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The Papers of Eugene Meyer(mss52019) 119_07_001- Subject File, Federal Reserve Board, Bill Draft — Price Stabilization, 1931 it Vz- sget4 ie..1) 1 lersh-' sialmilleillir— neich-Swegair/a ehez...(p.e4pr /93/ ft:PETAL Oct. 26, 1931 VII TENTATIVE DRAFT OF THREE BILLS (A, B and C) (with comments) FOR STABILIZING THE PRICE LEVEL Bill A, Emergency Measure and BilIsB & C to be Considered Later VII BILL "A" A BILL DIRECTING THE FEDERAL RESERVE SYSTEM TO RESTORE AND THE GENERAL TO TO NORMAL STABILIZE LEVEL OF COMMODITY PRICES SO FAR AS POSSIBLE BY MONETARY AND CREDIT MEANS; OR TO ADJUST THE SUPPLY OF MONEY AND CREDIT TO THE REQUIREMENTS OF THE VOLUME OF TRADE WORKING IN COOPERATION WITH AN INTERDEPART.. MENTAL COMMITTEE ON PRICE INDE-LES, THE CENSUS BUREAU, THE BUREAU: OF FARM ECONOMICS, NINES, FOREIGN AND DOMESTIC COMMERCE, LABOR STATISTICS, etc. • • VII Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. GEN Dr Section 1. PROVISIONS The Act approved December 23, 1913, known as the Federal Reserve Aot, as amended, is hereby further amended as follows: Add to section 14 the following paragraphs: "(g) The term tFederal Reserve System', as used in this Act, shall mean the Federal Reserve Board, the Federal Reserve Banks, and all committees, commissions, agents, and others under their direction, supervision, or control. "(h) The Federal Reserve System shall, as conditions make them suitable, use in its monetary and credit policy all the powers naw or hereafter possessed by it, in order to effect the following purposes: (1) to raise the general level of commodity prices to such a level as mill be most beneficial to business and general public welfare. (2) thereafter to prevent that price level from fluctuating, so far as possible. "(i) Such monetary and credit policy shall include (1) open market operations, that is, bitying and selling eligible bills and securities; (2) buying and selling gold or gold certificates in exchange for federal reserve notes ;dr other funds (the price of gold being $20.67 per 04. of pure gold, i. e. one dollar per 23.22 grains of pure gold); (3) adjustment of rediscount rates; (4) adjustment of gold reserve ratios of Federal Reserve Banks as hereinafter prescribed; (5) advice to member banks and non-member banks, with the object of securing their cooperation in stabilization policy, including, espeCiallY adjusteht of disc:)unt rates to cuStbmer's, open mai:ket opvtatiOn VII - 2 and rediscounts with Federal Reserve bc,nks when needed to add to "free sold." (6) relations, consultation, cooperation, and lawful transactions with non-American banks, including the Bank for International Settlements at Basle known as the World Bank; (7) statistical studies; (8) publicity; and (0) all other activities permitted under this Act and suitable for the purpose of controlling or influencing the general level of prices through monetary and crudit policy. "(j) Whenever any important decision as to monetary or credit policy is taken by the Federal Reserve System tending to effect the aforesaid purposes, such decision or action, with reasons therefor, shall, with reasonable promptitude, be reported by the Governor of the Federal Reserve Board to the press through its usual Washington correspondents in the usual way, and in such detail as may be deemed by him to be most effective for advising the public of the same." PRICE INDEXES Section 2. (a) An Interdepartmental Committee on Price Indexes,with not less than -- nor more than -- members, such as the present informal organization commonly so designated,shall be constituted by the Federal Reserve System and shall consist of statisticians representing those Departments and Bureaus of the Federal Government which compile and publish price statistics. (b) It shall be the duty of the Interdepartmental Committee on Index Numbers, in cooperation with the Bureau of Standards,after careful study of the problems of measuring price changes and the best methods of constructing an Index Number for measuring the General Level of Commodity Prices, to decide upon the best methods for computing the Official Price Index Number (or Index Numbers) of the United States. The types of price series to be used, the methods of weighting the prices, and the formula for constructing the Index (or Indexes) VII - 3 and other technical details shall be determined by the said Interdepartmental Committee on Price Indexes. (c) ;Lt the direction of said Interdepartmental Committee the quotations of prices which are to be used in constructing the Official Price Index Number shall be collected by the Census Bureau, the Bureau of Farm Economics,the Bureau of Minee., the Bureau of Foreign and Domestic Commerce, the Bureau ei Labor Statistics, and the several other Bureaus or agencies of the government which are best equipped and best fitted by function and by experience to collect them quickly and accurately in all important commercial centers. (See Note 1.) (d) It shall be the duty of said Interdepartmental Committee to coral:lute the Official Price Index Number (or Index Numbers) from the data on prices and quantities furnished by the cllectinc Bureaus and agencies above mentioned, according to the methods and formulas approved by it. (e) Said Interdepartmental Committee is hereby authorized and directed, as promptly as possible, at short intervals to publish,and transmit to the Federal Reserve System its said Index Number (or Index Numbers) for the purpose of measuring and providing a standard for regulating the General Level of Commodity Prices. Said committee is authorized to improve the Index Number (or Numbers) from time to tiLle as evidence, data or methods for possible improvement become available. (0 The Federal Reserve System shall employ the said Official Index Number (or Index Numbers) as a guide or criterion by which to accomplish the restoration of the General Level of Commodity Prices to a more normal level and the stabilization of that level as hereinafter authorized and directed. • VII -.4 VOLUNE OF TRADE INDEXES ••••••• Since the stabilization of the price level is substan- Section 3. tially equivalent to adapting the volume of credit to the growth of business, the Federal Reserve System is authorized to employ as a supplementary guide or criterion, for normalizing and stabilizing the price level,what it shall deem the best available statistics of the volume of trade and all data related thereto. RESTORATION OF PRICE LEVEL Section 4. Immediately after the amendment,stated in Section 1 above, to the Federal Reserve Act, the following further amendment shall be added: " (k) The Federal Reserve System is hereby authorized and directed totnke all suitable and available steps to raise the present deflated level of prices, as speedily as possible to the level existing before the present deflation. / O.) Said pre-deflation level is to be determined on the basis of the best statistics available. KEEPING THAT LEVEL ••••••••••• ••••••••ri. "(m) Then said pre-deflation price level is reached,taking into consideration all aspects of the situation, including specifically the figures reached by the Index (or Indexes) employed for that purpose, the fact shall be made public in the 'limner provided in Section 1 (j) supra, and thereafter said level shall be maintained as nearly as this is possible throut;h monetary and credit policy. nikn) In maintaining said level so far as possible, the Federal Reserve System is authorized to extend its open market operations by buying and selling commercial paper as well as all other types of drafts, bills of exchange, acceptances, municipal warrents,government bonds, and other securities hitherto authorized. • • VII - 5 "(o) If the securities held by the Federal Reserve System, and available for sale, seem, at any time,to the stabilization committee hereinbelow constituted, to be too near exhaustion, the System is authorized to issue and sell, in the open markets, (and at any later time, re-buy), new interest-bearing debentures in such volume and of such date of maturity and rate of interest as may be deemed by it most suitable. "(p);ai net profit or loss from buying and selling said deben- - .Government and shall tures or paying interest thereon shall accrue to the U.,) annually be paid into,or reimbursed fron,the Treasury of the U.S. (q) If the gold reserve ratio is deemed to be too near to the prescribed minimum, the System is authorized and directed to lower the legal minimum reserve requirement for Federal Reserve Banks in accordance with, and under the conditions and restrictions already prescribed in Section II, subsection c of the Federal Reserve Act; If, on the other hand, the legal minimum Gold reserve ratio is deemed to be too high) the System is authorized and directed to raise the legal minimum ratic for Federal Reserve Banks. SOME TECHI,ICAL DETAILS "(r) If the Free Gold of the S,stem is deemed, at any tine, to be too near exhaustion, the System is authorized for a period of fifteen days at a time, to utilize its holdings nf government bo:ids as backing fcr Federal Reserve notes. Such authorization nay be renewed as often as required. nt s) As its principal instrumentality for accomplis':Iing the purposes of this Act the Federal Reserve System,acting through the Federal Reserve Board, is hereby authorized and directed to establish a Stabilization Committee to supersede the present Open Market Policy Conference. "The Stabilization Comnittee shall clnsist of five members of which number at least one shall be from the Federal Reserve Board, and at least • VII - 6 one shall not be otherwise connected with the Federal Reserve System. The term of office of each member shall be five years, except that the first five shall by lot have terms respectively of one, two, three, four and five years. "Their salaries shall be "The Stabilization Committee shall choose otherwise effect its awn organization. sIwn chairman and It shall have jurisdiction over open market operations, the buying and selling of gold or gold certificates,shall exercise the authority to approve and to require changes in rediscount rates and such other powers as may be delegated to it by the Federal Reserve Board, or Banks, or System. (t) "Anyone within the Federal Reserve System shall have the right to submit auggestions which they believe might result in a more effective stabilization to the Stabzation Committee and the Comwittee may offer such suggestions to all other functionaries in the System. Section 5. Powei.s and Discretions on the part of the Federal Reserve System or any constituent thereof herein named, or implied, if not otherwise provided for herwhi, shall be exercised by the most appr9priate existing authority within-the System, in the usual way of such authority as to formalities and majority or other vote. Section 6. Provisions herein for acts to be performed or services rendered by the federal bureaus or agencies are compulsory; and when subject to request by the Federal Reserve System or constituent thereof become compulsory on receipt of written notice from the secretary or other proper official of the Federal Reserve System or constituent thereof. Section 7. Salaries and other expenses required by this Act shall be prescribed by the executive head of the respective Bureaus or Committees or agencies, none to be more than per year. These shall be included in VII - 7 the several budgets submitted to the by said (Treasury), and shall be paid to the respective Bureaus. Note 1. For example, the Bureau of Farm Economics would doubtless continue to collect prices at the farnz; the Bureau of Mines to collect prices of metals, or coal and other minerals; the Bureau of Foreign and Domestic CoLunerce to collect prices of manufactured and partly manufactured commodities; the Bureau of Labor Statistics to collect retail prices of pods constituting the workers' cost Sf living. VII - 6 Bill "B" to be introduoed Ivith "A" but rot necessary to pass at once. CONCERNING LEGAL TENDER AND AUTHORIZING (BUT NOT REQUIidNG) THE FEDERAL RESERVE SYSTEM IN 02DER TO MAINTAIN THE GOLD STANDARD, AND IN STABILIZING THE GENERAL LEVEL OF 00:AMODITY P1RICES TO ALTER THE PRICE IF GOLD .AND RELATING TO Ti'LE TREASURY AND THE SECRETARY THEREOF, THE BUREAU OF _ME lAINT, GOVERNMENT ASSAY CFFICES, ETO., AS TO GOLD LND OTHER 171ATTERS, VII - 9 House of Representatives of Be it enacted by the Senate and the Congrese assembled. the United States of 4'Imerica in nalITAINIG THE LEGAU, GOLD RESERVE RATIO Section 1. ral Reserve If the Gold Reserve is deemed by the Fede ed ninimum, the System is authorized System to be too near to the prescrib if the ot-ier methods already authorized through its Stabilization Committee, cial pAce of gold. appear inadequate,to raise the offi rve ratio is deemed to be too If, on the other hand, the gold rese the ugh its Stabilization Committee, if high, the Sys-tee: is authorized thro -o.eice appear inadequate, to lower the official other methods already authorized of gold. (See Note 1, 2 and 3.) SOME TECHUICa, DT-ILS Seceien 2. thus be changed, Should, at any time, the price of gold System is authorized to introduce tem:either up or clown, the Federal Reserve nt een its selling and buying prices sufficie poraril:: a small differential betw () , on rumor of a proposed change in pric to prevent speculators (for instance rnReserve System or the United States Gove from taking advantage of the Federal at one price and later selling it back ment either by buying gold from them ing gold to them at one price and later to then at a higher price, or by sell e. (See Not: buying it back of the_a at a lower pric iciently changed to safeguard :Ifter the price of gold has been suff mably, again be left unchanged for a the reserve ratio so that price may, presu may be removed so that the Govern-aetts considerable period, the differential n coincide. (See 'Tote 5.) buying price and selling price may agai Section 3. selling gold iJl profits and losses from buying and shall accrue to U. S. Treasury. •V • VII - 10 Section 4. .1.t all times the United States Treasury, Mint s,Govern- ment Assay Offices and any other agencies authorized to buy or sell gold shal l employ the same identical prices as thos e emplqyed by the Federal Reserve System, (See Note G.) Section 5. i•••. If at any time the price of gold is changed as herein provided, (a) the coinage of cold by the Bure au of the Mint shall cease except as provided under "(4)" belo w although its equivalent, the unli mited purchase of gold at the official pric e, shall continue. (b) the redemption, by the United States Treasury, of United States notes, Treasury notes, and all other paper money, except gold cert ificates, shall be accomplished by selling gold bullion therefor, at the offi cial price. (c) the United States Treasury shall continue to redeem Gold certificates, being warehouse rece ipts, in gold bullion or gold coin at the option of the holder, at the pres ent rate of $20.67 an ounce of pure gold, or 23.22 grains per dollar. (d) The Mint is authorized and directed to coin at the present rate of 23.22 grains of pure gold per dollar such of the gold bull ion belonging to the Government as may be required to satisfy any demand for gold coin by holders of gold certificates . (c) Any (full weight) gold coin in circulation shall 1)e- redeemable by the United States Treasury at its face value, in gold bull ion and shall continue to be full legal tender. (f) Gold bullion shall be full lega l tender at the official price at which the Federal Reserve System soils it, provided this bullion is in the form of standard gold bars nine -tenths fine, officially stam ped as to such fineness and as to weight by the Unit ed States Government under rule s and regulations pre- scribed by the secretary of the Treasury. (See Note 7.) Section 6. In preparation for the contingency that the price of is authorized to gold may sometime be changed, the Federal Reserve System Reserve accumulate systematically gold certificates in exchange for Federal Notes, and the Treasury is authorized, occasion eff?,rs, to retire and to the end destroy systematically such certificates when not further needed, in the price that, long before the possible contingency arrives of a change wholly replaced of gold, the L;old certificates in circulation shall be almost by Federal Reserve I:otes. Section 7. Federal Reserve rotes shall be full legal tender. Section 8. To avoid needless litigation, notice is hereby given this act all to all whom it may concern that one year after the passae of clausea-contractual debts then outstanding containing the well-known "gold U payable in gold coin of the present standard of weight and fineness," or gold bars other words to that effect, shall be payable in official standard regardless of the nine-tenths fine at the official price of gold then in force, any contract outsaid "gold clause"; provided, hoevar, that either Party to but wibhin standing said on,-year period may, eliter the passage of this Act, and effect; so said one year period, reinstate the "gold clause" in full force written notice to that far as said contr-ct is concerned by ;;ivinc or mailing ng the effect to the otlier party or parties to said contract fully specifyi contract bond or other instrument to which ho is a party.. Any contractual debts containing the gold clause entered into after in the passage of this Acb shall, notwithstanding that el:also, be payable old Reserve standard bullion bars at the current official price at which the Federal System sells gold; provided, however, that said. "gold clause" may be validated full by inserting in the contract the words "This gold clause is inserted with (date knowledge of and notwithstanding the zot of cf. this Act) entitled (title of this 11.0t). • VII - 12 and provided the contract is expmmcd in terms of units of weight in terms of dollars. and not Mon contracts containing the gold clause arc thus proved by express reference to this Act to be intended by both contracting parties to be Performed in weight of gold, the contracting parties are free to perform them, But if, by inadvertence or neglect, the gold clause is em- ployed without such special agreement subsequent to this It.ct and the parties to the contract come into dispute asto wh2ther the old g.ild dollars or the now should be used, that party contending that the new should be used shall be sustained and the other party shall have no valid claims to the contrary. Note 8.) Section 9. Powers and discretions on the part of the Federal Reserve System or any constituent theroZ herein named or implied, if not otherwise provided for herein, shall be exercised by the most appropriate e:ds'c.,ing authority within the System in the usual way of such authority as to formalities and majority or other vote. Section 10. Provisions herein for arts to be performed or services rendered by other federal bureaus or agr- cies are compulsory; and vhen subject to request by the Federal Reserve System or constituent thereof become compulsory on receipt of written notice from the secretary or ether proper official of the Federal Reserve System or constituent thereof. Section 11. Salaries and other expenses required by this -.et shall be prescribed by the exocutivo head of the respective bureaus or committe-s or agencies, none to be more thanper year. — —.7 several budgets submitted to the eeto the respective bureaus. There shall be included in the (Treasury), and shall be paid by said • • Federal there is no mandate put upon the Note 1. It will bo observed that merely authis price of gold. Such a change Reserve System ever to change the ation. As long as ssary to prevent inflation or defl ized if and when found nece to be compatible s ef ;:g0.67 an ounce continuos the retention of the present basi s will renain. of a stable price level, that basi with it s$ naina constant price of gold and the But if and when the retention of mpatible, a l of prices are found to be inco tenance of a fairly constant leve be trusted can ies Federal Reserve authorit change can and should be made. The that,:ihen them to need be. But it is only fair not to make it any sooner than legal sold the ilize the price level and to keep given the responsibility to stab by the mpts atte eventually hamstrung in their reserve ratio they should not be taining main of much as the only proper purpose fixity of the price of Gold. Inas ct to obje ent inflation, no one can properly a uniform price of gold is to prev purpose can better be served therebv. changing the gold price if that the ose, is not an abandonment of Any change, made with such a purp chonge t Grea any to nd ion of gold to correspo luat reva a ly simp but dard stan gold t conceivably present price of $20.57 an ounce nigh in its purchasing power. The deflation. /And or n out producing material inflatio be maintained indefinitely with w years. 'ma no change would bu required in it is altogether probable that y change which might become necessar It is further to bc noted that any n agai is o ng manner so that the reserve rati after it is once made in a thorogoi stand unnor low - this new price will probably moderate - neither absurdly high changed for many years. part s no occasion for alarm, on the Under these circumstances there seem pect el its 67 as sacred, over the remote pros of those who regard the figure U0. furtherance in only as any change is authorized being someday changed, especially and its chief purpose - stability. of maintaining the _,old standard Eold be raised this opereetes auto Should, nt any time, the price of Note 2. , namely: improve the reserve ratio in two ways matically co raise and thereby owners of their gold to the (1) It stimulates the sale by 2:old ges the purchase of Gold fro_e_ Federal Reserve System and discoura the of the gold in the vaults of (2) It increases the dollar-value Federal Reserve Banks. , a gold is increased by one per cent If, for instance, the price of 2067 or e ts now worth $20.67 an ounc million ounces of gold in the vaul S ng namely to h, instee.d,one per cent more risi million dollars is thereupon wort 20.67 nillion nillion dollars, an increase cf U0.8767 per ounce or to 2087.67 Banks as a profit. the books of the Federal Reserve dollars which can be entered on e price of gold should be reduced Contrariwise, if at any tim,th ways, namely: reduce the reserve ratio in t:ro this opecates automatically to owners of their gold to the (1) It discourages the sale by z,old es the purchase of sold from it. Federal Reserve System and encouraL If vault sold. (2) It decreases the dollar-value rve on the books of the Federal Rese This., of course, registern a loss Banks. Note 3. There is practically nek limit under this Ilet, to the power of the Fed-oral Reserve System., either to counteract deflation or to counteract iAlflation. Its buying power is practically unlimited and, when exercised, it will raise the prices of securities and other goods, not only of those it buys but of the great mass of others. This is true not only because of the sympathetic movement of securities but because the buying power does not cease with its exercise by the System. Those who receive this buying power pass it on by buying other securities and goods of all sorts, raising their price in turn and so on indefinitely. This new buying power is not at the expense of some other buying power as in the case of an individual spending money already in circulation before he gets it. The Federal Reserve notes or other credit is newly created, a net addition to the circulating medium. Until withdrawn this new circulating medium adds permanently to the annual buying power of the country. Taoechowresistless is the power of the Federal Reserve System to sustain the price level, suppose that, as was threatened recently there should be a nation-wide run on banks and continued hoarding, causing an increasing vacuum in our circulating medium; this vacuum, however great, could be filled as fast as created, by pouring out Federal Reserve Notes in purchasing of securities (to say nothing of any added deposit balances). Yet the gold reserve need never be too law if the price of gold were raised sufficiently. Furthermore, if action were prompt enough there would be no hoarding as hoarding is the result of deflation. For the same reasons the outflow of gold to foreign countries cannot prevent the Federal Reserve System from safeguarding the price level against deflation so long as it has the power to raise the price of gold. The only limit to be encountered would be reached when the Federal System had exhausted the entire legally available security market so Reserve as to have gathered within its awn walls all Government bonds,and other securities on its eligible list. To take an example of the reverse sort,suppose there should be a threat of inflation, due, say, to speculative activity resulting in increasing loans and swelling the volume of deposits subject to check. The Federal Reserve could then, if need be? sell newly created debentures without limit,receiving back their awn Federal Reserve Nrtes (or deposit balances on their books to the credit of member banks or the United States Government). This shrinkage of outstanding Federal Reserve Credit would cause member banks in turn to curtail the credit extended by them to their customers. Otherwise their reserve ratios would be reduced below the legal requirement. This shrinkage would have no limit since there is no limit to the possible issue of debentures. The importation of gold from abroad cannot upset the control of the Federal Reserve over inflation so long as the latter can decrease the price of gold. Of course, every change in the price of gold changes the rates of foreign exchange. But the slight additional inconvenience caused by this to foreign commerce will be as easily and regularly allowed for an any other, and the inconvenience is small as compared with the advantages obtained in the fact that domestic commerce has a stable level of prices; for foreign commerce is of very small volume, say one-tenth the volume of domestic comaerce. VII -13 Note 3 continued Moreover, at present, several of our chief foreign customers are now off the gold standard, so that there is scarcely any inconvenience added to that we already have at present. Ultimately, it is altogether likely thatEll important conmercial nations will adopt uniform stabilization laws and policies. There is only one obstacle to provent the Federal Reserve System, b7 this Act, Iron fully safe-guarding the price level against both inflation and deflation. It cannot stop the danger of Government inflation. The Government can, in its sovereign power, break any or all rules laid down in this lict, break away from the gold Standard, and inflate the currency to suit itself. In times of great distress, such as war, this usually happens. There is no way by law tc prevent inflation by the Government; for the Government is the lawmaker. But as long as the rules laid dawn in this Act are observed the Federal Reserve System has full control of the circulating medium, including deposit currency, and can stop either inflation or deflation to any conceivable extent. The reason why there should be a special safeguard against specuNote 4. lation injurious to the Government is because the Government unlike an ordinary buyer and seller, stands ready to buy and sell at the same price instead of making a profit in the selling price over the buying prier,. Thereafter the gold standard will continue with a fixed price of Note 5. gold (that is a :ixed weight of the gold dollar) exactly as at present until any further adjustment is needed to avoid deflation or inflation. Thus while all the virtues of the gold standard arc retained, its periodical evils are avoided. Instead of those periodical evils of inflation and deflation there will be occasional readjustments in the price of gold. But these changes in the gold price basis will be made sol7)1y in order tc avoid changes in the commodity price base. In this respect they will differ frem such revaluations as those of France and Italy in recent years. They regained the gold standard after war time inflation, through devaluing the gold franc and lira. The above provisionsmake possible the perpetuation of the gold Note 6. standard under all possible circumstances. They also permit the retention of the present price of gold, 420.67 per ounce, and the corresponding weight of the dollar except when, if ever, a change of price should be necessary to supplement the other efforts of the Federal Reserve System in order to prevent deflation or inflation of the price level. The chief justification of the gold standard has been that it afforded, to some extent, a safeguard against inflation such as has so often occurred when a country has gone off the gold standard and has adopted irredeemable paper money. But this safeguard against inflation has only been partial, instance, we experienced a great gold inflation between 1896 and 1930. For Note 6 continued Moreover the gold standard has afforded no safeguard whatever against deflation. England has just preferred going off the gold standard raeher than suffer further deflation. • Under the present plan there will never be any need of America following the English example by abandoning the gold standard. She will have a gold standard safeguarded against deflation and inflation alike,a geld standard almost fully assimilated to a virtual goods standard, in short, a genuine standard of purchasing power, fair to debtors and creditors alike. It may never be necessary to change the price of gold; but when, if ever, a change should become necessary, it would always be a benefit and never an injury. If the price of gold is ever raised, it will only be because otherwise we should suffer deflation. That is, the price of gold would be raised only when gold became so scarce that its price clearly ought to be raised. Contrariwise, if the price of gold is ever lowered it will only be because otherwise we would suffer inflation. In other words, the price of gold would be lowered only when gold becomes so superabundant that its price clearly ought to be lowered. Note 7. The holders of gold certificates or gold coin can thus have no cause for complaint. For they can, at any time, become hclders of gold coin; and the holders of gold coin can, if their coined dollars of 23.22 grains each are bigger than the new current gold bullion dollar, melt them into bullion and get more dollars than they originally had; while, on the other hand, if their coined dollars of 23.22 grains are smaller than the now current bullion dollars these coins can be used, like t*en coins, at their face value, or redeemed in the new and bigger bullion d011ars. Practically, however, the number of the old style gold coins or gold certificates will be negligible, because of Section 5. The object of the above provisions is obviously to forestall disUote 6. putes over the "gold clause" and yet to give full freedom of centracting parties, if any, who still wish that clause to stand. William Howard Taft,when Professor at Yale, told me that, in his opinion, Congress has full power to mtdify or abrogate contracts despite the fact that our Constitution forbids the States from so doing. He cited the Greenback cases as sustaining his opinion. Probably the number of disputes over the gold clause would be very Levi. At the time of the passage of this Act there would presumably be no difference between the two standards and the average man would be willing to accept the new standard for several reasons: (1) The Corporations with gold-clause bonds outstanding would surely prefer the "new" dollars because they would then keep their bond accounts in the some standard as is customary and in which all their other accounts are kept and would daabtless recommend that their bondholders should accept the "new" standard; • VII - 17 Note 6 continued (2) the ordinary bondho1d-3r would have the same preference; (3) he would have no reason to believe that he would gain by using the "old" dollars; (4) he would not like to look forward to expensive litigation and possible defeat; (5) he would recognize the superiority of a stable standard. In cases wh;3re a person was obstinately in favor of the "old" there would still be some chance of the other party agreeing on that basis. There would be every opportunity to come to an agreement on either basis and both parties usually desiring to come to some sort of an agreement in advance of the day of a possible divergence between the two standards. For these reasons it seems certain that the number of cases left still unagreed upon would, by the time when, if ever, probably many years hence, the two standards would actually diverge, would be negligible. ( VII - IS BILL "0" A. BILL AUTHORIZING AND DIRECTING THE FEDERAL RESERVE SYSTEM TO AID IN STABILIC,ING THE GENERAL LEVEL OF COMMODITY PRICES THROUGH ADJUSTING THE MEMBER BANKS' RESERVES AND TAXING NON- ER BANKS ON CLEARINGS t VI: - 19 Senate and House of Representatives of the Be _ it enacted by the United States of America in Congress Assembled Section 1. The Act approved December 23,1913, known as the Federal Recerve Act, as amended, is hereby further amended as follows: Add to section 14 tho following paragraphs: (t) If the gold reserve ratio is deemed to be too near to the prescribed minimum, the System is authorized, in addition to or in conjunction with other measures already authorized in such a contingency, to lower the minimum reserve requirements of member banks, the reduction to be by a uniform percentage. "If, on the other hand, the legal minimum gold reserve ratio deemed to be too high, the System is authorized, on due notice, in addition to, or in conjunction with, other measures already authorized in such a contingency, to raise the minimum reserve requirements of member banks, the increase to be by a uniform percentage. Section 2. The Act of March 3, 1865, imposing a tax on state bank notes is hereby amended by adding: The Federal Reserve System is authorized and directed to make a service charge of— % on all checks cleared for non-member banks. Three Bills to Stabilize the General Level of Prices Bill "A" Bill "A!' requires the Federal Reserve System to dc all in its power to stabilize the general level of prices at some "normal", considerably above the present deflated level. This is to be done by all available methods, including buying and selling securities in the open market, raising and lowering rediscount rates, raising and lowerins the reserve ratios of Federal Reserve Banks (they can be lowered under existing laws), advising commercial banks, cooperating with foreign banks; - also by statistical studies and by publicity. Important decisions as to monetary and credit policy are to be made public. Official index numbers for measuring price levels are to be establishei by the Interdepartmental Committee on Price Indexes. Since a stable price level means adjusting credit to the requirements of trade, statistics of the volure of trade are to be watched as a supplementary check and guide. In case the Federal Reserve System, in selling securities, should eXhause its supply, it may replenish the supply by issuing new debentures. Any profits or losses from these stabilization operations are to accrue to the United States Treasury. Bill "A!' is largely an emergency measure. It would operate by methods which are, for the most part, already available. Bill ttelt, on the other hand, involves new methods and can await long and thorough study. Bill "B" According to Bill "B", if, despite the methods in Bill "e, the gold reserve of the Federal Reserve System becomes reduced to the danger point, the Federal Reserve System is authorized to raise the official price of gold. Reversely, if the reserve becomes too high, the price cf gold may be lowered. There is no mandate put upon the Federal Reserve System thus to change the price of gold. The procedure is merely authorized when and if the addition of that method to the other methods of preventing inflation or deflation shall be deemed necessary. Probably no change would be necessary for many years, if at all. Without such authority, however, the Federal Reserve System might possibly find itself unable to stabilize the price level, as the gold reserve might become otherwise unmanageably and absurdly low or high. Suppose, in case of genuine necessity, the price of gold should be raised; the effect on the gold reserve ratios would be salutary in two ways: (1) it would stimulate the sale of gold to the Federal Reserve System discourage the purchase of gold from it; and (2) it would increase the dollar value of the gold in the vaults of the Federal Reserve Banks. If, for instance, the price of gold should be raised by one per cent, then 100,000,000 ounces in vault, worth now (at $20.67 an ounce pure) 2067 million dollars would become worth one per cent more. That is, the per ounce price would rise to $20.876 and the total to 2087.67 million dollars - an increase of 20.67 million dollars. The reverse applies if the price of gold should need to be lowered. This power to change the price of gold would counteract any tendency toward inflation or deflation of the price level, or toward outflow of gold abroad or influx from abroad. Gold coinage would cease and gold bars be employed instead. The redemption of other sorts of money in gold would be retained - taking the form of the free and unlimited purchase of gold bulli.)n by the Mint at the official price substantially as at present, except that the official price might not remain forever at $20.67 an ounce To avoid speculation in gold at the expense *I' the government, or of the Federal Reserve System, a small spread may be made between official prices for buying and selling. Provision is made for special treatment of any lef-over gold coins, or gold certificates, and also for "gold clause" contracts. Bill "C" Bill "C" gives the Federal Reserve System authority to raise or lower the reserve ratios of member banks. For the purpose f drawing non-member banks into the System, the bill authorizes a penalty on non-members in the form of a charge for clearing their checks. Thus, with practically all banks under one system and their reserve ratios subject to control by that system, the volume of credit can be fully controlled, so as to be adjusted to the needs of business; which is another way of saying: so as to keep a stable level of prices. The enclosedi is supplementary to the letters and bills already L147:L=rf I agree vith zaat or the Bills oxcept as to* two pointz. ax not =Art that is should *Mere to a 91g,taIltr price Index expelusive/y, 'Jut think thnt sevisiel indtzes ohould be rualebed se mead with coaK,= tten74t including the Snyder es. equivalent gesicel index, enl thtt the obolis subjett at Imismse should be worinal cat as a tosimisal sabilierar tbas ister-apartal *op. mitts* on price Imdames *Ad' alresk mists It tiaglinztm. olio Jo not think that tbe level ought to in ratted alum law 'Jack to wbere wo stesrted rr tsAr,ttlf say beck• Thom ear be * row other details ,i tab Iirle11 differ from tlmt bills es t bine drawn then for tbe rederatieno Of scurse, tbect billievelietylvt for publicati•on but rick are calte free ta show them viltb 440reition t* *Apse as oil. vim, or eritiolisid406 be of bap. Air emmommts dii be post* spoiscialati• Irving nabs, • 110 ALE UNIVERSITY DEPARTMENT OF POLITICAL ECONOMY NEW HAVEN CONNECTICUT PROFESSOR IRVING FISHER 460 PROSPECT STREET November 25, 1931. Mr. Eugene Meyer, Governor, The Federal Reserve Board, Washington, D.C. My dear Governor Meyer: Enclosed is a copy of the stabilization bi1I5prepared partly by me in conjunction with Dr. W. I. King, Professor John R. Commons and others for the Stabilization Committee of the American Farm Bureau Federation. I intended to send it to you long before this, but I have been out of town and the matter slipped my mind. Doubtless you will find a good many faults in this bill. In fact, I myself go, and the bill goes not represent exactly my own views but represents those which the Committee wanted expressed. I did succeed, however, in getting the Federation to give up the greenback plan which they were about to propose. If you have time to go over thfisLbi1l4 in case you have not aireat seen it, and feel that you would be interested to do so, I would be delighted to have the opportunity to discuss it with you sometime, although I realize that you are already overwhelmed with other work. Very sincerely yours, IF.W November 30, 1931. Prof. Irving Fisher, Department of Political :conomy, New Haven, Connecticut Dear Professor Fisher: :lease accept my thanks for your letter of November 25, 1931, enclosing a co74 of the stabilization bills prepared partly by you in conjunction with Dr. I. King, Professor Tohn R. Commons, and others for the Stabilization Committee of the Annrican Farm 3ureeu Federation. AP you iniicata, the pre3sure here is very great these days, but I shall be clad to examine the bills at the first opportunit. nth beet wishes, 1 Era Very truly yours (Igned) Euseucl Wye;
@FedFRASER