then it is almost a sale.
Mr. W h i t n e y . It is not almost a sale, but it is absolutely a method
of financing on the part of the lender or the carrying of those iftft
shares of United States Steel for whomever he may have them




STOCK EXCHANGE PRACTICES

121

Senator B a r k l e y . After h e b o r r o w s t h e s t o c k a n d r e t u r n s i t a t
some future d a y h e d o e s n o t r e tu r n th e id e n t i c a l s h a r e s t h a t h e
^borrowed, does h e ?
Mr. W h i t n e y . N o, sir.
Senator B a r k l e y . He returns another 10 0 shares.
Mr. W h i t n e y . Another 100 shares and receives back the money.
Senator B a r k l e y . Which he has bought from somebody else.
Mr. W h i t n e y . Yes, sir.
Senator B a r k l e y . S o as a matter of fact it is not a loan b u t an
actual sale of the identical shares of stock, is it not?
Mr. W h i t n e y . N o, s i r ; i t i s n o t a s a le .
Senator B a r k l e y . Well, there is a sale that transpires with ref­
erence to it.
Mr. W h i t n e y . N o.
Senator B a r k l e y . What is the meaning of turning over to the
lender a check for the amount represented by the stock?
Mr. W h i t n e y . That is the method of borrowing the stock, that
"the lender receives the dollars and the borrower receives the stock.
Senator B a r k l e y . N o w , when the lender gets his stock back what
becomes of the money he has in the meantime held?
Mr. W h i t n e y . He p a y s it back to the borrower.
Senator B a r k l e y . The same amount?
Mr. W h i t n e y . The market value of the stock at the time.
Senator B a r k l e y . At the time o f the return?
Mr. W h i t n e y . Yes: at the time o f the return.
Senator B a r k l e y . So that the lender may make a profit out of
lending his stock, depending upon the fluctuations of the market?
Mr. W h i t n e y . The lender being the individual customer makes
■that profit. Suppose he is long 100 shares on margin at the time of
lending it and it may be selling at 50, and when it is returned it may
he selling at 55.
Senator B a r k l e y . All right.
Mr. W h i t n e y . Then there is the difference, but it is purely a book«ntry difference.
Senator B a r k l e y . So that the lender does not profit by the lend­
ing of his stock to some broker who wants to deliver it on behalf of
■somebody he has sold to?
Mr. W h i t n e y . Not in the difference of money. But he does profit
possibly by the interest rate. I f there is a scarcity in United States
Steel then it may be lending flat and he has to pay no interest.
Or, as sometimes occurs, Steel may be lending at a premium and
then that premium goes to the lender.
Senator B a r k l e y . Well, I do not understand from all I have
heard about it.
Mr. W h i t n e y . What was that?
Senator B a r k l e y . That was just a facetious remark. Never mind.
Mr. W h i t n e y . The actual money which the borrower pays to
the lender is deposited against a return of that stock, and that
amount of money must be kept to the market, as we call it, depending
upon the variations in price o f the particular stock loaned.
Senator B a r k l e y . Let us say that United States Steel is selling
-at 33.
Mr. W h i t n e y . All right.



122

STOCK EXCHANGE PRACTICES

Senator B a r k l e y . And somebody who has 100 shares is willing
to loan them to a broker.
Mr. W h i t n e y . Yes, sir.
Senator B a r k l e y . And he lets him have the certificate and in
return receives a check for $3,300, and he then goes on about his
business and deposits that $3,300 in his bank.
Mr. W h i t n e y . Right.
Senator B a r k l e y . And the broker gets the certificate and delivers
it to whoever has bought it the day before.
Mr. W h i t n e y . That is right.
Senator B a r k l e y . And suppose that transaction remains in status
quo for, we will say, two weeks, and in the meantime United States
Steel goes up to 40, and the transaction proceeds to its conclusion,
so that these 100 shares must be returned to the lender. It is then
returned on a value of 40, which would be $4,000.
Mr. W h i t n e y . In the meantime, however, the lender has called
upon the borrower to put up an additional $700. It is kept at the
market at all times.
Senator B a r k l e y . He takes out of his $3,300 that he is holding as
security for the stock, $700, or whatever amount the stock goes up to?
Mr. W h i t n e y . Yes.
Senator B a r k l e y . What happens to him when he gets it back?
Mr. W h i t n e y . When he gets the stock back?
Senator B a r k l e y . Yes.
Mr. W h i t n e y . He pays back at the then market price of the stock*
Senator B a r k l e y . Which would be 40?
Mr. W h i t n e y . Yes; which would be 40.
Senator B a r k l e y . Well, has he won or lost?
Mr. W h i t n e y . Well, there is no question of winning or losing on
that particular transaction. The only question of winning or losing
would be when after getting that stock back he sold it out in the
market.
Senator B a r k l e y . But when he gets it back he has to put up in
cash what represents its value at 40.
Mr. W h i t n e y . Yes, sir; because he has already received that f r o m
the lender.
Senator B a r k l e y . It is the lender I am talking about. I am talk­
ing about when the lender gets his 10 0 shares back.
Mr. W h i t n e y . Y o u have that inverted. The lender gets his 100
shares back and the borrower returns it.
Senator B a r k l e y . The lender has turned over 10 0 shares for which
he has received $3,300.
Mr. W h i t n e y . Yes, sir.
Senator B a r k l e y . And it goes up to 40 and it is delivered back tohim at 40. You say he has to pay at the price of 40 to get his stock
back?
Mr. W h i t n e y . He pays back to the borrower the amount o f monev
that has been given to him by the borrower in keeping that stock tn.
the market, the money that was on deposit with the lender.
Senator G ore . Then the borrower had to keep putting it up
Mr. W h i t n e y . I f the market went against the short seller h*
to put it up.
ue naa




STOCK EXCHANGE PRACTICES

123

Senator B a r k l e y . Inasmuch as the market went from 33 to 40, the
man who borrowed that stock and sold it had to keep putting up a
margin?
Mr. W h i t n e y . Yes.
Senator B a r k l e y . And then he gets it up to $4,000, we will say.
Then it is bought back or sold by somebody again and is returned to
the original lender. And in that transaction you say he makes
neither a profit nor a loss except as the interest charge may affect
him?
Mr. W h i t n e y . The lender?
Senator B a r k l e y . Yes.
Mr. W h i t n e y . But the short seller who sold at 33, in your in­
stance, he borrows the stock and lets it ride for, say, two weeks, at
which time it is selling at 40, and he decides to cover and buys it in
and pays 40. He has lost $700. He returns that stock to the lender
and nis broker gets back the money that has been put on deposit.
The lender, however, has no loss or profit there, except a book loss or
profit, unless he goes out and sells that 1 0 0 shares on the market
thereby completing his situation.
Senator B a r k l e y . Out of the price at which he originally bought
it.
Mr. W h i t n e y . Yes, sir.
Senator C o u z e n s . That is on the assumption, of course, that the
borrower doesn’t split with the lender after he makes a profit. That
issue was raised when you were here before, as to what the relation
was between borrower and lender.
Mr. W h i t n e y . D o you mean as to one house against another
house?
Senator C o u z e n s . Yes.
Mr. W h i t n e y . There is no split that I know of at all.
Senator C o u z e n s . Well, no matter. It is alleged and I think can
be supported that the borrower of stock if he makes a profit splits
with the lender. But I understand you do not admit such a practice.
Mr. W h i t n e y . I do not know of any such practice. I stated the
other day that where premiums are paid, by agreement between the
customer and the broker they were sometimes split or the whole of
them given to the customer.
Senator B a r k l e y . Does the transaction which I have just recited
with reference to a hundred shares of steel stock tend to create a
fictitious market?
Mr. W h i t n e y . N o, sir.
Senator B a r k l e y . The man who owned that stock did not desire
to sell it; therefore, there was no market so far as he was concerned,
but he was willing to loan it to somebody else.
Mr. W h i t n e y . There was the market even if he did not care to
sell it; yes.
Senator B a r k l e y . So far as he was concerned there was no mar­
ket, but he was willing to loan it to some other man who did not
have any steel and therefore allow him to sell it. Does that o f itself
create a fictitious market and therefore a fictitious value?
Mr. W h i t n e y . I can not see it, sir, no.
Senator B a r k l e y . Do you know whether, as a matter of ex­
perience, it has done it, that practice ?



124

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . I do not think so, Senator, 110. I think it is quite
the contrary. I think it is a very real market, not fictitious in any
way.
Senator B a r k l e y . That is a very, very profound question, whether
the practice of selling something that yon do not own, but which
somebody else owns and which they are willing to loan you in order
that you may sell it, creates a fictitious market, either by depressing
it below its real value or by creating a situation where it may be
brought back, and therefore another fictitious valuation put on it so
that it would rise immediately after the sale.
Mr. W h i t n e y . Short selling, as far as I know, the making o f
short contracts, exists in every industry in the world, pretty nearly.
It is not confined merely to security markets.
Senator G o r e . Let me get your point of view, Mr. Whitney. We
will take a pair of Siamese twins.
Mr. W h i t n e y . Yes, sir.
Senator G o r e . They look at the market quotation and see that
United States Steel is 35. One of the twins thinks that it is worth
more than that and is going up and he buys on a margin, he buys
for rise, he takes a risk of its going down; if it goes up he wins.
The other twin thinks that when it is selling at 35 it is too h ig h ;
he thinks it is going down; he sells it short. He takes the risk of
its going up. It it does go down he wins. It is your contention that
the moral character of these two transactions is no different?
Mr. W h i t n e y . Exactly. It is a great simile.
Senator G o r e . I see.
Senator B a r k l e y . In that case the Siamese twins, being insepara­
ble, it is “ heads I win and tails you lose,” is it not?
Mr. W h i t n e y . It is a stand-off, sir.
Senator G o r e . I think that is the only way to play the market.
Mr. Whitney, have you submitted or can you submit a chart or
graph showing the decline of stocks since October, 1929, the decline
of agricultural products which are dealt in on the exchanges, and
also showing the decline in agricultural products that are not dealt in
on the exchanges, so that we could have a graph showing the paral­
lelism or the deviation of those prices and their levels and ranges?
Can that be done?
Mr. W h i t n e y . I think it can be done. I have not got it. I have
here what may be of interest, however, a chart prepared b y the
Department of Agriculture, and it shows the values o f farms
throughout the United States, also in the west north central States
and the weighted yearly average in wheat and corn.
’
These figures show that farm values followed very slowly after
the tremendous increase in the prices of wheat in 1916 up through
1919, and with the perpendicular fall in wheat and corn in 1920
and 1921 it was not until almost a year or more later that the farm
values fell. It is an interesting point perhaps in that connection
Senator Gore, that-----’
The C h a i r m a n (interposing). May I ask, do you mean the value
of farm lands, or farm commodities?
Mr. W h i t n e y . Farm lands.
The C h a i r m a n . As shown from what record?




STOCK EXCHANGE PRACTICES

125

Mr. W h it n e y . The Department of Agriculture's chart. This is
the chart taken from their very figures, or rather the figures of the
Department of Agriculture, and the chart is ours.
It may be significant here that the farm values, financed by mort­
gages presumably, did not show a decrease in value until some long
period after the fall in the commodities wheat and corn. Perhaps
the reason stocks and bonds show such a close relationship to earn­
ings o f corporations that they represent is because they are carried
not on mortgage but on short-term loans.
I also have here a-----The C h a ir m a n (interposing). May I suggest there that it would
be interesting to know how the farm values were determined- I
know the Agricultural Department depends largely on census figures,
and they are five years apart in most States, that is, five years from
the Federal census to the State census.
Mr. W h it n e y . I have here, Senator Norbeck, the exact way that
these figures were compiled as stated by the department. May I
defer until those could be filed?
The C h a ir m a n . Certainly.
Mr. W h it n e y . I think we can, to go back, Senator Gore, find out
what you want. We have not it here.
Senator G ore. I have heard it contended, Mr. Whitney, that farm
products that are not dealt in on the exchanges have declined more
and fluctuated more violently than the products that are dealt in.
It would be interesting if that is true, because that benefits both the
bulls and the bears and those that have no open market. I f they
have fluctuated more violently than those that do, it might show-----Mr. W h it n e y (interposing). I think that can be pointed out, at
least interesting facts may be developed, on this very chart I have
before me, which shows that wheat started at about $1.50 a bushel
in 1915 and rose to a weighted price of about $2.20 in 1919, although
it went to $8.25. This is a weighted yearly average price.
Senator G ore. It was pegged at $2.20 part o f the time.
Mr. W h it n e y . And then it precipitously fell in price, yes; back
to almost a dollar, and then later to below a dollar again.
Senator G ore. Does your chart show the range o f
land
prices?
Mr. W h it n e y . Yes, sir.
Senator G ore. There is no short interest in that?
Mr. W h it n e y . No.
Senator G ore. The decline would be independent of that?
Mr. W h it n e y . They reached their peak in the United States
farm lands in 1920, as did also the west North Central States farm
values.
Senator Norbeck, the Department o f Agriculture’s figures, so
stated as we took it off, farm real estate index numbers of estimated
value per acre, 1912 to 1929, were taken from the Bureau of Agricul­
tural Economics, United States Department of Agriculture, and in
the west North Central States that included Minnesota, Iowa, Mis­
souri, North Dakota, South Dakota, Nebraska, and Kansas. Does
that answer your inquiry? Would you like this in the record as a
matter of interest?
119852— 32------ 9




STOCK EXCHANGE PRACTICES

1 26

The C h a ir m a n . I do not think it is necessary unless somebody
wants it.
Senator G ore. I would like to have it in.
The C h a ir m a n . Very well; put it in.
Hr. B ra n c h . Mr. Chairman, I think it would be important to
have those exhibits marked by the reporter at this point and inserted
in the record for future reference.
(Exhibit 16, being tabulation of “ Farm real estate index numbers
of estimated value per acre, 1912-1929,” is here printed in the record
in full as follows:)
E x h ib it

16

Farm real estate, index numbers of estimated value per acre, 1912-1929
( 1912- 1914= 100)
[Source: Bureau of Agricultural Economics, U. S. Department of Agriculture]
1912

___ _

TTnfted States
0
Q

c

I
1
1

1913

1914

1915

1916

1917

1918

1919

1920

97
97
96

Geographic division

100
100
99

103
103
104

103
105
112

108
114
128

117
122
134

129
134
145

140
147
160

170
184
213

1924 1925

1926

1927

1928 1929

1930

124
121
130

119
115
121

1922 1923

Geographic division
United States____________ ____________

139
150
162

135
142
156

130
132
143

127
126
136

117
113
117

116
112
116

lilt
109
113

1021
167
174
197
1981
108
97
96

Nora.—West North Central States include Minnesota, Iowa, Missouri, North Dakota.
South Dakota, Nebraska, and Kansas.
Yearly weighted average farm prices of specified crops, ~by crop years, for the
United States as a whole
[Source: Bureau of Agricultural Economics, V. S. Department of Agriculture]
[Cents per bushel]
Crop year beginning

1912

1913

1914

1915

1916

1917

1918

1919

1920

1021

83.3
56.7

79.3
71.8

99.4
71.4

98.2
69.6

144.4
119.0

205.8
148.1

206.3
153.1

218.6
151.5

182.9
62.1

104.4
54.3

Crop year beginning

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

Wheat.......................................
Com------------------------------- . . .

98.0
76.7

92.4
84.0

127.8
105.8

145.9
71.0

123.8
74.9

120.5
85.2

100.1
85.8

105.1
79.8

66.4
56.1 ----------

(Exhibit 17, being graph of “ Farm real estate values per acre
and wheat and corn futures,” is here printed in the record in full
as follows:)




STOCK EXCHANGE PRACTICES

1 27

Senator F l e tc h e r . What was the index in 1926, Mr. Whitney ?
Mr. W h i t n e y . For which, Senator Fletcher?
Senator F l e t c h e r . Either farm lands or farm products?
Mr. W h i t n e y . The price of corn was 75 cents, wheat $1.25, and
farm lands approximately 1 0 0 , as against the peak of 160 to 180.
Mr. G r a y . N o w , Mr. Whitney, if we may bring you back to New
York and the mechanics of short selling.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Y ou h ad com pleted y ou r descrip tion , I th in k .
Mr. W h i t n e y . I think so, except perhaps for irrelevant details.
Mr. G r a y . One or two little things I may ask—when a broker
sells stock for a man short, as far as he is concerned and as far as
the buying broker is concerned, it is like every other transaction on
the stock market, is it not? It is completed between the two of
them in the usual way, with delivery being made the next day and
settlement being made through the clearing house?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . So that there are no differences as far as the part of
the transaction is concerned between a long sale; that is, between a
person who is selling and delivering his own stock, or even between
a person who is buying, whether he is buying on margin and paying
fully?
Mr. W h i t n e y . N o difference except in the conduct of the selling
broker.
Mr. G r a y . Yes. Well, now, then, we are coming to the selling
broker. The selling broker, having to make delivery and his clients
not having the stock for the purpose of delivery, goes elsewhere and
gets it, and he gets it almost invariably from another broker, does
he not?
_,
Mr. W h i t n e y . I believe so.
Mr. G r a y . That is to say, either from some other broker or from
stocks which he has himself and which he has an authority to lend ?




128

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Or from his customers who have given him au­
thority to lend.
.
Mr. G r a y . I speak of that meaning stocks that he has himself
with authority from the owners of it, they being pledged with him
to lend.
Now, let us take the situation where he gets it from another
broker. There is sometimes what is called a flat loan made, is there
not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And that flat loan means that the lender gives the
stock to the broker who has just put the transaction through, and
the broker who has put the transaction through deposits with him.
the market value of the stock, but then there is no interest or pre­
mium paid—that is correct, is it not?
Mr. W h i t n e y . There is no interest paid nor premium if the s t o c k
is loaned flat.
Mr. G r a y . And the broker who has borrowed the stock-----Mr. W h i t n e y (interposing). That may happen, yes.
Mr. G r a y . Well, I am considering just the-----Mr. W h i t n e y (interposing). A case, yes.
Mr. G r a y . An instance of flat loaning with no other elements in
it.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . I want to get the entire mechanics before the commit­
tee. And the only thing that happens as between the loaning broker
and the one who has borrowed the stock from them until the time
that it is returned is that the broker who had made the sale and
borrowed the stock has to keep in custody and control and posses­
sion of the broker who has loaned him the stock an amount of money
equivalent to whatever the fluctuating market values are. That is
true, is it not?
Mr. W h i t n e y . Yes; with a further exception.
Mr. G r a y . Well, tell me the exception.
Mr. W h i t n e y . That is, if, during the period at which the bor­
rower is getting stock from the lender, the rate for that particular
stock changes, so does the relationship between the borrower and
the lender change.
Mr. G r a y . What do you mean by the “ rate ” ?
Mr. W h i t n e y . I f it started off—your instance—flat, if that be­
comes a premium to be paid, then the borrower has to pay the pre­
mium to the lender; or, if that stock goes off the flat basis and goes
on interest basis, then the lender has to pay interest to the borrower.
Mr. G r a y . In other words, if there is a change in the money rate
you start with flat, as you would start with scratch in a race, there
must be a change with this accordingly?
Mr. W h i t n e y . There may be, yes; and if there is the relationshiD
changes.
F
Mr. G r a y . That is, it changes from a flat lending to lending o n
interest and possibly lending on interest or premium!
Mr. W h i t n e y . That is right.
Assuming that there is no change in the rate, the o n l v
thing that must be done is to keep the lending broker on a par with
market conditions, and then when the transaction is closed the return
mg to him of the stock and the securing of the money?



STOCK EXCHANGE PHACTICES

Mr. W h i t n e y . That is right.
Mr. G r a y . N o w , in the m ean w h ile th a t len d in g broker has the
use of th a t m oney fo r n o th in g , has he n ot ?
Mr. W h i t n e y . Yes.
Mr. G r a y . Does his customer get any benefit of that if he is lend­
ing the customer’s stock?
Mr. W h i t n e y . I explained that at length.
Mr. G r a y . Will you tell me that yes or no and then make any
explanation you want? Does he get any benefit?
Mr. W h i t n e y . Must I answer yes or no, Mr. Chairman ?
Mr. G r a y . I s it not capable of being answered yes or no? I f it
is n o t capable of being answered yes or no, of course, I would su g ­
gest th a t i t is not necessary.
Mr. W h i t n e y . I would say yes and no.
Mr. G r a y . Y ou h ave been d o in g th at a great deal, I noticed b y
reading the record.
Senator G ore. That is Andy’s method.
Mr. W h i t n e y . D o y ou w a n t an answ er?
Mr. G r a y . Y es; I would like to have one.
Mr. W h i t n e y . Well then, I will explain, as I explained to the
committee before. The rate of interest charged to customers alt the
end of each month, by their brokers is based on what the money has
cost the broker during that month to him. So, therefore, if that
broker is loaning any considerable amount of his customer’s stock
flat, that will go into the reckoning at the end of the month, as to
what money cost that broker during that month, and it will be passed
on into the rate that he charges his customers.
I f you take a specific instance of 100 shares, as I also stated to
this committee, the amount of money and interest to the particular
customer is almost infinitestimal. So my answer truly I think and
properly is yes and no.
Mr. G r a y . Mr. Whitney, do you mean to tell this committee that
if we subpoena the books of a brokerage house in New York in ac­
cordance with the records, if he were shown to be a very large lender
of stocks to brokers who had sold short for their clients, in that
instance the books would show that whatever moneys they had made
in interest and premiums were taken into consideration at the end
of the month in rendering a monthly statement to their clients and
determining the interest or service rate, whatever it may be, that
they in some States or another to avoid the usury laws they call it,
that it would reflect itself there?
Mr. W h i t n e y . In the determination of the rate of money cost to
them during the month, the fact that they had a large amount of
stock on loan would be reflected, in my opinion.
Mr. G r a y . Now, let me see: Do you mean to say that in deter­
mining the rate which a broker is going to charge his customer for
money that he has loaned on only marginal transactions under
which the customer is dealing, is lowered by that broker because he
takes into consideration in making his calculation the net amount
that it has cost him for money during the month?
Mr. W h i t n e y . For money during the month, yes, sir; that is my
op in io n .
Mr. G r a y .

Then if we subpoenaed the books of two different
brokers, we will say they are active brokers both doing relatively



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STOCK EXCHANGE PRACTICES

the same amount of business, and one of them, however, was shown
on the books during that month to have been a very large lender of
stocks, while the other one had done practically no lending, the rate
of the first broker mentioned for which he charged his customer
would be substantially less than the rate which the other customer
was charged? Is that correct?
Mr. W h i t n e y . I believe that would be so.
Mr. G r a y . And do you also believe that taking a certain number
of brokers dealing on and members of the New York Stock Exchange
and in New York City, so that we might not go up against any
State regulation, the rates which they charge at the end of the month
to their customers—at the end of each specific month—varies
substantially?
Mr. W h i t n e y . Does the rate to the customer vary?
Mr. G r a y . Yes.
Mr. W h i t n e y . Oh, yes; at times tremendously.
Mr. G r a y . Oh, at times—I recognize that, but taking the same
month into consideration and taking a dozen different big brokerage
houses, do you mean to say that tne rate which one big brokerage
house during that month would charge their customers would be
less than another brokerage house that had made a considerable
amount of money by loaning?
Mr. W h i t n e y . Perhaps not, Mr. Gray, but you are forgetting,
perhaps, that the rates are in small fractions; they are 3V4, 3% per
cent, or whatever it may be.
Mr. G r a y . Yes; but in large transactions they become very im­
portant, those fractions.
Mr. W h i t n e y . I f those large transactions have a tremendous in­
fluence or a great influence on the total result, then you have not
stated an instance of it, nor have I got it particularly in my mind,
any instance.
Mr. G r a y . Maybe I have not made the situation clear. Suppose,
for instance, during a month that there was a very large short-sale
interest. We take a half a dozen houses that have been actively
engaged in the loaning of stock.
M r . W h i t n e y . Yes.
Mr. G r a y . The brokers who are buying for the short interests or
selling for the short interests. And we take another half a dozen
houses that are on a par with them as to the quantity of business
they do but who do not make it a practice of loaning stock.
Would you say that the first halt a dozen have charged their clients
less by reason of the money that they have made from the money
that they have loaned them on marginal accounts at the end o f the
month, than the second half dozen nave?
Mr. W h i t n e y . They might.
Mr. G r a y . I would like to know whether they do.
Mr. W h i t n e y . Mr. Gray, you have got so many questions in­
volved in this point. It is tne type of business they do. It is where
they are getting their money, whether by call loans or by time loans.
There may be a difference, a lot of things weighing in the final rate
arrived at. I do not pretend to state that there may be any great
difference between our houses, but I do pretend to state that the cost
of money from all sources affects that rate.
Mr. G r a y . What I am trying to ascertain-----


STOCK EXCHANGE PRACTICES

131

Mr. W h i t n e y (interposing). And also that, to the individual
whose stock is being loaned, in so far as the interest is concerned,
it is a very, very small item.
Mr. G r a y . What I am trying to get at is whether or not these
brokerage houses who loan stock, whether it be their own or their
customers’ stock, and get paid for it by interest rates, get paid
for it by premiums-----Mr. W h i t n e y (interposing). No, sir; we have not talked about
premiums. We are talking about interest only.
Mr. G r a y . I will come to premiums, but let us confine ourselves
to interest, if you prefer.
Mr. W h i t n e y . Well, that is what you were confining yourself to
in the flat rate.
Mr. G r a y . Let us confine ourselves to it then. The interest rate
that is paid to that broker who loans that stock, do you mean to
tell me that that is taken, either directly or indirectly, into considera­
tion when the interest rate that he charges his customers is reached
and fixed?
Mr. W h i t n e y . It is taken into consideration in the finding of the
cost of money during that period, and in its relationship to the rate
charged to the customer, I believe that is a fact.
Mr. G r a y . And you mean that he takes into consideration the
interest that he has received in order to figure the net cost of the
money to him and he gives a customer credit for it.
Mr. W h i t n e y . I think it is reflected-----Mr. G r a y (interposing). In reaching the figures?
Mr. W h i t n e y . In reaching the conclusions; yes. But I do contend
that that amount is very, very small in its relationship to a particular
customer.
Mr. G r a y . Well, you mean because he is dealing with a large
number of customers and when it comes to dividing up that interest
which he has received from these lending transactions it is compara­
tively small?
Mr. W h i t n e y . Very small; yes.
Mr. G r a y . Small in the first instance and then small because you
have to divide it among a large number of customers?
Mr. W h i t n e y . As to a particular customer; yes.
Mr. G r a y . Now then, you spoke of premiums. Does he give him
the benefit of the premiums that he earns?
Mr. W h i t n e y . In some cases; yes.
Mr. G r a y . Well, what cases doesn’t he do it?
Mr. W h i t n e y . It is a custom where the premium is very small
not to give the premium, because the broker runs all risk of loaning
the stock, and the bookkeeping and various other detailed actions on
his part. There seems no particular reason why he should give that
premium. I believe it is a custom that if the premium is requested
an agreement is entered into by brokers.
Mr. G r a y . T o p a y it?
M r . W h i t n e y . T o pay the premium, on the condition that the
cu stom er takes the risk.
Mr. G r a y . I wil ask you in a moment about the risk. I want
to ask you this question now: I f interest is received from the loaning
of a customer’s stock, why is not credit for that interest given to
the specific customer whose stock is loaned ?



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STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Well, it is a legal question, Mr. Gray, but let
me point out something-----Mr. G r a y (interposing). No; it is a practical question.
Mr. W h i t n e y . All right, I am going to get to the practical sid e ,
because I can not pretend to be a lawyer. Suppose you are a b r o k ­
erage house. I am going to put you in this position and le t y o u
do it.
Mr. G r a y . I may be able to get out of it as easily as you are
doing.
Mr. W h i t n e y . I am not trying to get out of it. I think this w ill
show you why. There is a brokerage house whose customers h a v e
granted that broker by specific agreement the right to loan 1 0 ,0 0 0
shares of steel. You follow me?
M r . G r a y . I do.
Mr. W h i t n e y . That broker attempts in the loan crowd to loan
10.000 shares of Steel. Or he may be short for other customers
and he is loaning for one customer to the others to fulfill their
contracts. Out of the 1 0 ,0 0 0 shares of steel he is able to loan but
2 .0 0 0 shares.
Now, if you will answer me to whom is he going to credit th e
interest or the premium on the 2 ,0 0 0 shares out of the 1 0 ,0 0 0 th a t
he has a right to loan, then perhaps I could tell you how m o r e
easily could we adjust this matter by regulation.
Mr. G r a y . You mean he has a quantity of 10,000 shares t h a t b e ­
longs to miscellaneous customers?
Mr. W h i t n e y . Right.
Mr. G r a y . And he has authority from all of them to lend?
Mr. W h i t n e y . Yes, sir.
M r . G r a y . And he is able to loan only 2 ,0 0 0 ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . I f you are asking me for my answer I should s a y it
should be divided among all of his customers that owned that p a r ­
ticular stock and had authorized him to loan, and not divided and
distributed among all of his customers who had no interest in th a t
stock whatsoever. So I might suggest that as a change o f y o u r
rules on the exchange.
Mr. W h i t n e y . We have no rules on that.
Mr. G r a y . H o w do you govern that situation ?
Mr. W h i t n e y . Suppose that this broker has this 10,000 sh a re s
on which he has permission and it is divided among the a c c o u n ts
of a hundred customers a hundred shares each. Do you not a p p r e ­
ciate that the bookkeeping there would be perfectly huge for th«
effort to be gained ?
Mr. G r a y . In other words, the broker considers how much trouble
he is being put to rather than how much benefit his customers are
entitled to?
Mr. W h i t n e y . I do not agree that the customer is entitled under
the circumstances. I do not see how it can be adjusted.
Mr. G r a y . Y ou spoke of premiums as small premiums. Tell m e
in the ordinary times where there is some depression, where there
is, we will say, a good deal of short selling—I am not necessarily
talking about times of great depression or panic—and stocks for
lending purposes in a particular issue become somewhat scarce,
what are the premiums; what would they usually amount to?



STOCK EXCHANGE PRACTICES

133

Mr. W h i t n e y . In ordinary times the highest premium paid is
flat. Of later there have been premiums ranging from one-two-hundred-and-fifty-sixths of 1 per cent up to particularly occasions of
one-half of 1 per cent,
Mr. G r a y . Was that premium based on a percentage basis, Mr.
Whitney, or so much a snare per day ?
Mr. W h it n e y . So much a share per day.
Mr. G r a y . Then, it is not on a percentage basis at all, is it?
Mr. W h i t n e y . Only in the reckoning per day, that is all.
Mr. G r a y . Does it amount at any time to-----Mr. W h i t n e y (interposing). That is the way we carry it, sir.
Of course, it can be turned into dollars.
Mr. G r a y . Of some of these things I am discussing with you I
may not have the knowledge and some I may have. I am just inquir­
ing. With respect to this: A man may borrow a certain stock and
may have to pay a premium for it of as high as 50 cents per share
per day; is that right ?
Mr. W h i t n e y . The short seller may have to pay as high as that
per day; yes, sir.
M r . G r a y . That involves a question of a half a point on the stock,
does it not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . S o th a t, i f a short seller m akes a sh ort sale to -d a y a n d
pays a premium o f o n e -h a lf o f 1 p er cent fo r the stock w h ich h e
borrows, for every tw o days th a t he h o ld s th a t h e h as g o t to g e t a t
least one p o in t advan tage to be even, does h e n o t?
Mr. W h i t n e y . Yes, sir; eventually.
Mr. G r a y . A s a usual th in g , i f he borrow s stock under those c ir ­
cum stances and agrees to p a y a p rem iu m o f th a t am ou n t, h e a n tici­
pates a v ery substantial decline w h ich is g o in g to g iv e h im an o p p o r ­
tunity to recoup, does he n ot?
Mr. W h i t n e y . I f he maintains his position; yes.
Mr. G r a y . Y e s .
Mr. W h i t n e y . He thinks he is going to have a profit to cover

that, unquestionably.
Mr. G r a y . Premiums have risen to almost unnamable heights,
have they not, until the stock exchange stepped in and controlled
what might be a possible corner?
Mr. W h i t n e y . Yes; they have. What I am thinking of is Wheeling-Lake Erie, and the corner in that stock; I do not know just what
the premium was, but the Wheeling-Lake Erie situation was not
really a corner; it was a situation where railroads were buying con­
trol, if I remember rightly, and the premium did go there very high.
M r . G r a y . Where the shorts sold more than they could possibly
get hold of without paying a substantial premium?
Mr. W h i t n e y . I am not sure that there was any real, what might
be called real, true, short interest. I think people got locked in.
Mr. G r a y . That is a short interest, is it not ?
Mr. W h i t n e y . Well, it might be. I do not think new contracts
were taking place. That was an exceptional situation.
Mr. G r a y . You mean they were short quite some time before and
could not get out?
Mr. W h i t n e y . And could not get out.



STOCK EXCHANGE PRACTICES

134

Mr.
Mr.

G r a y . The premium went to $7 and $ 8 a share t
W h i t n e y . I believe so; yes.
M r . G r a y . That meant $7 or $8 a day they had to have

back for t h e
lending of stock?
Mr. W h i t n e y . Yes.
Mr. G r a y . So that a person who was short under those circum­
stances on Wheeling & Lake Erie either had to cover or lose 7
points a day in that particular stock until they did cover?
Mr. W h i t n e y . That is right. But not, Mr. Gray, in the instance
that you just said, that that person thought he was going to make
that profit. In the Wheeling-Lake Erie case it is my opinion that they
were locked in and could not cover because the stock was not available.
Senator B a r k l e y . Mr. Whitney, did the practice of short selling
on the New York Exchange cause this depression?
M r. W

h it n e y .

N o, sir.

Senator B a r k l e y . You are positive of that?
Mr. W h i t n e y . I am positive as I can be of anything in this w orld;
yes.
Senator B a r k l e y . Well, I will not ask you what did.
Senator G ore. I will ask you another question, too.
Mr. W h i t n e y . May I follow that one point? My counsel says it
may be of interest to you, Mr. Gray.
Mr. G r a y . All right, sir.
Mr. W h i t n e y . There was a situation, to bring out more clearly
why I made the remark that I thought people were locked in witn
shorts of Wheeling. I know of a case in my own office. The pre­
ferred, the two preferred issues, had a clause in them that was con­
strued by many to allow the transfer of the preferreds into common
stock, thereby allowing the individual to sell the common in which •
there was a market, take the preferred, transfer it, and deliver it
against the contract. I believe there was a ruling by the Interstate
Commerce Commission just at that time that that could not be done,
and I know one instance, as I say, in my own office where an individ­
ual who owned outright the Wheeling preferred did that and found
himself in a dreadful quandary.
M r . G r a y . I understand.
Mr. W h i t n e y . And as soon as he could correct his position he did
so. I do not think it was the short seller’s intent that the market
was going down, but merely a hedge position.
Mr. G r a y . Well, I was not referring particularly to Wheeling &
Lake Erie because of the purpose I had in mind; only that instance
in connection with the loaning of stock and the possible payment o f
premiums.
Mr. W h i t n e y . That is very unusual, such a high premium.
Mr. G r a y . By the way, you are concerned, of course, for your
clients—you said you were in the bond business, but you are also in
the brokerage business in connection with stocks, are you not?
Mr. W h i t n e y . In the execution of orders of stock; yes. sir.
Mr. G r a y . In other words, you do not do any lending or borrow­
ing of stocks for your own account ?
Mr. W h i t n e y . W e do not do a marginal business.
Mr. G r a y . I do not want to get deeply into your personal matters
You say that your house does buy and sell on your own account?



STOCK EXCHANGE PRACTICES

135

Mr. W h i t n e y . At t im e s ; yes, sir.
Mr. G r a y . And you do loan stocks %
Mr. W h i t n e y . I f we ow n th em , a lw a y s, if w e c a n ; yes.
Mr. G r a y . But you do not have to make a distribution of your
profits, not doing a marginal business ?
Mr. W h i t n e y . That is right. But I have often loaned stocks for
customers that they owned, and invariably in such instances I have
given them the entire premium.
Mr. G r a y . Because you do not make a business of doing that and
that is a transaction where you simply acted as their agent?
Mr. W h i t n e y . As their agent and they took the risk.
Mr. G r a y . By the way, you have mentioned that word “ risk ”
several times. You take a transaction where a broker lends a hun­
dred shares of United States Steel, to use an illustration, to another
broker who has made a short sale for a client of his. That broker
who loans it gets the full value of it and under the agreement from
day to day the man who borrowed it has to keep on a level with the
market. So what risk does he run?
Mr. W h i t n e y . I f he can not keep that stock on the level of the
market, if by any chance there is any material change in the market,
which has been quite frequent of late, and that broker fails. We
have had a very pertinent instance of that recently.
Mr. G r a y . You mean by that, if, for instance, that United States
Steel is sold to-day and it is at a certain price to-day, and it should
go up to-morrow 5 points, it becomes necessary, taking the unit of
100 shares, for the broker that borrowed it to contribute another
$500 to the lender to-morrow ? That is what you mean ?
Mr. W h i t n e y . That is right.
Mr. G r a y . And that is settled through the clearing house?
Mr. W h i t n e y . In many instances; in most instances.
Mr. G r a y . In every instance with the brokers?
Mr. W h i t n e y . Not if it is a private transaction.
M r . G r a y . I am ta lk in g abou t m em bers o f th e exchange.
Mr. W h i t n e y . No; i f it is a private one outside, not done through
the clearing house, it is allowable.
Mr. G r a y . Then there may be a number of such transactions
aside from the regulations which have been put into effect lately
that may never have been reported?
Mr. W h i t n e y . N o , sir.
Senator G ore. I would like to ask a question, Mr. Gray.
Mr. G r a y . All right, Senator.
Senator G ore . Back to my Siamese twins, Mr. Whitney: We will
say they are Ching and Chang, and C-liing bought United States
Steel at 35, put up a margin, say, of 25 per cent, and his broker car­
ried him for the balance. In other words, Ching borrowed the bal­
ance between the margin and the market price at which he bought.
He borrowed the money to pay on his transaction.
On the other hand, Chang when he sold he put up his margin
and he borrowed stock to consummate his transaction.
In the one case the bull borrowed money to carry on his trans­
action and the bear borrowed stock to carry on his transaction. That
is a fact, is it not?
Mr. W h i t n e y . Yes.



STOCK EXCHANGE PRACTICES

136

Senator G o r e . And your contention is that there is no moral
distinction between borrowing money and borrowing stock to carry
on these activities on the exchange?
Mr. W h i t n e y . Correct.
Senator G o r e . That brings me to one point, Mr. Whitney, that
seems to raise a moral problem in my mind. Ching, the bull,
bought first a hundred shares of United States Steel. He bought for
a rise, anticipating a rise. Now, his broker lent his hundred shares
of stock to Chang’s broker, who sold that hundred shares short, who
sold for a fall. It looks like there are two antagonistic forces at
work and it looks like it is not fair, hardly, for Ching, who bought
for a rise, to have his stock sold? which might have a bearish
tendency and induce a decline in prices.
I can understand where, if Ching, the bull, consented to the loan
of his stock, that rescued it from any moral iniquity and, of course,
made it on the square.
Mr. W h i t n e y . Ching’s stock is never loaned to the short seller
without the permission of Ching. Now, April 1 was not the date
that that was inaugurated. That same permission has been in ex­
istence as long as I can remember with all customers.
Senator G o r e . I understand that, but I also understand that only
in a sort of general waj and vague way did Ching, the bull, really
appreciate what was going on. I understand that under your new
rule he does know ana he affirmatively consents in a separate agree­
ment.
Mr. W h i t n e y . That is right.
Senator G o r e . That his stock can be lent for this particular pur­
pose.
Mr. W h i t n e y . That is right.
Senator G o k e . Of course, he has no complaint in that case. I
understand that.
Mr. W h i t n e y . Senator Gore, perhaps I was not clear enough the
other day on that particular point. I think it is interesting. I
tried to state^ that whether or not the customers who had signed
these permissions were cognizant of the various clauses in them
might possibly be open to question, as Senator Couzens suggested.
But I do point this out, and I want to stress it, that after bringing
the attention of all customers throughout this country pointedly
to this permission and making them sign the specific consent as to
the loaning of stock, there was no change in the situation as to the
availability of stock for loan on and after April 1 than what existed
before April 1, thus showing that the people of this country, having
it in their power and understanding what it meant to have their
stocks loaned, allowed their stock to be loaned as it had been in
the past.
Senator G o r e . Yes; I understand. Now, after April 1 the cus­
tomer gave his affirmative consent and was conscious of his consent
and of the fact that he was giving his consent.
Mr. W h i t n e y . Yes, sir.
Senator G o r e . That is true under the existing rules ?
M r. W

h it n e y .

Y es, sir.

Senator G ore. I was not sure that was true under the old rule
when it was involved in a general agreement and he might
exactly appreciate what he was doing and the effect of his own act



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137

Mr. W h i t n e y . Senator Gore, we will grant that for the sake of
argument he did not entirely appreciate what he was doing. But
the result as to their being stock for loan, available or loaning, did
not differ in the past from what the situation is at the present.
Senator G ore. Well, I can see how it might have been more avail­
able in the past when they did not know what they were doing ex­
cept as a matter of assumption rather than as a matter of fact.
Mr. W h i t n e y . It was not more available in the past. I think
there has been more stock available since this rule went into effect
than in the past.
Senator G ore. Well, I could not see how that could be, because I
assumed that under the old rule all the stock held by any broker in
behalf of a customer was available to be lent if the broker saw fit
to do it.
Mr. W h i t n e y . I think because certain individuals who were long
of stock had this thing brought to their attention and inquired as
to there being premiums paia and thought they could make a little
money.
Senator G ore. Yes.
Senator B a r k l e y . D o these loanable, stocks represent stocks that
have been put up as collateral by customers in lieu of cash margin ?
Mr. W h i t n e y . Both, sir. Wliat they have put up as margin and
what they have purchased on margin. Any stock existing in their
accounts.
Senator B a r k l e y . For instance, if I had a hundred shares of
Steel and I wanted to buy a hundred shares of General Motors and
did not have any money, 1 would put up my hundred shares of steel
as collateral?
Mr.* W h i t n e y . Yes.
Senator B a r k l e y . That Steel, if I agree that you may loan it as
broker, may be loaned to any customer who wants it to sell short?
Mr. W h i t n e y . Yes, Senator Barkley; but please remember that
that hundred shares of Steel in the carrying o f the hundred shares
of General Motors if it was not loaned would have to be put up in a
bank.
Senator B a r k l e y . I understand, as collateral for the borrowing
of money?
Mr. W h i t n e y . For the borrowing of money.
Senator B a r k l e y . To enable you to transact your business?
Mr. W h i t n e y . Yes.
Senator B a r k l e y . We are assuming that, of course. Probably in
this case it would not be necessary.
Mr. W h i t n e y . I want to in that connection, Mr. Gray, perhaps
further amplify my yes-and-no answer.
Mr. G r a y . G o ahead. These are only a few preliminary questions
I am asking now.
Mr. W h i t n e y . I f I go to a bank with stock to borrow on, to get
money on, I have to put up a margin at the bank.
Mr. G r a y . In other words, they loan you only part of it.
Mr. W h i t n e y . Part. The rule of the exchange is that a broker
may not use more of a customer’s stock in borrowing money than
is necessary to carry the account of the customer.
Mr. G r a y . Is not the rule the other way round; that he may not
borrow more money on his stock than he is loaning? Is that not



138

STOCK EXCHANGE PRACTICES

the rule? Is not the rule that the broker may not borrow more
money on his customer’s stock than he has loaned to the customer on
that stock? Is not that the way your rule reads?
Mr. W h i t n e y . It comes to exactly the same thing.
Mr. G r a y . Well-----Mr. W h i t n e y . I will give you the constitution. We have it here.
But the rule of the business conduct committee—we try to be very
simple in our edicts—is that the broker may not use more o f his
customer’s securities in making loans than is necessary to carry the
account of that customer, and it is also true that the broker may
not loan dut of the customer’s account more than is necessary to
carry that account. He could not loan all of his shares. He can
only loan that sufficient to cover his debit balance.
Now, to go back: When he goes to the bank the broker has to put
up a margin, let us say, 25 per cent, the same that he has demanded
of the customer. So, if he loans that stock in the loan crowd, the
only benefit that he gets, the broker, is his interest on the 25 per cent
margin. It is not on the entire amount; it is on the 25 per cent,
the difference between what he receives or would receive from the
bank in a loan and what he receives from the borrowing broker.
Mr. G r a y . Is that not a violation of your rule?
Mr. W h i t n e y . No, sir.
Mr. G r a y . I was going to ask you about that later, but I will
ask you about it now.
Mr. W h i t n e y . What?
Mr. G r a y . I f you have the rule, I will be glad to see the language
of your rule, if counsel have it. You may read it fully.
Mr. W h i t n e y . Section 4 of chapter 12 of the rules of the exchange
[reading]:
An agreement between a member and a customer, authorizing the member
to pledge securities, either alone or with other securities carried fo r the
account of the customer, either for the amount due thereon or fo r a greater
amount, or to lend such securities, does not justify the member in pledging or
loaning more o f such securities than is fair and reasonable in view o f the
indebtedness o f said customer to said member.

Mr. G r a y . That does not mean that he may not go beyond the
amount, then?
Mr. W h i t n e y . “ Than is fair and reasonable.” In other words,
if the customer is long 10 0 shares of stock, we do not make the
broker split it up into 75 shares and 25 shares and hold the 25
shares in his office.
Mr. G r a y . But when a broker-----Mr. W h i t n e y (interposing). That would be impossible under the
mechanics of it.
Mr. G r a y . I understand that, because of the transactions being in
hundred shares; but when a broker, however, in the instance o f a
hundred or any multiple of a hundred shares of stock, where he has
bought it for a customer on margin and is so carrying it, loans that
stock, he gets 100 per cent of its value into his hands, does ha r w ?
Mr. W h i t n e y . Yes, sir.
01
Mr. G r a y . Can you make it a little bit clearer to me ? It m av be
my denseness, but I do not quite see it, just where he is runnin*
any risk at all when, on the one hand, he nas loaned, to use your same
percentage, to his customer 75 per cent of the value o f that stock



STOCK EXCHANGE PBACTICES

139

his customer is paying him interest on that 75 per cent, he has
loaned the stock to some one else and he gets his money back and
keeps that money, notwithstanding the fact that the interest is being
paid to him, and he is in a position in which his customer has to
make good at all times for any fluctuations in the value. What is
the risk he is running?
Mr. W h it n e t . I thou gh t I had explained th at b y saying------Mr. G r a t (interposing). You may have, but I say I did not
understand it.
Mr. W h itn e y . That when the broker lends that stock to another
broker and there may be fluctuations in the market and the borrow­
ing broker is unable to meet those fluctuations and fails, there may
be in the selling out or the buying in of that contract a loss to the
broker. In this particular instance, the buying in of the contract,
there may be a loss incurred on a transaction which is first that 01
the lending broker. He, of course, under our regulations, may put
it against the borrowing broker, where it belongs. I f the conglom­
erate claims against that borrowing broker are such that he can
not pay them, losses will be incurred by those brokers who have
loaned stock to him or who have other contracts.
Mr. G r a t . Y ou spoke o f such an instance bein g in y ou r m in d a
m om ent or tw o ago, but th ey are rare ?

Mr. W h it n e t . Yes; they are rare. Insolvencies are rare on the
exchange, but nevertheless they may occur.
Mr. G r a t . Did you ever know of instances where the brokers
voluntarily, when they are loaning the customer’s stock, offer to the
customer the option first of taking the benefit of that if they
desire it?
M r. W

h it n e y .

I do not understand you r question at all.

Mr. G r a t . For instance, you say that the customer himself may
get the benefit of that lending agreement, provided he is willing to
run the risk. Have you ever known it to be the practice in any
brokerage house for the brokers to offer the customers the oppor­
tunity to make a profit that the broker makes if he is willing to
assume the risk?
Mr. W h it n e t . Yes, sir.
Mr. G r a t . Y ou h ave?
Mr. W h it n e t . Yes, sir. Mind you, th at is absolutely-----Mr. G r a t (interposing). I am not talking about your house.
Mr. W h it n e t . That is a matter between the broker and the cus­
tomer. That is in the power of the customer in signing the agreement
that his stock may be loaned. He may require the premium or he
may not. He may move his account elsewhere. A ll those matters
are in his entire jurisdiction, in the jurisdiction and control of the
customer.
Mr. G r a t . Brokerage houses up until a certain point of time had a
form which they required their customers to sign which included in
it the authority to the broker to loan the customer’s stock; that is
true, is it not?
Mr. W h it n e t . Many forms; yes, sir.
M r. G r a t . A n d as a m atter o f fa ct som e tim e ago the stock e x ­
change required its members to get a separate fo r m w ithout anyth in g
else on it signed b y its custom ers a uthorizin g the loan in g o f the
custom ers’ stock, d id they n ot?



140

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Before their customers’ stock could be loaned; y e s ,
sir.
Mr. G r a y . And when was it that that reform came in to being)
Mr. W h i t n e y . That rule went out in February some time, to ta k e
effect as of the 1st of April.
Mr. G r a y . As of the 1st of April of this year?
Mr. W h i t n e y . Of this year.
Mr. G r a y . Yes, sir. And as a matter of fact, in practice the
various brokerage houses immediately mailed to their customers those
forms, with the request that they sign them—is that true?
Mr. W h i t n e y . I presume so. I ao not know whether they mailed
them or whether they presented them by person or what they did.
Mr. G r a y . They got them to their customers in some way ?
Mr. W h i t n e y . Exactly. That was a necessity.
Mr. G r a y . Necessity from whose viewpoint?
Mr. W h i t n e y . In order to conform with the rules of the exchange
if they wanted to loan that stock.
Mr. G r a y . Necessity from the broker’s viewpoint if he wanted to
loan the stock?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And inasmuch as there is a decided advantage to the
broker in the loaning of the stock, they pressed their customers for
the signing of that authority, did they not?
Mr. W h i t n e y . I do not agree with you, Mr. Gray; no.
M r . G r a y . Y ou do n o t agree?
Mr. W h i t n e y . No.
Mr. G r a y . Would you consider

it, if you please—I will not put
you in that position because of what you tell me in connection with
the manner of your firm’s conducting business—do you think that
a broker conducting a general business with margin and short ac­
counts and in the habit of loaning stock would consider it an ad­
vantage to retain under his control the average customer who would
not consent to the loaning of his stock?
Mr. W h i t n e y . I believe to-day; yes. Normally, perhaps not. I
think you have forgotten or passed over the fact that the loaning of
stock, forgetting the state of mind that exists in this country as to
the depression and as to the deflation of stocks, you have forgotten
the fact that the loaning of stocks is one way o f financing the commit­
ments of customers.
Mr. G r a y . I have not forgotten it, because I differ with you as to
whether it is, although you have had much wider experience than I
have in matters of that kind.
Mr. W h i t n e y . Well, I should be interested to be shown where i t is
not.
Mr. G r a y . Well, to come back to what I was talking about and
not get to another subject: Would you consider a letter that I am
oing to read to you that I have in my hand that was sent out b v a
rokerage concern under the date of March 16,1932, a typical letter
that was sent to the customers with respect to the signing of this new
authority to lend:

f

D bab Sir : The New York Stock Exchange has adopted a resolution effeotfe*
April 1, 1932, under which member firms are required to secure a spoW—! ! !
specific authorization in writing in order to lend securities held on martrin
any customer.
Ior




STOCK EXCHANGE PRACTICES

141

W e inclose herewith one form o f authorization, and if the same is agreeable
to yon, you may sign it and return it to us.
You may, of course, revoke this authorization by written notice to us, and
the inclosed form expressly permits such revocation by you.

Do you consider that a typical form?
Mr. W h i t n e y . It sounds so, yes, sir; leaving it to the discretion
purely of the customer.
May I in that connection, Mr. Chairman, present as an exhibit-----Mr. G r a y (interposing). Just a minute, please, and then present
your exhibit after you let me put my secondary question in connec­
tion with this matter, and your answer.
And six days later another letter is mailed out by that same firm
that has received no reply from the customer, and would you con­
sider this typical:
D eas Si b : W e have not received any reply to our previous communication.
We are now inclosing duplicate card and beg to advise you that it is a matter
of importance and we must request you to s'.gn and return the same to us
immediately.

Was that typical of what the brokers did where they did not get
the cards returned to the first letter?
Mr. W h i t n e y . That I can not answer, Mr. Gray. It is true in
the letter that you read.
Mr. G r a y . There does not seem to be much option left to the cus­
tomers in that second letter, does there ?
Mr. W h i t n e y . I f he does not want to he does not have to sign it.
Mr. G r a y . N o . In other words, if he is a margin customer and
he knows he has got to depend on his broker for the purpose of carry­
ing him, he is very likely to do what his broker wants him to do,
isnenot?
•
Mr. W h i t n e y . Or else go to another broker or to have the banks
carry him, which has been a common practice.
Mr. G r a y . And if he goes to another broker the other broker is
going to require him to do the same thing ?
M r . W h i t n e y . Not necessarily, at all.
Mr. G r a y . Not necessarily. But, of course, a great many things
are not necessarily so, but practically that is what would happen,
would it not?
Mr. W h i t n e y . You seem to be trying to impute some derogatory
action on the part of the broker. Let me explain briefly-----Mr. G r a y (interposing). Only to this extent, that he is working
for his own interest at all times, primarily for his own interest. I t
you want to get what belief of mind I seem to be imparting to you
m my questions; yes.
Mr. W h i t n e y . Weil, I do not agree with the belief of mind, be­
cause you are trying to stress that this is all to do with short selling.
I am sorry I have to go over and take the time of the committee
repeating myself.
M r . G r a y . I f there were no short selling there would be no lending,
would there?
M r. W h i t n e y . W hat!
Mr. G r a y . I f there is no short selling there would be no lending ?
Mr. W h i t n e y . Then you have not read the testimony.
M r. G r a y . Maybe not. But answer my question—if there were
no short selling there would be no lending?
119652—32-----10



142

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Why, of course there would be lending.
Mr. G r a y . What would the lending be for ?
Mr. W h i t n e y . Absolute necessity in many, many cases.
Mr. G r a y . What would the lending be for ?
Mr. W h i t n e y . I will try to repeat verbatim what I stated to this
committee before.
Mr. G r a y . Is that answering that question, what you said ver­
batim?
Mr. W h i t n e y . Yes; absolutely.
Mr. G r a y . I f it is an answer to the question I have no objection to
your repeating verbatim. I f not, please answer my question and
then repeat what you want verbatim.
Mr. W h i t n e y . I will try to answer your question.
Mr. G r a y . All right.
Mr. W h i t n e y . I am an individual in California. I have i n m y
safe deposit vault 500 shares of steel. I give an order to m y b r o k e r
to sell it and he sells it in New York. By no stretch of a n y o n e ’ s
point of view can that stock of mine in my safe deposit v a u l t i n
California be delivered to my broker in New York by 2.15 the n e x t
day for delivery in accordance with the contract he has entered i n t o
for me. He must borrow.
Now, we have hundreds and hundreds of brokers throughout this
country dealing with the New York Stock Exchange as members or
as correspondents who must in the natural course of their business
have their brokers in New York borrow for them against sales which
are not short sales.
Mr. G r a y . What you call sales against the box ?
Mr. W h i t n e y . No, sir.
Mr. G r a y . Well, it is virtually, because the man expects to deliver
eventually instead of carrying it on as a short sale ?
Mr. W h i t n e y . No, sir; not at all. The stock may be carried b y a
new-----The C h a i r m a n (interposing). In other words, the term “ selling
against the box ” may be the covering of another transaction where
a person may have his shares in the box and still not deliver them?
Mr. W h i t n e y . That is right. That is another type of trans­
action.
The C h a i r m a n . It would be short selling and just holding them
in the box as a sort of insurance against disaster?
Mr. W h i t n e y . It may be. I do not agree, Senator Norbeck, that
the man who sells against the box with the knowledge of his broker
is a short seller. He may, possibly, without the knowledge o f his
broker, sell short and give such an order. What I am talking about
is the individual in delivering his stock to his broker at the tim e of
sale, if you wish, the broker has it in his control at the time o f sale
and that is not selling against the box, and the borrowing o f stock
is of vital necessity in that operation.
Senator B a r k l e y . In the case you cited you actually deliver your
500 shares of steel stock to your broker in California;
Mr. W h i t n e y . Yes, sir.
Senator B a r k l e y . When it is sold?
Mr. W h i t n e y . Yes, sir.
Senator B a r k l e y . And the reason the borrowing is entered into in
New York is because it takes three or four days to get that certificate



STOCK E X C H A N G E PRACTICES

143

from California to New York and the delivery must be the next
-day?
Mr. W h i t n e y . Absolutely.
Senator B a r k l e y . And a period of two or three days before the
stock reaches New York elapses and when it does reach New York
it takes the place of the stock that has been borrowed ?
Mr. W h i t n e y . That is right, Senator Barkley.
The C h a i r m a n . I f this is a good time to close we will recess until
2.30 and the witness will continue on the stand at that time.
(Accordingly, at 12.32 o’clock p. m., a recess was taken until 2.30
o ’clock p. m. of the same day.)
AFTER RECESS

The committee resumed at 2.30 p. m. on the expiration of the
recess.
The C h a i r m a n . The committee will come to order.
Senator B l a i n e . Mr. Chairman, when Mr. Whitney was before
the committee at the last hearing he was requested and he promised
to bring certain records, papers, and files, and certain information.
I will ask Mr. Whitney if he has brought that information and those
files.
TESTIMONY RESUMED OF RICHARD W HITNEY, PRESIDENT NEW
YORK STOCK EXCHANGE, NEW YORK, N. Y .

Mr. W h i t n e y . I think, Senator Blaine, that everything I was re­
quested to send, and specifically as I understood Mr. Branch to re­
quest on Tuesday, was sent down here and delivered on Saturday
afternoon.
Senator B l a i n e . Well, then, Mr. Chairman, I ask that all those
records and all the information which Mr. Whitney was requested
to bring, and which he did bring to Washington, be now laid before
the committee.
The C h a i r m a n . Very well.
Senator B l a i n e . I do not mean that they physically be placed
here now, but that they be put in the possession of the committee
and that any and every member of the committee have the privilege
to g;o and examine those files and records.
The C h a i r m a n . It is so ordered. Mr. Whitney told me this morn­
ing that he was bringing certain papers requested by different Sen­
ators, and he asked me how to bring that out, and I told him later
in the day I wished he would announce it so that it would be a part
o f the record, and he said he would. I do not know why it did not
come up earlier.
Senator B l a i n e . May I ask, Mr. Chairman, if those records and
files are available to the committee?
The C h a i r m a n . That is for the committee to determine, but it is
my view that they are.
Senator B l a i n e . Have they been laid before the committee? I f
Mr. Whitney has them he could not deliver them to a member of
the committee. He could deliver them only to the committee. I




144

STOCK EXCHANGE PRACTICES

understand that now by order of the chairman they have been laid
before the committee. Now, that carries with it the right of every
member of the committee to examine those papers. Am I correct
in that understanding?
The C h a i r m a n . Yes. But go ahead, Senator Walcott.
Senator W a l c o t t . I think I can clear the situation up for Sena­
tor Blaine. The records that were asked for by the subpoena were
sent in here to the committee.
The C h a i r m a n . And they were received in this room.
Senator W a l c o t t . And the papers that were received here Satur­
day evening, those are all available to the committee and have been.
I will say that they have been in the possession of the committee,
ever since then. And I am very much in favor of your resolution,
Senator Blaine, that they be laid before the committee formally ? but
I will say that they have been in the possession of the committee,
in the committee room, since they arrived. I might also add that
everything asked for in the subpoena of Mr. Whitney has been re­
sponded to and that we have everything asked for.
Senator B l a i n e . And now they are formally laid before the com­
mittee, so that any member of the committee may examine them.
The C h a i r m a n . It has been my understanding that they were
available to every member of the committee from the minute they
were delivered here. No one asked for them is the only reason they
have not seen them.
Senator B l a i n e . That is true, as to the chairman’s understand­
ing. But there having been no meeting of the committee, and not
having formally been laid before the committee I did not feel like
asking some member of the committee if he had the records, because
no member of the committee is entitled to those records until fo r ­
mally laid before the committee. It is the committee that is en­
titled to them, and therefore I felt that it became absolutely neces­
sary to lay them before the committee so that the members might go
in and examine the files and records. I assume that the clerk o f tne
committee has possession of those papers for the committee and can
make them available to any member of the committee upon request
of the member?
The C h a i r m a n . Exactly.
Senator B l a i n e . Thank you.
The C h a i r m a n . May I state that the attorneys tell me i f they
could proceed for a couple of hours without much interruption it
might not be necessary to have a hearing to-morrow. I just w ant to
request members of the committee to give the attorneys as free a
hand as they feel they can, and that whenever they interrupt, not to
make it longer than absolutely necessary. We will in that way try
to make real headway this afternoon.
Mr. Gray, you may proceed with your examination.
Senator B l a i n e . Mr. Chairman, let me suggest that I would urge
very strongly that the attorney be permitted to pursue his examina­
tion without any interruption. Then when he is through the mem­
bers of the committee would be at perfect liberty and would have
the opportunity as well to examine the witness at such length as the
members may desire.
The C h a i r m a n . Do you mean after the attorney gets through 9
Senator B l a i n e . Yes.
*



STOCK EXCHANGE PRACTICES

145

The C h a i r m a n . That would be the better way to proceed. I un­
derstand there are a number of members of the committee who want
to ask questions, and they will have an opportunity later on.
Senator B a r k l e y . Do I understand that that is any reflection
upon the proceedings we had this morning %
The C h a i r m a n . No reflection upon any Senator.
Mr. G r a y . It makes no difference to me.
The C h a i r m a n . The request did not come from the attorneys not
to be interrupted. But they did inform me that if they could go
ahead without interruption it would not take so long. You may
proceed, Mr. Gray.
Mr. G r a y . Mr. Whitney, was there ever any rule prohibiting mem­
bers from selling short on the New York Stock Exchange at any
time? I do not mean by my question what you may have put into
effect as an order in an emergency situation, but is there any rule
preventing the selling of stocks short?
Mr. W h i t n e y . Not that I remember, Mr. Gray, except on Septem­
ber 2 1 and 22 -----Mr. G r a y (interposing). That was emergency action. Is it not
a. fact that short sellers, and I am speaking of those who are pro­
fessionals and who keep closely in touch with the market, endeavor
to keep the market at a certain level while they are selling their
stocks and fixing their position and before they withdraw their sup­
port, and then, with the withdrawal of that support, accompanied
by other actions on their part, it takes place for the purpose of
driving the market down in order that they may cover?
Mr. W h i t n e y . I have no knowledge of any such operation as you
suggest; no.
Mr. G r a y . Have you found instances where positions have been
assumed on the short side of the market by brokers who have advised
their customers to buy that particular stock that they may be short
in? In other words, to advise their customers to take a position con­
trary to the position which the firm is maintaining?
Mr. W h i t n e y . N o , s i r ; a n d i f w e d i d w e w o u l d t a k e im m e d ia t e
a c t io n a g a in s t a n y s u c h fir m .
Mr. G r a y . In other words,

in instances of that kind if they were
directed to your attention you would consider that they were viola­
tions ofyou r rules and regulations?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Have you found any instances where there has been
a very large short interest in the market, rumors that have been cir­
culated, we will say, both with respect to it, true in some respects,
if you please, but false in the major portion of the rumors, and for
the purpose of depressing the market?
Mr. W h i t n e y . D o y o u m e a n a t t r ib u t a b le t o o u r m e m b e r s ?
Mr. G r a y . Yes.
Mr. W h i t n e y . No.
Mr. G r a y . Well, I will divide that question and ask you: First,
attributable to your members who are holding a short position?
Mr. W h i t n e y . No, sir.
Mr. G r a y . Have you found that it exists attributable to others,
who were not members of your stock exchange, but who hold a de­
cidedly short position?




146

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . N o , s i r ; not to m y kn ow ledge. You are asking
m e , as I understand, whether we know o f ru m ors as having^ been
started b y persons w ith a large short po sition , and m y answ er is, no.
Mr. G r a y . Do you mean by that to say that you do not know it
officially?
Mr. W h i t n e y . I do not know it personally, either.
Mr. G r a y . You never heard of that?
Mr. W h i t n e y . O f the fact?
Mr. G r a y . Yes; of the fact that rumors have been so circulated.
Mr. W h i t n e y . Mr. Gray, I have heard of a great many rumors,
but that they could be placed at the feet of short sellers specifically
or of our members, I have no knowledge.
Mr. G r a y . Isn’t it a fact, and if you make an examination o f charts
that might be drawn for the purpose of showing the relation o f the
short interest to the market in its ups and downs, isn’t it a fact that
the short interests usually cover, and the charts so indicate, when the
decline runs for a certain length of time, say, for about two-thirds
or three-quarters of the actual time? I f I do not make myself clear
I mean this: Isn’t it a fact that the charts in connection with short
sales, as compared with market conditions, show that the shorts
start to cover at about two-thirds of the decline? Have you ever
looked into that?
Mr. W h i t n e y . N o; and I can not answer your question.
Mr. G r a y . I will show you some charts on that later. But isn’t
it a fact that the short seller usually sells when the market is in an
unfavorable condition?
Mr. W h i t n e y . You asked me that question this morning and I
can merely refer you to my answer. That is not my understanding.
He may do it at that time but that is not necessarily an absolute fact
as to his operations.
Mr. G r a y . I directed your attention this morning to the state­
ment that you made before the House committee, showing that the
short interest was relatively small at the peak of the market in
1929, in October.
Mr. W h i t n e y . That was our b e l ie f .
Mr. G r a y . Can you tell us when that short interest began to in­
crease? And then I ishall ask you afterwards to what point it
increased.
Mr. W h i t n e y . No; I can not. We collected the figures beginning
with November 13,1929, and for I think two or three weeks. I have
not those figures before me and I do not know. Then we ceased
and have not regularly compiled any figures until May 25, 1931.
We asked in 1930, in October or November, for some snort figures
to be brought up to date from June, not on the lines that we have
asked of late, but on certain things in order to acquaint ourselves.
Mr. G r a y . From the statistics that you collected, running from
November 13, 1929, on down for those few weeks, can you tell us
what the short interest was on any of those dates ?
Mr. W h i t n e y . I believe as of that date, November 13, 1929 it
was approximately 1,600,000 shares.
’
Mr. G r a y . That was not a very large short interest, was it?
Mr. W h i t n e y . I do not think so. I wish to point out that the
market had gone down very materially in the preceding two or thrp«
weeks.



STOCK EXCHANGE PRACTICES

147

Mr. G r a y . And for how long did j^ou get those figures, I mean
at that time ?
Mr. W h i t n e y . I am not quite sure. Our counsel tells me for
about three weeks, Mr. Gray. We never made any compilations, as
I remember it, such as we have made on these figures since May 25,
except on that one day.
Mr. G r a y . Can you tell me whether or not in that period of three
weeks that short interest materially increased?
Mr. W h i t n e y . I do not know. I can probably find it out, but I
do not know now.
Mr. G r a y . I should be very glad if you would find out and advise
this committee.
Mr. W h i t n e y . Very good.
Mr. G r a y . A s of any date that would be accessible to you, whether
at the end o f the three weeks or at the end of one week, or of two
weeks, after November 13, 1929.
Mr. W h i t n e y . May I first see what we have?
Mr. G r a y . Certainly.
Mr. W h i t n e y . I am not at all sure, and after I see what we have
then I can communicate with you and advise you as to whether or not
such things as you want are possible of compilation.
Mr. G r a y . All right. Now, from November 13, or from three
weeks after November 13, 1929, you stated that you kept no records
of this matter until May 25,1931; is that correct ?
Mr. W h i t n e y . N o regular reports o f our m em bers to th e e x ­
change.
Mr. G r a y .

My recollection is that you said a moment ago that you
asked for some reports dating back. Do you mean somewhere around
May of 1931 you asked for reports covering, we will say, January,
February, ana March?
Mr. W h i t n e y . Around October or November of 1930 we asked for
some figures, to include June, July, August, September, and October,
if I remember rightly. But they were not, as I say, as specific as
these figures we are now having compiled and reported to us and, if
I remember rightly, not along the same lines in many details.
Mr. G r a y . They were for the months of June to October, 1929.
Mr. W h i t n e y . From June to October of 1930, inclusive, I believe.
Mr. G r a y . You asked for them some time in 1931 ?
Mr. W h i t n e y . No; we asked for them at the end of the period,
some time in October of 1930.
Mr. G r a y . Could you tell the committee how high the short inter­
est rose at any time between November 13, 1929, and May 25, 1931?
Mr. W h i t n e y . N o ; I can not, Mr. Gray. But that is another point
that we may be able to give you if you wish us to look it up. But I
am notpositive about it.
M r . G r a y . I s i t n o t a fa c t th a t at tim es in the e a rly p a rt o f 1931, as
well as th e latter p a r t o f 1930, th a t th a t sh o rt interest rose to seven
or e ig h t m illio n shares?
Mr. W h i t n e y . We have no knowledge of it.
Mr. G r a y . Have you any recocllection of it yourself?
Mr. W h i t n e y . I would have no basis upon which to form

such an
opinion. May I state here, Mr. Gray, that when we first requested
those figures, on May 25,1931, there were various estimates as to the
short position, and those estimates almost universally were made as



STOCK EXCHANGE PRACTICES

1 48

a reckoning of the short interest to be between ten and fifteen m il­
lion shares.
Mr. G r a y . At what point of time was that ?
Mr. W h i t n e y . This was May 25, 1931, when we asked for those
figures. And the proof was that the short interest was 5,679,000
shares, if I remember rightly.
Mr. G r a y . That is approximately correct, as I recall. I think the
figures were 5,600,000 shares—wait a minute. What figure do you
give?
Mr. W h i t n e y . From recollection I gave it to you just now as
5,679,000 shares. Anyway, it was close to that.
Mr. G r a y . It was 5,589,700 shares, according to your tabulation
that we have here.
Mr. W h i t n e y . All right.
Mr. G r a y . The short interest on May 25, 1931, taking standard
stocks and taking the market in general, was higher than it has ever
been at any time since; isn’t that true ?
Mr. W h i t n e y . That is correct. You asked me about the short
interest, did you not?
Mr. G r a y . Yes.
Mr. W h i t n e y . The short interest was higher on May 25, 1931,
than it has been at any time since.
Mr. G r a y . I do not want to repeat my questions, but isn’t it a
fact that after the peak in October of 1929, in the declining market
that short interest gradually increased?
Mr. W h i t n e y . I do not know. I can not tell you. We have n o
schedule of figures, and I do not remember of any compilation
being made during that period since November 13, 1929, tor a n y
particular day on which I could even base a guess.
Mr. G r a y . N ow , the chart which you have in front of y o u , I
believe, and which I think was marked Exhibit N o. 10 in th is
hearing.
Mr. W h i t n e y . All right.
Mr. G r a y . Showing the relation of the short interest to the action
of stocks over a certain period of time, was based on certain stand­
ard stocks. That is correct, is it not?
Mr. W h i t n e y . Certain standard stocks that the Standard S tatis­
tics Co. used for their index figures.
Mr. G r a y . And in which were included what might be designated
as perm anent— and the w ord “ p e r m a n e n t” is h ard ly a co rrect

one__

but as a permanent short interest as distinguished from those who
buy and sell on the same day.
M r . W h i t n e y . D o you m ean our com pilations'?
Mr. G r a y . Yes.
Mr. W h i t n e y . Yes, sir. The net position at the

end of each day
or at the opening of each day.
Mr. G r a y . Senator Fletcher wants me to ask how many stocks
are given consideration by the Standard Statistics Co. in making
that compilation. It is approximately 90 stocks, is it not?
Mr. W h i t n e y . Ninety stocks, yes. i want to point out to Senator
Fletcher, however, that when we have compiled figures as to the
short interest we have as of each date shown the number o f issues
in which a short interest existed. I f I could have that compilation
for a second I would be able to tell Senator Fletcher.



STOCK EXCHANGE PRACTICES

149

M r. G r ay . D o you mean that you have broken it dow n as to the
various stocks?
M r. W h itn e y .

Yes.

Mr. G ra y . So that some o f these schedules th at are in evidence
now b efore the com m ittee w ill indicate, i f the members will exam ine
them, o f just that short interest, o f h ow m uch it was in one stock

and how m uch in another.
Mr. W h i t n e y . And in how many stocks a short interest existed
as to each day. There are 90 stocks taken by the Standard Statistics
Co. in order to give their index figure, and there was a short interest
as of May 25,1931, in how many stocks, Mr. Stock ?
Mr. S t o c k . These 616 different stocks.
M r. W h itn e y .

Yes, in which there was a short interest.

Mr. G r a y . Isn’t it a fact, Mr. Whitney, that that short interest,
however, is largely concentrated in what are known as the key
stocks?
Mr. W h i t n e y . The larger short interest is always, of necessity,
in the more active stocks. The more active stocks are probably the
key stocks. But there is a considerable short interest in many
stocks, and I believe in answer to sections 1 or 2 of your subpoena it
was shown that in the case of between 53 and 65 stocks there was
a short interest of 1 0 ,0 0 0 shares or more.
Mr. G r a y . Isn’t it a fact that where you have a short interest
that is divided, for instance on May 25, among 616 stocks, a very
large proportion of the total number of shares represented by that
short interest are confined to approximately 25 or 30 stocks?
M r . W h i t n e y . T o 50 o r 60 stocks, I w ou ld say.

Mr. G r a y . Y ou would say 50 or 60 stocks.
M r . W h i t n e y . Yes, sir.
Mr. G r a y . And what percentage to the 50 or 60 stocks ?
Mr. W h i t n e y . That I do not want to guess about, but it could
be worked out very easily.
Mr. G r a y . Y o u would say it was correct if I called your attention
to the fact that Mr. J. George Frederick has made a calculation as
of May 25 with respect to 2 2 stocks, and that he shows the short
interest with respect to those 22 stocks represented 35 per cent at
that time of the total outstanding? You would say that that was
correct, would you not ?
Mr. W h i t n e y . That may be correct. I do not know Mr. Fred­
erick, and I do not know the source o f his information. But as
I say it could be easily worked out.
Mr. G r a y . Well? Mr. Whitney, let me say to you that the schedule
which he has furnished is accurate when a comparison is made with
the schedule that you have furnished as of that date. Will you
accept that as being the proper figures, then ?
M r . W h i t n e y . In those circumstances I can answer that I think
it is.
Mr. G r a y . N o w , in the chart that has been marked “ Exhibit 10,”
and in the data which has been furnished in these other schedules,
I think you have already stated you only included the definite out­
standing short interest, and that you did not take into consideration
the short sales that were covered on the same day. You have al­
ready told us that, have you not?
Mr.

W h itn e y .




Because they offset each other.

150

STOCK EXCHANGE PRACTICES

Mr. G r a y . What do you mean when you say they offset each
other ?
Mr. W h i t n e y . Because I can not see the distinction between w h a t
is the dire effect, or any effect for that matter, of selling 10 0 sh ares
short on a particular day and 1 0 0 shares being bought on t h a t
particular day. There is no net change in the short interest.
Mr. G r a y . There is no net change in the short interest. O f
couse, it represents selling and buying and therefore it equalizes
itself at the end of the day so far as the quantity of stocks is con­
cerned. There is no doubt about that, is there ?
Mr. W h i t n e y . That is true.
Mr. G r a y . But would you consider it would make a difference if
those short operators sold at a certain hour during the days and.
drove stocks down to a point where they were able to covers
Mr. W h i t n e y . What do you mean by driving stocks down?
Mr. G r a y . Well, don’t you know of any methods that are adopted
by any short sellers for driving the market down?
Mr. W h i t n e y . I do not know of any bear raid that has ta k e n
place on the New York Stock Exchange, or of any efforts t o d r iv e
stocks down, for a long, long period of time. We have n o t b e e n
able to find it.
Mr. G r a y . For how long?
Mr. W h i t n e y . At least nine months to a year or more that w e
have been investigating.
Mr. G r a y . H o w about before that?
Mr. W h i t n e y . We have not any proof that any such action t o o k
place.
Mr. G ray . Y ou do not think that in the last nine months o r a
year there has been any concerted action on the part of any s h o r t
interest for the purpose of driving the market down in order that
they might cover ?
Mr. W h i t n e y . Not so far as we can find out.
Mr. G r a y . Do you mean by that answer that not so far as you
officially know ?
Mr. W h i t n e y . No; not so far as we officially, by means of investi­
gation, could find out, and we have investigated hundreds and
thousands of cases where a large block of stock was sold, to find out
whether it was for short account, and invariably it was not.
Mr. G r a y . On some days the permanent short interest that we
have been referring to may change 2 0 ,0 0 0 shares, and on another
day a very much larger amount. It may increase or decrease as your
statistics show, don’t they?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . But take a case, and it frequently’ happens, w h e r e w e
will say 160,000 or 2 0 0 ,0 0 0 shares are sold short on one day and
covered on the same day.
Mr. W h i t n e y . That has happened, I believe; yes.
Mr. G r a y . And you do not think that has any depressing effect
upon the market?
Mr. W h i t n e y . No; I do not think it has a depressing effect u p o n
the market, any more than I think if a short seller sends an o r d e r
in to sell 100 shares and he sells it to a purchaser who is a s h o r t
seller covering. I can not see any depressing effect upon the m a rk e t
m that.



STOCK EXCHANGE PRACTICES

151

Mr. G r a y . Did you ever make any investigation to determine
when this day short selling that was covered, usually took place, at
what hour?
Mr. W h i t n e y . N o , sir. Do you mean that the reconstruction of
the tape would give us that?
Mr. G r a y . Yes.
M r. W h i t n e y . N o , sir.
should like to know.

I d o not k n ow h ow it cou ld be done.

I

Mr. G r a y . Well, it could be done if there was any symbol used
to indicate short sales? It could be done in that way?
Mr. W h i t n e y . Yes; I suppose it might be done. But I stated
here last week, Mr. Gray, that I could not see any distinction be­
tween marking a short sale and marking a marginal purchase.
Mr. G r a y . W h y n ot m a rk both o f th em ?
Mr. W h i t n e y . I do not see anything to be gained by it.
Mr. G r a y . Don’t you think it would permit the stock exchange
to know whether either a great lot of marginal buying had a bad
effect on the market by bringing about any wild advances, or short
sales had a bad effect on the market by bringing about a serious
depression? In other words, you don’t think it would give you any
information for the purpose of aiding you in determining that?
Mr. W h i t n e y . We know when stock is being bought. We do not
have to find out whether it is for marginal buying or investment. It
is the method by which it is done. We can see that, and vice versa.
We can determine, particularly now, very readily whether sales are
being made for short account.
Mr. G r a y . Y ou m ean under you r present sy stem ?
Mr. Whitney. Under our present system, and in the past as well.
Mr. G r a y . When I suggested to you th at y o u co u ld determ ine
d u rin g w h at period o f the d a y these sh ort sales w ere m a d e b y th e use
o f a sym bol, you then suggested the necessity o f m a r k in g w ith a
sym bol the lo n g sales th a t were m ade a n d w here purchases w ere m ade
on m a rg in . N o w I am askin g y ou w hether or n o t i f both y ou r su g ­
gestion and m ine w ere adopted and y ou secured th a t in fo r m a tio n
fr o m th e tap e, it w ou ld n o t h elp the stock exch ange to determ ine
w hat effect those m a rg in al sales on the one side and sh ort sales on the
other h ad on the m arket, in order to a d op t such p ro p er rules and
regulations as m ig h t be necessary to keep the m arket m ore level.
Mr. W h i t n e y . Grant that if we had such symbols which might

give the stock exchange information, I do not understand how they
could be of any benefit to the stock exchange or anybody else over
and above the information we now have through our power to secure
information.
Mr. G r a y . In other words, you do not think it would be of any
benefit in the regulation of the affairs of the stock exchange?
Mr. W h i t n e y . N o , I do not.
Mr. G r a y . Coming back for a moment to the percentages.
I
read your testimony, page 91, before this committee, to the effect
that from May 25 to November 30, 1931, the net short transactions,
taking these figures in the exhibit of statistics of short selling, showed
that less than 5 per cent of all transactions on the stock exchange
were for short account., and that in excess of 95 per cent were liquida­
tion of holdings of American securities by their owners. Do you
mean by that to say that the percentage of short accounts which were



152

STOCK EXCHANGE PRACTICES

carried over from day to day in this total we have been talking about,
was only 5 per cent ?
Mr. W h i t n e y . N o, sir. It was the in and out transactions.
Mr. G r a y . Y ou were talking of them alone?
Mr. W h i t n e y . No, sir. I was talking about both, because d u r in g
that period I referred to the short interest which declined by a b o u t
2 .0 0 0 .0 0 0 shares, if I remember correctly, so that the net short posi­
tion materially decreased, and I think you will find that I referred
to the net short position.
Mr. G r a y . N o w let me understand. By that do you mean t h a t th e
short interest between May 25th and November 30th declined a b o u t
2 .0 0 0 .0 0 0 shares?
Mr. W h i t n e y . That is what I mean.
Senator B r o o k h a r t (presiding). There is the call for a vote on
the floor of the Senate. We will get the clerk of the committee to
find out what it is on. In the meantime you may proceed.
Mr. G r a y . I notice in this schedule B of Exhibit 4, you g i v e t h e
percentages of the share that were sold short and covered o n t h e
same day as they relate to the total number of shares traded i n o n
that day, from September 26 to October 28, 1931. They vary a t t h e
start from 1.76 per cent to as high as 6.31 per cent. That is intended
to apply only to the coverings on the one day, as I understand i t .
Mr. W h i t n e y . I think it so states.
Mr. G r a y . What would you say the percentage of short s a le s
was? I do not know whether you have made any calculations on
this or not, but if you take these figures into consideration a s w e l l
as the short sales that were made on that particular day, that w o u l d
change the volume. That is, the volume of short sales f r o m o n e
morning to the next.
Mr. W h i t n e y . Do you mean the change in the net position?
Mr. G r a y . Yes.
Mr. W h i t n e y . In the May 25 to November 30 figures that i s what
we did take, although we made no credit in reducing the percentages
in the 2 ,0 0 0 ,0 0 0 shares decrease. We were merely taking the aver­
age short sales that were covered the same day. There was an over­
balance of purchases by short sellers during that period o f 2 ,0 0 0 ,0 0 0
shares.
Mr. G r a y . That is, during the declining market?
Mr. W h i t n e y . Well, it did very materially decline; yes, sir.
Mr. G r a y . H o w many shares are listed for sale on the e x c h a n g e ?
I mean the total number.
Mr. W h i t n e y . Do you mean listed to be traded in?
Mr. G r a y . Yes; approximately.
Mr. W h i t n e y . About 1,500,000,000 shares. That is something, l £ r>
Gray, we can easily find out. And I am not sure that we have n o t
got it here somewhere.
Mr. G r a y . I think your data show it to be somethin** likA
1,300,000,000 shares.
Mr. W h i t n e y . It is ever changing.
Senator B r o o k h a r t (presiding). The committee will stand in
recess for a time until we can go over to the floor of the Senate
and vote.
(Thereupon, at 3.15 p. m., a recess was taken until 3.30 p. m .)



STOCK EXCHANGE PRACTICES

153

The C h a i r m a n . The committee will resume. Mr. Gray may pro­
ceed with his examination of the witness.
Mr. G r a y . Mr. Whitney, I had asked you and you had told me,
and of course we know that it varies, but at the present time the
stocks that are listed, and so far as quantities are concerned of any
certain stock on the exchange, can you tell this committee what
proportion of that stock is available for dealing? You have some
statistics on that, haven’t you? In other words, we all know that
some of that stock, or a great portion of the stock in fact, is not on
the market; it is not bought and sold day in and day out. But
has the exchange any record of what proportion of these listed stocks
is available for purchase and sale ?
Mr. W h i t n e y . D o you mean the so-called floating supply?
Mr. G r a y . Well, the floating supply, as I understand it, consists
entirely of street stuff, doesn’t it, certificates?
Mr. W h i t n e y . Well, it may.
Mr. G r a y . D o you consider floating supply not only street cer­
tificates but additional certificates dealt in day in and (lay out ?
Mr. W h i t n e y . I think the floating supply is what is in broker­
age offices or in street names or something of that kind. That is a
rather indefinite figure.
Mr. G r a y . Have you any knowledge of the percentage ?
Mr. W h i t n e y . I have no knowledge, any day that 500,000 or
1,500,000 shares could be termed floating supply; no, sir. I do not
think we have any statistics.
Mr. G r a y . Could you tell it to me for instance in the matter of
any particular stock ? That is, as to any of the key stocks, so called
Mr. W h i t n e y . I have no knowledge, Mr. Gray. What may be
merely in brokerage offices to-day may not be what is traded in on
the stock exchange to-morrow. There may be new buyers to come
in and sellers who are long of stock, and so forth, and it is a matter
of conjecture only so far as I know.
Mr. G r a y . Don’t you get, from your financial papers, sufficient
information to keep you generally posted as to what that general
average is? That is, within what range o f two figures it might be?
Mr. W h i t n e y . I do not know. But if the financial papers have
such estimates I am perfectly willing, on the basis that they take
to compile them, to say that perhaps they are approximately correct.
But I do not know.
Mr. G r a y . D o you know as a matter of fact that in the case of
United States Steel floating stock it is only about 12 per cent of the
actual issue?
Mr. W h i t n e y . I would not say that that was so at the present
time. In the case of United States Steel, like so many other large
corporations, they have tremendously increased their shareholders
during the past year or two, and how you can determine what is the
floating supply available for trading in the market I do not quite
know.
Mr. G r a y . Well, the reason I am asking you that question is be­
cause you made the statement, if I recollect aright, in your Hart­
ford speech to the effect that the short interest represented—and if
I do not quote you correctly without looking at it please correct
me—that the shorty interest represented about two-fifths of 1 per
cent of the stocks listed. But I think I have your statement here.



154
Mr.

STOCK EXCHANGE PRACTICES

W h i t n e y . That is
M r . G r a y . Y ou s a id :

approximately it.

T h e s u b s e q u e n t flu c t u a tio n s in th e s h o r t in t e r e s t I s h a ll r e c o u n t p r e s e n t ly .
F o r t h e tim e b e in g I w is h t o p o in t o u t t h a t t h e a g g r e g a t e s h o r t in t e r e s t in t h e
m a r k e t, e v e n a t it s M a y 2 5 p e a k o f 5,589,700 s h a r e s , c o n s t it u t e d o n l y t w o f if t h s o f 1 p e r c e n t o f th e 3,305,516,716 s h a r e s lis t e d a s o f J u n e 1.

And that is where I got the figures I referred to. Would the
volume of business that was dealt in on the exchange in any one day*
from which you gave us your percentage of 5 per cent, approximate in
any way the percentage of the floating stock. Would you say that
that is a guide we could use?
Mr. W h i t n e y . I do not think they have any relation one to the
other. The 5 per cent was the percentage of the in and out transac­
tions to the total transactions, which had no relation whatever to
the total of listed stocks.
Mr. G r a y . I am not speaking of the total of the listed stocks. In
other words, could we consider that the transactions of a day repre­
sented in a certain sense the floating stock?
Mr. W h i t n e y . N o; I do not think so at all, Mr. Gray. I do not
know just what you want to deduce here, but I am perfectly willing
to go as far as 1 can.
Mr. G r a y . What I want to know is, how much of the floating
stock on the market of the 90 stocks considered by the Standard
Statistics Co., what proportion of that floating stock is held b y the
short interest? Could you give me any idea of it?
Mr. W h i t n e y . No, sir; I have no idea. And I do not know h o w
to find it out, either.
Mr. G r a y . D o you know what proportion of United States Steel
of the floating stock, I mean, is held by the short interest or con­
trolled by them?
Mr. W h i t n e y . D o you mean what percentage is the short interest
in United States Steel.
Mr. G r a y . What proportion is represented by the floating supply ?
Mr. W h i t n e y . N o , sir; I do not know.
Mr. G r a y . Do you know that it is about 40 per cent?
Mr. W h i t n e y . I can not believe it is as large as that, but I do not
know.
M r . G r a y . Y ou w o u ld n ot say th a t th at is inaccu rate, t h o u g h ?
Mr. W h i t n e y . I do n o t know .
M r . G r a y . Y ou do n o t kn ow ?
Mr. W h i t n e y . No, sir.

Mr. G r a y . All right. Now coming back to the matter o f your
statistics that you have given to this committee, the schedules which
indicate the outstanding short interest on the morning of this nar
ticular day and then of that particular day.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . That is no guide and would not help this committee
to determine what proportion of a day’s business was short
would it? In other words, suppose there were 3,000,000 sh a r^ J
at i?
of
business, and there ^ e?e
2,500,000 shares short at the opening of to-morrow’s business that
would not indicate that there had been a coverage of 500.000 shnroc
to-day, would it?
scares




STOCK EXCHANGE PRACTICES

155

M r W h i t n e y . YVis sir.
D
Mr. G r a y . Might there not have been a coverage of a certain
number of shares of stock to-day and an additional short interest
created ?
Mr. W h i t n e y . But the net would be a coverage of 500,000 shares
to-day.
Mr. G r a y . But as a matter of fact that net change of 500,000
shares might exist, and still there might have been 500,000 more
shares sold during the day on the short side and 1 .0 0 0 ,0 0 0 shares
covered, which caused that net result?
Mr. W h i t n e y . That might be true.
Mr. G r a y . Don’t you think the number of shares that might be
sold short in a day, or the amount of shares that might be covered
in a day, have any relation, whether they are in those bought and
sold on the same day or whether in the class we are just talking
about, have any relation to market conditions at all?
Mr. W h i t n e y . I can not see that they have any relation or interest
as to the market conditions; no. In fact, I should be very delighted
if you would point that out. It might be something we have over­
looked.
Mr. G r a y . I am trying to get information from the gentleman
who is supposed to know.
Mr. W h i t n e y . And I have given y o u m y answer.
Mr. G r a y . In other words, you think for instance if there were a
million shares sold short to-day, and that stock has newly created
a short interest of a million shares, and particularly if o f the short
interest that has been in existence there were 500,000 shares covered,
and if on the same day there were a quarter of a million shares that
were sold short and covered the same day, that those transactions
would not affect the question of the rise or fall of the market at all,
all other things being equal?
Mr. W h i t n e y . Well, now, you are changing your question or your
hypothesis that there was a net decrease of the short position by
500,000 shares in one day.
Mr. G r a y . Well, put it the other way, whether a decrease or an
increase, I do not care which way it affects the market. I want to
find out whether or not it does not have a decided effect.
Mr. W h i t n e y . I think-----Mr. G r a y (interposing). In other words, do not the manipulations
of short sellers, in their buying and covering, affect the rises and
declines very decidedly?
Mr. W h i t n e y . I f it were possible to take such a large figure as
an instance, which I have no knowledge of as occurring in the net
change in the short position in the way o f increases, what you say
might be so. But the fact that there have been occasional coverings
by shorts in the net position of over 500,000 shares on one day—and
I only know of one—in spite of the fact that on that particular day
the market was going down, or just staying steady during a part of
the session, then I will grant that that covering was an important
stabilizing effect, which is one of the reasons why we invoked it.
But I think your simile is of too large a figure for me fairly to give
you an answer. I do not pretend to say that perhaps marginal buying
in large proportions, or short selling in large proportions, might not



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STOCK EXCHANGE PRACTICES

have an effect upon the market. They might and probably do. But
the figures you take are very tremendous, and I know of no instance
in any of these schedules where any such increase of the net short
position ever took place.
Mr. G r a y . You mean with the figures which I take, which a r e
quite large as you indicate, it might make a decided change, but you
think with smaller figures it would not make a change?
Mr. W h i t n e y . I do not think so.
M r. G r a y . Y ou adopted a rule som e tim e a go, I believe, th a t n o
sh ort sales are perm itted b y members o f the exch an ge at a p r ic e lo w e r
than the last transaction on the tape, is th a t correct ?

Mr. W h i t n e y . That is the interpretation of the rule of the com­
mittee; yes, sir.
M r. G r a y . W h a t was the reason f o r the a d o p tio n o f th at ru le ?
M r. W h i t n e y . T o make it m ore sim ple and easier f o r the b u sin ess
conduct com m ittee when desiring to make in q u iry im m e d ia te ly to
find ou t fro m the brok er w h o had executed the tran saction , w h e th e r
or n ot it was f o r a lon g o r short account. P r io r to th a t tim e we
w ou ld have to g o in to his office and exam ine the books.
M r. G r a y . Y o u also adopted a rule w hich took care o f th a t e n d
o f the transaction, d id y ou not, when you requ ired every b r o k e r to
rep ort in the m atter o f his sales, w hether it was f o r a sh o rt in te re st
o r n ot?

Mr. W h i t n e y . Yes; but as I have explained, Mr. Gray, and I am
sure you will appreciate, it takes some days to compile these figures,
coming into the exchange from all parts of this country. Whereas,
if the business conduct committee sees a sale of any appreciable
amount of stock that seems to depress the price or make a decrease
in the price, that we might think was for snort account, now we can
immediately ask the broker whether it was or not, instead o f going
into the office and finding out that fact, or as you suggest, waiting
until the report comes from that broker.
Mr. Gray. I do not think you have made it clear. Let me go back.
You first adopted a rule which required all short sales to be reported
as such, did you not?
Mr. W h i t n e y . The net short position, yes, sir.
Mr. Gray. No, no; I am not talking about that. To-day i f a
broker takes an order to make a short sale, the minute that sale goes
to the floor it is designated as short, is it not?
M r. W h i t n e y . T o the broker.

Mr. Gray. T o the broker. Well, of course, to a member o f vnnr
body and to your body?
Mr. W h i t n e y . I f we inquire only; not otherwise sir.
Mr. Gray. I f you inquire. What is the purpose of conveying the
information to the broker, and what is the purpose of your maJring
the rule, if it is not for the purpose of keeping control in your par­
ticular body or your particular board or committee ?
Mr. W h i t n e y . Directly, at that time, to bring to the attention
of the broker what type of order he is executing, as well as the fa cili­
tating our getting information quickly if we desire it.
Mr. Gray. Don’t you have the brokers to whom those reports are
made by the other broker when he comes to make the sale and he
tells him it is a short sale, furnish that information to you d a i l y ?



STOCK EXCHANGE PRACTICES

157

Mr. W h it n e y . N o, sir, never to the oth er broker.
Mr. G b a y . Unless you ask f o r it?
Mr. W h it n e y . Only to us if we ask for it; never to the other
broker.
Mr. G r a y . Now let me see: Broker A comes in and he offers for
sale a certain number of shares in a certain stock to Broker B. I f
that is a short sale your rules require him to tell that other
broker-----Mr. W h it n e y (interposing). No, sir.
Mr. G r a y . They do not?
Mr. W h it n e y . No, sir. I f I go into United States Steel and offer
500 shares at 33*£-----Mr. G r a y . Yes, sir.
Mr. W h it n e y . No one knows that, whether it is for short account.
We require that broker to tell nobody it is for short account or long
account, not even ourselves, unless we inquire.
Senator F letcher . Mr. Whitney, you mean that rule is for the
convenience of the exchange and not for the protection of the mar­
ket or having any effect on the market?
Mr. W h it n e y . Senator Fletcher, it is for the convenience and
knowledge of the exchange and also for the information to the
broker who has the order for execution, so that he may see posi­
tively he does not violate any rule of the exchange in executing
that order.
Senator B rookhart . Suppose a customer does not tell him about
it—then what?
Mr. W h it n e y . We force our brokers, Senator Brookhart, to ascer­
tain those facts from their customers, and the burden of proof lies
with the broker to find it out. He is responsible to us for finding
out those facts.
Mr. G r a y . Does not the broker, as a matter of fact, Mr. Whitney,
after finding that out, make a report daily to your body of those
short sales?
Mr. W h it n e y . Yes and no.
Mr. G r a y . How do you compute your statistics if he does not?
Mr. W h it n e y . If, for instance, he sold a hundred shares of Steel
for a customer-----Mr. G r a y (interposing). Yes, short.
Mr. W h it n e y . Short, and later in the day covered it for that
customer. That would not appear in the short net position, but it
would appear on the in and out transactions.
Mr. G r a y . Suppose he sold it and did not cover it the same day.
It appears on the net short position?
Mr. W h it n e y . Then it would appear on the net short position.
Mr. G r a y . Does he report to your body for statistical purposes
that day?
Mr. W h i t n e y . It comes in two days from the date of compilation.
Mr. G r a y . N ow , what is the board’s reason for wanting that in­
formation? What was your reason for adopting the rule? What
is your reason for requiring the broker to get that information from
the man when he comes to sell?
Mr. W h i t n e y . Well, I am answering one of yo u r questions, the
latter. To be perfectly sure that our rules are not violated and to
119852— 32—— 11




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158

put it squarely up to the broker that he knows what he is doing,
the broker on the floor, that he knows what he is doing in executing
such an order?
Mr. G r a y . All right ; then what is the reason for your rule ?
Mr. W h i t n e y . What rule?
Mr. G r a y . Why, a rule which requires the broker to find out from
his customer whether the sale is short or not, keep a record o f it,
and advise you.
Mr. W m T N E y . Because it has been a rule of the constitution for
many, many years with regard to demoralizing a market.
Mr. G r a y . Yes.
Mr. W h i t n e y . Both up or down. This is merely a pointed draw­
ing attention to that rule to our brokers, or it was at the time.
Mr. G r a y . In other words, is it not because the short selling lias
a demoralizing effect and because your board desires to k eep posted
on all of the short sales that are made, to be thoroughly informed
and to keep it within your control?
Mr. W h i t n e y . I do not grant that short selling has a demoral­
izing effect.
Mr. G r a y . I know you do not.
Mr. W h i t n e y . We do {grant that short selling may be illegitimate,
sometimes called bear raiding, and may have a very demoralizing
effect, and it is to prevent that latter that our rules are made.
Mr. G r a y . But you say that never happens in your business a n y
more?
Mr. W h i t n e y . I say that in the past it has not happened. W e
have had this rule, sir, for years, to prevent that happening. Now,
I grant that some rules may be violated, but it is our stern and con­
stant endtavor to prevent this rule and other rules being violated.
Mr. G r a y . In other words, though you think short selling—I
think I use your own words—is “ healthy ” to a market, though you
said without short selling the exchange would have to close, you
still think it is so dangerous that it ought to be controlled very care­
fully in the manner in which you have indicated ?
Mr. W h i t n e y . We are not controlling, sir, the legitimate short
selling. We are attempting as best we may to prevent bear raiding,
which has been against our constitution for years.
Mr. G r a y . Y ou say you are not controlling legitimate short sell­
ing. Are you not controlling legitimate snort selling when you
require a broker to find out from the man who sells whether it is a
short sale or not, keep a record of it and report it to you, and when
you also adopt a. rule that you will not permit a short seller to make
that healthy sale that you are talking about at any figure below the
last sale on the tape?
Mr. W h i t n e y . N o , sir.
M r . G r a y . Y ou are n o t co n trollin g it?
Mr. W h i t n e y . No, sir.
M r . G r a y . Well, what do you call it?

Mr. W h it n e y . Anybody can sell short.
Mr. G r a y . I did not ask you that; I asked you what do you cal 1
it?
Mr. W h i t n e y . I call it controlling.
Mr. G r a y . I asked you what you called it and you said not con
trolling.
*



STOCK EXCHANGE PRACTICES

159

Mr. W h i t n e y . I thought you asked if it was to prevent short
selling, and we have not prevented short selling.
Mr. G r a y . I know you have not, but as a matter of fact you have
made an effort to control it, have you not, because you think it is a
dangerous factor in the stock market?
Mr. W h i t n e y . No, sir.
Mr. G r a y . Then will you tell me why d i d you control it ?
Mr. W h i t n e y . Because we wish the information. For the other
reasons specifically on the point you raise we put these various rates
into effect.
M r . G r a y . Y ou o n ly p u t th e m in t o e ffe c t t o fu r n is h s ta tis tics t o
c o m m itte e s ?
Mr. W h i t n e y . That was one of them; yes, sir.
Mr. G r a y . Well, now, let us see: You have another rule that we

have been talking about, and that rule is that a man may not sell
short stock at a price lower than the last transaction on the market.
Is that correct? Do I quote the rule correctly?
Mr. W h i t n e y . Y ou d o n o t , sir.
Mr. G r a y . Well, you quote it.
Mr. W h i t n e y . There is no such rule.
Mr. G r a y . There is no such rule?
Mr. W h i t n e y . No, s ir.
Mr. G r a y . Then you mean to say that if United States Steel was
selling at 35 and I wanted to sell it short at 34, I would not be
stopped ?
Mr. W h i t n e y . Last sale at 35?
Mr. G r a y . Yes.
Mr. W h i t n e y . And you went and sold it now?
Mr. G r a y . Yes.
Mr. W h i t n e y . Short account?
Mr. G r a y . Yes.
Mr. W h i t n e y . Yes; we would consider that as a bear raid and on
your part or on the broker’s part to demoralize and depress the
market, and we would take some action upon that broker for so
doing. But that, sir, is based upon the constitution rule, section 4,
article 17 of the constitution, that has been a rule of the stock
exchange for years.
Mr. G r a y . Tell me what that rule provides.
Mr. W h i t n e y (reading):
Purchases or sales of securities or offers to purchase or sell securities, made
for the purpose of upsetting the equilibrium of the market and bringing about
a condition of demoralization in which prices will not fairly reflect market
values, are forbidden, and any member who makes or assists in making any
such purchases or sales or offers to purchase or sell with knowledge of the
purpose thereof, or who, with such knowledge, shall be a party to or assist
in carrying out any plan or scheme for the making of such purchases or sales
or offers to purchase or sell, shall be deemed to be guilty of an act incon­
sistent with just and equitable principles of trade.

Senator B r o o k h a r t . Were you not violating that rule all the time
in 1928 and 1929?
Mr. W h i t n e y . Not that I know of, Senator Brookhart.
Senator B r o o k h a r t . Y ou d o n o t c o n s id e r th a t b i g b o o m d e m o r a l­
iz i n g th e m a r k e t t h e n ?




160

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . No, sir; not based on earnings of corporations
throughout this land at that time.
Mr. G r a y . Mr. Whitney, I do not want to argue with you about
your own rules, and of course I will concede that I may have been
misinformed and you know more about your rules than I do. I
have been, however, definitely advised that you have a rule, I am not
talking about your constitution, but that your body has adopted a
rule or regulation to the effect that a declared short sale may not be
made for a figure under the last transaction. You say there is no
such rule ?
Mr. W h i t n e y . I say there is no such rule. On October 5 ,1 believe,
the business conduct committee sent out a notice to the members
demanding of them that each broker in executing a selling order
shall acquaint himself whether or not it is for short or long account
and so inform his broker on the floor of the exchange, in direct
reference to this article of the constitution I have read you. The
interpretation put on that request, that demand, by the brokers, has
had the effect that you stated.
Mr. G r a y . Yes; and it is a practice and not a rule?
Mr. W h i t n e y . It is a practice rather than a rule.
Mr. G r a y . Now that we have the practice fixed, do you know how
it can be evaded?
Mr. W h i t n e y . I do not know how it can be evadad. That is not
saying that it may not be, Mr. Gray.
Mr. G r a y . D o you know that it has been evaded right along?
Mr. W h i t n e y . Not that we know o f.
Mr. G r a y . Let me ask you: Suppose 1 0 0 shares of United States
Steel are selling at 48; that is the last sale ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . You would not permit a short seller to sell 100 shares
of steel at 42^fe under your practice? I f he wants to sell 1,000
shares short, is there anything to stop him from actually selling
10 0 long shares for 4 2 ^ and immediately putting his other 1 ,0 0 0
on the market short at that price?
Mr. W h i t n e y . I do not believe there is anything to prevent him if
an individual desires to do that. I will not grant that is done with
the knowledge of our brokers, however.
Mr. G r a y . Well, there are a lot of things that seem to h a p p e n
over the knowledge of your brokers. I was going to say your b o a r d *
that there are a lot of things that happen that your board does not
k n ow about.
Mr. W h i t n e y . What?
Mr. G r a y . Well, the things that you do not seem to have anv
knowledge of to-day is what I have particular reference to. H a v i
you ever heard of it being evaded in that way?
Mr. W h i t n e y . Specifically, no.
Mr. G r a y . Yes; I did not use the word “ specifically.”
Mr. W h i t n e y . Because you said, Have I ever heard of it?”
Mr. G r a y . Yes; I did not use the word “ specifically.”
Mr. W h i t n e y . Naturally, one has heard discussed the possibility
of evasions.
Mr. G r a y . Yes.




STOCK EXCHANGE PRACTICES

161

Mr. W h i t n e y . We have found no such instances, and we are us­
ing our very utmost power at all times to see that that rule as well
as our other rules are not violated.
Mr. G r a y . You have made investigations because you have heard
rumors that is the way it is being done?
Mr. W h i t n e y . We have not specifically to my knowledge made
investigations about it. We have not heard rumors that it was being
done.
Mr. G r a y . Then it is a strange suggestion that comes to you for
the first time when I mentioned it that it could be done in that
w ay?

Mr. W h i t n e y . No ; I have heard that there is that possibility.
* Mr. G r a y . Y ou mean you have heard discussed among members
of the exchange the possibility of evading the rule in the manner that
I have indicated?
Mr. W h i t n e y . Not by members; no, sir. I do not think any mem­
ber would dare to be a party to such a transaction, Mr. Gray.
Mr. G r a y . Well, now, let me ask you if there is another way in
which it might be evaded. Some discussion has been had with re­
spect to what are called sales “ against the box.” I think that the
committee thoroughly understands the situation. As I understand
it, it is a sale that a man makes when he has his own stock and when
he can deliver it but when for some reason ho does not care to de­
liver his own stock and when he gets his broker to borrow other
stock for the purpose of making delivery required under the rules.
Is that what a sale against the box is %
Mr. W h i t n e y . Yes, sir.
Mir. G r a y . All right. And if I walk into a broker’s office desir­
ing to make a sale against the box in that way, and I tell my broker
that I have the stock and can deliver but do not desire to deliver
but that I desire him to borrow the stock, is there any requirement
on that broker’s part to confirm or investigate my statement to him?
Mr. W h i t n e y . The proof of the truth of that statement is up to
the broker in his relation with the exchange.
M r . G r a y . I s i t th e ir practice to m ake a n in v estig a tio n , do y o u
kn ow ?
Mr. W h i t n e y . I think so; absolutely.
Mr. G r a y . And to what extent do they carry their investigation?

In other words, do they not have to see the stock if they really want
to find out whether it is so or not, and do they do that?
Mr. W h i t n e y . I do not think that they probably actually view
the stock. X imagine they take the word of a customer who has been
looked up carefully before taking his account, and they believe a
man that makes that statement. I see no reason not to.
M r . G r a y . N o w , then, if that man who makes his sale against the
box a week hence or two weeks hence changes his mind and simply
covers his other sale as an ordinary short sale, there is nothing to
stop him from doing it, is there?
Mr. W h i t n e y . I believe n ot.
Mr. G r a y . That is another method by which the rule can be evaded
and by which you upset your statistics; is that not true ?
Mr. W h i t n e y . No ; that does not upset the statistics. I grant pos­
sibly in that way, if a man chose to do so, that might be a violation
or upset the rule.



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STOCK EXCHANGE PRACTICES

Mr. G r a y . In other words, it turns a sale against the box in to a
real short sale?
Mr. W h i t n e y . N o ; I will not grant that a sale against the box
is ever a short sale, because that individual who makes such & sale
at no time has to buy it back. He may at any time produce his own
stock for delivery against the contract.
Mr. G r a y . Yes; but if he chooses to treat it as a short sale acnd
cover it in the same way as a short seller, there is nothing to stop him
from doing it, is there?
Mr. W h i t n e y . No. There is no distinction there between that in­
dividual and yourself, as I see it, selling and delivering your own
shares against your sale and thereafter deciding that you were wrong
and buying it back.
Mr. G r a y . Yes; but that is not what he does, is it ?
Mr. W h i t n e y . Not in the mechanics; no.
Mr. G r a y . By the way, you made a statement before the House
committee, and I can turn to it if it is necessary, to the effect that
you make or have made some four or five thousand investigations.
Do you mean by that the investigations that are made by that staff
of about 2 0 investigators.that you have constantly working? Is that
what you meant, or did you mean that definite investigations o f defi­
nite charges of the violations of your rules to that extent were made?
Mr. W h i t n e y . I meant both, Mr. Gray, and that statement was
made to this committee, and not to the House, as I remember it,
but it was made to this committee, and included the regular and
special investigations carried on at all times by our staff o f ac­
countants.
M r . G r a y . Y o u stated to the H o u se, h ow ever, th a t, fo r in sta n c e ,
as an illu stration , th at one instance o f a sale 0 1 a th ou san d s h a r e s
cam e to you r attention— and I believe th is was b efo re— it is h a n d e d
t o m e, so I can look at it and read to y o u :

“ * * * where a niau conies in ancl sells a thousand shares o f stock on $
declining price, immediately we will investigate whether that was lo r a taog
or short account and if for a short account, immediate action would be taken
o f a penalizing nature.

That is on page 103 starting at the very bottom. You mean by that
prior to the time of the adoption of these other rules that we have
been discussing, or this rule, that if you found a sale of a thousand
shares under the existing market you would immediately cause an
investigation to be made?
Mr. W h i t n e y . Depress the market; yes.
Mr. G r a y . N o w , the effect o f the short seller who evades in t h e
way that we first discussed it where he sells a hundred shares o f
long stock and then puts his other thousand in short out is e x a c t l y
the same, is it not?
Mr. W h i t n e y . Yes, sir; it might have that effect; yes.
Mr. G r a y . Would you punish him?
Mr. W h i t n e y . We would punish the broker, absolutely.
Mr. G r a y . In the case that I have indicated where a man, fo r
instance, strictly within your rule, sold a hundred shares long, cre­
ated a price and then sold a thousand short, at that price?
Mr. W h i t n e y . I f the broker had knowledge of what the customer
was attempting to do and doing; yes.
M r . G r a y . I t is possible fo r a m an under those circum stances-— —-




STOCK EXCHANGE PRACTICES
M r. W

h it n e y

(in te r p o sin g ). Y o u

163

cited the case as an evasion

yourself.
Mr. G r a y . I did.
Mr. W h i t n e y . Well, I do not think that the New York Stock
Exchange looks upon that type of evasion as a proper act in any way.
Mr. G r a y . And you would have no control over the situation,
would you, if he sold a hundred shares long through one broker and
when the market was created, immediately sold the other thousand
short through another broker ?
Mr. W h i t n e y . I f we can not find something out, Mr. Gray, we
haven’t got control. If we can find it out we have absolute control.
Mr. G r a y . N o w , do you keep any record o f these sales again st the
box at all ?
Mr. W h i t n e y . The exchange ? No, sir.
Mr. G r a y . I s there any m ethod by w hich th at can be d o n e ?
Mr. W h i t n e y . Only by asking for such facts from our houses.
Mr. G r a y . You could get it the same way that you got a report
of short sales from your brokers, could you not, and your members?
Mr. W h i t n e y . At the present time, yes. Whether that could be
got for a period of time dating back, gong back over a period, I do
not know.
Mr. G r a y . Back in 1929—I think you mentioned it to-day—in
November you said that you secured certain information. Did you
not send a questionnaire out to your members at that time ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Is there a copy of that that is available to the
committee ?
Mr. W h i t n e y . Right here.
Mr. G r a y . Let me ask you another question, first, if you please,
because you may have a copy of the questionnaire. Did you make
a compilation of the replies to that questionnaire that would be
available for us ?
Mr. W h i t n e y . As I told you, sir, this morning, I think this morn­
ing, in my belief the only compilation we have made was as of
November 13,1929, the first date on which the members sent in these
facts as asked by the questionnaire.
Mr. G r a y . Have you a copy of the questionnaire %
Mr. W h i t n e y . We have one, of course, on record.
Mr. G r a y . All right will you see that the committee is furnished
with a copy of the questionnaire ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And if the answers to the questionnaire as sent in by
the different brokers were tabulated in any way, give us that tabula­
tion so that we will get what statistical information it will give us.
Mr. W h i t n e y . Yes, sir. That questionnaire was very similar,
Mr. Gray, to the one that has been used since.
Mr. G r a y . We would like to see that one.
Mr. W h i t n e y . Yes. We would be glad to give it to you.
Senator F l e t c h e r . Mr. Whitney, does the exchange undertake to
regulate or control in any way the amount of dealing in any partic­
ular stock? For instance, a corporation that never has issued over
2 0 0 ,0 0 0 shares of stock, never had more than that oustanding; that
stock is found to be traded in into million* Have you any way of
examining that and controlling it.



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Mr. W h i t n e y . Y ou mean traded in in millions throughout th e
year?
Senator F l e t c h e r . Yes.
Mr. W h i t n e y . No, sir; we do not attempt to control those trans­
actions.
Senator F l e t c h e r . For instance, Mr. Frederick gives an illus­
tration in his book, the J. I. Case Co. has only 194,960 shares o f
stock outstanding. Yet in 1931 a total of 13,777,300 shares were
traded.
Mr. W h i t n e y . No, sir; we do not control that. That particular
stock happens to have had and now has a very great interest seem­
ingly to the trading public.
Senator F l e t c h e r . D o you think that practice going on unre­
stricted and unrestrained in any way is sound practice ?
Mr. W h i t n e y . I do not see how we can prevent, sir, people who
wish to buy or sell stock from so doing. I cited in answer to that
case before the Committee on the Judiciary in the House, in answer
to the Congressman from Oklahoma, that that same thing might
apply with a group of 500 hogs. A certain man might own 500
hogs and sell them to another man, and so on, he to another, and
going along the list they might change hands many times in a short
period of time until they eventually reach the packer.
Now, if you multiply that 500 hogs by the number of changes
of hands, you get a large figure, possibly. And it seems to me
the same tiling applies to shares of stock. It is the turnover that
counts. We do not control it.
Senator F l e t c h e r . In those circumstances would not conditions
arise at times where a man who borrowed the stock, for instance,
could not find other stock to take the place of shares that he had
sold or shares where he had sold short, for instance, and borrowed
stock?

Mr. W h i t n e y . That is the risk that the short seller always takes.
He may sell something which does not belong to him, but he has
got to buy it back.
Senator F l e t c h e r . And it really does not exist at all in any­
body’s hands?
Mr. W h i t n e y . Yes; it exists in somebody’s hands. I have never
known a case where a short interest exceeded the issued capital
stock. That could not be, sir.
Senator F l e t c h e r . I should imagine it might occur where they
are selling millions of shares when there is only a thousand or so
issued.
Mr. W h i t n e y . Well, there are not millions of shares brought in
over a period of a day. There may be a great amount dealt in
in that particular issue.
Senator B r o o k h a r t . Could not that be stopped by requiring the
broker to sell the shares by number, the certificates ?
Mr. W h i t n e y . Senator Brookhart, for what end to be gained?
Senator B r o o k h a r t . Well, you and I have a different view o f it.
I think that gambling scheme of selling fictitious, imaginary stock
myself^ ^reat
^ an(l always a demoralization of the market

Mr. W h i t n e y . There is no sale, Senator Brookhart, of imaginary
stock on the New York Stock Exchange.
g nary



STOCK EXCHANGE PRACTICES

165

Senator B r o o k h a r t . Then whj' not sell it by the exact number
of the certificate? That would not be imaginary.
Mr. W h i t n e y . Is it necessary to state the number of the certifi­
cate at the time of sale? An actual certificate is delivered against
that sale.
Senator B r o o k h a r t . Yes; but the certificate may be theoretically
delivered back and forth a dozen times there.
Mr. W h i t n e y . During the day.
Senator B r o o k h a r t . Yes, and if you gave the number, why, that
would not occur.
Mr. W h i t n e y . I do not know what is to be gained, sir, however,
by that.
Senator B a r k l e y . It would take more bookkeeping and you could
do it the same by giving the number. You would just have to report
the number each time, is the only difference.
Mr. W h i t n e y . That is all. What a man buys he can sell one
number. When the next fellow sells it again, it is the same number
again.
Senator B r o o k h a r t . Yes; but one fellow on one side can sell a
number and the other fellow would not have the same number. He
just sells a fictitious number. But if you had to give a number,
why, then, he would not make the sale.
Mr. W h i t n e y . Senator, I do not know what would be gained by
such a rule.
Senator B r o o k h a r t . Y ou think it would not stop any of this
piling up of imaginary sales ?
Mr. W h i t n e y . I do not grant that there are imaginary sales.
Each sale is a contract which has to be fulfilled.
Senator B r o o k h a r t . Well, but why not sell them by number,
then, and try it and see if it would not stop it?
Mr. W h i t n e y . I am afraid I do not know what you have in your
mind to stop.
Senator B r o o k h a r t . Here is a whole crowd of brokers in there
and they are all offering stock, some buying and some selling, and
they do not know anything about whose numbers they are or what
numbers they are or anything at all. I f they had to sell them by
number they would then know what they were doing.
Mr. G r a y . The Senator possibly means that it should be treated
as a commodity instead of as a right.
Mr. W h i t n e y . Possibly. But I do not know in any market,
whether it be on an exchange or whether it be out in the stock­
yards, that with a particular pig, for instance, with a number on
nis ear—in selling him we do not give that number. We have to
deliver so many pigs.
Senator B r o o k h a r t . When the farmer sells him he sells him
according to the number in his ear.
Mr. W h i t n e y . I do not think so, Senator.
Senator B r o o k h a r t . But the board of trade does not appeal to
me any more in its fictitious sales than your scheme of selling stock.
Mr. G r a y . We were talking, Mr. Whitney, about the efforts that
the board have made for the purpose o f preventing a demoralization
by a sale below the market.




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STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Yes, sir.
Mr. G r a y . A sale according to your theory above the market, o r
rather an offer to purchase above the market, according to y o u r
thought, as to the regulation of the stock market, would have the
same demoralization effect, would it not ?
Mr. W h i t n e y . It might.
Mr. G r a y . For instance, if the market on United States Steel was
at 35—I think that was the illustration that we used before—you
said that you would immediately stop an effort to sell a thousand
shares of steel at 34.
Mr. W h i t n e y . For short account.
Mr. Gray. Suppose, now, that the market was at 3 5 ,1 went in and
offered to buy a hundred shares of it at 36.
Mr. W h i t n e y . And the market was what?
Mr. G r a y . Thirty-five.
Mr. W hitney. That is not the market, sir. That is the last sale.
Mr. Gray. The last sale.. The market, of course, is what is asked
for it. But suppose it was selling at 35. Suppose the range was
between 34 and 35. It has not been above 35 to-day, and ample
stock was being offered, and I went in and offered to buy a hundred
shares at 36. Of course, you have answered this “ under the regula­
tions.” But I would be forced to close my contract and close my offer
at whatever price it was being offered for in the market. I f I wanted
and insisted on paying 36 for it would I be stopped?
Mr. W h i t n e y . I f you did it for the purpose of creating a false
price for the shares; yes.
M r . G r a y . Y o u watch that just as closely as you do the s h o r t
sales ?
Mr. W h i t n e y . We have tried to watch it. I am not saying that
we may not have been lax. We have learned a lot, Mr. Gray, from
the panic of 1929 and since.
Mr. G r a y . I haven’t any doubt of it. A lot of us have that are
not members of the stock exchange.
Mr. W hitney. But, to answer you specifically, if the purpose was
to create a false price, that is just as contrary to our rules as de­
pressing the price.
Mr. G r a y . N o w , you spoke when you were before the House
committee about pegging. Will you tell the committee just what
you mean by “ pegging,” pegging the market? It is to hold a
market quotation to a certain level and keep it from going below,
is it not?
Mr. W h i t n e y . Page what is that?
Mr. G r a y . I think it is on page-----Mr. W h i t n e y (interposing). Well, that is not very important.
Mr. G r a y . Well, let me be the judge of it.
Mr. W h i t n e y . Pegging is-----Mr. G r a y (interposing). You said this: You were asked the
question:
I was thinking of a situation where some corporation had stock it was
very much interested in maintaining at a certain price, vitally interested in
the stability of that price, and that situation might be seriously disturbed by
interlopers trading in that stock on the outside. Is there any evil ariaimr
from that standpoint?
™




STOCK EXCHANGE PI'ACTICES

167

To which your answer was-----Mr. W h i t n e y . What page?
Mr. G r a y . Page 120. [Reading:]
My answer is, emphatically, “ no.” As a broker, when I have bet*u given
orders which are called “ peg ” orders, to prevent a stock going below a certain
price, I tell them that is the most ridiculous thing in the world. A “ peg ” price,
whether to short or long selling, always gives the impression there is something
artificial in the situation. A normal reaching o f a price level is what we are
interested in.

Is it not a fact that people who are interested in certain stocks give
orders and have their brokers execute orders at certain prices in
order that the market might be pegged and kept from dropping
below a certain figure or going above a certain figure, whichever way
they may want to hold it?
Mr. W h i t n e y . That may be done; and as I say, I think it is a
very dangerous practice to the interest of the person or individuals
that do it.
Mr. G r a y . Is there any regulation of the exchange as to that being
done?
Mr. W h i t n e y . It is perfectly legitimate.
Mr. G r a y . But it is in one sense of the word the same thing as a
short selling, is it not?
Mr. W h i t n e y . No, sir.
Mr. G r a y . I mean by that that the short selling has the purpose
of driving the market down, while your margin buying has the
purpose of driving the market up, while pegging is done for the
purpose of either preventing the market from going down below a
certain figure or from going up above a certain figure, is it not?
Mr. W h i t n e y . Yes; but I see no relationship between pegging and
short selling.
Mr. G r a y . I mean it is creating an artificial value all the way
through, isn’t that true?
Mr. W h i t n e y . No; it is not artificial as I see it.
Mr. G r a y . Well, suppose the stock is being sold-----Mr. W h i t n e y (interposing). You buy stock: you sell !>toek.
Mr. G r a y . Yes, sir; suppose the stock is being sola or quoted on
the market to-day at about 40, or we will say at 41, use that figure,
and the man that is interested in that stock does not want it to fall
below 40, and if he lets it alone market conditions would be such that
it would probably go to 39 or 38. What he does is put an order
in to his broker to buy all of that stock that is offered above 40 in
order to keep the price from dropping, does he not?
Mr. W h i t n e y . He m a y .
Mr. G r a y . And is he not creating an artificial value?
Mr. W h it n e y .* N o , sir. He is b u y in g stock an d p a y in g d ollars fo r
it.
Mr. G r a y . All right, if that is your answer. I do not know
whether I gather from your answer on page 1 2 0 when you indicated
to your customers that you thought that it was a ridiculous thing
to do, your firm is in the habit of executing peg orders or not. Is it1
Mr. W h i t n e y . We have executed orders to buy quantities o f stocks
or bonds at a price, yes; and my advice is that if it seems that they
are buying too much o f that stock it is to their detriment to con­
tinue making that price.



168

STOCK EXCHANGE PRACTICES

M r . G r a y . D o you do it in bonds also ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Do you do it in bonds for the firm of
& Co., of which your brother is a member ?
Mr. W h i t n e y . No, sir.
Mr. G r a y . You never have?
Mr. W h i t n e y . I would not say that we have not

J. P. Morgan

had orders to
buy bonds, but we have never had orders to peg bonds for them;
no, sir.
Mr. G r a y . Haven’t you done it for them on German reparation
bonds ?
Mr. W h i t n e y . Not that I know of, Mr. Gray.
Mr. G r a y . Wouldn’t you know ?
Mr. W h i t n e y . No; probably not.
Mr. G r a y . Will you find out and tell this committee?
Mr. W h i t n e y . Exactly what do you wish?
Mr. G r a y . Just what I asked you for.
Mr. W h i t n e y . Whether we have ever had an order-----Mr- G r a y (interposing). Whether or not your firm has been en­
gaged in the business of pegging the value of German reparation
bonds for J. P. Morgan & Co.
Mr. W h i t n e y . Yes; I will give you that answer.
M r . G r a y . All r ig h t ; th an k you.
Senator F l e tc h e r . At what figure?
Mr. G r a y . At any figure, but I will suggest to Mr. Whitney that
the figure I am informed about is at 90.
Mr. W h i t n e y . Is there any date that you want?
Mr. G r a y . You will find the date on your records if you find that
you have done it.
Mr. W h i t n e y . All right, sir.
Mr. G r a y . Now, is there any short selling in bonds?
Mr. W h i t n e y . In some bonds, but not usually.
Mr. G r a y . The bond market does not need short selling f o r th e
purpose of keeping it in a healthy condition, does it ?
Mr. W h i t n e y . I t certain ly does.
Mr. G r a y . You think it does?
Mr. W h i t n e y . I certainly do. One of the reasons it is in such
a very unhealthy condition at the present time is that very thing.
Mr. G r a y . Do you recommend that short selling in the bond
market be adopted?
Mr. W h i t n e y . I f it could be.
Mr. G r a y . I f it could be. What is the reason it can not be ?
Mr. W h i t n e y . Because there is not a supply of bonds available
for borrowing purposes.
Mr. G r a y . And you think that if you could introduce this healthy
thing that you are talking about, such a short selling in the bona
market, the market would not go up ?
Mr. W h i t n e y . I did not say so; no, sir; nor have I implied that
in any testimony here, Mr. Gray, with regard to short selling.
Mr. G r a y . You mean rather that it would be kept on a more staKla
basis? Is that what you mean?
Mr. W h i t n e y . That the market as a whole is on a more stable
chafingC Se °* ® eculation’ bottl short selling and marginal puraU
P




STOCK EXCHANGE PRACTICES

Mr. G r a y . And by reason of the practice of lending stock for the
purpose of giving the necessary aid to short sell—you think that that
is good practice, tool
.
i i v
Mr. W h i t n e y . Short selling could not exist without the lending
o f stocks
Mr. G r a y .

Do banks ever engage in the lending of stocks, or is it
all confined to brokers and individuals?
Mr. W h i t n e y . I do not know, Mr. Gray.
M r . G r a y . Y ou do not know.
Mr. W h it n e y . They may very likely within their discretion loan,
stocks they are long of, but I do not know.
Mr. G r a y . In your experience you are able to tell this committee
whether or not any banks have ever been engaged in the practice of
loaning stocks to brokers for the purpose of aiding a short sale, are
you not?
Mr. W h i t n e y . The practitce, I do not know. May I point out----- Mr. G r a y (interposing). Pardon me— i f banks do not do it would
it not be because they do not consider it is a good safe practice?
Mr. W h i t n e y . I do not see any reason for them to think it was not
a safe practice.
Mr. G r a y . You do not. Now, you said you wanted to point out
something and I interrupted you.
Mr. W h i t n e y . Yes. At the time of the Kreuger suicide Interna­
tional Match bonds, I think, had sold the day before around 50. The
best bid, I believe, was 30, and bonds were offered for sale. There
happened to be a man short o f 1 0 bonds, and he bought them, as I
remember, at 36, the best bid other than his being 30, thus saving the
seller of those bonds, presumably an investor, from losing an addi­
tional 10 points per bond.
Mr. G r a y . Additional 6 points.
Mr. W h i t n e y . Six points per bond.
Mr. G r a y . And making for the man who put through the transac­
tion another 14 points ?
Mr. W h i t n e y . And making for whom?
Mr. G r a y . Making for the man that put through the transaction
and bid 36 for them when the last market was 50, an additional 14
for his trouble.
Mr. W h i t n e y . Yes; but the short seller did not know that Mr.
Kreuger was going to commit suicide.
Mr. G r a y . N o ; of course not. Neither did any of the other mem­
bers of the New York Stock Exchange, or it would have been a
different story.
Senator B a r k l e y . I f they had known that there would have been
a lot more shorts, would there not?
Mr. W h i t n e y . I presume so, Senator Barkley, or people liquidat­
ing stocks.
M r . G r a y . It is a fact, is it not, that banks do not list their stocks
fo r sale on the New York Stock Exchange?
Mr. W h i t n e y . Some of them are listed; yes.
Mr. G r a y . Very few, are there not?
Mr. W h i t n e y . Not many.
Mr. G r a y . Why do they not list their stocks for sale on the New
York Stock Exchange?




STOCK EXCHANGE PRACTICES

170

Mr. W h i t n e y . I do not know, Mr. Gray. I think perhaps th a t
the point of view has been that fluctuations in bank stocks on an
organized market may be in one way or the other detrimental to th e
interest of their shareholders. There have been various banks liste d
there, and there are to-day.
Mr. G r a y . They would also consider that the short selling w o u ld
be quite dangerous, would they not?
Mr. W h i t n e y . I do not think so, sir; no.
Mr. G r a y . Y o u do not think so. In other words, you think t h a t
their opinion is that the fluctuations on the market would be d a n ­
gerous for them but that they have no though with respect to sh o r t
selling dangers affecting them in the slightest? In other w o r d s,
they would consider that it would be a healthy market?
Mr. W h i t n e y . I was talking about the banks’ shareholders and
possibly the influence upon their depositors as well, if they saw
fluctuations taking place. In answer to the last part of your q u es­
tion, from what I know of the attitude of bankers they believed in
the necessity of short selling to make up a proper market.
Mr. G r a y . You mean short selling in general stocks t h a t are
listed in order to make-----Mr. W h i t n e y (interposing). I make no exception, sir, between
bank stocks and listed stocks.
M r . G r a y . Y ou m ean the bankers that you k n ow , and in th is i n ­
stance you seem to know som ething about it, bankers th a t y o u k n o w
have indicated to you th at they consider th at sh ort se llin g is a h e lp
gen erally and they are m a k in g no distin ction betw een stocks t h a t
are ord in arily dealt in on the m arket and ban k stocks ?
Mr. W h i t n e y . That is m y belief.
Mr. G r a y . All right. Now, Mr. Whitney, I am going to take y o u

back to the 21st day of September when England went off the gold
standard.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . September 21st was a Monday. The London Stock
Exchange closed, did it not?
Mr. W h i t n e y . Did not open that day.
Mr. G r a y . Well, that is what I meant, that from the last business
day it did not open. It remained closed how long ?
Mr. W h i t n e y . I think it opened with restrictions on the 26th
of September. Forgive me as to my dates.
Mr. G r a y . Yes; that is all right. What do you mean by “ with
restrictions ”—as to short selling ?
Mr. W h i t n e y . No; not that I know of, was there any r e g a r d to
short selling.
Mr. G r a y . What were the restrictions ?
Mr. W h i t n e y . The restrictions were that they adopted what is
known as a cash settlement as against their usual term settlement.
Mr. G r a y . The Berlin Bourse had been closed, had it not be­
fore that?
’
Mr. W h i t n e y . I believe so.
Mr. G r a y . Some time in July?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . The Berlin Bourse opened when?
M r. W

h it n e y .




I beg pardon ?

STOCK EXCHANGE PRACTICES

171

Mr. Ghay. When did the Berlin Bourse open after its closing in
July, do you recollect?
Mr. W h i t n e y . No. I have it somewhere. I think they opened
for-----Mr. G r a y (interposing). A short time in October, was it not?
Mr. W h i t n e y . N o , not October, I do not think so. Some time
later.
Mr. G r a y . It was after England went off of the gold standard,
isn’t that true? Before that, he says. All right, we will accent that
statement. Give me the date that the Berlin Bourse closed, if you
can.
Mr. W h i t n e y . Yes, I have it. The Berlin Stock Exchange closed
entirely June 12 , 1931, reopened but only for the cash settlement on
September 3, again closed entirely September 2 1 , and on April 12,
1932, reopened again but only for cash dealings.
Mr. G r a y . Now, the Paris Bourse did not close, did it?
Mr. W h i t n e y . I believe not.
Mr. G r a y . Let me ask you incidentally a thing I intended to ask
you later, but while we are talking about the Berlin Bourse, do you
know as a matter of fact that as between the time of the closing of
the Berlin Bourse in 1931 and its opening in 1932 what the percent­
age of decrease in stocks in general was ?
Mr. W h i t n e y . I do not.
M r . G r a y . D o y o u k n o w th a t it w as about 12 per cent?
Mr. W h i t n e y . I do not. I do not know anything about

it at all,

sir.
M r . G r a y . Y ou do not know anything about it at all. Now, on
the New York Stock Exchange, considering these 90 statistical
stocks, the difference between September 2 1 and this spring has been
what, about 50 per cent?
Mr. W h i t n e y . Why, the price as of May 25 was approximately
105 and the last figures as of April 5 or 6 was 55.
M r . G r a y . S o that within that length of time there was a drop
of almost 50 per cent?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . N o w , your board was met with the proposition when
you learned that England had gone off the gold standard as to what
you were to do on that Monday morning, September 21, were you
not?
Mr. W h i t n e y . Yes.
M r . G r a y . Did you consider closing the stock market?
Mr. W h i t n e y . We did.
M r . G r a y . And you determined that it was inadvisable to do that,
did you not?
Mr. W h i t n e y . Absolutely.
M r. G ray. W h y ?
Mr. W h i t n e y . Because

we felt that it would probably cause chaos
in our banking structure; that the owners of securities throughout
this country that had been using for a long period of time the New
York Stock Exchange as a place, and pretty nearly the only place,
on which they could get cash, would have denied to them that mar­
ket, and that we would inflict by such an act a moratorium on this




1 72

STOCK EXCHANGE PRACTICES

entire country and perhaps a further tightening of moratoria exist­
ing in other countries as well. We felt that the one thing to do was
to remain open.
Senator F l e t c h e r . May I ask there, you have the right to close
the exchange when you like and open it when you like?
Mr. W h i t n e y . N o, Senator Fletcher. We nave that right, but we
do not think we should exercise that as against the best judgments
of all that may be interested. And those judgments, in so far as we
were able to obtain them, we did obtain. Sunday night, the 20th
of September, and Monday morning, the 21st of September, before
the opening of the exchange. I am not trying to quibble with you.
We have that right. It is our power.
Senator F le tc h e r . I was not certain whether you contend that
you had absolutely the right to do that if you saw fit to do it.
Mr. W h i t n e y . We have the absolute power to do it, yes; but w e
do not exercise that power except under the considerations I have
stated.
Mr. G r a y . You made up your mind, for the reason that you have
mentioned, not to close the exchange. As a matter of fact, did the
outstanding short interests have anything to do with your keeping
the exchange open?
Mr. W h i t n e y . It was one of the factors in our determination t h a t
if we kept the exchange open and banned short selling, as we did,
that that would drive the shorts to cover, for fear that their con­
tracts could not be balanced--consummated, if the exchange h a d t o
close.
M r . G r a y . N o w , you are discussing the question o f one o f t h e
effects. I have n ot g ot to th a t yet.

Mr. W h i t n e y . One of the effects upon us in making our decision.
Mr. G r a y . I am asking you whether or not the large interest—
and whether you and some other members of the board have not so
declared since that meeting on the morning of September 21—that
the intent of the large short interest to cover if tne exchange was
closed was a factor that you took into consideration?
Mr. W h i t n e y . In remaining open.
Mr. G r a y . That is one of the factors?
Mr. W h i t n e y . Yes, sir; and the result of what the short interest
would do in that event.
Mr. G r a y . We will come to the result shortly. In discussing this
matter you have referred on occasions to the closing of the stock
exchange in 1914, have you not?
Mr. W h i t n e y . Yes, sir.
M r . G r a y . H o w lo n g w as it closed th en ?
Mr. W h i t n e y . From August until some time in December.
Mr. G r a y . Was there any disastrous effect such as you anticipated

might have occurred had you closed the stock exchange on the morn­
ing of September 21,1931?
Mr. W h i t n e y . The situation was entirely different.
Mr. G r a y . The situation may have been different, and I will grant
you that there were other factors at that time, but I am asking you
whether there was any such disastrous results as you anticipated
might have occurred had you closed the stock exchange on the morn,
mg of September 21,1931?



STOCK EXCHANGE PRACTICES

173

Mr. W h i t n e y . Mr. Gray, I do not set up myself or the governors
of the New York Stock Exchange as having all the knowledge in
the world. Far from it. When we closed in August, 1914, we did
so with the assurance from the banks of this country, and, if I re­
member right, from the Government of this country, that the loans
existing at that time based on collateral security would not be dis­
turbed. When we discussed this question in September, 1931, the
advice, as I have already stated here this afternoon, based on the
situation with regard to collateral listed security loans, was such that
we were begged not to close, and all advice given us was that we
stay open because of the bank situation of the United States.
Mr. G bay . T here was a very large sh ort interest in the m arket at
that time, was there n ot?
Mr. W h i t n e y . There was a short interest of about four m i l l i o n
shares, I b e lie v e .
Mr. G b a y . I want to read you for the purpose of asking a ques­
tion or two about it what you said in your speech at Hartford with
respect to the time of September 21,1931. [Reading:]
The most drastic step would have been to close the exchange. This was
actually done twice before, for a few days in 1873 and for several months in
1914. W e knew from experience that closing the exchange would not hold up
security prices, but on the contrary would plunge them down to levels such as
were seen in the “ gutter markets ” o f August, 1914.

Were those levels in what you have designated as the “ gutter
markets in August of 1914 ” very much lower than the last quoted
prices on the exchange before the close?
M r . W h i t n e y . Yes, sir, 25 to 50 per cent below. The same thing,
to bring it more up to date, has been true with shares where minimum
prices nave been set in exchanges in Canada not so long ago, where
they had minimum prices, and there were dealings taking place else­
where in that country and in this materially below the minimum
prices set by the exchange.
M r. G b a y . T h en any fea r th at y o u h ad that the shorts w ou ld n ot
be able to cover i f you r m arket was closed w as en tirely groundless,
was it n ot?

Mr. W h i t n e y . The short position, sir, that we are referring to and
have been referring to rests with our members, and in 1914 we did
not allow our members to trade either one way or the other, to buy
or to sell, except at a minimum price and under the specific control
of a committee appointed to oversee transactions.
Mr. G b a y . B u t the custom ers cou ld have d on e as th ey chose?
M r. W

h it n e y .

N o , s ir .

Mr. G b a y . What would stop them from dealing in the gutter
market covering their shorts?
Mr. W h i t n e y . The contract would not be recognized by the ex­
change or by our brokers.
Mr. G b a y . What difference would that make to the customers
under those circumstances?
Mr. W h i t n e y . Well, he would have to pay for the stock outside
of any member of the exchange.
Mr. G b a y . Well, your action was not due on September 21 to the
protection of the short interests?
Mr. W h i t n e y . In no way.
119862— 32------ 12




STOCK EXCHANGE PRACTICES

1 74

it.

Mr. G r a y . In no way at all. Let me read you some of the rest
[Beading:]

01

It would have frozen bunk loans and investments, with serious consequences
to our whole banking structure.

That is the closing.
Obviously, this was a step to be avoided if any other possible alternative
could be found.
A second possible emergency measure was the establishment o f minimum
prices, which the stock exchange had employed with good results when it
reopened in the late fail o f 1914. But the present situation was utterly d if­
ferent from that occasion, for then the problem was how to open the exchange,
not how to avoid closing it. Such a measure would plainly be useless and even
dangerous when still unspent liquidation might quickly force prices below the
muimum levels and in effect result in a closing of the whole market under fire.
There was left, however, a third expedient, which in all its long history the
New' York Stock Exchange had never tried, and that was a temporary suspen­
sion o f short selling. This method in our opinion iK»sses«ed certain features
suited to the current crisis. Accordingly, by a unanimous vote of the govern­
ing committee, short Selling was forthwith suspended for that day and until
future notice.

In other words, you opened, but on Monday, September 21, and
until further notice, as you have stated, an order went out suspend­
ing short selling; is that true ?
Mr. W h i t n e y . In the emergency; yes, sir.
M r . G r a y . Y o u h a v e t o l d u s t h a t s h o r t s e l lin g is a h e a l t h y c o n ­
d i t i o n f o r th e m a r k e t , h a v e y o u n o t ?
Mr. W h i t n e y . And it was particularly so in this instance.
Mr. G r a y . Yes; and you have told us that it is a stabilizing in­

fluence?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . But as a matter of fact, the reason you abandoned it
was because you were afraid that your own members, as well as num­
bers that were not your members, would start immediately to sell
short when the market was opened on Monday morning, September
2 1 , for their own benefit, irrespective of what happened to the coun­
try; is not that true?
Mr. W h i t n e y . No, sir.
Mr. G r a y . What were you afraid of then that you banned short
selling?
Mr. W h i t n e y . Because we realized that with such a world-wide
happening as England going off the gold standard, the liquidation
upon our market, the only one of prominence open in the world,
would be something terrific, and so we invoked the necessity o f short
sellers covering in order to stabilize that market, and they did it.
Mr. G r a y . Yes. But at the same time if short selling as a general
thing is a healthy thing for a market—of course, you are talking
about the covering—but if you had not abandoned that dangerous
end of it there would have Been short selling orders galore on Mon­
day morning, September 2 1 .
Mr. W h i t n e y . N o , s ir .
M r . G r a y . Y o u d o n o t t h in k s o ?
Mr. W h i t n e y . I do not think so.
M r . G r a y . Y ou t h in k t h e n t h a t y o u r m e m b e r s o f y o u r
y o u r b r o k e r s a n d th e c u s to m e r s w it h w h o m t h e y d e a l
have
b e e n g r a c io u s e n o u g h t o h a v e r e f r a in e d f r o m e n d e a v o r i n g t o t a k e




exchange
would

STOCK EXCHANK3E PRACTICES

175

advantage o f the situation and sell som ething that they were pretty
sure was g o in g to be w orth less m oney in a fe w days I

Mr. W h i t n e y . I have not stated that, Mr. Gray, and I have tried
to give a very different impression from that you are trying to put
in my mouth.
Mr. G r a y . I think that is true.
Mr. W h i t n e y . The reason we opened the exchange with the regu­
lation imposed to stop and ban short selling was because we felt
that the short sellers would have to cover and would cover, giving a
stabilization in the market, and we felt that if we did not have that
buying power in the market there would be no use opening the ex­
change, because there would have been 110 market.
Mr. G r a y . I get your viewpoint, but what would be the result
had you not banned the short selling; just what I have indicated,
would it not?
Mr. W h i t n e y . God only knows.
Mr. G r a y . Yes; that is what I thought. Therefore, you consid­
ered short selling on that day would be quite dangerous, would you
not?
Mr. W h i t n e y . No; I w i l l n o t g r a n t th a t .
Mr. G r a y . Well, then, why didn’t you let them sell ?
Mr. W h i t n e y . Because we did not know what the market would
be, sir, at all, if we did not open with this ban. We were contem­
plating not opening at all.
Mr. G r a y . I want to find out, Mr. Whitney, whether or not you
did not ban short selling on September 2 1 , because you knew it would
absolutely demoralize market conditions.
Mr. W h i t n e y . We did not ban short selling 011 that day for that
reason; no, sir.
Mr. G r a y . All right then; I want your opinion as a man of expe­
rience as to what would have happened had you not banned short
selling that morning.
Mr. W h i t n e y . The market would have closed.
M r. G r a y . W e ll, I mean suppose you left it open and d id not ban
short selling, what w ould have happened to the m arket?

Mr.

W h i t n e y . The market would have closed.
M r . G r a y . You mean conditions would have been

so panicky that
they would have had to close?
Mr. W h i t n e y . Yes, sir. I do not grant, however, that short sell­
ing would have caused that panic.
Mr. G r a y . What would have?
Mr. W h i t n e y . Liquidation, sir.
Mr. G r a y . All right now; you had some liquidation, you had
some coverings by the shorts, it is true, but you banned the one
dangerous thing, which was short selling, 011 September 21. You
were afraid to let short selling take place, were you not?
Mr. W h i t n e y . No, sir.
Mr. G r a y . Why didn’t you let it take place then? We are going
a little around in a circle, but I am trying to get from you the fact
instead of having you argue.
‘
Mr. W i i i t n e y . Because we wanted the shorts to cover, which they
did and two days later we took the ban off.
Mr. G r a y . I am coming to two days later.



STOCK EXCHANGE PRACTICES

1 76

Mr. W h i t n e y . Well, lot me come to it.
Mr. G r a y . Yes; g o a h e a d .
Mr. W h i t n e y . We took the ban off, and then the short position
came down again on that.
Mr. G r a y . So they did, and the market crashed ?
Mr. W h i t n e y . It did not.
Mr. G r a y . I w i l l demonstrate that.
Mr. W h i t n e y . Y ou c a n n o t d o it .
Mr. G r a y . I t h in k so .
Mr. W h i t n e y . By the third day-----Mr. G r a y . Bight while you are about it, that short selling: For
instance you take United States Steel, short selling was not in effect
on September 21, and it was not in effect on September 22, was it?
Mr. W h i t n e y . N o , sir.
Mr. G r a y . Was it in effect completely on September 23 or with
restrictions ?
Mr. W h i t n e y . Yes, sir; completely.
Mr. G r a y . Completely. All right.
Mr. W h i t n e y . Except the restrictions under our constitution.
Mr. G r a y . Oh, why, of course you have regular restrictions. D o
you know when on the 23d the short sellers started to operate ? H a v e
you any data on that at all?
M r. W h i t n e y . N o, sir.

Mr. G r a y . You can not divide the day, can you ? Now, as a matter
of fact, on September 2 1 —have you that information on United
States Steel?
M r. W h i t n e y . N o .

Mr. G r a y . Have you any personal recollection on it?
Mr. W h i t n e y . No, sir.
Mr. G r a y ! All right. As a matter of fact, United States Steel
on September 21 opened at about 76 and closed at 80, did it not?
Mr. W h i t n e y . I f you say so, I will believe it.
Mr. G r a y . All right; when I say to you that I have a chart in
front of me that is worked out from the figures that are furnished by
your organization and its data, why I will ask you then to believe it.
On the following morning, on the 22d, with short selling it opened
at 78 and closed at 80, and on the third day which you allowed short
selling it opened at 82, as you have indicated, higher, went a point
higher and closed at 83, but when short selling got into its swing
the next day it opened at about 82% and dropped to 75 and a fra c­
tion, or seven points and a fraction in one day, and it never recovered
its position and kept on going down after short selling became
operative.
Do you still say that it was a good healthy thing to ban short
selling and a good healthy thing to open up the right to sell short
after several days.
Mr. W h i t n e y . Yes. sir.
Mr. G r a y . Y o u d o ?
Mr. W h i t n e y . You are going on assumptions that the short seller®
were the only contributing factor to steel going down on the fourth
day, but pass over with great lightness the fact that steel went u d
on the third day when short selling was allowed again.




STOCK EXCHANGE PRACTICES

1 77

Mr. G r a y . I do not pass over it, Mr. Whitney, and if you want
my reason it is because of the fact—my belief may be worth little
or nothing—that it was not until the afternoon of the third day
that the shorts began to operate and its effect was felt the next day
when he stock dropped 7y2 points.
Mr. W h i t n e y . And how about the effect upon the world that
owned securities in full realization of what going off the gold stand­
ard in England meant ?
Mr. G r a y . All right; let me answer that in this way, by asking
you a question: On Monday you did not allow any short selling?
Mr. W h i t n e y . That i s right.
Mr. G r a y . And I think United States Steel is a fair illustration
of the market for the day, and I think I can show you a number
of other stocks that acted in practically the same way. United
States Steel opened at about 76 and went to 80 on that day and
kept on in a healthy condition until on the next day it opened at
78, with short selling under ban, and went to 80 on that day. Then
short selling was permitted the next day. It opened at 82 and it
closed at 83.
Do you think that if you had permitted short selling on the
fourth day, thus adding to the liquidation, whether it was forced
or not, that that stock would have dropped 7V points? In other
fc
words, it is not fair to put the question to you that way. Let me
put it this way to you: Suppose there was a liquidation.
Mr. W h i t n e y . There was
Mr. G r a y . Don’t you think that that liquidation was decidedly
added to by permitting the shorts to come into the market and sell
on that day?
Mr. W h i t n e y . N o , Mr. Gray; I d o n o t .
Mr. G r a y . You do not? It is your opinion, Mr. Whitney, is it
not, if you will allow me just a minute-----Mr. W h i t n e y (interposing). I wish you would give me the figures
of Exhibit 4 that appear as-----Mr. G r a y (interposing). I will be very glad to give it to you.
Mr. W h i t n e y . Y ou are asking me things that my memory does
not remember.
Mr. G r a y . That is the reason I took the chart.
Mr. W h i t n e y . Y o u are not taking charts. Y o u take a specific
stock.

Mr. G r a y . I will take any one that you name.
Mr. W h i t n e y . I do not think any particular stock really proves
the case. I think it is all stocks.
Mr. G r a y . Y ou n a m e a s t o c k a n d w e w i l l t a k e it .
Mr. W h i t n e y . I am contented. You can go ahead with United
States Steel.
Mr. G r a y . Y ou are contented that United States Steel is prob­
ably representative, are you?
Mr. W h i t n e y . I think probably that it is.
Mr. G r a y . Then what I wanted to ask you—and this has nothing
to do with those figures—you have said that you do not think that
permitting short sales on the tourth day caused any dropping in the
market either of United States Steel or of any other stocks. It is




1 78

STOCK EXCHANGE PRACTICES

your general belief that short selling, which is liquidation in effect,
never is a depression on the market; is that so ?
Mr. W h i t n e y . It may have an influence, sir. That it is the cause,
no; the basic cause, no.
Mr. G r a y . You are not able to tell us, for instance, on that 24th
of September, while you are looking at statictics and while I think
I know what you are looking for, what amount of United States
Steel shares were sold short on that day, are you ?
Mr. W h i t n e y . Yes; the net position.
M r . G r a y . Y ou c a n t e l l u s t h e n e t p o s i t i o n ; y e s , s ir . S u p p o s e y o u
g i v e it t o u s.
Mr. W h i t n e y . I can not give it to you for that day, because we
do not seem to have it, but for the trading on the 21 st, there was a
decline of but 2,700 shares. The trading on the 2 2 d. an increase o f

but 100 shares, and then the trading on the 23d, 24th, and 25th-----Mr. G r a y (interposing). Give me them separately. What was
the 25th?
Mr. W h i t n e y . I have not got them. They are not here. Oh, I
beg your pardon. Sorry. Forgive me. I have got the wrong
figures.
On September 21 the trading decreased about 45,000 shares.
Mr. G r a y . Are you talking about trading, or are you talking a b o u t
short trading?
Mr. W h i t n e y . The net short position.
Mr. G r a y . Yes.
Mr. W h i t n e y . And during the trading on the 22d it decreased
about 32,000 shares, and on the 23d it increased about 27,000 shares,
and then on the day you refer to, Mr. Gray, when short selling had
gotten into full blast again-----Mr. G r a y . Yes.
Mr. W h i t n e y . It decreased approximately 39,000.
Mr. G r a y . But you are looking at the wrong d a y , Mr. Whitney,
and I will show it to you. I have not even seen what you have m
front of you. Your figures are at the opening.
Mr. W h i t n e y . Yes, sir; absolutely.
Mr. G r a y . Are vou looking at the opening of the 24th I
Mr. W h i t n e y . N o , sir; I am looking at the opening of the 25th
as compared with the 24th.
Mr. G r a y . And at the opening of the 24th, or rather at the clos­
ing, what was the number of shares short?
Mr. W h i t n e y . T w o hundred and eigh ty -tw o thousand.
Mr. G r a y . And what was it the next day?
Mr. W h i t n e y . Three hundred, twenty-one thousand.
Mr. G r a y . But as I say to you, that Is absolutely no indication
how many shares were sold short on that day, is it! You can not
tell us, can you %
Mr. W h i t n e y . Sold short— but we are taking into account o n t h in g
to do with the covering of shorts sold the same day: no, sir.
Mr. G r a y . In other words, there might have been with that reduc­
tion a very large number of shares sold short on that day ?
Mr. W h i t n e y . And a great preponderance of purchases by short
sellers that day.




STOCK EXCHANGE PRACTICE?

179

Mr. G r a y . N o w , your Schedule B—I don't know whether yow have,
got the 2 1 st here or not. And now let us take all the stocks, if 1
may be permitted. These are dates on the opening, are they not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And this schedule that we are looking at, so that you may
understand it, is not the position on all the shorts from day to day;
this is that which was traded in, is it not ?
Mr. W h i t n e y . N o , sir.
Mr. G r a y . Traded in covered?
Mr. W h i t n e y . N o , sir.
Mr. G r a y . Y ou are loo k in g at Schedule A or Schedule B?
Mr. W h i t n e y . Y ou are d o in g it.
Mr. G r a y . Don’t worry; we will get along very nicely. This
Schedule A—I am looking at it up side down. You keep it that
way. I can see it this way. That Schedule A is the change in the
position on the outstanding short interests, is it not X
Mr. W h i t n e y . The total short interest.
Mr. G r a y . On a ll stocks?
Mr. W h i t n e y . On all stocks in which a short interest existed.
Mr. G r a y . On the morning of the 21 what was it?
Mr. W h i t n e y . Three million nine hundred sixty-one thousand.
Mr. G r a y . On the morning of the 2 2 d what was it ?
Mr. W h i t n e y . Three million one hundred sixtv-two thousand.
Mr. G r a y . So that with the ban on short selling it dropped con­
siderably ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And on the morning of the 23d what was it?
Mr. W h i t n e y . T w o m illio n nine hundred tw en ty -n in e th ou sand,
a drop of 233,000.
Mr. G r a y . And on the morning of the 24th what was it ?
Mr. W h i t n e y . T w o m illio n nine hundred fo r ty -n in e th ou sand, an
increase o f 20,000.
Mr. G r a y . T h a t is the result o f the sellin g o f the 23d, the short
selling?
Mr. W h i t n e y . That is right.
Mr. G r a y . In other words, even your net position increased, did
it not?
Mr. W h i t n e y . It did 20,000 shares, as against the day before when
short selling was allowed of a decrease of 233.000.
Mr. G r a y . N o , no.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Y ou m ean to say that on the 23d there was a d ecrease!
Mr. W h i t n e y . On the 23d.
Mr. G r a y . No; I will take you back again.
Mr. W h i t n e y . Wait a minute now.
Mr. G r a y . All right; you correct yourself then.
Mr. W h i t n e y . On the trading of the 23<1 there was an increase
of 2 0 ,0 0 0 .
Mr. G r a y . Yes; that is what I thought. And on the trading of
the 24th there was an increase of what ?
Mr. W h i t n e y . O f 37,000.
Mr. G r a y . And by the way, just to carry it out to another day,
trading of the 25th, what happened ?



STOCK EXCHANGE PRACTICES

180

Mr.- W i i i t n e y . I have not those figures, but by the-----Mr. G r a y (interposing). That is because, I suppose, the Saturday
came in there. What was the difference between the last day you
gave us, then, and the next day you gave us (
Mr. W h i t n e y . T w o th o u s a n d .
Mr. G r a y . Well, now then; turn to Schedule B, will you, which is
the next schedule on the next page?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . N o w Schedule B and those statistics u s e d is a schedule
showing the amount of stock that was sold short on one day and
covered in the same day; that is true, is it not ?
Mr. W h i t n e y . That is right.
Mr. G r a y . And I suppose you have no statistics for the 2 1 st o r 22d
o f September, have you?
M r. W

h it n e y .

N o, sir.

Mr. G r a y . All right; how much stock on that schedule was bought
and sold on the 23a?
Mr. W h i t n e y . I have no figures.
Mr. G r a y . You have no 23d figures?
Mr. W h i t n e y . It does not begin until the '26th. That was
Saturday.
Mr. G r a y . How was that? There was a short selling on those
days.
Mr. W h i t n e y . That is when we started this compilation.
Mr. G r a y . Oh, you mean you did not start it until the 26th ?
Mr. W h i t n e y . No, sir.
Mr. G r a y . That would not be of much help to us, maybe. Y ou
started it on Saturday and that was a short day of two hours?
Mr. W h i t n e y . Yes, sir.
M r . G r a y . H o w m u c h s t o c k w a s s o ld s h o r t o n t h a t d a y a n d c o v e r e d
th e s a m e d a y ?
Mr. W h i t n e y . Twelve thousand three hundred.
Mr. G r a y . H o w much on Monday, the 28th ?
Mr. W h i t n e y . Eighty-five thousand nine hundred.
Mr. G r a y . And on Tuesday?
Mr. W h i t n e y . One hundred fifty-four thousand.
Mr. G r a y . In other words, it jumped from 12 to 80 to 154 ?
Mr. W h i t n e y . Dependent upon the trading on the floor.
Mr. G r a y . O f course.
Senator B l a i n e . Those are all short and covered ?
Mr. G r a y . Those are all short and covered?
Mr. W h i t n e y . Yes; certainly.
Mr. G r a y . In other words, I have had him indicate to you what the

position was during that week where there were short sales that
were carried short, and then in order to give the complete story I
have had him give this figure also, but it is not available for the
23d, 24th, or 25th, not until the 26th, as I understand Mr. Whitney.
Mr. W h i t n e y . Not until the morning of the 26th.
Mr. G r a y . All right.
Mr. W h i t n e y . I do not want you to forget, however, as I have
contended, that those that sold short the same day bought them




STOCK EXCHANGE PRACTICES

181

Mr. G r a y . Oh, yes; I know that.
Senator B a r k l e y . I s there any reason for leaving out those three
days immediately after you lifted the ban ?
Mr. W h i t n e y . Senator Barkley, we never had those figures for
any period before that time.
Mr. G r a y . They did not start until that time.
The C h a i r m a n . The committee will adjourn for to-day, and Mr.
Whitney will be here on Thursday morning at 10.30 to continue.
(Accordingly, at 5.05 o’clock p. m. the committee adjourned to
meet again on Thursday morning, April 21, at 10.30 o’clock a. m.)







STOCK EXCHANGE PRACTICES
T H U R S D A Y , A P R IL , 81, 1932

U
C o m m it t e e

on

S t a te s S e n a t e ,
B a n k in g a n d C u r r en cy,

n it e d

Washington, D. C.

The committee met at 10.30 a. m., pursuant to adjournment on
Monday, April 18,1932, in room 301, Senate Office Building, Senator
Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Walcott, Carey, Watson, Couzens, Fletcher, Barkley,
Bulkley, and Gore.
Present also: William A. Gray, Esq., associate counsel to the
committee.
The C h a i r m a n . The committee will c o m e to order. Mr. Whitney
is o n the stand. You may proceed, Mr. Gray.
TESTIMONY OF RICHARD WHITNEY, PRESIDENT HEW YORK
STOCK EXCHANGE, NEW YORK, N. Y — Resumed

Mr. G r a y . Mr. Whitney, on page 97 o f the House investigation
o f y o u r testimony you said, and I am quoting your words, that—
I f there had been no short selling o f securities on the stock exchange it
would have been forced to close many months ago.

"Why do you believe that to be true ?
Mr. W h i t n e y . Because I felt at that time, and have felt since,
that short selling, as I have stated here many times before, is a very
integral part of speculation, along with marginal buying, and that
it with investment makes up the market.
Mr. G r a y . Do you mean to say now that that which you said be­
fore the House Committee, that if short selling were not permitted
the stock exchange would have to close, is a fact?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . In other words, it is your thought that the market can
not be conducted on a basis of buying and selling, prices being regu­
lated by the intrinsic values of the stocks and by the law of sup­
ply and demand, but that there has to be some artificial speculating
in order to keep that market alive ?
Mr. W h i t n e y . No, s i r ; I do n o t th in k th a t sh ort sellin g or m a r g i­
nal pu rch asin g is artificial.
Mr. G r a y . Y ou d o n o t t h in k s o ?
Mr. W h i t n e y . No, sir.
Mr. G r a y . Y ou do not think it

is artificial for a man to sell that
which he has not and wait for the price to decline and buy it back

again!




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STOCK EX C H A N G E PRACTICES

Mr. W h i t n e y . N o, sir. That same process applies in most i f
not all types of industry.
Mr. G r a y . Well, I am not going to get into a discussion with you
as to the difference between the short selling of stocks and the snort
selling of commodities for delivery in the future. But isn’t the
selling of stocks short a pure speculative or gambling transaction?
Mr. W h i t n e y . It is not gambling. It is speculating.
Mr. G r a y . What is your distinction between speculation and
gambling?
Mr. W h i t n e y . I think the distinction is in the endeavor or the
act, dependent upon one’s purpose. Gambling is an endeavor where
there is no useful purpose, and the individual who gambles therefore
is a drone. The individual who speculates is using his money, taking
a risk, but with the desire for something productive.
Mr. G r a y . What desire do you think a short seller has for s o m e ­
thing productive? Has he any other desire than to make money on
his gamble?
Mr. W h i t n e y . That, as I have explained, is the difference in judg­
ment from the man who purchases on margin. Without that you
would not have a market. It would be totally artificial without it.
Mr. G r a y . As to any difference in judgment, it is the same differ­
ence in judgment when a man bets that red is coming up on the rou­
lette wheel and the other man bets that black is coming up. Isn’t
that a fact?
Mr. W h i t n e y . Oh, no. I do not mean that at all.
Mr. G r a y . You state that the man who engages in short selling
has the purpose to make money. But is his purpose other than to
make money on the fall of the market?
Mr. W h i t n e y . My answer is that I do not think he has any purr
pose except to make money, but it is exactly the same purpose
as has the marginal purcnaser when he buys stock—he desires
to make money. And as I have said continuously, the two make up
speculation, and without the one or other the markets would not exist.
Mr. G r a y . But you are getting away from the question. You gave
me your definition of speculation or gambling-----Mr. W h i t n e y (interposing). Speculation.
Mr. G r a y (c o n tin u in g ). Or, rather, you show ed m e w h a t y o u
th ou g h t the distinction was.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And you told me that speculation was something that
was done with a purpose.
M r . W h i t n e y . Yes, s ir .
Mr. G r a y . Your answer seemed to indicate it had some other pur­
pose than that of gambling. When a man gambles he does it w ith
the purpose of winning. Is there any other purpose in the world
that the short seller has than that?
Mr. W h i t n e y : I referred the other day-----Mr. G r a y (interposing). Oh, no. Answer that, please.
Mr. W h i t n e y . I am going to answer it.
Mr. G r a y . Well, answer that question. Is there any other pur­
pose? And then you can tell me anything you referred to the other
day thereafter.
Mr. W h i t n e y . Well, then, will you repeat your question as ions
as you are going to tell me how I must answer?



STOCK E X C H A N G E PRACTICES

185

Mr. G r a y . I am not going to tell you how you must answer, but
I am going to ask the committee reporter to repeat the question to

you-

(Thereupon the committee reporter read the following questions
and answers:)
Mr. G r a y . But you are getting away from the question.
d e fin it io n o f s p e c u la t io n o r g a m b lin g ------Mr. W h i t n e y (interposing). Speculation.

You gave me your

Mr. Gray (continuing). Or rather you showed me what you thought the
d is t in c t io n was.
Mr. W h i t n e y . Y e s , sir.
Mr. G r a y . And you told me that speculation was something that was done
with a purpose.

Mr. W h i t n e y . Yes, sir.
Mr. G e a y . Your answer seemed t o indicate it had some other purpose than
t h a t o f gambling. When a man gambles he does it with the purpose of
winning. Is there any other purpose in the world that the short seller has
t h a n that?
Mr. W h i t n e y . I referred the other day------Mr. G r a y (interposing). Oh, no. Answer that, please.
Mr. W h i t n e y . I a m g o in g t o answer it.
Mr G r a y . Well, answer that question. Is there any other purpose? And then
y o n c a n tell me anything you referred to the other day thereafter.

Mr. G r a y . Now, please go ahead and answer that.
Mr. W h i t n e y . The seller for short account has the purpose cer­
tainly of desiring to make money by his act. But there is a grave
distinction between gambling and speculation.
Mr. G r a y . But you have not told me yet. Has that short seller,
whom you admit has the purpose to make money, any other purpose
that you know of?
Mr. W h i t n e y . No; I do not think he has any other purpose
than to make money. But the fact of short selling is coupled with
the fact of marginal purchasing, and you are getting into the
economic aspects of this question, which are involved and long,
and only in that way could I explain the distinction that I firmly
believe exists between gambling and speculation.
Mr. G r a y . The short seller on the stock exchange sells for de­
livery at any time he chooses to make delivery in the future, doesn’t
he?
Mr. W h i t n e y . He does not.
Mr. G r a y . Subject, of course, to possibly somebody calling on
him to make delivery.
Mr. W h i t n e y . He must make delivery the next day or full busi­
ness dav.
Mr. G r a y . Of course, under the rules of the stock exchange he
has to make delivery, and for that purpose he borrows stock. But
as far as covering is concerned he may do it at any time he chooses.
Mr. W h i t n e y . He does not have to cover until such time as he
wants, subject to certain conditions.
M r . G r a y . N o w , in y ou r distin ction w ith respect to , or rather in
your statem ent w ith respect to the clo sin g o f the exchange in event
o f there bein g no short sellin g o f securities, d id you include in the
expression “ sh ort sellin g ,” or d id you inten d to include sh ort sellin g
o f the d a y also which is covered on the sam e d a }'?
Mr. W h i t n e y , No.




Ig

6

STOCK E X C H A N G E PRACTICES

Mr. G r a y . In other words, there is some short selling in which
there is no actual covering until a much later period, and there a re
other short sales which are made during the day and c o v ered
immediately, which, of course, does away with the necessity o f
borrowing and delivering stock. Did yon intend to include t h a t
in your distinction?
Mr. W h i t n e y . I take it I was thinking of the whole aspect o f
short selling, and not with any specific reference to the in-and-out
sales covered the same day.
M r . G r a y . D o you th in k th a t in -a n d -ou t short sales covered t h e
same d a y are necessary, and th a t i f th ey were n ot p erm itted to ta k e
place th e stock exchange w ou ld h ave to close?
Mr. W h i t n e y . They are absolutely necessary to a market. And

I should like, if I may, to introduce here for the record my speech
on the subject, and I think it is the one delivered at Hartford, in
which I-----Senator G ore (interposing). Delivered where. M r . Whitney ?
Mr. W h i t n e y . At Hartford. No; it was not in my speech deliv­
ered at Hartford, but I should like to put both of those addresses
into your record here, the one made at Hartford 011 October 16 and
the one made at Syracuse on December 15.
M r . G r a y . I h ave no objection.

T h e com m ittee w ou ld lik e t o h a v e

th em , I guess.
Mr. W h i t n e y . I f I may, Mr. Chairman.
The C h a i r m a n . They may be made a part
Mr. W h i t n e y . In my speech at Hartford I

of the record.
pointed out the neces­
sity of the type of in-and-out trading, pages 13 and 14, if I may
read it?
The C h a i r m a n . Proceed.
Mr. W h i t n e y . I said [reading]:
The ban on short selling immediately created a new problem.
hours after short selling was forbidden------

W ithin tw o

Mr. G r a y (interposing). In order that the committee may under­
stand it, you were talking there with respect to the period o f time
of September 21, when the ban was put on short selling.
Mr. W h i t n e y . Exactly. To prove my contention that short sell­
ing is a necessity.
M r . G r a y . G o ahead.
Mr. W h i t n e y . I said

[reading]:

The ban on short selling immediately created a new problem. W ithin tw o
hours after short selling was forbidden, the governing committee found there
was a real danger o f technical corners and of crazy and dangerous price ad­
vances. At one time there were accumulated orders to buy approxim ately
8,000 shares of General Motors stock at the market. No stock was offered for
sale within many points of 30%, which was the last preceding sale and the
highest price that the stock reached at any time during this period. Som e­
thing had to be done immediately or otherwise the buyers would have hid
frantically for the stock and a rapid and entirely unwarranted advance would
have taken place. An example of what I mean occurred in Beading Co. stock
which opened at 48%, advanced to a high of 75, and subsequently declined to
♦
52. Similar situations existed in leading and active share issues such as
United States Steel, American Can, and others. In order to avoid such w ild
fluctuations, which would have disturbed and disorganized the market, the
business-conduct committee was authorized to permit a limit“d amount o f sh ort
selling. All such short sales were made, however, under close supervision o f
the governors of the exchange when it was necessary to prevent violent p rice



STOCK EXCHANGE PRACTICES

187

changes. These facts prove that a complete prohibition of short selling could
not be enforced for even two hours without creating an unnatural and dan­
gerous market.

(The speeches delivered by Mr. Whitney at Syracuse on December
15 and Hartford on October 16, 1931, will be inserted at this point
for printing in the record.)
E x h i b i t N o . IS
S H O R T SEL L IN G

(Address delivered by Richard Whitney, president, New York Stock Exchange,
before the Hartford Chamber o f Commerce, Hartford, Conn., and over the
nation-wide network o f the Columbia Broadcasting System (In c.), October
16, 1931.)

Gentlemen, it is a pleasure to address the members aud guests of the Hart­
ford Chamber of Commerce which represents so ably one of our oldest and
most important financial centers. I particularly appreciate the invitation to
speak to you this evening because it gives me an opportunity o f discussing, at a
timely moment, a subject of the greatest importance. I have entitled my re­
marks “ short selling,” but I intend to talk to you not only about the theoretical
aspects o f short selling but also about the part which short selling l*as played
in the recent financial crisis.
I have complete confidence in the common sense of the people of the United
States when forming an opinion if the true facts are before them. I do not
believe that the facts with regard to short selling have been thoroughly under­
stood or properly explained to the public, and for this reason perhaps hasty
conclusions have been reached and expressed on this problem.
Just what is short selling V Let us imagine a man has become convinced
that a certain security is selling at too high a price. He feels that it is certain
to sell at a lower price in the future and he wishes to take advantage o f this
situation. To do so, he tells his broker to sell the stock on the stock exchange.
At the moment the order is given the broker usually does not know whether
his customer is making a short sale or is actually selling stock that he possesses.
The order is sent through to the floor of the stock exchange and is executed in
exactly the same way as any other order. The broker who buys is not aware
that the man who is selling has not possession o f the stock. The contract made
between the brokers Is for delivery of the stock against payment on the next
business day, and the buying broker will demand that the seller deliver the
; tock to him in accordance with the contract. It is only when the day for
delivery arrives that a short sale differs from a sale o f long stock. The man
who has not in his possession the stock which lie has ordered his broker to sell
must obtain it in order to carry out his contract. This is done in the usual
course o f business by the short seller borrowing the stock from other persons
vho possess it. Stocks can be borrowed just as money can be borrowed.
Therefore, the short seller borrows the stock and delivers it on his contract and
the short sale is then complete.
You can readily see that a man who thus sells stock short and meets his
obligation to deliver by borrowing does substantially the same thing as a man
who buys stock and pays for it with borrowed money. The short seller, at the
time of the sale, has not. got the stock in hand to deliver: just as the long
purchaser, at the time o f the purchase, has not got the cash in hand to pay
for it. In each case, the seller or buyer has sufficient credit to borrow the
stock or money with which to meet his obligation. If it is wrong for a man
with credit to borrow stock because he is selling it short, it is just as wrong for
a man to borrow money to buy stock or any other kind o f property.
When we borrow money or stock or any other kind o f property what we really
do is to obligate ourselves to return the same or equivalent property at some
time in the future. Few people seem to realize that a short sale is nothing
but a contract to deliver stock in the future. The short seller, when he has
made his sale, is obligated to return the equivalent to the person who loaned
him the stock. The loan may be due at a fixed time or it may be payable on
demand, but in either case the short seller must at some time buy the stock
that he has borrowed and return it to the lender. This is the feature o f short
selling that makes it so essential to an open market f«r securities. Every man



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STOCK EXCH AN GE PRACTICES

who has sold short is, as I have said, a potential buyer of securities, and this
is a source of great stability to a market, because experience shows that when
prices suddenly decline the short sellers purchase stocks in order to discharge
their loans. This is especially true in times of crises when other people hesitate
to buy and the short sellers represent the purchasing power which prevents the
market from becoming demoralized. The stock exchange has recognized this
fact for many years and has always permitted short selling because it was con­
vinced that no securities market could long continue in business if short selling
were forbidden.
In spite of all that has been said about short selling, there can be no doubt
that it is a lawful practice. There are many decisions by our highest courts
upholding it. There is one, however, which is worth quoting, not only because
it is a decision of the Supreme Court of the United States, but also because
the opinion was written by one of our most eminent jurists, who, with broad
vision, has recognized the necessity of upholding the practice of selling for
future delivery. I refer to the opinion of Mr. Justice Holmes in the case of
Board of Trade v. Christie Grain & Stock Co., in which he said:
« * * * o f course, in a modern market contracts are not confined to sales
for immediate delivery. People will endeavor to forecast the future and to
make agreements according to their prophecy. Speculation of this kind by
competent men is the self-adjustment of society to the probable. Its value is
well known as a means of avoiding or mitigating catastrophes, equalizing prices
and providing for periods of want. It is true that the success of the strong
induces imitation by the weak, and that incompetent persons bring themselves
to ruin by undertaking to speculate in their turn. But legislatures and courts
generally have recognized that the natural evolutions of a complex society are to
be touched only with a very cautious hand, and that such coarse attempts at a
remedy for the waste incident to every social function as a simple prohibition
and laws to stop its being are harmful and vain. This court has upheld sales
of stock for future delivery * * * ”
As Justice Holmes so clearly points out, short selling is not only a lawful
practice but it is also the expression of the business judgment of an individual
or individuals in selling something where the belief exists that the prevailing
price is too high to be warranted by existing conditions. This opinion is set
off against that of the purchaser, who believes the price is warranted. O f
these fundamentally different views, one is right and the other is wrong, as
may be proved over a period of time. Human judgment is never infallible, and
yet he whose judgment at a particular time is proved incorrect may find
himself at a later period justified in his first opinion. However, in the interim,
where his judgment has been wrong, either as a purchaser or as a short
seller, he should not put the blame for his lack of business judgment upon the
market place that affords him the opportunity to buy or sell.
For a great many years the short sale has been a regular feature, not only
of all the leading security markets in the world, but also of practically all
branches of business. Competent and impartial economic students, both here
and abroad, have long declared that short selling, by restraining inflation and
cushioning sharp declines, tends to stabilize the fluctuations of prices. That
this contention is no mere aeademic theory, recent occurrences in the stock
market have very clearly shown, and I shall have occasion in a moment to
allude again to this vital service of the short sale.
In addition, we of the stock exchange are compelled by daily experience
in our business to realize other and equally necessary reasons for continuing
to permit and approve the practice. For one thing, short sales enable per­
sons who hold securities at considerable distances from New York City to
liquidate them speedily und safely. Were short selling to be prohibited, it
would mean that no one more than 24 hours’ mailing distance from New York
could freely sell in our market the stocks which he owns.
Short selling is also regularly employed as a “ hedge,” not at all for the
purpose of making speculative profits, but for insuring against losses due to
price fluctuations. Probably the most important cases of this sort occur in
our odd-lot business. To forbid such short selling would paralyze the oddlot business as we know it to-day. It would compel the charging of a huge
instead of a small, price differential between 100-share lots and odd lots of
less than 100 shares. This, I would remind you, is no mere question of finan­
cial technique, confined in its influence to Wall Street. It would immediately
affect the realizable value of securities held by millions of American citizens
alt over this country*-




STOCK EXC H A N G E PRACTICES

189

Any halt or hindrance to short selling would have the effect of driving from
the stock market the most important sources of buying power, and it could
only lead to an excess of sellers and further declines in prices. Whether
the opponents of short selling know this or not, the New York Stock Exchange
knows it, and it is one of the basic reasons for the stock exchange attitude in
defense of short selling.
The decline in security prices has not been due to short selling, but has been
due to our unsatisfactory business conditions and to the liquidation of securities
owned outright or held on margin. I am not making this statement in any
doctrinaire fashion, but on the basis of cold fact. I am basing it not only upon
the experience of the New York Stock Exchange through business depressions
for over a century, but also upon our knowledge of the actual forces recently
at work in the stock market. I would remind you that the stock exchange lias
frequently investigated the facts concerning short selling. In 1917. and again
in 1929 and 1930, the stock exchange obtained comprehensive and illuminating
statistics concerning it. In May of this year, this work was renewed upon a
still more extensive scale. Ever since May 25, 1931, we have obtained, at
least weekly, the number of shares which composed the entire short interest
in the market, and since September 21 these reports have been made daily.
These statistics, to which I am about to refer, prove the truth of my statement
that short selling has not been the cause of declining security prices.
On May 25, 1931, when our members again began to report their short ac­
counts to the exchange, the total size of the short interest in the market
amounted to 5,589,000 shares. This aggregate fell considerably while stock prices
remained relatively unchanged until the news of the proposed international debt
moratorium was announced, when the short interest dropped still further as the
excited but temporary rise in prices ensued. Through August the short interest
increased somewhat, while prices fluctuated uncertainly. It rose to a new
peak of 4,480,000 on September 11, but on September 18— the last weekly date
before the English sterling crisis struck the stock market— it had again fallen
and stood at 4,241,000 shares.
The subsequent fluctuations in the short interest I shall recount presently.
For the time being I wish to point out that the aggregate short interest in the
market, even at its May 25 peak of 5,589,700 shares, constituted only two-fifths
of 1 per cent of the 1,305,516,716 shares listed as of June 1. An estimate of
shares in the “ long ” account carried by stockbrokers puts their number at
approximately 59,000,000— or about ten and a half times the contemporary short
interest. All listed shares represent potential selling power, and shares in
“ long” accounts, of course, represent an actual selling threat immediately in
the market. Shares in the short interest, on the other hand, represent the only
compulsory buying power which the market possesses.
The real cause of declining security prices, as I have said, was not short
selling but the continued liquidation of stocks held both outright and on margin.
In order to comprehend the reasons for this extensive tendency to liquidate
securities we must remember that it arose not in the stock market, but quite
outside of it, and the stock market has been its victim rather than its cause.
Institutional investors, because of the laws which govern their investments,
have frequently been compelled to sell. The indentures of some investment
trusts and security holding companies have similarly been responsible for
forced liquidation of their investments. Many companies with a surplus in
the form of securities in their treasuries have, because of the depression, been
compelled to convert these securities into cash. In every depression which we
have ever had, compulsory liquidation of this sort has been imposed upon the
stock market, in order to keep business going.
There is also another kind of compulsory liquidation of securities in busi­
ness depressions, which is due to the fact that the stock exchange is the most
available market. Owners of land or real estate, of private business enter­
prises of inventories of goods, or of unlisted securities, often find that they
can not sell these forms of property, and they are inevitably forced to obtain
funds by selling securities which are listed on the New York Stock Exchange.
Some of the people who thus sell listed stocks in order to continue to carry
less salable property forget that their own sales have been an important cause
of the decline in security prices and often unjustly attribute to short selling
the result which they themselves have been instrumental in bringing about.
A clear proof of the fact that it has been liquidation rather than short selling
which has been responsible for declining security prices, has, as a matter or
fact, been afforded in the security market itself, at least to those who have eyes
119852— 32------ 13




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STOCK EX C H A N G E PRACTICES

to see. The decline in prices has not occurred merely in stocks, where short
selling is permitted, but also in the bond market where short selling is all but
impossible because of the difficulty of borrowing for delivery. I can speak feel­
ingly on this subject, because I am in the bond business myself. Despite the
fact that bond prices are usually steadier than stock prices, probably the great­
est and most ridiculous declines have taken place in bonds rather than in shares.
In some cases the bonds of certain governments bearing a high rate of interest
have sold at a price below that of bonds carrying a low rate of interest, de­
spite the fact that both issues were obligations of the same government, were
equally secured, and due at approximately the same date. The bondfe of
obviously sound governments have likewise sold far below bonds of other coun­
tries whose financial position has been much more doubtful. Very plainly this
has not been due to short selling but to liquidation. Indeed, if bonds could
readily be sold short, abnormalities of this sort would have been considerably
reduced.
Other cases could be cited where unlisted stocks, which can not be sold short,
have shown price fluctuations far greater than the average listed stock issue.
This is not a matter of mere conjecture or assertion but of fact. It completely
shatters the contention that it is the short seller who has forced prices down.
Nor have these facts been difficult to obtain. They have been printed on the
news tickers throughout the land and published in practically all of our news­
papers. The principal moral to be drawn from the evidence in regard to de­
clining security prices is, therefore, that we must base our opinions on. fact
and not on conjecture.
With this general background I can now review the financial crisis caused
when Great Britain suspended gold payments and the emergency measures
which were then taken by the New York Stock Exchange. The sensational
news from London had not been anticipated by most of us. In fact the very
large American and French credits which had so recently been extended to
Great Britain seemed to preclude the likelihood of any such action. I need
not explain to this audience how severe a shock the news was, not only to this
country but to the whole world. It is sufficient to recall the fact that every
important stock exchange in Europe save only Paris closed instantly and that
restrictive measures on banking and trade were very commonly adopted. Such
a situation in finance had not occurred since the crisis created by the outbreak
of the World War, when the New York Stock Exchange and every other im­
portant stock exchange in the world had been compelled to close.
When the governing committee of the New York Stock Exchange met on
Monday, September 21, at 9.15 a. m., all the important stock exchanges in
Europe except Paris had already suspended, and Paris had concluded its Mon­
day session under severe restrictions. In consequence the New York Stock
Exchange remained the only great open market in the world where securities
could be sold. It was obvious to all that a crisis was at hand, that for* the
time being a normal market might not exist, and that emergency measures
must be taken. The only real question was just what those emergency measures
should be.
The most drastic step would have been to close the exchange. This was
actually done twice before, for a few days in 1873 and for several months in
1914. We knew from experience that closing the exchange would not hold up
security prices, but on the contrary would plunge them down to levels such as
were seen in the “ gutter markets” of August, 1914. It would have frozen
bank loans and investments, with serious consequences to our whole banking
structure. Obviously, this was a step to be avoided if any other possible alter­
native could be found. A second possible emergency measure was the estab­
lishment of minimum prices, which the stock exchange had employed with good
results when it reopened in the late fall of 1914. But the present situation
was utterly different from that occasion, for then the problem was how to open
the exchange, not how to avoid closing it. Such a measure would plainly be
useless and even dangerous when still unspent liquidation might quickly fo rce
prices below the minimum levels and in effect result in a closing of the whole
market under fire. There was left, however, a third expedient which in all its
long history the New York Stock Exchange had never before' tried, and that
was a temporary suspension of short selling. This method in our opinion pos­
sessed certain features suited to the current crisis. Accordingly, by a unani­
mous vote of the governing committee, short selling was forthwith suspended
for that day and until future notice.




STOCK EXCHANGE PRACTICES

191

O f course, the real point in the crisis produced by the lapse o f sterling was
that a further liquidation of securities was inevitable, and the duty of the
New York Stock Exchange was to remain open so that this might be accom­
plished in an orderly maimer. Additional buying power in the security market
was vitally needed to achieve this result. It was certain that no buying power
great enough to meet the emergency was to be found except in the short inter­
est, created by those who had previously sold short and who were committed
under their contracts to repurchase. This short interest o f 4.241,000 shares on
September 18, was at least mobilized and effective. In the opinion o f the com­
mittee, a sudden ban on short selling would be likely to force covering by those
who were short, thus steadying the market temporarily until the immediate
shock o f the London news could be dissipated. W hile this emergency method
involved serious drawbacks concerning which I will speak in a moment, in the
light o f the extraordinary circumstances surrounding the market, it seemed
to be the least dangerous and most salutary measure to pursue.
The result completely confirmed the decision of the governing committee.
Share prices rallied during Monday, September 21, and Tuesday. September 22.
The volume of trading expanded, and all those who had securities and wished
to sell them, had an ample opportunity to do so. Time was also afforded the
great security markets o f Europe, and especially the London Stock Exchange,
to adopt suitable emergency measures and to reopen.
The ban on short selling immediately created a new problem. Within two
hours after short selling was forbidden, the governing committee found there
was a real danger of technical corners and of crazy and dangerous price ad­
vances. At one time there were accumulated orders to buy approximately
8,000 shares of General Motors stock at the market. No stock was offered for
sale within many points of 30%* which was the last preceding sale and the
highest price that the stock reached at any time during this period. Some­
thing had to be done immediately or otherwise the buyers would have bid
frantically for the stock and a rapid and entirely unwarranted advance would
have taken place. An example of what I mean occurred in Reading Co. stock,
which opened at 48%, advanced to a high o f 75, and subsequently declined to
62. Similar situations existed in leading and active share issues such as
United States Steel, American Can, and others, in order to avoid such wild
fluctuations which would have disturbed and disorganized the market, the business-conduct committee was authorized to permit a limited amount o f short
selling. A ll such short sales were made, however, under close supervision o f
the governors o f the exchange when it was necessary to prevent violent price
changes. These facts prove that a complete prohibition o f short selling could
not be enforced for even two hours without creating an unnatural and danger­
ous market.
»
The temporary stabilization of stock prices produced by banning short sales
almost immediately resulted in a flood o f most enthusiastic letters from those
who had always condemned short selling. Indeed, the stock exchange authori­
ties, i f they had lost their senses, might have courted great popularity by con*
tinning the ban on short selling which would have proved as brief as it doubt­
less would have been intense. We knew perfectly well that the more cheerful
appearance in the market was wholly artificial, that it was not the glow o f
natural health but the flush o f artificial stimulation. Under this temporarily
pleasant surface, the real facts were far from reassuring. The emergency
action o f the exchange had stimulated buying power in the market by inducing
the short interest to cover. The market was therefore running on its final
resources. At the close o f business Monday, September 21, the total short
interest had decreased by the large amount o f 544,000 shares. By the end o f
business the following day, Tuesday, the 22d, while short selling was still
forbidden, it had fallen a further 535,000 shares. Obviously this rapid exhaus­
tion o f the final available and dependable buying power in the market could
not continue. Buyers o f securities were still unwilling to purchase as much
as o u t r ig h t and margin sellers were offering. The inevitable liquidation had
been steadied, but it had not been halted. By the morning o f September 23
the governing committee was informed that the London Stock Exchange had
reopened. The action o f our own market on September 21 and 22 seemed
to indicate that the shock o f crisis had been absorbed and that normal trading
conditions could be resumed. Furthermore, the governing committee was con­
stantly concerned by the rapid exhaustion o f the short interest, and, for all




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STOCK EXCHANGE PRACTICES

these reasons, the restriction on short selling was removed before the opening
o f the market on September 23.
The action of the market on the first day when short selling was again per­
mitted was most interesting. Prices advanced; there was real activity, and
most significant of all, the short interest decreased by an additional 233,000
shares.
On September 24 the market suddenly became very weak. This was un­
doubtedly due to the wild fluctuations in foreign exchange. The English
pound varied so rapidly in value that the London Stock Exchange adopted
stringent restrictions on trading. The fall in security prices was once again
blamed on short selling, but the fact that the short interest increased on Sep­
tember 24 by only 20,000 shares clearly proves that this argument was
unsound.
From September 24 to October 5 we had declining markets. Prices receded
tremendously, and the fact that short selling was permitted during this period
brought a great deal o f criticism on the exchange. But short selling did not
cause this decline in prices. The total short position at the close o f business
on October 5 was 2,612,000 shares, so that there had been a further decrease
in the short position between September 24 and October 5 o f 337,000 shares.
What then is the real significance of this unprecedented two days’ suspen­
sion of short selling which the stock exchange imposed? Plainly that it w as
an emergency measure, taken in a great crisis. The definite figures concerning
the short interest which I have already quoted to you prove the enormous
significance o f the short sale in cushioning falling prices. Without such a
short interest on September 21, the New York Stock Exchange might have been
forced to close its doors. I f the suspension of short selling had been continued
so that the short interest had become exhausted, the same result might have
been inevitable. The New York Stock Exchange provides a market-place, in
which security prices are made by all the buyers and all the sellers in the
country. If the holders of securities insist upon selling them in the absence
o f sufficient buying power, prices must decline until buyers are attracted. T h is
is the law o f supply and demand, and there is no escaping it. The attitude
taken by the New York Stock Exchange, I feel, has been in thorough accord
with its own announced principles, and with those fixed economic laws which
all business must always obey. The stock exchange in its policy has not yielded
to emotional psychology. What it did was to meet a most grave situation by
an appropriate emergency measure.
During this whole period, no small part o f the burden of maintaining the
financial stability o f the world fell upon the New York Stock Exchange. I
believe that by staying open and maintaining a market for securities, the New
York Stock Exchange behaved as the greatest organized market in the greatest
creditor nation of the world should behave in a time of crisis.
Nobody can discuss the question of short selling without also considering the
practice which is commonly described as “ bear raiding
In the public mind
the two are often linked together and the evils o f “ bear raiding ” are attributed
to short selling. If a person sells stock, not because he believes the stock is
too high, but because he believes that by selling quickly and in great volum e
lie can force the price to decline, he is abusing the legitimate practice o f short
gelling. Contrary to what many people believe, the exchange has always op­
posed “ bear raiding ” . Its constitution specificially provides that any member
who sells securities for the purpose o f demoraziling the market may be sus­
pended or expelled.
In recent months we have all heard a great deal about “ bear raiding **. J
would like to ask just what proof there is—not blind prejudice, not vague
assertions, but actual proof and evidence—that “ bear raiding ” has taken place
in the stock market The New York Stock Exchange has for many months
been investigating this whole subject. It may well be that actually w e have
investigated it too much rather than too little. We have particularly looked
into all sales o f shares in big blocks—the supposed method whereby it is
alleged that “ big operators smash prices.” Out of some 50 or 60 cases ot
this sort recently, we have found only one that was a short sale, and it w as
an order to sell on a scale up, in every way a legitimate short sale w ith a
stabilizing effect on prices, and in no way aimed at, or resulting in, a demor­
alization of the market. I f we have had no occasion to take definite action
under our rule, despite the many investigations o f suspicious looking cases, it




STOCK EXCHANGE PRACTICES

193

has been because we have found real liquidation ratlior tlian “bear raiding ”
was responsible for declining prices.
One other point on this subject. Our records show that at the close o f the
market on September 21, the total short interest of 3,697,000 shares comprised
the commitments o f 9,369 separate accounts. The analysis of these reports
has failed to disclose any single individual or group o f individuals who might
be said to be dominant factors on the short side o f the market. On the con­
trary, these accounts were short, on the average, only about 400 shares each,
and I do not hesitate to say that the transactions o f the vast majority of these
people could not by any stretch o f the imagination be called “ bear raiding.”
In conclusion, let me mention we have required that all brokers, before
executing any selling orders, must know whether these are for long or short
account. The purpose o f this rule was not, as some believe, to prevent short
selling. It was to make the brokers, who under our Constitution are responsi­
ble fo r the way in which they execute orders, realize the nature o f the sales
intrusted to them for execution. It also allows the committee on business
conduct to determine instantly whether any sales seeming to have a demoraliz­
ing effect upon the market are short sales or actual liquidation. As I have
said, the exchange is absolutely opposed to “ bear raiding ” and has used and
will continue to use all o f its power to stop this practice and to discover and
punish “ bear raiders.”
It is, o f course, a fair question to ask, i f short selling is a necessary and
beneficial practice, why there is such vociferous objection to it. W e all recog­
nize, I am sure, that it is a fundamental tendency of human nature, when
severe trials and difficulties arise, to throw logic and reason to the winds, and
to indulge in emotional outbursts. I do not believe that clear thinking Ameri­
can citizens will commit any such folly and I am sure that they will not refuse
to accept or fail to comprehend the fundamental facts in regard to short
gglHng or any other important problem.
I only wish that our problems in the stock exchange were really as simple
as many believe and that our governing committee could halt declining prices
simply by abolishing short sales. I f we have refused to take such action, i f
we continue to declare that such a step is perilous, it is because we feel
we must speak the truth and do our duty to the whole community.
Stock market prices, as a discerning editorial writer recently expressed it,
are not prosperity itself, but simply an index to it. The stock market reflects
business conditions. It is not their cause. It is wrong to say that a ban on
short selling could halt our business depression. When economic equilibrium
in the world’s affairs is again reestablished— and make no mistake, gentlemen,
it will be—liquidation of securities will stop, buyers will regain confidence, and
prices will rise. The prohibition o f short sellng would delay and can not
ths process. Neither our governmental authorities by means o f legisla­
tion, nor the New York Stock Exchange by means of its regulations, can by any
magic stroke perform economic miracles.
The policies o f the New York Stock Exchange have resulted from a centuryold experience with the American security business, from familiarity with
the even longer experience o f the older yet similar stock exchanges o f Europe,
from close and intimate contacts with the realities o f the market-place, and
from an immediate knowledge of the vital facts and circumstances surround­
ing its daily problems. It is o f course always easy for those without respon­
sibility to urge hasty actions upon those who are charged with it. The New
York Stock Exchange has been fully aware o f its serious responsibilities
through the recent critical years. The maintenance o f an open market during
this period has required and still requires, not only detailed knowledge of the
facts and judgment founded upon experience, but also courage to do those
thinga which are right, regardless o f how unpopular they may be for the time
being. As long as the New York Stock Exchange remains responsible in this
way, it wiU not be deflected from maintaining sound and necessary policies.
Knowing the real facts concerning short selling, the stock exchange must
continue in the only course which is compatible with courage, conscience, and
faith in the future o f this country.




1 94

STOCK EXCHANGE PRACTICES
E x h ib it N o . I d
SHOET

SHILLING

A.ND LIQ U ID A T IO N

Address delivered by Richard Whitney, president New York Stock Exchange,
before the Syracuse Chamber o f Commerce, Syracuse, N. Y., and over the
nation-wide network of the Columbia Broadcasting System (In c.), December
15, 1931
Gentlemen, it is, I assure you, both a privilege and a pleasure to address
the members and guests o f the Syracuse Chamber o f Commerce. I have
entitled my remarks “ Short selling and liquidation,” and, although this topic
has been greatly discussed in recent months, I make no apology for speaking
again about it, because o f its great importance. Some weeks ago in Hartford
I devoted all my remarks to short selling and discussed particularly the very
dramatic demonstration which the English crisis gave o f the necessity o f short
selling and its usefulness in stabilizing prices in the face o f unexpected devel­
opments. To-night I will discuss some of the more recent facts and statistics
in regard to this subject, but I also wish to touch upon some of the real reasons
for the low prices which now exist in the stock market.
I can not help feeling that the criticism which has been leveled at short
gAiiing has been due, in large measure, to the desire of the public to find some
simple explanation for the tremendous declines which have taken place in the
prices o f stocks. I am firmly convinced that the real explanation lies in the
world-wide disturbance of our business and credit conditions. It is not any
single factor, like short selling, but the combination o f many more important
and basic factors which has brought about the result.
The exchange for many years has taken the position that short selling is &
necessary part o f an open market for securities. W e have always said that
in a crisis buying by short sellers would serve to maintain an orderly market.
These statements were not based merely on theory. They were the result o f
the practical experience o f the exchange during the last hundred years and
they were supported by the experience of the older market places o f Europe.
During the last year, when short selling was attacked so violently, the ex­
change, in order to have the fullest possible information on the merits o f the
question, required its members to report their actual short positions at differ­
ent periods. From May 25 o f this year to September 21 these reports w ere
made on approximately a weekly basis. Since then the reports have been
made daily. In my address at Hartford, I gave some of the statistics w hich
were derived from these reports. The exchange since that date has prepared
detailed figures in regard to the short positions, including not only the totals
for each day, but also separate totals for each stock. A study o f these
statistics is so illuminating that the exchange has decided to make them public,
and they will shortly be furnished to the press. I warn you that the figures
are voluminous and will prove o f more interest to statisticians than to the
average person. Nevertheless, we shall publish these facts as the best p ro o f o f
the necessity o f short selling and the best refutation o f the charges against it.
I can not in a speech give you many of these detailed figures. You m ay be
interested, however, in knowing that on November 24 the total short position
was 3,584,161 shares or slightly more than 2,000,000 shares below the peak
figure which was reached in the spring of this year. On the same date the
number o f separate accounts having short commitments was 12,254, so thajon the average each of these accounts was short less than 300 shares.
I f it is true, as so many critics have asserted, that short selling smashes
prices then certainly one would expect the stocks with the largest short interest
to show the widest fluctuations and the greatest declines. The figures prove
that this assumption is entirely false. Altogether there were only 15 stocks
which at any time since May 25 have had an individual short interest o f
over 100,000 shares. Of these 15 issues, only 2 had a short interest which was
consistently in excess o f 100,000 shares each and only 6 have always had a
short interest o f more than 50,000 shares each. These 15 stocks, curiously
enough, are the very ones which everybody will admit have had the steadiest
market and the narrowest price fluctuations. The greatest short interest in
any single stock at any time was 406,000 shares in General Motors. This figure
may seem very large but you must remember that General Motors has 43,500 000’
shares of common stock and, therefore, the short interest was actually less
than 1 per cent of the total capital of the company. I f you examine the price
fluctuations of General Motors you will find that in the whole course o f the
year 1931 its high price was 48 and its low price slightly above 22. T h is is



STOCK EXCHANGE PRACTICES

195

a depreciation o f a little more than 50 per cent. There are many other stocks,
as we all know only too well, that show a greater percentage o f depreciation.
Furthermore, the market action o f General Motors has been consistently
steady. Great quantities o f the stock have been bought and sold and yet it has
normally moved by small degrees either upward or downward. It is hard
to believe, in view o f these facts and figures, that the critics o f short selling are
justified in saying that this practice smashes prices.
Let us look now on the other side o f the picture and observe the issues
which have had a very small short interest or no short interest at all. Out o f
the 15 stocks which have experienced the greatest decline in percentage o f
value since May 25, none had any sizable short interest at any time, while
four never had an individual maximum short interest of more than 100 shares
and all of them at times had no short interest whatever. Incidentally, out o f
the 15, three were preferred stocks. Of the 15 stocks that, in the same period,
showed the greatest decline in point of dollars per share, only 3 had any
considerable short interest at any tim e; 5 never had a short interest of over
100 shares, and 11 at different times had no short interest whatever. Of these
15 stocks, 8 were preferred issues.
The statistics I have referred to show the total short position existing at
the end o f each business day. Some critics have pointed out that the size of
the overnight short position does not reflect the short sales made and covered
the same day. This is, o f course, quite true, and it is a perfectly legitimate
criticism of our figures. But it is no proof at all that enormous daily “ inand-out ” short transactions have been responsible for smashing stock prices.
Since September 26 the stock exchange has compiled the total number o f shares
which have been sold short and covered the same day. At their maximum,
these “ in-and-out” short sales have never exceeded 10.41 per cent o f the total
daily sales on the exchange. For the period from September 26 to November
30 they averaged 4.75 per cent. I know these figures will seem surprisingly
small to those who have read repeated statements about the destructive activities
of professional traders. The truth, however, is often stranger than fiction.
There is still another factor which should be considered iii interpreting our
figures. It is entirely possible for one short seller to sell short on Monday
and to cover on Tuesday by purchasing from a new short seller. In this
case, the short commitment o f the first man would be replaced by the new short
sale o f the second man and in consequence the figures fo r the short interest
would not change. On the other hand such a sale would not be reflected in the
compilation o f the “ in-and-out ” daily short selling. Just how extensive short
sales o f this sort have been no one can state with accuracy, and unfortunately
it would take an enormous amount o f work to analyze the millions o f separate
stock-market transactions which occur even in a dull market. However, in
testing the influence o f this factor on prices, let us remember that the cover­
ing purchase by the first short seller neutralizes the new short sale, and prices,
therefore, are not influenced by these transactions.
Finally, I will cite an instance o f how people have been misled by the cir­
culation o f unjustified guesses in regard to short selling. A financial writer
on a metropolitan journal, alluding to the market o f October 28, declared:
“ Yet, in responsible quarters it was stated that several stocks had been under
heavy short pressure. A canvass of specialists, so I was told, revealed that
approximately 80 per cent of the selling in North American was for short
account; 60 per cent o f Consolidated Gas; 75 per cent o f the United Corpora­
tion ; 80 per cent of United States Steel, and 70 per cent o f General Electric.’*
This article was promptly brought to my attention and to test the accuracy
of this very definite statement I had a special investigation made o f the
short sales in these stocks. Treating all the “ in-and-out” transactions as
short sales and adding to them the actual increase in the short position on
the day in question, I found that the short sales o f United States Steel had
amounted to 24 per cent as against the imaginary 80 per cent, o f General
Electric to IT per cent as against the supposed 70 per cent, o f Consolidated
Gas to 10 per cent as against 60 per cent, o f North American to 7% per cent
as against 80 per cent, and of United Corporation to only 2% per cent as
against the highly imaginative 75 per cent. This is a good illustration o f the
false statements and exaggerated rumors so frequently circulated concerning
short selling. Misinformation of this sort has been been used, consciously or
unconsciously, to build up a prejudice against short selling and has also been
the basis o f hasty and unsound conclusions about this subject.



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STOCK EXCHANGE PRACTICES

I do not wish to appear cynical, but it seems to me very doubtful i f even the
most complete statistics will ever convince those who do not wish to be con­
vinced. There is an old saying that you can lead a horse to water but you
can not make him drink. It is always easy for people to invent imaginary
statistics as in the case cited above, and to assert that the actual figures are
meaningless when they do not support the writer’s preconceived ideas. The
statistics I have cited, both to-night and on previous occasions, should prove
to all fair-minded people who wish to know the truth that short selling is not
a destructive force, but a vitally necessary part of a security market.
In recent months many statements have been made to the effect that the
lending o f stocks by brokers was unfair. It has been asserted that this prac­
tice has made short selling possible and that there was no justification fo r a
broker using the stock which had been purchased by margin customers fo r the
purpose o f assisting the short sellers who are speculating fo r a decline in
prices. In fact it has sometimes been said that this practice was illegal and
that brokers had no right to lend stocks without their customers’ consent. This
last statement is true and brokers do not lend the stocks belonging to margin
customers without permission. It is also true that brokers have not an un­
limited right to pledge their customers’ securities and, therefore, brokers secure
an agreement from their customers that the stocks purchased on margin may
either be loaned or pledged.
You may well ask why brokers seek the right to lend their customers’ securi­
ties. In order to answer this question I must first explain how securities are
loaned. Very few people apparently realize that when a broker lends stock
he receives as security for the loan the market value o f the stock in cash. In
the last analysis, therefore, the lending o f stocks has the same effect as bor­
r o w i n g money against collateral security. When a man buys stock on margin
he borrows part of the purchase price and secures his loan by pledging the
stocks he has purchased. When a man borrows stocks, he secures the loan by
depositing the money value o f the stocks borrowed. In both cases the lender
insists that the security be maintained at an adequate value. I f you borrow
money and pledge stocks as security and the stocks decline in value, the lender
will require you to put up additional collateral. I f you borrow stocks and
they appreciate in value, the lender of the stocks will require you to deposit
more money. The lending o f stocks is a method by which brokers finance
their customers’ commitments and the pledging of stocks is another method
o f accomplishing the same result. Both methods are equally fair and I,
personally, can see no reason why the right to lend stocks against a deposit o f
money should be restricted i f the pledging o f stocks against a loan o f m oney
is permitted.
The critics of the lending of stocks do not, however, consider this aspect o f
the matter, because their real intent and purpose is to prevent short selling.
They suggest that the lending o f stocks be forbidden, not because it is an
evil practice in and o f itself, but because they believe that by restricting the
lending of stocks they can stop short selling. As I have said above, the
exchange Is firmly convinced that short selling is a necessary part o f a
security market, and, therefore, it opposes any restriction upon the lending
o f stocks, because it recognizes that the proponents o f such regulations are
attempting to do indirectly what they would not do directly. I f the exchange
is wrong and if short selling is an evil, then it should be prohibited. I f w e
are right and short selling is both necessary and useful, then let us fa ce the
problem frankly and not attempt to restrict short selling by indirect and
devious ways.
I am aware that many persons who are not familiar with the m ethods
o f Wall Street seem to believe that the lending of stocks is a simple m atter
by which short sellers can, almost without difficulty or expense, borrow the
securities that they have sold short. Many persons have said it was
that margin purchasers in 1928 and 1929 had to pay high interest rates on
the money which they borrowed to buy stocks, while now, the short sellers
seem to escape scot-free. Statements of this kind show a lack o f knowledge
of what actually takes place when stocks are borrowed. I have ju st said
that the market price of the securities must be deposited with the lender at
the time a loan o f stock is made. In normal times the money thus deposited
bears interest at the current rate for call funds so that, in effect, the lending
o f stocks and the lending o f money are on an exactly equal basis. W hen,
however, there is an excessive demand for the loan o f stocks the persons who
lend them demand additional compensation for the loan just the way the



STOCK EXCHANGE PRACTICES

197

lenders o f money ask a higher rate of interest when funds are scarce. In
the case o f stocks, the first method of increasing the burdeu on the borrower
is to diminish the rate o f interest or to cease paying interest on the money
which has been deposited as security for the loan. If no interest Is paid, the
gtocks are said to lend “ flat.” I f this method o f penalizing the borrower o f
stocks is not sufficient, the lender requires, in addition, the payment of a daily
premium. This premium, as a matter of convenience, is figured in terms of
a fraction o f a dollar per share, but its effect is exactly the same as an in­
crease in interest rate on the loan of money. It may be unfortunate that the
practical method o f handling these charges for the lending of stocks differs
from the way interest is computed on loans of money, bee:tuse the public does
not seem to realize what a great burden a seemingly small premium imposes
upon the borrower o f stocks. Lot me illustrate this point by an example.
Suppose you were borrowing 100 shares o f stock winch was selling at 75;
you would have to deposit with the lender $7,500. I f the premium on this
stock was quoted at one-sixteenth and you continued this loan for 30 days you
would have to pay a premium of $187.50. That is equivalent to 30 per cent
per annum on the money value o f the stock which you borrowed. To-day,
many stocks are lending at a premium which amounts to much more than the
highest rate o f interest ever charged in recent years for loans o f money.
The short seller, therefore, who borrows stock does not escape scot-free. He
sometimes pays a very high price for the privilege of going short o f the market.
It is this very charge on the lending o f securities which ultimately may
control the volume o f short selling, just the way the interest rate for money
loans ultimately controls the volume of margin purchases. The effect o f
interest rates and premiums is not, o f course, immediate. W e saw that
demonstrated very clearly in 1929 when, in the face of very higli-interest
rates, people were still willing to borrow money to buy stocks. In fact at
that time some people even went so fa r as to assert the interest rate had lost
its ability to control the market, and yet before the end of the year the con­
stant pressure of high-interest rates helped to bring about a vast liquidation.
In like manner, I am confident that when substantial premiums are charged
by the lenders o f stock the volume o f short selling will necessarily decline.
The premiums on stocks, like the interest rates on money, are governed by
the law o f supply and demand. Excessive borrowings o f stock will result
in higher and higher premiums, just the way excessive borrowings o f money
will result in higher and higher interest rates. Let me repeat that the funda­
mental economic law o f supply and demand will ultimately cure any unsound
tendencies. The sound relation between speculation for declining prices and
speculation for advancing prices will only come about if the law of supply and
demand is permitted to work freely and naturally. If we attempt to interfere
and to impose artificial restrictions upon either the purchaser or seller o f
securities we are bound to create an abnormal and unnatural market which
will ultimately bring about worse evils than those we seek to cure.
The facts and statistics I have cited show that short selling has not smashed
prices on the stock exchange. What then has brought about the drastic decline
of security prices which has taken place in the last two years? W e ail know
we are in the midst o f a business depression more severe than any within the
metnory o f man, and yet we do not seem to understand why security prices have
fallen so low. I think this is due to the fact that the average man forgets
very quickly the tremendous economic events which have occurred in the last
two years.
Starting with the recession of business activity in 1929 and consequent unem­
ployment, we have successively seen a more and more rapid falling off of
business. At the same time, conditions in many nations of the world have been
chaotic. W e all know what has been taking place in Russia. The breakdown
of reparations payments by Germany, and the resulting moratorium, has affected
not only this country but many o f our former allies. England and several
other European countries have gone off the gold standard. South American
nations, with few exceptions, have defaulted in the payment o f interest upon
their external obligations which are held throughout this country and Europe.
The machinery o f government in Australia lias been on the verge o f collapse.
There have been revolutions in Spain, serious disturbances in India, and the
possibility o f a great war in China. Each one o f these factors would have been
sufficient to disturb confidence in the value o f securities. Taken collectively,
their force was irresistible.




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STOCK EXCHANGE PRACTICES

The security market has only reflected world conditions and yet there is con­
fusion and misunderstanding, one reason, perhaps, being that it has reacted
more quickly to the depression than other lines o f business or industry. B y its
very nature, a security market must reflect existing conditions more rapidly
than business which is often carried along for considerable periods o f time by
inertia. Existing contracts also tend to keep business in operation, even after
it is clear that additional orders will not be forthcoming. With securities, how­
ever, the effect o f a business disturbance is immediate and liquidation takes
place much more rapidly than in other lines. Let me remind you that brokers*
loans at the highest point in 1929 were almost exactly $8,500,000,000. On the
1st o f December o f this year they were only about $730,000,000. This indicates
a shrinkage o f more than 91 per cent and gives some idea o f how drastically the
stock market has been liquidated. When you consider that this decline in the
amount o f brokers’ loans has necessitated the selling o f long stocks it is little
wonder that prices have fallen to their present low levels. It is not short sell­
ing, but liquidation which has been responsible for the decline in security prices.
In this connection let me point out what a small part short selling has actually
played in the stock market. Since May 25, when the exchange first commenced
to collect regular statistics in regard to the short interest, down to November
30 o f this year, the total short position actually declined by about 1,850,000
shares. Yet in this same period the total number o f transactions on the ex­
change amounted to 264,300,000 shares. Assuming that the daily “ in-and-out ”
transactions o f short sellers should be computed at 5 per cent, which is more
than it has averaged during the last two months, this type o f trading could not
account for more than 13,200,000 shares. There would then remain 251,000,000
shares, or 95 per cent o f the total sales unaccounted for, with no allowance fo r
the shrinkage which actually took place in the short interest. In other words,
during a period o f steadily declining prices, short selling amounted to less than
5 per cent o f the securities sold. To say that this 5 per cent was the cause o f
the decline is to ignore entirely the effect o f the 95 per cent which represented
the sale o f securities owned outright or held on margin.
The unwillingness on the part o f the public to buy securities has been the
real trouble with our market and the cause o f declining prices. That there
were no willing buyers is easily explained by prevailing business conditions.
I do not doubt that many o f you have said to yourselves in recent times that
such and such a stock looked cheap or that it was selling at an absurd p rice
and yet you hesitated to buy. This was because you were not sure that the
worst was over and you still expected that the next day might bring fo r t h
bad news. Confidence is bound to return, and when it does, prices w ill rise.
I feel that the basic causes o f the depression have been intelligently studied
and that in all quarters of the world responsible people are working tow ards
constructive ends. I have no doubt o f their ultimate success, and I have su­
preme confidence in the future o f our own country and its great business an d
industrial organizations.
In conclusion, let me repeat that the exchange is a market place. I t does
not make prices nor should it be a party to any arrangement or scheme to
affect prices. I f a market place for securities is to fulfill its function in th e
economic order o f things, it must fairly and honestly permit the forces o f
supply and demand to determine prices. The exchange, as an institution
must be impartial. I t can not for expediency or convenience assist prices to
rise when they are low or depress prices when they are high. W e are all anxious
to see prices rise; to see business become normal and prosperity return, but i f
the officials o f the exchange allow their personal wishes to influence th e ir
judgment they will be false to their trust. It is because, the exchange knows
that short selling is an essential part o f a market fo r securities that it defends
the practice and stands firmly against the restriction or impairment o f it
directly or indirectly. This is not a hasty nor an arbitrary conclusion, but
is based upon the exchange’s long experience and upon the definite facts an d
statistics which our recent investigations have produced. In the light o f th is
knowledge our duty is plain and we must oppose attempts to cure present con ­
ditions by unsound means. In so far as the exchange is concerned, the defense
o f short selling is not a matter o f opinion, it is a matter of principle.

Mr. G r a y . D o you mean to say that on September 21 or Sep­
tember 2 2 when snort selling was banned there was an unusual and
dangerous market?




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199

Mr. W h i t n e y . There was at times in specific stocks, and in others
that I have mentioned.
Mr. G r a y . I s there anything else that you want to introduce be­
fore I go further?
Mr. W h i t n e y . Nothing that occurs to me at this time.
Mr. G r a y . All right.Your answer to me is that you do include in
and out short sales of the day in your statement on short selling.
Mr. W h i t n e y . No, sir. Or do you mean that the exchange would
have to close?
Mr. G r a y . Yes, sir.
Mr. W h i t n e y . I have certainly included it here; yes, sir.
Mr. G r a y . Do you include also in your suggestion sales against
the box, that they are necessary or the exchange would have to
close?
Mr. W h i t n e y . As to sales against the* box I have stated frequently
that in my opinion they do not constitute short sales on the exchange,
but they are exactly the same as liquidation of stock.
Mr. G r a y . In other words, your answer is that you did not in­
clude that part in your statement, that short sales are necessary or
the exchange would have to close.
Mr. W h i t n e y . I naturally did not, because they are not included,
either to my mind or that or the governors of the exchange, as short
sales.
Senator G ore. Let me ask a question right there, Mr. Gray.
Mr. G r a y . Certainly.
The C h a i r m a n . G o ahead, Senator Gore.
Senator G ore. Mr. Whitney, are sales against the box in any re­
spect analogous to the action of a dealer in cotton and wheat when
he buys spot cotton or cash wheat? He sells short or holds a hedge
against it. Does that apply at all in regard to selling against the
box, where the man has the stock that he holds as a long pull, but
sells short in order to protect himself against a decline or a loss
resulting from a fall in price?
Mr. W h i t n e y . I think, Senator Gore, that very likely it might be
somewhat analogous with reference to the commodity markets, where
a miller or a manufacturer has bought spot cotton or wheat, and
he may very likely hedge that and does in the market, and also in
anticipation o f sales that he has already made for future delivery o f
his finished product. The whole question is one that involves the
safety of those buying commodities for their processing into finished
products.
Senator G ore. Well, now, when a man sells against the box the
reason you do not call that short selling is due to the fact that he
does not have to buy the stock in.
Mr. W h i t n e y . Absolutely; he does not have to buy the stock back
at any time if he does not care care to, and at any "time may make
delivery.
.
Senator G ore. He may deliver on his sale what he has in his box.
Mr. W h i t n e y . Right.
Senator G ore. All right.
The C h a i r m a n . You may continue, Mr. Gray.
Mr. G r a y . Mr. Whitney, I gathered from your testimony the
other day that one of the most important things that the members
of the stock exchange have to consider is o f course the amount of



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STOCK EXCHANGE PRACTICES

money that they can make from the conduct of their business, and
that anything which, if prohibited, would restrict the operations o f
the market, such as short selling and the lending of securities, has
to be permitted in order that the proper volume of business may be
done and brokers’ earnings may be maintained, even though the
public may suffer. Is that your view ?
Mr. W h i t n e y . That is not m y view, and it is not true.
Mr. G r a y . Y ou did say, however, didn’t you, that short selling
and lending of securities were very important factors in a broker’s
business? And didn’t you intimate that without the existence o f
these things brokers could not carry on?
Mr. W h i t n e y . I stated that the lending of securities was a neces­
sity for the conduct of the business of the stock exchange. I did
not imply or state that it was profitable and therefore in any way
necessary to brokers in what they receive from such lending of stocks.
I also pointed out, if I remember correctly, that the Tending o f
stocks was a necessity in the conduct of the market entirely separate
and distinct from its necessity with regard to short selling, as apply­
ing to many other actions bv persons m the market, either investors
or speculators, away from the city of New York.
Mr. G r a y . In order that there might be delivery made in compli­
ance with your rules, you mean.
Mr. W h i t n e y . In order that the market might be maintained for
all of the citizens of the United States; yes.
Mr. G r a y . In connection with the lending of stocks that we dis­
cussed the other day, and I want to avoid repetition as much as
possible, the exchange’s requirements that particular authority must
be given by the customer to the broker in order that the broker may
lend the customers’ stocks which he has in his possession, and which
went into effect on April 1 , do you recall that?
Mr. W h i t n e y . The requirement that the customer must sign or
that it is necessary for the broker to have the customer’s acquiescence
and permission to loan stocks before the broker could lend them, that
did go into effect on April 1 .
Mr. G r a y . I think you indicated to me that there was no com­
pulsion used to compel customers, particularly marginal customers,
to sign that authority.
Mr. W h i t n e y . Y ou showed me two letters from a firm to their
customers, and I could not say from those particular letters whether
compulsion was used. I made no statement, nor do I remember
anv question being put by you as to compulsion in general.
M r . G r a y . Well, has it been used?
Mr. W h i t n e y . Not that I know of.
Mr. G r a y . Y ou are on the business conduct committee?
Mr. W h i t n e y . I am not.
Mr. G r a y . Y ou are not on the business conduct committee o f t h e
New York Stock Exchange?
Mr. W h i t n e y . No, sir. But I have been.
Mr. G r a y . You have been on it?
Mr. W h i t n e y . Yes.
Senator C o u z e n s . Who composes the business conduct committee
o f the New York Stock Exchange now?




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201

Mr. W h i t n e y . It consists of the chairman, Mr. Lindley; the vice
president of the exchange, Mr. H. G. S. Noble, who is an ex-presiaent of the exchange; Mr. George U. Harris; Mr. E. T. H. Talmadge; Mr. Alexander B. Gale; and Mr. Martin Richmond.
Senator C o u ze n s . H o w often do they meet?
Mr. W h i t n e y . They have two regular meetings each week, and
they are very apt to meet almost daily, and the chairman, I think,
spends his entire day on business conduct committee matters.
Senator C o u z e n s . D o th ey m eet on co m p la in ts o f brokers or
citizens, or how?
Mr. W h i t n e y . More particularly on complaints where they may
be brought in by customers. They meet on any score that may come
under tneir province.
Senator C o u z e n s . But there would be no score to come under their
province unless there was complaint made, would there %
Mr. W h i t n e y . Oh, yes, sir. There are lots of things to do with
the questionnaire and the routine business that comes under their
jurisdiction.
Senator C o u z e n s . T h a t is a ll th a t I w ish to ask at th is tim e.
Mr. G r a y . Mr. Whitney, have you ever known of any complaints
to be made to the business conduct committee by the customers of any
brokers with respect to pressure of coercion brought to bear upon
them to sign this authority to lend stocks ?
Mr. W h i t n e y . Of that I am not positive. I have had letters from
individuals, and very, very few only, statins that they would not
sign the consent, which they had an entire right to refuse to sign.
A ir. G r a y . Have you known of any instances where the business
conduct committee’s attention has been called to the fact that when
a customer declined to sign unless he was given the profits which
might arise from the lending of stocks, that his account was practi­
cally asked to be removed from the brokerage house ?
Mr. W h i t n e y . N o , sir; I do not.
Mr. G r a y . Have you any knowledge of a complaint that was filed
with your committee by a man named Thomas A. Kenny?
Mr. W h i t n e y . N o , sir.
Mr. G r a y . You do not know, then, that in that instance Kenny
was requested to sign the form that was issued by a certain broker­
age house, that he declined to < so unless an arrangement was made
do
by which he would have an interest in the profits that were made
from the lending, and that the firm then indicated to him, or stated
to him directly, that he should remove his account, notwithstanding
the fact that it was fully margined? You do not know of that
instance ?
Mr. W h i t n e y . I do not.
Senator C o u z e n s . Would that be against the rules of the exchange,
I mean to do that?
Mr. W h i t n e y . Senator Couzens, in all sincerity I could not answer
that question unless I knew all the facts in the case, both from the
point of view of the customer and of the broker.
Senator C o u z e n s . But I asked, is there any rule of the New York
Stock Exchange that would forbid a broker doing that, assuming
that the statement is correct?
Mr. W h i t n e y . There is no formal rule, but there is absolutely the
unwritten rule that the taking of accounts by a broker is entirely



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STOCK EXCH A N GE PRACTICES

at his discretion. He is not forced to take accounts if he does not
want to. And in like measure no customer has to keep an account
with a broker if he does not want to. Those matters are entirely
between the broker and his customer.
Mr. G r a y . Mr. Whitney, amplifying your answer to- Senator
Couzens’s question, I now ask you whether or not this letter, and I
am going to read it to you, fairly states the position of the business
conduct committee of the New York Stock Exchange, or of the
managers of the stock exchange upon that point, complaint having
been made to your committee about the situation as I have outlined
it to you in my previous question and this committee having been
advised that this request was made, to remove the account, I want
to know whether a letter such as this indicates the attitude of your
committee [reading] :
Your letter of March 25, 1932, has been referred by the secretary of the
exchange to the committee on business conduct, by whom I am directed to say
that the separate authority to lend referred to in the resolutions of the govern­
ing committee of February 18, 1982, was not intended to be obtained for each
specific lending of securities but to cover the general right to lend in future,
subject to revocation by the client.
Where you are unwilling to sign such a separate authorization, there can
be no compulsion upon you that you do so. If your broker does not desire to
carry the account otherwise, your obvious course is to secure another broker
who is willing to transact your business without such authority.

Now, does that letter fairly express the attitude of the business
conduct committee toward such cases?
Mr. W h i t n e y . I think so. Naturally the business conduct com­
mittee—and I have not the full records here, but I would be de­
lighted to get it—but as I say, naturally, I presume, the business
conduct committee investigated that case from all angles so far as
lay in its power, and therefore that letter, in my opinion, is a proper
answer according to what they found in the case.
Mr. G r a y . The name of the man is Thomas A. Kenny, and the
correspondence on the subject with your business conduct committee
started by a communication addressed to the secretary on March 25,
1932. Will you be so kind, when the opportunity affords, to have
the records of that particular case examined and forward a copy o f
your investigation, and what your files show with respect thereto,
to this committee?
Mr. W h i t n e y . Yes, sir. This is just one case out of thousands
or tens of thousands, as I understand it.
Mr. G r a y . Do you mean to say that thousands or tens of thou­
sands of complaints have been made ?
Mr. W h i t n e y . N o , s i r ; o f c u s to m e r s o f th e e x c h a n g e .
Mr. G r a y . Well, of course we know there are tens of thousands
of customers of the New York Stock Exchange, and there might
have been more than one without complaint, but-----Senator G ore (interposing). Let me ask a question right there.
I suppose, Mr. Whitney, that the owner of stock in a short sale
transaction would share in the premiums.
Mr. W h i t n e y . In some cases, and in other cases, as I understand
it, no. That, again, is a matter purely and entirely of agreement
between the customer and his broker. I attempted the other
day-----Senator G ore (interposing). Is it a rule or the practice?



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203

Mr. W h i t n e y . It is not a rule of the exchange, and I do not
think it is the fixed practice. I stated the other day in order to
show one of the many difficulties in this connection that a house
might have 1 0 ,000 shares of United States Steel which they were
carrying for customers from whom they had in each case permis­
sion to loan stock. In other words, say they had 10,000 shares that
they could loan, but they were unable in the particular instance
cited by me to loan but 2,000 shares of the 1 0 ,0 0 0 . And I tried to
point out how it was impossible for that house to allocate to any
particular customer, constituting perhaps 1 0 0 in all, each with 100
shares, whatever premiums might be accruing.
Mr. G r a y . Well now, Mr. Whitney, hasn’t the stock exchange
ruled that broker and customer are in the position of principal
and agent? That is to say, the customer is the principal and the
broker is the agent.
Mr. W h i t n e y . D o y o u s a y r u le d ?
Mr. G r a y . Yes.
Mr. W h i t n e y . I think that is the way we look upon the matter;
yes.
Mr. G r a y . All right. Looking upon it in that way, isn’t it a
fact that when a broker who is the agent of his customer borrows
the customer’s stock that, in the first place, means that he saves the
interest on the money which he would otherwise have to deposit
with the lender; that is true, isn’t it ?
Mr. W h i t n e y . Only the margin involved, as I pointed out the
other day. Not the full amount, but only the margin.
Mr. G r a y . We realize that there are different classes of borrow­
ings. A man may borrow when he does not have to pay any inter­
est; one broker may borrow from another. But there are also in­
stances where he has to pay interest, isn’t there ?
Mr. W h i t n e y . That is true.
Mr. G r a y . And there is a premium involved at times, isn’t there?
Mr. W h i t n e y . At times; yes, sir.
Mr. G r a y . N o w , t h e n , w h e n a b r o k e r c a n u s e h is c u s t o m e r ’ s s t o c k
he saves t h a t p r e m iu m , d o e s n ’ t h e ?
Mr. W h i t n e y . I d o n o t q u it e u n d e r s t a n d y o u r q u e s t io n .
Mr. G r a y . Let me put it this way: When a broker loans his cus­
tomer’s stock he gets a premium.
Mr. W h i t n e y . There is a premium paid if the stock is loaning at
a premium; yes.
A ir . G r a y . Then, if the broker is the agent of the customer why
shouldn’t the principal, the customer, be entitled to get what he
earns from that transaction in the loaning by the broker of that
customer’s stock?
Mr. W h i t n e y . I have never said he was not entitled to it. I
have tried to point out the difficulties involved in that entire situation, the various legal aspects as involved in the relationship be­
tween principal and agent that you speak of, and there are many
other points that bear upon that situation. I have never stated that
the customer was not entitled to the premium.
Mr. G r a y . Let me ask you the question the other way: Then you
believe he is entitled to it?
Mr. W h i t n e y . I do perhaps in certain instances, and I do not in
others.



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STOCK EXCHANGE PRACTICES

M r . G r a y . I w ill have to fo llo w th at a lo n g w ith y o u th en . In
w h a t instances do you believe h e is and in w h a t instances d o y o u
believe he is n o t?
Mr. W h i t n e y . I think perhaps if a customer had 1 0 ,0 0 0 shares o f
American Can and there was a demand for American Can in th e
loan market and a broker went to him and said, Would you like t o

loan it?—if the customer said yes, then probably the customer and
the broker would make some agreement as to splitting the premium,
and I certainly think in that case the customer would probably be
entitled to a part of that premium. But I have just tried to state
to Senator Gore, as I stated to you at the beginning of the week,
there are grave mechanical difficulties making it impossible to allo­
cate premiums.
Mr. G r a y . Now, just a mcment, please: Every person knows, o f
course, that when a broker goes to a customer and says politely as
you have indicated—and I will say that I have never known them
to do it, but you say they do-----Mr. W h i t n e y (interposing). Well, I have known it frequently*
Mr. G r a y . You h av e?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . When the broker says, Would you like to loan your
stock? and then discusses the situation under which it is to be loaned
and makes an agreement as to the premium, then, of course, the
broker must pay it. But I am talking of instances where the broker
has this authority we have spoken of signed by the customer to loan
the customer’s stock, do you believe that that customer should have
the profits that the broker makes from that transaction ?
Mr. W h i t n e y . That is entirely dependent upon the actual situa­
tion in each and every particular case, and for that reason the stock
exchange has never entered that situation.
Mr. G r a y . Mr. Whitney, you said a little while ago that you had
never stated the customer was not entitled to the premium. I then
asked you whether or not it was your belief that he is entitled to it,
and you have endeavored to indicate that he might be in some cases
and might not be in some other cases.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . I s there any reason in the world why he should n o t
have it in every instance, because it is his agent who is making the
profit, and it is out of his property.
Mr. W h i t n e y . Mr. Gray, you are delving into legal aspects t h a t
I can not answ er. I do not Know. But I have tried to tell you just
as frankly as I am able what is involved in this lending and borrow­
ing of stocks, and the almost impossibility of allocating a premium
to the general run o f customers. I have granted that some custo­
mers receive parts or all of premiums and others do not. But i t is
the broadest kind of subject, and I have tried to explain it to you.
Mr. G r a y . Don’t you think that is a matter which the stock ex­
change through its proper committees should investigate and regu­
late?
6
Mr. W h i t n e y . I do not think the stock exchange ought to regu­
late on that subject; no.
Mr. G r a y . Is that because of the fact that the stock exchange
consists of a number of brokers, who if they were limited at all
would lose profits they would otherwise make ?



STOCK EXCHANGE PRACTICES

205

Mr. W h i t n e y . No, sir.
Mr. G r a y . It is not for that reason at all ?
Mr. W h i t n e y . Not at all.
Mr. G r a y . That never enters into the discussion when you de­
termine what regulations should be put into effect ?
Mr. W h i t n e y . No, sir; and quite to the contrary. The stock ex­
change, I expect, if I am to point out certain aspects in connection
with this subject, has done many things to the detriment of the
profit-making abilities of its members.
Mr. G r a y . Mr. Whitney, do you know of firms or members of
firms, and when I say do you know I mean has the attention of the
stock exchange ever been called to it, who have been interested in
either one side or the other of the market with respect to certain
stocks, and have advised their customers to act to the contrary?
Mr. W h i t n e y . No, sir.
Mr. G r a y . Has there ever been such an instance called to the at­
tention of the business conduct committee of the New York Stock
Exchange for the purpose of action ?
Mr. W h i t n e y . I cited one here last week, that of E. W. Wagner
& Co.; yes, sir.
Mr. G r a y . Is that the only instance you know in your experience?
Mr. W h i t n e y . I think that was the cause somewhat but not the
primary reason for their expulsion with regard to the firm of Prince
& Whitely. The firm of E. W. Wagner & Co. was expelled for that
reason primarily.
Senator G ore. I assume, Mr. Whitney, you would expel any firm
that was found guilty of it.
Mr. W h i t n e y . Yes, sir; absolutely; if they were found guilty.
Mr. G r a y . Do your members as a matter of fact generally^ follow
the policy of refraining from advising their customers with ref­
erence to such stock where they are dealing in it themselves either
on one side or the other of the market?
Mr. W h i t n e y . I did not quite get your question.
Mr. G r a y . I mean by that question that if a certain firm is heavily
long of stock would they refrain from advising their customers to
act in a way that would be contrary to their interests.
Mr. W h i t n e y . I have no knowledge on that subject at all. I f I
may change it around so as to see if I understand you?
Mr. G r a y . G o ahead.
Mr. W h i t n e y . I f a firm believes in a security and that it is
worthy of investment or speculation because of its prospects, it may
very properly in the best of faith advise its customers to purchase
that security. And there is involved the entire subject of the mer­
chandising and distributing of securities.
M r . G r a y . I will put my question a little more directly: Is it the
practice of members of the exchange where they themselves are
heavily long of stock to refrain from advising their customers to
sell?
Mr. W h i t n e y . I have no knowledge on that subject. I have no
knowledge of specific cases where firms may be heavily long of stock
as to what their advice specifically is. I f you will give me an in­
stance I will try to answer.
M r . G r a y . D o you think that would be a matter for proper regula­
tion by the stock exchange?
119852—32------ 14




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STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . I think it would be wrong for a member of the
stock exchange to advise his customer to purchase stock when lie
himself was selling it or vice versa. Does that answer your question!
Mr. G r a y . Yes; that answers it.
Mr. W h i t n e y . Absolutely.
Mr. G r a y . That being true has the stock exchange any rule g o v ­
erning that situation other than the general rule it has with respect
to unethical and improper conduct?
Mr. W h i t n e y . No; not that I know of, except of course that that
would come if discovered under the immediate jurisdiction of the
business conduct committee, and our rules are very broad as to our
powers of infliction of penalties.
Senator G o re . Mr. Whitney, since the crash of 1929 has there
sprung up a group of advisers, I mean outside the stock exchange and
outside of those who hold seats on the exchange, offering to advise
customers or persons who might deal on the exchange, for a charge
or a commission?
Mr. W h i t n e y . I think there are many so-called financial advisers,
Senator Gore, but I do not know specifically whether they have p&rticuluarly grown up since the crash. I should rather believe they
were more m evidence before that time.
Senator G ore . Perhaps more before then, yes, but I have heard it
stated that there has been an increase in the number and the activi­
ties of that group since the crash, and that they were peddling their
advice.
Mr. W h i t n e y . I believe the Deputy Attorney General of New
York State recently issued figures that he had put out of business
some 403 firms, not members of the New York Stock Exchange, dur­
ing the month of March because of their endeavors to unload ficti­
tious or fake stocks upon the public. That may be an answer to
your question.
Senator G ore. Yes.
Mr. W h i t n e y . That is, if they might be properly called a d v i s e r s .
They are certainly improper advisers.
Senator G ore. Well, people who hold themselves out as experts.
Mr. W h i t n e y . They may do so.
Senator G ore . And attempt to give advice on stocks to the public.
Mr. W h i t n e y . They may try to do that.
Sen ator G ore . T

o

lay m en , 1 suppose.

Mr. W h i t n e y . They may try to do that.
Mr. G r a y . Mr. Whitney, has your exchange a rule that a broker
may not borrow more money on his customers’ stock than he has
loaned his customers?
Mr. W h i t n e y . I h a v e r e a d t h e r u l e s t o y o u c o n t a i n i n g t h e words
4 f a i r a n d r e a s o n a b l e ,” y e s , s i r .
4
Mr. G r a y . When a broker therefore has the stock of a customer
who is a margin trader and to whom he is lending sufficient money
to carry his stock, he loans that stock and receives from the person
to whom he loans it the full present market value, isn’t that a viola­
tion of that rule?
t -^ W h it n e y . No» sir’ and 1 answered that question last Monday
1 think the only way we could properly answer that is by taking the
case of 10 0 shares, and it would apply in multiples, that if a custo­
mer had put up a margin to cover his account and purchased 1 0 0



STOCK E X C H A N G E PRACTICES

207

shares, the broker receiving permission to pledge and lend that stock
would have to borrow on that stock at the bank or borrow on it by
lending it to another broker-----Mr. G r a y (interposing). We are talking about the other broker.
Mr. W h i t n e y . All right, lend it to another broker, which is as
I think you yourself granted the other day, because the unit of trad­
ing is 100 shares, it would be impossible to expect the broker to split
that stock and only use 75 shares.
Mr. G r a y . I agree with you on that. But instead of 100 shares
suppose he had 5,000 shares of stock that was worth $100 a share
on the market ?
Mr. W h i t n e y . All right, Mr. Gray, go ahead. I am listening.
Mr. G r a y . That would be an item of $500,000 which would repre­
sent the present market value of that stock.
Mr. W h i t n e y . I f selling at par.
Mr. G r a y . I mean it was selling at $100. I do not care what the
par is.
Mr. W h i t n e y . Well, I mean that is a brokerage term.
Mr. G r a y . N o w then, the usual amount which would be required
from a substantial individual trading with his broker as a margin
on that stock would be how much? Remember, he has just pur­
chased it at $100 a share and has 5,000 shares.
Mr. W h i t n e y . Approximately $400,000.
Mr. G r a y . Do you say approximately $400,000?
Mr. W h i t n e y . Oh, do you mean on the margin?
Mr. G r a y . Yes.
Mr. W h i t n e y . It would be $100,000. I beg your pardon.
Mr. G r a y . Well now, let us say that—oh, it is a matter of 20 per
cent, isn’t it?
Mr. W h i t n e y . Yes, sir. And in that connection, Senator Couz­
ens, 1 want to refer to what I said to you the other day.
Senator C otjzens. Yes, Mr. Whitney, I was just going to remind
you of what you said the other day.
Mr. W h i t n e y . I did not tell you on last Monday because I did
not have the time.
Mr. G r a y . Let us go back to my explanation-----Senator C o u z e n s (interposing). Mr. Whitney, go ahead and ex­
plain what you were going to say on the question of percentages
required on these marginal purchases.
Mr. W h i t n e y . Yes, Senator Couzens, the other day I find by
reference to the record—and the record has been so absolutely accu­
rate that it must have been an occasion of something else being on my
mind that caused me to make the statement, and perhaps I was
thinking about 1929. The present margin agreement below which
we will not allow our brokers to go is 20 per cent. The attitude of
the committee, although no official notice was given of it, was
changed on June 1, 1931. It had been from June 13, 1929, 25 per
cent, and since April of 1929 we had made our houses have sufficient
•capital—and we consider it necesary for this to be entirely distinct
from their other working capital—to equal 30 per cent margin on
any securities they carried for their own account. But at the time
o f changing our requirement, and I wish to reiterate that this was




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STOCK EXCHANGE PRACTICES

not made public but it was a figure below which we would not allow
.
our brokers to go-----Senator C o u ze n s (interposing). Then how did brokers get advice
o n this matter if you did not make it public?
Mr. W h i t n e y . In the case of each and every questionnaire that
is brought in the accountants go over all the accounts and see that
that margin at least is adhemd to.
Senator C o u z e n s . What I asked you is, how do brokers know
about the change of margin from 25 to 20 per cent ?
Mr. W h i t n e y . They do not know, and therefore I believe that
the margin which most brokers require, or at least that many brokers
require at the present time, is still 25 per cent. There was the dis­
tinct bearing upon the decision of the committee in arriving at that
lower margin, in the fact that practically every New York lending
bank as of that time reduced its requirements on loans to but 2 0
per cent of the collateral, if listed on the New York Stock E x­
change. Therefore, in accordance with our rules, we did not think
it proper to demand of customers a greater amount of margin than
is necessary to carry that account by borrowing from a bank. I
referred to that the other day.
Senator C o u z e n s . Well, now, following up Mr. Gray’s question,
assuming for instance instead of this purchaser of 5,000 shares at
$ 1 0 0 a snare, assuming that he paid 40 per cent. He would, there­
fore, have a margin oi $300,000. May I ask if that broker would be
permitted to loan that stock and secure a $400,000 loan?
M r. W

h it n e y .

N o, sir.

Senator C o u ze n s . So that in fact he could not put up that stock
for security for any greater loan than the unpaid margin on that
stock?
Mr. W h i t n e y . That is correct.
Senator C o u z e n s . That is all.
T h e C h a ir m a n . Y ou m ay continue, M r. G ray.
Mr. G r a y . S o that when we get away from the single 100-share

lot and discuss a lot such as Senator Couzens and myself have been
asking you about, your statement is, and let me see if I understand
it, that if a $20 0 ,0 0 0 margin had been put up and the broker had
loaned to the customer $300,000 in order to complete the transaction
and make settlement, that under your rules would not permit him
to borrow more than $300,000 on tnat stock; is that correct?
Mr. W h i t n e y . I f I remember rightly, you originally used t h e
figures of $500,000.
Mr. G r a y . Yes.
Mr. W h i t n e y . I f there was a margin put up of $100,000, t h e n
in my opinion, the broker would not be entitled to use that stools
for loans with banks or lending to other brokers for more than
$400,000.
Mr. G r a y . And if he had put up a 4 0 per cent margin, not m o r e
than $300,000?
Mr. W h i t n e y . Whatever the balance of indebtedness is. May I
read again [reading]:
Does not justify the member in pledging or loaning more o f such securities—




STOCK EXCHANGE PEACTICES

209

And it refers specifically to pledging and loaning “ more of such
securities than is fair and reasonable in view of the indebtedness of
said customer to said member.”
Mr. G b a y . All right.
The C h a i r m a n . How old is th at r u le ; o r is it a new rule ?
Mr. W h i t n e y . N o, sir. I can n ot tell you w hen it was a dop ted ,
hut it has been g o in g alon g as fa r back as I can rem em ber, w hich
is some tw enty-odd years.
The C h a i r m a n . As a m atter o f fa c t, th ey do use th em to b o rrow ?
Mr. W h i t n e y . N o m ore th an is fa ir and reasonably necessary.
The C h a i r m a n . Have there not been cases in court where that
matter has been definitely proven ?
Mr. W h i t n e y . Yes, sir; we expelled that man.
Senator C otjzens. I am still at a loss to u n derstan d the necessity
for p u t tin g in those w ords “ fa ir an d reasonable.”
Mr. W h i t n e y . Just because of the 100 shares.
Senator C o u ze n s . Only on account of 100 shares ?
Mr. W h i t n e y . And fluctuations in the market, too.
Senator C o u z e n s . Yes; but I still do not understand. I f it is
specific that a broker can not borrow any more than the unpaid
margin on the stock, why the words “ fair and reasonable ” in the
rule?
Mr. W h i t n e y . T o answer that I would have to go into all the
questions relating to pledging and loaning of stocks.
Senator C o u z e n s . Well, I do not think the issue can be confused
by going into details, because it seems to me very specific as to
whether or not a broker is permitted to use stock to borrow any
more than is due and unpaid on the stock.
Mr. W h i t n e y . He certainly is not allowed to.
Senator C o u z e n s . Well, that answers the question. You do not
need to go into details.
Mr. W h i t n e y . He is n ot.
Mr. G r a y . You spoke of one case in answer to the chairman-----Mr. W h i t n e y (continuing). May I say one word more in answer
to Senator Couzens’s question?
The C h a i r m a n . Proceed.
Mr. W h i t n e y . Senator Couzens, on the questionnaires the account­
ants o f the exchange investigate that point just as thoroughly as they
investigate the carrying of accounts for less than a proper margin,
and if any such instances are found they are immediately reported
to the committee.
Senator C o u z e n s . And what does the committee then do?
Mr. W h i t n e y . It demands that that be righted at once. And I
stated to you, or tried at least to say to you, that there are conditions
of stock in transit, and one thing and another, where there may be
that momentary situation, but it is absolutely not allowed.
Senator C o u z e n s . A s to the inquiry that you make through these
questionnaires, does it develop frequently that you find that rule
violated?
Mr. W h i t n e y . I do not think so, sir. We have been particularly
stressing that rule for many, many years; both the rule as to excess
muf gin and-----The C h a i r m a n (in te r p o s in g ) . Let me ask y o u i f the rule was not
the d irect result o f action by the New York State L egislature m aking



210

STOCK EXCHANGE PRACTICES

such a practice a felony, and that when you say you emphasize the
rule it is of very little importance because there is a State la w
compelling that matter.
Mr. W h i t n e t . Yes—well, I do not want to say “ yes,” because I
have no knowledge of any stressing of that rule by reason of a law
of the State of New York. But under the laws of New York I h a v e
no knowledge that specifically the books of the members of the ex­
change are investigated in this particular direction in any m a im e r
covering the extent in detail as we do it ourselves. We see that it is
lived up to.
Mr. G r a y . N o w , Mr. Whitney-----Mr. W h i t n e y (continuing). Senator Norbeck, counsel tells m e o f
a very important point, and I think I stated it here in one o f m y
other appearances. The law of the State of New York, as I under­
stand it, says that such and such will be a felony or is a felony un­
less an agreement exists between the customer and the broker. The
stock exchange went further than the law, as is stated in this par­
ticular section, so that the broker may not do certain things in spite
of having a pledge:
An agreement between a member and a customer, authorizing the member to
pledge securities, either a loan or with other securities carried for the account
o f the customer, either for the amount due thereon or for a greater amount o p
to lend such securities, does not justify the member in pledging or loaning
more o f such securities than is fair and reasonable in view of the indebtedness
of said customer to said member.

The C h a i r m a n . The only point I was making, it was following an
enactment by the State legislature which made it a felony, and the
initiative was taken by the legislature and not by the stock exchange.
Mr. W h i t n e y . That I can not tell you. I do not know.
Mr. G r a y . N o w , Mr. Whitney, the point of the questions put to
you there is this : We have on the record now that a man who had
bought $500,000 worth of stock and had put up a margin o f 40 per
cent, thus leaving the amount which the broker had loaned $300,000; that that broker may not borrow more than $300,000 on that
customer’s stock. N o w that is settled, is it not?
Mr. W h i t n e y . I think so.
Mr. G r a y . You have also told us several times that when a b r o k e r
takes that stock of the customer it is mixed with other stock. That
is true, is it not ? In other words, if he has-----Mr. W h i t n e y (interposing). What do you mean, “ takes it and it
is mixed” ?
Mr. G r a y . He gets it through his settlement. It is delivered t o
him. It may be a matter of bookkeeping, but it is delivered to him.
Mr. W h i t n e y . When he buys that stock it is delivered to him*
yes, sir.
’
Mr. G r a y . All right. Now, he may have besides that $500,000
worth of that stock, of course, some other shares—that is true ?
Mr. W h i t n e y . He m a y .
Mr. G r a y . And when I speak of it being mixed I mean he has all
of his stock of that particular kind together. That is true, is it not?
Bight here I am going to ask you to explain “ street certificates ”
to the committee.
Mr. W h i t n e y . So I see.




STOCK EXCHANGE PRACTICES

211

Mr. G r a y . We had better get that first, so that the committee will
understand what street certificates are. What are they ?
Mr. W h i t n e y . Street certificates—the common term is used of a
certificate that on the face of it has a broker’s name who is a mem­
ber of the New York Stock Exchange.
M r. G r a y . I n other w ords, it is a certificate w h ich is con tin u ally
floating fr o m one concern to another and is used f o r th e p urp ose
o f m alnn g these various settlements— isn ’t that true?

Mr. W h i t n e y . It may be. Not necessarily. Yes; it may be.
Mr. G r a y . We will distinguish it, will we not, from a certificate
that is issued to an individual who buys a stock for investment pur­
poses and has the stock put in his name ? There is a transfer to him
and he takes a certificate when it is paid for. That is correct?
Mr. W h i t n e y . That may be so.
Mr. G r a y . Yes.
M r . W h i t n e y . T h ere are m a n y cases w here stock is ow n ed a n d fo r
one reason or another it is k e p t in th e street certificate.
Mr. G r a y . Yes; I understand that, too. But as a general thing,

the certificates that are used in the matter of the transfer or the
settling, if you please, are dealings between the various members
of the exchange on their lending and are for the most part what
they call street certificates—that is correct, is it not?
Mr. W h i t n e y . I am perfectly ready to grant it; yes.
Mr. G r a y . All right.
M r . W h i t n e y . I do n o t pretend to k n ow the w h ole situ a tio n , b u t I
am p erfe ctly ready to g ra n t it.
Mr. G r a y . Well, I think you

know as much about it—we are
oing to try to get some knowledge from you—but I think you
now as much about the stock exchange matters as any other man
that we could get here—from your side of it.
Now, therefore, to put the definition o f u street certificates ” in
a little different language, they are something that are rarely trans­
ferred on the books of the particular corporation who has issued that
stock. Thev place with a bank power of attorney and they go from
A to B and B to C and C to D without ever being transferred on
the books. That is correct, is it not?
Mr. W h i t n e y . No, sir. May I explain?
Mr. G r a y . Yes; I wish you would.
Mr. W h i t n e y . I f it is a dividend-paying stock—and perhaps
regrettably that may be a more rare animal to-day than in usual
times—it is usually transferred when it goes from one broker to
another—not perhaps usually, but often. Whereas, if it is a non­
dividend-paying stock, what you say may be very likely the majority
of cases.
Senator B u l k l e y . Transferred to what, to the new broker?

f

M r. W h i t n e y . T o the new b r o k e r ; yes, sir. S o th a t the d ivid en d
w ill com e to th e brok er w h o is h o ld in g the accou n t f o r the custom er
who is entitled to it.

Mr. G r a y . That would make it a little clearer. In other words,
the transfers are constantly from broker to broker?
Mr. W h i t n e y . In many cases; yes, sir.
M r. G r a y . T h erefore, it is rather to be presum ed th at a brok er w h o

is ca rr y in g m arginal accounts w ill have a large num ber o f such



212

STOCK EXCHANGE PRACTICES

certificates in a particu lar stock cov erin g all the d ivid en d d ealin gs
w ith h is customers o r f o r his customers— that is correct, isn’t it?

Mr. W h i t n e y . That may be; yes, sir.
Mr. G r a y . All right now, come back to another instance where you
have a man who has 5,000 shares of that stock. Do you mean to tell
me that when another brokerage house comes along and wants to
borrow from that brokerage house 5,000 shares of that particular
stock, the broker who is to lend it will not just simply just take a
5,000-share certificate out and loan it?
Mr. W h i t n e y . He will not.
Mr. G r a y . What will he do?
Mr. W h i t n e y . He will take stock out that he is entitled to loan
under the very rules that I have cited.
M r. G r a y . D o you mean to tell me th at brok er w o u ld be so c a re fu l
that he w ould take but— I th ink we were ta lk in g about 500 shares—
th at he w ould take but 300 shares o f th at p articu la r stock ou t and
loan it ?

Mr. W h i t n e y . Yes, sir. The stock exchange for a long, long time
have demanded the keeping of excess margin in separate boxes by
our brokers, excess margin of customers.
M r. G r a y . I s that stock earm arked in any w a y?

Mr. W h i t n e y . Yes, sir.
Mr. G r a y . How.
Mr. W h i t n e y . There are various methods, one of which is to put
it in an envelope with the name of the customer attached to the
certificate.
Mr. G r a y . Did you ever know of any instance where the brokerage
house simply loaned that entire stock when there was a great demand
for it on the short side?
Mr. W h i t n e y . With no relation to the short side, sir. I have
known, I believe, of cases where a house has deliberately done that,
and we expelled them.
Mr. G r a y . What supervision does your exchange keep watch over
the loaning of that stock by brokers to make sure that this rule is not
violated?
Mr. W h i t n e y . A check up of every questionnaire submitted by our
brokers, as well as additional investigations of that and other points
by our accountants at odd times throughout the year.
M r. G r a y . D o you have reports m ade to y o u m such a w a y b y th e
brokers w ith respect to these lending transactions so th a t t h e y in ­
dicate the particu lar stock that is loaned and ou t o f w hose s to ck i t is
lo a n ed ? i o d o not, d o y o u ?

Mr. W h i t n e y . Well, I have said, Mr. Gray, that the brokers keep
excess margin on one hand that may not be loaned, whereas what
they keep in the other box may be used for pledge or loaning pur­
poses, because it is entitled to be so used.
Mr. G r a y . The reports that are made to you, do not, however,
contain anything that you could check up on that situation, do they?
Mr. W h i t n e y .^ We do not have reports on that from our brokers.
We go and look into it to see that it is so, and they know the rule.
Mr. G r a y . Y ou think they abide by it?
Mr. W h i t n e y . Yes, sir; I do. I f they do not care to they are
made to.
J




STOCK EXCHANGE PRACTICES
M r. G ray. Y

ou

sa y you --------

,

Mr. W h i t n e y (interposing). May I read another article of the
Constitution?
Mr. G r a y . Let me get this one question apropos o f your answer.
D o you mean to say that when you send your accountants around
they make a physical examination of these securities so as to know
that theproper proportion of them are kept and not loaned?
Mr. W h i t n e y . Whether or not, sir, they make a physical examina­
tion of all securities—I believe they do not, of all securities held,
but-----M r . G r a y (interposing). Then what check-up do you have?
Mr. W h i t n e y . We have an absolute check-up. We have what
their books show and we have what they are borrowing and what
they are loaning and from banks and brokers.
M r . G r a y . W e l l , b u t th a t does n ot differen tiate th e p a rticu la r
custom er’s stock, does it?

Mr. W h i t n e y . The particular customer’s stock, no; but, the par­
ticular customer’s stock that may be loaned is in that category and it
is proper to loan it.
M r . G r a y . I k n ow , but y ou have g o t a custom er’s stock and under
you r rules in this illustration that w e have been using he m ay b o rro w
but $300,000. W h a t is g o in g to stop h im fr o m loa n in g th at certi­
ficate, gettin g the fu ll am ount o f the m arket valu e o f it, as is neces­
sary to be done in the m atter o f short sales and len d in g ?

Mr. W h i t n e y . The New York Stock Exchange.
Mr. G r a y . H o w do they go about stopping it? I have not seen
yet anything that you have told me that is a check-up on it. It
may be my dumbness, I do not know.
Mr. W h i t n e y . Aren’t you trying to imply and to assume some­
thing, Mr. Gray, that is greater than even the power of the Gov­
ernment or State or anybody in this world? An auditor in report­
ing to whoever it may be, Government or State, the Interstate Com­
merce Commission, certifies that he has done this and that, that he
has checked what the bank loans are and where they are or where the
cash is, taken the word of other people, and using the books of the
corporation that he is investigating he finds that they agree, and it
gives him a basis of knowing that the truth exists. That is what
we do, sir. Can we do more?
M r . G r a y . Yes. Do like a good bank examiner would do in con­
nection with the bank: Examine the securities themselves and see if
they are there. Now, you have asked me a question and I have told
you. Why not?
Mr. W h i t n e y . We do it with what is in safe-keeping.
M r. G ray. Y

Mr.

ou

d o n o t do it.

I said with what is in safe-keeping.
M r . G r a y . With what is in safe-keeping?
Mr. W h i t n e t . What is in excess margin or is in safe-keeping
which is paid for.
M r . G r a y . But you have just told me that your auditors do not
make a physical examination of these securities to determine that
they are there.
Mr. W h i t n e y . I said they make an examination of the records, of
the loans of the banks, and of the books of the firms, to see that that
W h it n e y .




214

STOCK EXCHANGE PRACTICES

w h ich is used fo r pledge o r fo r loa n in g purposes does n o t e x ceed
w h a t th ey h ave a r ig h t to len d or p ledge.
Mr. G r a y . You asked me whether or not I could suggest to you a

method by which it could be done? I have suggested it to you. I
ask you whether or not you do not think it would be the proper
thing to have your auditors make a physical examination o f those
stocks for check up purposes?
Mr. W h i t n e y . I think it would be an absolute impossibility.
M r . G r a y . Y ou d o?
Mr. W h i t n e y . May I
Mr. G r a y . You have

read—you said I m i g h t ?
said all you can tell me on that particular

subject first, have you?
Mr. W h i t n e y . No.
M r . G r a y . W e l l , y ou m a y te ll m e a n y th in g else y o u want.
Mr. W h i t n e y . Section 2 of chapter 15 of the rules of the e x c h a n g e
states:
“ Members of the exchange and firms registered thereon carrying
margin accounts for customers shall, as of the date of their a n sw e r
to each questionnaire, cause to be made a complete audit o f t h e ir
accounts and assets, including securities held for safekeeping, i n a c­
cordance with such regulations as shall be prescribed by the c o m ­
mittee on business conduct, and shall file with said committee a s ta te ­
ment to the effect that such audit has been made and whether it i s i n
accord with the answers to the questionnaire.”
I believe from what Mr. Redmond tells me, and I believe it to b e
true, that our auditors in the matter of the safe-keeping o f securities
spot check just exactly the same way as would bank examiners with
regard to stock held in safe-keeping.
Mr. G r a y . N o w , just a minute. 1 don’t know just exactly w h a t
you mean by “ spot check.” You do not mean to take back your
statement that the auditors do not make a physical examination o f
these securities, do you?
Mr. W h i t n e y . Of all these securities; I do not wish to take back
my statement.
M r . G r a y . N o.
Mr. W h i t n e y . That they spot check it I believe is true.
Mr. G r a y . By that you mean that they check it here and

there f o r
test purposes?
Mr. W h i t n e y . Exactly as d o bank examiners.
Mr. G r a y . I do not want to discuss with you whether they do or
not. I know what they ought to do.
The C h a i r m a n . Bank examiners examine a ll the assets.
Mr. G r a y . He says that they do not; that they just spot check it.
The C h a ir m a n . No ; he was referring to the auditors spot checking.
Mr. G r a y . Yes; but he said that they did exactly as the bank
examiners did, and I do not agree with him.
The C h a i r m a n . Oh, we know that is not a fact with the bank
examiners.
M r . G r a y . W e l l , I th o u g h t so.
Mr. W h i t n e y . Mr. Chairman, let

me understand you. You think
that a bank examiner looks at every single security that exists in all
the banks when they examine it?




STOCK EXCHANGE PEACTICES

215

The C h a i r m a n . They certainly do in the banks that I know any­
thing about. Otherwise the examiners would have no value. How
ca
’ A 5 11 '
they have not looked at it?
Mr. G r a y . N o w , Mr. Whitney, that brings us to the next point:
Is it not a fact that most o f the insolvencies of brokers are caused by
the fact that the securities of the customers have disappeared; that
they have gotten the money, and that the money is gone ? In other
words, that if there was a check-up on the question of their keeping
those securities so that there would be an equalizing basis, if you
please, it would prevent the numerous insolvencies of brokerage
houses and thus help the people, of course ?
Mr. W h t t n e y . That the securities held in safe keeping are gone?
Mr. G r a y . Yes.
Mr. W h i t n e y . No, sir; not that I know of.
Mr. G r a y . You do not think that that brings on any insolvencies
and you do not think that a check-up-----Mr. W h i t n e y . Why, insolvencies may be brought about for many
reasons, o f course. There are exceedingly few stock exchange mem­
bers as compared with other people in various types of financial
business.
Mr. G r a y . By the way, you have spoken of investigations from
time to time.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . After Kreuger’s suicide the short interests in Kreuger
& Toll become quite large, did they not, immediately ?
Mr. W h i t n e y . Shortly thereafter, I believe so, for a certain reason
which I will explain.
Mr. G r a y . I have no objection to your explaining it if you prefer
to do it. But aside from the reason, what I want to ask you is
whether the stock exchange made any investigation of that situation.
I do not mean that situation that brought about the failure of
Kreuger & Toll. We are not going to get into that. But I mean
the question of the short interest that developed and whether or not
you do not think that that might be just as disastrous as that terrible
panicky market that you anticipated on September 2 1 and 2 2 , and
why did you first conduct an investigation, and if you did not, why
not?
Mr. W h i t n e y . There are four or five questions there.
Mr. G r a y . There are, that is true. You answer whichever ones
you remember. Let me put it this way-----Mr. W h i t n e y (interposing). I would like to know what you want
me to answer.
Mr. G r a y . Did vou make any investigation of the short interest
of Kreuger & Toll’s that grew and grew after Kreuger’s suicide?
Mr. W h i t n e y . Specifically, how?
Mr. G r a y . In any way.
Mr. W h i t n e y . When we saw the short interest, when it really
assumed very large proportions, we did investigate to find out what
it was, and we found, if I remember rightly—that is why I am asking
Mr. Redmond for the figure—the short interest as of the opening of
March 21, including the trading days of March 18 and 19, increased
from 6 4,0 0 0 shares roughly to 268,000, and it is m y best rem em b ra n ce
that w© found 2 1 1 ,0 0 0 shares of the 268,000 were sold as a hedge for



216

STOCK EXCHANGE PRACTICES

protection against an account carried for Mr. Kreuger by a certain
firm.
Mr. G r a y . All right; go ahead.
Mr. W h i t n e y . In full agreement, under the right given to that
firm by an agreement signed between them and Mr. Kreuger.
Mr. G r a y . Why should a person—and I am asking for informa­
tion—sell as a hedge? It is really a sale of their own stock. They
might as well sell their own stock, might they not?
M r . W h i t n e y . They do not have long stock. They were carry­
ing stock for a customer.
Mr. G r a y . Y ou mean that the particular brokerage house t h a t
was handling this stock or specializing in it-----Mr. W h i t n e y (interposing). No; not specializing in it, sir.
Mr. G r a y . Well, all right. This brokerage house that w a s
handling this particular stock, carrying stock for the customer,
hedged on their own account, so that there might not be a lo s s
suffered by them—is that it?
Mr. W h i t n e y . In the case of Mr. Kreuger?
Mr. G r a y . Yes. All right.
Mr. W h i t n e y . He had died. No authority could be given as t o
the disposal of his stock, and they under their agreement had a right
to sell for their own account.
Mr. G r a y . I understand that situation. Now, on the morninjg of
the 22d that short interest fell off from 268,000 to 255,000, did it
not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And in one jump overnight it jumped to 407,000?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . A matter of 152,000 additional short shares, in t h a t
stock—is that right?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Did you investigate that?
Mr. W h i t n e y . I think that pertained to the same situation. I t
then fell to 339 and then 276, 256, 249, and 220.
Mr. G r a y . Yes. But you think that applied to the same situation.
Do you know?
Mr. W h i t n e y . I d o n o t k n o w p o s it iv e ly . I c a n l o o k t h a t u p .
Mr. G r a y . Have you a report of your investigation on that?
Mr. W h i t n e y . Not with me; no.
M r . G r a y . I don’t suppose y o u have, b u t is th ere a w ritte n r e p o r t
o f it?

Mr. W h i t n e y . I do not believe there is a written report, but we
can get one and submit it to you. Be glad to.
M r . G r a y . W i l l y o u do th a t an d su bm it it to th e co m m ittee?

Mr. W h i t n e y . Yes.
Mr. G r a y . Thank you.
The C h a i r m a n . I was going to say to the members of the com­
mittee it is apparent that we can not complete this before noon, and
there is one matter I want to take up before we recess. I think we
should recess till 2.30.
_ The matter I wanted to lay before the committee is on the ques­
tion of whether to make these names public, names of the short trad­
ers on a particular day. The attorney advises me that he preferred
to keep them from the public until subpoenas could be served, and



STOCK EXCHANGE PRACTICES

217

that he has now served the subpoenas and sees no reason for any
more se crecy about those names. I f the committee does not object,
the names will be given to the public.
There being no objection, it is so ordered, and they will be made
available the best they can.
Very well; the committee will go into executive session for a few
minutes before recessing. Everybody is excused except the members
of the committee. We will reconvene for the hearing at 2.30 in this
room, and Mr. Whitney will return at that time.
(Thereupon, at 11.55 o’clock a. m., the committee proceeded to exec­
utive session, and the hearing of witnesses was recessed until 2.30
o’clock p. m. of the same day.)
AFTER RECESS

The committee reconvened at 2.30 p. m. on the expiration of the
recess.
The C h a i r m a n . The committee will come to order. Mr. Whitney
is on the stand.
TESTIMONY OP RICHARD WHITNEY, PRESIDENT OF THEi NEW
YORK STOCK EXCHANGE, NEW YORK, N. Y .— Resumed

Senator F l e t c h e r . Mr. Whitney, do I understand your view to
be that short selling is important in the sense of the market?
Mr. W h i t n e y . Yes, sir.
Senator F l e t c h e r . And is there such a thing as good short selling
and bad short selling ? In other words, is there such a thing as bad
short selling where, for instance, there are combinations or concerted
action for the purpose of bearing the market or forcing liquidation ?
Does that not occur sometimes?
Mr. W h i t n e y . There are two classes, Senator Fletcher: One,
where the short selling is entirely and absolutely legitimate; and
the other, short selling that might be illegitimate, just the same as a
bear raid. The latter we are absolutely against, and the former we
are for.
Senator F l e t c h e r . There is such a thing as that—illegitimate
short selling ?
Mr. W h i t n e y . I do not think bear raiding exists to-day in the
market.
Senator F l e t c h e r . Well, may there not be illegitimate short sell­
ing when there isn’t absolutely a bear rail, for the purpose of forcing
liquidation ?
Mr. W h i t n e y . I do not see how that could take place.
Senator F l e t c h e r . I was wondering if there was not a distinc­
tion there between short selling generally, which you approve, and
occasionally when it is very harmful and depressing both to the
market and to the public; whether it is not possible for that sort of
short selling to take place, and whether, if that is true, there could
not be some regulation of restriction imposed so as to prevent it.
Mr. W h i t n e y . We at the present time know of no r e stric tio n s
beyond what we have put into effect that will prevent what I say is
illegitimate short selling or bear raiding. Naturally i f you gentle­
men will point out to us what you think we might do to prevent it,



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STOCK EXCHANGE PRACTICES

anything further that we might do to prevent bear raiding or illegiti­
mate short selling we would gladly give it every consideration and
be thankful for the advice.
Senator C o u z e n s . What about putting a tax on it such a s th e
House put on the transfer of stocks? Wouldn’t that help out?
Mr. W h i t n e y . I do not think, Senator Couzens, that bear r a i d i n g
exists to-day. I f any tax could be placed upon bear raiding, i l l e g i t i ­
mate short selling, then all well and good. But I can not s e e h o w
such a tax could be put on without affecting legitimate short s e l l i n g ,
which I contend is a necessity.
Senator C o u z e n s . But you know sometimes we have to put a
burden on the whole in order to catch a few people.
Mr. W h i t n e y . Well, as I have said, I do not think bear raiding
exists to-day.
Senator C o u z e n s . Evidently there is some illegitimate selling g o ­
ing on. It seems to me we may have to adopt the House revenue b i l l
and place a tax on transfers so as to get some of the bad ones.
Mr. W h i t n e y . I think that would be disastrous to the stock mar­
kets, the security markets as a whole, and to the investors o f this
country.
Senator F l e t c h e r . Mr. Whitney, your position is, as I understand
it, that if there is to be any restriction or regulation or controll it
should be through the stock exchange itself and not by way o f legis­
lation.
Mr. W h i t n e y . Yes, sir. And any advice given to u s that w e
could act upon to further what we are trying to do to-day w e would
be very glad to consider.
Senator B r o o k h a r t . I can not understand yet what is the d iffe r ­
ence between this so-called short selling legitimately and bear r a i d ­
ing. The line of demarcation between the two is not clear to me.
Mr. W h i t n e y . Bear raiding is an act that depresses and d e m o r a l ­
izes the market and tends to make prices fictitious.
Senator B r o o k h a r t . Well, doesn’t any short selling tend t o d o
that same thing?
Mr. W h i t n e y . N o , sir.
Senator Brookhart. What does it tend to do when it does not
tend in that direction?
Mr. W h i t n e y . Under the way that short selling is now e x e c u t e d ,
or sales for short account are now executed, it is no different from
liquidation in the market, and it forms a very, very small part o f
the transactions in the market.
Senator B r o o k h a r t . Well, liquidation depresses the market
doesn’t it?
9
Mr. W h i t n e y . Liquidation under the interpretation put upon the
rules of the exchange may be done at any price. Short selling under
that interpretation is not done except at a price not less than the last
sale.
Senator Brookhart. Well, the reason you have to have that re­
striction on short selling is because there is something inherently
illegitimate in it. I f so then you have to have some restriction
somewhere.
Mr. W hitney. We think anything that will depress or demoralize
and bring false prices to the market is illegitimate, as I have stated




STOCK EXCHANGE PRACTICES

219

Senator B r o o k h a r t . Well, the only reason why short selling is not
bear raiding always is because of your restriction that they must sell
at the last price.
Mr. W h i t n e y . No, sir; because of our restriction, which has been
a part of the constitution as long as I remember, applying to both
sales and purchases.
Senator C o u z e n s . Would 50 per cent on the profits of short selling
help to curb short selling?
Mr. W h i t n e y . I do not know, Senator Couzens, whether it would
or not. As I have frequently stated here, any such restriction would
tend to take away the stability and equilibrium of the market, and
therefore I think it highly undesirable.
The C h a i r m a n . Y ou m a y proceed, Mr. Gray.
Mr. G r a y . Mr. Whitney, would you like to get home to-night?
Mr. W h i t n e y . I do not particularly care, Mr. Gray. I will say
that I am veryhappy here in Washington.
Mr. G r a y . Well, that is very nice. I f it is not cutting short your
explanations at all, and if you will answer me directly and as briefly
as possible in response to some of my questions we will try to get
through.
Mr. W h i t n e y . All right.
Mr. G r a y . On this subject discussed within the last few minutes
let me ask you: Isn’t it a fact that not only in years past but right
down to the present time there have been many rumors circulated
crediting operators on the New York stock excnange with forming
pools to either raise or depress prices?
M r . W h i t n e y . There might nave been such rumors but I can not
say that the New York Stock Exchange is responsible for rumors.
M r . G r a y . N o, b u t y o u h a v e h e a r d th o se r u m o r s , h a v e n ’t y o u ?

Mr. W h i t n e y . At times I have heard rumors; yes, sir.
Mr. G r a y . Did you take any steps to investigate those rumors?
And did you hear only by rumor, if you please, of pools being formed
for either depressing or raising prices ?
M r . W h i t n e y . We do sometimes. And I will say that we took
immediate steps on April 8 , 1932, on advice of such a rumor from
Senator Walcott.
Mr. G r a y . That was with respect to what stock, do you recall?
Mr. W h i t n e y . The stocks that were particularly investigated, as
I remember, were United States Steel, American Telephone, Consoli­
dated Gas, and Public Service of New Jersey.
Mr. G r a y . That was this year that you are now talking about?
Mr. W h i t n e y . Yes; within two weeks.
Mr. G r a y . Within the last several years, and prior to that time,
do yon know of any investigations that have been conducted by
reason o f any rumors ?
Mr. W h i t n e y . Frequently we have investigated rumors. I think
I have said that many times here.
M r. G r a y . R u m o r s o f p o o ls ?

Mr. W h i t n e y . We investigate for all sorts of purposes.
Mr. G r a y . But, I am now talking about rumors of pools.
Mr. W h i t n e y . Rumors that this, that, or the other may be done
in a particular stock have caused the business conduct committee of
the exchange to watch that stock; yes, sir.



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STOCK EXCHANGE PRACTICES

Mr. G r a y . I am directing your attention to an article that ap­
peared in the Wall Street Journal of July 1 1 , 1930, for the purpose
o f inquiring as to whether or not that came to your attention, and
whether any investigation was made of its truth [reading] :
Wall Street has taken with a grain of salt reports of the formation of a huge
pool sponsored by international banking interests. These stories have men­
tioned sums running up to $100,000,000 us the amounts involved in the alleged
operations. While the rumors of big bankers getting together to start a better
market are discredited, there is good reason to believe that some prominent
operators are organizing groups to work in special stocks. It is thought that
the liquidated state of speculative accounts will favor such activities.
In this connect on, it is reported that M. J. Meehan’s change o f plans, which
will bring him back to New York Saturday from a European trip originally
mapped out for two months longer, had to do with new pools formed in Standard
o f New Jersey and Vanadium. According to these rumors, W. C. Durant w ill
'be associated with Mr. Meehan to furnish the bull leadership which the market
has lacked for several months. I f such is the case, it will be the first tim e
that these two operators, who were so prominent in the Coolidge bull swing,
have actively cooperated for many years.

Did that come to your attention?
Mr. W h i t n e y . N o , sir. I never heard of it before.

Exchange
Stock

M r . G r a y . Y ou are the president o f the N ew Y o r k S to c k
a n d y et y o u never h eard o f th is ?
Mr. W h i t n e y . Yes; I am the president o f the New York

Exchange now and was at that time, but I do not recall that particu­

lar incident or that article as appearing in the paper in any way.

Mr. Gray. A ll right. On page 103 of your testimony before the
House committee you say you have examined with care the accounts
o f short sellers in an effort to find out if there is any evidence of
concerted action, and you find no such evidence. When was that
investigation made?
Mr. W h i t n e y . That particular reference was to investigations we
have continually been making, as I have said here before.
Mr. Gray. It had no reference to any particular investigation?
Mr. W h i t n e y . Only to the investigations that we continually have
made by the business conduct committee.
Mr. Gray. All right. On page 18 of your Hartford speech you
stated that you have records snowing that at the close of the market
on September 21 the total short interest of 3,697,000 shares com­
prised the commitments of 9,369 separate accounts. Have you a
list of the persons whose accounts were involved ?
Mr. W h i t n e y . A s to the first figure I believe that was found t o
be an error because it was the first day that we asked for daily
transactions from our members.
Mr. G r a y . I a m c o m i n g t o t h a t b u t t h a t is n o t w h a t I a s k e d y o u .
Mr. W h i t n e y . Well, it I may go back to it.
Mr. G r a y . This is as to the number of accounts.
Mr. W h i t n e y . Whether we have a list of those accounts by
names, similar to that given you for April 8 ?
Mr. G r a y . Yes.
;Mr. W h i t n e y . I believe we have.
Mr. G r a y . Will you furnish it to the committee?
Mr. W h i t n e y . I f that is the desire of the committee; yes.
M r . G r a y . I w ou ld request it on b eh a lf o f the co m m ittee, i f you




STOCK EXCHANGE PRACTICES

2 21

Mr. G r a y . N o w , Mr. Whitney, have you a list of the brokers that
were involved in those accounts on the morning of September 21?
In other words, does the list also show not only who those short
accounts were held by, but the brokers who held them?
M r . W h i t n e y . I t h in k s o .
Mr. G r a y . Will you furnish them?
Mr. W h i t n e y . Yes, sir. You said at one place as to the morning
of September 21. I am not sure whether our records are for the
close or the morning.
Mr. G r a y . Your speech said at the close of the market on Sep­
tember 2 1 .
Mr. W h i t n e y . Yes. May I now go back to the figure of the
short interest, or will you cover it by your questions ?
M r. G r ay . I have it here, b u t w ill d ire ct y o u r attention to it
later.

I thou gh t it m ust be an error.

Mr. W h i t n e y . All right.
Mr. G r a y . We have a paper before the committee, and it has
been marked “ Exhibit No. 1 0 ,” which shows in the chart the relation
of the short interest to market fluctuations.
Mr. W h i t n e y . And to brokers’ loans.
Mr. G r a y . And to brokers’ loans, but I have not been asking you
about that. As a matter of fact, that chart becomes somewhat
inaccurate, doesn’t it, because of the fact that it does not take into
consideration the in and out sales by shorts during any one day.
Mr. W h i t n e y . I do not consider the chart inaccurate because it
does not take into consideration those in and out sales.
Mr. G r a y . Let me put the question to you, then, in this way:
it does not consider the in and out sales?
M r. W h i t n e y . N o , s ir ; because they offset each other.
M r. G ray . A s a m atter o f fa ct, in actual liq u id ation o f stock when
it is purchased b y a real buyer th at stock m ay be rem oved fr o m the
market, w hile in the case o f a buyer to co v e r a sh ort sale th at stock
is delivered to the lender and is in all lik elih ood k ept in the floa tin g
supply, isn’t that true?
M r. W h i t n e y . N o , sir.

Mr. G r a y . Why, not?
Mr. W h i t n e y . Because the lender may perfectly well be the owner
of that stock just as a new purchaser might be.
M r. G r a y . A s a m atter o f fa ct, how ever, in the m a jo rity , and I
will say in the large m a jority , o f cases that is sim p ly a p a rt o f the
floating su p p ly o f stock, isn’t it?

Mr. W h i t n e y . That very well might be; yes.
Mr. G r a y . Isn’t it a fact that selling by shorts in a declining
market puts an extra burden on the buying power?
Mr. W h i t n e y . Puts an extra burden on the buying power ?
Mr. G r a y . Yes.
Mr. W h i t n e y . The buying power has to assimilate the selling of
shorts, yes; but the short seller must himself then buy, either up or
down, depending upon whether his judgment was correct or not.
Mr. Gray. Well, we discussed that before and I do not want to
get into it again, when a short seller buys, but I will take it up later.
We have talked about pivotal stocks and trading in them, and
whether or not the action of pivotal stocks did not generally upset
110652— 32-------15




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STOCK EXCHANGE PRACTICES

the market. Is it not a fact that the transactions of short interests
in the New York Central stock in December o f 1931 caused an up­
setting of the whole market at that time?
Mr. W h i t n e y . I do not know, Mr. Gray.
Mr. G r a y . Do you remember the situation then ?
Mr. W h i t n e y . I do not. What is the date?
. .
Mr. G r a y . During December of 1931. It is the statistics f r o m
December 1 to December 31,1 believe.
Mr. W h i t n e y . Thank you. I believe I have those here.
Mr. G r a y . All right. There was, was there not, a very large sh o r t
interest in New York Central during the month of December?
Mr. W h i t n e y . There was a considerable short interest.
Mr. G r a y . Starting on the 1 st of December with a short interest
of 81,541 shares and ending with a short interest—let me see w h a t
it is.
Mr. W h i t n e y . O f 55,570 shares.
Mr. G r a y . At the close of the month.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . During that time it rose to what?
Mr. W h i t n e y . T o 112,179 shares on December 10, as of the open­
ing.
M r. G r ay.

Don’t you know it is a fact that the action of the shorts
in New York Central in that month decidedly disturbed the market
and brought about a decline of prices?
Mr. W h i t n e y . I do not. It may have been possible that some
news with regard to the dividends or earnings of the New York
Central Railroad affected the market rather than any action of short
sellers.

Mr. G r a y . Isn’t it a fact that during that month the New Y o r k
Central short interest was the largest ever in its history, o r d o y o u
know that from recollection?

Mr. W h i t n e y . I do not know that from recollection; but i f you
say that is so, in so far as our records are concerned, then it is all
right.
Mr. G r a y . They s o s h o w .
Mr. W h i t n e y . Then all right.
Mr. G r a y . Do you consider that intrinsic values have anything to
do with the sales price of stocks on the New York Stock Exchange?
Mr. W h i t n e y . I certainly do.
Mr. G r a y . And they should have.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . I f intrinsic values were the things that were given the
highest consideration in the purchase and sale of stock, then sales
would be regulated by the law o f supply and demand, wouldn’t they?
Mr. W h i t n e y . Yes; which I think they are.
Mr. G r a y . Now, you will not agree with me, I suppose, that either
selling on margin or short sales result in bringing about artificial
values.
Mr. W h i t n e y . I won’t agree; no, sir.
Senator B u l k l e y . Mr. Whitney, I should like to get your defini­
tion of intrinsic value into the record, if we mav.

Mr. G r a y . Will you give that, Mr. Whitney?

Mr. W h i t n e y . Senator Bulkley, a great many things go t o make
up intrinsic values. It is the earnings of a corporation, the general



STOCK EX C H A N G E PRACTICES

223

situation as to that particular industry, and I do not think I am
competent to tell you all the things that go to make up intrinsic
value.
Senator B u l .k l e y . I do not know whether anybody is competent
to define this. I know that we have had a good deal of difficulty in
trying to find out what it means, but I should like to know in what
sense at least you use it. You have talked about intrinsic values,
and now I should like to ask you, What do you mean ?
Mr. W h i t n e y . If we may take the case of a railroad, I suppose in
order to get at the basis or its intrinsic value you would try to find
out what that railroad is worth if it went out and tried to sell itself.
I think particularly with regard to a railroad it is only worth while
as a running institution. Mere real estate or rails, i^ they are not
being operated upon, are presumably of no value to anyone. There­
fore, in making up the intrinsic value of a railroad we must consider
it as a going concern and primarily what business it is doing, what
its capital structure is as to its debts and fixed charges, its taxes, and
then eventually arrive at what the common stock or preferred stock
is worth.
Senator B u l k l e y . Well, based upon replacement value, isn’t it?
Mr. W h i t n e y . Well, I was not taking that into consideration.
Senator B u l k l e y . I should like to know what your view of it is.
Mr. W h i t n e y . I am trying to get at what the stock may be selling
at at a particular time. And one must see the business it is doing, the
profits it is making, what its fixed charges are, and then arrive,
together with other considerations, perhaps, at what the common
shares are worth, the equity shares.
Senator B u l k l e y . Well, frankly, I do not think that is a very
clear definition of what intrinsic value is, and I do not see how you
can be confident whether a stock is selling below intrinsic value when
you can not tell better than that what intrinsic value is.
Mr. W h i t n e y . Well, I am perfectly willing to withdraw what I
have said as to intrinsic value.
Senator B u l k l e y . I am not trying to force you to withdraw
anything, but am trying to find out whether that phrase means any­
thing definite or not.
Mr. W h i t n e y . I presume I used that phrase, intrinsic value, as
meaning what seemed to be the true and proper value of the shares
at a given period.
Senator B u l k l e y . In the opinion of somebody ?
Mr. W h i t n e y . Yes; of myself in this case, or of all persons when
it is reflected in the market.
Senator B u l k l e y . Well then, it becomes market value at that
time, doesn’t it?
Mr. W h i t n e y . Yes; there is a market value, and there is also a
book value. But book value, many times, rests on situations which
to prove up as a fact would necessitate a sale of the property of the
particular corporation. There are various kinds of values, if you
please.
Senator B u l k l e y . In any event it is fair to say that in t r in s ic value
is not a thing that could be computed by any rule, and that it does
involve the element of'personal opinion, doesn’t it?




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STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . I think without question-----Senator B r o o k h a r t (interposing). Are sales at the market on the
exchange any indication of intrinsic value?
Mr. W h i t n e y . In order not to get involved in the question of
intrinsic values I will say I think they are a very clear indication of
what a stock is worth in the estimation o f those in this country that
are interested in it.
Senator B r o o k h a r t . Y ou say, then, that sales of stocks do indi­
cate genuine value upon which you can rely?
Mr. W h i t n e y . Upon which you can rely if you want to purchase
or sell shares. It is the only real place I know of where you can
resolve what you own in the shape of shares of a corporation into
cash.
Senator B r o o k h a r t . Well, now, at the time the value of the rail­
roads was fixed by the Interstate Commerce Commission the quota­
tions of stocks and bonds showed them worth about eleven and threefourths billions of dollars, but the commission fixed their value at
$18,900,000,000. What would you say was the indication there as
to the quotations being of real value?
Mr. W h i t n e y . I believe that perhaps since that time that price
as to the worth of the railroads has been revised.
Senator B r o o k h a r t . Yes; it has been revised, and the stock
boomed up, and then after they gave them a return on that high
valuation they were boomed back down again, so that there is about
the same difference now that there was then.
Mr. W h i t n e y . Market value really shows what the consensus of
opinion is as to the worth of the stock at the particular time and at
which cash may be realized by the sale of that particular stock.
Senator B r o o k h a r t . Do you regard market value o f sufficient
reliability that it would be safe for us to say that railroad values
should not exceed market value.
Mr. W h i t n e y . There are a great many other considerations to
come into that point.
Senator B r o o k h a r t . All right, Mr. Gray, you may proceed.
Mr. G r a y . Mr. Whitney, you mentioned book value. As an illus­
tration for the committee of how book value compares with what
you call market value or quoted prices, do you happen to know the
book value of United States Steel?
Mr. W h i t n e y . I have heard recently that it is in the neighbor­
hood of $ 2 0 0 a share.
Mr. G r a y . It is $208 a share, isn’t it?
Mr. W h i t n e y . Well, perhaps so.
Mr. G r a y . And it sold on the market on yesterday at $29 a share.
Mr. W h i t n e y . In that neighborhood, I think.
Senator B u l k l e y . Mr. Whitney, do you know what the intrinsic
value of it is ?
Mr. W h i t n e y . No; I do not think I do, unless you could take it
as $ 2 0 0 a share, and that is providing you can go out and sell the
assets and properties of the United States Steel Corporation to
somebody for that price.
Senator B u x ,k l e y . That raises the question, do you mean b y in­
trinsic value the book value?
Mr. W h i t n e y . I really can not answer that question. I think
book value and market value, perhaps somewhere between the two.



STOCK EXCHANGE PRACTICES

or at one or the other, rests the actual intrinsic value. But I think
intrinsic value also has to take into account the operating business
of that particular corporation at the time, and its prospects, orders
on hand, and so forth.
Senator B u l k l e y . Well, I have tried a number o f other witnesses
and have not had a definition of intrinsic value yet.
Mr. W h i t n e y . W e l l , I am sorry.
Senator F l e t c h e r . Do you think the market is never manipulated
so that what the quotations express are not really market values
Are not the markets at times manipulated so as to arrive at prices?
Mr. W h i t n e y . The market at times may seemingly reflect a mar­
ket vidue that is not warranted by earnings and prospects. It seems
to me that situation existed in 1929 on the up siae, and I think that
situation is exaggerated now on the down side. But I do not think
that was manipulation.
Senator B r o o k h a r t . Y ou may resume, Mr. Gray.
Mr. G r a y . Mr. Whitney, just one or two brief questions on short
selling. Isn’t it a fact that large blocks of stock are dumped on the
market right after a decline starts by way of short selling for the
purpose of forcing liquidation of the market down to a point where
they want to cover?
Mr. W h i t n e y . Not to my knowledge.
M r . G r a y . Y o u never heard of them doing it?
Mr. W h i t n e y . I d o n o t k n o w o f a n y s p e c if i c c a s e ; n o , s ir .
M r . G r a y . Have you ever examined the charts and your own rec­
ords sufficiently to determine whether or not that is so?
Mr. W h i t n e y . I h a v e e x a m in e d th e c h a r t s a n d o u r r e c o r d s v e r y
carefully, and I d o n o t k n o w o f a n y s u c h in s t a n c e ,
Mr. G r a y . You do not know of any instances where the short
interest has become very large and has worked almost up to the peak
during the course of the year—that is, the high peak of the year—
while that market has been steadily declining during that period
of time?
Mr. W h i t n e y . Well, you have just pointed out a case in the New
York Central Railroad. But my point is this, that that does not
prove the shorts deliberately depressed the market. It may very
well rest upon that fact that bad news came out in resard to earn­
ings or the dividend of that particular corporation. This is a con­
jecture, however, and I will say that I do not know.
Mr. G r a y . I f the history o f the pivotal stocks during the last
year or two showed, from the charts, that the short interest increased
substantially while the declines were on. wouldn’t you say there­
fore it was evidence of dumping for the purpose of depressing
prices?
Mr. W h i t n e y . N o , sir. The so-called pivotal stocks are the stocks
in which there is the biggest market, and the individual who is
studying the market, either on the bull side or the bear side, knows
the normal signs of the market, so that he may reverse his position
at will.
Mr. G r a y . By the way, Mr. Whitney, it is the practice of a good
many large operators to operate in dummy names, is it not?
Mr. W h i t n e y . Not that I know of.
Mr. G r a y . Y o u d o n o t k n o w t h a t e v e n ?
Mr. W h i t n e y . Who do you mean by dummy names?



STOCK EXCHANGE PRACTICES

226

Mr. G r a y . Names other than their own. You know what a dummy
director is, of course.
Mr. W h i t n e y . I have heard of them; yes.
Mr. G r a y . I thought you might have. And we will learn o f other
things you have heard about in New York after a while. You have
never heard of operators buying and selling stocks in dummy names?
Mr. W h i t n e y . In the names of corporations which they own,
possibly?
Mr. G r a y . I am not asking about the names of corporations. I
am talking about the operator who does not desire his name to
appear upon the record in his buying and selling of stocks.
Mr. W h i t n e y . Do you mean upon the records given to the New
York Stock Exchange?
Mr. G r a y . Upon the records of brokers even.
Mr. W h i t n e y . I have known of numbered accounts being used,
but when those accounts are reported to the New York Stock E x­
change the name of the owner has to be shown.
Mr. G r a y . That is not what I asked you. I asked you whether
or not you did not know it is the practice of the large operators,
either on the bull or the short side of the market, to use other names
than their own in connection with their transactions.
M r . W h i t n e y . No, sir; I do not know that.
Mr. G r a y . Y ou s a y y o u d o n o t k n o w t h a t ?
Mr. W h i t n e y . N o , sir.
M r. G r a y . Y ou have heard the names o f a num ber o f ve ry la rg e
operators in N ew Y o r k ?

Mr. W h i t n e y . I b e g your pardon?
Mr. G r a y . I say., you have heard the names of a number of very
large operators in New York?
Mr. W h i t n e y . I have heard, or at least people have said that such
individuals may possibly be in the market, interested in the market
I f you will ask me specifically, I will try to answer you.
Mr. G r a y . I am not going to ask you about any specific names,
but don’t you know it is the habit of those people to operate under
dummy names?
Mr. W h i t n e y . No, sir; I do not.
Mr. G r a y . You do not know that?
Mr. W h i t n e y . No, sir.
Mr. G r a y . By the way. your concern you said represented the
Morgan concern in some or its transactions.
Mr. W h i t n e y . We have done business with the Morgan concern;
yes.
M r . G r a y . H o w d o y o u c a r r y t h e ir a c c o u n t ?
M r. W h it n e y . H ow d o I c a r r y it ?
Mr. G r a y . H o w does your firm carry their account ?
Mr. W h i t n e y . We carry no account for J. P. Morgan & Co.
Mr. G r a y . Y o u do not carry it?
Mr. W h i t n e y . No, sir. All of our business for them is cash. W e

deliver to them securities and are paid, or vice versa; they deliver
to us and we pay them and then deliver them out against sales.
Mr. G r a y . Do you mean you receive from them an order to buy
in their name?
Mr. W h i t n e y . Certainly, always.




STOCK E X CH A N GE PRACTICES

227

Mr. G r a y . And you carry no accounts on your books with them at
all?
Mr. W h i t n e y . Do you mean margin accounts? No, sir.
Mr. G r a y . Oh, of course you do not carry any margin accounts
for them, Mr. Whitney.
Mr. W h i t n e y . Mr. Gray, you are asking me a question, and I am
honestly trying to answer.
Mr. G r a y . You have to do some bookkeeping in connection with
that account ?
Mr. W h i t n e y . Yes.
Mr. G r a y . And you carry them on your books, do you ?
Mr. W h i t n e y . Oh, I see. I think we use the No. 8 for our own
purposes. That is for the purpose of our broker on the floor, when
the order goes to the floor, so he will know for whom he is executing
the order. And we use it for every single customer of ours, so that
the name J. P. Morgan & Co. will not be written on the slip.
Mr. G r a y . You said a little while ago that where numbers were
used for transactions, when reported, as they have to be, to the stock
exchange, the name is given.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Whose name does appear when it reaches that point?
Mr. W h i t n e y . It is my understanding when it reaches the
exchange-----Mr. G r a y (interposing). Well, it is your firm and I don’t know.
Mr. W h i t n e y . But we do not report any position for J. P. Morgan
& Co., because we carry no margin account for them.
Mr. G r a y . You would only have to report transactions that were
open from day to day ?
Mr. W h i t n e y . That is all.
Mr. G r a y . Now, Mr. Whitney, I will direct your attention to Sep­
tember 21 again at the time you closed short selling on the exchange.
M r . W h i t n e y . All right.
Mr. G r a y . You have given several reasons why you think the
shorts covered on that day.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Don’t you believe that one of the principal reasons
that actuated the shorts to cover on that day was because the banning
of short selling would cause stocks to rise and because, therefore, it
might be good judgment to cover?
Mr. W h i t n e y . I think the reason for covering was because they
were afraid the exchange might close and they wished to protect
their contracts, which they could not do on the last date that the
exchange was closed.
Mr. G r a y . They could protect their contracts if they had a
market, couldn’t they ?
Mr. W h i t n e y . I said that, about last Monday; that the members
of the exchange could not do so, and only the broker and the cus­
tomer-----Mr. G r a y (interposing). Under the membership rules?
Mr. W h i t n e y . Under our rules.
Mr. G r a y . Still you do not answer my question. I asked you,
Don’t you think one of the principal factors that caused the shorts
to cover on September 21 and 22 was because they knew a banning



228

STOCK EXCHANGE PRACTICES

of short selling would cause stocks to rise and therefore it was good
judgment for them to cover?
Mr. W h i t n e y . It may have been a factor.
Mr. G r a y . Don’t you think it was the principal factor?
Mr. W h i t n e y . I do not.
Mr. G r a y . That, of course, would not have applied—X mean the
inability to cover would not have applied to snorts who were not
members of the exchange, would it? I mean they could have bought
on the gutter market.
Mr. W h it n e y . I presume they could have, but they would have
to pay for those stocks and could not apply them against their ac­
counts with New York Stock Exchange members.
M r . G r a y . Y ou m ean th a t brokers w o u ld n o t h ave accepted d e liv ­
e ry o f th em ?
Mr. W h i t n e y . They w o u ld n ot.
Mr. G r a y . N o w , then, I come to the correction. I mean the cor­

rection that you wanted to make. I show what I note from your
Hartford speech, and I show what I note from your testimony before
the House committee. And I will direct your attention to certain
other figures that you have given us, and I will be very glad if you
have a statement to make showing which are the correct figures.
In your Hartford speech you said:
A t the close o f business Monday, September 21, the total short interest had
decreased by the large amount of 544,000 shares.

Mr. W h i t n e y . Yes, sir.
Mr. G r a y . N o w , in your House committee testimony, on page
1 0 0 , you testified that that interest covered on that day 280,000
shares. I want to be fair to you and give you a complete picture
first.
Mr. W h i t n e y . Are you using the correct dates ?
Mr. G r a y . I am, and I have examined it very carefully. I think,
I may say, I know where you have made a possible error, and I will
direct your attention to it in a moment.
Mr. W h i t n e y . The Hartford speech was made on figures that
had just been received. A speech of that sort takes some time to
compile and some time to i>rint, but the correct figures are in this
schedule that you have, Exhibit 4.
Mr. G r a y . It is a fact that you gave the figure on September 21
as 544,000 shares, while before the House committee you testified that
it was 280,000 shares.
Mr. W h i t n e y . I think I testified before the House committee as
of the opening of September 2 1 .
Mr. G r a y . N o ; and I have looked it over very carefully.
Mr. W h i t n e y . May I see i t ?
Mr. G r a y . Yes. I f you have a copy of the House committee pro­
ceedings it appears on page 1 0 0 :
Our statistics show that 280,000 shares were covered on September 21.

So we are only talking about what was covered. We are not
talking about the relative positions of morning and afternoon I
read the Hartford speech to this effect-----Mr W h i t n e y (interposing). The Hartford speech was incorrect
and it was corrected again in December.




STOCK EXCHANGE PRACTICES

229

Mr. G b a y . Then that is all that I want to know.
Mr. W h i t n e y . The facts are exactly as I stated, by check and
recheck, as shown in the exhibits.
Mr. G r a y . I want to get to your testimony before the House com­
mittee. That is incorrect, too?
Mr. W h i t n e y . Yes; by a day.
Mr. G r a y . Now, you have before you I suppose the schedule from
May 25 to November 30?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Your position is there stated on September 21 as the
morning position.
Mr. W h i t n e y . As o f the morning.
Mr. G r a y . So if we want to find out what the coverage is during
the day, or change of position, which is the same thing, we have
to refer to the morning of September 2 2 in order to get the coverage
on the day of September 21, don’t we ?
Mr. W h i t n e y . That is right.
Mr. G r a y . Assuming that your Hartford speech was wrong, and
we have that out of the way, and your testimony before the House
committee was that there were 280,000 shares covered, while by an
examination o f the statistics you gave us it appears to be 784,487
shares.
Mr. W h i t n e y . Well, the figures are before you. I underestimated
very materially.
Mr. G r a y . Your House committee testimony was wrong and your
Hartford speech was wrong?
Mr. W h i t n e y . I will grant both are, but the Hartford speech we
thought was correct at the time of making it, and the testimony
given before the House committee was out of my head at the time.
Mr. G r a y . Didn’t you have any statistics then before you?
Mr. W h i t n e y . N o, sir.
Mr. G r a y . Then the correct figure of the coverage on September
21 was in round figures 800,000 snares?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . That was on the first day the exchange was ©pen on
the short-selling ban and they covered" 800,000 shares of stock, re­
ducing their position by that amount?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And on the second day that the exchange was open
and short selling was banned, and I am now speaking by the statis­
tics, they reduced it further by 233,518 shares; is that right ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And on the third day when short selling was per­
mitted it was increased by 20,117 shares; is that right?
Mr. W h i t n e y . Up but 20,000 shares.
Mr. G r a y . Well, I will give you the “ but.” And on the next
day there was a further increase of 37,293 shares.
Mr. W h i t n e y . Yes, sir; all of which I stated on last Monday.
Mr. G r a y . On the next day there was a slight decrease of 2,29?
shares.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Then an increase of 78,155 shares.
Mr. W h i t n e y . Yes, sir.



230

STOCK EXCHANGE PRACTICES

Mr. G r a y . And then came some coverage which gave a very m a ­
terial decrease on the line down.
Mr. W h i t n e y . A very material decrease day by day for six days,
ending up with a 424,000 decrease on one day.
Mr. G r a y . That was not an increase to that point. It was in­
creased to 2 2 1 ,0 0 0 and then a decrease of that coverage down to
14,000, and then 424,000.
Mr. W h i t n e y . Yes, sir; there was a steady decrease day by day
in the short interest.
Senator G ore. Mr. Whitney, have you the statistics for the total
number of shares traded in each day on the exchange?
Mr. W h i t n e y . I think I have it. The total transactions f r o m
September 26 on are in the record.
Senator G ore . That is about where in this series of things that
you aregiving.
Mr. W h i t n e y . That is just about in the middle of this series.
Mr. G r a y . In other words, prior to that it is weekly and after
that it is daily, as you are answering Senator Gore, but from then
on the daily transactions are here.
Mr. W h i t n e y . Senator Gore asked me what the total number o f
shares traded in each day were on the exchange.
Senator G ore. Yes, sir; the same day, in and out.
Mr. W h i t n e y . We did not start to compile the in and out sales,
the sales for short account and coverings each day, until as o f the
26th of September. From that time on we also showed the total
number of shares traded in, and the percentage of those in each.
We of course have those records for any date past for some con­
siderable time.
Mr. G r a y . Those figures begin on September 21.
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . But you have not put in the record the total transac­
tions for those days.
Mr. W h i t n e y . N o ; we have not. There was no reason for leaving
them out at all, but we did not know that they would be o f any
interest.
Mr. G r a y . They might be interesting.
Mr. W h i t n e y . I have not got them. The trading on the 21st,
22d, and 23d was very considerable.
Mr. G r a y . What was that?
Mr. W h i t n e y . The ratio of short sales to total transactions was
what I took the inquiry to be.
Mr. G r a y . Senator Gore has been asking you about the in-and-out
sales. Did you so understand him?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And I am asking about the total volume of business
done. Do you know what it was on the 21st of September?
Mr. W h i t n e y . N o , sir.
Mr. G r a y . Was it very much?
Mr. W h i t n e y . Very considerable.
Mr. G r a y . Isn’t it a fact that the covering of sales in that short
business was less than 5 per cent?
Mr. W h i t n e y . Less than 5 per cent?
Mr. G r a y . Yes.
Mr. W h i t n e y . On the 2 1 st?



STOCK EXCHANGE PRACTICES

231

Mr. Gray. On the 21st and 22d together.
Mr. W h i t n e y . No, sir.
Mr. G r a y . Y ou d o not th ink so?
_ _ .
Mr. W h i t n e y . N o, sir. Y o u used the figu re 800,000, and that
w ou ld m u ltip ly it b y 20, w h ich w ou ld m ake th e results on the 21st
000 000

slittrcs*

3vir.5G r a y . It is the 21st and 22d I am talking about now, both

days together.
Mr. W h i t n e y . Well, the same thing applies.
Mr. G r a y . That would be approximately 1,000,000 shares or 20,0 0 0 ,0 0 0 for the two days.
Mr. W h i t n e y . N o, sir. I d o n ot th in k any such tota l transac­
tions to o k place.
Mr. Gray. But you have not the figures?

Mr. W h i t n e y . No, sir; but I am pretty nearly sure of them.
Mr. G r a y . D o you know whether or not over the week-end just
prior to the 21st of September there were very large market orders
that came in from Europe?
Mr. W h i t n e y . I do not know.
Mr. G r a y . Y ou made the statement in connection with the con­
sideration by the exchange o f what was a proper remedy to put into
effect on the morning o f September 2 1 , that you felt if you closed
the exchange you would cause insolvency. Do you remember that?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . But you closed the exchange in 1914 and it was closed
for some few months.
Mr. W h i t n e y . Yes.
Mr. G r a y . Did that cause any insolvencies?
Mr. W h i t n e y . I have stated to the committee, I think once, cer­
tainly, if not twice, that at the time of the closing of the exchange in
1914, we not wanting or having the knowledge to take full responsi­
bility upon ourselves, consulted with the banks of New York, and I
believe the Government, and were assured that the loans of brokers
at that time would not be molested or sold out. I also stated that
before September 21,1931, the same effort was made on our part, and
we were urged most sincerely by these parties I have referred to, to
keep the exchange open at all costs.
Mr. G r a y . W ill you answer my question: Did the closing of the
exchange in 1914 cause any insolvencies?
Mr. W h i t n e y . I think I have answered that. I will say-----Mr. Gray. You can answer it yes or no.
Mr. W h i t n e y . I do not know. Insolvencies o f whom ?
Mr. G r a y . Of .brokerage firms.
Mr. W h i t n e y . I do not know. Not o f any members that I know
of.
Mr. Gray. What has been the percentage of depreciation between
September of 1931 and April o f 1932 on the stock exchange, the
average reduction in price, I mean.
Mr. W h i t n e y . I would have to refer to the chart to tell you.
Mr. Gbay. It is Exhibit No. 1 0 , isn’t it? Have you that there?
Look at it and tell me, if you please, if it is not approximately 50
per cent?
Mr. W h i t n e y . September 2 1 , did you say?



232

STOCK EXCHANGE PRACTICES

Mr. G r a y . Well, suppose we take it from—well, let me see what
the chart runs from. Take it from September 21.
Mr. W h i t n e y . A decline from about 87 to the last day on the
chart, which is April 5, of 56.
Mr. G r a y . Did you say 56?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And the decline from January 1 , 1931, was what? You
have 56 as your last point, and now what is your first point ?
Mr. W h i t n e y . January 31?
Mr. G r a y . Take when you start your chart, January 1. 1931.
Mr. W h i t n e y . It is 125. But I don’t see what bearing that has.
Mr. G r a y . You may not. Do you know that the Berlin Stock
Exchange closed on June 12? I think you testified to that effect the
other day, and that it opened a few days in September and opened
again last week.
Mr. W h i t n e y . Under certain restrictions; yes, sir.
Mr. G r a y . Do you know what the average depreciation o f the
principal stocks was on the Berlin exchange, the figure from the time
it closed in June of 1931 to the time it opened the other day?
Mr. W h i t n e y . N o ; I do not.
Mr. G r a y . Y ou do not know that it was approximately 12 per c e n t?
Mr. W h i t n e y . No, sir; I have no information on that, but I c o u ld
find out. The presumption is that because Germany has been i n a
position of late that perhaps—what date did you say for Germany ?
Mr. G r a y . June 12,1931.
Mr. W h i t n e y . The condition in Germany caused a drop in prices
before that day, just as conditions have caused a drop in prices here.
Mr. G r a y . But your answer is that you do not know?
Mr. W h i t n e y . No, sir. Do you wish that information supplied?
Mr. G r a y . I will be very glad if you will get it for us; yes. Now,
when England went off the gold standard September 2 1 . the Paris
Bourse did not close.
Mr. W h i t n e y . I do not think so; no.
Mr. G r a y . And it has remained open continuously since ther. ?
Mr. W h i t n e y . Yes, sir.
M r . G r a y . D o you know w hat regulations th ey pu t into effect w it h
respect to short sellers ?
Mr. W h i t n e y . I believe they demanded an increase in the margin

and the delivery of a certain part of the stock that was sold short.
Senator G o re . What exchange was that?
Mr. W h i t n e y . The Paris Bourse. But the transactions o n that
exchange to the best of my knowledge are inconsiderable.
Mr. G r a y . Inconsiderable?
Mr. W h i t n e y . Yes.
Mr. Gray. A s a matter of fact, they require a deposit of 25 per
cent of the stock which is sold short. That is, they require the seuer
himself to furnish 25 per cent of the stock, and in addition to that
require him to put up 40 per cent cash margin.
Mr. W h i t n e y . I believe that is so, although I am not positive.
Mr. G r a y . Don’t you know that the Paris Bourse considered that
that was a constructive factor, and that the doing of that thing aided
the Paris Bourse to keep the fluctuations of stocks from goino- over
a wide range; that it stabilized and steadied things?
*
*



STOCK EXCHANGE PRACTICES

233

Mr. W h i t n e y . I do not know that.
Mr. G r a y . D o you know that there were articles written shortly
after England went off the gold standard, in the papers of this coun­
try, dispatched from the other side, indicating that that was so?
Mr. W h i t n e y . That it stabilized the market ?
Mr. G r a y . Yes.
Mr. W h i t n e y . No, sir; I have no knowledge of that.
Mr. G r a y . I ask you now whether you think to put the New York
Stock Exchange to-day, after we have had and are still having this
declining market, in a position where short sellers would be required
to make a deposit of 25 per cent of the stocks which they are selling,
and to put up a cash margin of 40 per cent, would not stabilize the
situation ana help to prevent future declines ?
Mr. W h i t n e y . I can see no reason in the world to believe that it
would.
Mr. G r a y . In other words, you believe that the short seller should
be permitted to operate freely without such restrictions?
Mr. W h i t n e y . Under the regulations of the New York Stock
Exchange as they did exist and have existed.
Mr. G r a y . All right.
Mr. W h i t n e y . May I point out that in the situation where 25 per
cent of the stock sold short must be, as under the Paris regulations,
delivered by the short seller, does not in its very essence prevent
the short seller operating, because he can borrow that stock and
deliver it if he wants to.
Mr. G r a y . Yes. But it puts an additional burden on him, does
it not?
Mr. W h i t n e y . Yes, sir; artificially. You will appreciate, Mr.
Gray, that the conditions of delivery in fulfillment o i contract on
the Paris Bourse are different from ours, and we demand that the
stock be borrowed and delivered the next day.
Mr. G r a y . While their regulations give them a further period of
time for the purpose of settlement?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Would you consider that it might be an advantage to
put such a regulation as that in effect here ?
Mr. W h i t n e y . Term settlement?
Mr. G r a y . Yes.
Mr. W h i t n e y . I think it would be disastrous, and one direct effect
it would have would be to make short selling easier.
Mr. G r a y . Because of the fact, you mean, that they had an addi­
tional extra time in which to deliver it?
Mr. W h i t n e y . Exactly.
Mr. G r a y . That is what we want to find out.
Mr. W h i t n e y . May I just there put into the record as an ex­
hibit—I do not care to read it—a prepared statement with regard
to the term settlement, in answer to Senator Gore’s request the other
day?
Senator C o u z e n s . I s it your statement?
Mr. W H r p iE Y . Yes, sir. It has been prepared with me and by
me, and I will assume full responsibility, Senator Couzens, for it.
The C h a i r m a n . It may be inserted in the record at this point.




234

STOCK EXCHANGE PRACTICES

(The statement on “ Term settlement ” presented by Mr. Whitney,
designated as “ Exhibit 2 0 ,” is here printed in the record in full, as
follows:)
T h k T eem

Settlem ent

On the New York Stock Exchange and other American exchanges, contracts
to purchase or to sell stocks are usually settled by 2.15 p. m. the next fu ll
business day, after they are made, by delivery o f the seller’s stock and payment
o f the buyers’ money. This system is usually referred to as a “ cash ” or
“ daily” settlement.
All European stock exchanges have such cash settlements, too, although under
them delivery of securities and payment of money usually occurs not sooner
than four days or more after the date of contract. But many foreign exchanges
also employ a “ term ” or “ account” settlement for dealings in varying p ro­
portion of their listed issues.
Under a term-settlement system contracts made “ for the accou nt” are
settled upon certain predetermined days each month. In the fortnightly settle­
ment systems o f London, Paris, and other centers, two such settlement dates
<each month are established— one at the beginning, the other at the m iddle o f
each month. In the monthly settlement system of Berlin, settlement is effected
only at the end of each month.
Until the settlement period arrives, all purchases and sales o f securities fo r
the “ term ” or “ account ” are simply open contracts which for the time being
do not require either the payment of buyers’ money or the delivery o f sellers’
securities. It is not necessary to borrow either money or securities during the
interval between the date o f original contract and tlxe date of the first subse­
quent settlement. In London it is not even the custom o f brokers to require
their customers to put up margin before entering into term contracts fo r the
purchase or sale o f securities.
Settlement of term contracts abroad usually takes about four days. D uring
the first three days of this period, security purchases and sales contracts m ade
during the whole preceding “ term ” o f two to four weeks are cleared; on the
final date payment o f money balances and delivery of security balances occn ra
Under the London term settlement, which is the most conspicuous exam ple
o f such systems, a brokerage customer who has bought or sold “ fo r the
account” rather than for “ cash” has three different ways o f terminating his
commitments. # In the first place, he can, if he wishes, deliver securities on a
term sale contract at the settlement against money payment in full, or he can
make complete money payment on a term-purchase contract against the delivery
o f the securities which he has bought. In the second place, lie can term inate
his term sale or his term-purchase contract by making another contract to
buy or to sell respectively during the same account; in this case his purchase
and subsequent sale contract (or his sale and subsequent purchase con tract)
are cleared and any profit resulting from his “ in-and-out ” dealings is p a id to
his broker and by the latter to him, while any loss therefrom is paid b y his
broker and collected by the latter from him.
It may be, however, that the customer who has bought or sold securities
fo r one term account may wish to hold his “ long ” or his “ short ” position
over the settlement date o f the first account and into the next account. In
this third case, stocks originally purchased will at the settlement be sold fo r
cash, but at the same time purchased again for the next account period, i f it
is a “ long ” position which is being carried over; or, if it is a “ short ” position
which is being carried over, stocks originally sold will at the settlement be
purchased for cash, but at the same time sold again for the next account.
Although in the form o f actual cash and term purchases or sales, these
operations actually amount, in the first instance to borrowing money in order
to maintain a “ long ” position, and in the second instance to borrowing stock
to maintain a “ short ” position. In effect these operations enable stock to be
loaned against money and money against stock in much the same fundamental
fashion as occurs in the case o f loans of stock in American stock
But under the foreign term-settlement systems, the interest on such loan s o f
money for the coming fortnightly term period is expressed by the difference
between the prices o f the cash and term transactions, the former being usually
slightly lower. But when particular securities are difficult to borrow in this
way, the price o f the cash transaction may slightly exceed that o f the accom ­
panying term transaction—a foreign parallel to the American “ premium”
on borrowed stock.



STOCK EXCHANGE PBACTICES

235

The term-settlement system has sometimes been enthusiastically recom­
mended for adoption in this country, but usually by those inadequately
informed concerning European and American stock exchange settlement methods.
The New York Stock Exchange has maintained its traditional “ daily settle­
ment” because it is convinced that this existing system is vastly superior to
a “ term ” settlement in efficiency, safety, reliability, and fundamental accord
with actual American conditions. This attitutde is based upon long experience
with stock exchange settlement problems in general, and in particular upon
comprehensive studies into the realities o f foreign term-settlement systems.
A primary objection to the introduction o f term settlements in this country
arises from the increased facility which they would create fo r purely speculative
activity. H ie New York cash settlement calls fo r delivery and payment the
next full business day and fo r this reason compels a margin purchaser to
borrow money at once, or a short seller to borrow stocks at once. But between
the dates o f contract and settlement, a term commitment in securities is
merely an open contract, and fo r a period up to two weeks (or in Berlin
up to one month), the “ account” trader is completely free from the need
of borrowing anything, and his purchases or sales can be proportionately
unrestrained. As a matter o f fact, an important reason why the term-settle­
ment system has commended itself to so many European stock exchanges is
the increased marked activity which it induces. However, well suited term
trading may be to European conditions, there is no doubt that in this country
its introduction would stimulate a frequently powerful tendency toward intense
security speculation.
Term settlements are also less stable than cash settlements. From July
through the autumn o f 1914 all the stock exchanges in the world were closed.
The New York Stock Exchange fully reopened with its usual cash settlement,
December, 1914. When subsequently the leading stock exchanges o f London,
Paris, Berlin, and other European centers reopened, term settlements were
forbidden and only cash settlements allowed. This situation continued for
several years, and term settlements were not resumed in Paris until 1920, in
London until 1922, and in Berlin until 1925. Again, last year, the London
Stock Exchange suspended its term settlement September 26, 1931, and did
not resume it until January 27, 1932. The Berlin Stock Exchange closed
entirely June 12, 1931, reopened but only for the cash settlement on September
3, again closed entirely September 21 and on April 12, 1932, reopened again
but only for cash dealings.
The superior stability and safety o f cash settlements is due to their ability
to keep unsettled security contracts between stock exchange members always
at a minimum by frequent daily settlements, instead o f allowing them to pile
up gigantically for two weeks or more. This factor is freely admitted to have
been for many years a principal cause of London brokerage insolvencies, which
have long been more frequent than in New York. Also, if a stock exchange
is compelled to suspend, prompt settlement of such contracts accumulated over
the period of a fortnightly term is impossible. London Stock Exchange term
contracts for the latter half of July, 1914, were not completely settled until
September, 1922—over eight years later. In a period o f severe price declines
a great mass of unsettled contracts would endanger the entire market. I f
the New York Stock Exchange had had a “ term ” settlement during October,
1929, it is doubtful if the exchange could have avoided suspension, and if the
enormous mass o f term contracts which would then have accumulated could
have been settled even by this time.
Another difficulty which would arise with “ term ” settlements in this country
would be the Increased danger of a revival o f nonmember bucket shops. A
bucket shop is a pretended brokerage firm which either does not really buy
securities for its customers at all, or which, if it docs buy them, secretly sells
them out at once unknown to the customer. If prices fall, the bucket-shop
keeper can then pretend to sell the margin customers out and pocket most or
all o f th°ir margin. If, on the other hand, prices rise, the customers never
obtain their supposed profits because the bucket shop silently disappears. The
New Tork Stock Exchange, of course, does not tolerate bucketing by its mem­
bers, and fo r a great many years it has led the fight to stamp out the firms
which from time to time organize near the fringes o f our financial districts
in order to practice this swindle. The adoption of a “ term ” settlement by
our tew in g stock exchange might, however, lead to a revival o f nonmember
bucket shops, because It would apparently justify the bucket shop in not having
in its possession or under its control the securities which its customers naa



236

STOCK EXCHANGE PRACTICES

purchased on margin. If the victim of a bucket shop asked where his securities
were, the bucket-shop keeper would, with a semblance of truth, be able to say
that he had not yet received them because of the delay entailed by the “ term ”
settlement. In New York the only “ term ” settlement ever practiced w as by
a small bogus stock exchange, which subsequently New* York State authorities
closed on this very ground that it deliberately fostered bucketing by its members.
The term settlement may be in sufficient accord with the slower p ace o f
European business, but it would obviously drag behind our much quicker
American tempo. People in this country, when they sell securities, expect to
be able to get their money in a few days, not after several weeks. Under a
term settement system this would, of course, be impossible, and the immediate
negotiability of listed securities would thus necessarily be lessened.

Mr. G r a y . N o w , Mr. Whitney, it is rather difficult to lean across
the table with you to examine this next exhibit. So I will put this
chart down here and we may both look at it.
I am showing you a chart of the United States Steel Corporation,
covering a period of time from June 1,1931, down to about the 10th
or 11 th of April in 1932, and it has in it the fluctuations as to the
quotations during that period of time and down to a certain point
at the end of January of this year has the openings and closings o f
the stock, and then has in addition thereto a line indicating the
fluctuations of the short interests. (Charts marked Exhibit 21 ap­
pears in the appendix.)
As a matter of fact, when stocks started to decline in value as
approximately July 1—I am not going to use the exact dates here;
it will take up too much time—to about the 15th of September,
approximately 25 points—that is correct, is it not ?
Mr. W h i t n e y . Yes, sir; previously having gone up from a price o f
85. as I understand it, to 105, then from 105 down 25 points; yes.
Mr. G r a y . T o 80. During that period of time I am directing
your attention to the chart with respect to the short-selling position.
The short-selling position about the first of July was approximately,
say, 280,000, was it not?
Mr. W h i t n e y . All right, sir; yes.
Mr. Gray. And during tnat time up until the other point of time
that I have indicated to you, while the stock was declining 25 points,
the short position rose to 400,000, did it not ?
Mr. W h i t n e y . I b e lie v e s o .
Mr. G r a y . Where is there in that illustration at that point a n y
indication of short coverings which acted as a cushion for tne market
to save its decline?
Mr. W h i t n e y . I never said, Mr. Gray, that the shorts, specifically
in steel—that is one out of many—prevented that decline. I think
just during that period the tonnage orders on their books were
steadily declining and that they passed a dividend, or rather de­
creased their dividend.
Mr. G u a y . Y o u think there was some other reason for that d o
you?

’

Mr. W h i t n e y . I am confident of it.
Mr. G r a y . Y ou are confident of it. All right; then I direct your
attention to the facts, still talking about United States Steel, that if
the position with reference to the market price on nearly the end of
October, 1931, was that it was about 64 or 65; is that correct?
Mr. W h i t n e y . Yes, sir.Mr. G r a y . It then rose during the next 10 days to 75.



STOCK EXCHANGE PRACTICES

Mr.

W h itn e y .

237

A s did the short interest.

Mr. G r a y . All right, as did the short interest—to To. And then
it started at 75 and with very slight variations, came down—I am
going to give you two different dates—came down to, about the 7th
or 8 th of December, about 54, and then toward about the 18th of
December to somewhere in the middle forties—that is true, is it not ?
Mr. W h i t n e y . With the short interest declining the most part of
that time.
Mr. G r a y . That is what I am going to ask about. Now, we
started with a point of time in October. I ask you whether or not
when this stock was about 54 the short interest w not represented
ras
by approximately, we will say, 230,000; is that correct ?
Mr. W h i t n e y . I b e l i e v e s o .
Mr. G r a y . And while that stock was declining to a point where
the stock was 55, the short interest grew to 3*25,000, did it not?
Mr. W h i t n e y . Yes; while the stock went u p and then went down;
yes, sir.
Mr. G r a y . From that period of time for a period of about 10 days
there was a vacillating condition, was there not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Then while the stock declined from about the 10th of
December during a period of a weeks time from a point where it
was worth 50 down to a point where it was worth approximately 37—
and correct me if I pick these figures wrong at all, please, Mr.
Whitney-----Mr. W h i t n e y . All right.
Mr. G r a y . The short interest went up from 300,000 to about 375,000
and then dropped on coverings. That is true, is it not ?
Mr. W h i t n e y . It went up in two days and then precipitately
dropped with the stock.
Mr. G r a y . All right then; let me take you over another period of
time. Let us see if you can show us reasons for this.
Mr. W h i t n e y . I am not pretending to show you the reason for
anything, sir.
Mr. G r a y . I am going to try to see whether you know.
Mr. W h i t n e y . I am answering your questions.
M r . G r a y . Y o u s t a t e d n u m e r o u s tim e s t h a t th e s h o r t in t e r e s t w a s
n e c e s s a r y b e c a u s e o f t h e f a c t t h a t i t le n t t h e s u p p o r t t o a d e c l i n i n g
m a r k e t a n d t h a t i t a c t e d as a c u s h io n .
Mr. W h i t n e y . I don’t remember saying that.
Mr. G r a y . You don’t remember saying that?
Mr. W h i t n e y . I said that it stabilized the market at all times,

both short selling and marginal purchases.
Mr. G r a y . Haven’t you also said that it acted as a cushion while
the market was declining, to furnish buying power and to prevent
the market from further declining ?
Mr. W h i t n e y . At times.
Mr. G r a y . At times?
M r . W h i t n e y . At times. I d o n o t remember ever specifically
saying it about United States Steel, and this chart-----Mr. G r a y (interposing). I am going to ask you to pick the stock
you want me to Io o k at when I am through looking a t Steel.
Mr. W h i t n e y . I will take the whole list.
119852—32------ 1«




238

STOCK EXCHANGE PRACTICES

Mr. G r a y . N o w , I will ask you whether or not at a point of time
about the 18th or 19th of December Steel was not selling at about
42 or 43. Is that correct?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . It then moved down and up, that is down to a point
where it was selling at about 36, up again to a point where it was
selling at about 46, and then down again to a point where it was
selling at about 37—is that correct?
Mr. W h i t n e t . Yes, sir.
Mr. G r a y . During that period of time is it not a fact that the
short interest mounted from about 260,000 to 450,000 in Steel, while
those declines were going on?
Mr. W h i t n e y . I f those figures are correct, sir; yes.
Mr. G r a y . Well, I can only say to you that these charts’ statistics
are taken from the statistics that you furnished us.
Mr. W h i t n e t . Then I entirely grant it. I would like it in evi­
dence, please.
Mr. G r a y . Yes.
.
Senator C o u z e n s . May I ask Mr. Whitney if he considered at that
time the intrinsic value of Steel Corporation stocks ?
Mr. W h i t n e y . Did I consider it?
Senator C o u z e n s . Yes.
Mr. W h i t n e y . N o, Senator Couzens.
Senator C o u z e n s . D o you know now what the intrinsic value is?
Mr. W h i t n e t . N o , Senator Couzens, I do not.
Senator C o u z e n s . When you sell short or speculate on the m a r k e t ,
you do not figure the intrinsic value then at all ?
Mr. W h i t n e t . I did not know that I said that I had sold Steel
short. I f I were going to operate in the market I would unquestion­
ably form a judgment or calculation as to the worth of the parti­
cular shares of the particular company.
Senator C o u z e n . Would you be guided by the intrinsic value or
by the stock market value?
Mr. W h i t n e t . I would be guided by everything, all information
that I could gather.
Senator C o u z e n s . And you never sold Steel short at all?
Mr. W h i t n e t . That I can not answer one way or the other. I d o
not remember, sir.
Senator C o u z e n s . Y o u should not have said? “ I do not r e m e m ­
ber,” because you had the sentence ending all right before you said
that.
Mr. G r a t . Mr. Whitney’s counsel asks that certain phases o f t h e
chart be put upon the record.
Mr. W h i t n e t . No; I will take that upon myself, Mr. Gray. I
was going to.
Mr. G r a t . I f the chairman of the committee has not any objection,
of course I have not any objection. I want everything put upon
the record.
The C h a i r m a n . Without objection, it m a y go in the record.
Mr. W h i t n e t . From about September 1 or 8 the short interest
decreased from almost 400,000 shares to October 8, two hundred
forty-odd thousand shares, and the market in steel during that en­
tire time was oh a downward trend. Is that correct, Mr. Gray ?




STOCK EXCHANGE PRACTICES

239

Mr. G b a y . That is correct. Now, having told you that, I want to
ask you— course, the shorts have to cover sometimes, do they not?
-of
i u r . W h i t n e y . Yes, sir.
Mr. G r a y . And if they feel that there is going to be a boom in
the market, that prices are going to go up, then is when they cover,
do they not? In other words, if they think the prices are going to
continue to go down, they do not cover: they wait for a further de­
cline; that is correct, is it not?
M r . W h i t n e y . I f th ey are w ise th ey cover at th e r ig h t m om en t.
Mr. G r a y . Yes, at the right moment.
Senator G ore. I s there any such a n im a l'?
Mr. G r a y . Therefore, I want to ask you whether as a matter of
fact this picture does not show you—you spoke of that decline along
■with the general decline—that just prior to that there had been this
tremendous rise in short interest of 400,000, while there had been a
decline—whether or not you do not think that that chart shows that
the shorts then considered that it was the time to cover, and they
covered while there was first a slight decline, and then a general
average maintained for three or four weeks, and then when the
fWlrnA started down again they started immediately up again, and
then with a slight variation reached the point of 450,000 of shorts
while it was declining. Isn’t that the history of that chart?
Mr. W h i t n e y . Not entirely, sir, because-----Mr. G r a y . It will speak for itself then.
Mr. W h i t n e y . On the first of January the stock went up approxi­
mately 13 points, almost 33 per cent, and the short interest increased
daring that time.
Mr. G r a y . Yes, and kept on increasing when the stock went down ?
Mr. W h i t n e y . Y es; and that stock again had an almost 33 to 40
per cent increase in value, and the short interest materially declined.
Tn other words, Mr. Gray, I do not think that charts are infallible,
neitheryours nor mine.
Mr. G r a y . I will show you some more. I am not responsible for
+.T chart, Mr. Whitney, and it is not taken from your statistics, but
n«
I am showing you a chart touching American and foreign power
over the two months of August and September of 1931. The chart
will appear in the appendix.
Mr, W h i t n e y . Yes, sir.
Mr. G r a y . I direct your attention to the point marked “ 1 ” on
fW . chart, which is the 21st of August, 1931. That represents the
short interest as being about 1 2 2 ,0 0 0 or so shares, does it not, on
that chart?
M r . W h i t n e y . Yes.
Mr. G r a y . Stock went down, did it not?
Mr. W h i t n e y . What is this [indicating on chart] ?
Mr. G r a y . This is the opening and closing prices of the stock at
the various times.
Mr. W h i t n e y . It went down very, very slightly for a while and
then rose.
Mr. G r a y . Then rose for a period of about two or three days?
Mr. W h i t n e y . Yes.
•Mr. G r a y . From the point I would say about the 24th of the
month it has continuously declined with practically no sustaining
power; that is true, is it not?



240

Mr. W
est------

STOCK EXCHANGE PRACTICES
h it n e y .

It has continually declined, and the short inter­

(interposing). What happened to that?
Mr. W h i t n e y . For another few days, 10 or 12 perhaps, increased
from about 122 to approximately 140,000 shares, and then-----Mr. G ray (interposing). And then started to cover?
Mr. W h i t n e y . And then precipitately declined when the m a r k e t
was declining.
.
.
Mr. G r a y . When you make a comparison of the p o i n t t h a t as
marked 441 ” and the point over here mat is marked “ 3, you h a v e
got approximately the same short interest, haven’t you?
Mr; W h i t n e y . Yes.
Mr. G r a y . And within that point of time, where you have t h e
same short interest the coverage is only represented by the i n c r e a s e
from August 21, is it not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . In other words, while that stock had been declining
from approximately $38 per share—I want to be c o r r e c t about this—
to approximately $ 2 0 a share, there is no covering o f the short
interest except that which had increased during the same period of
time; is that true?
Mr. W h i t n e y . Not materially, that is right. It increased about
30 per cent though in value, just as the same instance I told you o f
in steel.
Mr. G r a y . I do not want to take after this chart here, but I want
to ask you-----Mr. W h i t n e y (interposing). May I have that put in the record
as being the issue of the New Republic—oh, pardon me, t h a t is
not it.
Mr. Gray. I will see that it gets in the record, but at this time
I want to direct your attention to Case Threshing Machine. D o
you know what their total outstanding issue is?
Mr. W h i t n e y . One hundred a n d ninety-five thousand s h a r e s .
M r. G ra y

M r . G r a y . D o you h appen to kn ow h ow m u ch o f t h a t is c lo se ly
con trolled?
Mr. W h i t n e y . I do not, sir. Presumably, by the short interest

that existed in it, very little.
Mr. G r a y . A s a matter of fact, at one time Case & C o .’s stock,
while only 195,000 shares, had over 140,000 shares sold short, did
it not?
Mr. W h i t n e y . I f you say so, sir; yes.
Mr. Gray. Don’t you know that your own statistics-----Mr. W h i t n e y (interposing). I do not know the statistics in
everything.
Mr. G r a y . Y o u a c c e n t t h a t s t a t e m e n t?
Mr. W h i t n e y . Certainly; yes.
Mr. G ray. That is a matter of about 71 per cent of the outstanding
stock, is it not?
Mr. W h i t n e y . Yes, sir. We spoke about that case the other day.
Mr. G r a y . I mentioned that to you?
Mr. W h i t n e y . Senator Fletcher d id .
Mr. Gray. Oh, possibly he did. You think that is a healthy con­
dition, do you, for the stock market?
Mr. W h i t n e y . I do not see where——



STOCK EXCHANGE PBAOTICES

241

Mr. G r a y (interposing). You said short interests were helpful to
an opposition of the speculation on the exchange.
Mr. W h i t n e y . 1 do not see where it is unhealthy, and the short
interest of that size in the stock certainly is going to tend to keep
that stock stable.
M r . G b a y . G o in g to ten d to do m ore th a n th a t, is it n o t ; g o in g
to te n d to b ein g abou t a possible corner in i t , is it n o t ?
Mr. W h i t n e y . N o such tliing, that we can see, exists in Case

Threshing Machine stock at the present time, or at any time.
Mr. G r a y . N ow', Mr. Whitney, you spoke about my picking United
States Steel. Is there any other stocK you would like to put your
own demonstration on if I show you the chart? I have some o f them
here.
Mr. W h i t n e y . N o , sir; but my point being that I think all shares,
as stated on Exhibit 1 0 , are more of proof, if any chart can be of
proof, than any particular stock.
Mr. Gray. On Exhibit 10. You have Exhibit 10 in front of you,
have you not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . N o w , I will grant you, so you do not need to make it
as part of your answer, that there are indications^ on Exhibit 1 0 ,
which is in evidence in the hearing, where the short interest followed
for periods of time the action o f the stock itself on the market. But
I want to direct your attention to several situations.
It is a little difficult to see these dates here. As a matter o f fact,
at some period approximating the 1st day o f July the stock was
quoted at what price? You are probably more familiar with that
and canpick it up quicker than I.
Mr. W h i t n e y . Stocks were quoted-----Mr. G r a y (interposing). Average o f over 1 2 0 ?
Mr. W h i t n e y . Yes, sir; just about.
Mr. G r a y . And from that point of time down to approximately
what looks like it might be about August 5 or 6 , just that one
decline, stocks declined to what, about 108?
Mr. W h i t n e y . Approximately.
Mr. G r a y . Yes. And in the j>eriod o f time that we have just de­
scribed there was a rise and a fall and then another rise that brought
the short interest from—what is that figure on the left o f the short
interest ?
Mr. W h i t n e y . At t h e b e g i n n i n g a n d t h e e n d it w a s a l m o s t t h e
s a m e figure.
Mr. G r a y . Oh, no, no.
Mr. W h i t n e y . I think so, sir. It was 3,750,000 shares at the be­
ginning o f the first of June, approximately, please.
Mr. G r a y . Tell what it became somewhere shortly after the first
of August.
Mr. W h i t n e y . On August 1 it was-----Mr. G ray. 4,300,000?
Mr. W h i t n e y . Approximately 4,000,00 0. On August 1, i f you
look at the Franco-American Loan-----Mr. G r a y (interposing). Look at the height o f that rise, which
will bring it to about August 4 or 5. It was about 4,300,000, was
it not?
M r . W h i t n e y . Yes, s ir .



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STOCK EXCHANGE PRACTICES

Mr. G r a y . And during that period of time the general stocks o n
that chart dropped a matter of about 1 2 points, did they not?
Mr. W h i t n e y . Yes; ju s t a b o u t .
Mr. G r a y . Then taking the period of time in the latter part o f
last year and the beginning of this-----Mr. W h i t n e y (interposing). Don’t you think perhaps it is better
to take it as it continues throughout the chart?
Mr. G r a y . N o w , I grant to you, Mr. WTiitney-----Mr. W h i t n e y (interposing). Oh, pardon me.
Mr. G r a y . In order to save time in my questions, there were in­
stances where it showed that the short interest followed the action
of the market.
Mr. W h i t n e y . All right, sir.
Mr. G r a y . I am calling your attention to several other sp ec ific
instances where we have had consistent declines, and what I am
interested in is knowing the action of the short interest.
Now take the time starting around the 1 st of December. General
stocks were quoted, as I see this, at approximately 90. Is that right?
Mr. W h i t n e y . No, sir. General stocks were selling at 75 a n d
the short interest was 3,750,000 shares.
Mr. G r a y . All right. Stocks went u p from there very slightly,
did they not?
Mr. W h i t n e y . N o , sir; they are practically the same, and then
they went down, and then they vary.
Mr. G r a y . What happened to the short interest?
Mr. W h i t n e y . The short interest followed it almost exactly until
about the 10 th of December, when the market went down and the
short interest continued to go down to a low in January of all time.
Mr. G r a y . In December, you say about December 1 0 the market
started down?
Mr. W h i t n e y . It went down slightly then to about the 15th, and
then it rose, and then it zigzagged, and then it went down and it
rose and it went up again.
Mr. G r a y . There was a general downward movement until a p ­
proximately the middle of December, is that not true?
Mr. W h i t n e y . From the 1 st, a down movement in stocks and a
downward movement in the number of shares short.
Mr. G r a y . Mr. Whitney, will you look back at about the end o f t h e
second week in November?
Mr. W h i t n e y . All right, sir.
Mr. G r a y . Stocks were about 90, were they not.
Mr. W h i t n e y . On November 10 they were about 90.
Mr. G r a y . The short interest was about 3,000,000?
Mr. W h i t n e y . Yes, sir.
Senator G o r e . That is on Steel alone?
Mr. W h i t n e y . No, all stocks.
Mr. G r a y . Stocks, generally speaking, declined until they reached
a low point. I can not get the exact date here, but it looks as if
it might be somewhere around the 20th of December. They declined
enerally until they reached a low point around the 2 0 th of Decemer until they were worth only about 62, is that right?

g

Mr.

W

h it n e y .

That is right.

Mr. G ray . In the meanwhile the short interest rose from 3,000 Ofift
to—what is that ?—about 3,100,000 ?
’



STOCK EXCHANGE PRACTICES

Mr.
Mr.

W h i t n e y . About 3,750,000.
G r a y . Then it came down with
M r . W h i t n e y . Of course.
M r . G r a y . There has been very little

243

covering, did it not?

actual change in the market
between the 20th day of December and toward the end of March;
isn’t that true? I mean there has been an up and down movement,
but there has been practically no change during that period of time?
* Mr. W h i t n e y . The end 01 March, from 62, your figure of the 10th
of December, or 64, to about 56 or 57 at the end of March.
Mr. G r a y . The short interest in the meanwhile after that time
that w e talk about in November and December came down, so that
at a point of time around the 1st of January it was approximately
what will w e say, 2,800,000?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Then it rose again?
M r . W h i t n e y . Yes, sir.
Mr. G r a y . So that in February it was what, the high peak, near
4,000,000, was it not?
Mr. W h i t n e y . Just under 4,000,000; yes. Then it came down.
Mr. G k a y . Then it came down with the market.
Mr. W h i t n e y . And has followed the market almost-----Mr. G r a y (interposing). No; it came down again, did it not?
Mr. W h i t n e y . Yes; but when the market rose, it rose too.
Mr. G r a y . Yes. Well, the chart will speak for itself. Have you
any other charts that you think would demonstrate your contention
that short selling acts as a cushion for the market when we have
a strong decline?
Mr. W h i t n e y . N o; I think that chart is sufficient, sir.
Senator G o re . Probably it would come in this connection: The
short interest in Steel applied principally to the common stock, did
it not, Mr. Whitney?
Mr. W h i t n e y . There was a very considerable interest in Steel
preferred, as well.
Senator G o re . They dealt in it, the shorts, as well as in the
common?
Mr. W h i t n e y . Yes, sir.
Senator G o r e . But of course, the preferred, as a rule, is not re­
garded as such a specultive stock as the common stock?
Mr. W h i t n e y . By no means.
Senator G ore . In regard to bonds, they are not dealt in so much
by the shorts, are they, very little?
Mr. W h i t n e y . No, sir; not as much. There is comparatively little
short selling in bonds.
Senator G ore . I was wondering while we were on these charts
if it would be possible to submit a schedule of some bond that would
represent the bonds to show whether or not they fluctuated, not so
much of course as the common stocks, but more as related to the
preferred stocks.
Mr. W h i t n e y . I can show you something that is very similar,
Senator Gore. I would like to present in evidence, if I may, a
chart showing from the beginning of February, 1928, until the 1 st of
March. 1932, 421 stocks listed on the New York Stock Exchange,
including industrials, rails, and utilities, and also showing 20 New
York bank stocks dealt in over the counter.



244

STOCK EXCHANGE PRACTICES

The bank stocks and the average for the 420 listed stocks started
about together in 1928, and then from a figure of about 130 or 135
for the stocks listed and 145 for the banks, at the top of the peak in
October, 1929, the 421 listed stocks had reached an average price
of 225, whereas bank stocks at that time had reached a peak o f 360.
There was a precipitous fall in the bank stocks from 360 to about
205, whereas the listed stocks fell to an average of about 150. (See
chart Exhibit 2 2 in the appendix.)
*
Senator G o re . And the bank stocks were not-----Mr. W h i t n e y (interposing). Dealt on the stock exchange, and to
the best of my knowledge did not have any large short position.
Senator G o r e . That is what I am trying*to get at, as to when these
forces and influences are operating and what they are, and see which
were at work and which were not, so we can know how much to
charge to the activities of the short interest, if that is possible.
N ow , d o you know whether the same w ou ld be true w ith re fe re n ce
to certain lines o f bonds ?

Mr. W h i t n e y . Yes, sir, I think it would be particularly true. I
have seen no more drastic fall in prices than has occurred in bonds
of late of all kinds, with possibly the exception of governments.
Senator G o r e . Some of the fluctuations of the foreign government
bonds have been very violent.
Mr. W h i t n e y . I meant United States bonds.
Senator G o r e . I think two reasons for that are, one, the stability
of the Government, its credit, and the other its tax-exempt securities.
Mr. W h i t n e y . United Kingdom five and a halves of Great Britain
fell to around 90 and have recovered lately to around par and a half.
Senator G o r e . State that again.
Mr. W h i t n e y . The United Kingdom five and a halves of Great
Britain did fall from well above par to around 90 and have recovered
to around par and a half recently. There has been great fluctuation.
Those are some of the most active foreign government bonds.
Senator G o r e . What I am trying to get at is some sort of a meter
to gage the influence of these different forces.
Senator G o l d sb o r o u g ii (presiding). Mr. Gray, will you proceed?
Mr. G r a y . Mr. Whitney, is it not a fact that the average coverings
of the shorts on the way down on a declining market, when the time
arrives for them to cover most of that covering takes place when the
decline is about two-thirds of the way down? I do not mean that
every short picks that time, but I mean to say that the heaviest
covering comes about that time.
Mr. W h i t n e y . I haven’t the slightest idea, Mr. Gray.
Mr. G r a y . Would an examination of the chart show that?
Mr. W h i t n e y . Not any examination I have made.
Mr. G r a y . All right; never mind.
Now, you have referred to the pegging of loans. Members fre ­
quently take pegging orders to sell on a scale down and buy on a
scale up?
Mr. W h i t n e y . Selling on a scale down and buying on a scale up-—
you mean stop loss orders?
Mr. G ray . No; I mean giving orders to sell at certain prices on
the scale up—I used the wrong expression—on the scale up and buy­
ing on a scale down. That is frequently done, is it not?
Mr. W h i t n e y . I presume so; yes, sir.



STOCK EXCHANGE PRACTICES

245

Mr. G r a y . And it is done, is it not, for the purpose of making
an artificial market, very frequently?
Mr. W h i t n e y . N o , s i r ; n o t t h a t I k n o w o f a t a ll.
M r . G r a y . Not that you know?
Mr. W h i t n e y . I d o n o t t h in k i t is a r t if ic ia l.
Mr. G r a y . I beg your pardon ?
Mr. W h i t n e y . I d o n o t t h in k t h a t is a r t ific ia l.
Mr. G r a y . You do not think it is artificial. You said that you
handled the pegging of some bonds for the Morgan firm, did you not?
Mr. W h i t n e y . I did not, sir.
Mr. G r a y . What did you say about it?
Mr. W h i t n e y . I said that I handled orders on German Govern­
ment 5% per cent bonds. I did not say that I-----Mr. G r a y (interposing). Did you not say that you did execute
such orders or some of such orders for the purpose of pegging the
market?
Mr. W h i t n e y . Y ou a s k e d m e i f I h a d a n d I s a id I d i d n o t b e lie v e
so, if I remember.
Mr. G r a y . I want to know whether you have had time to find out.
Mr. W h i t n e y . Yes; I have the facts before me if you wish to hear
them.
Mr. G r a y . Y ou have the facts before you. I would like to get
them; yes. Tell me, please, about that.
Mr. W h i t n e y . Do you wish the whole story?
Mr. G r a y . Yes; as fully as you can give it to us.
Mr. W h i t n e y . German 5y2 s were offered on June 12, 1930, at 90,
bv a syndicate composed of 1,0 1 1 participants, dealers in securities,
throughout the United States. The bonds sold on that first day,
the offering price being 90, on the New York Stock Exchange be­
tween 90^ and 91. They continued to sell at a price above the
offered price until four days later, June 16. They continued to sell
at the offered price and at prices above the offered price of oneeighth or a quarter until July 2 , on which date the price agreement
oi the syndicate was lifted. On that day before that notice was
sent out the bonds on the stock exchange sold from 90 up to 90y2.
That was the range.
The following day, with no syndicate price maintained, the bonds
sold on the stock exchange between 8 8 % and 911/4, 1 % points below
the offering price and l 1 points above.
^
Then from there on until the expiration of the syndicate at the
end of July, the bonds ranged between 89% and 8 8 *4 , the average
being approximately 88 %. At the expiration of the syndicate no
bonds were delivered to the participants as against their partici­
pating agreements in the syndicate in case bonds remained.
Mr. G r a y . Y ou m e a n t h a t a l l h a d b e e n d is p o s e d o f t h a t t h e s y n d i ­
c a te d e s ir e d t o d is p o s e o f ; is t h a t t h e a n s w e r ?
Mr. W h i t n e y . All s o f a r as I k n o w h a d b e e n d is p o s e d

of by th e
syndicate.
Mr. G r a y . Yes.
Mr. W h i t n e y . And during that time purchases were made at tne
syndicate price until the price restriction was taken off, so that for
a period of 18 to 2 0 days all those wlio had purchased those bonds
could have sold them at the purchase price or for more. And during




STOCK EXCHANGE PRACTICES

246

that time we purchased for the account of the syndicate approxi­
mately $9,200,000, slightly in excess of $9,200,000 bonds.
Mr. G r a y . When was that that the syndicate put that out; last
year you mean?
Mr. W h i t n e y . No, sir.
Mr. G r a y . I do not know the year.
Mr. W h i t n e y . June 12,1930. I beg your pardon.
Mr. G r a y . Not blaming it on you, of course, but what are those
bonds selling for now?
Mr. W h i t n e y . They are selling for around 3 5 They have sold
at 23 in spite of the fact that they and the 7 per cent German bonds
have at all times paid interest, the latter having paid on April 15
last; and I have every reason to believe that the
will pay inter­
est on June 1 . That is the fluctuation in the world situation.^
Mr. G r a y . Your firm, now, acting for Morgan & Co., and if I am
wrong about this, correct me; I so understood your statement the
other day—acted for this syndicate in maintaining that price during
the time that the syndicate’s operations were in effect; is that correct!
Mr. W h i t n e y . Yes, sir; under order.
Mr. G r a y . Under order, of course.
Mr. W h i t n e y . Yes.
Mr. G r a y . That means that your brokerage house executed such
orders as were given to you by the syndicate; that is correct, is it not?
Mr. W h i t n e y . Through J. P. Morgan & Co.
Mr. G r a y . And the purpose of the execution of those orders was
to maintain—and I was going to use the word “ artificial,” but I
know you would not agree with me—to maintain a fixed valuation
for those bonds; that is correct, is it not?
Mr. W h i t n e y . T o maintain a price, sir. So that at any time, a s I
have stated, during some 18 or 2 0 days any purchasers who did not
want to hold the bonds that they had bought could have sold them
at the selling price or higher. That is an absolutely usual and c u s ­
tomary method of merchandising and distributing securities.
Senator B r o o k h a r t . In that connection did you tell them that you
were only going to maintain that price for 18 or 2 0 days?
Mr. W h i t n e y . Tell w h o m ?
Senator B r o o k h a r t . These purchasers?
Mr. W h i t n e y . Tell the purchasers—I did not have anything to
do with the purchasers, if you mean the persons to whom the bonds
were sold.
Senator B r o o k h a r t . Y ou maintained the price 18 or 20 days, so
that they could sell and get their money back ?
Mr. W h i t n e y . No; I said if they wanted to sell.
Senator B r o o k h a r t . I f they wanted to sell.
Mr. G r a y . I think Mr. Whitney will admit that no such infor­
mation was conveyed to those who actually conducted the deals with
the purchasers.
Mr. W h i t n e y . A s to h ow lo n g the b id w ou ld be nam ed?
Mr. G r a y . Yes.
M r. W h i t n e y . N o , sir.

Mr. G r a y . He will admit that.
Senator F l e t c h e r . Were those bonds sold to the public generally?
Mr. W h i t n e y . That is to be presumed, Senator Fletcher, inasmuch
as there were 1 ,0 1 1 participants in that syndicate.



STOCK EXCHANGE PRACTICES

247

Senator F l e t c h e r . How much was the total ?
Mr. W h i t n e y . A little in excess of ninety-eight millions.
Senator F l e t c h e r . They were finally sold to the public through
this syndicate?
Mr. W h i t n e y . Without knowing the absolute fact, I would say
the majority of those bonds were sold to banks throughout this coun­
try all over. They were considered a prime issue at the time.
Senator F l e t c h e r . Then the banks sold them to their customers?
Mr. W h i t n e y . That I do not know. That I have no reason to
believe.
Senator F l e t c h e r . These transactions did not take place on the
stock exchange?
Mr. W h i t n e y . The sale of the bonds bv the syndicate, no. The
transactions that I have referred to did. There were very great
transactions on the stock exchange over and above what we did,
please understand.
Mr. G r a y . I understand that.
Senator B r o o k h a r t . I s the idea of the syndicate that they have
done their duty toward the customers if they maintain the market
for 18 or 2 0 days after they have unloaded?
Mr. W h i t n e y . This particular issue was vastly oversubscribed by
the public, by the country. It seemed to be an issue that met tre­
mendous success.
Senator B r o o k h a r t . That is not what I asked you.
Mr. W h i t n e y . I am trying to explain.
Senator B r o o k h a r t . I asked you if these syndicates that operate
on the board of trade in this way, or the stocK exchange, considered
they performed their whole duty to their customers by maintaining
a price for 18 or 2 0 days in which they could get their money back.
Mr. W h i t n e y . Certainly; in this specific case, if there was ever
a n y question o f duty, I think it was done. I believe that prices have
b e e n maintained for very much longer periods where there seemed
a n y reason to do so.
Senator B r o o k h a r t . Supposing the public had turned around and
sold them in 18 or 2 0 days. Would they have maintained the price
anyhow?
Mr. W h i t n e y . I b e lie v e s o .
Senator B r o o k h a r t . There were not m a n y s o l d in the 1 8 or 2 0
days, were there?
Mr. W h i t n e y . I think about 20 per cent of the entire issue was
sold, or more, on the New York Stock Exchange.
Senator B r o o k h a r t . That was the speculators?
Mr. W h i t n e y . No, sir. No speculators got these bonds that I
kn ow o f.
Mr. G r a y .

The point I want to develop, Mr. Whitney, is this:
During that period of time your firm, acting under orders from this
syndicate or from J. P. Morgan & Co. in connection with those
bonds, were maintaining a price on the market. That is correct,
is it not?
Mr. W h i t n e y . We were bidding a price at which anybody could
sell bonds; yes, sir.
Mr. G r a y . Yes. In other words, what you were doing was execu­
ting buying and selling orders for the purpose of maintaining that
price?




248

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Not selling orders; n o , sir.
Mr. G r a y . Only buying orders. In other words, what you -h a d
was what in effect you may call either a syndicate and pool, & syn­
dicate for the issuance of the bonds, the underwriting of t h e m ,
possibly, but a pool for the purpose of maintaining that price a t a
certain level. Isn’t that true, for a certain period of time?
Mr. W h i t n e y . Yes; Mr. Gray. The syndicate at all times w -ere
selling the bonds.
Mr- G r a y . Yes.
Mr. W h i t n e y . And as I stated, at the end of the period o f the
syndicate all the bonds presumably had been sold by the syndicate
participants, all those and the ones they had bought back.
Mr. G r a y . Yes.
Mr. W h i t n e y . Because no bonds were delivered by the syndicate
to the participants when it was closed.
Mr. G r a y . And in order that the syndicate might get a p r o p e r
price for the bonds your firm executed these various orders to k e e p
that price up; is that right?
Mr. W h i t n e y . I do not think that the implication is correct.
Mr. G r a y . You do not think it is?
Mr. W h i t n e y . No, sirMr. G r a y . Did you use some other brokerage firm in the doing
of that work?
Mr. W h i t n e y . We?
Mr. G r a y . Yes, you.
Mr. W h i t n e y . Not that I know of. We may have. I can not
tell you that.
Mr. G r a y . Was it not necessary that you should buy through
another firm and sell through another at times ?
Mr. W h i t n e y . I did not sell bonds, Mr. Gray.
Mr. G r a y . I f somebody buys, somebody has to sell, do they not ?
Mr. W h i t n e y . You are implying that I as president of the s t o c k
exchange allowed my firm to wash sales ?
Mr. G r a y . I am going to ask you directly. I am not going to
imply. I ask you whether you did.
Mr. W h i t n e y . I did not.
Mr. G r a y . The firm of Asiel & Co. ?
Mr. W h i t n e y . Y ou mean, did I buy through Asiel and they s e l l
to us, making wash sales?
Mr. G r a y . I asked you whether you used Asiel & Co. in that trans­
action.
Mr. W h i t n e y . For the purpose of washing sales? We certainly
did not.
Mr. G r a y . All right. That is what I want you to answer.
Mr. W h i t n e y . And there is no more honorable firm than Asiel
& Co., and they would not think of doing that sort of thing.
Mr. G r a y . I am not even criticizing your firm, Mr. Whitney. I
want to know the facts.
Senator B r o o k h a r t . A s I understand this, your firm was selling
bonds?
Mr. W h i t n e y . N o , sir; we were not. We were buying bonds.
Senator B r o o k h a r t . Who were selling them for the syndicate?
Mr. W h i t n e y . The syndicate participants, consisting o f 1,011
dealers and individuals throughout this country.



STOCK EXCHANGE PRACTICES

249

Senator B r o o k h a r t . They were selling these German bonds?
Mr. W h i t n e y . I presume so.
Senator B r o o k h a r t . And while they were selling they had you
employed to maintain the price ?
Mr. W h i t n e y . My firm had the orders, had some orders, these
orders.
Senator B r o o k h a r t . You were buying them for this same syndi­
cate that was selling them to the public'(
Mr. W h i t n e y . Tnat is right.
Senator B r o o k h e a b t . And in that way they were double-crossing
the whole community in maintaining their pnce ?
Mr. W h i t n e y . I see 110 dou b le-crossin g w h atever.
Mr. Gray, as to your question, it may have been possible that the
member 01 my firm who would normally be in the foreign bond
crowd might nave gone out to lunch and he may have at that time
given Messrs. Asiel & Co. the order that we had." They were merely
acting as our brokers, as we were acting as J. P. Morgan & Co.’s.
There is no such thing as wash sales involved.
Mr. G r a y . Let me ask you whether or not those bond transactions
are reported through the stock clearing house. They are, are they
not?
Mr. W h i t n e y . I believe there was what is called a settlement of
those bonds.
Mr. G r a y . Through the stock clearing house \
Mr. W h i t n e y . At a later date; yes, sir.
Mr. G r a y . Would it be reported through the stock clearing house?
Mr. W h i t n e y . Yes; through the stock clearing house.
Mr. G r a y . In other words, what I want to get at is, would the
records of the stock clearing house show whether or not Asiel & Co.
had or had not on a certain day sold an equal number of bonds with
the number of bonds that your firm had bought ?
Mr. W h i t n e y . I presume at the settlement date it certainly would
show; yes. But that does not prove the case. You have got to go
and look at our records to see for whom we bought and Asiel’s to see
for whom they sold.
Mr. G r a y . Yes; but is it not a fact that where prices are to be
controlled—-now, I am drifting away from this specific, concrete
transaction—but where prices are to be controlled and for any reason
operators want to control prices, they buy in one name with one firm
and sell with another name with another firm ?
Mr. W h i t n e y . At the same price ?
Mr. G r a y . Yes.
Mr. W h i t n e y . N o , sir.
Mr. G r a y . And at varying prices in order to make the price move
the way they want it to move?
Mr. W h i t n e y . That latter is to the advantage of the individual
who may want to purchase if they are scaling orders at which he
can buy.
Mr. G r a y . Oh, you do not understand me.
Mr. W h i t n e y . Perhaps I do not.
Senator B r o o k h a r t . Only for 18 days, though.
Mr. W h i t n e y . There is no wash sale occurring when a member
of the exchange buys bonds at 90 and another individual sells them
at 901/4.



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STOCK EXCHANGE PRACTICES

Mr. G r a y . I grant you that. I am not asking you whether or
not there were such things as that. I am asking you whether or not
an operator, when he desires to put through wash sales for the pur­
pose of either increasing or decreasing the value of the stock, does
not give an order to one broker to sell in a certain name and an order
to another broker to buy in a certain name at the same price.
Mr. W h it n e y . And at the same time?
Mr. G r a y . Practically.
Mr. W h i t n e y . In all instances that we have been able to d etect,
the gentlemen of the exchange that perpetrated those acts w ere
expelled.
Mr. G r a y . Yes; and I am asking you whether or not, if there
were any buying and selling transactions between your firm and
the firm of Asiel & Co., they will show on the records o f the stock
clearing house.
Mr. W h i t n e y . My record is open to you.
Mr. G r a y . Well-----Mr. W h i t n e y . I am not sure of this other fact. sir. I can as­
sure you of this, that the stock clearing corporation’s records would
not show for whom I had bought or for whom Asiel & Co. had
sold, but our books will show-----Mr. G r a y (interposing). It will show the prices, will it not?
Mr. W h it n e y . That would not have anything to do with th e
price of eggs.
M r . G r a y . I t w o u ld show it, w o u ld it n o t?
Mr. W h i t n e y . Yes, sir; but what good does

that do? It p r o v e s
nothing.
Mr. G r a y . Y ou m ig h t th in k so. I am a sk in g y o u i f y o u k n o w .
Mr. W h i t n e y . I know so.
Mr. G r a y . Who is the economist of the stock exchange?
Mr. W h i t n e y . Mr. J. Edward Meeker.
Mr. G r a y . I am looking at his book. See whether you agree
with some things that he says.
Mr. W h i t n e y . Which b o ok , please, sir?
Mr. G r a y . Called “ The Work of the Stock Exchange.”
Mr. W h i t n e y . Yes; he has written another book recently on that
subject.
Senator B r o o k h a r t . Let me ask a question there. What was th e
trading account of the syndicate that had the German bonds?
Mr. W h i t n e y . I do not know, sir.
Senator B r o o k h a r t . H o w much of the issue was oversold by th e
syndicate. How much was it oversold?
Mr. W h i t n e y . I have no knowledge that it was oversold at all.
I said that in my belief the issue was greatly oversubscribed; in
other words, there were far more purchasers desiring bonds than
there were bonds available.
Senator B r o o k h a r t . You mean subscribed by orders on t h e
exchange?
Mr. W h i t n e y . No; to the syndicate.
Senator B r o o k h a r t . To the syndicate direct?
Mr. W h i t n e y . Direct.
Senator B r o o k h a r t . And were these sales made direct or t h r o u g h
the exchange?
g




STOCK EXCHANGE PRACTICES

2 51

Mr. W h i t n e y . The sales b y the syn dicate an d th eir salesm en and
themselves were presu m ably, so fa r as I k n ow , m ade direct.
Senator B r o o k h a r t . And then what use do we have for a stock
exchange in distributing bonds? Why can't that all be done that
way?
Mr. W h i t n e y . The stock exchange’s prime function is to main­
tain a market after the distribution has taken place, or to effect
distribution in the way of speculation, as has often occurred.
Senator B r o o k h a r t . It is not to help investors that want to keep
the bonds, then; it is to help speculators that want to gamble?
Mr. W h i t n e y . It helps the investor, absolutely. It is essential
to investors in securities, or else there would not be the quantity,
if any.
Mr. G r a y . Referring to the giving of scale orders, he said:
The grounds for objection to this practice o f employing scale orders are not
so much that it stimulates the activity o f trading in the new security, as that
it may amount to a manipulation o f prices at which sales are made. Scale
orders can not be used without fixing upon some one figure above which the
syndicate will sell and below which it will purchase. This, of course, tends to
confine the price approximately to this figure, since, if heavy selling orders
come into the market, they will meet the syndicate’s scale buying orders, and
thus prevent the price from declining severely, while heavy buying orders will
similarly meet the syndicate’s scale selling orders and prevent a sharp rise in
price. I f the figure around which the syndicate tends temporarily to confine
the movement of prices is a fair one and in accord with the real value o f the
security, no economic harm is done. On the other hand, should the price set
by the syndicate be higher than the inherent value o f the security warrants,
the possibility o f causing ultimate losses to investors arises.
D o y o u agree w ith th a t?
Mr. W h i t n e y . Yes; I believe

I do, if one can judge what “ inher­
ent value o f the security ” is with relation to Senator Bulkley’s ref­
erence this morning.
Mr. G r a y . Yes. Then the permission, or the implied permission,
i f you please, that is given to members of your exchange to act for
outside operators in executing these pegging orders or in accepting
these orders on a scale up or a scale down, is a permission that is
given to a member of your exchange to help control these prices
artificially, is it not?
M y . W h i t n e y . N o , sir.
M r . G r a y . Y ou d o n ot th in k so?
Mr. W h i t n e y . N o; I do not see the

artificial end of it. I grant the
rest of your statement.
Mr. G r a y . It opens the door to a great deal of fraud, does it not?
Mr. W h i t n e y . No, sir; I do not see fraud; no. Is there anything
wrong—may I ask this question ?
Mr. G r a y . Yes.
Mr. W h i t n e y . I s there anything wrong for you as an owner of a
hundred shares of stock or a thousand shares to make an easier
instance, if that stock is selling at $40 a share, to put in a hundred
shares to sell at 41 and a hundred shares at 42 and a hundred shares
at each point up until your one thousand have been exhausted, and
in turn, after perhaps you have sold those thousand or a part of it,
to put scale orders down below the market to buy them back at ? I
know nothing that is illegitimate, constitutes fraud, or that is artifi­
cial in such an operation, and I believe that is what you have been



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STOCK EXCHANGE PRACTICES

referring to by stating the putting of scale orders up and down in
the market.
Mr. G r a y . But it is a fact, however, that the pools that are formed
for the purpose of either depressing or increasing prices use that
very method in their stock, do they not?
Mr. W h i t n e y . That I can not tell you, because we are talking
about a hypothetical case; but I believe* the case I have cited is per­
fectly legitimate in every way.
Mr. G r a y . Can you tell me whether or not these German bonds
were not overpriced a matter of about 10 per cent, those that were
sold that you speak of ?
Mr. W h i t n e y . I do not think so, Mr. Gray. You are asking my
private opinion as a bond man. I do not think so, not in view o f the
tremendous oversubscription and the prices at which those bonds
sold the first two to four days after they were put out.
Senator B r o o k h a r t . What are calls or options ? I am not refer­
ring to puts and calls which are sold for cash.
Mr. W h i t n e y . Calls or options?
Senator B r o o k h a r t . Yes.
Mr. W h i t n e y . I believe they are most commonly a call upon a
certain stock to buy it at a certain price, for which I believe a con­
sideration is given.
Senator B r o o k h a r t . What kind of a consideration?
Mr. W h i t n e y . Dollars.
Senator B r o o k h a r t . A difference in addition to the price, bonus,
or commission or something—is that the consideration?
Mr. W h i t n e y . No; I think the option calls allow an individual or
a firm to buy stock, or whatever it may be, at a certain price, paying
for that in dollars.
Senator B r o o k h a r t . And he pays a consideration for the option?
Mr. W h i t n e y . That I can not tell you, but if he takes up the stock
he pays for it.
Senator B r o o k h a r t . These options run from 30 to 90 days ?
Mr. W h i t n e y . I have no knowledge, Senator Brookhart. I f you
will ask me something specific that I know about, I will try to
answer.
Senator B r o o k h a r t . I was trying to find out about the mechanics
of that whole thing. By whom are such calls granted?
Mr. W h i t n e y . By anybody.
Senator B r o o k h a r t . Are such options extensive by members of
the exchange?
Mr. W h i t n e y . They may be, sir. In other words, if I have a
block of stock that some one wants to buy or get an option on fo r a
consideration, I may be very glad to grant that at a price.
Senator B r o o k h a r t . For a certain time ?
Mr. W h i t n e y . Yes, sir.
Senator B r o o k h a r t . Would those securities be the property o f
the broker or does the stock belong to others ?
Mr. W h i t n e y . I said I thought it could belong to anybody.
Senator B r o o k h a r t . Anybody ?
Mr. W h i t n e y . Investor, broker, anybody.
Senator B r o o k h a r t . Are brokers permitted to distribute listed
stocks?



STOCK EXCHANGE PRACTICES

253

Mr. W h i t n e y . Only under special regulation and under the juris­
diction of the committee on quotations and commissions and the
committee on secondary distribution.
Senator B r o o k h a b t . Why do all those restrictions have to be
placed around that particular transaction ?
Mr. W h i t n e y . In order that no regulation or rule of the stock
exchange may be violated in so doing.
Senator B r o o k h a r t . H o w do the patrons who receive these calls
dispose of the securities under option?
Mr. W h i t n e y . They sell them.
Senator B r o o k h a r t . In the regulation transactions of the ex­
change?
Mr. W h i t n e y . I presume they may sell them on the exchange or
otherwise, sir. I f you are referring to listed stocks, then they may
sell them only according to the permission given by these specific
committees that I speak about.
Senator B r o o k h a r t . What are called pool operations? Are they
similar to this syndicate you mentioned in reference to German
bonds? What is a “ pool ” ?
Mr. W h i t n e y . N o , sir; I am not quite sure what is meant by a
u pool.” What is commonly meant by a pool, if I think or know
correctly, is not similar to the syndicate operation of the German
bonds.
Senator B r o o k h a r t . H o w is the pool operated? Set up one here
a little bit and let us see what it looks like.
Mr. W h i t n e y . May I possibily present to you or the committee
an actual case that I will investigate and send you the pool agree­
ments and tell you all about it?
Senator B r o o k h a r t . Yes.
Mr. W h i t n e y . Whatever I could say here would be imaginary,
because I know of no specific operation that I can recount to you.
Senator B r o o k h a r t . Describe this one, then. That is all right.
Mr. W h i t n e y . I haven’t got one in my mind. I say I can find
out one and send it to you, make a record o f it.
Senator B r o o k h a r t . Y ou can not tell me now, then, how they are
set up and how they operate?
Mr. W h i t n e y . No, sir. There is no general rule and this has
nothing to do with the New York Stock Exchange, Senator Brook­
hart.
Senator B r o o k h a r t . Pools are outside of the exchange, but they
operate through the brokers on the exchange, do they not?
Mr. W h i t n e y . Members may be participants in what is commonly
called a pool operation, but the stock exchange, as such, does not
have any agreement that pools have to sign or members of the pool
have to sign.
Senator B r o o k h a r t . Well, but they can promote or set up a plan
to increase the values in the exchange or to decrease them for their
own profit, can they not?
Mr. W h i t n e y . I do not know what you mean quite by “ set up a
plan to increase or decrease the values in the exchange.”
Senator B r o o k h a r t . They get their heads together about what
they are going to sell and what they are going to bid and work it
back a n d forth in that way to promote a price?
119852— 32------ 17




254

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . I grant that they get their heads together to d e c i d e
how pools shall be conducted. That would be necessary.
Senator B r o o k h a r t . What are the purposes of pools generally ?
M r . W h i t n e y . T o distribute th a t stock or bonds.
Senator B r o o k h a r t . That kind of a pool wants to

dispose o f th e m
at the highest possible price, does it not?
Mr. W h i t n e y . Not necessarily. A t a price.
Senator B r o o k h a r t . And at a profit?
Mr. W h i t n e y . Not necessarily. I think most of the instances o r
the requests that have come to tne committee on secondary distribu­
tion of the exchange in the last year or two where they wanted t o
distribute listed stocks, they have been trying to sell something t h a t
cost them very much higher than the price at which they were will­
ing to sell those stocks, and we put a definite limit as to the prices
between which those shares o f stock may be sold.
Senator B r o o k h a r t . Why do you have to put special limits in
those cases?
Mr. W h i t n e y . What we think is a fair swing, spread.
Senator Brookhart. You do not do that in all swings, and
spreads, do you?
Mr. W h i t n e y . In all that are under that regulation, yes, sir.
Senator B r o o k h a r t . That are handled by pools, you mean?
Mr. W h i t n e y . Handled b y a group of selling agents or firms who
wish to sell these securities that come under the jurisdiction o f the
exchange in secondary distribution.
Senator B r o o k h a r t . They form pools for both purposes, o f a d ­
vancing and depressing the prices at different times, do they not?
Mr. W h i t n e y . I know of none of the latter, sir.
Senator B r o o k h a r t . H o w is that?
Mr. W hitney. I know of none of the latter, for depressing prices.
Senator Brookhart. But they are for advancing prices?
Mr. W h i t n e y . To distribute stocks, I said.
Senator B r o o k h a r t . Yes. Now, is there such a thing as a “ floor
pool ” '{
Mr. W h i t n e y . Not that I know of, Senator Brookhart.
Senator B r o o k h a r t . You never heard of that?
Mr. W h i t n e y . No, I do not think I ever have.
Senator B r o o k h a r t . Well, I can not get the difference b e tw e e n
them then.
Mr. G r a y . Never heard of any pool.
Mr. W h i t n e y . Oh, yes. I never said that, Mr. Gray.
Mr. G r a y . Y o u have heard rumors.
Mr. W h i t n e y . Yes; b u t I can not tell exactly how they operate.
You are asking tremendous knowledge on my part, and retention
of facts.
Senator B r o o k h a r t . What is a specialist?
Mr. W h i t n e y . A specialist is one who executes orders for the other
brokers on the exchange in a particular stock.
Senator B r o o k h a r t . And who appoints him? How does he c e t
his lob?
®
Mr. W h i t n e y . Himself.
Senator B r o o k h a r t . And what information does he get then in
reference to that particular stock?




STOCK EXCHANGE PRACTICES

255

Mr. W h i t n e y . He may study that stock and the corporation be­
hind it to his heart’s content.
Senator B r o o k h a r t . Does he have information of how much each
broker has for sale?
Mr. W h i t n e y . He has information as to what orders are entrusted
to him for execution only, so far as I know.
Senator B r o o k h a r t . He has information as to all the orders to
buy and to sell both ?
M r. W h i t n e y . N o , sir.

Senator B r o o k h a r t . What orders does he have information about
then?
Mr. W h i t n e y . Those orders that are entrusted to him to execute.
Mr. G r a y . That constitutes 90 to 95 per cent, does it not?
Mr. W h i t n e y . Of all orders executed in a particular stock? I
would not say so; no, sir; nowhere near. A specialist does not
usually or invariably, by any manner or means, get market orders,
and I do not think that if you took a particular stock to-day and
then looked at the specialist’s accounts you would find that ne did
9 5 per cent of the business if there was any activity in that stock at
alL
Senator B r o o k k h a r t . I say for what purpose do they have these
specialists? Why do they have to be set up?
Mr. W h i t n e y . Well, he is a specialist like the man who specializes
on the heart, teeth, whatever it may be. He handles that particular
stock or a few particular stocks at one post. He never leaves there.
Senator B r o o k h a r t . He gets a great many or most of the orders
for both buying and selling from the brokers that are designating
him as their specialist, does he not?
Mr. W h i t n e y . What he gets, I believe, Senator, mostly are the
buying and selling orders, the selling orders above the market and
the buying orders below the market, what are called “ limited orders.”
He usually has those given him for the day, for the week, for the
month.
Senator B r o o k h a r t . He is the only man that has all o f that
information, is he not ?
Mr. W h i t n e y . A s to a l l of those orders; yes.
S en ator B r o o k h a r t . That puts him in position to affect the market
very much, does it not, by having all this close information?
Mr. W h i t n e y . But h e m a y not.
Senator B r o o k h a r t . Why may he not?
Mr. W h i t n e y . There are very stringent rules with regard to the
action of a specialist.
Senator B r o o k h a r t . How do you detect whether he does or not?
Mr. W h i t n e y . By his actions by investigation of his books, in
case there is any complaint of any kind.
S e n a to r B r o o k h a r t. I f h e g ets b y w ith it w ith o u t a c o m p la in t,
t h o u g h , i t is a l l r i g h t ?

Mr. W h it n e y . Well, we are watching it too, Senator Brookhart,
all the time.
Senator B r o o k h a r t . You watch every sale of every specialist and
every transfer?
Mr. W h i t n e y . No; not every sale, but we are watching the conduct
of our members steadily.



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STOCK EXCHANGE PRACTICES

Senator B r o o k h a r t . Why do they want specialists? What func­
tion is he going to perform?
Mr. W h i t n e y . I think I can tell you. There are, I believe some
one said, some 1,250 different stock issues listed on the exchange.
Supposing I had 1,250 different orders for 100 shares each on all of
those stocks. I could not possibly, if the orders were limited or
close to the market^ be in those 1,250 different places at once. So
therefore, with limited orders of that kind, I will naturally leave
them with the specialist who is always in that particular stock or
where it is traded in, and for that reason he exists.
Senator B r o o k h a r t . He makes these sales or transfers just by
bookkeeping them?
M r. W

h it n e y

.

N o, sir.

Senator B r o o k h a r t . H o w are they made?
Mr. W h i t n e y . In the open market.
Senator B r o o k h a r t . Well, it is not any more trouble for the other
broker to do it in the open market than it is a specialist, is it?
Mr. W h i t n e y . The other broker will do it if he can save giving
the order to the specialist, because he has to pay out part o f his
commission if he does it.
Senator B r o o k h a r t . The commission is divided with the
specialist ?
Mr. W h i t n e y . In a way, not actually half and half. There are
certain commissions that these specialists get, or any so-called $ 2
broker.
Senator B r o o k h a r t . What is an “ air pocket ” ?
Mr. W h i t n e y . An air pocket is a name that was given by a very
famous gentlemen where no bids existed in the panic of 1929.
Senator B r o o k h a r t . That is a space in between bids where----- M r. W h i t n e y (in terp osin g ). N o bids.
Senator B r o o k h a r t : N o b i d s at all?
Mr. W h i t n e y . N o b i d s a t a ll.

Senator G o r e . They just drop down, is that the idea?
Mr. W h i t n e y . There were not any bids at all below the last sale,
Sejnator Gore, in some instances. Needless to say, that caused us
a great deal of anxiety.
Mr* G r a y . It so happens, Mr. Whitney, that I was going t o a sk
you some questions on tne floor traders and specialists at the time th e
presiding chairman, Senator Brookhart asked you. Before I reach
it, there is one other thing I want to ask you.
Does your stock exchange have a list or investment trusts?
Mr. W h i t n e y . We have a list o f fixed investment trusts.
M r. G ray. Y
y o u r ex ch an ge?

ou

m e a n t h o s e w h o s e s t o c k s th e m s e lv e s a r e

sold on

Mr. W h i t n e y . N o, sir. The management type of trusts are the
only ones that we list or shares of which may be traded in on our
exchange.
Mr. G r a y . Yes. That is what I mean. In those trusts that h a v e
stock of their own which is traded in, such as the United Corpora­
tion, for instance?
Mr. W h i t n e y . Yes, sir. I do not want to quibble, but we do not
call that an investment trust.
Mr. G r a y . Yes; but there are investment trusts. What I want to
know is whether or not your exchange for purposes o f their own



STOCK EXCHANGE PRACTICES

earry a list of the various
Do you have such data ?

257

investment trusts that are in operation.

Mr. W h i t n e y . I imagine so; yes. I will gladly get it for you. I
think our statistical department has it.
Mr. G r a y . If you have in your statistical department data with
respect to the existing investment trusts that are doing business with
various brokers, wherever it may be—I do not know how extensive
your list may be—in the buying and selling of stocks on the New
Yoric Stock Exchange, we would like to have it.
Mr. W h i t n e y . That I can not answer. I am sure we have not
that, because that would necessitate asking each and every one of
our firms. Do you want us to do that?
Mr. G r a y . N o .
Mr. W h i t n e y . There are two types of investment trusts, accord­
ing to ourselves: Management, some of which are listed on the ex­
change, the shares of which are listed on the exchange. There are
many others. Then there are fixed investment trusts whose shares
we do not list on the exchange, although we have specific regulations
with regard to those fixed investment trusts—that is included in
some of the things I want to put in—allowing our brokers to have
association with them.
Mr. G r a y . For further investigation, will you give us such statis­
tics as you have on that point ?
Mr. W h i t n e y . Yes, sir; be glad to.
Mr. G r a y . Whenever it is convenient to do it. Now let me ask
you: Take these various investment trusts—I use that name; I do
not know just what you do call them—that are organized for the
purpose of buying and selling stocks. Do they do a considerable
business in the loaning of stocks to brokers on the exchange ?
Mr. W h i t n e y . I do not know, Mr. Gray.
Mr. G r a y . What I am endeavoring to ascertain is whether or not
short sellers are in the habit of it or whether they make a practice
of it, getting the loans of these stocks that they are going short of
from any o f these investment trusts prior to the time of the making
of the short sale to the broker. Tell me whether that practice exists.
Mr. W h i t n e y . I have no knowledge of it; no, sir; nor has the
exchange in so far as I know.
M r. G r a y . That is to say, these investment trusts have, of course,
large blocks of various stocks in which they see fit to deal?
Mr. W h i t n e y . Some h a v e .
Mr. G r a y . I beg your pardon ?
Mr. W h i t n e y . Some may have now.
Mr. G r a y . As I understand from your other testimony at differ­
ent times, one of the opportunities which is afforded a broker and
those who own large blocks of stocks to make money is by the lend­
ing o f those stocks.
Mr. W h i t n e y . I f they are lending at a premium; yes.
Mr. G r a y . Yes; and I take it that it would'be very natural for
the investment trusts to make money; part of their legitimate busi­
ness, under the rules of the stock exchange, by the loaning of such
stocks. But you can not tell me whether that is a large portion of
their business or not?
Mr. W h i t n e y . I do not know.




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STOCK EXCHANGE PRACTICES

Mr. G r a y . If such a thing was done, that is, if a short seller with
the investment trusts made a deal whereby he got his stocks in the
first instance and delivered them, of course, that would not appear
as a short sale at all; there would be nothing to so indicate?
Mr. W h i t n e y . N o, sir.
Mr. G r a y . Now, I am going to come down to the proposition o f
your floor traders. Tell this committee, if you will, please, first,
what a floor trader is. That is information that ordinarily everyone
who knows anything about stock transactions should know, b u t I
would like to have it in the record in this hearing—what is a floor
trader?
Mr. W h i t n e y . A floor trader is a member o f the exchange who
buys or sells stock for his own account and presumably at a fairly
small spread o f profit.
Mr. G r a y . Is he a member of the exchange?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . N o w , following u p and then coming back to t h a t , sev­
eral questions of Senator Brookhart’s, as to the way in which busi­
ness is translated, maybe it would be very buch better if I asked
you to tell me instead of telling it to you, instead of asking i f that
is correct.
Mr. W h i t n e y . I wish you would. It would be easier for me.
Mr. G r a y . Is it? I may be inaccurate about it, but I will try to
be correct about it. When a broker gets an order it is transmitted
through his telephones, which are closely connected with the floor
of the exchange. That is the first step, is it not?
Mr. W h i t n e y . It is on the floor of the exchange.
Mr. G r a y . It is on the floor of the exchange. And through that
telephone message there is transmitted to the representatives o f that
firm on the floor the order itself; that is correct, is it not?
Mr. W h i t n e y . Yes; whether he be a member of that firm-----Mr. G r a y (internosing). Or acting for the firm?
Mr. W h i t n e y . Or acting for the firm, or a specialist acting fo r
the firm.
Mr. G r a y . Well, as a matter of fact, of course, every brokerage
firm, in order to execute its orders, has to have, either through some
member of its firm or a cooperating firm, one member on the floor I
Mr. W h i t n e y . Exactly.
Mr. G r a y . Or else the orders could not be executed. Then there
are different centralized points on that floor where certain stocks
are dealt in. That is true, is it not?
Mr. W h i t n e y . Every stock must be dealt in at a particular point.
Mr. G r a y . And that is called a “ post.”
Mr. W h i t n e y . Right.
Mr. G r a y . And if it is a market order, why, then the man who has
a market order to buy or sell can go to that post and immediately,
if it is a buy order, accept the lowest offer to sell and close the
transaction. That is true, is it not?
Mr. W h i t n e y . If, in his judgment, that is a good execution o f the
order; yes, sir.
Mr. G r a y . I f it is a market order, he must execute it at the lowest
price at which he can buy?
Mr. W h i t n e y . Well, it depends. For instance, if the market is
41 bid, 42 offered, last sale 41, and he went in there with 500 shares



STOCK EXCHANGE PRACTICES

to b uy, he w ill n ot necessarily p a y 42 fo r them.
discretion.

259
H e w ill use his

Mr. G r a y . He has to exercise that discretion within quite a prompt
or reasonable time—that is correct, is it not?
Mr. W h it n e y . Yes. It all depends upon the way the order is
given.
Mr. G r a y . Yes: but if it is a straight order to buy at the market,
it ought to be executed immediately at whatever price it shows?
Mr. W h i t n e y . Within the discretion of the broker.
Mr. G r a y . And, of course, the same thing is true on the other side

wi1
1

M r . G r a y . And following up the explanation given by Senator
Brookhart, if a broker has an order to buy or sell a stock at a fixed
price which may be slightly out of the range of bids and offers for
the moment, that is where the specialist comes in; isn’t that so?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . He is a man, for instance, in large stocks who only
sells or buys one stock, but in some of the less-active stocks may sell
a certain group; that is correct, is it not?
Mr. W h i t n e y . Quite right.
Mr. G r a y . And then that person, the man on the floor who is a
member of the exchange with that order goes to that specialist and
places that order with him; is that correct?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . The specialist keeps a book, does he not?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And that book has in it two accounts or two columns,
as you may call it, in which he has in one all of his buy orders ana
in another all of his sell orders—that is true, is it not?
Mr. W h i t n e y . Buy on the left and sell on the right, yes, sir; at
the price.
Mr. G r a y . It is a fact that if the specialist discloses the informa­
tion that he has to any individual or to any group of men or any
representative of that group who desires to either depress or increase
or advance the price o f that particular stock, then the person who
secures that knowledge has a decided advantage; isn’t that true?
Mr. W h i t n e y . Yes; and the giving of that knowledge in such a
case is contrary to the rules of the exchange.
Mr. G r a y . I understand that. Don*fc you know as a matter of
fact -that the way pools to advance prices or—you don’t like the
word “ bear raids ”—or pools to depress prices and thus make a
profit to those whose stock is sold short, are generally handled from
the knowledge that is obtained from the specialist in that particular
stock?
Mr. W h i t n e y . N o , sir; I do not. I f a broker goes into a crowd
and watches the operations o f that stock, stays tnere and makes a
practice of staying there, not a specialist, he probably can know of
his own judgment just as much as any specialist could tell him.
Mr. G r a y . He would not know the ran,ge o f the orders to buy and
sell outside of the market range at that time, would he?

M r, W h i t n e y . N o .

Mr. G r a y . N o . N o w , you say you do not know that there have
been instances, frequent instances, where in the pools for the rise




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STOCK EXCHANGE PRACTICES

or for the depression of the market have existed with the coopera­
tion of the specialist. Do you mean you do not know7 that officially ?
Mr. W h i t n e y . I do not know it either w ay. I will grant that I
T
believe often in an operation or a syndicate operation the specialist
will be a party, may be a party.
Mr. G r a y . Has he the right to do that?
Mr. W h i t n e y . Yes; so far as I know.
M r . G r a y . Y ou m ean to say then th a t i f there are a n u m b e r
o f m en-------Mr. W h i t n e y (interposing). But I am not predicating his right

on his using that right to the detriment of his customers who have
entrusted orders to him, and there is a distinction.
Mr. G r a y . I am not talking about the particular different cus­
tomers who have entrusted their orders to him, but he has the right
to operate in that particular stock in which he is a specialist and to
use the knowledge which is shown on his books to the advantage o f
himself and the other men who are interested with him, has he not?
Mr. W h i t n e y . He may use that knowledge, yes, but when you
say to the advantage of himself and the other men interested with
him, that seems to imply to the disadvantage of the people who have
given him orders. So I can not agree with that.
Mr. G r a y . That does not necessarily follow. Don’t you know
that as a matter of fact the operations of these large traders are
generally conducted with the connivance and the help of the spe­
cialist who has an interest in what they are doing ?
M r. W h i t n e y . N o , sir.

Mr. G r a y . On either side o f the market I am talking about?
Mr. W h i t n e y . No, sir. You say the large traders?
Mr. G r a y . Yes, sir.
Mr. W h i t n e y . I do not know that for a fact.
Mr. G r a y . O f course, if that was done it could not be done with­
out the cooperation of some members of your exchange; t-hct is true,
is it not? In other words, a specialist is a member of your exchange,
is he not?
Mr. W h i t n e y . Yes; but why may a man not operate in stocks on
the exchange without having any connivance or agreement or under­
standing with a specialist? There is nothing to prevent a man from
buying stock on the exchange and selling it on the exchange without
the specialist knowing anything about it.
Mr. G r a y . Because of what you have just told me, and that is that
the man who has that knowledge has a decided advantage over the
man who has not that knowledge. Isn’t that true? You said that
a minute ago.
Mr. W h i t n e y . I say that the specialist had the knowledge.
Mr. G r a y . And did you not also say to me that the man who
desired to put that stock either up or down had a decided advantage
in doing it if he knew what was on a specialist’s book?
Mr. W h i t n e y . He might have that advantage; yes.
Mr. G r a y . He would have that advantage, would he not ?
Mr. W h i t n e y . That depends on whether the specialist gave him
the information, and I have tried to say in each instance if the spe­
cialist, even acting with anybody, gives information that is to the
detriment of his customers, that is absolutely contrary to the rules
of the exchange.



STOCK EXCHANGE PRACTICES

2 61

Mr. G r a y . Leaving out the question of whether it may or may not
be to the detriment of his customers for the moment, y ou have said
first that the man who can get the knowledge of what is on that
specialist’s book has an advantage, and you have said that the spe­
cialist is justified not only in giving it to someone but in cooperat­
ing with that someone in the buying and selling of stocks to his own
advantage and to the advantage of those that are associated with
him, have you not?
Mr. W h i t n e y . I have said that with the reservations that I have
also stated.
Mr. G r a y . In other words, with the reservation that he should not
do it to the detriment of his customer?
Mr. W h i t n e y . That is right.
Mr. G r a y . All rig h t.
Mr. W h i t n e y . May not.
Mr. G r a y . May not. You could not describe to us how such a
pool could operate, could you, with the cooperation of the specialist,
if they wanted to depress the value o f stocks?
Mr. W h i t n e y . I am not granting that pools depress the value of
stocks.
Mr. G r a y . Do you know how it could be done ?
Mr. W h i t n e y . To-day?
Mr. G r a y . I do not know whether or not with the present low con­
dition of the market it would be depressed much further, but in
normal times how could it be done?
Mr. W h i t n e y . N o ; Mr. Gray. I told Senator Brookhart I would
be glad to look up some pool agreements and try to give him those
facts, but I truthfully do not know.
Mr. G r a y . Are they in writing?
Mr. W h i t n e y . I th in k p ro b ab ly .
Mr. G r a y .. You are talking about syndicates such as you spoke of
in connection with those bonds.
Mr. W h i t n e y . N o , n o; I am speaking of pool agreements in stock.
They exist.
Mr. G r a y . You mean by that agreements between gentlemen who
can and do in those instances put it in writing that they will make
investments in stock either for the rise or for the fall of the market—
that is what you mean, is it not?
Mr. W h i t n e y . Who are you talking about?
Mr. G r a y . I am talking about the man who goes in and de­
liberately sells them facts and by the purchase of the facts, acting
in cooperation with a specialist, causes the market to have a rapid
rise or a rapid drop in order that he might take advantage of it
by then turning to the other side of the market.
Mr. W h i t n e y . I haven ’t any k n ow led ge o f such operation s.
Mr. G r a y . And you could not tell us how a person could do
that?
Mr. W h i t n e y . I f you will ask me a concrete question to tell me
what you have in your mind, I will try to answer it to the best of my
ability.
Mr. G r a y . I know nothing about this matter, but I will ask you
about this: Do you remember the Alaska Juneau matter?
Mr. W h i t n e y . I know n o th in g about th e A la s k a Juneau m atter.
I k n ow there is a stock listed 011 the exch ange.



262

STOCK EXCHANGE PRACTICES

M r. G r a y . D o n ’t y o u k n ow that it was done in that about e ig h t
m onths ago?

Mr. W h i t n e y . What was done?
Mr. G r a y . A manipulation both ways by pools.
Mr. W h i t n e y . Y ou h ave the proof; I h aven ’t , sir.
Mr. G r a y . Y ou d o n ’t know about it?
Mr. W h i t n e y . I do not. I have heard that the stock went u p

and

d o w n , b u t th a t th at w as a m an ip u lation -------Mr. G r a y (interposing). All stocks do that.
Mr. W h i t n e y . Yes. So, therefore, I do not know

the proof in the
case of Alaska Juneau that it was a manipulation. There can be
reasons for lots of things.
Mr. G r a y . There was nothing that ever came to the attention o f
the business conduct committee o f the exchange to indicate that there
was ever anything improper in that, or that the specialist had any­
thing to do with it?
Mr. W h i t n e y . So far as I know of anything that the b u sin ess
conduct committee knew of the up and down swings in Alaska
Juneau nothing was found that was improper.
Senator F l e t c h e r . I suppose these pool agreements that Mr. Gray
is talking about are just understandings among the group of p e o p le
orally. Nothing in writing?
Mr. W h i t n e y . No; I think they are in writing. I think I can
discover pool agreements that are in writing, because a man has a
commitment to such and such a participation in a pool.
Senator F l e t c h e r . Let me ask this one question about bear raids:
You mentioned about their being discouraged and not favored by
the exchange. How can you tell and when do you determine that
short selling leads to a bear raid? When does a bear raid begin
and the short selling take place?
Mr. W h i t n e y . I i we find, Senator Fletcher, that, let us s a y , a
block of shares of 500 or more are sold on the exchange and that
the sale depressed the stock from the previous price, we will im­
mediately ask the broker or his house whether it was for short a c ­
count or not, and our investigations have not proved that such sales
at a decrease from the last price were for short account; therefore,
a bear raid did not exist.
Mr. G r a y . Possibly the Senator wants to know where short s e llin g
stops and bear raiding begins.
M r . W h i t n e y . Short selling stops and bear raiding begins when
a depression in the price of the security occurs.
Mr. G r a y . Are you through, Senator?
Senator F le t c h e r . Yes.
Mr. G r a y . A few more questions. On page 17 of your H artford
speech you state that:
The New York Stock Exchange has for many months been investigating this
whole subject [o f bear raiding]—

And further state that you—
have particularly looked into all sales of shares in bi.« blocks.

That is what you have just reiterated?
Mr. W h i t n e y . Yes, sir.




STOCK EXCHANGE PRACTICES

263

Mr. G r a y . Your speech indicates that you have looked into 50 or
60 cases of this sort. Have you minutes or transcripts or records
of those investigations?
Mr. W h i t n e y . I do not think that we have of all of those. That
was done b y members of the business conduct committee and may
have been conducted entirely verbally.
M r . G r a y . I do n ot suppose th e com m ittee cou ld h av e a n y su ch
investigations as you h ave, sh ou ld th ey w a n t th e m ?
Mr. W h i t n e y . I will endeavor to find out. I do

not think so.
Mr. G r a y . You were asked the other day about a copy of your
questionnaire issued in November, 1929. Have you that?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . And have you any sort of a summary o f the replies
that were received?
Mr. W h i t n e y . Yes, I have; complete.
Mr. G r a y . W ill you let me just glance at it and then I will offer
it coming from you as an exhibit?
Mr. W h i t n e y . There is the questionnaire [handing document to
Mr. Gray]. The next page shows the total short position, and I
believe the last few pages show the breakdown in stocks.
Mr. G r a y . With your permission, Mr. Chairman, I will let the
reporter note this as an exhibit that has been offered so that it may
be examined hereafter. It is in response to my request that Mr.
Whitney furnish such data.
(The questionnaire and summary of replies thereto, designated
“ Exhibit 23,” are here printed in the record in full, as follows:)
N ew Y okk Stock E xch an g e,
C o m m it t e e on B u s in ess C o n d u c t ,

To

members

of

New York, Xox'cmber 18, 1929.

the exchange:
The committee on business conduct directs all members to furnish the follow­
ing information in regard to stocks listed on the New York Stock Exchange
(not including odd lots) loaned or borrowed or on which there has been a fail­
ure
deliver:
1. A list o f all stock borrowed, from whom, and for whose account.
2. A list o f aU stock loaned and to whom.
3. Intraoffice borrowings, and fo r whose account.
4. A list o f all stock which you have failed to deliver and for whose account.
First report.—1 he foregoing information as o f the close o f business Novem­
T
ber 12, 1929, must be filed with the committee not later than noon Saturday,
November 10, 1929, by members not more than one day's distance by mail from
New York, and by other members not later than noon Monday, November 18,
1929.
Subsequent reports.— Subsequent reports o f the changes occasioned by each
day’s business must be furnished from day to day thereafter.
Envelopes.— The envelopes containing the foregoing information are to be
addressed to the committee on business conduct, room 609, 11 W all Street, New
York City.
Wire houses are requested to cooperate with the committee by transmitting
th is circular over their wires to their out-of-town member correspondents and
f o r w a r d i n g the replies o f the latter to the committee.
A s r b e l G r e e n , Secretary.

to

Mr. W h i t n e y . That is the only day that mv records are now
existing and complete.
Mr. G r a y . Did you take any minutes of the meeting on the morn­
ing o f September 21 when you met to determine whether you were
going to close or what alternative you would adopt with respect
to England going off the gold standard ?



264

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . I can present the minutes that we took. I f I
remember rightly, I read to the governors of the exchange my pro­
posed announcement and motion was made upon that and it was
carried, and then I read it from the rostrum to the members o f
the exchange about 10 to 15 minutes to 10.
Mr. G r a y . That announcement covered, of course, more than y o u r
simple testimony here to the effect that you were abandoning s h o r t
selling. Will you furnish a copy of that to the committee?
Mr. W h i t n e y . Very glad to. It is practically incorporated in my
Hartford speech.
Mr. G r a y . Maybe the substance of it, but we would like to have the
transcript of it. Will you do that?
Mr. W h i t n e y . Of the announcement given?
Mr. G r a y . The transcript of the minutes of the board with
respect to what occurred and such—did it contain any discussion ?
Mr. W h i t n e y . I do not think there was any discussion.
Mr. G r a y . In other words, what you said went?
Mr. W h i t n e y . What the gentleman moved who made the motion
went.
Mr. G r a y . I understood you said you read to them what you were
going to announce.
Mr. W h i t n e y . I did not make the motion, though.
Mr. G r a y . Will you send us a copy of the transcript ?
Mr. W h i t n e y . Yes, sir.
Mr. G r a y . Thank you, Mr. Whitney. You remember the Man­
hattan Electrical Supply matter, do you not ?
Mr. W h i t n e y . Yes, sir; a good deal about it.
Mr. G r a y . There was a pool that operated in that stock, was
there not?
Mr. W h i t n e y . There was.
Mr. G r a y . And they run the stock up to 120, did they not ?
Mr. W h i t n e y . Perhaps, Mr. Gray. I don’t remember that.
Mr. G r a y . The pool broke and the stock crashed 60 points in one
day back to 60, did it not?
Mr. W h i t n e y . I believe so, due to the fact that the business con­
duct committee—because they suspected something was wrong, sent
out the questionnaire to all of our members asking facts upon that
stock.
Mr. G r a y . A s a matter of fact, is it not so that your action w a s
not taken until the attorney general’s office of the State of New Y ork
started an investigation?
Mr. W h i t n e y . I think that is not so.
Mr. G r a y . Y ou t h in k t h a t is n o t s o ?
Mr. W h i t n e y . But I do not wish to state it as a fact, because I
do not know; but I do not think so.
Mr. G r a y . That was undoubtedly a pool, was it not; what we have
been referring to as a pool ?
Mr. W h i t n e y . Either a pool or one individual; yes. It was an
illegitimate operation on the market.
Mr. G r a y . That was, by the way, back in 1926 and 1927, was it not ?
Mr. W h i t n e y . I think there were two episodes in that stock.
Mr. G r a y . I will come to that in a second. As a matter o f fact
the exchange was put on notice by the first that there had been some­
body illegally handling that stock. That is true, is it not *



STOCK EXCHANGE PRACTICES

265

Mr. W h i t n e y . It seems so.
Mr. G b a y . Do you remember that in 19*29, as it developed after­
wards, that Brown, the president of the Manhattan Electrical
Supply, employed a broker by the name of McCarthy to operate
another such pool?
M r. W

h it n e y .

I a m n o t p o s it iv e a b o u t th e n a m e s , b u t t h a t m a y

b e so.

Mr.
Mr.

G b a y . The
W h it n e y .

occurrence took place ?
Yes.

M r. G b a y . A n d b y the op eration o f that p o o l they pushed the stock
up f r o m 20, to w hich price it had d ro p p e d th eretofore, to 50 ?

Mr. W h i t n e y . Very likely, sir.
The C h a i r m a n . I am surprised to hear that. I have been under­
standing that there had been no such things as pools existing. Now
we begin to hear about them.
Mr. G b a y . I understand so.
The C h a i r m a n . It is quite illuminating.
Mr. W h i t n e y . I don’t know about the details of these pools,
Senator.
Mr. G r a y . A s a matter of fact, the exchange being put on notice
by reason o f what had transpired before in that stock, is it not a
fact that that fraud was perpetrated and the exchange took abso­
lutely no notice o f it and paid no attention to that pool operation
until the attorney general of the State of New York stepped in
there %
Mr. W h i t n e y . That I also have no knowledge of.
Mr. G r a y . Y o u h a v e n o k n o w le d g e o f t h a t ?
Mr. W h i t n e y . No. The exchange took immediate action in that
as soon as anything suspicious happened, so far as we could find out
and knew. Will you please mention the date of that second episode ?
Mr. G b a y . I can say to you that it started in about December o f
1929.
Mr. W h i t n e y . December?
Mr. G r a y . I would be glad to have vou clear on it.
Mr. W h i t n e y . I just wanted that for my own information.
M r . G r a y . Yes.
Mr. W h i t n e y . Because, if I remember rightly, there was—well,
I don’t know.
Mr. G r a y . The rise continued until May and June of the following
year.
Mr. W h i t n e y . O f 1931, or 1930?
Mr. G r a y . O f 1930.
Mr. W h i t n e y . The market went up in general during that latter
part.
Senator G o r e . What stock is that ?
Mr. W h i t n e y . Manhattan Electrical Supply Co.
Mr. G r a y . Did you get complaints during* that period of time,
directing your attention to this concern and the former manipula­
tion, and the fact that another manipulation was going on, to which
you paid no attention?
Mr. W h i t n e y . I do not know, Mr. Gray.
M r . G r a y . You don’t know that?
Mr. W h i t n e y . No.



266

STOCK EXCHANGE PRACTICES

Mr. G r a y . Y o u have said that your business conduct committee
would be interested in that.
Mr. W h i t n e y . I do not recall either one, and I was chairman, o f
the business conduct committee at that time.
Mr. G r a y . You mean, you do not recall ever having received
those?
Mr. W h i t n e y . Complaints?
Mr. G r a y . Yes.
Mr. W h i t n e y . No; not during that period.
Mr. G r a y . I might say to you the reason I am asking you the
question is because the information I have, from proper sources,
is to the effect that the complaints could get no satisfaction from
the business conduct committee and were compelled to go to the
attorney general’s office in the State of New York.
Mr. W h i t n e y . I would ask that you admit those to evidence, s o
that I may have knowledge of them, Mr. Gray.
Mr. G r a y . I would be very glad to do so.
Mr. W h i t n e y . Because, if 1 may be so bold as to say, the facts
with relation to Mr. Kenny’s case as presented this morning are not
as full as the business conduct committee has them. Understand I
am not imputing anything to you or to anybody else.
Mr. G r a y . W e would be very glad to hand you the file in t h e
Kenny matter.
Mr. W h i t n e y . I am going to hand you the files, which are very
interesting.
Mr. G r a y . I would be very glad to have you do that.
Mr. W h i t n e y . And I would like, also, for our benefit, to h a v e
the full detail on this complaint, because if that is a fact t h e n
something should be done about it.
Mr. G r a y . I will say to you that my information comes from the
attorney general of the State of New York, who prosecuted the case.
Mr. W h i t n e y . And the complaints?
Mr. G r a y . The names of them, you mean ?
Mr. W h i t n e y . Yes.
Mr. G r a y . I can not tell you at the moment.
M r . W h i t n e y . But he stated that the complaints came t o t h e
exchange?
Mr. G r a y . Yes.
M r . W h i t n e y . And nothing was done about it ?
Mr. G r a y . Nothing was done about it ; yes.
Mr. W h i t n e y . I would like very much the name of the indi­
vidual, because that individual might have been stretching the truth
when he said he complained to the exchange.
Mr. G r a y . I can not advise you at the moment.
Mr. W h i t n e y . May I h a v e i t ?
Mr. G r a y . I will be very glad to get it for you, very glad.
Mr. W h i t n e y . Please.
Mr. G r a y . That investigation developed, didn’t it, if you recall
the facts—if you do not know them, of course there is no use o f my
asking you about them—that McCarthy, this broker, had bribed
customers’ men of several stock exchange houses to advise their cus­
tomers to buy the stock, thus disseminating false information.
Mr. W h i t n e y . I believe, sir, that that developed in the later caw
in the reports.
’



STOCK EXCHANGE PRACTICES

267

Mr. G r a y . It also developed that McCarthy was operating
through a number of different accounts and different names and
different brokers, didn’t it?
Mr. W h i t n e y . Particularly with one house, if I remember, who
were suspended for five years.
Mr. G r a y . D o you recall the instance o f the Dunhill International
stock?
Mr. W h i t n e y . No ; Mr. Gray, I do not. What is the date of that
Dunhill International? May I have that?
Mr. G r a y . It started in August of 1930, followed during the month
of August, and early in September, certain things being done, the
matter eventually came to the attention of the Attorney General’s
office, and he took action in connection with the matter.
Mr. W h i t n e y . Y o u appreciate that we are a source of a great
deal o f the information going to the Attorney General’s office, I trust.
Mr. G r a y . Y ou may be, but not in these cases.
Mr. W h i t n e y . We a re .
M r . G r a y . I say, you may be. I do not doubt that at all.
Mr. W h i t n e y . I think you will find, sir, in the case of the Man­
hattan Electrical Supply Co., that that is so.
Mr. G r a y . My information from the Attorney General, Mr. Whit­
ney, although I do not want to get into a discussion with you on the
matter, is to the contrary. Now, going into another subject, can
you suggest the means whereby the exchange could be properly in­
formed as to which sales were sales against the box?
Mr. W h i t n e y . I did not hear the question.
Mr. G r a y . Can you suggest the means whereby the exchange could
be properly informed for their records as to which sales were sales
against the box?
Mr. W h i t n e y . Only by instructing our brokers to so inform us,
but, as I have told you, we see no necessity whatever for that infor­
mation.
Mr. G r a y . Y o u do not think it would be proper that the informa­
tion should be public, in order that if there are instances where
officers or directors of institutions are selling the stock of the com­
panies, in which they are such officers and directors, in that manner,
it should be made known ?
Mr. W h i t n e y . There is no law that I know of to prevent a man
galling stock up to the amount that he owns in any corporation of
which he is an officer or director.
Mr. G r a y . I a m n o t r a is in g a n y q u e s t io n i f t h e r e is a n y la w a g a in s t
it.

Mr. W h i t n e y . But I do want to raise the question about the law.
Mr. G r a y . Yes. Well, go ahead.
Mr. W h i t n e y . That is it.
Mr. G r a y . That there is not any law to prevent him from doing it?
Mr. W h i t n e y . Yes; in the State of New York or in the United
States, as far as I know. Therefore, why should the New York
Stock Exchange do something that is conceded to be proper under
Mr. G r a y . Haven’t you even testified to-day that irrespective o f
what the legal rights were, you have adopted regulations because
you did not think such things should be done? You said so to-day,
didn’t you?




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Mr. W h i t n e y . Yes.
Mr. G r a y . Therefore, it is no answer to say what you just said.
Mr. W h i t n e y . And I reiterate, but we have only done that where
we felt, for the best interests of the customers of our members, such
regulations should be put in force. We do not think that in the case
you suggest.
Mr. G r a y . In other words, your answer in this case then is not
whether a man has a legal right to do it or not, but irrespective o f
legal rights, you don’t think it is a proper matter to regulate?
Mr. W h i t n e y . We believe he has a legal right and also believe he
has a perfect right.
Mr. G r a y . And you should not interfere with it or regulate it in
any way?
Mr. W h i t n e y . Yes.
Mr. G r a y . That is your answer?
Mr. W h i t n e y . Quite. Any more, Mr. Gray, than I would attempt
to prevent you selling what securities you desire to sell that you
owned; and I see no distinction there.
Mr. G r a y . Mine are gone long ago, but I didn’t see any necessity
for making that public.
Mr. W h i t n e y . I am sorry.
Mr. G r a y . I say I didn’t see any necessity for making that public.
You called attention to it, so I am telling you.
Mr. W h i t n e y . Y ou w a n t th a t k ep t o ff th e record, d o n ’t y o u ?
Mr. G r a y . No; I don’t care. It does not make any difference to
me.
Mr. W h i t n e y . All right.
Mr. G r a y . Mr. Whitney, it is a fact, of course, that under the law
and under the regulations of your stock exchange, all of your mem­
bers have a right not only to act as brokers and agents for customers
who want to buy and sell stock, but they have a right and there are
no restrictions 011 the firms, nor on the members of the firms, in this
respect, to deal in their own names and for themselves; that is true,
is it not?
Mr. W h i t n e y . That is true, with the proviso, however, that there
is a strict regulation of the exchange in taking a position opposite
to the customer’s.
Mr. G r a y . That, of course, we know is against the law as well as
your regulation.
Mr. W h i t n e y . May I point this out, Mr. Gray?
Mr. G r a y . Yes.
Mr. W h i t n e y . I am sorry to take the time, but I feel that some
of these things are of interest.
Mr. G r a y . The committee is after information, and of course we
will be glad to have anything you can tell us on either side o f the
matter.
Mr. W h i t n e y . Yes. I think a majority of our partnerships, stock
exchange partnerships, have specifically the rule that they dp not
take a position, nor the members of that partnership, for their own
account.
Mr. Gray. Let me see if I understand you correctly. You mean
that there are a number of firms which are members oi the exchange
that of their own accord adopt the rule for the conduct of their own
business that they do not buy or sell any stocks?



STOCK EXCHANGE PRACTICES

269

Mr. W h i t n e y . Under their partnership agreement.
Mr. G r a y . Anything at all?
Mr. W h i t n e y . Any securities whatever.
Mr. G r a y . Don’t you think that is a very salutary rule ?
Mr. W h i t n e y . A salutary rule?
Mr. G r a y . Yes.
Mr. W h i t n e y . It depends on what the man’s business is. Our
members deal in all sorts and types of business. Some are commis­
sion brokers. Some are just ordinary brokers, like myself. Soine
do a commission business and are dealers in securities, and some are
bankers, and so forth.
Mr. G r a y . What class of members o f the exchange were you re­
ferring to when you said that there were some of them that had
adopted the rule of refraining from that?
Mr. W h i t n e y . All classes.
Mr. G r a y . All classes?
Mr. W h i t n e y . Yes. And our rules in that respect-----Mr. G r a y . I am not concerned so particularly with other than
those houses which buy and sell for customers, whether they do it
in the manner you indicate your house does, or whether they do it
on a commission basis. Wouldn’t it be a good rule for the exchange
to adopt, to require those houses which are dealing for customers
not to deal on their own account ?
Mr. W h i t n e y . Possibly. But that is something that we have had
under consideration at various times, and we feel that the result to
the business of our houses would be so detrimental, where it affected
dealers in securities, distributing houses, that the rules that we have
cover the situation. I refer to the rule with regard to capital re­
quirements, specifically with regard to securities owned by those
houses that own them, and the capital requirements with relation
to margin accounts, and to positions taken opposite to what their
customers are doing.
Mr. G r a y . I f such a rule were in effect, then, o f course, a house^
could not engage in the stabilization of prices, such as you have indi­
cated your house did with respect to this loan; or did you not in
that case buy in your own name? You bought in the name of the
customer in that case, did you not?
Mr. W h i t n e y . I bought in our own name for customers.
M r. G r a y . For customers?
Mr. W h i t n e y . Yes.
Mr. G r a y . Speaking of that for a minute, the stocks you bought,
had to go around in a circle and had to come around in the market
again from the syndicate; in other words, the customers you were
buying for were practically the same customers you were selling for ?
Mr. W h i t n e y . No; I do not know of any proof of that.
Mr. G r a y . I do not know of any proof o*f it either, sir. There are
a lot of things we ask about that we can not prove.
Mr. W h i t n e y . I do not know why, if you sell for a member of a
syndicate, under general orders.
Mr. Gray. Your orders to peg were on behalf of the syndicate,,
weren’t they?
Mr. W h i t n e y . Yes.
Mr. G r a y . And your orders were to buy.
119852— 32-------18




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STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . But I have not admitted that the syndicate was
selling to me.
M r . G r a y . But the syndicate was selling at the same time.
Mr. W h i t n e y . Yes; but I do not admit that they were selling
these bonds on the floor of the stock exchange. They were attempt­
ing to sell to investors.
Mr. G r a y . And while they were attempting to sell to investors,
where there were any offers in the open market, you picked them up,
so as to not let the price drop ?
Mr. W h i t n e y . At the price at which I had the order.
Mr. G r a y . In order to keep up the price, while the syndicate was
selling these bonds privately to the banks all over the country, any
that were offered in the open market you bought, and then when the
syndicate had sold all its original stock, it stopped, didn’t it?
Mr. W h i t n e y . The syndicate, yes. But the price had not been a
pegged price during that period.
Mr. G r a y . You indicated that as soon as it stopped, the price
dropped a couple of points.
Mr. W h i t n e y . It had a range.
Mr. G r a y . It had a range, and then went lower.
Mr. W h i t n e y . It sold at many times above the price of the offer.
Mr. G r a y . Don’t you think that commission houses and other
houses buying for their own customers should be stopped from buy­
ing on their own account?
Mr. W h i t n e y . I do not believe they could be, except perhaps over
a period of time, because the results would be too grave and disas­
trous to our business.
Mr. G r a y . In what way?
Mr. W h i t n e y . They would have to change their entire business.
They would have to change from being a steel factory to a rubber
factory.
Mr. G r a y . You mean they would have to abolish that part o f the
business in which they went into business for themselves ?
Mr. W h i t n e y . Suppose they had things on their shelves that they
had to sell.
Mr. G r a y . As a matter of fact, that regulation is in force on the
London Exchange, is it not?
Mr. W h i t n e y . There is no comparison between the London E x­
change and the New York Exchange.
Mr. G r a y . I didn’t ask you that. I asked you whether that regu­
lation is in effect on the London Exchange.
Mr. W h i t n e y . No, sir.
Mr. G r a y . Don’t you know that the London Exchange-----Mr. W h i t n e y . I know what is in force, but the answer to your
question is no.
Mr. G r a y . W ill you tell me what is in force then with reference
to the rights of brokers on the London Exchange who engage in
buying and selling of stocks of customers, with respect to buying and
selling on their own behalf ?
Mr. W h i t n e y . On the London Exchange a member has to signify
whether he is going to be a dealer, or a jobber, or a broker. I f he
signifies he is going to be a broker, he executes orders for the account
o f customers—



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271

Mr. G b a y . He may buy?
Mr. W h i t n e y . On the floor of the exchange. I know of 110 law
which prevents his buying for his own account off the stock exchange.
Am I right?
Mr. Gbay. Perhaps you are.
Mr. W h i t n e y . Whereas on the stock exchange the dealer or job­
ber of the other type of member may only deal for his own account,
as I understand it, and not for the account of customers or as agents.
But what their business is off the exchange, I do not know, and I do
not know the regulations affecting it, and that is a question that
would be most grave for our members.
Mr. Gbay. Seeking again to find out whether a change in some of
your methods upon the stock exchange might be of an advantage and
serve to avoid terrific rises and terrific depressions, may X ask you to
give us your thought as to whether or not a regulation of this type
would be of any moment: To provide, if you please, that short sales
may not be permitted after the opening of the market on a certain
day, to sell short except within a certain percentage below the clos­
ing price of the day before, and, if you desire to put that into effect
on the other side, providing that margin buyers, not outright buy­
ers, may not be permitted to buy except within a certain range of
the closing price of the night before; and in order that you may
clearly understand my thought, I will give you an illustration of
what I mean. A stock closing at 100 at 3 o’clock one afternoon may
not be sold short the next morning, we will say, at a lower price
than 99, or may not, if you please, be bought at a higher price on
margain than 101.
Now, my thought is—and I will be glad to have you tell me
whether I am wrong or right, however you may view the matter, or
I would like to have you express your views in any way at all—that
if a person who desires to sell short because he thinks the market is
going to drop, is permitted to sell short within a range as I have in­
dicated, or between 100 and 99, he has that opportunity; he may sell
short; and if his judgment is good that the market is going c^own,
he is going to have an opportunity to cover at a later time to his ad­
vantage, because his judgment was good. ^But if the market does go
down decidedly during the day for legitimate reasons, we will say,
and there is a flood o i liquidation that comes into the market below
99, it adds to that liquidation and the furthering of the depression
of prices by his continuing his short sales during that day, at least
down the line, until he has accumulated a very large short position.
Now, taking that merely as a suggestion from one who does not
know very much about it to one who should know a great deal about
it, will you give me the benefit of your opinion as to that, as to
whether or not it would not regulate stock movements, if you please,
or help the stock on the one hand and decidedly increase the advan­
tages on the other, in a tremendous liquidation?
Mr. W hitney. Why, Mr. Gray, that would have the effect of doing
away with speculation in the market. And I am reiterating here
again.
Mr. Gbay. Yes.
Mr. W h i t n e y . That as soon as you t a k e away speculation you take
away at least one-half of the market, the other half being investment.



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You stultify, stifle, and pretty near put an end to the speculative
side of the market?
Senator G ore. It would leave a falling market to the seller o f long
stock.
Mr. G r a y . Senator Gore asks if that would not leave the failing
market to the seller of the long stock.
Mr. W h i t n e y . Our regulations at the present time, Senator Gore,
do in large measure just that. I think that would cause eventually
the security markets to close. I f that is the desire, then they had;
better close.
Senator G ore. I f you could evolve such a plan, it would be a
good idea for the Farm Board to handle it, perhaps.
Mr. W h i t n e y . I believe there has been some criticism in that
respect, in the fluctuations in cotton prices. We—I, let us say—have
never heard anything but contrary views, not only, if you please,
from cotton brokers but from cotton growers, shippers, millers, and
all, that they thought it stultified and hurt the market.
Mr. G r a y . Now, Mr. Whitney, in answer to Senator Gore, you
stated that your rules and regulations to-day prevent to a certain
extent that being done, but a short seller to-dav, under the interpre­
tation of your rules, is permitted to sell, as long as he does not sell
below the price of the last sale.
Mr. W h i t n e y . A s long as he does not depress the market, right.
Mr. G r a y . I f the market is naturally being depressed by liquida­
tion, by the owners of long stock, and he steps in, he is adding that
much more to the torrent, isn’t he ?
Mr. W h i t n e y . That may be.
Mr. G r a y . Yes.
Mr. W h i t n e y . And vice versa.
Mr. G r a y . You do not think, therefore, that it gives the shorts all
the opportunity they should have in the proper exercise o f their
speculative judgment—now, I don’t know whether one point is a
proper percentage basis, but you do not think that he is given the
opportunity to exercise his proper speculative judgment if he is per­
mitted to go down to a certain point and sell short, with the oppor­
tunity to cover. He is making his speculation, but he is being stopped
from continuing that during the decline and thus creating that
much additional liquidation, bringing about a depression, isn t that
so? Don’t you think he gets enough speculation out of it?
Mr. W h i t n e y . I do not grant that the short seller is the cause o f
the depression.
Mr. G r a y . I know you do not.
Mr. W h i t n e y . But we won’t argue that point. My answer, M r.
Gray—and I am giving it just as honestly as I can—is that you by
any such method stultify in your final results the security markets
of this country. I f that is the desire and that is the effect upon
seventeen to thirty millions o f Americans who are investors to-dayy
then it may be a wise thing to do, but the exchanges, in my opinion
will close.
T
Mr. G r a y . In other words, your opinion is very plainly then that
there is no merit in such a suggestion?
Mr. W h i t n e y . The suggestion, sir, will have my most sincere con­
sideration and thought, but I am giving you my nonest opinion.



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273

Mr. Ghat. But your present answer is that it is your honest
opinion that such a suggestion, though it may be worthy of some
consideration, should not be adopted, because if it is adopted it
would cause eventually the markets to close, is that your answer ?
Mr. W h i t n e y . The final result; yes. sir.
Mr. G r a y . And that is because *of the fact that it deprives the
short seller of the right to sell at any time at all that he wants, as
long as he keeps within his offers of the price of the last sale, is that
right?
Mr. W h i t n e y . You and I were altogether a minute ago. You were
talking about short sellers and marginal purchasers in the same
breath. I f you talk about speculation, I will say yes. There is
too much predicated on short selling and depression.
Mr. G r a y . In my examination of you, Mr. Whitney, it has been
my intention in discussing the matter, when I refer to short sales,
not particularly to refer to that, because that is not the only evil
in the market, and I recognize the existence of all of the other evils
that you have so characterized, or the other matters that you have
characterized as evils. I personally agree with you that there is
more than one evil in the stock market. You may not think that
short selling is an evil; I may think it is. But it is not my inten­
tion to attack in my questions that side of the market which has to
do with short selling.
Mr. W h i t n e y . Any sale.
Mr. G r a y . I only refer more frequently to short selling because
of the fact that it is looked upon generally—whether you look upon
it as such or not-—as one of the evils that has caused the depression,
and, I suppose, if I may be permitted to testify to this extent, that
the reason the public does not complain so much about the evils that
caused the rise in the market is because it brings to them what they
think is prosperity, while they recognize immediately a depressing
situation that arises as the result of a decline in the market. Whether
I am right about that or not, I do not know. Therefore, I fell
naturally into the error, if you want to call it an error, of discussing
with you as a prominent evil the matter of short selling.
Mr. W h i t n e y . Which I do not grant.
Senator G ore . May I ask a question there?
Mr. G r a y . May I ask just one more question, Senator, and then I
am through, I believe.
Senator G ore. Certainly.
Mr. G r a y . The difference between you and me, however, Mr.
Whitney, is this, is it not: You do concede that short sales require
some regulation, because you have regulated it ?
Mr. W h i i !n e y . I grant that transactions on the floor of the
exchange o f necessity have to have regulation; yes.
Mr. G b a y . And if you conceded that short selling, extensive short
selling in a declining market added trouble, brought about increased
liquidation and tended to depress the market, then you would be­
lieve that such a regulation as I have suggested would be a wise
one, wouldn’t you ?
Mr. W h i t n e y . No.
Mr. G r a y . In other words, if you can predicate the situation upon
my belief that it does depress the market, you think it would be
wise to do some such thing, don’t you ?



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Mr. W h i t n e y . No, sir. I think that if it is proved, if it possibly
can be proved, that the majority of the people of these United States
think a market should be one-legged, should be artificial, and, there­
fore, would eventually result in doing away with speculation— if they
think that, then it is better for us to go back 50, 75, and 100 years,
and have no investments in this country’s industries.
Mr. G r a y . The matter of the regulation of prices, then, in s u c h
an exchange would be governed by the law of supply and demand,
wouldn’t it ; and, though I hate to use this language again, you would
have intrinsic value, stock that would be worth something one day
and might, by reason of business conditions, be worth less or more
the next day?
Mr. W h i t n e y . Or n o th in g .
Mr. G r a y . That gives you the speculative element, then?
Mr. W h i t n e y . I t is the speculative elem ent, as I sa id b e fo r e , that
sm oothes the w aves, b u t can n o t affect th e tides.
Mr. G r a y . But you have indicated just now that

if that speculative
element was ended it would be up and down, as you indicated.
Mr. W h i t n e y . Voluntarily.
Mr. G r a y . All right; that is all a speculator’s heart desires, is
it not?
Mr. W h i t n e y . But you have eliminated the speculator, under your
plan.
Mr. Gray. But he would come back very fast if he saw a condi­
tion such as you have described existing.
Mr. W h i t n e y . But, in the meantime, the markets would h a v e b e e n
closed entirely.
M r. G ray . I im agine th ey w ou ld be, i f th ey h a d been u n d e r y o u r
control.

Senator G ore. We are hearing a g oo d deal about these bulls and
bears. There is one other animal that I am concerned about and
that I want to ask you about, Mr. Whitney. As I recall, in January,
1929, United States Steel was selling around 165 or 166. In Sep­
tember, 1929, it got as high as, I think, 261 and a fraction. United
Corporation, I think, went on the board in 1929 around 28. In Sep­
tember it got up to about 75. And other stocks went up propor­
tionately. Is that a sort of a bull market, Mr. Whitney?
Mr. W h i t n e y . In the eyes of the people of this country, sir, yes.
Senator G o r e . I figure that there were three classes o f people in
that market. There was the investor who thought United States
Steel was a good buy, who bought it and looked it up, and thought he
was making a good investment when he made it. He was the investor.
Then, there was the speculator, who checked the market conditions
and market trends and tendencies, who investigated the assets and
earnings and orders of the company, and who felt the stock was sell­
ing too low and it would go up, and he bought it for a rise. I figure
he was a speculator.
Then, there were a lot of people in this country who did not know
anything about United States Steel, did not know where its plants
or offices were, who did not know anything about market conditions
generally, did not know anything about the assets, earnings or
orders of the company, but they had seen the stock advance for a
month and just thought it would keep on going up,. I figure they



STOCK EXCHANGE PRACTICES

275

were gamblers. They were the lambs, Mr. Whitney. They just
kind of wandered into this bear corral.
Is there any way, Mr. Whitney, to keep those gentle creatures out
of this market? He is the fellow who got us into trouble to start
with, buying without rhyme or reason. I remember one stock that
was selling at sixty times its earnings. I do not think any investor
bought that stock who figures things conservatively. I do not think
speculators did. But there are a lot of these gamblers who had seen
it go up who thought it would keep on going up, without any knowl­
edge about it at all, without any knowledge of the conditions that
should govern the value of the stock. They bought and, of course,
their buying had a bullish tendency, and kept on shooting it up. Ix
there is any way on earth to guard the fool against his folly, there is
the place to start.
Mr. W h i t n e t . I agree.
S en ator G ore. B u t I don’t kn ow w hether there is o r not.

Mr. W h i t n e t . But to start with, Senator, such a situation occurs
not only in stocks and bonds, but in everything else that there is.
It happend in copper, the metal. It happened in land. It happened
in wheat and corn at other periods.
Senator Gore. Yes.
Mr. W h i t n e t . It has happened in everything. I think that is
an American trait.
Senator Gore. It happened in Florida on land.
Mr. W h i t n e t . Yes.
Senator Gore. It happened in Long Island on land.
Mr. W h i t n e t . Yes.
Senator Gore. Prices just kept skyrocketing.
Mr. W h i t n e t . That is right.
Senator Gore. Of course, I assume if there had been a short in­
terest in real estate it would not have gone so far or so fast. I
don’t know. But we did have a possible short interest in these
advancing stocks, but I can see how no bear who relied on the real
facts and conditions would venture in, when everybody came in who
did not know anything about it and bought it without knowledge
of the real value. ^ I had a letter to-day, suggesting that you require
these lambs to give their notes for the balance between the price
and the margin. I do not think that would be of anv service.
Mr. W h i t n e t . That would keep the lambs out.
Senator Gore. It would.
Mr. W h i t n e t . I f they gave their notes. I don’t think we would
take their notes an^ more than perhaps real estate owners would.
Senator Gore. That might be a good rule, then. These lambs
get shaken on every hand, and they do a lot of mischief. There
are some people, Mr. Whitney, who seem to think that the people
who study conditions and think that prices are going up and values
will advance, and buy on margins for a rise, and if prices go up
they make a pront-—
isome people look on them as financiers and
pupilc-spirited patriots, but if, on the other hand, when they think
prices are g°in£ U and they make a miscalculation, and they go
P
down, and they lose money instead of making money, they are tne
victims of a bear raid.
Mr. W h i t n e t . True. That is what the common thought is.



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STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . N o , sir. I think that if it is proved, if it p o ssib ly
can be proved, that the majority of the people of these United States
think a market should be one-legged, should be artificial, and, there­
fore, would eventually result in doing away with speculation—if they
think that, then it is better for us to go back 50, 75, and 100 years,
and have no investments in this country’s industries.
Mr. G r a y . The matter of the regulation of prices, then, in such
an exchange would be governed by the law of supply and demand,
wouldn’t it ; and, though I hate to use this language again, you would
have intrinsic value, stock that would be worth something one day
and might, by reason of business conditions, be worth less or more
the next day?
Mr. W h i t n e y . Or n oth in g .
Mr. G r a y . That gives you the speculative element, then?
Mr. W h i t n e y . It is the speculative element, as I said before, that
smoothes the waves, but can not affect the tides.
Mr. G r a y . But you have indicated just now that if that speculative
element was ended it would be up and down, as you indicated.
Mr. W h i t n e y . Voluntarily.
Mr. G r a y . All right; that is all a speculator’s heart desires, is
it not?
Mr. W h i t n e y . But you have eliminated the speculator, under your
plan.
Mr. G r a y . But he would come back very fast if he saw a condi­
tion such as you have described existing.
Mr. W h i t n e y . But, in the meantime, the markets would have been
closed entirely.
Mr. G r a y . I im a gin e th e y w o u ld be, i f th ey h a d been u n d e r y o u r
control.

Senator G ore. We are hearing a good deal about these b u lls and
bears. There is one other animal that I am concerned about and
that I want to ask you about, Mr. Whitney. As I recall, in January,
1929, United States Steel was selling around 165 or 166. In Sep­
tember, 1929, it got as high as, I think, 261 and a fraction. United
Corporation, I think, went on the board in 1929 around 28. In Sep­
tember it got up to about 75. And other stocks went up propor­
tionately. Is that a sort of a bull market, Mr. Whitney?
Mr. W h i t n e y . In the eyes of the people of this country, sir, yes.
Senator G ore. I figure that there were three classes of people in
that market. There was the investor who thought United States
Steel was a good buy, who bought it and looked it up, and thought he
was making a good investment when he made it. He was the investor.
Then, there was the speculator, who checked the market conditions
and market trends and tendencies, who investigated the assets and
earnings and orders of the company, and who felt the stock was sell­
ing too low and it would go up, and he bought it for a rise. I figure
he was a speculator.
Then, there were a lot of people in this country who did not know
anything about United States Steel, did not know where its plants
or offices were, who did not know anything about market conditions
generally, did not know anything about the assets, earnings, or
orders of the company, but they had seen the stock advance fo r a
month and just thought it would keep on going up.. I figure they



STOCK EXCHANGE PRACTICES

275

were gamblers. They were the lambs, Mr. Whitney. They just
kind of wandered into this bear corral.
Is there any way, Mr. Whitney, to keep those gentle creatures out
of this market? He is the fellow who got us into trouble to start
with, buying without rhyme or reason. I remember one stock that
was selling at sixty times its earnings. I do not think any investor
bought that stock who figures things conservatively. I do not think
speculators did. But there are a lot of these gamblers who had seen
it go up who thought it would keep on going up, without any knowl­
edge about it at all, without any knowledge of the conditions that
should govern the value of the stock. They bought and, of course,
their buying had a bullish tendency, and kept on shooting it up. I f
there is any way on earth to guard the fool against his follv, there is
the place to start.
Mr. W h i t n e y . I agree.
S en ator G obe. B u t I d on ’t k n ow w hether there is o r not.
Mr. W h i t n e y . But to start with, Senator, such a situation occurs
not only in^ stocks and bonds, but in everything else that there is.
It happend in copper, the metal. It happened in land. It happened
in wheat and corn at other periods.
Senator G ore . Yes.
Mr. W h i t n e y . It has happened in everything. I think that is
an American trait.
Senator G ore . It happened in Florida on land.
Mr. W h i t n e y . Yes.
Senator G ore . It happened in Long Island on land.
Mr. W h i t n e y . Yes.
Senator G ore. Prices just kept skyrocketing.
Mr. W h i t n e y . That is right.
Senator G ore . Of course, I assume if there had been a short in­
terest in real estate it would not have gone so far or so fast. I
don’t know. But we did have a possible short interest in these
advancing stocks, but I can see how no bear who relied on the real
facts and conditions would venture in, when everybody came in who
did not know anything about it and bought it without knowledge
of the real value. ^ I had a letter to-day, suggesting that you require
these lambs to give their notes for the balance between the price
and the margin* I do not think that would be of anv service.
Mr. W h i t n e y . That would keep the lambs out.
Senator G ore . It would.
Mr. W h i t n e y . I f they gave their notes. I don’t think we would
take their notes any more than perhaps real estate owners would.
Senator G ore . That might be a good rule, then. These lambs
get shaken on every hand, and they do a lot o f mischief. There
are some people, Mr. Whitney, who seem to think that the people
who study conditions and think that prices are going up and values
will advance, and buy on margins for a rise, and if prices go up
they make a profit—
-some people look on them as financiers ana
public-spinted patriots, but if, on the other hand, when they think
prices a-re gomg^ up and they make a miscalculation, and they go
down, and they lose money instead of making money, they are the
victims o f a bear raid.
Mr. W h i t n e y . True. That is what the common thought is.



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STOCK EXCHANGE PRACTICES

Senator G ore . Now, on the other hand, the speculator is figuring
the prices are too high, that they are fabulously high and can not
stay up, and he goes in and sells, figuring they are going down, and
they do go down, and he makes a profit. That is a bear raid. He has
broken the price of the stock. If, on the other hand, he figures th©
price is going down and sells short and makes a mistake and the
prices go up, he gets stung and takes a loss. He is just as foolish
to start with, and it serves him right. [Laughter and applause.] Is
not that the mental process o f people of that sort?
Mr. W h i t n e y . That, I think, is the way the people of the country
are thinking.
Senator G ore. That is all, Mr. Chairman.
The C h a i r m a n . I want you to get through, Senator Gore. X do
not want to interrupt you.
Senator G ore. I am through, Mr. Chairman. I am just trying
to get the lamb in the fold, if I can. I would let the bulls and
bears fight it out. [Laughter.]
The C h a i r m a n . Vanadium earned $1.50 in 1930 and pays no divi­
dend now, but in 1930 hit a new high at 134. Was that the result
o f a pool operation?
Mr. W h i t n e y . I do not know it, Mr. Chairman. A ll the steel
stocks were selling at tremendous prices in that period. Y ou say
1929?
The C h a ir m a n . N o ; in 1930. It hit the high price in 1930. What
action would be taken if it was found that there was a group of
brokers whose own records would show they had optioned large
amounts of stock for the benefit of pool operators; would that be in
violation o f the rules?
Mr. W h i t n e y . I f they had options to buy stock for pool opera­
tors?
The C h a i r m a n . I f they had optioned large amounts of stock for
the benefit of pool operators, if they had gone in with the pool
operators to buy the necessary stocks for them ?
Mr. W h i t n e y . It would all depend, Mr. Chairman, on what the
operation was with reference to the conduct of the pool. There is
no objection, certainly, to a man giving an option to another man in
a legitimate way. Each and every case would have to stand on its
own bottom.
The C h a ir m a n . I intended to go into that pool matter quite fully,
but it is getting so late that I will just ask a few questions. Is it
not a fact that such options are often secured without the payment
o f cash?
Mr. W h i t n e y . I can not answer that, Mr. Chairman. I do not
know.
T h e C h a ir m a n . I s it n ot a fa c t that in r ig g in g the m a rk et they
g o out and take op tion s f o r a certain tim e, at a certain p rice , and
then later at another p rice, and then o fte n it is done even without
the investm ent o f cash and w ith ou t a single question b e in g asked?

Mr. W h i t n e y . I will try to answer that question in connection
with Senator Brookhart’s.
The C h a i r m a n . All right.
Mr. W h i t n e y . I don’t know what you mean. I would like you to
explain what you mean by rigging a market.



STOCK EXCHANGE PRACTICES

277

The C h a i r m a n . Oh, every person in this room knows what rig­
ging a market is. I am not going to try to explain that to the best
informed man on the stock market present. [Laughter.] Market
letters have gone out indicating rises. Pools have been formed for
the purpose of effecting them. Even houses of good reputation have
aided in advancing the prices of stocks which sold for ten times what
they are worth now.
Mr. W h i t n e y . That may be, but is that proof that the prices were
not realistic and proper ?
The C h a i r m a n . There will be a good deal of proof brought out to
show they were not realistic; yes. I will admit it is hard to demon­
strate between what is realistic and what is artificial in a market of
this kind. The artificial element is introduced so often and the blame
is placed on the natural trend. Have you any knowledge of financial
writers who prognosticate great increases in prices and hold options
on shares of stock that they are trying to boost ?
Mr. W h i t n e y . I have not, sir.
The C h a i r m a n . All right. We just want to get you on record on
some o f these. Is there such a thing as a floor pool %
Mr. W h i t n e y . I have answered that. I never heard of it before.
The C h a i r m a n . Is it not really a well-known fact that pools are
sometimes formed on the floor, together with the specialist, to hold
the price up at a certain point for a certain length of time % You are
not going to admit that?
Mr. W h i t n e y . N o . I will admit that people may get together and
try to buy stock in a particular security, but I can not understand-----The C h a i r m a n . The specialist has his book before him and he
knows the exact status of the whole matter, and sometimes brokers
on the floor get together with him or get together among themselves
and form pools for the purpose of holding the market up a certain
length of time.
Mr. W h i t n e y . But to whose detriment is that ?
The C h a i r m a n . That is the way you have been answering us for
five days.
Mr. W h i t n e y . But I don’t see, Mr. Chairman-----The C h a i r m a n . I ask you whether it is a fact and you ask to
whose detriment is it.
Mr. W h i t n e y . I ju st said it co u ld be done, b u t I d o n ’t th in k th a t
anybody is bein g h u rt, th a t a n y r ig g in g o f the m a rk e t is ta k in g p lace.
The C h a i r m a n . Y o u a d m it it is done?

Mr. W h i t n e y . I say i t may b e d o n e .
The C h a i r m a n . Referring to wash sales, you say they are not per­
m itted,! understand.
Mr. W h i t n e y . They are not permitted.
Senator G o r e . May I ask one question there, Mr. Chairman?
The C h a i r m a n . Certainly.
Senator G o r e . I wish you would put in there in connection with
Mr. Gray’s question, as to what is the definition of a wash sale, what
is a matched order.
Mr. W h i t n e y . I should consider a matched order a wash sale.
They are both of the same nature.
The C h a i r m a n . What is churning, according to your ideas?
Mr. W h i t n e y . We have no such thing.
The C h a i r m a n . I s not the effect just the same as a wash sale?



278

STOCK EXCHANGE PRACTICES

Mr. W h i t n e y . Mr. Chairman, I don’t understand you. Churn­
ing, by its name, would seem to be buying and selling stock actively.
The C h a i r m a n . You know that the papers have carried th a t
churning story all the way from 1929, and yet the managers of th e
exchange don’t know anything about it. You don’t read the papers,
evidently.
Mr. W h i t n e y . I don’t agree with everything the press says, not
always. I don’t always agree with them.
T h e C h a i r m a n . I s it n ot a fa c t th a t ch u rn in g is a w ash sa le ?

Mr. W h i t n e y . No, sir.
The C h a i r m a n . Is it not a fact that the same time that they b u y
they also sell?
Mr. W h i t n e y . I f they sell-----The C h a i r m a n . That the operations are in connection with the
specialist, who has the books there and knows everything ?
Mr. W h i t n e y . I f a purchase is made at one price and a sale is
made at another by the same individual, that is not in a n y w a y a
wash sale.
The C h a i r m a n . In other words, to sell for the purpose of creating
action, where nobody gains anything and nobody loses anything, is
not a wash sale, unless it is called a wash sale; if it is called churning,
it is not a wash sale, is that it?
Mr. W h i t n e y . No ; it is not a wash sale in either case, as I under­
stand you.
The C h a i r m a n . But it washes, doesn’t it?
Mr. W h i t n e y . No, sir.
The C h a i r m a n . It washes out.
Mr. W h i t n e y . Some one must lose on such a transaction.
The C h a i r m a n . Yet if they are on both sides of the market they
don’t need to lose, do they?
Mr. W h i t n e y . I said if they traded, sir, at the same price, that
is a wash sale. I f they trade at different prices, the same individual,
that is not a wash sale, and he must lose the difference.
The C h a i r m a n . What is the object of churning then, if your state­
ment is correct?
Mr. W h i t n e y . The object of churning, as you interpret the word,
is activity in the market.
The C h a i r m a n . Is activity in the market for the purpose o f fo o l­
ing the public? Won’t you admit that it has no other purpose?
Mr. W h i t n e y . I do not think you have asked me a specific ques­
tion as to what you want me to answer, Mr. Chairman.
The C h a i r m a n . I just asked you whether that was not the whole
purpose of it.
Mr. W h i t n e y . But aren’t we assuming that something illegal o r
improper has been done; and that I do not grant.
The C h a ir m a n . Y o u don’t g ra n t th a t a n y th in g o n th e street is
im p rop er or a n y th in g is ille g a l?
Mr. W h i t n e y . Oh, yes, I do.
The C h a i r m a n . We are thoroughly convinced of
Mr. W h it n e y . Yes; I d o.
The C h a i r m a n . We are not going to argue that

that.

with you. W e
can not convince you. You are hopeless. [Laughter.]
Mr. W h i t n e y . I grant that lots of tilings are improper and illegal
sir. I have only tried to tell you that I thought the New Yorlc




STOCK EXCHANGE PRACTICES

Stock Exchange was doing its utmost as a body of men to prevent
illegal practices.
The C h a i r m a n . I notice in several cases that I called your atten­
tion to that there was not one where the New York State legislature
had not forced the hand of the exchange. My attention has been
called to other matters since. The rules against improper prac­
tices on the exchange can be traced right back to the State law that
forced them. I notice that.
Mr. W h i t n e y . And we have gone further than the State law in
m a n y cases.
The C h a i r m a n . And sometimes the rule you make is a paper rule
and is not observed.
Mr. W h i t n e y . That I do not agree with, sir.
The C h a i r m a n . No; of course not.
Mr. W h i t n e y . Well, I ask for proof. I think that is but fair.
The C h a i r m a n . You a t t e n d t h e s e h e a r i n g s for a w h i l e a n d w e w i l l
give you s o m e proof.
Mr. W h i t n e y . I have. [Laughter.]
The C h a i r m a n . After a while we will have some other witnesses.
Does the pool operator know the condition of the stock from the
speculator ?
Mr. W h i t n e y . He may.
The C h a i r m a n . He may ?
Mr. W h i t n e y . As I have answered you, sir.
The C h a i r m a n . Y ou w ill also a d m it th a t th e p u b lic k n ow s n o th ­
in g abou t it, w o n ’t y o u ?
Mr. W h i t n e y . I w ill not.
The C h a i r m a n . O f course, we should not expect you to admit it.
Mr. W h i t n e y . Mr. Chairman, if an investor came to me and asked

me to find out about a specific stocky as to how he could buy a thou­
sand shares, I would go to the specialist and ask him, and find out,
and tell that investor, he being a part of the public.
The C h a i r m a n . He is a very small part o f the public that deals on
the market though, is he not? You tell one man, and he is part of
the public, but the public itself would not know, would it?
Mr. W h i t n e y . I f th ey were interested, I see n o reason n o t to te ll
them.
The C h a i r m a n . O f course, that is getting outside o f the question.
Mr. W h i t n e y . N o; it is not getting outside of the question.
The C h a i r m a n . The specialist has information the public can not
have, and therefore the public gets soaked, isn’t that true?
Mr. W h i t n e y . No, sir; I don’t agree with that.
The C h a i r m a n . Y o u and I dont agree on many things. There­
fore, we will have to leave it there. Is it not a fact also that rigging
the market and sending the values up to a high point works pretty
good, but as soon as the support is withdrawn, then down it goes ?
Mr. W h i t n e y . I don’t know, Mr. Chairman. The market went
up and sustained itself on an upward curve with respect to almost
every share, until the panic came.
The C h a i r m a n . There is a great difference in shares. The pool
operations are quite evident.
Mr. W h i t n e y . I do not know o f p o o l operation s in Septem ber
and O c to b e r o f 1929.



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280

The C h a i r m a n . Sir?
Mr. W h i t n e y . I do not know of pool operations at that time.
The C h a ir m a n . We don’t expect to prove that by you; not at all.
But I thought you would admit that one stock that did not pay a
dividend, but still getting way up, and maybe going up while the
general trend of the market was high, would almost in itself be proof
of a pool support; but you won’t admit that.
Mr. W h i t n e y . Supposing that particular company discovered some
very valuable oil on its property or discovered a gold mine or one
thing and another; those things happen.
The C h a i r m a n . Supposing in two weeks it all went to the dickens*
after the support is withdrawn.
Mr. W h i t n e y . Yes.
The C h a i r m a n . And supposing the report of the discovery o f oil
was just a paper report, one of these letters we talk about, that isr
to fool the public. Now, you won’t admit wash sales, of course.
M r . W h i t n e y . N o, sir.
The C h a i r m a n . But don’t

you think we can prove that from the

market tape?
M r. W h i t n e y . N o, sir.

The

C h a ir m a n . Y

ou

don’t think we can ?

M r. W h i t n e y . N o, sir.

The C h a i r m a n . Well, we will try to.
Mr. W h i t n e y . I will be glad to have you do it.
The C h a i r m a n . We think we are going to prove some of these
things by your own records.
Mr. W h i t n e y . There are a great many things, Mr. Chairman,,
that I would like the opportunity to put in the record, too.
The C h a i r m a n . We have quite a record already and we will give
you some more chance. But we will go on. Is there any stock ex­
change rule that prevents any trader 011 the floor from selling 10,000
shares of stock to the specialist and then buying it from him at an
eighth of a cent or a quarter of a point higher ?
Mr. W h i t n e y . Yes.
The C h a i r m a n . There is such a rule ?
Mr. W h i t n e y . Yes.
The C h a i r m a n . Have you any knowledge of the fact that it i»
done?
Mr. W h i t n e y . I have not, sir, nor do we know of its having been
done of late. That is not an actual rule of the exchange. It is an
interpretation of exchange rules. I myself stated that to the spe­
cialists and other members of the exchange some time in the past.
The C h a i r m a n . What is meant, for instance, by a strong opening
of a stock?
Mr. W h i t n e y . More buyers than sellers as it opens up.
The C h a i r m a n . Is it not also a fact that a great deal of stock may
be offered and some interested in boosting the market will buy a
few shares just before the close of the day, and that goes out as
a high quotation, showing a strong market in the stock. The stock
may be bought at a relatively high price and it may make it look
as though it is a good market for the public to get into. Do not
those things happen?




STOCK EXCHANGE PRACTICES

2 81

Mr. W h i t n e y . That is not going to affect the price at the close
if there are a lot of shares offered at a price and they take two or
three hundred o f them.
The C h a i r m a n . I s i t n o t a f a c t t h a t t h e s a le i s r e p o r t e d a t a
higher p r i c e a n d g o e s o u t a t t h a t p r i c e a n d is a n i n v i t a t i o n ?
Mr. W h i t n e y . It is perfectly proper for an individual, if the
market is 15^-16, to pay 16 at the close.
The C h a i r m a n . Isn’t that one of the methods used to boost the
stock?
Mr. W h i t n e y . It may be, Mr. Chairman. You have not cited
to me any pool operation on which I can give you a proper answer.
These are hypothetical questions.
The C h a i r m a n . They are hypothetical questions asked of a man
who is a perfect encyclopedia of information in this matter and
whose business, as Senator Brookhart has said, is not to know
anything. I agree with the Senator on that. We have not had
frank answers to many of the questions we have asked you.
Mr. W h i t n e y . I am sorry, Mr. Chairman, but I have endeavored
to do my best.
The C h a i r m a n . We w i l l see i f we can develop o u r case anvw a y .
Mr. W h i t n e y . Yes.
The C h a i r m a n . You will be subject to call, Mr. Whitney, but
you do not need to be here to-morrow. It is time that we adjourn
now until then.
Mr. W h i t n e y . Mr. Chairman, you gave me your word that I
could put in certain evidence.
The C h a i r m a n . Certainly.
Mr. W h i t n e y . And that is going to take me a considerable
length of time. I have also asked your permission at a previous
hearing, the first hearing, for the right to file a more formal brief
to this whole question on the affirmative side of this matter. I have
been merely here attempting to answer questions on things that I
still claim that I do not know. .
The C h a i r m a n . We have not dismissed you, Mr. Whitney. You
understand that. You are still under the subpoena. It is a question
of whether you want to put those in to-night or the next time you
come here. Certainly we want to give you a chance to put in your
side o f the case.
Mr. W h i t n e y . I would like, if you can spare the time, to put
them in to-night. Or I will appear and very shortly put them in
in the morning.
Senator G o r e . Mr. Whitney, would it be too much trouble for you
to put in a chart, beginning m about the middle o f May, 1929, and
give the course of the prices of United States Steel, General Motors,
American Telephone & Telegraph, until the crash in October, and
also the course of the prices of Standard Oil of New Jersey and two
or three independents like Phillips, Skelly, and Barnsdall.
Mr. W h i t n e y . Yes, sir.
Senator G o r e . I wish you would do that.
Mr. W h i t n e y . From June, 1929, until when?
Senator G o r e . From about the middle o f May.
Mr. W h i t n e y . The middle o f May?




282

STOCK EXCHANGE PRACTICES

Senator G o r e . There was a rally in oil at that time in the Standard
of New Jersey and these independent petroleum companies. I think
it would be an interesting revelation as to the course of these inde­
pendent stocks. They went down in the crash and these other stocks
went up. There might be some inference drawn later on, if we could
get the short interests in those stocks, whether the decline in those
independents could be laid to short selling, what the reason might be.
Mr. W h i t n e y . We would be glad to get that, Senator Gore.
Senator G ore . It had a very marked effect, whatever the cause was.
Are you through for the night, Mr. Chairman?
The C h a i r m a n . N o ; Mr. Whitney may place these matters in the
record. Do you want to make a statement in connection with them?
Mr. W h i t n e y . Mr. Chairman, it is going to take quite some time.
I can do it to-morrow.
The C h a i r m a n . I will say this, Mr. Whitney, that as far as put­
ting the record in, you can do it at this time, and as far as making
any statement we will give you a chance to make it—your state­
ment will take how long?
Mr. W h i t n e y . The statement and the records are all dovetailed
into each other, Mr. Chairman. I think I can do it in about a half
to three-quarters of an hour, unless there are a great many ques­
tions on these matters.
The C h a i r m a n . In view of the lateness of the time, Mr. Whitney,
and the fact it is going to take that long, I suggest you let that go
until you appear next time as a witness.
Mr. W h i t n e y . And I may not have that opportunity to-morrow
morning?
The C h a i r m a n . Y o u will have the opportunity. I promise it t o
you.
Mr. W h i t n e y . But not to-morrow morning?
The C h a i r m a n . To-morrow morning we have a number o f wit­
nesses who were subpoenaed for to-day, who have waited all day for
you to get through, and we have got to give them a chance, too.
Mr. W h i t n e y . Well, I am sorry that that is your decision.
The C h a i r m a n . I f you want to place your records in, you can do
that. I f it is going to take an explanation of a half an hour or three*
quarters, we can not do it to-day or to-morrow, but we will do it for
you.
The committee is adjourned until 10.30 to-morrow morning.
Mr. W h i t n e y . Mr. Gray, do you want to be present while I put
these things in now?
Mr. G r a y . I have no objection to your putting them in now, if
you care to do it that way. I will ask the reporter to see that I g e t
a look at them a little bit later on.
Mr. W h i t n e y . I want to put in a copy of the constitution o f the
New York Stock Exchange (as o f October 28,1931), to which refer­
ence was made several times to-day.
(The book referred to was marked “ Exhibit No. 24,” and will be
printed in the appendix.)
Mr. W h i t n e y . I wish to put in a bound copy of statistics in regard
to short selling, April 1 to April 12,1932, inclusive.
(The bound copy of statistics referred to is marked “ Exhibit No.
25 ” and will appear in an appendix to be printed hereafter.)



STOCK EXCHANGE PRACTICES

283

Mr. W h i t n e y . I wish to put in three memoranda, Nos. 1, 2, and
8, on United Corporation, with reference to which Senator Brookhart
was interested.
(The document referred to is marked “ Exhibit No. 26,” and
appears as follows:)
E

x h ib it

No.

26

M EM ORA N DU M N O . 1 , U N IT E D CORPORATION

The highest market value of stocks of United Corporation reached in 1929
appears to have been on September 23,1929. The number o f shares outstanding
on that date of each class, the quotations and the portfolio values are shown
below:
Common:
Shares-----------------------------------------------------------------------------7,178, 43S
Price--------------------------------------------------------------------------------- ---------- 75 %
Market value----------------------------------------------------------------------$541 ,972,069
Preferred:
Shares-----------------------------------------------------------------------------1 , 779,367
Price------------------ -------------------------------------------------------------- ----------48%
Market value---------------------------------------------------------------------- $86,076,879
Total highest market value------------------------------------------------- $§28.048,948
Portfolio value-------------------------------------------------------------------$545, 818,219
The number of shares outstanding April 8, 1932, were as follow s:
S hares

Common----------------------------------------------------------------------------------------- 14,529,456.
Preferred---------------------------------------------------------------------------------------- 2,488,658.
Of these, 7,275,972 shares of common were not outstanding at any time during
1929, and 7,351,018 shares of common were not outstanding on the date o f high­
est market valuation.
Of the preferred stock outstanding April 8, 1932, 709,291 shares were not
outstandinf either at the date of highest market valuation or at anv other
date in 1929.
MEMORANDUM NO. 2, UNITED CORPORATION

United Corporation has outstanding certain option warrants entitling holders
to purchase common stock at $27.50 a share. The highest number of these at
any time outstanding was 3,994,757. On September 23,1929 (the date o f highest
market valuation for the securities as a whole), 3,804,204 option warrants were
outstanding, o f which a very small proportion were available for trading.
The highest market price of these option warrants on September 23, 1929 was
46^4 bid. (Actual sale price, if any, can not be ascertained.)
’
Assuming that the references to the market value of the securities was
meant to include these option warrants, it must also be assumed that $27.50
per warrant had been paid into the company’s treasury and added to its assets.
This gives the following comparison:
Total highest
market value

Portfolio
value

1. Comm on and preferred stocks
(memorandum N o. I).
2. Add market value option warrants
same day.

1 $628,048,948

Actual from memorandum N o. 1___

$545, 818,219

1 175,944, 435

Add additional portfolio value from
assumed exercise of option war­
rants at $27.50.

104,515,610

3. Highest market value, including
option warrants.

803,993,383

Adjusted value, including exercise
of options.

650, 333, 829

1 Statement in record regarding cor­
responding valuations.

1,397,000,000




267,000,000

STOCK EXCHANGE PRACTICES

284

M EM O RA N D U M N O . 3 ,

u n i t e d c o r p o k a t io n

Surmised basis which may have been used in arriving at statement appearing
in record as to market value o f securities of United Corporation ($1,397,000,000)
and as to valuation o f securities held by United Corporation ($267,000,000).
Actual securities
Highest
of United Cor­
market
Market value of
Present out­
poration out­
present securi­
price
standing securi­
standing at date
reached by ties at highest
ties (Apr. 8,
of highest collec­
1929 quotations
each dur­
1932)
tive market value,
ing 1929
Sept. 23,1929
Common shares...................................
Preferred shares.......... ................ ........
Option warrants................ ..................

14,529,456
2,488,658
3,732,059

7,178,438
1,779,367
3,804,204

75^
49%
47Ji

$1,096,973,928
124,121,818
178,672,324
1,399,768,070

The total market value of securities
actually outstanding on day of
highest collective market value,
was, as shown on Memorandum
No. 2.................................................

1
803,903,383

The nearest approximation which has come to light o f the figure o f $267,quoted in the record as the highest value o f the securities in the
portfolio, is that the annual report for 1931 gave the estimated market value
of total investments December 31, 1931, as $269,405,996. This compares with a
portfolio value of $545,818,219 on September 23, 1929. (See statements Nos.
1 and 2.)

000,000,

Mr. W h i t n e y . I wish to put in the record a memorandum regard­
ing the work of the committee on stock list.
(The memorandum referred to is marked “ Exhibit 27,’’ and is
printed in the record in full, as follows:)
M EM ORA N DU M REGARDING W OKK OK T H E C O M M ITT EE ON STO C K L IS T

It is difficult to make a statement as to the precautions taken by the New
York Stock Exchange in the admission o f securities to the list without Creating a
wrong impression. A perusal o f the requirements for listing would tend to
create the belief that the committee on stock list, which considers and makes
recommendations to the governing committee upon all listing applications,
functions in a purely perfunctory manner. On the other hand, a fu ll statement
of the activities o f this committee might tend to create an impression that
investors in listed securities are safeguarded to a degree which would be
impossible. The truth, o f course, lies between these extremes.
The committee on stock list does not attempt to pass upon the value o f
securities covered by a listing application. It does, however, attempt to a&sure
itself that such securities have some real value at the time o f admission.
Listing, however, provides no assurance that a business may not become less
profitable in the future than it has been in the past, nor that the securities
listed may not decline in market value or intrinsic value, or both, after listing.
There is a distinct recognition by the committee of responsibility to provide
the investor, as far as is practicable, with means o f judging a value for himself,
and to afford the investor such reasonable protection in other respects as is
available under the conditions applicable to the work of the exchange.
The committee has general listing requirements, special requirements fo r
listing foreign-bearer shares, special requirements for listing securities o f man­
agement type-investment trusts, special requirements for listing foreign govern­
ment bonds, special requirements for passing upon the association o f members
of the exchange with investment trusts of the fixed or restricted management
type, together with forms o f agreement pertinent to different types o f applica­
tion, lists o f documents to be filed in support of applications, and other similar
matter.
These requirements deal with the nature and extent o f the information to
be furnished, which information must be embodied in a printed application.




STOCK E X CH A N G E PRACTICES

285

An application may conform literally to requirements in all respects, but the
information therein disclosed, or brought out at the hearing of the initial
application of any company, may show that the securities in question are not
available for listing, in which case such application will be deferred until the
faults are cured, or rejected altogether.
In passing upon applications, the committee on stock list considers the
following points, among others:
1. The character of the officers and directorate of the company, if th6
applicant is a corporation or association as distinguished from Government,
State, and municipal issues.
2. The validity of the issue. With each original listing application, and with
each application to list additional securities of like character, an opinion of
counsel must be forthcoming as to the validity of such issue.
3. There must be clear evidence that there is something to be listed, either
a substantial amount of property, or a substantial amount of earnings, or both.
The exchange will not list a void or anything depending upon mere hopes and
prospects.
4. The size of the corporation and of the issue. There must be a sufficient
volume of securities to be listed to meet the needs of an orderly market, and
the corporation as a whole must be large enough to have a reasonable prospect
of success in the particular line of business in which it is engaged.
5. Sufficient distribution of the securities to be listed, to avoid the liklihood
of a corner or other troublesome market condition, must be assured.
0. Objection is made to listing the securities of a corporation whose business
or accounting practices, as disclosed by its application, at the hearing before
the committee, or in any other manner becoming known to the committee, are
such as appear likely to mislead the public.
7. Each application (excepting one for listing certificates of deposit represent­
ing securities already listed) must contain a substantial amount of financial
information, including balance sheet, income account, and surplus statement,
in such form as to be readily understood. The surplus statement, however, if
relatively simple, may be combined with the income account. Applications
must be accompanied by an agreement that all future financial reports will be
in the same form as those submitted in the listing application.
8. The corporation must agree to publish, once in each year, and to submit
to its stockholders at least 15 days in advance of its annual meeting, the above­
described financial statements. In the case of holding companies, the agreement
provides either for full consolidated reports of all majority-owned subsidiaries,
or, in lieu thereof, for information in other form sufficient to determine the
aggregate gains or losses of the system as a whole. The corporation must also
agree to publish statements of earnings quarterly or semiannually wherever
conditions permit. Careful consideration is given to all eases in which repre­
sentations are made objecting to the rendition of quarterly statements
9. Bach listed issue of stock must have a transfer agent and a registrar
without whose signatures the certificates representing the stock are not valid
To qualify as an acceptable transfer agent and registrar, a formal application!
with accompanying documents, must be approved by the committee on stock list
Individuals, as such, are not acceptable in either capacity, but a corporation may
act as its own transfer agent. A registrar must be a bank or a trust company.
Hegistrars of all stocks listed on the exchange are under written agreement
not to register any additional shares without the written authority of the
exchange. Applicants for listing both stocks and bonds are under agreement
not to bring out additional issues without first making application for listing.
These precautions are taken to prevent, as far as may be, the possibility of
an overissue. They appear to have been fully effective since they were first
designed.
10. No security may bo admitted unle*ss it is prepared, by an engraving company or a bank note company upon whose work the committee on stock list
has been authorized by the governing committee to pass. This authorization
is given only after formal application by such engraving or bank note com­
pany, and involves careful inspection of the premises and other precautions.
Specimens of all securities to be listed must be submitted to the committee
on stock list for examination as to workmanship, in order to see, as far as is
practicable, that the certificate is protected against counterfeiting and conforms
to the required standards as to engraving.
119852— 32-------19




286

STOCK EXCHANGE PRACTICES

Each application for listing is carefully scrutinized by members of the office
force, and is submitted to the members of the committee on stock list with
a comment or analysis, pointing out its salient features and the objections,
if any, raised thereby to listing. When an application is approved by the
committee on stock list, it is recommended by them to the governing committee
of the exchange for final approval.
New forms of securities are frequently evolved, and changes in the corpora­
tion acts of the estates, together with changes in economic conditions, give rise
to frequent new problems as to forms of charters, accounting methods, and
business practices. The attitude of the exchange is one o f constant watchful­
ness to prevent the admission to its list of securities o f corporations the nature
of whose business and character of whose charters, or whose business and ac­
counting practices, do not appear to adapt such securities to widely disseminated
public ownership.
The work of the office force of the committee on stock list involves daily
many consultations and interviews with corporation officials or representatives,
lawyers, accountants, and others, upon old or new corporate practices and
problems, with a view to the determination of the manner, if any, in which
these practices or problems affect the availability for listing o f the securities.
In such consultations it is usual that both parties endeavor to secure the cor­
rect answer, rather than to establish, defend, or attack any particular practice.
The requirements o f the exchange are well known, and but few manifestly
unfit companies apply for listing. In cases o f doubt as to whether a company
can qualify, there are usually preliminary conferences with members o f the
office staff which tend to prevent the formal submission o f applications which
the committee would manifestly have to reject. In such cases, prospective
applicants are always advised, however, that application may be made, and
w ill be considered by the committee, if desired by the applicant. There are
thus relatively few rejections o f applications submitted. The more usual
causes for such rejection are the size of the corporation, or the volume o f
to securities outstanding and to be listed are inadequate, or that the distribu­
tion is inadequate.

Mr. W h i t n e y . I wish to put in the record a complete set of listing
requirements, including papers in regard to fixed investment trusts.
(The document referred to is marked “ Exhibit 28.” Same will
appear hereafter in an appendix.)
Mr. W h i t n e y . The next is a set of typical applications, with an
index as to what is contained.
(The documents referred to are marked “ Exhibit 29,” and are re­
tained in the committee files.)
Mr. W h i t n e y . I also wish to file a pamphlet entitled “ Accounting
for Investors,” written by the executive secretary of our committee
on stock list.
(The pamphlet referred to is marked “ Exhibit 30,” and is retained
in the committee files.)
Mr. W h i t n e y . I wish to file a list of circulars of the committee on
business conduct with regard to advertising.
(The circulars referred to are marked “ Exhibit 31.” Same will
be included in the appendix.)
Mr. W h i t n e y . I wish to file a memorandum showing the holdings
of listed stocks by other listed corporations.
&
(The memorandum referred to is marked “ Exhibit 32.” Same
will be included in the appendix.)
Mr. W h i t n e y . I wish to put in a chart showing the relation o f
farm-land prices in Iowa to corn prices in that State during the
period of 1912 to 1930, inclusive.
(The chart referred to is marked “ Exhibit 33.” Same will appear
in the appendix.)




STOCK EX C H A N G E PRACTICES

287

Mr. W h i t n e y . I wish to put in an exhibit of typical forms of
contracts between customers and firms registered 011 the New York
Stock Exchange covering margin accounts, and commonly called
margin agreements.
(The documents referred to are market ” Exhibit 34 ” and are
retained by the committee for its purposes.)
Mr. W h i t n e y . The next is a set of typical collateral loan agree­
ments used by various New York banks and trust companies.
(The documents referred to are marked 4 Exhibit 35.” Same will
4
appear in the appendix.)
Mr. W h i t n e y . Next are typical forms of day-loan agreements
used by various New York banks and trust companies.
(The documents referred to are marked 4 Exhibit 36.” (See
4
appendix.)
Mr. W h i t n e y . I want to put in a chart and a copy of data on
which this chart was based, showing the variations for 1928, 1929,
1930, 1931, and for the first few months of 1932 in prices of corn
and wheat traded in on exchanges, and a chart showing the prices
of apples and potatoes not traded on exchanges.
(The charts referred to are marked 4 Exhibit 37.” Same will be
4
printed in appendix.)
Mr. W h i t n e y . Also a chart appearing in the New York Times
of April 16, entitled, 4 Comparison of the stock averages with re­
4
serve loan figures.”
(The chart referred to is marked 4 Exhibit 38 ” and is retained by
4
the committee for its purposes.)
{Whereupon, at 6.10 o clock p. 111., Thursday, April 21, 1932, an
adjournment was had to 10.30 a. 111. of the following day, Friday*
April 22,1932.)




STOCK EXCHANGE PRACTICES
FRIDAY, APRIL 22 , 1932
U
C o m m it t e e

n it e d

on

B

S tates S e n a te ,
C urrency,

a n k in g a n d

'Washington., D. C.
The committee met at 10.30 a. m., pursuant to adjournment on
yesterday? in room 301, Senate Office Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Walcott, Blaine, Carey, Couzens, Fletcher, Glass, Bark­
ley, Bulkley, and Gore.
Present also: William A. Gray, Esq., associate counsel to the
committee.
The C h a i r m a n . The committee will come to order. I will a s k
Senator Brookhart to take the chair.
Senator B r o o k h a r t (presiding). Who is your next witness, Mr.
Gray?
Mr. G r a y . Mr. Matthew C. Brush.
Senator B r o o k h a r t . Mr. Brush, will you please stand and hold
up your right hand to be sworn: You do solemnly swear that the
evidence you will now give and the answers you will make to the
questions propounded to you will be the truth, the whole truth, and
nothing but the truth, so help you God?
Mr. B r u s h . I do.
Senator B r o o k h a r t . Be seated.
TESTIMONY OP MATTHEW C. BRUSH, NEW YORK CITY
Senator B r o o k h a r t . Y ou may proceed, Mr. Gray.
Mr. G r a y . Mr. Brush, will you give to the committee reporter
your f u l l n a m e ?
Mr. B r u s h . Matthew C. Brush.
M r . G r a y . W h e r e d o y o u r e s id e ?
Mr. B r u s h . 128 West Fifty-ninth Street,
Mr. G r a y . New York City?
Mr. B r u s h . Yes, sir.
Mr. G r a y . Try to keep your voice up so

New York.

that everybody c a n h e a r
you.
Mr. B r u s h . I w i l l .
Mr. G r a y . Mr. Brush, would you be designated as having any
special business or profession?
Mr. B r u s h . I a m p r e s id e n t o f a n in v e s t m e n t t r u s t , a n d a n o ffic e r
in s e v e r a l o t h e r t y p e s o f c o m p a n ie s .
Mr. G r a y . The investment trusts you refer to are what?
Mr. B r u s h . The American International Corporation.




290

STOCK EXCHANGE PRACTICES

Mr. G r a y . When you say you are interested in several other c o m panies, do you mean as an officer or director?
Mr. B rtjsh. Mostly as director. I am an officer in some co m ­
panies, and am chairman of the executive committee, or ch a irm a n
of the finance committee, or on some committee, but not p resid en t
of those companies.
Mr. G r a y . Officially you are interested in approximately how m a n y
corporations in one capacity or another ?
Mr. B r u s h . May I answer that question in this way: I am asso­
ciated perhaps with approximately 50 corporations.
Mr. G r a y . Are those corporations in the main corporations whose
stock are traded in on the New York Stock Exchange?
Mr. B r u s h . Yes, sir.
Mr. G r a y . A s a matter of fact, you, in addition to the associations
that you have indicated and from which you may gain some k n o w l­
edge of the New York Stock Exchange, have been a pretty h e a v y
trader in stocks, haven’t you ?
Mr. B r u s h . It depends on what you mean by trader. I h a v e
traded substantially in stocks; yes, sir.
Mr. G r a y . We will develop that a little more later on, but w e m a y
say at this time that you have been a trader on the New York
Stock Exchange.
Mr. B r u s h . Y e s.
Mr. G r a y . And you—
;—
Mr. B r u s h (interposing). Pardon me, Mr. Gray, but I want to
say here I am not a member of the New York Stock Exchange.
Mr. G r a y . I know you are not, and I was going to develop t h a t
point. You are not a stockbroker.
Mr. B r u s h . N o , sir.
Mr. G r a y . Are you affiliated in any way with any brokerage h o u se
or houses?
Mr. B r u s h . N o , sir.
Mr. G r a y . And do you do any trading for anybody else th a n
yourself?
Mr. B r u s h . For myself and friends. That is, we handle no trades
for the public.
Mr. G r a y . For how long have you in the way you have indicated,
for yourself aiid such others as may be associated with you, been
trading on the New York Stock Excnange?
Mr. B r u s h . Well, I will say approximately since the summer
of 1921.
Mr. G r a y . Did you say approximately since the summer o f 1921?
Mr. B r u s h . Yes, sir; but I am not dead sure of that date. It may
have been in the fall of that year or the first of the next year, but
that date is substantially correct.
Mr. G r a y . N o w , Mr. Brush, on the question o f the volume of your
trading I should rather leave to you what gauge you will adopt to
indicate the volume of it. What has been the extent of your
trading?
Mr. B r u s h . Well, when I first started to trade it was pretty
skinny trading. A man ordinarily trades in the market to the
extent of his capital, or to the extent that his finances will permit.
I started in probably buying and selling—well, before I came to
New York I would buy 100 shares or 50 shares of stock on the Boston



STOCK EXCHANGE PBACTICES

Z V fl

Stock Exchange. But I have traded as high as—well, I have had a
long position in the market, in 1929, and you will understand that
I am guessing at this because I did not have this thought in mind,
but, say, 125,000 shares.
Mr. G r a y . That is to say, on the up move in 1929, prior to the
time when the stock market reached its peak, along in the month
preceding that time.
Mr. B r u s h . Yes, sir.
Mr. G r a y . You were long on approximately 125,000 shares.
Mr. B r u s h . Yes, sir.
Mr. G r a y . Does that represent your greatest long position?
Mr. B r u s h . I think so, Mr. Gray. Now, you will understand
that that is not exactly correct, but I think it is approximately
com ct.
Mr. G r a y . A l l right. You trade on both sides of the market, I
suppose, on whichever side you think is to your own personal
advantage?

Mr.

B r u sh .

Yes, sir.

M r. G r a y . A n d what can you say to the com m ittee as to the
greatest o r the largest p osition th at y o u have ever assumed on the
short sid e o f the m a rk et!

Mr. B r u s h . I w ill sa y it w as a p p r o x im a te ly th e sam e figure.
Mr. G r a y . In other words, there was a period of time when you
were approximately 125,000 shares short on the market?
Mrv B r u sh . Yes, sir.
M r. G r a y . N o w , on the question o f volu m e w h ich th a t represents
in d olla rs and cents, can you indicate to the com m ittee th a t sh ort
interest, either in the m atter o f its gross o r its average p rice p e r
fchare, and y o u w ill understand that I d o n o t ex p e ct y o u to b e exact
about this, but just want y ou to give th e com m ittee the best in fo r ­
m ation y o u can.

Mr, B r u s h . May I ask my associate here about that?

Mr. G r a y . Oh, yes. There is no objection to your consulting him.
Let Mr. Millar bring his chair up closer to you there.
Mr. B r u s h . I thank you. Now, Mr. Gray, I want to answer this
in the way that you want it.
M r G ray. G o

right ahead, in your own way.

Mr. B r u s h . The liquidating value of my position in August of
1909, which we will call the peak of the market------

Mr.

G ray

Mr.

B rush.

(interposing). You say that was in August of

1929?

Yes, sir.

M r. G r a y . W a sn ’t the peak o f the m arket rath er a little b it later

than that?

Mr. B r u s h . N o , sir. September 22, 1929, I think, was the high
date; but this time I am talking about was in August or September
of 1039. I t was not when the market broke, on October 24. It did
not break during the peak of the market. It had broken maybe
four or five weeks before that, in a way. I would say that the liqui­
dating value of everything I had on the market at that time was in
t h ^ v fc in ity o f $15,000,000.

Mr. G r a y . Mr. Brush, you have already stated that there were
times when you thought it was to your interest to maintain a short
position. Let me ask you whether or not. when stocks were climb­




292

STOCK EXCHANGE PRACTICES

ing in 1929 you ever at any time during that period maintained *
short position?
Mr. B r u s h . I do not think, Mr. Gray, I was ever short of stock
until—well, let me consult my associate ?
Mr. G r a y . Certainly. G o ahead.
Mr. B r u s h . My associate confirms my impression that I w as neve*
short to amount to anything—oh, I might have been short 1,000
shares—but not to amount to anything.
Mr. G r a y . In other words, your figure of 125,000 shares on the
long side would probably represent your net position?
Mr. B r u s h . Yes, sir. And on the short side I will say I did not
start in on the so-called short selling until the spring of 1930, and
as a matter of fact, it was in April oi 1930.
M r . G r a y . A n d then y o u th o u g h t y o u w ere exercisin g g o o d j u d g ­
m ent.
M r . B r u s h . T h a t w a s th e id ea I h ad , an d I stay ed w ith it.
Mr. G r a y . The point I want to ask you about in respect to that

is this: A man who trades as you do and steps from the long to the
short side of the market when in his judgment he thinks mats the
proper thing to do, as a matter of fact waits, does he not, until
after, like in a movement such as 1929 and followed by 1930, until
that peak is reached and he thinks it is on a steady decline and it
gets thoroughly started, before he takes a short position; isn’t that
true?
Mr. B r u s h . Well, Mr. Gray, there are two distinct schools in
both the matter of buying and selling stocks. I might say that I
am definitely and distinctly of one school, although there are a
great many very successful men who do not agree with me. I do
not believe in selling stock on the scale down and I do not believe
in buying stock on the scale up. I f I think a stock is going to go
up eventually and is a good purchase, I buy it, because it is my
|
belief that if it is not a buy at that price then it is not a buy at all.
Mr. G r a y . You do not keep buying as the price advances!
M r . B r u s h . N o , s i r ; n or sell as th e price declines.

Mr. G r a y . In other words, you mean that you take your p o s i t i o n
with your first substantial purchase.
Mr. B r u s h . Mr. Gray, you understand that I am not a t r a d e r
from day to day or during the day. In other words, if in my o w n
mind I think the short position is the correct one, according t o t h e
way I view it, then it is an investment in the short position f o r m e .
I may be short by a thousand shares of stock and long of 10,000
shares of another stock, or vice versa.
Mr. G r a y . Because you think one is going up and the other g o i n g
down.
Mr. B r u s h . Yes; or if I can not sell one I a jn long of. F or in­
stance, I am a director in a bank, and I am a member of the execu­
tive committee of the same bank. I want to remain in that bank.
I want to stay in it, and I own a substantial block of stock? in it.
In order to protect my long position—and I will say that I am, or
have been for a year, thoroughly confident that the bank stock
would hit a lower price. I do not think I would exercise good
senaa to stay very long of stock which I thought would sell lower;
therefore I sold short in a readily marketable stock, against my
position in the bank stock, in order to keep my position. Now, Mr.



STOCK EXCHANGE PRACTICES

293

Gray, I do not want to make my answers so long, but you asked
me and I got going. [Laughter.]
Mr. G r a y . I do not care how long you make your answers so
long as you make them intelligible to us.
Mr. B r u s h . W e l l , I w ill do m y best, and i f a t a n y tim e I f a i l to
make m y se lf understood ju st ask m e over again .
Mr. G h a t . All right. Now, Mr. Brush, you spoke of that being
your own method, but I take it even in following your own method
you would rarely assume a short position, of course, unless it might
be in some particular stock, while the market was having a general
move upward, and that you would rarely assume a long position
while the market was having a general decline. Is that a fact?
M r . B r u s h . That is a difficult question to answer, because the
only time you can sell stock short is when there is a demand for it.
You certainly can not sell stocks short if there is not a buyer. For
instance, if you start in selling 1,000 shares of stock at TO, and if it
is a thin stock, probably by the time you get off the last 500 shares
it will stand at 60, so that would be poor trading. But, if you are
going to take a substantial short position you ought to begin sell­
ing while the market is advancing, which gives you a demand.
Mr. G r a y . In other words, try to pick the time of the turn.
Mr. B r u s h . Yes; or rather be ahead of the turn and take a lick­
ing down if necessary. I f you buy stock and if the condition exists
as it does to-day, at a time when the market has seen its bottom,
which a lot of people think it has seen, and a man wants to take a
position himself and says, “ I don’t want to sit here and see the
parade go by,” he puts in buying orders on the scale down. Now,
Mr. Gray, my policy may be wrong and the other fellow may make
more money his way, but I should rather miss the market for 10
points on the rise ana thereby see the condition of the market suffi­
ciently reflected and miss those 10 points than to try to buy at the
bottom of the market.
Mr. G r a y . Mr. Brush, you spoke of stocks in which you might
find a thin market. As a matter of fact, traders like yourself deal
pretty much in stocks that might be called pivotal and of which
there is generally a supply, do they not?
Mr. B r u s h . Yes, sir.
Mr. G r a y . Y ou find it sa fe r to do t h a t?
Mr. B r u s h . Oh, yes; it is a dangerous thing to be short o f the
market when there is a very scant supply.
Mr. G r a y . What is your opinion with respect to its effect upon the
market, whether it be on the up side or the down side, when there
are extensive dealings in some of the pivotal stocks? Does it control
generally the movement of other stocks?
Mr. B r u s h . I do not think, Mr. Gray, it controls it, but it is
a factor.
.
Mr. G r a y . I t has a decided effect u p on oth er stocks.
Mr. B r u s h . Yes, sir; and it depends upon thousands of things
that affect the market. Really the market is affected by supply and
demand and by whether a man—well, if you take it in the matter of
the liquidation of stocks so-called, and our term, as we understand
the term, liquidation means that you may finally get discouraged
about it, let us say, United States Steel, that you have in your
drawer, and you go to your box and get it and sell it. That means



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STOCK EXCHANGE PRACTICES

liquidation. And it is the same thing in the case of a bank or any
other institution. And if there is a big supply of any stock, then
the market will go down, because it is a question strictly of supply
and demand no matter whether it be a case of cattle, or horses, or
the securities market, or paintings, or anything else; the buying or
selling of stocks by you and I certainly is a contributing factor.
Mr. Gray. Although I want to go into that further a little bit
later, I want to ask you this question here: As stocks are bought and
sold on th© New York Stock Exchange, the law of supply and
demand of course affects them. On the other hand, they are affected
decidedly by artificial manipulation, are they not ?
Mr. Brush. Mr. Gray, I can not answer that question yes or no.
But I will say that stocks could be manipulated.
Mr. Gray. All right. Suppose we let that rest until I come to the
point of asking you about some of the practices of the New Y ork
Stock Exchange, which I will do later 011.
Mr. Brush. All right.
Mr. Gray. You mentioned what you have told us as being one
school that you followed. You also said there was another school,
whose methods were different from this school that you have men­
tioned and that you follow. Won’t you explain how they operate?
Mr. Brush. Well, say a man decides he wants to have a long line
of United States Steel. In other words, he wants to own 10,000
shares of United States Steel, and we will say United States Steel
is selling at 50. He will put in an order to buy 1,000 shares at 50
and 1,000 shares at 49y2 and 1,000 shares at 49*4, and so on down.
I f he does not get the whole 10,000 shares within a 5-point range,
he misses that portion.
I might state to the committee that I know of a specific instance,
the case of a man who is now dead, a man whose name everybody is
familiar with? although I do not care to mention it here, and I sat
in his office with him and he put in an order to buy 10,000 shares of
stock selling at par. He put 111 an order for 1,000 shares at 100, and
then 1,000 shares each at one-eighth down. While I sat with him
he got a report on his order and he owned his 1,000 shares at 100,
but the market never sold below 100. He was trying to buy 10,000
shares. Then the market went up 100 points. Now, he missed one
hundred times 9,000 shares profit by trying to buy the stock at points
one-eighth down.
Now, that illustrates my point, which is the opposite of that school
of thought, that if a stock is a buy at 99 it is a buy at par or it is
not a buy at all. But that is the idea of the other school; and in
selling it is the same way. I f a man has 10,000 shares of United
States Steel and it is selling at par and he wants to get rid of it, or
if he is going to sell 10,000 shares short, he puts in an order to sell
1,000 shares at par and 1,000 shares each at fractions on the way
down. He may get his Steel all off or he may not, dependent upon
the market.
Mr. Gray. That means selling on the scale up or buying on the
scale down.
Mr. Brush. Yes, sir.
Mr. Gray. What is wrong in back of that method ? Is it better
to assume the average position?




STOCK EXCHANGE PRACTICES

295

Mr. B r u s h . The average position. And as I say, a fellow will
use the expression to-day that he does not want to see the procession
go by. I do not know what United States Steel is selling for
to-day-----Mr. G r a y (interposing). Well, it is low enough, 20 or 3 0 , 1 believe.
Mr. B r u s h . Oh, well, I will not comment on that. I was going
to say something along that line, but T think I better not.

Mr. Gray. Go ahead. The committee wants your comments.
Mr. B r u s h . Well, I am no progn osticator.
Mr. G r a y . The committee would like to hear your comments.
Mr. B r u s h . Well, I won’t attempt to do it. I think I better not.
And, too, it is difficult for me to defend the other fellow's school.
Mr. G r a y . But you have heard it discussed. Go ahead and tell us.
Mr. B r u s h . All right. But United States Steel may not go down,
and it is selling at 30, we will say. On the other hand, the man is
scared to death not to be long of steel. Ordinarily he would be long
of steel. Ordinarily he would want a position of 10,000 shares. So
he figures if he buys 1,000 shares at 30 and 1,000 shares at 29% and
1,000 shares at 29^4 he will not be able to get his desired 10,000
snares. So he will take his position and will pocket his pride and
be satisfied if he can buy some of it at the bottom. And it is the
same way in selling; he sells on scale. He does not attempt to make
the entire sale at once but is satisfied to sell 100 shares right at the
top or to buy 100 shares right at the bottom.

jD I make myself clear, gentlemen?
o
Mr. G r a y . I think so.
Mr. B r u s h . W e l l , I don ’t k n ow , b u t I w ill tr y .
Mr. G r a y . Well, now, Mr. Brush, will you give this committee
your opinion, irrespective of what your own interests mav be, very
briefly as to the effect, and we will take one side of the market first;
as to the effect of outside heavy short selling in a declining market?’
Mr. B r u s h . Oh, it influences the market.
Mr. G r a y . Decidedly influences it, doesn’t it?
Mr. B r u s h . Needless to say. I can not guess—hut let me illustrate
it, and perhaps that will give you a better explanation of what I
mean: Let us assume that United States Steel is selling at 30 and
you, as the representative of a large institution, have 100,000 shares
of steel. And you have in mind to get rid of it. You start in to
sell some at 30. There is not sufficient demand for you to get off
more than 4,000 or 5,000 shares at 29%. Let us say that I know
what you are doing, and I come in and offer 5,000 shares of United
States Steel at 29%. I f there is loiig United States Steel that has
been sold ahead of that price then I am in competition with you,
selling my short position against your liquidating your long position
at the same price, lliat shows that the supply is greater tnan the
demand to the extent that I have sold short at that price, if I know
you are selling long, and then I think it has an effect in depressing
the market.
Mr. G r a y . Well, Mr. Brush, I am quite sure that the committee
appreciates whatever information you can give them.
Mr. B r u s h . Oh, well, Mr. Gray, this is not a technical question
that you and I are talking about. I don’t care whether you sell
chickens or rabbits or milk bottles, the situation is about the same.
If there are too many milk bottles being offered, then the bellow




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STOCK EXCHANGE PRACTICES

has to lower his price in order to get rid of what he h a s to s e ll.
Some of these gentlemen sitting around this table no doubt have
worked on the farm, and they Know what it means to get rid of
agricultural commodities, and they also doubtless know that t h e
stock market is no different. For me to sit here and tell you i f I
have 5,000 milk bottles to sell and only 500 are wanted, that t h a t
situation does not affect the price of the 500 milk bottles t h a t a re
wanted would be foolish.
Senator B r o o k h a r t (presiding). I f you sell 500 milk bottles and
then someone else comes in and offers to sell 5,000 milk bottles, he
does not know what he will get for them.
Mr. B r u s h . That is what I say, it increases the supply.
Mr. G r a y . Well, I will say that we tried to convince Mr. Whitney
o f that but he would not be convinced. That is to say, when there
was a large short interest that stepped into a declining market it
aided liquidation, sometimes to the point of giving the market a
decided depressed condition.
Mr. B r u s h . O f course, Mr. Gray, I should say in all justice t h a t
if somebody should come in while we are working on these milk
bottles and desires to purchase 10,000 milk bottles, there would b e
another situation. While it is not a controlling factor, yet it is a
contributing factor.
Mr. G r a y . On a declining market the short interest increases d e ­
cidedly down to a certain point in that market, where the experi­
enced shorts come to the conclusion it is time for them to begin to
cover, isn’t that so ?
Mr. B r u s h . Mr. Gray, that is an awfully hard question to a n sw e r .
Mr. G r a y . Well, you have of course made a study o f the v a r io u s
movements of stocks.
Mr. B r u s h . I have a chart here which I think partially a n sw e r s
your question.
Mr. G r a y . 1 will be glad for you to look at it, but our experience
has been in examining charts as to the market in general and as to
certain pivotal stocks that when we reach a point in the decline i n
price of 15 points, we will say, generally that short interest w i l l go
up a few hundred thousand shares.
Mr. B r u s h . Well, Mr. Gray, I won’t quarrel with you on figures,
but if there is a declining market, and a man who has a profit i s
convinced—and you must remember that you are backing your judg­
ment with money on stocks or anything else—if there is a declining
market, and he is convinced there is either going to be a sufficient
short interest or long interest liquidating in the stock to make a
further decline, he sees a good chance to take a short position in t h e
market until it reaches a point where you have definitely buyers o f
stock, when he can not duck buying. But if you want to buy s to c k ,
say, this morning, you go, if you please—but you understand t h a t I
am not on the stock exchange—but say I figure that the market i s
likely to turn on me, then I have got to buy, because I owe this other
man 1,000 shares of United States Steel, and I must either borrow
it, or buy it over the counter, or go into the market. When y o u
get to a certain point, and you used the figure 15 points, and as t o
that I say it depends on so many things that it would be in the
nature of a guess, and yet the principle is sound.




STOCK EXCHANGE PRACTICES

297

Mr. G r a t . Short sellers remain with that declining market as
long as, and are adding to their holdings, as long as they feel it is
going to decline.
Mr. B r u s h . Not adding to holdings but increasing the short
position.
Mr. G r a t . I am very apt in discussing matters with you to talk
on the wrong side of the market, and if I do correct me. They add
to their holdings on the way down until stocks reach a point where
they will level off or turn up, isn’t that so ?
M r . B r u s h . N o ; th ey sell o n th e w a y dow n .
Mr. G r a t . They ada to their short interest, then.
Mr. B r u s h . Yes, sir.
Mr. G r a t . I f you want to look at that chart which

your associate
has, it will be all right.
Mr. B r u s h . Well, do not bother about that. I think I have an­
swered your questions, and charts are very difficult to explain to a
large group o f men. I can explain it to Senator Walcott who is
sitting here next to me. Here is the declining market, Senator
Walcott, and here is the short interest. We can not go back o f
that, except-----Senator B u l k l e t (interposing). At what period is that?
M r . B r u s h . September or 1931. That was the first figure I have
that I could secure as to the volume o f the short interest.
Senator B u l k ie st . What does that cover, the stocks used b y
Standard Statistics Co. ?
Mr. B r u s h . It is the Dow-Jones average. The Standard Statis­
tics Co. have another group, and the New York Herald-Tribune
another group, and the New York Times another group.
Senator B u l k l e t . But this is the Dow-Jones group?
Mr. B r u s h . Yes.
Mr. G r a t . We happen to have the Standard Statistics and it will
doubtless help us to have that chart also.
Mr. B r u s h . This is the declining market [indicating on chart].
When you get to this you have the bottom of the market, and here
is your short interest, and it increased-----Senator B u l k l e t (interposing). What is the date of that bottom?
Mr. B r u s h . October 10. That shows that the short interest was
2.400,000 shares approximately. Now your short interest increases
right through here [indicating on chart]. At the same time your
market went up, and in that particular case your increasing short
interest did not depress stocks, and then this rally followed, and
then they were selling short until it got to this point here [indicating
on chart].
^
Mr. G r a t . That buying was done because they thought it was
necessary to cover.
Mr. B r u s h . In order to get their line out. The short interest was
nil here [indicating on chart]. As the market went up it gave them
an opportunity to buy stocks, and in that case the increase in the
short interest did not depress the market at all. That is not exactly
the standard practice, but that was the actual case in this situation.
Then the market went straight down finally from 116 until it shows
an average of 70.
Senator B u l k l e t . What dates do you refer to?



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STOCK EXCHANGE PEACTICES

Mr. B r u s h . Between November 1 and January 7. In that case
your short interest increased while the market was going d o w n , as
you will see here [indicating on chart]. Then you had a rally a g a in
and the short interest went up because the market would take i t , a n d
the market stayed here about the same, and then next decreased to
here [indicating on chart].
Senator G o l d s b o r o u g h . What date was that?
Mr. B r u s h . This carries us to about last Monday, I think.
Mr. G r a y . In other words, there are times when the m a r k e t is
moving up and the short interest moves with it because of th e f a c t
that they are taking their position.
Mr. B r u s h . That is right. So that it is very difficult to answer a
general question in the matter of the whole market. Sincerely i t is
very difficult for either you or I to try to conclude whether the s h o r t
selling affected it or not. There are so many things that have t o be
taken into consideration that you do not see on a chart.
Senator F l e t c h e r . Do you mean to say there is no general r u le
to show it ?
Mr. B r u s h . Yes, sir. But I do not quarrel with anybody w h o w i l l
admit with me that supply and demand takes care of it, and i f t h e y
think this law of supply and demand doesn’t come in, if the demand
doesn’t increase then the market will go down.
Senator B u l k l e y . Does that chart show the total volume of s h o r t
selling as compared to the total volume of trading?
Mr. B r u s h . No, sir.
Mr. G r a y . Do you mean the volume of short selling during t h a t
particular time, Senator Bulkley, because there are other e x h ib it s
here that contain all that data?
Senator B u l k l e y . I wanted that information as it might relate
to that chart.
Mr. B r u s h . Y ou mean if 1,500,000 shares are traded in on any
day, how much of it is short selling?
Senator B u l k l e y . Yes.
Mr. B r u s h . That is not on this chart. Mr. Whitney may have
that data.
Mr. G r a y . Senator Bulkley is talking about what has been re­
ferred to here as in and out selling. There is no way to get at the
in and out selling, that is, where the shorts make their position and
cover on the same day, except by going to the statistics for each
particular day. That is true, Mr. Brush, isn’t it?
Mr. B r u s h . That is right.
Mr. G r a y . I now want to ask you with respect to the charts and
statistics showing the change in the short position from day to da^.
In your opinion are statistics that show the change in the short posi­
tion from day to day an accurate guide, or isn’t it a fact that when
the coverage is during any particular day, by shorts who maintain
their position, and an additional short interest comes in on that day
which is not given consideration, then in your opinion does the figure
from day to day showing the changes give an accurate picture o f
the situation?
Mr. B r u s h . H o w w a s t h a t ?
Mr. G r a y . In other words, I mean this—if there happens to b e a
decrease in the short interest to 500,000 shares from one morning to
another, it is a fact that that short interest might have been increased



STOCK EXCHANGE PRACTICES

299

1,500,000 shares during the day while there may have been a coverage
of 1,000,000 shares, and that duplicates the net position.
Mr. B r u s h . You understand that I am not a member of an
exchange. As I understand the figures they give out, and Mr.
Whitney has a book somewhere, he gives you the actual number of
shares that are short as of 3 o’clock to-day.
Mr. G r a y . Yes.
Mr. Brush. And that is the short position. To-morrow at 3
o’clock he gives you the number of shares short that day. But I
do not understand that his chart shows what took place between
3 o’clock to-day and 3 o’clock to-morrow.
Mr. G r a y . N o . And without that information as to what took
lace that chart is not accurate guide of what effect short selling
ad on the market.
Mr. B r u s h . No; because a man at half past 10 this morning may
have sold 1,000 shares of United States Steel, and then at half past
2 o’clock he may have covered them. I may be in error on this, but
as I understand that does not show in the short position.
Mr. G r a y . Y ou are n ot in error. A s a m atter o f fa ct, the in -a n d out trad er selects a p rop itiou s tim e to sell, w h ich is freq u en tly in the

E

m orning.

Mr. B r u s h . I seldom trade by the day. I f I take a short position
in the market I take it for a period of time, of weeks or months or
a year.
Senator G ore . Mr. Brush, I am interested to know if you can
translate the psychology of the man who gets in and out on the same
day. Is that due to a nervous market or to sudden news ?
Mr. B r u s h . It is not due to a nervous market but to a nervous
man. (Laughter.) And I do not mean to be facetious. What I
am talking about is the average man who trades. And I am not a
member of the exchange. I have never been on the floor of the
exchange in my life. In fact, I have never seen the floor of the
exchange, even from the gallery, but once in my life. I do not
suppose I have been in three brokers' offices in New’ York in 10
years. The man who trades as I do would be crazy to try to do that
kind of work. It is too fast for him. The man who does that must
stand at the j)ost and play that racket. They are what we call in
New York chiselers, and that means any man who chisels in and
out. I f he is not a broker he has to pay a commission, and if he
is in that position he at least has to get one-fourth of a point, and
then he has the tax. I f he is short of stock he has to pay a premium.
Senator G o re . This may be Greek to vou as it is to me, but I
u n d ersta n d some men might engage in that sort of thing because
of limited capital, and others might get in in the morning and get
out in th e afternoon because of some sudden news or u n e x p e cte d
turn in th e market that changes his calculations.
Mr. B r u s h . Senator Gore, both of your suggestions are correct.
Sen ator G o r e . B u t that there are som e men w ho m ake it their
business o r p rofession o f chiseling in and out.

Mr. B r u s h . Well, I do not know that you would put it quite as
raw as that. And yet it is the natural inclination of a man on the
floor of the exchange, I assume, if he sees United States Steel selling
an and he anticipates good news and that it will sell at 31, he buys
some at 30, and then at 2 o’clcok he may sell at 81%. It depends



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STOCK EXCHANGE PRACTICES

upon how many shares he trades in. Ordinarily that type of trader
would not trade in over 300 or 400 shares of stock.
Senator Gore. But it must often be a sudden and unexpected turn
in the market apart from the general trend.
Mr. B r u s h . Of course, if the President of the United States c o m e s
out with a proclamation at half past 11, and this fellow sold short
stock at 11, it is just too bad.
Senator Gore. Well, that depends upon the sort of proclamation,
doesn’t it?
Mr. Brush. Well, we can not guess on that kind of thing, but in
case of a catastrophe we might say.
Senator Gore. That is what I figured, that that fellow had missed
his guess, is that so? I thought that was the motive or the control­
ling force that caused a good many people to get in and out, and
then when they started to get out that affected something else.
Mr. B r u s h . I do not think the volume of that kind of trading
amounts to much. That kind of trader can not trade in enough
stock, and he probably gets a licking almost as many times as he
makes money.
Senator Glass. In all these hurried transactions, how much
thought is given to the real value or the intrinsic value o f stocks?
Is there very much, if any?
Mr. Brush. By me?
Senator Glass. By anybody.
Mr. B r u s h . O f course, I am trying to give you a lot of informa­
tion about stuff I am not a party to. This speculation in and out
by the day or week is not my business. I never buy stock, Senator
Glass, that I do not know all about. And when I say I know all
about, I not only know the entire statistical position of the company,
its earnings, the relation of earnings to market price, but the people
who are running it, the men on the board of directors, the officers
of the company, the location of the company’s business, whether in
Maine or California or somewhere else. I must then know somebody
who is in the business, and then-----Senator Glass (interposing). You are a professional. I am talk­
ing about the outside public. What do they know about the intrinsic
values of stocks that they buy with the expectation of selling them
the next day?
Mr. Brush. Well, I suppose I might as well get shot right now,
for that will be the result of this anyway.
Mr. Gray. Go ahead and answer Senator Glass.
Mr. Brush. I wish you could leave this off the record. W ell, to
be perfectly frank with you, it is a pathetic basis on which the
average man buys stocks.
Senator Glass. Y ou would not say that a proclamation by the
President <)f the United States would either increase or decrease
the intrinsic value of a stock, would you ?
Mr. Brush. It increases or decreases the desire to buy or sell.
Senator Glass. Oh, yes.
Mr. Brush. And the man that does that has probably assumed
that as a result of the proclamation it may make that stock worth
more money. But, Senator Glass, that is going pretty well into the
future.



STOCK EXCHANGE PRACTICES

3 01

Senator G l a s s . H o w d o y o u m e a n , m a k e i t w o r t h m o r e , t o e a r n
a greater d iv id e n d ?
Mr. B r u s h . T o e a r n a g r e a t e r d i v i d e n d ; y e s .
Senator G l a s s . Do you mean to say that a proclamation issued by
the President of the united States would make a stock earn a greater
dividend?
Mr. B r u s h . Well, I am not a politician, Senator Glass.
Senator G l a s s . Well, it does not r e q u ir e a politician to answer
a simple question like tnat.
Mr. B r u s h . I would say that if the President of the United States
had the power to issue a proclamation which would have an effect
upon a certain kind of business^ that would increase the earning
power and dividend-paying ability of the companies that are en­
gaged in that kind of business.
Senator G o r e . Wouldn’t that react more on the demand side?
It would not, of course, affect the supply side. That factor would
not change. I can see how it might materially affect the demand
side, and it would affect the price.
Mr. B r u s h . I would not try to guess at it, and yet I might say
that it is the same thing as in the case of congressional action. Now,
if the Congress in its various activities takes some position which
is likely to nave a material effect upon the earning power of a com­
pany, that would be a time for the man who is interested to study
that very thing and attempt to know what he is talking about.
I do not know whether I answered your question fully, Senator
Glass.
Senator Glass. You answered it all right in one word, pathetic.
[Laughter.]
Mr. B r u s h . All right.
Mr. Gkat. I f I may supplement the question as to what affects
the public, isn’t it a fact that a good many people watch the board
and when that indicates a movement they get the idea that a certain
stock is a good thing to follow and they step in ?
Mr. B r u s h . Perhaps they d o that.
Mr. G r a y . Then, to follow that up a little bit further, on the ques­
tion o f its being pathetic, will you add to your answer ?
Mr. B r u s h . They may get a circular this morning from Henry &
Kabibler, or two fellows who have just come over from Greece two
months ago, saying that the X Y Z stock is a good stock to buy, and
they go ahead. That sounds like an exaggeration, but the Senator
on my left (Mr. Walcott) will bear me out, as he was in the business
long before I was.
Senator F l e t c h e r . Mr. Brush, you said something to the effect
that prices depend upon the law of supply and demand, that whether
a man ought to sell short or go long depends upon supply and de­
mand. How can you determine supply and demand? What are the
factors entering into that?
Mr. B r u s h . The condition of the country, the condition of the
company, prices of commodities, all these and other things govern
your supply and demand, influence supply and demand. For in­
stance, i i you and I are convinced that the condition o f a certain
business is good or is promising, then there are a lot of other people
who will think the same way and will want to buy stock, and vice
versa. I f conditions are such that we think we ought to sell, that
119852—32----- 20



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STOCK EXCHANGE PRACTICES

increases the supply, or it may be the economic factors, I will say. It
may be over my head, but that is the way I will answer.
Senator F l e t c h e r . Does that develop on the stock exchange, or
is it outside in the country?
Mr. B r u s h . It develops on the stock exchange by reason o f cus­
tomers in brokers’ offices. Senator Fletcher, if you and I should
decide to say that the wheat situation will be affected by reason of
some tremendous damage to wheat, then you and I know perfectly
well, if our opinion or guess is right, that there will be a scarcity
of wheat and more people will want to buy. I f there would be a
scarcity of wheat then the supply would fall off, and on the question
of supply and demand we would buy.
Mr. G r a y . Now, taking up the illustration that you have given
us of the effect on the mind o f a member of the public who receives
a letter and acts on it, that situation is used by some crooked manip­
ulators of the stock market, and by some brokers at times, of course,
who cooperate, I think, for the purpose of increasing or making an
artificial demand for that particular stock, isn’t that so ?
Mr. B r u s h . It c a n b e .
Mr. G r a y . That happens, you know.
Mr. B r u s h . Oh, Mr. Gray, there are undoubtedly influences b y
means of crooked circulars—and we are talking of outside the stock
exchange now—of those people who put out dope sheets, but the
exchange has more to do with it than you and I have.
Mr. G r a y . But at times there is cooperation in that work on the
park of the exchange or some of the houses.
Mr. B r u s h . It is possible that they could do it with a brokerage
house and not a member of the exchange, either.
Mr. G r a y . Isn’t it done sometimes?
Mr. B r u s h . I do n,ot think it fair to say, for I have never had
any knowledge of any member of the New York Stock Exchange
working in cohoots with that character of information to the detri­
ment of the public and to his own advantage.
Mr. G r a y . That trading is done, however, through brokers on
the New York Stock Exchange?
Mr. B r u s h . It h a s to b e .
Mr. G r a y . And it should be in some instances very apparent to
those brokers from the information available to them, I mean that
that character of manipulation is going on.
Mr. B r u s h . That is a hard question for me to answer. You a r e
asking me now to judge what this or that fellow is thinking about,
and I do not think it fair to try to do it.
Mr. G r a y . Let me come back to the question of short selling.
There are some traders in the market that are—I was going to use
the words, constantly operating on the short side. I do not mean
that they are constantly selling short but who prefer as a general
thing to play the market from that end, isn’t that true?
Mr. B r u s h . Yes, sir.
Mr. G r a y . Mr. Whitney has said there is nothing in existence
and, has not been for years past that might be designated under
the name of bear raids. I think I understand, and possibly some
of the members of this committee understand, by the use o f the ex­
pression “ bear raids ” was meant some concerted attack made upon
the market by those who operated continuously on the short side



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for the purpose of depressing prices in order that they might, hav­
ing assumed the short position, cover at a point decidedly to their
advantage. Doesn’t that happen?
Mr. B r u s h . I do not think it has happened since the time when
they put in that restriction. Up to last November when they put
in the restriction, which I will explain as best I can, or I will explain
to you what I have always understood bear raiding to be, although
you will understand that I am not in it.
Mr. G r a t . Y ou m a y ta k e a n y le n g t h o f t im e o n t h is s u b je c t t h a t
is inspired by m y q u e s t io n t h a t w i l l e x h a u s t it , i f y o u w ill.
M r . B r u s h . D o y o u m e a n t h a t w i l l e x h a u s t th e s u b je c t , o r m e ?
M r . G r a t . Oh, I think you will be able to stand the strain.
Mr. B r u s h . Before this restriction was put into effect, if you

had
had a crook in the game somewhere, and if United States Steel was
selling at 30, and he had a good line of Steel out, after he had
started Steel at 35, 33, 32, and so forth, and then the market was
selling at 30, and then he put in an order to sell 5,000 shares of
United States Steel at 29—that is, a point under the market—it is
a cinch that he would get that 5,000 shares off, because the people
who are willing to pay 30 for the stock will pay 29. That is bear
raiding.
Mr. G r a t . And that has been done?
Mr. B r u s h . Not to my knowledge, Mr. Gray, and it can not be
done to-day.
M r . G r a t . Well, now, you gave us the definition of it, and a thing
can not be defined unless it exists.
Mr. B r u s h . Well, I will put it this way: I know of instances
where a stock toward the close, that is, either before last November
or two years ago, where the stock was either closed up a point or
down a point, and to my mind the climb up is as bad as the climb
down, because it pulls in every sucker in the United States. You
can still close them up because there is no restriction. I f Steel is
selling at 29 and 5 minutes to 3 o’clock I go in and buy a thousand
shares at 30, I have closed the market up a point, and the fellow
at Keokuk, who perhaps sits with his brother over a stein of beer,
well, if they had it out there, would say: “ Look at that market.
See Steel is up a point. Let us buy some.” And the fellow who
closed it up a point, sells in the morning. It is just as big a crime
to close a stock up as down.
M r . G b a t . And is that done to-day ?
Mr. B r u s h . I s a t in a r o o m a n d s a w i t d o n e t w o y e a r s a g o , b u t I
have not seen i t d o n e s in c e .
M r . G r a t . As I understand, when you buy or sell stocks, you make
a thorough examination as to the particular issues. I take it also
that you find it necessary to keep yourself thoroughly posted on the
methods that are followed in the market.
Mr. B r u s h . Not particularly, because that kind of stuff does not
last 24 hours. I f I buy something it is for a year or six months or
three months. I do not attempt security trading of any other kind.
It is to fast. I am not trying to protect myself against that kind
of trading, it is too fast.
M r . G r a t . There are people in the market who are doing that very
thing now, are there not?



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STOCK EXCHANGE PRACTICES

Mr. B r u s h . I will make a good guess that it is probably true,
but not on the up side these days. I won’t say to-day. And they
can not do it on the down side.
Mr. G r a y . That is because of the rule of the exchange to the e f f e c t
that there may not be a short sale made at a price lower than t h e
la s t sale on the market.
Mr. B r u s h . No, sir.
Mr. G r a y . But don’t they evade that in this way—and it occurs
to me that it might be easily evaded: We will say that steel is
selling at 30, and we will say that somebody wants to dispose o f
1,000 shares short for the purpose of depressing the market. Can’t
they very easily do that by putting in 100 shares of long stock which
they own at 2 9 and immediately affect it with the 1,000 shares
thereafter?
Mr. B r u s h . Can it be done with 100 shares?
Mr. G r a y . I will ask you that and you may take any figures you
wish.
Mr. B r u s h . I do not know. I do not trade that way. I do not
think it affects it, Mr. Gray.
Mr. G r a y . All right.
Mr. B r u s h . I assume of course, that h e would have to have 100
shares of stock.
Mr. G r a y . He would have to have 100 shares long which he would
sell at 291/a for the purpose of creating a short market on which
to dump the 1,000 shares. The 1,000 shares may not damage the mar­
ket, but it is easily done in larger lots. I used these figures for
illustrative purposes.
Mr. B r u s h . I am not a member of the stock exchange, but It
should guess that you would immediately have a member o f the
board of governors of the exchange over at that post. Some time
ago, after the Kreuger & Toll situation, or one of the situations
anyway, where the market the next morning opened off decidedly,
there was one stock that did not open until about 11.30 because
of no bid, and no trading was allowed in that stock until a member
of the board of governors went over and tried to reconcile the bids
and the selling prices. I am guessing at this but I would say in
the case you describe if a man went to work to sell 100 shares at
29, and followed that with 1,000 shares at 29 short, that a member o f
the board of governors would be there and stop the sale.
Mr. G r a y . It is strictly within the rule of the board though.
Mr. B r u s h . Yes; as far as I k n o w .
Senator Gore. On the cotton exchange I understand a pool can
not sell cotton at a lower price than somebody is bidding, if some­
body is bidding a higher price on a bona fide bid. He can not sell
it for less than that. Is there any rule of that sort on the stock
exchange?
Mr. B r u s h . I can not answer that. And I do not know anything
about cotton.
Senator G o r e . It works the other way around on the cotton
exchange.
Mr. B r u s h . A s far as the stock market is concerned, I would
say that a member who undertook to sell stock, even after this
happened, a big block of stock, the exchange would take it up.
But I can not answer that as I say, for I don’t m ow. I am not close
enough to the stock exchange management to know.



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M r. G r a y . Had you answered Senator Gore’s last question?

Mr. B r u s h . I tried to. I do not qualify to answer, Mr. Gray.
Mr. G r a y . I mean I did not want to interfere with it.
Mr. B r u s h . Did I satisfy you, Senator Gore ?
Senator G o r e . Yes; you said that you knew of no rule. So that
answers the question, o f course, if you did not have the information
on the point.
Mr. B r u s h . No; I have not.
Mr. G r a y . Mr. Brush, you are familiar with what a specialist is
and what his duties are and how he carries them out, are you not?
Mr. B r u s h . In a general way, Mr. Gray.
Mr. G r a y . Won’t you say to the committee what a specialist is,
what his duties are, and how they are carried out ?
Mr. B r u s h . I have personally never seen a specialist that I know
is a specialist, but I understand-----Mr. G r a y (interposing). No; but you found it necessary in your
study of the things to know the complete operations of the market,
have you not?
Mr. B r u s h . Substantially, yes. To my best knowledge a specialist
is a man who stands at the post of the particular stocks that you
may have in mind, whatever it is. And each stock has a specialist.
Some specialists may cover 5,10, or more stocks when the stocks are
rather thin trading.
And if I give an order to a broker to buy a thousand shares of
steel he calls his floor man. His floor man goes to that post where
the other people are there buying and selling steel and makes the
bid, and this fellow records it in his book, and he has in his book
the bids and sell prices of people who put in an order to buy and
sell a stock at X points above or below the market when the market
reaches that.
In other words, I can put in an order, Mr. Gray, to-day “ G. T. C.,”
good till canceled, to sell a thousand shares of steel at 32. I may not
get it off for a month and in the meantime if I want to cancei it I
can.
I assume that that is on his book. I have never seen a specialist’s
book in my life.
Mr. G r a y . In other words, he is the man who in the larger stocks
trades in one stock alone or carries out orders.
Mr. B r u s h . Two men in some of the larger stocks?
Mr. G r a y . Yes; in some of the larger stocks there is more than
one. He has a report in his book of every order that is placed, and
the time which it is to remain good, both on the buying and selling
side o f the market in that particular stock, unless—I said every
order—unless some orders are just placed as they come in, market
orders for instance, are executed, if you please, through some other
broker who is there ready to accept that market order?
Mr. B r u s h . I do not know,. Mr. Gray, absolutely, whether if a
broker went to the post and bid 30 for a thousand steel and the
other brokers said “ sold,” I have absolutely no knowledge whether
that goes into the book or not. The stuff, I am quite sure, in his
book is that if I put an order in there, steel selling at 30 and I give
a broker an order to buy a thousand shares of steel at 29, that I am
sure must go in the book.



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STOCK EXCHANGE PRACTICES

Mr. Gray. In other words, all the pending orders on either side
of the market at a fixed price that are not able to be immediately
executed go into that specialist’s book?
Mr. B r u s h . T o th e b e s t o f m y k n o w le d g e .
Mr. G r a y . So that he has a record of all of the bids that have
been made through every broker on the New York Stock Exchange
and can tell from that record what the range on the bid is, what the
lowest price is that is offered for stock, what the highest price is
that it is offered for, and what the lowest and highest price i^ at
which stock is operated for sale—that is correct, is it not?
Mr. B r u s h . I think you are correct.
Mr. G r a y . Now, to the man who is trading in large b lo c k s o f
stock the knowledge of what appears upon that specialist’s b o o k
is rather important, is it not?
Mr. B r u s h . I w o u l d t h in k i t w o u l d b e .
Mr. G r a y . W ill you tell this committee frankly, Mr. Brush, i f y o u
please, as to whether or not it occurs-----Mr. B r u s h (interposing). I have no knowledge-----Mr. G r a y (interposing). I was going to ask you—you m a y b e
anticipating—whether or not it occurs that some of these la r g e
operators cooperate with the specialist, take him in on so m e o f
these deals, and by the use of that information put into effect b u y ­
ing or selling orders for the purpore of manipulating the m arrafc
in one direction or the other.
Mr. B r u s h . Frankly, Mr. Gray, I do not know. I do n o t k n o w
whether the book is exposed to them or not. I know I never sa w
it, and I was never able to get it.
Senator C o u z e n s . Mr. Brush, perhaps without mentioning a n y
names, you could disclose to the committee as vividly as you a id to
me yesterday just how these specialists operate, at least a c c o r d in g
to your understanding. As I understood it, you just had in d ir e c t
knowledge of how they operated. Would there by any o b je c tio n
to your telling the committee just how you understand they o p e r a te
at times?
Mr. B r u s h . Senator Couzens, I will guess at it the best I c a n .
Senator C o u ze n s . You were telling me a little story y e s te r d a y
of how they operated. I do not think that there is anything t h a t
you can not tell the committee along those lines.
Mr. B r u s h . I am handicapped to intelligently do it, because, a s
I say again, I am not a member of the exchange. I have never b e e n
in a pool in my life. I could not say to save my soul to-day t h a t
I could name a single man who is a specialist, nor the stock in w h ic h
he might be a specialist, and that is absolutely true.
Senator C o u z e n s . You do know that they exist, though, d o y o u
not?
Mr. B r u s h . The specialists exist, and p o o l managers exist, un­
doubtedly.
Mr. G r a y . And pools exist?
Mr. B r u s h . And pools exist; yes, sir.
Mr. G r a y . On both sides of the market?
Mr. B r u s h . I th in k so .
Mr. G r a y . You have learned that in your little experience o u t­
side, while the president of the stock exchange does not get t h a t .



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Well, I think he did slip up and say that some pools did exist,
yesterday.
The C h a i r m a n . After denying it for several days.
Mr. G r a y . Will you answer Senator Couzens’ question, please?
Mr. B r u s h . The only way I can answer that intelligently, the best
I can, Senator, is, if you and I, Senator, should join with half a
dozen other people with the idea of operating a pool, there is only
one reason on earth for doing it ; that is to make money, because I
do not know anybody that is in Wall Street for their health, and
any trade that ever was described to you is made because the fellow
expects to make money some way. And you and I and six other
men form a pool in X i Z stock with the idea of getting an accumu­
lated supply o f it and selling it at a profit. Now, I am doing a lot
of guessing and a lot of hypothetical stuff here.
Mr. G r a y . Don’t apologize for it. We all know it, but we would
like to have the people like you tell it.
Mr. B r u s h . All you have got to do is buy me a ticket south, not
back to New York. [Laughter.]
After we have accumulated our supply of ten, twenty, or thirty
thousand shares, whatever we are going "to do, depending upon our
finances, if we knew that on the book there was a certain amount of
stock on the sell side—and I don’t know, and I give you my word—
whether the book is ever exposed to any other member or not. I
have never seen a book, nor has any broker that has ever worked
for me been able to give me a book; I mean over the phone, to tell
me what the supply and demand for stocks were.
But if he can see the book he knows that there are 5,000 shares a
point and a half or two points up. He would do what they say
clean the book,” and there is no more stock there. Naturally, then
the ?law. of supply and demand would go into effect, and if there
is no stock, the stock will go up. I f there is too much stock on the
other side the stock will go down. I f he cleans the book on the down
aide, then there is no demand for stock, and when there is no demand
for stock, stock prices go down.
Now, that is a hypothetical imagination, because I have never had
.
contact with it in my life, but I will do the best I can.
M jv G « a y . Y o u h a v e h e a r d t h a t e x is t s ?
Mr. B k u s h . Yes; I have heard that exists.
Senator. B b o o k h a r t . Y ou have mentioned twice

about being afraid
to go back to New York. Is that run like A1 Capone’s racket up
there f
Mr. B r u s h . A1 Capone is a piker compared to what it will do
to me.
Senator G oke. Would there be any chance o f Caponizing these
bulla and bears?
Mr. B r u s h . Do what, Senator Gore?
Senator G o r e . I was wondering if we could Caponize the bulls
and bears.
Senator W a l c o t t . Mr. Brush, don’t you think that the capital
gains tax has had a very pronounced influence in making a shortage
in many shares of stock on the way up ?
Mr. B b u s h . Yes; I d o . I r e a lly t h i n k i t h a s .




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Senator F l e t c h e r . These people would not sell because of the tax
they would have to pay to the Government; therefore, they kept
holding?
Senator T o w n s e n d . That is absolutely true.
Mr. B r u s h . I guarantee that. I would hate to tell you w h a t i t
cost me.
Senator W a l c o t t . That’s one of the biggest factors in the specu­
lative market.
Mr. B r u s h . Y ou never would have had, Senator Fletcher, i n the
world, your market from the 1st of March to September 22,1929, i f
it had not been for that tax.
Senator G ore. Had not been for what?
Mr. B r u s h . The capital gains tax.
Senator F l e t c h e r . D o you have any experience with brokers in
connection with what is known as brokers’ loans?
Mr. B r u s h . No; because I never go back of my broker, Senator
Fletcher. I ask my broker to buy or sell me some stock. Now as
to where he takes that stock, if it is long stock, and goes and bor­
rows money on it at the bank or where he borrows the stock to sell
it, I have absolutely no knowledge, and I am not interested.
Senator F l e t c h e r . These brokers’ loans amounted to $8,000,000,000
loaned to 15,000,000 speculators over the country. A ll o f t h e m
were in debt and they were loaned without any note or o b l i g a t i o n
in writing or anything of the kind, just loaned "outright.
Mr. B r u s h . But with collateral, Senator.
Senator F l e t c h e r . Collateral; yes. There had to be a collapse
of that some time, don’t you see? Wasn’t that a very bad practice?
Mr. B r u s h . Y ou had people buying stocks in the summer o f 1929,
including yours truly, who ought to have had their heads examined.
Now, as to the contributing factors which knocked it off in Septem­
ber, there were all kinds of them, Senator. I don’t think you could
attribute it to any one situation myself.
Senator G o r e . That market was sort of a delirium, was it n o t ?
Mr. B r u s h . It certainly was, Senator Gore.
Senator G or e . A good deal like the South Sea bubble in England
and the Mississippi bubble in France, the bubble in Holland?
Mr. B r u s h . We had every man, woman, and child and church a n d
school house and library in the market.
Senator C o u z e n s . I want to take exception to that, Mr. Brush.
Mr. B r u s h . I am sorry, Senator Couzens.
Senator G o r e . Judge and janitor and waitress.
Mr. B r u s h . I would say the occupants of these institutions, not
the officials of the institutions.
Senator B l a i n e . O f course, that was the era of prosperity.
Mr. B r u s h . You don’t want me to comment, Senator?
Senator G or e . I think there is the trouble, Mr. Brush. Y ou can
not keep folks from buying on a rising market or selling on a falling
market. It is just human nature and you can never repeal that
law.
Mr. B r u s h . You can never stop it, Senator Gore, any m o r e than
you can stop a man from buying a horse that is worth $100 and p a y ­
ing $500 if some other fellow wants it.
Senator G o r e . It is due to lack o f horse sense, a n d you c a n n o t
mend that.



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M r . G r a y . Mr. Brush, it has been stated by Mr. Whitney— I think
the committee would like to have your opinion, if you feel that you
can give it—that if short selling is stopped the stock: exchange would
practically close. Will you venture an opinion upon that ?
Mr. B r u s h . Well, I would not like to comment on what would
cause the exchange to close, but I do think this, Mr. Gray, that if
you prohibit short selling you would get terrific swings in your mar­
ket, because if I wanted to buy some stock there would be no stock
available to me except out of a box. I would have to actually buy
the stock from somebody who owned it, and if I wanted to sell some
stock I would have to find a buyer who is willing to buy it outright
and lock it up. I think one man’s guess is as good as another as to
what the result would be, but my impression would be that you
would get swings of 10,15, or 20 points either way in the market.
Senator B r o o k h a r t . Some regulation of the long buying would
help that, would it not?
M r . B r u s h . Senator, I do not like t o guess at that, because I do
n o t really qualify.
Mr. G r a y . Would it not, if this marginal buying on the up side
and the shorty selling, the selling of something that you haven’t got
on the down side, were abolished, take the market out of the gambling
element or out of the position of conducting a gambling institution
and let the question of prices be controlled by the natural law o f
supply and demand.
M r . B r u s h . I think you would have terrific swings in your market.
I f I may volunteer this, I think, Mr. Gray-----Mr. G r a y ( i n t e r p o s i n g ) . I d o n o t k n o w w h a t i t is.
M r . B r u s h . I think, Mr. Gray, the word “ short selling ” has be­
come an extremely unfortunate word for a man to use at all, because
a short sale, as I understand it, is a contract. In other words, you
have made contracts for whether it is horses or wheat or stock or
anything. I contract with you or I go to a bank and instead of
borrowing money I borrow a certificate of stock, and I sell it to Tom,
Dick, o r Harry. But I agree with you, from whom I borrow it, to
return it to you on a moment’s demand. So I am really making a
contract, a “ future contract,” which is the term I like to use, rather
than the term “ short selling.” I am making future contracts the
same as you make them in wheat. Senator Gore knows you make
them in cotton. You make this kind of a contract, Mr. Gray, if I
may illustrate-----M r . G r a y . G o r ig h t a h ead .
Mr. B r u s h . For instance,

say, during the war Guy Tripp sent
for me from Texas and said, wBrush, I want a thousand horses.” I
have got five, but I know a lot of my neighbors have probably got
some. I don’t know what they are selling at, but my best judgment
a s a Texas man is that I can deliver those horses and make some
money at $50, and I make a contract with the Bureau of Ordnance
to deliver a thousand horses in New York at $50 a horse.
Now, I go back out there and I assemble these horses at $37 and
bring them down to New York and deliver them, and I did not
have a horse when I started to make the contract.
4
. .
This may be a very homely comparison, but to my mind this is
the way I understand it. It is the same as though you contract to
deliver a quart o f milk every morning to me at my house; your milk



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man does not have milk, God knows, for the last day, and he may
have enough cows and he may not have enough cows. It is a future
contract to me, and not the term “ short selling.”
Mr. G r a y . There are going to be a lot of Senators that will d iffe r
with you.
Senator G la ss . Suppose that horse trading would go on in d e fi­
nitely with the 500 horses. What would you call that—with n o
expectation of ever delivering the horses and with nobody ev e r
having any use for the horses? What would you call that?
The C h a ir m a n . And there being no horses m the deal?
Mr. B r u s h . Senator, I can not answer that question.
Senator G l a ss . Well, your illustration is exceptional. The thing
that you cited would be an actual trade for something that somebody
wanted and expected to get and to use, whereas these transactions w e
are talking about, nobody invests his money for 5 minutes; no­
body invests his money and has to stand at a ticker to find out
whether it is going to be high or low within the next 15 minutes.
Mr. B r u s h . I do not think, Senator Glass, the amount o f 15minute trading is large enough to amount to anything at all.
Senator G l Ass. Well, who invests his money for a day? That is
not investment. That is speculation.
Mr. B r u s h . I can not qualify as to that because that is not th e
way I trade.
Senator G ore. Mr. Brush, this is a sort of a study in psychology,
and I would like to get your reaction if you care to express your
opinion. Now, you take a bull speculator who checks the market
situation, trends, and other factors. He decides the market is going
up and he buys. Now, he buys because he thinks the market is going
up and not in order to make the market go up primarily, isn’t that
true?
Mr. B r u s h . I think so.
Senator G ore. The fact that he does buy may have a tendency t o
raise prices if there is a trend upwards, but whenever he buys some­
body sells?
Mr. B r u s h . Right.
Senator G o re s. And those two factors cancel each other unless t h e r e
is a market trend upward.
Now, on the other hand, you take two men who are going to sell
stock. One is long o f stock and he sells his stock outright. H e
thinks the market is going down and he will sell before it does go
down and get rid of his long stock to avoid a loss.
A short seller figures the market is going down, after his investiations, and he sells short because he thinks the market is going
own and not in order to make it go down.
Isn’t that the general psychology of this business?
Mr. B r u s h . That is my impression, Senator Gore.
Senator G ore. N o w , when he sells short, of course, somebody buys
it, and those two factors, the buying being a bullish factor and sell­
ing being a bearish factor, those two factors, of course, would cancel
each other?
Mr. B r u s h . That is right.
Senator G ore. Unless there is a trend downward ?

f

M r. B ru sh . T h a t is righ t.




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311

SenatoF G o r e . The holder of long stock just unloads his stock on
the market and that is a weight on the price, and when the short
seller sells he is bound to buy back sooner or later?
Mr. B r u s h . Yes, sir.
Senator G or e . I was wondering whether that necessity to buy back
would offset the tendency which his selling had to depress the market.
- Mr. B r u s h . Senator Gore, I do not think the man lives—at least
1 could not answer that question, except that I know that when the
man has sold his stock short or made this future contract, as I have
termed it, he is a potential buyer.
Senator G o r e . Yes.
Mr. B r u s h . He is going to buy the stock.
S e n a t o r G o r e . A n d t h a t i s h is o n l y w a y o u t . N o w , w e h a v e h a d
s o m e c h a r t s h e r e in w h i c h th e c u r v e s s e e m e d t o b e e r r a t i c , w h i c h
w o u l d in d ic a t e t h a t t h e r e a r e s o m e o t h e r f o r c e s c o n t r o l l i n g t h e t r e n d
o t h e r t h a n ju s t th e s h o r t s e l lin g a n d l o n g b u y i n g .

Now then, suppose a man sells Steel snort at 100 and it goes down
to 90. There have been some questions or answers here which indi­
cate that a man ought to step in and get out at that point. I figure
that if he thought the dip had about reached the lowest point and
there is liable to be an up turn he would cover and get out. But if
he thought the trend was still downward, it might go down to 80,
he would not get out, but he might sell some more short and go on
down. Isn’t that true?
Mr. B r u s h . Yes.
Senator G o r e . Now, you take it when Steel was 261. It is down
to 29. There may have been some short sellers who rode all the way
down through all the gyrations; isn’t that true?
. Mr. B r u s h . That is possible, yes.
Senator G o re . Others would get in and out.
Mr. B r u s h . Yes, sir.
. Senator G o r e . They calculated on the up turn and the down trend.
So that it is rather an estimate o f the future trend of the market that
controls a short seller as to whether he covers or sells more and goes
on down.
What I am getting at, you notice these curves here; sometimes the
shorts increase and the stock goes up.
. Mr. B r u s h . This curve shows that.
Senator G o r e . Yes. Well now, he calculates that it is a temp­
orary up turn and that the down trend will counteract that and it
will still go on down further. Would that not be his psychology?
Mr. B r u s h . Yes. He is what we call “ bucking the trend.” No
man ever makes money in the market that bucks the trend. I don’t
care what he does.
S e n a to r G

ore.

H e is o n e o f th o s e t h a t lo s e s ?

Mr. B r u s h . He loses.
Senator G o r e . I have been told—I do not know whether it is
true or not—that 97 per cent lose anyhow. I imagine that is true.
You know, there is an old saying that “ every instance is an excep­
tion to the general rule.”
Mr. G r a y . By the way, it might be interesting, Mr. Brush—have
you ever known any of these statisticians, maybe not some of the
'big ones, to endeavor to work out the percentage of people that
eventually lose on the stock market?



STOCK EXCHANGE PRACTICES

312

Mr. B r u s h . N o , but I know plenty of them, Mr. Gray, t h a t c a n
tell you very definitely just what the market is going to do at 3 o ’c l o c k
next Thursday.
Mr. G r a y . I am coming to that.

Senator G o r e . He ought to be in a strait-jacket.
Mr. G r a y . But in that connection don’t you also know? Mr. Brush,
many a man that has been closely allied with some specific c o r p o r a ­
tions—I don’t know whether you have been in this position or n o t —
who can pretty well say, because they know what is going to be d o n e ,
that they are safe in putting in an order to buy a particular stock o f
the corporation in which they might be interested at 2 o’clock this
afternoon?
Mr. B r u s h . That is perfectly possible, Mr. Gray. I f a man w h o
is running a business knows that he is going to do something a s a n
officer of that company at 2 o’clock this afternoon that is going t o

affect the stock----Mr. G r a y . I do not mean anything meritorious; I mean by
o f manipulations he knows what is going to take place.

reason

Mr. B r u s h . In the price?
Mr. G r a y . In the stock itself; yes.
Mr. B r u s h . I f there was a manipulation in a stock of that kind it
would not happen that quickly, Mr. Gray. I mean by that it would
take days or weeks or months. But certainly any man, Mr. Gray,
with inside information with regard to any situation ought to be
able to make money out of it, regardless of the nature of it.
Mr. G r a y . There are several other practices that are engaged i n
for the purpose of manipulating prices on the market. You a r e
familiar with them, are you not?

Mr. B r u s h . Will you cite them to me and
rather than trying to guess at them?

I

will pass

on th e m ,

Mr. G r a y . For instance, the matter of the pegging of the market
to keep up prices. That is pure manipulation, is it not? Or prices
down, either way?
Mr. B r u s h . I i it is pegging of the market.
Mr. G r a y . That is done with regularity, is it not?
Mr. B r u s h . No question but what markets have been pegged at
a price for a period of time as long as the fellow who is doing the
pegging can stand the pressure. You undoubtedly recall that Mr.
John D. Rockefeller had an order for a million shares o f Jersey
at 50-----Mr. G r a y . I am not as familiar with the market as you are.
Mr. B r u s h . During the bad slump, it was put on the ticker that
Mr. Rockefeller would be prepared to take a million shares of Stand­
ard of New Jersey at 50. It stayed there a little while, and Standard
of New Jersey is 21 now.
I don’t know whether the story was true or not, but it stayed at
50 for a while, but if he pegged at 50 or at 60 that was good pegging
as long as he could stand the pressure against the stock that was
made on him by orders.
a

Mr. G r a y . N o w , it is the practice also of traders in order to k e e p
price within a certain range and at the same time not have to p e g

or not have to put in money-;-----

The C h a i r m a n (interposing). He said Mr. Rockefeller.
record should show who that is.



The

STOCK EXCHANGE PRACTICES

313

Mr. B r u s h . Mr. John D. Rockefeller.
Mr. G r a y . Manipulators will put in orders to buy with one firm
and to sell at practically the same price in another name with
another firm; that is true, isn’t it?
Mr. B r u s h . I d o n o t k n o w , Mr. Gray, b e c a u s e I d o n o t se e w h a t
the f e l l o w a c c o m p lis h e s w i t h t h a t .
Mr. G r a y . Creating an active market.
Mr. B r u s h . That is possible, if he has some object in view in
creating an active market. I am very sincere in this, because I -----Mr. 5 r a y (interposing). He does that because he has some rea­
son t o keep that market active in order that he might put through
some commitment that he and a pool that he is operating for de­
sires t o put into effect.
Mr. B r u s h . That is perfectly possible. I am very sincere when
I say I do not know of any such case.
Mr. G r a y . I s t h e r e s o m e t h in g t h a t is k n o w n a s “ r i g g i n g ” t h e
market?
Mr. B r u s h . I would say rigging the market is the same as rig­
ging anything. I f a fellow goes in there and puts out false infor­
mation and buys the stock and sells it secretly, he has created a
bull sentiment in that market. It is an interpretation of words
now, because I would say that that would be one type of rigging
the market.
Mr. G r a y . All right. Have you known that to be done with
the cooperation of brokers?
Mr. B r u s h . No; I have not, sincerely, Mr. Gray. I do not con­
tact with that sort o f thing, because I do not trade the way that
type o f trader trades. But I can understand it is possible.
Mr. G r a y . By the way, it is a fact that a lot o f large operators
will operate in other names at times? Isn’t that true?
Mr. B r u s h . Oh, I do not think there is any question but what
that is done.
M r. G r a y . The general purpose of it is what?
Mr. B r u s h . It is to conceal the activity of that particular man.
That had its good and its bad features. As a matter o f actual
fact, i f a man has a reputation of being a bad actor in the market
in selling stocks, and so forth, it is a good thing that he operates
under a different name, because otherwise the market would fall
out o f bed if they knew that So-and-so was selling.
M r. G r a y . Y ou m ean b y th at th a t i f a m an h a v in g a repu tation
o f a b a d actor— there are som e in N ew Y o r k , isn ’t th a t s o ?

Mr.

B

rush.

Yes.

M r. G r a y . That he having such a reputation, if it were publicly

known what he was going to do, it would have a decided effect on
what would happen to that stock on the market right away?
Mr. B r u s h . I t h i n k s o .
M r . G r a y . T h a t w ou ld b e because it w o u ld b e anticipated th a t
that w h ich h e d id intend to d o w as g o in g t o b e som eth in g th a t
was n o t g o in g to be done in the rig h t w ay and f o r the benefit o f
this p a rticu la r m an o r he alone o r the p o o l in w h ich he is interested?

Mr. B r u s h .
body in New
trader, one of
he does these



Well, I would put it a little bit differently. I f every­
York knew that So-and-So, who was a great short
the greatest reputation years ago, I don’t know what
days, if they knew that he was selling stocks right

STOCK EXCHANGE PRACTICES

314

across the board, why, the impression would be that he would not
be selling them, unless he thought the market was going down, and
a lot of people would try to follow him and get licked.
Mr. G r a y . Do you happen to know the history of the J. I. Case
Corporation with respect to certain market conditions?
Mr. B r u s h . N o . I have the same information that everybody
in New York has. There was a lot of trading in Case and a lot
of buying and selling in Case, and there is relatively a small out­
standing issue of Case.
M r. G r a y . D o you h appen to know that there is o n ly an o u t­
standing issue o f about 196,000 shares?

Mr.

B

rush.

T h a t is r ig h t .

M r. G r a y . D o you happen to know th at a p p roxim a tely 90,000 of
that is closely h eld ?

Mr. B r u s h . Y ou are talking about Case now?
Mr. G r a y . Yes; Case. I f I am wrong in that, please tell m e .
Mr. B r u s h . You are naming another one so far as figures a r e
concerned. You are sure of Case?
Mr. G r a y . Yes; I am talking of Case.
Mr. B r u s h . I do not know that, because I do not trade in Case.
Mr. G r a y . Y o u do know that at times during the last year at least
71 per cent of the entire outstanding issue of Case was short?
Mr. B r u s h . Sincerely, I can not qualify on Case at all, b e c a u s e
I have seldom traded in a share of Case. I have heard all t h e
stories about Case being a great market opportunity for t r a d i n g
on account of its very small outstanding issues, but I do not k n o w .
I have never seen the short position of Case in my life, and I say it
honestlv.

Mr. G r a y . Is there anything particularly in your knowledge
respect to Auburn and the manipulations of it ?

w ith

Mr. B r u s h . That is the one I had in mind, and that is the reason
why I thought you were using that, because the figures are almost
identical. There are 196,000 shares of Auburn. I have never known
the total short position. The only place I saw anything about the
Auburn operation was in Mr. Whitney’s book, and my recollection
is it was 50,000 shares.
Mr. G r a y . In other words, that is approximately 50 per cent o f
the available stock for the short interest?
Mr. B r u s h . My impression is—and this I could not prove to s a v e
my life, but this is the kind of information you get in New York—
that there are 196,000 shares of Auburn and about half o f i t i s
owned by Cord, which leaves the other half outstanding, and that
of the other half probably half of it is held by a group of men. So
that it left you a very small amount of stock to trade in. I could
not prove that to save my life, but that is the universal knowledge
around the streets of New York.
Senator G ore. Isn’t there a rule, Mr. Brush, that when the a m o u n t
of floating stock gets down to a certain point, below a certain p o in t ,
it is ruled off the board ?

Mr. B r u s h . I am sorry, Senator Gore, I d i d not hear you.
Senator G o re . I say, is there not a stock-exchange rule that when
the floating stock available for operation or purchase and sale gets
down below a certain point or too restricted it is ruled off the board?
Mr. B r u s h . I do not know that that is the rule, Senator, but I do




STOCK EXCHANGE PRACTICES

315

know this, that in the case of a corporation when they ask to have
their stock listed—I say I know this because it occurred in a corpora­
tion of which I am a director—where the stock of this company,
utility company, was owned in a very substantial percentage by a
holding company, when this subsidiary was to be listed the stock
exchange made the directors pass a vote agreeing to always have a
supply of that stock in case it was necessary for borrowing purposes.
Senator G o r e . I understand there is some regulation of that sort.
Mr. B r u s h . I do not know the rule.
Senator G o re . And that is to obviate so-called corners, is it not?
Mr. B r u s h . Of course, if there is no stock you have a corner.
S e n a t o r G or e . A s t h e a v a ila b le s u p p l y o f s t o c k b e c o m e s less i t
f a c ili t a t e s th e o r g a n iz a t i o n o f a c o r n e r ?
Mr. B r u s h . Certainly, either an u p or down corner.
Mr. G r a y . Just another question or two, Mr. Brush. You are

familiar, of course, with investment trusts and know that there are
quite a. few that exist?
Mr. B r u s h . Yes, sir.
Mr. G r a y . And I think you said that you were president of one,
the American International Corporation?
Mr. B r u s h . Yes, sir.
Mr. G r a y . And that trust, as well as the others, of course, buy
and sell other stocks on the New York Stock Exchange?
Mr. B r u s h . Yes, sir.
Mr. G r a y . Does your investment trust—and I am only asking
about yours particularly to follow it up by asking a question with
respect to others and getting general information—loan such stock
as you may possess to other short sellers of those stocks?
Mr. B r u s h . Practically, no. The reason I say “ practically, no”
is that we had one case where a house of issue came to us and said
“ We are in a jam for stock ” and we loaned them a small block of
shares for a short time.
Mr. G r a y . Y o u do not engage in that practice?
Mr. B r u s h . Oh, no. I know the case of a company in which we
were interested which was a foreign construction company and they
in connection with some exchange wanted to borrow some stock,
which we loaned. The point that you are making does not apply
to our case, Mr. Gray.
Mr. G r a y . D o you know whether it applies generally to other
investment trusts in New York?
Mr. B r u s h . I do not know that, but I do know that on two
occasions recently on the board of directors on which I was sitting
I asked the presidents of two investment trusts who were there what
their policy was and they said that they thought under the present
situation that it was very unfortunate and unwise, for their invest­
ment trusts at least, to loan stocks. So there are two that I know do
not do it. Now, as to the others, I do not know.
Mr. G r a y . Don’t you know that it has been the habit of some in­
vestm en t trusts to loan and in anticipation of an intended short
sale to persons who are selling on the short side of the market their
stocks, and that that is a medium by which the in v e stm e n t trusts
seek to earn some little additional profit ?
,
Mr. B r u s h . I have heard that, Mr. Gray, but I do not know ot

any case.



316

STOCK EXCHANGE PRACTICES

M r . G r a y . B y th e "w ay, y o u r k n o w le d g e o f t h e m e c h a n ic s o f t h e
s t o c k e x c h a n g e is s u c h t h a t o f c o u r s e y o u w o u l d s a y t h a t t h a t s t o c k
b e i n g lo a n e d i n t h a t w a y , t h a t t r a n s a c t io n w o u l d n e v e r a p p e a r as
a s h o r t s a le i n c o n n e c t io n w i t h th e r e t u r n s t h a t h a v e b e e n m a d e b y
th e b r o k e rs t o th e e x ch a n g e ?
Mr. B r u s h . I have got to think o f things as y o u ask me, because
I never heard o f it.
Mr. G r a y . In other words, if an investment trust loans to a n

intended short seller------

Mr.

B r u s h (interposing). Over the counter?
G r a y . Over t h e counter.
M r . B r u s h . N o.
Mr. G r a y . That would not appear as a short sale?
Mr. B r u s h . No.
Mr. G r a y . And if it happens with great frequency,

Mr.

then there
are a great many additional short sales that we haveno record of?

Mr. B r u s h . Except I would assume—I a m playing m y c a r d s as
they are dealt to me here now, because this is a new one for me—I
would assume that the broker under his present ruling is supposed
to notify his post and the exchange of every short sale.
Mr. G r a y . Yes; but if a short seller comes in with thaijt stock
which he has previously borrowed from the investment trust——
Mr. B r u s h (interposing). That is a short sale.
Mr. G r a y . There is nothing to distinguish it at all from a short
sale?

Mr. B r u s h . Unless the fellow is dishonest and does not report
it as a short sale.
Mr. G r a y .
the sale?

H

ow

does he know it if he has borrowed who has

m ade

Mr. B r u s h . No; I beg your pardon. I thought you meant the
broker borrowed it.
Mr. G r a y . Whether that is not the habit of the investment trusts!
Mr. B r u s h . That I can not answer, but this is the way I under­
stand your question; that I go to you, president o f the investment
trust, and I say, “ Mr. Gray, have you got a lot of steel here? ” And
you will say, Yes,” and I say, I would like to make a contract
with you to borrow from you for three months 5,000 shares o f steel,”
and I make such a contract and you give me the stock. I give you
the money, the market price, and I pay you the premium. I put
that in my pocket.
M r. G r a y . I s th a t d o n e ?
Mr. B r u s h . I do not know, Mr. Gray, sincerely.
M r . G r a y . D o t h e in v e s t m e n t t r u s ts lo a n t o t h e b r o k e r s w h o n e e d
th a t sto ck ?
Mr. B r u s h . The three that I know about, these two that I men­

tioned and our own company, no. But I can understand perfectly
why they might, because they make the premium and make the
interest on the money.

Mr. G r a y . N o w , Mr. Brush, this committee, as you know, i s en­
deavoring to ascertain everything that they can to help learn all they
can about the New York Stock Exchange and the things that ought
to be subject to correction. Can you give them any further informa­
tion than that which you have already given them on the subject
that would be helpful in any manner whatsoever?



STOCK EXCHANGE PRACTICES

Mr. B r u s h . That is a broad order. That gives m e an awful lot
o f leeway.
Mr. G r a y . Well, we have asked you, I have myself at least asked,
you, such questions that occurred to me for the purpose of develop­
ing anything that we thought we ought to have. Now there may
be something that I have omitted that occurs to you that is valuable
information for the committee to have, and if such thing occurs to
you, why, we would be very glad to have it.
Senator C o u z e n s . While Mr. Brush is thinking about that, have
you been a short seller long, Mr. Brush ?
Mr. B r u s h . Since April, 1930.
Senator C o u z e n s . Prior to that you were not in short selling 1
Mr. B r u s h . No ; I never sold a share o f stock short until I think it
was in April, the middle of April, Senator Couzens, in 1930. My
associate says that is not quite correct, but practically correct.
Senator C o u z e n s When you entered into it in 1930, of course
as you say, you entered it to make money, but-----Mr. B rush (interposing). Please understand, Senator—may I
qualify that?
Senator C o u z e n s . Yes.
Mr. B r u s h . I o w n t o - n i g h t a n d h a v e o w n e d f o r s e v e r a l y e a r s
s o m e v e r y s u b s ta n t ia l b l o c k s o f s t o c k o f a c h a r a c t e r t h a t I c a n n o t
s e ll or d o n o t w a n t t o s e ll, d u e t o a d ir e c t o r a t e o r a n o ffic e r s h ip o r
t h e s t o c k i s s o t h in I c a n n o t s e ll it.
S en a to r G ore. S o what? You used a word there I did not u n d er­
sta n d .

Mr. B r u s h . So thin. In other words, stock, Senator Gore—I do
not want to mention the stock because I think it would hurt the
situation—but as chairman of the executive committee and as a sub­
stantial stockholder in a building, two years ago I could see where
we were going to go on a lot o f these rents. I could not sell that
stock. I could not, due to my loyalty to my associates. I think
eventually the stock is going to be worth a great deal of money,
maybe in five years.
So I sold stocks of a liquid nature that are readily salable and that
I could buy back readily in order to offset my long position. As
I would say. I hedged on them.
S e n a t o r C o u z e n s . In o t h e r w o r d s , y o u s o l d t h e m s h o r t ?
Mr. B r u s h . I sold them short in order to offset my long position
in other stocks. I own a substantial block of stock in a company
that is going through a receivership. Now, I can not sell that stock.
I think it is going to be worth less money. So, while I sit there
having this stock, I have sold stock short to try to hedge against it.
I own a substantial stock in a bank. I do not want to sell that
bank stock. I am in the bank and I am active in it, and I have
quite a little block of it. I think the stock is away below what it
ought to be. I think eventually it is going to sell a lot higher, but
still in the meantime I think that stock is going to sell 10 per cent
lower in the next six months. I do not want to sell it, so I sell
another stock to offset it.
S e n a to r C o u zen s. H

ow

m u ch stock h ave y o u

s o l d s in c e A p r i l ,

1930, a p p r o x i m a t e l y ?
Mr. B r u s h . Oh, gosli, Senator Couzens, I could not tell you.
m e a n bought and sold or traded in ?
110852—32------ 21




io u

318

STOCK EXCHANGE PRACTICES

Senator C o u z e n s. Yes.
Mr. B r u s h . I could not even guess at it. Senator Couzens, I will
be glad to give you that figure, but I do not believe I would be ableto guess within 50 per cent of being correct.
Senator C o u z e n s . You do not carry in your mind these short s a le s
that you have been carrying on all the time ?
Mr. B r u s h . Oh, gosh; for two years?
Senator C o u z e n s. In other words, you have been so active in themarket you could not remember ?
Mr. B r u s h . No; but that 24 months, Senator Couzens, is a lon g :
time.
Senator B u l k l e y . What about this year? What about s i n c e
January?
Mr. B r u s h . How much have I sold so far since January; sold
short ?
Senator B u l k l e y . Yes; since the 1st of January.
Mr. B r u s h . I have got to qualify it. Senator Bulkley. I f I ami
short of A stock and it goes down 10 points and I think it is too low ,,
and B stock over here has not started down yet, I would cover that
and put out B stock.
Senator B u l k l e y . Y o u have done that sort of thing s i n c e the*
1st of January?
Mr. B r u s h . Certainly. Done it for two years.
Senator B u l k l e y . And have you a short line now ?
Mr. B r u s h . At the present moment; yes.
Senator B u l k l e y . What do you think about the theory that is ad­
vanced that that retards the recovery of the country by holding thestock market down ?
Mr. B r u s h . I do not think my short position has any more effect
upon the prosperity of the country than a rabbit.
Senator B u l k l e y . I s it not a contributing factor ?
Mr. B r u s h . I do not think so.
Senator B u l k l e y . N o w , when you are short of a stock y o u want
to see it go down, don’t you ?
Mr. B r u s h . Well, if hope has any effect on it, Senator Bulkley,.
yes, sir.
Senator B u l k l e y . Don’t you do anything about it? Don’t you;
do anything to help it down ?
Mr. B r u s h . I certainly do not.
Senator B u l k l e y . Never have?
Mr. B r u s h . Never in my life.
Senator B u l k l e y . Have you joined with any other people to havea certain action in selling the stock?
Mr. B r u s h . Never in any way, shape, or manner have I been*
with a pool or a group of men. I operate absolutely alone.
Senator G l a s s . Why shouldn’t you if you want to*
Mr. B r u s h . B e with a group ?
Senator G l a s s . I say, why shouldn’t you want it to go down i f
you make money out of it, just the same as the fellow wants it togo up who wants to make money?
Mr. B r u s h . That is not what Senator Bulkley asked me. Heasked me if I did anything to make it go down.
Senator G l a s s . You are in the stock market to make money, are
you not ?



STOCK EXCHANGE PRACTICES

319

Mi. B r u s h . Yes; but I am not going out-----Senator G l a s s (interposing). Wouldn’t you make the market go
lip if you thought you could make money out of it ?
Mr. B r u s h . I have no control to make the market, Senator Glass,
go up or down.
Senator G l a s s . Well, I say if you could you would, would you
not? In other words, I want to find out what harm there is, if
ham there be, in gambling high and gambling low.
Mr. B r u s h . Well, Senator, I figure that economic conditions and
a million other factors make stocks go up and down and not my
trading, and when I take a position, a short or a long position in
the market, I do not advertise it to a soul on earth, and I do not
undertake to make that stock do anything.
Senator G l a s s . I am not supposing that you do. The point I
make is that a bear is no worse than a bull, and not as bad.
Mr. B r u s h . Senator Glass, you would never have had your bear
picture i f you had not had your bull picture in 1929.
Senator G l a s s . Of course not; and the country would not be in
this condition if you had not had your bull picture in 1929.
Mr. B r u s h . No, sir; that is correct.
Senator B a r k l e y . Do you think that this bull market caused the
depression or that there was an expectation that the depression was
over?
Mr. B r u s h . N o , Mr. Gray, I have-----Mr. G b a y (interposing). Don’t come to me for help.
Mr. B r u s h . I can not do that. I do not know. I try to follow
the economic conditions and not guess why they occur.
Senator B u l k l e y . Y ou s t ill t n in k t h a t y o u a r e ju s t ifie d in p l a y ­
ing short o n th e m a r k e t a t t h is t im e , d o y o u ?
Mr. B b u s h . Well, justified in what way, Senator?
Senator B u l k l e y . As a patriot.
Mr. B r u s h . I do not think I am affecting the—I do not think
patriotism has any more to do with my position in the market than
that inkwell; not a bit.
Senator G l a s s . Wouldn’t you say you are as much a patriot as
the fellow who boosted the market up ?
Mr. B r u s h . I c e r t a in ly d o .
Senator G l a s s . I d o t o o .
Mr. B b u s h . The fact that I am short at the market, Senator
Bulkley, has no more effect upon the market than anything in the
world you can think of.
Senator B u l k l e y . That is just what I want to get at, your opinion.
You do not think that the market is any lower on account of your
being short in it ?
M r. B r u s h . N o , sir.

Senator B u l k l e y . And you do not think that it is depressed by
short and staying that way ?

p la y in g

mm

r u s h . N o , sir.
B u l k l e y . You

Senator

might turn around and sell it short to­

morrow?
Mr. B r u s h . I might have to buy to cover my shorts.
,‘Mr. G b a y . I might ask, it is not your staying short, but it is your
continually adding to it?



320

STOCK EXCHANGE PEACTICES

Mr. B r u s h . That is right.
Mr. G r a y . It is your continually adding to the short position,
and therefore offering additional stock that brings about the
decline?
Mr. B r u s h . Yes, sir; that is right.
Senator B u l k l e y . That is just what I am asking him.
Mr. G r a y . He will concede that the continual adding to the short
osition brings about additional declines, but you asked him a b o u t
is present position.
Senator B u l k l e y . Yes; I asked him about his present position,
and then I asked him if he is prepared to go out and sell some more
short to-morrow or the next day.
Mr. B r u s h . No; I am not, Senator Bulkley. I ought not to say
this, because I do not like to give out my expert information to all
of these fellows over in New York.
Senator B u l k l e y . I didn’t mean it that way.
Mr. B r u s h . But the man does not live, Senator Bulkley, that
can guess—-I am willing to go on record with this—what is going
to happen in the market of the United States in the next 6 to 9
months or 12 months. I do not care who he is or how smart he is
or what position he holds—he does not live. Because all contribut­
ing factors pro and con in this picture in the next 9 months, the
possibilities just beggar your imagination. So I would not take
a position to-day in the market if I did not have one either way.
Senator B u l k l e y . A s I understand your answer, then, it is that
you would not sell short probably to-morrow, because you are not
sufficiently confident that it is going down, but would not hesitate
to do it if you thought it was going down?
Mr. B r u s h . Well, I don’t know. It has been customary—I h a v e
had some tough breaks, too, by doing this—to back my judgment
with my money if I have got any. And if it is proper for me to
buy something if I think it is going up, I think it is perfectly proper
for me to sell it if I think it is going down.
Senator G l a ss . Why not? That is the game, isn’t it?
Mr. B r u s h . That is life, Senator Glass.
Senator B u l k l e y . That is just the point I was trying to develop,
his whole attitude about it.
Mr. B r u s h . Don’t think, Senator Bulkley, that the man who sells
the market short always wins. You take a man like myself, who
runs through the market from December, 1931, till the following
February with a substantial short interest, and then run through
the moratorium last June with a substantial short interest, he doesn’t
sleep much nights, you know, for four or five weeks. I f I had
quit on September 22,1929, which I should have had brains enough
to do, I would have had a lot more money than I have got to-day.
Senator G o re . Mr. Brush, there was a substantial rally after the
moratorium last year. You attribute that to two forces: Some peo­
ple thinking the drepression was over and stocks were taking a
trend upward, and another factor was the shorts who were getting
out and covering against thier profits?
Mr. B r u s h . Well, Senator Gore, that is very difficult to answer.
That moratorium came without any warning to the man who was
short of the market at all. He then immediately had to try to
decide, and do it very promptly, whether he thought that was going

E




STOCK E X C H A N G E PRACTICES

321

to last or whether they would again sell low. The man who thought
that they would still sell lower certainly did not cover his position
and run through that with a terrific paper loss. Now, if he had
money enough to last through he won. I f toward the last of it
he did not have money enough to ride through he went broke. So
he is just matching his judgment.
Senator G o re . The sam e thing happened after the reconstruction
legislation this winter?
Mr. B r u s h . The same thing has happened. All you have got to
do is to look at these charts and see what the fellow had to ride
through here if he was going to stay with them.
Senator G ore. Of course, some of the shorts covered and did not
ride through, and that had a tendency to put the market up, and
I assume that others who thought, in turn, that the market would
go down increased their short position, and that had a tendency
to depress the market.
Mr. B r u s h . Senator Gore, you see, shorts covered right at the
top, some of them, and went along with the market. So it just
influenced that both ways. So tftis is not all just “ driving up in a
hack with gold dollars.”
Mr. G r a y . I was going to ask you the question, supplementing
Senator Glass’s suggestion, about the pools. It is not the pools
either for the up side or the down side that are the danger, but it
is the manner in which their object is accomplished in some instances?
That is about the trouble, is it not ?
Mr. B r u s h . I think that is an excellent statement; yes, sir.
Mr. G r a y . All right; that is all I wanted just now.
The C h a i r m a n . We are going to adjourn. You may consider
yourself excused, subject to call, Mr. Brush, and the committee will
meet at 2.30 this afternoon. The first witness will be Percy
Rockefeller. Is he here?
Mr. P e r c y R o c k e f e l le r . Yes.
(Thereupon, at 12.20 o’clock p. m., a recess was taken until 2.30
o’clock p. m., of the same day.)
AFTER RECESS

The Senate Banking and Currency Committee reconvened at 2.30
o’clock p. m., Friday, April 22, 1932, at the expiration of the noon
recess.
The C h a i r m a n . The committee will come to order. So will the
audience.
Mr. G r a y . Is Mr. Rockefeller in the room ?
Mr. R ock efeller . Yes.
The C h a i r m a n . Y ou swear that the evidence that you are about
to give before this committee will be the truth, the whole truth, and
nothing but the truth, so help you God?
Mr. R ock ef el ler . I do.
TESTIMONY OF PERCY A. ROCKEFELLER, GREENWICH, CONN.

Mr. G r a y , Will you give the reporter your full name, Mr. Rocke­
feller?
Mr. R o ck ef el ler . Percy A. Rockefeller.
Mr. G r a y . And where do you reside?



322

STOCK EXCH A N G E PRACTICES

Mr. R ock efeller . Greenwich, Conn.
Mr. G r a y . Have you any particular business or profession thax yo
can designate?
Mr. R o c k e f e l l e r . I am interested in various industries.
Mr. G r a y . Various industries and different enterprises?
Mr. R o ck efeller . Yes.
Mr. G r a y . Connected with various corporations?
Mr. R o ck ef el ler . Yes, sir.
Mr. G r a y . On the board, or an officer of some of them ?
Mr. R o ck efeller . On the board of several of them.
Mr. G r a y . How m a n y?
Mr. R o ck ef el ler . Well, quite a good many. I do not know au
together.
Mr. G r a y . Well, approximately?
Mr. R ock ef el ler . I th in k possibly 30.
Mr. G r a y . Those are corporations whose stock is traded in upon,
the New York Stock Exchange?
Mr. R ock ef el ler . Some of them are and some of them are not.
Mr. G r a y . We have been advised that you have been a very large
trader in stocks on the New York Stock Exchange. Is that correct!
Mr. R o ck ef el ler . I have at times sold and bought considerable
amounts of securities.
Mr. G r a y . And for what period of time have you been engaged in
trading in stocks on the New York Stock Exchange?
Mr. R ock ef el ler . A good many years. Fifteen or 2 0 years I
should think, probably.
Mr. G r a y . D o you do that trading in your own name ?
Mr. R o ck ef el ler . I do, sir.
Mr. G r a y . All o f it?
Mr. R ock ef el ler . I have been interested in various syndicates at
times.
Mr. G r a y . What you would call pools ?
Mr. R o c k ef el ler . N o; I should ca ll th em syndicate a cco u n ts.
Mr. G r a y . And by syndicate accounts you mean that you are
engaged with other men in trading in the market ?
Mr. R o c k ef el ler . I have been at times; yes, sir.
Mr. G r a y . Does that mean that you have been engaged in t r a d ­
ing in the market on both what they call the long side a n d th e
short side ?
Mr. R o c k ef ll er . I have for my personal account traded on both
sides. The syndicate operations have been on the long side.
Mr. G r a y . Well, is it not a fact, Mr. Rockefeller, that most
of those syndicate operations have been on the short side ?
Mr. R ock efeller . N o , sir.
Mr. G r a y . That is not so?
Mr. R ock efeller . N o , sir.
Mr. G r a y . Discussing for a moment your individual operations,
will you tell the committee with respect to your position during
the last five or six years, without carrying your memory back any
further than that? What has been the highest position that you
have assumed on the long side of the market, either with respect
to the volume of shares or the value involved? In other words
your long operations have reached the point where there has
how much involved?
n



STO C K E X C H A N G E PRA CTICES

Mr.

R

ockefeller.

323

From memory I should say about 22,000 or

23.000 shares.

Mr. G r a y . Twenty-two thousand or twenty-three thousand shares ?
Mr. R o c k e f e l l e r . Yes.
Mr. G b a y . No more than that?
Mr. R o c k e f e l le r . I do n o t th in k so.
Mr. G k a y . And the most of your operations have been syndicate,
I suppose?
Mr. R o c k e f e l l e r . No; comparatively few.
Mr. G r a y . You mean that at no point o f time in the last five or
six years have you ever been long more than 22,000 to 23,000
«hares?
Mr. R o c k ef el ler . Well, I have not had an opportunity to check
that, but that is my impression, to the best of my knowledge and
belief.
Mr. G r a y . Does your position change very rapidly, or is it a
position that quite frequently is set for a great length of time ?
^Mr. R oc k e f e l le r . Sometimes it changes fairly rapidly and some­
times it is set for a considerable period.
Mr. G r a y . Well, now, if you will apply your memory, if you
please, to your position on the short side of the market. Tell us
What is the greatest position with respect to the number of shares
o f stock that you found yourself in on the short side of the market
at any time within that same period.
Mi. R o c k e f e l le r . I think at one time I was short 60,000 or
70.000 shares.
Mr. G r a y . So that your position in the main has been greater
on the short side of the market individually, than it has been on
the long?
Mr. R o c k e f e l l e r . No, sir. That short position was a very short
position, and I think it was in 1927.

Mr. G r a y . D o you mean that short position did not last for as
ions a time as your long position did? Is that what you mean?
Mr. R o c k e f e l le r . A s I rem em ber it, ju s t f o r a m o n th , o r po ssib ly
two

m on ths.
G r a y . Are you short or long in the market now?
R o c k ef el ler . I am long in the market.
M r . G r a y . Y ou are lo n g on th e m arket n o w ?
Mr. R o c k e f e l le r . Yes, sir.
Mr. G r a y . Y ou have some short positions, I suppose?
Mr. R o c k e f e l le r . No, s i r ; I h ave not.

Mr.
Mr.

^

'k
T

1

ons at all at the present time?

Mr. G r a y . When did you get out of it?
Mr. R o c k e f e l le r . Five or six weeks ago.
Mr. G r a y . Five or six weeks ago. When you thought it was a
favorable time to do so, I supposes
Mr. R o c k e f e l le r . Yes, sir.
Mr. G r a y . That is natural. What is the extent of your short posi­
tion with your syndicate operations ?
Mr. R o c k e f e l le r . I have no short position in syndicate operations.
Mr. G r a y . Have not for how long?
Mr. R oc k e f e l le r . I do not think I ever have. I do not recall any.
Mr. G r a y . Well, I will come back to that in a moment or two.



324

STOCK EX C H A N G E PRACTICES

During the period of time between the spring of 1929 and t h e latter
part of September or early pail of October, 1929, individually w h a t
was your position in the market, long or short?
Mr. R ock efeller . I think I may have had a small short position
at times, but in the main I was long on the market at that time.
Mr. Gray. And about when did you change that position to the
short side of the market?

Mr. R o c k ef el ler . Well, I never changed it in the balance on the
short side, but I began selling short, off and on, in the fall o f 1929.
Mr. G r a y . Y ou mean by that, after October?
Mr. R o ck efeller . October or November, somewhere in th e r e .
Mr. G r a y . Yes. In other words, as a trader, while th e market
was rising during the summer and early fall of 1929, you remained
on the long side?
Mr. R o ck efeller . That is my best recollection.
Mr. G r a y . But when the market reached its peak and started o n a
decline you shifted your position?
Mr. R o ck efeller . I th in k I h ave h ad a very con sisten t long posi­
tion as well as a short position ever since the a u tu m n of 1929.
Mr. G r a y . Putting it, however, this way, that you began t o a d d to
and to strengthen your short position after the break in October,
1929; that is correct, is it not ?
Mr. R o ck efeller . I think that is true.
Mr. G r a y . I wonder whether you can tell this committee what ef­
fect you believe the establishment of a large short position by either
yourself or others, or yourself in conjunction with others, when a
decided decline starts in the market-—
what effect that has on the
market?
Mr. R o ck efeller . I do not th in k a short position -------Mr. G r a y (interposing). Some of us believe that it decidedly de­
presses the market and adds to the liquidation. Is that not so ?
Mr. R o ck efeller . I am not sure of that. It may h a v e a tempo­
rary effect, but every short seller has to cover his stock, and I think
in the main those operations neutralize each other.
Mr. G r a y . Well, is it not a fact that h e does not cover his stock
until the decline reaches a point where either he thinks he has made
enough money to cover or where he thinks the decline is goin g to
stop? That is your experience, is it not?
M r . R o ck efeller . I th in k th a t is t r u e ; yes.
Mr. G r a y . Yes. And as a matter of fact, bv that time the short
interest by the adding to their position have drawn so much liqui­
dation into the market that that liquidation continues—real liquida­
tion—from long holders in the market to a period beyond where the
shorts cover, that is true, is it not?
Mr. R o c k ef el ler . I do not quite understand that.
Mr. G r a y . The shorts cover at a period of time where they think,
of course, either that they have made enough money or that the
market is going to turn. And having accentuated their position on
the way down I am asking you whether or not that has not brought
sufficient liquidation into tne market in your experience to cause
that liquidation to continue even beyond the point where the shorts
cover?
Mr. R o ck ef el ler . I am n ot sure th a t th a t is true.



325

STOCK E X C H A N G E PRA CTICES

Mr. Gray. Well, I want your judgment on it. Have you not
found from your experience that that is the case ?
Mr. R ockefeller . I personally do not think that short selling
materially changes the market.
Mr. Gray. You do not. Let us look at that. You mean you think
that there is real liquidation in the market and there is a flood of
short selling orders that come in, that it does not add to that liquida­
tion and cause a decided decline or depression?
Mr. R o ck efeller . It may temporarily.
Mr. Gray. What do you mean by “ temporarily ” ?
Mr. R o ck efeller . Possibly a few hours or a few days.
Mr. Gray. Well, you know from your experience that that short
selling as a usual thing continues as long as the market continues
to show an inclination to decline, is that not so?
Mr. R o ck efeller . Well, I have never had any information on
that.
Mr. Gray. Well, I am talking about your own knowledge from
your own experience. You do not need any information it what I
understand as to the volume of your trading is true.
Mr. R o ck ef el ler . Well, I think as far as my own case went I
usually took a position on the short side and covered when I thought
that the time was right. And I did not increase my short position
on the way down.
Mr. Gray. Most short traders do, do they not ?
Mr. R o c k ef el ler . Well, I do not know what other people do, sir.
Mr. Gray. Who have you been operating with?
Mr. R o ck ef el ler . What house?
Mr. Gray. Oh, no. What pools? What syndicate operators?
Mr. R o c k e f e l le r . In w h a t period ?
Mr. Gray. Any period during the last two or three years?
Mr. R o c k e f e l le r . The last two or three years. I have had a
syndicate operation in Air Reduction stock.
Mr. Gray. Short or long?
Mr. R o c k e f e l l e r . Long.
Mr. Gray. When was that?
Mr. R o c k e f e l l e r . Well, it was an account that started I think back
in—five or six years ago, possibly.
Mr. Gray. Still in existence?
Mr. R o c k e f e l l e r . Still in existence; yes, sir.
Mr. G r a y . Who a r e y o u r c o o p e r a t o r s in t h a t c a s e ?
Mr. R o c k e f e l l e r . Mr. F. B. Adams, who is associated with me
in business, and some of the members of the firm, I think, of Shearson-Hammill.
Mr. G r a y . Who?
Mr. R o c k e f e l l e r . Shearson-Hammill.
Mr. Gray. Now, they are brokers, are they not

I

Mr. R o c k e f e l l e r . Yes, sir.
Mr. Gray. They are members of the New York Stock Exchange,
are they not?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. G r a y . A n d they were members of the pool that you were
interested in in that case; that is true, is it not ?




326

STOCK EX CH A N GE PRACTICES

Mr. R o c k e f e l l e r . Well, that is my impression. The syndicate
papers are old and I have not checked them up, but that is my im­
pression, sir.
.
Mr. Gray. They were in a position to get inside information
your pool, were they not?

fo r

Mr. R o c k e f e l l e r . Well, they naturally know how the operations
of the company were; yes, sir.
Mr. G r a y . And they naturally know the operations of the s t o c k
exchange too, in that particular stock, do they not?
Mr. R o ck ef el ler . Yes; I suppose that is true.
Mr. G r a y . All right.
Senator F le t c h e r . That stock went from about 214 to 5 5 , d id i t
not?
Mr. G r a y . N o w ?
Senator F l e t c h e r . Fifty-five now, and it was 214.
Mr. R o ck ef el ler . I th in k th a t is a p p ro x im a tely correct. I think
it is below 55 n ow .
The C h a i r m a n .

Is it not a violation of the rules of the exchange
for a broker to participate in that way?
Mr. R o ck ef el ler . I am not sure about that, Senator.
Senator B a r k l e y . Your long position in this Air Reduction stock
is one that you have held since it was 214, or have you been in a n d
out as it went down?
Mr. R ock efeller . It was a little syndicate that was arranged t o
buy and sell the stock, and has continued over a long period o f t im e .
Senator B a r k l e y . So that you do not hold the same stock now a s
a syndicate that you held a year or so ago ?
M r . R ock efeller . N o ; w e b o u g h t i t fr o m tim e to tim e.
The C h a i r m a n . Mr. Rockefeller, if y ou will speak a little lo u d e r
we will hear y ou better.
Mr. R ock efeller . Yes, sir.
Senator F l e t c h e r . D o you sell generally through brokers, M r.

Rockefeller?
Mr. R ock efeller . Always.
Senator F l e t c h e r . Who are your brokers?
Mr. R o ck ef el ler . Well, at different times in the past I have
dealt with different brokers.
Senator C o u z e n s . Well, who are they?
Mr. R o ck efeller . A t the present time I have an account with
Shearson-Hammill, and with Jesup-Lamont, Prentice & Slepack,
and with Tucker-Anthony, and a small account with W. E. Hutton.
Senator B l a in e . Are those accounts in your own name or in t h e
name of an agent?
Mr. R o ck efeller . The Shearson-Hammill account is a syndicate
account.
Senator B l a i n e . Well, in the name of the syndicate?
Mr. R o ck efeller . I suppose it is in the name of the syndicate*
The account in Jesup & Lamont is in my own name. The account
in Prentice & Slepack is in my own name. The account in TuckerAnthony is in my own name.
Senator B l a i n e . Are those accounts carried by numbers at all ?
Mr. R o c k e f e l l e r . Well, I think some brokers have numbers and
some brokers have names. I think in my case they have both my
name and possibly a number to identify the account.



S T O C K E X C H A N G E P R A C TIC E S

327

Senator F l e t c h e r . The principal brokers are Jesup & Lamont,
are they not?
Mr. R o c k e f e l l e r . N o ; I would not say that any of them are prin­
cipal brokers.
Mr. Gray. I wish, Mr. Rockefeller, you "would advise us just how

that particular pool in Air Reduction operated, will you please?
Mr. Rockefeller. Well, I have not studied the account, but in
general the principle was to buy stock on weak days and hold it
until such time as we had a reasonable profit of 5 or 10 or 12 points
and then sell it. Sometimes the account would be active for a time
and sometimes it would be very inactive for weeks.
Mr. Gray. Now, Mr. Rockefeller, you are only telling me what
every stock purchaser does. He buys his stock and holds it and
when he thinks he has made a profit he sells it. But we want to
know what that particular pool did to aid itself in making a profit.
Mr. R o c k e f e l l e r . Nothing that I know of.
Mr. Gray. Nothing that you know of?
Mr. R o c k e f e l l e r . No, sir.
Mr. Gray. They depended on the natural rise and fall of the
market in connection with this stock, is that so?
Mr. R o c k e f e l l e r . Absolutely, so far as I know.
Mr. Gray. Are you connected with the A ir Reduction Co. in any
way?
M r . R o c k e f e l l e r . Yes, sir; I have been a director.
Mr. Gray. You are a director yet?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. Gbay. And you were a director at the time that pool started?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. Gray. Are you quite sure that in that particular case your
l was for the purpose of increasing the value of the stock or for
ing and selling at a profit?
Mr. R o c k e f e l l e r . Well, I think we had two purposes. A t that
time the Air Reduction Co. was not a very active stock, and it had
quite wide fluctuations, and we wanted to stabilize it. And of course
we also hoped to make a profit in doing it.
Mr. Gray. In other words, by “ stabilizing ” you mean artificially
regulating the price of the stock, do you not ?
Mr, R o c k e f e l l e r . No, sir. A number of us thought that it was not
advisable to have very wide fluctuations in some o f these stocks, and.
at that time the Air Reduction Co. had a comparatively small capi­
talization, and we would buy at times when people wanted to sell
and we would sell when we had a profit.
Mr. Gray. Well, now, you say it had wide fluctuations. And then
you say you wanted to stabilize, and then you say that you went into
the pool for the purpose of selling when it was high and buying
when it was low. I f it had wide fluctuations it would be an aid to
you in your market transactions, and you could make a profit. I f you
attempted to stabilize it you would interfere with the making of
that profit. Which was your primary purpose, and how did you
arrange it so that one of your purposes would not counteract your
other?
# .
Mr. R o c k e f e l l e r . Well, I do not know exactly how to explain it.
We were all interested in the company as stockholders.
Mr. G r a y . Y ou m e a n t h e b r o k e r a g e f ir m w a s t o o ?

C




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STO C K E X CH A N G E PRACTICES

Mr. R o ck efeller . I think they were.
Mf. G r a y . Yes?
Mr. R o ck efeller . And we wanted as far as possible to have a
good market in the stock.
Mr. G r a y . Well, now, in order to successfully operate your pool
it was necessary for that pool to take a short position too at times,
was it not?
Mr. R o ck efeller . Not to my knowledge. I do not think they
have been short on the stock.
Mr. G r a y . Y ou were never short on the stock?
Mr. R ock efeller . A s far as I know, no.
Mr. G r a y . What have been the high and low quotations o f that
stock since your pool was organized?
Mr. R o ck efeller . I don’t remember what the quotation was when
the syndicate was arranged. I think it got up to over 200.
Mr. G r a y . What is it to-day?
Mr. R ock efeller . About 40.
Mr. G r a y . About 40. Will you explain to this committee how
your syndicate, if it operated only on the long side of the market,
with a stock that has dropped from 214 at the time that your syndi­
cate started, to 40 to-day, when your syndicate still exists^ could
make any money operating on the long side of the market if they
operated on that side alone, without operating on the short side?
Mr. R o ck ef el ler . We have not made any money to-day. At
one time we had a profit, but to-day we have none.
Mr. G r a y . Well, now, you are talking about the net results.
Mr. R ock efeller . Yes, sir.
Mr. G r a y . Y ou mean to tell this committee that this pool oper­
ating for the purpose of making money—because that was your
primary object, was it not? Answer that last question first. That
was your primary object, to make money, was it not?
Mr. R ock efeller . We hoped to.
Mr. G r a y . Yes. O f course, the object is always accompanied by
the hope. You mean to tell me that that pool was never tempted
to operate on the short side of the market in a stock that has de­
clined from 200 and some odd down to 40?
Mr. R o ck ef el ler . As far as I know, sir, we have never been
short a share on the stock, sir.
Mr. G r a y . Never been short. Now I wish you would tell this
committee in a general way what the business of the Air Reduc­
tion Co. is.
Mr. R o ck ef el ler . It reduces the air into its component parts,
and it has a considerable sale for the oxygen in connection with the
acetylene-welding business.
Mr. G r a y . Yes. And some of its biggest customers are the steel
companies; is that not true?
Mr. R o c k ef el ler . They are in prosperous times large consumers.
Mr. G r a y . Yes. Well, during the time when this syndicate was
operating on the long side in Air Reduction Co. stock were you
short in certain steel stocks also?
Mr. R o c k e f e l l e r . Yes. I have been short of United States Steel
stock.
Mr. G r a y . Well, now, I do not want to confuse the issue, and
therefore I want to confine my question first to this particular



STOCK E X C H A N G E PRACTICES

0£iX}

syndicate that you have spoken of, which was operating on the
long side of Air Reduction Co. stock, and I am asking you whether
or not that syndicate—not yourself----- Mr. R o c k e f e l l e r . Oh, no, sir; no, sir.
Mr. G r a y ( c o n t i n u i n g ) . W e r e s h o r t o f s t o c k s o f t h e s e v a r io u s
steel c o m p a n ie s ?
Mr. R o c k e f e l l e r . No. As far as I know, that syndicate has
never operated in any stock except Air Reduction.
Mr. G r a y . All right. And w h i l e that s y n d i c a t e was operating
on the long side of Air Reduction Co. you were short yourself on
United States Steel?
Mr. R o c k e f e l l e r . I have been at times.
Senator C o u z e n s . H o w much short?
Mr. R o c k e f e l l e r . I d o n o t t h i n k I h a v e e v e r b e e n s h o r t m o r e
than 4,000 or 5,000 shares.
Mr. G r a y . Y ou were short of Bethlehem Steel, too, were you not?
Mr. R o c k e f e l l e r . N o ; I have never been short of Bethlehem
Steel. I am a director of Bethlehem Steel.
Mr. G r a y . Well, were y o u i n a n y s y n d ic a t e t h a t w a s s h o r t o f
Bethlehem steel?
Mr. R o c k e f e l l e r . No, sir.
Mr. G r a y . Were you short of vanadium?
Mr. R o c k e f e l l e r . No, sir.
Mr. G r a y . Were you short o f any other steel stocks, either indi­
vidually or in conjunction with any syndicate?
Mr. R o c k e f e l l e r . I do not think of any.
Mr. G i P y . Was your short interest in the United States steel
a
stock caused or did you go into it by reason o f certain informa­
tion that you were able to obtain on account o f the contracts of
the Air Reduction Company with United States steel?
Mr. R o c k e f e l l e r . No, s ir.
Mr. G r a y . Nothing 01 that kind?
Mr. R o c k e f e l l e r . No, sir.
Mr. G r a y . Y ou are quite sure of that ?
Mr. R o c k e f e l l e r . Yes, s ir .
Mr. G r a y . N o w , you were a director o f Bethlehem, also, were you ?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. G r a y . You were never short of Bethlehem?
Mr. R o c k e f e l l e r . No, sir.
Mr. G r a y . And never were connected with any syndicate that
was short of Bethlehem?
Mr. R o c k e f e l l e r . No, sir.
Senator C o u z e n s . While Mr. Gray is looking that up I would
likp. to ask how much money was involved in this syndicate that
started to regulate the price in Air Reduction %
Mr. R o c k e f e l l e r . I t h in k t h e m a x i m u m a m o u n t o f t h e s y n d ic a t e
has been s o m e w h e r e b e t w e e n 15,000 a n d 20,000 s h a r e s a t a n y o n e

time.

Senator C o u z e n s . And how much money did you have to put
up in the syndicate?
Mr. R o c k e f e l l e r . Well, now, we put up the money a great many
years, ago, and I don’t remember what the original subscription
was. X do know that I was called to margin on it this week.




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STOCK EXCHANGE PRACTICES

Senator C o u z e n s . Well, how much have y o u got in the s y n d ic a t e
now?
Mr. R o c k e f e l l e r . I can not tell you, offhand.
Senator C o u z e n s . Roughly, how much?
Mr. R o c k e f e l l e r . Weu, I have approximately one-half o f a onethird interest. One-sixth interest about.
Senator C o u z e n s . What would that amount to in dollars and
cents?
Mr. R o ck efeller . Well, it would be about—2 ,5 0 0 shares at 4 0 —
about $100,000.
Senator B r o o k h a r t . Is this 15,000 shares the floating supply of
the stock?
Mr. R o c k e f e l l e r . It was bought in the market; yes.
Senator B r o o k h a r t . Was that supposed to be substantially t h e
floating supply?
Mr. R o c k e f e l l e r . N o ; the company has a capital o f 900,000
shares, approximately.
Mr. G r a y . H o w much of that is closely held and how m u c h o f
that is floating? That is what Senator Brookhart wants to know,
I take it?
Senator B r o o k h a r t . Yes.
Mr. R o c k e f e l l e r . Well, I could not answer that to-day. I only
know of two large holdings, I think.
M r . G r a y . And they amount to what?
Mr. R o c k e f e l l e r . One is 15,000 shares I think, and I do not
know what the other holding is. I think it is about 50.
Mr. G r a y . About 50,000 f
Mr. R o c k e f e l l e r . I think so.
Mr. G r a y . Well, you do not mean to tell this committee that out
of 900,000 shares of stock in that particular company that over
800,000 of it is floating stock, do you ?
Mr. R o c k e f e l l e r . I do not know as you would call it floating
stock, but they have a very large stock list, and it is very widely
distributed.
Mr. G r a y . Well now, you understand what I mean by floating
stock, do you not?
Mr. R o c k e f e l l e r . Well, floating stock I think is usually con­
sidered to be the stock in brokers’ names that is in the street.
Mr. G r a y . Yes. What portion o f this stock o f this Air Reduc­
tion Co. is in that condition? What percentage or what number o f
shares?
Mr.
Mr.
Mr.

R o c k e f e l l e r . I have no idea of that. I have not checked.
G r a y . You have no idea of that?
R o c k e f e l l e r . No ; I have no idea.
G r a y . Well now, you did all your business of that syndicate

Mr.
through the brokerage nrm of Shearson & Hammill %
Mr. R o c k e f e l l e r . Shearson & Hammill; yes, sir.
Mr. G r a y . Who were part of the syndicate?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . Y ou did not operate through any other brokers there?
Mr. R o c k e f e l l e r . No, sir.
Mr. G r a y . Unless any members of the committee want to ask
you anything more about that particular syndicate I want to ask you




STOCK EXCHANGE PRACTICES

331

to name any other syndicate or pool that you have been interested in.
Mr. R o c k e f e l l e r . I was interested in-----Senator B a r k l e y . Before that let me ask you this: Being a di­
rector of the Air Reduction Co., and a member of this syndicate,
and also a dealer in this stock individually, you are in a position to
know fairly well the condition of the company and the probable
fluctuations in the price of its stock?
Mr. R o c k e f e l l e r . I d o n o t k n o w t h e p r o b a b l e f lu c t u a t io n s i n th e
stock; n o , s ir .
Senator B a r k l e y . Y o u , of course, were intimately acquainted
with its financial situation?
Mr. R o c k e f e l l e r . Yes, sir.
Senator B a r k l e y . And its business?
Mr. R o c k e f e l l e r . Yes, sir.
Senator B a r k l e y . And if increase in profits or output or general
outlook for the company would have any bearing uppn the market
▼alue of its stock you, o f course, would know that in advance?
Mr. R o c k e f e l l e r . We publish quarterly statements. O f course I
get the statements at every directors’ meeting.
Senator B a r k l e y . T o what extent were the purchases of your
stock in this company and the purchases of your syndicate actuated
by the intimate knowledge that you had of the company’s affairs
as a director?
Mr. R o c k e f e l l e r . I had nothing to do with the management of
the syndicate. That was in the hands of Shearson, Hammill & Co.
They were the syndicate managers.
Senator B a r k l e y . They acted under your authority, though?
Mr. R o c k e f e l l e r . They would consult from time to time.
Senator B a r k l e y . They bought when you told them to buy and
they sold when you told them to sell?
Mr. R o c k e f e l l e r . N o; they used their own discretion in buying
and selling.
Senator B a r k l e y . Without any advice at all?
Mr. R o c k e f e l l e r . Occasionally they would call up, but very
seldom.
Senator B a r k l e y . Did you impart to them information concern­
ing this company that you had as a director?
Mr. R o c k e f e l l e r . No; I n e v e r h a v e .
Senator B a r k l e y . Well, are you able to say to what extent you
took advantage of your knowledge of the company’s affairs as a
director to advise either the purchase or sale of the stock?
Mr. R o c k e f e l l e r . I do not think in all the time that the pool has
been in operation I have talked with them more than perhaps three
or four times. We have left it entirely to their judgment.
Senator B a r k l e y . Well then, in your individual purchases of that
stock did you base your purchases as an individual upon your knowl­
edge o f the condition of the company obtained as a director?
Mr. R o c k e f e l l e r . Well, I have either bought or sold almost noth­
ing o f it in the last five years excepting through this Shearson-Hamm 3 l p o o l.

Senator B a r k l e y . I thought you said earlier in your testimony
that you had on the long side dealt considerably in the stock of Air
Reduction.



332

STOCK EXCHANGE PRACTICES

Mr. R o c k e f e l l e r . No. I have held individually a substantial
amount, but I have never been an active dealer in the stock per­
sonally.
Senator B a r k l e y . That is all I want to ask.
Mr. G r a y . Your individual position with respect to the stock hold­
ings in the Air Reduction Co. has been what ? What is the greatest
number of shares of stock in that company you have owned?
Mr. R o c k e f e l l e r . Well, at one time I owned a very large amount
of the stock. I think I had 30,000 shares at one time.
: Mr. G r a y . When?
Mr. R o c k e f e l l e r . A long time ago. As I recall it I sold out the
large part of my individual holdings seven or eight years ago.
Mr. G r a y . What have you now?
Mr. R o c k e f e l l e r . I have 1,000 shares I think now.
Mr. G r a y . A thousand shares. And you are an officer of the com­
pany yet?
.
Mr. R o c k e f e l l e r . Yes, sir.
Mr. G r a y . You know what selling against the box means, do>
you not?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. G r a y . Did you sell some of it against the box ?
Mr. R o c k e f e l l e r . I have twice, I think.
Mr. G r a y . Twice?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . When was the first time?
Mr. R o c k e f e l l e r . I think twice last year.
Mr. G r a y . What was the quantity the first time ?
Mr. R o c k e f e l l e r . I think I sold 900 shares both times.
Mr. G r a y . Nine hundred shares each time %
Mr. R o c k e f e l l e r . I think so; yes, sir.
Mr. G r a y . When y o u parted with it—was that an actual s a le ?
Mr. G r a y . I have not parted with it. I still have my thousand
shares.
Mr. G r a y . I know; but you had 30,000 at one time; you have sold
two lots of 900 each, and you have a thousand yet. I want to know
about the rest of it. Did you sell the rest of it against the box ?
Mr .R o c k e f e l l e r . The large holdings I think I sold back in 1925
or 1926.
Mr. G r a y . Did you sell against the box then ?
Mr. R o c k e f e l l e r . No; I liquidated them in the market.
Mr. Gray. Y ou liquidated them in the market. When you sold
them against the box did you sell them in a dummy name or yourown name?
Mr. R o c k e f e l l e r . Oh, I sold them in my own name.
Mr. G r a y . You sold them in your own name?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . Take your first sale against the box, how long beforeyou eventually made a delivery with respect to that?
Mr. R o c k e f e l l e r . I did not deliver. I bought it back.
Mr. Gray. In other words, having sold it against the box you
waited until the stock depreciated in value, and then you bought it
back?
Mr. R o c k e f e l l e r . Well, let me explain.




STOCK EXCHANGE PRACTICES

333

Mr. G r a y . Well, if you will answer that I haven’t any objection to
your explaining; if you will first answer the question. As I under­
stand your answer you sold against the box, and instead of making
any delivery of your stock against the box you eventually bought
it back, is that right'(
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . All right. Now make any explanation you want.
The C h a i r m a n . He did not answer your question.
Mr. G r a y . Yes. He said, “ Yes.”
The C h a i r m a n . No; y o u asked him whether he bought it back
at a lower price. He did not answer that.
Mr. G r a y . Well, will you answer that question of Senator Norbeck’s ?
Mr. R o c k e f e l l e r . I do not recall whether it was a lower price
or a higher price.
Mr. G r a y . Well, there would have been no reason for your buying
it back at a higher price when you had the stock to deliver, would
there?
Mr. R o c k e f e l l e r . I f you will allow me to explain.
Mr. G r a y . A ll right.
Mr. R o c k e f e l l e r . Over the last two or three years I have needed
considerable amounts of money from time to time to meet commit­
ments at one time or another, and several times during that period
I have sold stock against the box, thinking that I might need the
money within a week or two. I f I found that I did not need the
money I repurchased the stock, and if I did need the money I would
deliver the stock.
Mr. G r a y . Y ou are talking o f Air Reduction stock, or generally?
Mr. R o c k e f e l l e r . I am speaking of several different stocks.
Mr. G r a y . Y ou are speaking of several different stocks. All
right. Now, let us confine ourselves to Air Reduction stock. You
sold 900 shares against the box?
Mr. R o c k e f e l l e r . Yes, sir.
M r . G r a y . Y ou b o u gh t th a t back, d id y o u ?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . At a lower price or not?
Mr. R o c k e f e l l e r . I do not recall.
Mr. G r a y . Well, now, Mr. Rockefeller, that

only occurred last
year, and it is in a company in which you are yourself interested.
Surely you can tell us wnether you bought it back at a lower price
or not.
Mr. R o c k e f e l l e r . Well, I can find out very easily and inform you,
but I do not recall at the minute.
Mr. G r a y . Y ou d o n o t th in k y o u b o u gh t it back above the price
a t w h ich y o u so ld it, do y o u ?
Mr. R o c k e f e l l e r . I would not be surprised.
Mr. G r a y . Y ou would not be surprised?
Mr. R o c k e f e l l e r . N o . I am not sure.
Mr. G r a y . In a declining market? The present

market has been,
generally speaking, declining throughout the general list, has it not?
Mr. R o c k e f e l l e r . It has had its ups and downs.
Mr. G r a y . Well, maybe on the second 9 0 0 shares y ou will have
more recollection. Did you buy that back?
Mr. R o c k e f e l l e r . I b o u g h t t h a t b a c k ; y e s .
119852—32----- 22



STOCK EXCHANGE PRACTICES

334

Mr. G r a y . Did you buy that back at a lower price or not?
Mr. R o c k e f e l l e r . I do not recall.
Mr. G r a y . What time last year was it that that happened?
Mr. R o c k e f e l l e r . I do not recall.
Mr. G r a y . Y ou do not even recall the time?
Mr. R o c k e f e l l e r . No. I think it happened twice during the year.
Mr. G r a y . And you can not tell this committee whether you
bought it back lower or higher?
Mr. R o c k e f e l l e r . No ; I can not recall.
Mr. G r a y . You have no idea on the subject at all?
Mr. R o c k e f e l l e r . No.

Senator F l e t c h e r . What is the par value of that stock? <
Mr. R o c k e f e l l e r . I do not recall what it is. I think it is a non­
par value though. I am not sure. It is incorporated in New York
State, and I think it is a nonpar value stock.
Mr. G r a y . There is no question in your mind, Mr. Rockefeller,
that if you sold that stock against the box and you bought it back at
a lower price, keeping your own stock in the box, but what you ac­
tually did was to make a short sale of that stock? That is true, is
it not?
Mr. R o c k e f e l l e r . It was technically short, but I was always long
of some stock.
Mr. G r a y . You were always in a position to deliver?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . But your transaction was that when you sold it against
the box, and so advised your broker—by the way, I suppose you
sold that through Shearson-Hammill?
Mr. R o c k e f e l l e r . No; I sold that through Prentice & Slepack, I
think.
Mr. G r a y . Through Prentice & Slepack. And when you sold that
against the box, what actually happened, of course, was that your
broker had to go out and borrow that stock and make delivery be­
fore the hour the next day that it was required; that is true, is it
not?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . And when you bought it back you bought it back
through a broker in the open market, and that broker returned the
stock to the person by whom it was loaned?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . And that is a short sale, is it not?
Mr. R o c k e f e l l e r . It was-----Mr. G r a y . Well, we all know it is. We only want you to admit
it, that is all.
Mr. R o c k e f e l l e r . Well, it was a sale against the box I was not in
an actual short position.
Mr. G r a y . But it became a short sale because you did not deliver
it by the stock that you had in the box; that is true; is it not?
Mr. R o c k e f e l l e r . Well, I was never actually short of the stock.
Mr. G r a y . In other words, you could have furnished it?
Mr. R o c k e f e l l e r . I could nave furnished it; yes.
Mr. Gray. Y ou were a director of the company at the time that
you did that?

Mr.

R

ockefeller.




Yes.

STOCK EXCHANGE PRACTICES

3 35

Mr. G b a y . And is that the reason you can not tell us whether it
was bought back below or above, because you do not want to tell us
that it was bought back below?
Mr. R ockefeller. No, sir. I do not recall. I will be clad to
find out.
Mr. G r a y . All right. That applies to both of the sales, does it?
Mr. R ockefeller. Yes, sir.
Mr. G r a y . In this pool that was conducted in Air Reduction stock,
in what name was it carried?
Mr. R o c k e f e l l e r . I do not recall what name the account was on in
Shearson & HammilPs books.
Mr. G r a y . Was there any name, or was it just a number?
Mr. R o c k e f e l l e r . I do not know, sir.
Mr. G r a y . Are some of these accounts that you are interested in
carried just by a number?
Mr. R ockefeller . I think that they always are with my name
connected with the number.
r name connected with the number?
Mr. G r a y . Then why the use of a number when your name
appears ?
Mr. R o c k e f e l l e r . Sometimes I would have more than one account
in an office.
Mr. G r a y . Well, did this syndicate have a name under which it
operated ?
Mr. R o c k e f e l l e r . I do not recall. The papers were signed a great
many years ago, and I do not recall.
Mr. G r a y . Well, all right. Now, suppose you tell me the next
pool that you were interested in, whether it was for the long or the
short side of the market?
Mr. R o c k e f e l l e r . I was interested in a pool in Tucker-Anthony, a
syndicate account in Childs Restaurant stock.
Mr. G r a y . In what?
Mr. R o c k e f e l l e r . In Childs Restaurant stock.
Mr. G r a y . N o w , Tucker-Anthony is the brokerage firm?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . Is that right?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . When was this pool?
Mr. R o c k e f e l l e r . I do not recall when it was started. Some con­
siderable time ago.
Mr. G r a y . Well, does that mean a year ago or several years?
Mr. R o c k e f e l l e r . I think either in 1928 or 1929.
Mr. G r a y . Who was in that pool with you?
Mr. R o c k e f e l l e r . I do not remember the members of that syndi­
cate. Mr. Moffatt, I think, George M. Moffatt, was one o f the mem­
bers. The others I do not recall.
Mr. G r a y . Any brokerage firm?
*
Mr. R o c k e f e l l e r . I do not recall whether Tucker-Anthony had
any interest in that at that time or not.
. . .
«
.
Mr. G r a y . It is a usual thing to take your brokers in on the pools,
is it not ?




STOCK EXCHANGE PRACTICES

336

Mr.
them.
Mr.
Mr.

R o c k e fe lle r .

I do not know whether Tucker-Anthony had

G r a y . Sometimes a specialist, too; is it not?
R ockefeller . I d o n o t k n o w as t o th a t.
M r . G r a y . A s a m a t t e r o f f a c t , in th e p o o l s in w h i c h y o u have
b e e n in te r e s t e d y o u h a v e f u r n is h e d a g o o d d e a l o f t h e m o n e y and
th e o t h e r f e l l o w s h a v e d o n e t h e o p e r a t i n g ; is t h a t n o t s o ?
Mr. Rockefeller. No, sir. I have never furnished more than my

proportion of the money.
M r . G r a y . Not more than your proposition. Well, did that pool
that was operating in Childs Restaurant stock operate on the long
or the short side, or both?
Mr. R o c k e f e l l e r . On the long side.
Mr. G r a y . Entirely?
Mr. R o c k e f e l l e r . As far as I know; yes, sir.
Mr. G r a y . Well, do you not know?
Mr. R o c k e f e l l e r . N o , sir; I have not checked up the accounts.
Mr. G r a y . I s t h e p o o l s t ill in e x is t e n c e ?
Mr. R o c k e f e l l e r . No. The pool was wound up about a year ago.
They broke up with all the stock and they had to divide it among
the syndicate members interested.
Mr. G r a y . In other words, being long of stock the pool broke up
and the stock was divided among those that were interested?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. G r a y . Well, who aid the operating in that pool for you?
Mr. R o c k e f e l l e r . I do not remember. I was a member o f the
syndicate, but I do not remember who the syndicate managers were*
Mr. G r a y . D o you not pay any attention to these things?
Mr. R o c k e f e l l e r . Yes; but it happened a number of years agor
and I do not recall. I could check up.
M r . G r a y . It could not have happened so long ago because o f the
fact that you said that last year they just divided the results—that
is, they divided the stock?
Mr. R o c k e f e l l e r . I had to take my proportion of the stock, but I
did not check up at that time about the balance of the pool.
Mr. G r a y . In other words, you can not remember back to last year
to tell us who was interested in that pool that divided this stock
during the year 1931; is that true?
Mr. R ockefeller. I do not recall the names of the other people
in the syndicate.
Mr. G r a y . Well, then, the answer to my question is “ Yes,” that
though this pool only divided its stock last year you can not.
remember who was in it with you, except a man named Moffatt ?
Mr. R o c k e f e l l e r . That is correct.
Mr. G r a y . That is correct, is it?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . All right. What other pools have you been in ?
Mr. R o c k e f e l l e r . -I was in a small syndicate in W. E. Hutton’s;
office.
Mr. G r a y . What stock did that operate in?
Mr. R o c k e f e l l e r . We started to operate in Lima Locomotive.
Mr. G r a y . In w h a t ?
Mr. R o c k e f e l l e r . Lima Locomotive.
Mr. G r a y . I am sorry; I did not hear that. Lima ?



STOCK EXCHANGE PRACTICES

337

Mr. R o c k e f e l l e r . Lima Locomotive.
Mr. Gray. Was that operating on the long or the short side?
Mr. R o c k e f e l l e r . On the long side.
Mr. Gray. Mr. Rockefeller, when was that syndicate or pool
formed ?
Mr. R o c k e f e l l e r . I think in 1928.
Mr. G ray. Is it still in existence?
Mr. R ockefeller. Yes, sir.
Mr. Gray. Who are the members of that syndicate or pool ?
Mr. R o c k e f e l l e r . Mr. Bragg and Mr. Smith.
Mr. Gray. Do you mean Thomas E. Bragg and Bernafd E.
Smith?
Mr. R ockefeller. Yes, sir.
Mr. Gray. All right. I was going to mention their names a little
later, but now that you have mentioned them I will ask you: They
are considered very large operators on the market in New York,
are they not?
Mr. R ockefeller. I think they have that reputation.
Mr. Gray. Well, don’t you know it?
Mr. Rockefeller. Not of my own knowledge; no.
Mr. Gray. Well, you are in a number of pools with them, aren’t
you?
Mr. R ockefeller. No, sir.
Mr. Gray. Where is Bragg?
Mr. R ockefeller. I do not know.
Mr. Gray. And you have no idea?
Mr. Rockefeller. No, sir.
Mr. Gray. It has been variously reported to me that he was in
Florida and in California and on his way to Australia. Don’t you
know where he is?
Mr. Rockefeller. No ; I do not know.
Mr. Gray. Where is Smith ?
Mr. Rockefeller. I do not know.
Mr. Gray. When did you see him last?
Mr. R o c k e f e l l e r . About a week or 10 days ago.
Mr. Gray. Where?
Mr. Rockefeller. In New York.
Mr. Gray. Where does he live?
Mr. Rockefeller. He has a home in Bedford, N. Y., and has an
apartment in uptown New York.
Mr. Gray. Whereabout in uptown New York?
Mr. R ockefeller. I don’t remember whether it is on Ninetysecond or Ninety-sixth Street.
Mr. Gray. Well, we can not locate him. Do you know anything
about where he could be found?
Mr. Rockefeller. No, sir.
Mr. Gray. Where does Tom Bragg live—and I apologize for being
so familiar with his name, but that is the way I have heard it spoken
of so often.
Mr. Rockefeller. I do not know. I think he has an apartment
in New York but am not sure.
Mr. Gray. When did you see him last ?
Mr. Rockefeller. I don’t think I have seen him in five or six
months.




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STOCK EXCHANGE PRACTICES

Mr. G r a y . And y ou have n o idea where he is?
Mr. R ockefeller. N o , sir.
Mr. G r a y . H o w many different pools have you been in with these
two gentlemen?
Mr. R o c k e f e l l e r . I was in this little acount, and then a number
of years ago I was in an account in Anaconda with them, in 1928 or
1929, somewhere along there.
Mr. G r a y . Were you in any others with them?
Mr. R o c k e f e l l e r . Those are the only two.
Mr. G r a y . Are both of these pools in existence now ?
Mi*. R o c k e f e l l e r . N o . The Anaconda account was wound up
within a comparatively short time.
Mr. G r a y . Have you furnished Bragg and Smith money for the
purpose of operating other pools of their own?
Mr. R o c k e f e l l e r . N o , sir; never.
Senator F l e t c h e r . Mr. Rockefeller, were you long or short i n
Anaconda?
Mr. R o c k e f e l l e r . I was long in Anaconda.
Mr. G r a y . S o that we may not get away from these others, but
more particularly now: Do you know William A. Barbour, presi­
dent of Childs Restaurants (Inc.) ?
Mr. R o c k e f e l l e r . I think I have met him.
~
T ' *
»ool ?
Mr. G r a y . Are you quite sure of that?
Mr. R o c k e f e l l e r . Not to my knowledge. I really do not recall
who was in the Childs pool.
Mr. G r a y . Well, you were a member of that pool, and you are an
intelligent man. Do you mean to say that you can not tell this
committee whether Mr. Barbour, the president o f Childs Restaurants,
was operating with you in Childs Restaurants stock?
Mr. R o c k e f e l l e r . I do not know.
Mr. G r a y . Y o u do not know?
Mr. R o c k e f e l l e r . N o . I will be glad to find it out for you.
Mr. G r a y . But you say you do not know.
Mr. R o c k e f e l l e r . N o , sir.
Mr. G r a y . It would not impress itself on your mind at all i f he
was?
Mr. R o c k e f e l l e r . No, sir; I do not know.
Mr. G r a y . Well, now, let us come to the pool in Lima Locomotive.
When was that started—but I believe you said in 1928, didn’t you?
Mr. R o c k e f e l l e r . I think that was the date.
Mr. G r a y . Does it still exist?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. G r a y . Was anybody else but Bragg and Smith in it?
Mr. R o c k e f e l l e r . I think some considerable time ago Mr. Smith
bought out Mr. Bragg’s interest, and I think just he and I are
interested in it.
Mr. G r a y . Was there at any time anybody else but Bragg and
Smith interested in it?
Mr. R o c k e f e l l e r . I think that was all.
Mr. G r a y . H o w much was put into that pool?
Mr. R o c k e f e l l e r . $150,000.
Mr. G r a y . Y o u say $150,000?



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339

Mr. R o c k e f e l l e r . Yes.
Mr. Gray. Did you three put up the $150,000, each of you putting
up $50,000; is that what you say?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. Gray. Y ou did not put up the major share of it yourself?
Mr. R o c k e f e l l e r . No, sir.

Mr. G r a y . As a matter of fact, Mr. Rockefeller, you know that
these two men are known as a couple of bear raiders in New York,
don’t you?
Mr. R o c k e f e l l e r . I suppose they have that reputation.
Mr. G r a y . Yes. But you say they were long of this stock that
you were with them on?
Mr. R o c k e f e l l e r . Yes.
Mr. G r a y . N o w , Mr. Rockefeller----Senator B l a i n e (interposing). Is this Bernard E. Smith popu­
larly known as Benny Smith?
Mr. R o c k e f e l l e r . As Ben Smith; yes, sir.
Senator B l a i n e . In the Street?
Mr. R o c k e f e l l e r . Yes, sir.
Mr. G r a y . As a matter of fact, to elaborate on that, he carries
some of his own accounts in the name of B. Smith, some in the name
of Benny Smith, some in the name of B. E. Smith, and some in
his name as Bernard E. Smith, doesn’t he?
Mr. R o c k e f e l l e r . I h a v e n o k n o w le d g e o f h is o w n a c c o u n ts .
Mr. G r a y . Y ou d o n o t k n o w a b o u t h is p e r s o n a l t r a n s a c t io n s ?
Mr.

R

ockefeller.

No, sir.

Mr. G r a y . All right. We will now come back to Lima Locomo­
tive. Mr. Rockefeller, do you mean to tell this committee that in
the operations on the long side of the market in Lima Locomotive,
you operating with Bragg and Smith in a pool, that you did not
sell short at any time?
Mr. R o c k e f e l l e r . The account was formed originally to operate
m Lima Locomotive alone. We lost some money in tKe account,
andthey operated in other stocks after that.
Mr. Gray. Tell the names of the other stocks.

Mr. R o c k e f e l l e r . I d o n o t k n o w w h a t t h e y d i d o p e r a t e in .
Mr. G r a y . Well, that proves to me and so I want to a s k you
whether or not it is true as to what actually happened, you were
in the hands of Bragg and Smith, and you furnished the money to
®ra8ig and Smith, who did the operating, a