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1 A J '/ TH E WH ITE H O U S E W A S H 1N G T O N November 28, 1930. Honorable Eugene Meyer, Federal Reserve Board, Washington, D. C. My dear Meyer: Please find enclosed herewith a letter received by Congressman Strong from the Professor of Economics of the University of Missouri. I have asked Strong to have a talk with you on this subject. Yours faithfully, / Enclosure• ./ ti jj g O . U N IV E R S IT Y OF MISSOURI COLUMBIA S C H O O L O F B U SIN ES S A N D P U B L IC A D M IN IS T R A T IO N DEPARTMENT OF ECONOMICS November 13, 1930 Honorable James G. Strong, M.O. Blue Rapids Kansas My dear Mr. Strong:It seems to me that the events of the last year furnish, properly interpreted, convincing evidence in favor of action on your bill instructing the Federal Reserve Board to endeavor to stabilize the price level. I assume that there is at present no chance of passing it because Congress as well as the public is so little educated on this matter. But something might be done to make its passage less remote if we could substitute the right kind of publicity for the misleading propaganda which is now so widespread. I have been discussing the matter with Mr* Norman Lombard and he seems to be in agreement with me, so far as I can judge, and anxious to do what he can* In general, it seems to be the case that the only persons who can get much public attention for an idea are newspaper editors, successful business men, and men prominent in public life. Unfortunately, most of these seem to be on the wrong t5?ack. I hope you will pardon my discussing at such length matters that you have undoubtedly yourself thought about but some of the points I wish to mention cannot, it seems to me, be emphasized too much in the present situation. Looking over the figures dealing with bank policy, I find that during the latter part of 1929 the Federal Reserve banks charged higher rediscount rates than at any time since 1921. There had been no rise of prices which would seem to justify such action. The average prices fluctuated somewhat during 1929 but on the average were, if anything, lower than they had been a year or two previously• I cannot see that the situation justified any such sharp credit restriction as we had. Though the Federal Reserve Board would not admit this, I cannot help feeling that they were influenced by criticism by the New York Federal Reserve Bank and general public criticism based on the speculative activity in the stock market. I do not believe that it should be the business of the Board to restrict credit sharply, in the absence of a tendency toward price level inflation, merely to restrict speculation in the stock market. There may be unwise specu lation at various times but in the long run the prices of stock are not going to remain higher than earnings will justify and stabilization of the price level by itself will prevent permanent and long-continued inflation of stock prices. If we take - 2 care of the general price level, the stock market will mostly take care of itself. The Board may properly warn member hanks against the danger of lending to speculators on inflated stock prices, hut it should not sharply raise its rediscount rates when the other circumstances do not call for it. To do so restricts credit, thereby diminishes borrowing for purchase of goods, decreases the demand for goods and labor, makes goods unsalable and business dull, brings unemployment and falling prices. In my opinion the notion that the Federal Reserve Board must Mdo something11 about stock specula tion is primarily responsible for the difficulties we are now in. Unfortunately, statements in the public press and by prominent political leaders are presenting an entirely different view. It is being said (St.Louis Post Dispatch in editorials, statement attributed to Ex-Senator James A. Reed and statements made by various persons in both political parties) that the high rediscount rates should have been applied even earlier, that stock speculation was "drawing funds away from legitimate" business and*that such credit must be restricted in order that "legitimate" business might receive due consideration. This kind of argument appeals to many persons because of their general sentiment against stock market speculation and their general feeling that what they are doing ought to be regarded as more fundamental to the industry of the country. Doubtless actual production is more fundamental, but the trouble is that such credit restriction, beyond what is necessary to prevent increase in the price level, is a terrible blow to persons engaged in such fundamental industries. Not only does it produce depression but the resulting fall of prices adds to the burden of all debtors. It seems to me that everyone inter ested in price level stabilization needs to use every possible opportunity to discredit this idea that funds must be restricted by high discount rates for the sake of legitimate business. Until the restriction came funds for the industries of the country were not seriously lacking. If they had been, we would have experienced business depression and rapidly falling prices. The Reserve system, notwithstanding the amount of stock speculation, had ample funds for legitimate business too. In fact, speculation uses far less money than would be commonly supposed from the volume of transactions. Because of the use of the facilities of the Stock Clearing Corporation and the rapidity of the transactions, a dollar does in this work some $1400 worth of business a year instead of perhaps $50 a year as in most business. Therefore it takes comparatively little money to carry on a great deal of speculation. But no matter how much it takes, the business of the monetary and banking system is to provide enough further funds*to take care of all other business. Where discrimination isYjpfrssible because the disposition of the funds cannot be followed, sharp restriction is bound to hurt real industry. It seems to me that we should pay less attention to attempting control of the stock - 3 market, let it mostly take care of itself, and center our attention on providing adequate but not super-adequate funds for business and on keeping the price level as nearly stable as possible alike through periods of stock inflation and deflation. Even if the sharp credit restriction of 1929 could be defended, I think that the Board should be criticized for not immediately reducing its rates to the lowest possible figure after the break* When prices are tending downward, even a low interest rate may be quite a burden* An immediate reduction to a very low figure and the wide use of funds in the open market in the purchase of government bonds, municipal notes, eligible drafts, etc* would put funds into circulation, increase spending, maintain the demand for goods, and largely offset the"prior credit restriction. But such a change in policy should be immediate and sufficient for the purpose. If purchasing two hundred million dollars worth of securities does not suffice, this merely means that three hundred million or five hundred million dollars or more should be spent. If a reduction of the rediscount rate from 6 to 4 per cent is not ehough to restore prosperity, a reduction to 2 or per cent might, if made promptly, suffice. The business of the banking institutions should be to meet the situation* It is all very well for the administration to call conferences of business men and get these men to agree that they will make various expenditures. In practice, however, they will not do very largely what they regard as unprofitable. The key to the situation lies in the monetary and banking arrangements of the country and it is there that control should be and can be exercised. Your sponsorship of the Strong Bill shows that you are fully aware of this fact, but I am sure that many of your colleagues are not. I wish there were some way to make them so. We are being treated, also, to the usual nonsense about “over-production". That it is nonsense should be shown by the fact that the workers in a hundred and twenty million population are normally as well employed now as four million were with much less equipment for production in 1775. When credit is sharply restricted, the demand for goods falls off. Merchants cannot clear their shelves. Manufacturers fail to dispose of their products except at sacrifice prices. Workmen find themselves out of jobs. Farmers axe compelled to accept greatly reduced prices for their crops or not sell. Therefore, there is a deceptive appearance of over-production. But we have not really produced too many goods. We have restricted, through a fallacious theory on the part of those who direct our banking system, the means of purchasing these goods, and, unless such policy is radically changed, there can be no recovery until the spirits of manufacturers, dealers, laborers and farmers are so broken by depression that all prices drop to a lower level, sufficiently low so that the reduced credit can take care of business. - 4 I am told by one of my graduate students who is studying the theories and pronouncements of the Federal Reserve Board that there seems to be a hesitation about making credit easy for the purpose of restoring business, on the ground that such restored business would be artificial and not "sound”. This also is a lot of nonsense. I am more and more convinced that a majority of members of the Federal Reserve Board do not understand the relation of their activities to business prosperity and to the price level. They are too ready to defend a policy which produces unfortunate results, by claiming that the unfortunate results come from extraneous factors over which they have no control. It is of course conceivable that so much gold should flow out to foreign countries as to compel them under existing law to restrict credit even if they did not otherwise wish to do so. But I have seen no evidence that their action of 1929 was forced by any such condition. Their reserves were 65 or 70 per cent, almost twice the legal requirement. The Federal Reserve system shoultt be a great gain to us, but if it is to be operated by men who consider it their duty to take action bringing on business depression, unemployment for millions, despair to farmers, falling prices, and bankruptcies, merely in order that speculative stocks may be kept from going higher than they think proper, the system may turn out to be a curse instead of a blessing. These men have tremendous power. There seems to have been among them in the past some disinclination to have their power controlled by a law of Congress, such as your bill, which would compel them to use this power in the direction of stabiliza tion and not in the contrary direction. It seems to me that the evidence accumulated during the last year is final in favor of the principle of your bill. It is being interpreted, however, by people who do not comprehend the real nature of our economic system, in quite the opposite way. These wrong views should be held up to public contempt and all persons of influence whose minds can be reached should have pointed out to them the tremendous power for good or evil which the Federal Reserve Board now possesses and the fact that Congress has not so much as told this Board that the power must be used for stabilization instead of for the contrary. Very sincerely yours, COMMITTEE ON BANKING AND CURRENCY T. ALAN G O LD S B O R O U G H FIRST DISTRICT OF MARYLAND HOUSE OF REPRESENTATIVES W A S H IN G TO N , D. C. February 17, 1932. ersonal Hon. Eugene Meyer, Governor, Federal Reserve Board, Washington, D. C. My dear Governor Meyer: In a few days, probably on Friday, I am going to speak in the House on some phases of the problem of stabilization. I may want to quote from your letter to me of February 12. If there is any reason why you -do not desire me to quote from this letter, kindly let me know. Very sincerely yours, February 12, 1932. Honorable T. Alan Goldsborough, House of Representatives, Washington, D. C. Dear Mr. Goldsborough: Your letter of January 19 addressed to the Secretary of the Treasury has been referred to the Federal Reserve Board and I have noted with interest the draft of the bill inclosed therewith ”To provide for increasing and stabilising the price level of com modities, and for other purposes”. Section 1 of your bill directs the Federal Reserve Board and the Federal reserve banks to use all their power to re store the level of wholesale commodity prices to that for the cal endar year 1926, and thereafter to use all their powers to maintain such a level. The relationship between the operations of the Fed eral reserve system and the price level is indirect and dependent on a large number of developments that are beyond the control of the Federal reserve system. I do not believe that it would be wise to impose upon the Federal reserve system a duty and a responsibility which it would not be able to discharge. This would tend to under mine the confidence of the people in the system, which would be a public calamity. - ■ '« MB* Honorable T. Alan Goldsborough, #2. As you know, there are & number of bills pending at this time which would affect in various respects the powers of the Fed eral Reserve Board nd for some time past a sub-committee, headed by Senator Glass of the Banking and Currency Committee of the Senate, has been engaged In a study of the operations of the Federal Reserve S y stem , with the view of formulating a legislative program. In the circumstances, I regret that I feel that I am not in position at this time to comment further upon your bill and I am sure that you will appreciate the reason for my point of view in this connection. Very truly yours, (Sinned) Eugene Meyer Governor The Goldsborough bill reads as followst "An Act For restoring and maintaining the purchasing power of tiie dollar. Be it enacted by the Senate and House of Representa tives of the United States of America in Congress assembled, That the Federal Reserve Act is amended by adding at the end thereof a new section to read as follows* *Sec. 51. It is hereby declared to be the policy of the United 8tates that the average purchasing power of t e dollar as ascertained by the Department of l»abor in the wholesale commodity markets for the period covering the years 1921 to 1919, inclusive, shall be re stored and maintained by tbs control of the volume of credit and cur rency. 1 Sec. 2. The Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury are hereby charged with the duty of making effective this policy. Sec. 5. Acts and parts of Acts inconsistent with the terms of tills Act are hereby repealed." . The bill was passed hastily by the House of Representatives after very brief consideration by that body, although extended hearings were held by a small sub-committee consisting almost entirely of advocates of the measure. The testimony of Governor Harrison of the Federal Reserve Bank of New York and Governor Meyer of the Federal Reserve Board in Washington, who both opposed the measure, was not printed prior toconsideration by the House of Representa tives. By many the bill is not considered seriously, or el3e is regarded as innocuous, and some of its support was given on the theoxy that it was a good political gesture ana that it could do no harm even if it did no good. It 1b safe to say that, even if it were to be passed by the Senate, which is extremely doubtful especially in view of the reactions against the bill in the newspapers here and abroad, it would without question be vetoed by the President and we believe it would not be possible to pass it over such a veto. Even in tbs event that the bill should become law, which is most unlikely, it contains no real threat of currency inflation, as it confers no new powers and its enact ment would, we are reliably informed, not lead the Federal Reserve System to make any change in policies. V • pages 521-62 opposition to Meyer testimony reasons for price stabilization legislation. EXTRACT F R O M HEARINGS BEFORE TH E S U B C O M M I T T E E OF T H E COMMITTEE ON BANKING A N D CURRENCY H O U S E OF R E P R E S E N T A T I V E S SEVENTY-SECOND CONGRESS F IR S T S E S S IO N STA TEM EN TS OF EUGENE MEYER G o v e rn o r of th e F e d e ra l R eserv e B o a rd and E. A. GOLDENWEISER D ire c to r of D iv isio n of R ese a rc h a n d S ta tis tic s F e d e ra l R e serv e B o ard A p r il 1 4 , 1 9 3 2 U N IT E D S T A T E S G O V E R N M E N T P R IN T IN G O F FIC E 119391 W A S H IN G T O N : 1932 STABILIZATION OF C O M M O D I T Y PRICES THURSDAY, APRIL 14, 1 0 3 2 H ouse of R epresentatives, Subcommittee on B anking and C urrency, Washington, D. C. The subcommittee met, pursuant to adjournment, at 10.30 o ’clock a. m., in the committee room, Capitol Building, Hon. T. Alan Goldsborough, presiding. Present: Messrs. Goldsborough (chairman), Busby, Prall, Strong, and Beedy. The C hairman. The subcommittee will please come to order. To-day we will hear from Mr. Eugene Meyer, the governor of the Federal Reserve Board. STATEMENT OF HON. EUGENE MEYER, GOVERNOR FEDERAL RESERVE BOARD OF THE The C hairman. Governor Meyer, will you state your connections for the purposes of the record? Governor M eyer. Governor of the Federal Reserve Board and also chairman of the board of directors of the Reconstruction Finance Corporation. Mr. G oldsborough. You have read H. R. 10517, have you? Governor M eyer. Yes, Mr. Chairman. Mr. G oldsborough. Now Governor, I think when you appeared before the committee before, you completed your statement and then the subcommittee or any member as the case might be, might ask you such questions as they thought should be asked, and, if you so desire, this hearing wall so proceed. Governor M eyer. That would please me very much, Mr. Chair man. I had the opportunity, Mr. Chairman, of reading a part of the record of the hearings conducted by the committee which has been put into print. Mr. G oldsborough. That was up to the time Governor Harrison appeared before the committee yesterday? Governor M eyer. I think so. The subject is such a large one and I have been so occupied with my various administrative duties— and it has been necessary also for me to be present at hearings before other committees—that, if I have not a prepared statement to give you in the beginning, I hope you will understand that it was not that I did not want to take the time to make a careful and formal record of my views, but rather that I have not had the opportunity. Mr. G oldsborough. If at the conclusion of your statement, Governor, you should like to correct the record before it is printed, we shall be very happy to give you the opportunity? 521 522 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES Governor M eyer. I thank you, and possibly to add to it if I may? Mr. G oldsborough. Yes. Governor M eyer. Anything that occurs to me? Mr. G oldsborough. Yes, sir. Governor M eyer. The whole question is one that has been so much under discussion in the press at home and abroad that it is hard in any limited period to attempt to do justice to it. I appreciate the fact that the members of the subcommittee are approaching the problem in a serious and earnest way, and are anxious to make a contribution of importance to the public interest. I have every sympathy with your general purpose. If I see difficulties which perhaps you do not quite visualize, it is perhaps due to my somewhat intimate experience with the administrative side of this sort of work and to my contact and experience with other factors which I think affect the practicability of accomplishing your purpose entirely by the means here suggested of control over the volume of credit or currency. Stability as I see it is affected in an important way by the volume of currency, including both credit and currency in this general concept. I do not feel, however, that it is the only factor, and I have in mind that any instrument such as the volume of credit, if used in accom plishing or attempting to accomplish such a purpose, has to be con sidered in relation to a great many other important factors in the situation. For example, I do not think anybody can say right now how much currency is actually hoarded. We use estimated figures to indicate that amount, but in view of the large number of banks that have been closed within the last two years, and the consequent greater use of cash in business, in small amounts in each case, perhaps, but in a large aggregate amount, it is impossible to determine or even to estimate how much of the so-called hoarded currency is not really hoarded but is made necessary by bank closings. Then, too, with the change in the banking situation, there has been in the past year and a half or two years a considerable decline in the number of small accounts that are paid by checks on account of charges imposed by banks, and that may have been a factor affecting the volume of required currency. Of course, offsetting that is the fact that under normal conditions with the diminished volume of business and the lower price level, it takes less money in circulation to transact business. I mention this merely because it brings out some of the difficulties with which anyone charged with responsibility for regulating the volume of currency would have to contend. I regard the efficiency of the banking structure as an important element in achieving stability in the price level, and in using for that purpose, to the extent it can be used, the regulation of the volume of currency and credit. I had the privilege of appearing here, not before this subcommittee, but before the whole Committee on Banking and Currency, as far back as in January of 1923, when I said after a study of the banking structure of the country----Mr. G oldsborough. On what bill was that? . Mr. M eyer. It was in connection with a bill on rural credits which resulted, I think, in the establishment of the Federal intermediate credit banks. After analyzing the banking structure in 1923, as a result of a study of the 4,300 banks to which the War Finance Corpo ration had made loans in the 1921—22 period, I called attention of this committee to the banking structure of the country as a primary ele ment in our economic and financial structure. May I just quote from that hearing for a moment, dating back as it does over nine years ago, because I think it is of interest at this particular time? I said then: 523 T h ere are necessarily m a n y difficulties involved in o u r d u al sv ste m of b an k in g . W e h av e a S ta te b a n k in g sy stem , a n a tio n a l b a n k in g sy stem , a n d a F ed eral reserve sy stem , th e la tte r h a v in g a m em bership d eriv ed from b o th th e S ta te a n d th e n a tio n a l sv stem s. T h e S ta te b a n k in g d e p a rtm e n ts supervise th e S ta te b an k s, a n d th e C o m p tro ller of th e C u rren cy supervises th e n a tio n a l b an k s, w hile th e r ederal reserve sy stem h as a su p erv isio n of its ow n for th e m em b er b an k s, a n d th e re has been a t tim es som e d isp o sitio n to co m p e titio n b etw een th e S ta te a n d th e n a tio n a l b a n k in g system s. T h e S ta te b an k in g law s fre q u e n tly p e rm it p ractices w hich n a tio n a l b an k s can n o t legally engage in. T h is is c reatin g c o m p etitio n b etw een th e tw o sy stem s ^ c h c a n n o t be reg ard ed as w holesom e a n d m ay lead to th e g rad u al w eakening ot b o th . T he q u estio n of b ran ch b an k in g is one t h a t is causing considerable discussion a t th e p re s e n t tim e. Som e of th e S ta te s p e rm it b ran ch b a n k in g on a n u n lim ited scale. As a re s u lt a g ita tio n is now going on for a n a m e n d m e n t to th e n a tio n a l b a n k in g a c t to p u t n a tio n a l b an k s on a p a r w ith S ta te b an k s in t h a t resp ect. I do n o t propose to discuss th e su b je c t of b ran ch b a n k in g here. B ran ch b a n k in g m a y be good or it m ay be b a d . _ I t m a y be good if carried on in a lim ited w ay a n d b ad if p e rm itte d on a n ex tensive scale. B u t, w h e th e r it is good o r w h e th e r it is b ad , b ra n c h b a n k in g should be considered on its m erits a n d sh ould n o t be th e p ro d u c t of com p e titio n in th e e n d eav o r to ex p an d e ith e r th e S ta te or th e n a tio n a l b a n k in g o rg an izatio n s. T h e co m p etitio n t h a t exists a t th e p re s e n t tim e betw een S ta te a n d n a tio n a l b an k s can n o t fail to rem in d one of th e co m p etitio n t h a t p rev ailed a g e n eratio n ago am o n g th e vario u s S ta te s seeking to becom e dom iciles fo r cor p o ra tio n s a c o m p etitio n t h a t w as based u p o n th e la x ity of th e law s g o v ern in 0, in c o rp o ra tio n . N o th in g could be m ore d isa stro u s th a n c o m p e titio n b etw een th e S ta te a n d n a tio n a l b a n k in g gro u p s based u p o n co m p e titio n in la x ity . I am mentioning this question of the banking structure, Mr. Chairman, particularly at this time because you contemplate using the influence of the Federal reserve system on "the volume of credit as a means of affecting the volume of business and the price level. It seems to me that the instrument through which the volume of credit functions is a vital factor in the efficiency with which the Federal reserve system can function, and that instrument is the banking system. In the hearings which we had a few days ago before the Glass com mittee with regard to amendments to the Federal reserve act, the board, through me, presented its views in favor of a unified national banking system, and I was rather interested that members of the com mittee did not seem to be opposed to that thought. On the contrary, Senator Glass and others said that if it could be brought about con stitutional^ they would be in favor of it. The board, in expressing its support of a unified banking system, did so unanimously. I merely call that to your attention at this time because I think that it is a vital factor in what you have in mind in achieving a greater stabil ity for business. I think it can not be denied that "an efficiently organized and properly supervised banking structure is vital to the control of inflation and deflation of credit, and efforts to stabilize without fundamental improvement in the banking structure seem to me not to pay sufficient attention to the agency through which sound principles can be put into practice. In the report which we, as a unanimous board, presented to the Banking and Currency Committee of the Senate there was also incorporated a recommendation for a new method of calculating 524 STABILIZATION" OF COMMODITY PRICES bank reserves. I quite appreciate that such an important matter as a new method of calculating reserves is one that ought to be given careful study and thorough investigation; but we had in the Federal reserve system a committee working about 18 months studying this question of reserves and they made a report to which I think sufficient attention has not been given by the Congress. It was the result of a very careful study, and while it may possibly have some weaknesses, we have the assurance from the men who have been studying it in a conscientious way that they tested it over a considerable period of past years. I think this proposal would be an important factor in achieving stability and preventing undue speculative expansion of credit and its contraction, from which we are now suffering. This system of reserves would tend to safeguard the banking structure by increasing the reserve requirements in a time of expansion and de creasing them at a time of credit contraction, and would, I believe, assist in the achievement of the more stable conditions which you in this committee are contemplating to a greater extent than this bill which deals only with the control of the volume of currency and credit . I do not know if this committee is familiar with that report on bank reserves, but, in a word, it abolishes the difference between time and demand deposits so far as their classification for purposes of reserves is concerned, and I think in that respect the recommendation is wise, because the low 3 per cent reserve on time deposits has been an inducement for banks and for depositors to build up to an undue degree time deposits which carry a higher interest rate and a lower reserve. This has induced banks to invest in slower assets in order to get the larger yield necessary to make a profit on the higher rates of interest paid. _ . Now, the proposed revision of reserve requirements provides for a uniform minimum of 5 per cent on net deposits, both demand and time, and reserves above the 5 per cent minimum are based on the velocity of turnover. In a true savings deposit there would not be any turnover; therefore, on that business there would be a 5 per cent reserve. Under this proposal, when business expands, and more checks are drawn and the turnover of deposits is greater, as is the case in an inflationary period, a greater reserve would be required based upon the velocity of these deposits. Mr. G oldsborough. That is in the member banks? Governor M eyer. That is in the member banks. It would also, owing to the fact that larger reserves were required, result in the banks expecting larger average deposits in those accounts that turned over more rapidly, which is proper. _ Those are the principal features. The other things are that it allows the banks to count as reserves, up to a certain percentage, their cash in vault. This provision applies to all banks, but country banks are the ones that more frequently need to keep cash in their vaults because they are not so readily accessible to the reserve banks, and to that extent it would benefit the country banks. There are a few cases where perhaps it would increase the required reserves of individual banks, but as a whole the principle applied would expand the reserves in relation to the expansion of business and particularly would do so in speculative periods, like 1928 and 1929. It would also make call loans made by others than banks result in STABILIZATION OF COMMODITY PRICES 525 increased reserve requirements because checks still have to be drawn to make settlements. . Our committee felt that the additional reserves required at the time when loans for account of others reached such large proportions, would have exerted a strong influence to check the inflationary and speculative movement long before the time when it came to a head. Mr. G oldsborough. That is exceedingly interesting. Will you explain? . Governor M eyer. I think it is an important factor in the whole situation, and I would be very glad to furnish this committee copies of the report which was made by the committee on reserves. We have some copies of it here with us. It is quite comprehensive and I think it is important for this committee that the question of bank reserves should be thoroughly understood. Mr. G oldsborough. What I had in mind right at that point was just how the expansion of the reserves would restrain loans for ac count of others? Governor M eyer. What I intended to say was that even loans for account of others, which, of course, would not be reflected in deposits, therefore not under present law in additional reserves, would still be reflected in the velocity of the turnover which under the proposed splan would require an increase in the reserve. The studies of the committee on the velocity of the turnover in relation to loans for account of others indicate that a very substantial increase in the reserves would have been made necessary, entirely apart from increased deposits, because the requirement would be 5 per cent on the deposit with the balance related to the turnover. That turnover is there whether the loans are made for account of banks or for account of others. Now, on the .broader subject, it is true, of course, that the volume of money and credit in circulation is an important factor in the price level, but some of the other things that seem to me to be vital in con nection with a study of the problem are conditions which I believe it is difficult for the Federal Reserve Board, or any other human agency that exists or that could be called into existence, to control. If we look back at the history of the last 10 or 12 years with the abnormal conditions at home and abroad in production and con sumption, at the currency standards in various countries, at the polit ical as well as the financial relations within and between nations, we can see factors which it seems to me, while subject to influence, nevertheless can not be definitely controlled by any one country or by any one group of men or any institution in any one country. I am one of those who agrees that the United States, with its large pop ulation, with its great productive and consuming capacity,&is the greatest single economic factor in the economic world. There are nevertheless many others, and the changing conditions in many of our relations, both national and international, are striking, whether we analyze them by a chronological process or whether we analyze them in view of the fluctuation of price, or of the volume of business or of international financial movements. Everywhere we have difficulties to meet and adjustments to make, dependent on the behav ior of human beings in large groups; and if we go back to the 1921 situation for a moment, where we had what looked at that time like a most acute depression we find that we came out of that depression STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES through a series of constructive developments in world relations, particularly with respect to our own country. We came out of the war and the temporary postwar inflation, first and foremost, as the one country where the world felt that its capital invested or its money deposited was safer than in any other country. That led to a tremendous movement of liquid capital and invest ment money toward the United States, which resulted in a tremendous amount of gold being imported into the country, representing foreign bank balances and individual deposits and investments. That hap pened to combine with rather extraordinarily favorable conditions at home from the point of view of the possibility of money affecting industry, and the particular feature to which I want to call your attention in that connection is expressed in this diagram. This is a graphic representation of the per capita value of building permits of 50 cities. From 1913 when business was slow there accumulated during the war period of 1917-18 until 1922 a de ficiency in the construction of housing and other plants such as office buildings, which left a very large construction program nec essary and sound. As soon as the money market began to ease after the 1919-1921 tight-money period, money began to flow into residential building—both apartments and private dwellings—and into business office construction all over the country. I am sure from your study of economics that you know that there is no single activity which produces a greater employment of labor and a greater purchase of material than the building industry. It employs labor at good wages—gives it buying power. It puts traffic on the rail roads and expands the employment of labor and material there, and finds its way more thoroughly into the general volume of business activity, I think from my observation over 35 years, than any other one activity. . When this activity began, we began to have an improvement in our general level of prosperity, because like many other good things, it began on a sound basis to fill a legitimate need. Population had in creased and housing and business plant had not. Therefore, a need existed. The business began by filling a legitimate need, with the demand large and the profits substantial, but it developed more and more, and cumulatively on a geometric ratio, into a tremendous specu lative activity. In this period a very important financial development occurred which was the means by which the construction activity passed from the legitimate stage into the speculative stage and to some extent, the dangerous stage. That was the development of a new channel to large amounts of capital through the real-estate bond market. Realestate bonds had been known previously on a small scale, locally. But in this period of rapid development and profitable activity there was found a way to large amounts of the savings of the country, through the real-estate bond market, on a scale which had never ex isted before. . That led to twTo things: To some extent, to speculative building wrhere the business was carried on for the profit of the people who were doing it rather than to meet a legitimate need; and to overbuilding in certain localities. * Now, it is generally assumed I think, from the present condition of the real-estate and construction industries that there is no building need to be filled at present. There is, but with the breakdown due to over-speculative building in certain areas in the recent past and the consequent injury to banking, the credit of the construction in dustry is greatly impaired. So that to-day, when we find that we have the lowest building volume that we have ever seen in peace times we also find, I think, one of the most significant factors in the present depression and deflation of price levels. These things I mention because I think they are so large in their importance that they balk us in achieving results which, under more nor mal conditions, might be possible. I had a feeling last year, when an easy money market prevailed for several months, that there might be an opportunity for stimulating a little greater activity in housing development in localities where there was a need for housing. In some places there might be more activity even now, if money were available in the mortgage market on an adequate scale. As you know, cotton or wheat have a world market, and if there is surplus anywhere there is a surplus everywhere; but housing is different, and even last year there was considerable housing construc tion done in suburbs of large cities where new highways and automo biles and buses are taking people out of the crowded sections into the suburbs. That is a possibility that I think will be developed in the future, and I think that there is a long time trend in that direction wdiere you will see results when conditions are a little more stabilized. But I also think that the recent overexpansion in building is one of the major factors in the present economic depression. Abroad last year we saw a major financial crisis in two of the four great economic powers of the world. The German situation first came to a critical climax, following difficulties in the Balkan States and in Austria and Hungary. At the end of a long period of reparations payments and heavy borrowings, the German situation came to a standstill, resulting in the so-called standstill agreement. I know it might be argued that if the price level had been maintained perhaps that would not have happened, but I doubt very much whether the maintenance of any price level could have prevented what happened in Germany where there was borrowing on short-time obligations to pay debts which could not be liquidated in any short period of time. The English situation followed not long afterwards, and if you analyze that situation you wall find that the English had large amounts of foreign deposits payable on demand, and that they had been making large amounts of loans abroad on less liquid and longer terms, so that when the strain was put upon them through with drawal of their short-time obligations they were unable in the cir cumstances to continue to meet their payments on a gold basis. There has always been a difference of opinion with regard to the English situation. The pound had been maintained close to the gold basis during the war through artificial methods, largely by borrowing in this country and the sale of investments. In February, 1920, I remember that the pound got down to $3.18 at the low point. That resulted in wage increases in England which could not be sustained, I think, after the English had restabilized at the old gold basis. They were unable to modify the wage scale and they became unable to compete with other countries where labor was cheaper, or where plants were more efficient. The result was that the whole economic basis on which pre-war England had been developed was undermined in an important respect. 526 119391—32----- 2 527 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES Developments during the war also changed the world market situation. I recently looked up what happened in the textile industry in the Far East during the years of the war and immediately after wards. Spindles in India and Japan and China grew from 10,415,000, in 1915, to 18,161,000, in 1922, and looms in about the same pro portion. In other words, in the war period, when England’s capacity for export production was interrupted, other countries which pre viously had depended on England or other European countries for supplies were forced to build up a production which continued to exist after the war. As a result Lancashire has been enormously handicapped by these developments in other countries to meet the demands which formerly had been supplied by England. England’s banking power, which was based on the fact that the pound was the almost universal medium of exchange in trade relations with foreign countries in pre-war da37s, became less dominant after the war. Less banking went to England and more came to this and other countries. The American interest in foreign trade went up by large amounts. Substantially, in that period when all Europe was engaged in war, America was called upon to take the place of many countries which were put out of the business of supplying industrial markets, and these figures indicate some of the fundamental changes that oc curred in world economic relations which can not be ignored when you approach the problem of how to achieve stability. I will give vou the figures: From 1913 to 1929, the share of the American market in goods imported into South America grew in Argentina from 15 per cent of the total to 26 per cent. In Brazil, from 16 per cent to 30 per cent; in Chile from 17 per cent to 32 per cent; in Columbia from 27 per cent to 46 per cent; in Peru from 29 to 42 per cent; and in Venezuela, from 39 to 55 per cent. In Asia, Africa, and the Oceanic Islands, our share in goods imported into British India grew from 3 per cent to 7 per cent; into China, from 6 per cent to 18 per cent; into Japan, from 17 per cent to 30 per cent; into Australia, from 14 per cent to 25 per cent; into New Zealand from 10 per cent to 19 per cent; into South Africa, from 10 to 19 per cent. That means that the United States developed the capacity to supply the needs of a market which was temporarily deprived of its normal sources of supplies, and after that productive capacity had been duplicated in the United States it came into competition with the other productive capacities. Certainly maladjustments in busi ness conditions and competitive conditions and price levels must flow from such a major development as that. Let me just say that, in the light of these major difficulties in the European economic structure, which were inherent in the situation as a result of the war, we have had to struggle in the world with maladjustments proceeding from the passions of war which did not end with the so-called peace; and national animosities as well as inter national economic and financial instability have been vital factors in our home situation. I think th at it was the large construction needed in the United States, which was in good condition, th at enabled us, in spite of the disturbed conditions of the world to develop w hat appeared to be an independent prosperity which we were able to maintain for a period of years. Total building contracts rose from $2,756,000,000 in 1921 to $6,381,000,000 in 1926, went down to $3,093,000,000 in 1931, and are on a still lower level at present. With the revival in building and the resultant activity that flowed into all the channels of trade, the purchasing power of the United States developed in a large way. But at the same time, with the tremendous expansion in the volume of industry, American industry, with more highly developed mech anization and larger production units, was able to make goods at low prices and to invade foreign industrial markets with manufactured goods, so that for a while it looked as though something impossible was going on and could go on. It went on longer than seemed pos sible. What I mean is that we were a large creditor annually in the world’s balance of trade through exports of raw materials and manufactured goods, and at the same time we were collecting interest on debts and investments on a large scale. It is interesting at this point to call to your attention that, in the period from 1922 up to the present moment there has been no great expansion of exports of crude materials, including raw materials and foodstuffs. From $1,447,000,000 in 1922, the export of crude mate rials reached a peak in 1925 of $1,740,000,000, and then declined. Exports of manufactured goods rose from $2,318,000,000 in 1922 to $3,745,000,000 in 1929. I think that that is a measure of the ability of the American manufacturer to sell in world markets at a competitive price, which is interesting and important; but, at the same time, it seems to me to be extremely difficult for foreign countries to buy raw materials to compete with an industrial country which can expand its market for manufactured goods on a competitive price level not withstanding high labor costs. That is wliat the United States achieved for a certain period and to a certain extent for the first time in the world’s economic history. 528 529 Mr. G oldsborough.You are not making a very good Republican high tariffspeech thismorning. Governor M eyer. Mr. Chairman, I am not making any tariff speech. Mr. Strong. I might interject that the Democrats made a stronger tariff argument when they brought in their bill and did not change the tariff rates. Governor M eyer. I believe in the tariff for protection of American industry and agriculture. I think it is more important to protect the domestic market than it is to invade foreign markets; but what I want to say is that, during this extraordinary period, we appeared to be able to do both. And it is not possible to do both. I think the future may show that the United States can not continue to operate on the basis of exporting raw materials and manufactured goods at the same time, in the volume that prevailed in that period. Mr. G oldsborough.All political economy teaches that, does it not? # Governor M eyer. Yes. But it went on for so long it appeared to be possible. _ # # Mr. G oldsborough.That is the way the world over, is it not? Governor M eyer. T o some extent. Of course, there were so many apparently constructive developments in this period from 1922 to 1929 that the world was lulled into a sense of security. There were periods of acute and critical difficulties like the invasion of the Ruhr in 1923, and the debacle of the mark; there was the degeneration of the 530 STABILIZATION OF COMMODITY PRICES franc and its final stabilization; but, in spite of the several critical periods that menaced the last decade, there was a gradual improve ment in European international relations due to the stabilization of of currency, which was helped enormously by the loans wTe made. There appeared to be a prospect of being able to go on and continue with a condition in the field of international finance that now is obviously impossible; there is, for example, no possibility, in my opinion, of Germany paying continuously for a long period of years the great annual sums contemplated in the Young plan in 1930. But the improved tendency and the satisfied feeling at times that we were on a sound basis gave confidence to people everywhere that a condition which was fundamentally unsound in major respects could be con tinued. I particularly feel that such matters as this great invasion of the world’s industrial markets by our manufacturing industries are im portant to consider in connection with stabilization, because for such a long period it looked as though something impossible was possible. We all criticize the other fellow, but we were all subject to the same delusions and mistakes in those periods, because they were world wide. It is well to look backward with a broad point of view. Speculation in stocks of course was reprehensible. Foreign loans were made on a scale that should never have been made.. Realestate was speculative to a degree. There were other speculative activities of great proportions and great unsoundness, and inter national relations were just as far from sound as many of the other activities of human beings. I am just mentioning, gentlemen, a few things that seem to me to be important in the picture. If it were possible to take your resolu tion and put it into effect and accomplish the result you have in mind—I would like to say absolutely this is the thing for you to do and I will do my best to help to carry out every purpose, or if I can not somebody else should be put in my place who can. But this bill contemplates, it seems to me, that a small group of men will understand things in the future that men nowhere understood within the last 10 years. I felt in 1928 that the indications were that the expansion of credit had gone to a dangerous extent. In talking it over I found that a lot of people did not agree with me. Some of them were very wise, too. But they said business is good and we can’t stop good business. In a time like this, of acute depression in prices, there is not a man who has any decency who would not want to see the price level rise if !a sound method were available to raise it from the present level. In times of good business and overexpansion, let me tell you it is very hard to get people to agree that things are overexpanded, and it is often hard for men, even if they feel it, to have the courage to say that it is the time to put on the brakes. Mr. Strong. That is the reason we want the law that we are proposing to pass. Governor M eyer. You can not accomplish it by law because it is a matter of judgment. Lou can not supply judgment by law. Mr. Strong. If you adopt a measure that indicates what should be done? Governor M eyer. I do not think that there is now or ever has been any failure on the part of the people in positions of responsibility to endeavor to avoid unsound inflation. STABILIZATION OF COMMODITY PRICES 531 I just want to try to give you a little picture of the problem we have. Take the problem of cotton which is one of the world’s great commodities. It is more than just a matter of so many million bales of cotton at so much a pound. I have always considered that cotton is one of the great key commodities not only of this country but of the world. In 1921 we had a large surplus of cotton. We had bad international currency conditions. The export trade went down and the price of cotton dropped to 10 cents. In the War Finance Cor poration, if you will remember, we negotiated some large loans to cooperatives and exporters and cotton started up quite promptly. But let us take a few individual commodities, because your price level, is, after all, a total of individual commodities. This very last year, the present cotton year, in spite of a reduction of acreage and a sub stantial reduction in the use of fertilizer, the yield per acre, due to climatic conditions, or Providence if you like, and absence of boll weevil and frost, was almost 200 pounds, compared with 150 pounds the year before, and was the highest yield since 1914, which was before the boll weevil swept over the Cotton Belt. A rise of 50 pounds per acre is a 33 per cent factor in the output of cotton. If the cotton yield last year had been what it was the year before, instead of nearly 200 pounds per acre, you would have had 12,750,000 bales of cotton instead of 17,000,000 bales, and you would have had an entirely different price level for cotton in the absence of 4,250,000 bales. Cotton perhaps would have stayed around the 10-cent level if it had not been for the abnormal yields last year. If you take a commodity like cotton, it is not only of importance in terms of so many million bales, but it is a vital factor in 13 States. It affects the buying power of the people of those States, and it is a vital factor to the industries of the North which sell to the South, and I fail to see how it is possible to avoid price level factors of major importance entering into the situation where you have such violent fluctuations in world production. Now, let us take the 1921 yield per acre of 125 pounds, and the last year’s yield of 200 pounds. Let us say it is produced on 40,000,000 acres, using round figures. On the same acreage, the difference be tween the 1921 yield and the 1931 yield would be 6,000,000 bales. We have another vital agricultural industry, and that is the beef cattle industry. We had a good deal to do with that in the War Finance Corporation. We loaned about $90,000,000 on cattle and sheep. During the war the sheep population had gone down 25 per cent and the cattle population had gone up 25 per cent. The result was that when we came into a stabilized period of normal conditions the beef cattle industry was reduced through attrition, a long period of droughts and low production, and so forth, till the beef cattle population which in 1921 was 45,000,000 dropped to 35,000,000; it may be a little higher than that at this time. The sheep population which had gone down to about 36,000,000 head in the war period has gone up as high as 54,000,000. But the beef cattle industry, I would say, is in a sound statistical position, and as soon as a turn comes in the general situation I look for an important revival and improvement. I think it is w'orth while to note perhaps for the record this chart which shows the awarding of building contracts and how it developed in 1921 and 1922 from small proportions to this large expanded area of large proportions when it was being overdone. STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES Mr. G oldsborough. Without objection, please insert that at this point. (There was no objection. The chart referred to is as follows:) As you know, M r. Chairman, I have been in the Federal Reserve System only a year and a half. N aturally I was an interested observer from the outside prior to that; but the last year and a half probably has been the most difficult period from a banking point of view certainly in the history of the system and perhaps in the history of the country; although in the past there have been other difficult periods. B ut again, out of this experience I feel, as I felt after the 1921-22 experience and study, th at a sound banking system is an essential precedent to any attem pt to moderate these peaks and depressions, whether you pass resolutions or not, or whether the board or the Federal reserve banks be rightminded in their purpose or intelligent in their efforts. The committee here supported me in 1921 when I recommended the revival of the War Finance Corpora tion as a method of adjustm ent in our economic machinery, and w~e made a large number of loans principally to nonmember country banks, although there were some member banks; and I think the corporation wras very helpful in easing the situation and in relaxing the forced contraction th at wTas going on—a contraction forced by fear and other things. The work of the corporation, combined with the gold imports wdiich followed about th at time, and with the need for construction which had developed, enabled us to achieve a quick come-back. I came here some weeks ago and asked you to authorize, and you did, a reconstruction finance agency, and amendments to the Federal reserve act, and I want to say at this time that I think the results have been good—not as immediate, perhaps, as might be hoped by some, but you can not just pull a financial lever, whether it be in the Federal reserve system to ease credit or increase the volume of Federal reserve credit, or loans in the Reconstruction Finance Corporation to make loans to country banks, which feel easier with the corporation than they felt with their correspondents, and immediately engender confidence and a more open mind to do business. There is always a lag, and it takes time for money to produce its effects on business. I used to study that particular aspect quite closely many years ago, and I found that when money became easy and available on mortgages it would ordinarily reflect itself in construction activities about six months later. You could see that under normal conditions when money became tight and unavailable in the mortgage market, in the days before the real-estate bond market, it wrould show up about six months later in business. There is a lag between the entry of money into circulation in the banks and its effectiveness in stimulating busi ness in wrays that are obvious to ovservers of business. The first thing to do is to exert every effort to arrest adverse ten dencies, and if you can hold the line, you can turn it eventually. There is a time element and there is a lag, and I am hopeful that we are now at the point where we are going to be able to hold the line. That does not mean that banks will not close, because occasionally there will be banks that will close because of events that are in the past, but I think the banks that have reopened—opened within the past six weeks—have had larger aggregate resources than the banks that closed in that period. Mr. Strong. That is, it takes a little more time from the time the corn is put into the hopper till the time it begins to come out? Governor M eyer. I think that is a pretty good way to put it. I was somewhat surprised and pleased over the speed with which we 532 >K5OFDOHARS BUILDING CONTRACTS AWARDED 600 Total 7 -- 6 — 500 -- q \\ /1 /\« I 1 % \ I I * /y tV\\ y\ J ' ^ V, ^ ,S~jIf / V ' ^ 7*. AI10W>er ^ A A / r /A/ a. e sitential fJ V_R A— ** i i Y __ y 1925 1926 1927 1928 1929 1930 1931 37£astemStates-3 month movingaverage,adjos/edforseasonalvariation The chart on the volume of manufacturing production shows some interesting figures. I t shows how closely some of the manufacturing curves follow a normal trend and wdiere the troubles of the inflation and deflation periods manifest themselves in the volume of manu- VOLUMEOF MANUFACTURINGPRODUCTION DAILY AVERAGE AGGREGATES IN F. R. BOARD INDEX. ADJUSTED TOR SEASONALVARIATION facturing production; and it is in these construction industries and in the industries wdiose buying pow'er is tied to the construction in dustry that you see the greatest expansion in good times and the greatest contraction in bad times. In part, to a large extent, con traction in these industries is what causes bad times. 533 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES were able to organize the Reconstruction Finance Corporation. We were able to organize it and put it into operation rapidly, so that loans have been made up to date to 1,392 banks. Mr. G oldsborough. Most of them are in small towns, are they not? i • -i i Governor M eyer. Ninety-two per cent of the banks to which loans have been authorized are located in towns of less than 100,000 people and 76 per cent in towns of less than 10,000 people. There are some loans all over the country in virtually every State, I think. Every day a considerable number of small banks receive loans and more of them are applying for money to be used not only to pay off indebtedness that presses on them but also to meet their other requirements. I do not like to prophesy and I do not like to promise, but I am hopeful, with all the various things that are being done, and while we are not going to be able to make good theirrecoverabie losses that have already occurred, or which may develop from time to time in the future, that with your help we "have made a contribution of real importance. Governor Harrison told you yesterday, as you probably already knew, that the Federal reserve system has been expanding credit in the banks through purchases of United States Government securities. There has been about $250,000,000 of hoarded currency returned as nearly as we can make out up to date, allowing for seasonal adjust ments. That has been fairly steady except for one period where there was a little flare during the period around April 1 on account of tax assessments. It looked as though currency was not returning but that apparently was in connection with tax matters; there were some withdrawals all over the country in almost every district. _The han dling of our volume of currency has got to be considered with respect not only to our domestic conditions but also with respect to inter national conditions as betw'een our country and our money market, our investment market, our exchange market, and the rest of the world, and in relation to what is going on between other countries. Sometimes it might seem logical to pursue a certain policy, if we could consider it from a purely national point of view, but we might be hampered in achieving success, if such a policy were carried out, by conditions with which w'e have very little to do and over which wTe have no control. Mr. G oldsborough. Right at this point, I hope that you and other members of the Federal reserve system will understand that this proposed legislation is not intended as a personal criticism. I think I can add here that when the Reconstruction Finance Corpora tion bill was being discussed and I was on the floor, I was aksed the direct question whether I believed the act would be administered in the public interest. My answer was that I absolutely believed it would be administered in a patriotic American way and that one of my reasons for saying so was because of your connection with-it. Governor M eyer. I appreciate that. Mr. G oldsborough. That is a matter of record. You understand that is how we feel. Have you finished your statement? Governor M eyer. I w^ould like to finish by saying that I am in hearty sympathy with the general results that you have in mind, Mr. Chairman and members of the committee and that I find that other members of the Federal Reserve Board and the governors of the Federal reserve banks, with whom we had a meeting this week. are all earnestly disposed to search out how each and every one can contribute to the improvement of the situation. You must remember that, when you talk of this operation as sufficient to control a price level at any particular point, you are thinking in terms of a price level which was established by the great est building activity- in the history of the country. I may be that it is the right price level, but it was a price level established with a very extraordinary background of building activity. The justice of it or the ability to restore it I am not discussing here because frankly I do not know the future of price levels. Mr. G oldsborough. There is not any specific price level men- • tioned in the particular bill under discussion? Governor M eyer. No, not in the bill; but I have seen the 1926 price level mentioned as the ideal, and it may be that it is. It may be the price level to which the world will return, and it may not. I would not profess to know. But if you get the ideal of a fixed price level which you can control by adjusting the volume of money up ward or downward as prices move up or down on the average "from that price level, you are immediately confronted with the fact we saw so clearly in the war, that to fix a price, whether you do it directly or indirectly, is very difficult unless you control production. Mr. G oldsborough. Well, we can not do that. Governor M eyer. N o ; but it is necessary before you can level prices. Mr. G oldsborough. There would be 784 commodities affected? Governor M eyer. Yes. In times like these we all say we want stability, which means return to normal conditions; and "that is the desire of everybody. There is no creditor class and no debtor class that has not got the same interest, because the creditor class has losses which far outrun any possible gain in buying power arising out of conditions of this kind. There is nobody that stands to profit or benefit from this situation; and in my opinion, therefore, the desire for a stabilized condition, by which we mean a return to more normal prices, is the desire of everyone. But to assume from that that it is a permanent, universal animating motive of human beings in the long run I think is dangerous, because what does every manufacturer in this country do to his price? He tries to make lower costs and lower prices. Every farmer is trying to produce his products morecheaply in order to make more money, but actually if enough do it more cheaply it brings the price down. What did the United States do to the European grain producer when we opened up the fertile fields of the Mississippi Valley? Were we for stabilization? We were for producing grain cheaper and selling it cheaper. W hat happened when the Canadian wheat fields were opened? We were interested then in stabilization and they were interested in invading what had always been our market. Now, there was Russia which by revolution was taken out of the economic circle of nations. She always had been a large producer of wheat in pre-war days—a large exporter. Canada came in and supplied that demand when Russia was not able to supply it, and one of the things to-day that the world price of wheat is "suffering from is the reentry of Russia into the world market. Mr. G oldsborough. Y ou are segregating the items, instead of developing in your own mind the picture of the price level? 534 119391—32----- 3 535 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES Governor M eyer. Well, I have them both in mind, Mr. Chairman, but I am choosing wheat and cotton and all those things, because they are big factors, after all. Pou can take from the 784 commodi ties, as provided by the bill, a large number of commodities, and they do not have the weight that a few of them have; and when you take cotton and grain and wheat, you have the biggest factor in world economics to-day. . . Mr. G o l d s b o r o u g h . Yes; and they are the very heaviest weighted in the index numbers, too. Now, Mr. Busby, have you any questions? Mr. B usby. I want to ask some rather general questions as to the testimony relating to these specific commodities to which you have addressed yourself. I would like to ask to what you regard our currency related, or on what value do you base our currency? Is it your view of the philosophy of our exchange system, that our currency should be based on credit, or should it be based on wealth, or should it be based on gold? If none of these things, what is your notion of the tangible value expressed by the currency used for exchange purposes? Governor M eyer. The law provides the method of issuing currency and----Mr. B usby. I understand that, but that does not answer my question. I am talking about the philosophy back of the situation, disregarding the statute which fixes the standard of the dollar. I might make myself plain by calling your attention to the fact that, in all of your discussions about the things which have'had to do with our domestic economical welfare, you have coupled your premise to Europe and foreign conditions. Governor M eyer. I did not intend to do that. I did not think I was doing that. I am giving it some weight, because it affects our domestic situation. . Mr. B usby. T o use one of your expressions, that the domestic welfare is tied with the international credit welfare----Governor M eyer. No; I did not say that. Mr. B usby. Y ou did not say that? I do not mean to say that you said that, but do you regard domestic welfare as being tied and inter mingled with international credit and the welfare of other nations, • as it&relates to their dealing in credit in this country? Governor M eyer. I do, in some areas and markets. If you take, for instance, cotton, in which your State is largely interested, roughly 50 per cent is for export, and the condition of the purchasing nations— their buying power and currency conditions—are economic factors in the market for cotton. Mr. B usby. I think we had better go back to the first question: What should determine the value of credit as it is available through the banking circles of this country? Should it be the wealth backing up the things that credit represents? Should it be some ephermeal notion that we call ‘‘confidence” in a vague sort of way? On what would you base the development of credit that is used for normal purposes, or in bringing it to the use of business and commerce in this country, not in foreign countries? Governor M eyer. The Federal reserve system is based on the theory of commercial transactions as the basis of credit, of course. Mr. B usby. What value do you regard money as being based on— on gold that is represented by the statutory requirements or on com modities that are represented in possibly 60 per cent of your Federal reserve note issues? And if not on those, on what would we base the value of money? Governor M eyer. Money has been the standard of value and the medium of exchange, both, of course, as you know as well as I; but when it comes to the exchange of goods and commodities you get back to the fact that really the bank check is the medium of exchange for the greater part of business; and for that reason I go back to what I said in the beginning, that a sound banking system, with the check, which is the real money of business, as currency, is the vital factor in the purposes I think the committee has in mind. Mr. B usby. There are two objects, as I understand it, that we have in mind at the present time: One object is to revive values in commodities, to make them come back somewhat in relation to our outstanding debts, so that we can sell things that we work and produce, and discharge the obligations we have assumed, and which we could at that time reasonably believe were in proper ratio to the commodity values as they stood then. Now, that is the first idea. . You have suggested 1926 as having been mentioned by some one as being the fair level to which we should return. I do not know what you say about it being the fair level. _ 1 Governor M eyer. I would not say anything about it, because I do not know. Mr. B usby. Would you mention any other point? Governor M eyer. N o, I would not know how. I would like to bring about an improvement in the present levels. Mr. B usby. Plow far would you carry that improvement; how far would you continue the work to carry that improvement? Governor M eyer. I ttiink it would depend a great deal on con ditions. That gets down to another thing that is of vital importance, and when you discuss these very fundamental questions, you hear a great deal about the quantity of money, or the quantity of Federal reserve credit. The quantitative theory is, of course, the basis of most of our discussions and the discussions of people who are interested in restoring things by that machinery, whereas I feel that more thought has to be given to the quality of the credit. If the amount of building that had been done in the United States had been done on a sound credit basis, instead of an unsound credit basis, the picture of the financial condition of the building industry and the present depres sion, I believe, would have an entirely different aspect. Now, it is not only the quantity that has to be thought of, it is the quality, and it is a warning to the banking authorities when they see obviously dangerous speculative activities in larger areas. Would not you, for instance, looking backward, feel that the Florida land speculation was, in itself, a warning of something wrong in the credit situation of the country? _ Mr. B usby. Looking forward and backward both, I feel that it was. I t never cost me even a 2-cent postage stamp. I want to tell you why, and give you my idea, and then I can question you. Governor M eyer . I would be glad to hear it. Mr. B usby. These gentlemen who happen to be in the Treasury— and I am not speaking of you, but of the gentlemen who deal with the financing in a broad sort of way, relate your testimony to credit, 536 537 STABILIZATION OF COMMODITY PRICES 538 almost wholly. Credits are a substantial thing, in my mind, only as related to the true values, and that is one trouble with the Florida boom; and we have no system that is accepted by responsible persons like yourself, and the others whose business it is to deal with this particular thing, of determining the value of these commodities or credits in relation to them; but the system has a drifting attitude, without an objective to be attained, or likely to be reached, or any purpose in maintaining the situation, unless, forsooth, some peculiar notion should get into the majority of the managers that that situation was right. Now, money and currency and credit can be related properly only to value, is my notion; and we have the Bureau of Labor Statistics which are accepted in this country, and throughout the world, as being wholly and fairly determinative of commodity values. It is my idea that our currency and our credit and the quality of our currency and our credit, since you have used the term, should be related to those true commodity values. Certainly they are determined by the utility and the law of supply and demand, which you have so forcibly pointed out; but those values are something tangible and definite; and currency and credit and faith in business, to my mind, could measure itself, if it knew by what measure it could determine its worth. I can not see, in the attitude of you bankers who come here, any disposition to direct the ship of finance to any point, any definite point. You may tell us what way you think you ought to go for a time, but we do not know how long you are going to go that way. If we give you the center of gravity of values, which is the wholesale commodity index price, any farmer in the country could calculate his propositions and his contracts in relation to that, and if we tell you to take that center of gravity of prices to a certain point, if it be the 1926 price, your only objection is that we might not be able to do it with the machinery that we have; and if we did it, we might not be able to hold it with the machinery that we have; and every time the subject is mentioned, we are thrown into the interlacing situation with the conditions of other countries, and an examination of our connection with the credits of other countries. Some of the best authorities that we have, hold that we have, per haps, at least $28,500,000,000 investment in credit, while foreign countries have invested $7,500,000,000 in this country, leaving us a net outlay, war debts and all, of about $21,500,000,000, and hold that the defaulted bonds and spurious issues of their countries—they got credit and property out of this country amounting to about $4,000,000,000, already defaulted, and that there is $11,000,000,000 of war debts, making a total of about $15,000,000,000 marked off, and that is the argument, as I understand it, of most of those who are in high financial positions, leaving a net amount, possibly, of $6,000,000,000 or $7,000,000,000 of all credits we have extended in all of our experience with foreign countries, that we can hope to collect. There is always the same picture of the bankers connecting us with the welfare of nations in the other parts of the world. Governor M eyer. I was discussing that in terms of the buying power for our exports, and I was not discussing it with the view to any interest we would have in the foreign countries, except so far as the conditions in those countries, politically or financially, would 539 STABILIZATION OF COMMODITY PRICES affect our export commodities; and you know it is important not only from the point of view of the quantity of exports, but also of the timing. I have occasionally called the attention of the committee here, in years gone by, to the fact that when conditions are normal, exchange is stabilized on some basis or other and that the cotton crop used to be sold, to the extent of 80 per cent of the annual exports, in the months of September to January. At the present I would say that probably the foreigners buying cotton would buy only about onetwelfth monthly. That leaves a large carrying problem for the producers and the banks that finance the producers. That is why we think that the change in the time element is one of the results of disturbed foreign conditions, and that is why there is a larger visible supply, really greater than it ought to be, because of the disturbed condition of the whole scheme of distribution, and the change in the time element. We think the timing apparatus on an automobile is very important, to get our spark plugs coming in at the right time. If they come in at the wrong time, you have a great deal of trouble. It is just as bad for the cotton market, when its timing gets out of order, because it affects the price and slows up the market. People do not think very much of the time element. Mr. B usby. That is a fine illustration, but I would not follow it to any extent, not that it is mysterious, but because it does not bear a great deal of logic, in my mind, just to speak to the point on the subject, without criticizing you. Governor M eyer . I am sure we want to be frank. I welcome criticism and new ideas, and I am anxious to learn. Mr. B usby. Now, what ideas or plans do you have for financing these foreign exports, or getting the pay back to the American exporter? Would you do it with advancing more credit, or would you get more gold from the foreign peoples, or would you exchange it for goods? These are all practical things, as we understand, but that timing business and all----Governor M eyer. I can not undertake to endeavor to solve the problems of the breadkown in international trade. Mr. B usby. Well, we can not sell commodities abroad unless they can pay for them back home, can we? Governor M eyer. The change in the time element—that compels us at home to make some readjustment in our financial machinery to carry the commodities for a longer period. If the exports of cotton were to be 6,000,000 bales in the year, it would be a very different thing if 80 per cent, or 5,000,000 bales, were exported in the first four months of the year instead of being spread evenly over the year. Mr. B usby. If they can not pay for it at any time, you can not export it. . Governor M eyer. They would pay gradually; and, of course, if they did not pay for it at any time, they could buy; that is all there is to it. # t Mr. B usby. That is most of the trouble now, instead of the time element. # Governor M eyer. It is both, because, after all, we are exporting millions of bales of cotton, and we exported in the current cotton year considerably more than we did a year ago, although conditions are worse. 540 STABILIZATION OF COMMODITY PRICES Mr. B usby. I s not it a fact that the foreign countries that have somewhat depreciated currencies, as it is rated, currency exchange, in selling commodities here, get their money back home and exchange it for considerably more money in their own money, and thereby undersell the American trader who seeks to go into his own market. Governor M eyer. Let u s . take the cotton textile industry, for instance, and let us take the processes----Mr. B usby. I know as much about cotton, of course, as anybody else, but you keep talking about it because you think I don’t know anything but cotton. # . Governor M eyer. N o, but that is one of the most important industries in this country. Mr. B usby. I might add that in 1929 the exports of cotton were $920,000,000, before we passed the last tariff act. I happen to know that, but I also know this: That the buying power is broken down abroad, notwithstanding we have given them some $15,000,000 of American credit. . . Governor M eyer. I am not favoring credit to foreigners, Mr. Busby, if that is what you have in mind. Mr. B usby. N o; but we have talked about it all of the time. Governor M eyer. N o ; we have just discussed the effect of those conditions on our trade. What does the manufacturer in England do? He buys future cotton, to be delivered in three months, or six months, and under normal conditions he transports it and manufactures it and sells it to China, or somewhere else, and gives them six months in which to pay for it. Now, that business is done on a manufacturing basis, or on a fairly competitive basis; but in the last few weeks, the pound has fluctuated from $3.25 up to $3.80, which is about 15 or 20 per cent. Well, where the manufacturers have to overcome fluc tuations of that magnitude and have no basis on which to make their calculations, because it is uncertain, it hampers business. Mr. B usby. I tried to get over this idea, that the credit set-up at the present time, being based on practically nothing but what the world has recently been pleased to call confidence, that is as unsub stantial as the fabric of dreams, just as you pointed out, and nobody knows how to make contracts----Governor M eyer. That is the trouble. M r. B usby. And if the currency and credit were based on the true values and stabilized values, commodity values, taking the quantity of commodities, like the 784 used by the Bureau of Labor Statistics— if those values remained reasonably constant and unvarying, and if that currency wras measured in relation to the values of that currency, we would not have this condition you have pointed out, and we could not have that condition that you have pointed out; but in answer to that part of your statement, I say to you that there is practically no commodity of importance in the world but what has fallen tremen dously in value, as measured bythe gold currency dollar, and it is not the fault of the commodities, and it is not the fault of the people that millions of them are w a lk in g the streets, having been sold out and separated from the last vestige of tangible property, while we talk about theories and the fine-spun notions of what somebody might do that would upset the apple cart; while we find ourselves saying, if you will, the private and public debt and measuring them by the present national wealth, which is in a condition of bankruptcy, and we are STABILIZATION OF COMMODITY PRICES 541 still spinning fine theories about credits and the lack of confidence and all of those things. We have the largest part of the gold in the world, and it is the measure of values at the present time, under our standard set up by statute. It has been suggested that no minimum gold requirement should be set up in the statutes of the countries of the world that are on the gold basis, and----Governor M eyer. N o minimum what? Mr. B usby. Requirement. Governor M eyer. You mean as reserves? Mr. B usby. As reserves. What would you have to say on that? Governor M eyer. Well, the Federal Reserve Board, under the present law, can suspend the reserve requirement. Mr. B usby. It has not done it, though. Governor M eyer. There has been no need to do it. Mr. B usby. D o you believe that the United States and France can continue to gather in the monetary gold supply of the world and ever have anything like a uniform gold currency range throughout the world? Governor M eyer. I t is only a few years ago that the French had a minimum amount of gold, and they would not have had it if the people had been able to get it out; and now, by a change of circum stances, the gold has moved to France. .. . Mr. B usby. Most of that change was brought about by stabilizing her franc at 3.9175 cents per franc, instead of 19.3 cents, and she was able to cancel 80 per cent of her debts, and that is the trouble in this country to-day. If we could cancel 80 per cent of our debts, private and public, we would have no trouble in getting along, but the debts are what is the burden on the people of the country, and the fixed charges. Governor M eyer. Yes; there is no doubt about that. Mr. B usby. Every country in the world except the United States has so manipulated its currency within the last 15 years as to cancel all the way from a total of its international debts, such as Russia did up to a large portion, such as has been done by England in going off the gold standard recently. Is not that a fact? Governor M eyer . Germany is struggling to maintain her currency at the present time. . Mr. B usby. She has already, at one time, canceled her domestic and internal debts. Governor M eyer. Yes; but they are making, as the result of that experience, which you regard as a happy experience----Mr. B usby. N o ; I do not. I beg your pardon. Go's ernor M eyer. Winch their people regarded as the most wretched experience in the history of the world—they are making a tremendous struggle now to maintain their currency, and avoid another experience of a kind which they abhor. Mr. B usby. I do not regard that as a happy experience, and I have spoken in the House many times and have never intimated any such thing. . Governor M eyer. I misunderstood, then. Mr. B usby. I have not come to that conclusion, nor have I sug gested anything of the kind; but I am speaking now dealing with the subject of a fair deal to the American debtor in the scheme of things under which we try to carry on business and to live and get a liveli STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES hood, and not be forced out into the cold, homeless, and without the hope of obtaining employment under our system. That is why I allude to those things. Governor M eyer. I think we are all symphathetic to that point of view. I have just answered that Germany abhorred the thought of the degeneration of her currency. Mr. B usby. I should say so. They were all wiped out. Mr. G oldsborough. Governor Meyer, as far as I know, the feeling of the subcommittee is that, as nearly as they have been able to ascer tain up to this time, the 1926 level represents a fair situation as to debtor and creditor. There has certainly been no disposition on the part of any member of the subcommittee, or Mr. Busby, to create a situation that would be unfair to the creditor. Now, if 1926 is not right, we would like to have all the assistance we can get to fix the point which is fair and would allow people to get from under their burdens, and to resume their normal positions as economic units. That is our position. Governor M eyer. That is a fair enough position, Mr. Chairman. Mr. G oldsborough. Governor Meyer, we would like to adjourn until 2 o’clock, and we would like to hear you again, as there are a few questions we would like to ask you. Governor M eyer. I will be very glad to come back. (Thereupon a recess was taken in the hearing until 2 o’clock p. m. of the same day.) AFTERNOON SESSION big cotton-producing States. If you will go back 30 or 40 years you will find that the proportion of cotton grown in the West has increased enormously and has taken away the market for a lot of the cotton grown in the Carolinas and Georgia. That does not alter the fact that relative stability is desirable, and limits to the area of fluctuation are desirable. Therefore, I do not think that you and I differ, and I only make the distinction because I do not believe the human race wants a static position, and I do not think that any human being----Mr. B usby. D o you think it wants a recurring condition like the one we are now unhappily passing through? Governor M eyer. I certainly do not. Mr. B usby. Well, now, what does your veiy far-reaching knowledge of the handling of domestic and international credit to-day, and bank ing problems, point out to you as a way to prevent us from recurring to this condition. I think it is worthy of us making almost any sacrifice in throwing aw'ay some fetish, such as the ancient idea of banking that we are still playing to, in order to prevent this condition recurring. This is a real problem with me, and I do not believe in theories. If we can lay aside theories, we can get to something substantial. Governor M eyer. I am entirely sympathetic to your point of view. Now7, if you ask me what I consider the most important factor in achieving relative stability, which is what }rou and I both think is possible----Mr. B usby. Surely. Governor M eyer. We do not think absolute stability is possible, hut relative stability with the elimination of the inflation and specula tion that wre have discussed. I regard the reorganization of the bank ing situation as most important, in view of the concentration of reserve bank activities and----Mr. B usby. You mentioned the reorganization of the banking s3Tstem of the country as being fundamental in your idea. Governor M eyer. I think it is one of the most important factors. Mr. B usby. Are you of the opinion that the comptroller’s notions of branch banking wuthin trade areas iis the proper set-up? Governor M eyer. Would you mind letting me tell you what I think? Mr. B usby. Yes; but I do not wrant to take up too much time with that phase of it. Governor M eyer. I do not believe that you wull get the kind of banking that shows stability, relative stability, except through a unified banking system; that is, if you put increased supervision and control on national banks, organized under national charters, 3Tou may have them withdrawing from the national banking system, as the 3T frequently do, or as it is frequent^ threatened that they will do wdien legislation is passed to insure the proper banking safe guards is under consideration. You are being asked here, year after year, to modify the national banking laws, because some State legislation has been passed which enlarges the function of strictly commercial banks, and all other kinds of banks. You can not make real progress in banking uniformity under such conditions. You can have a national banking system that is truly national in effect, as. well as in name. 542 Mr. G oldsborough. Gentlemen, the subcommittee will come to order. Mr. Busby, you may proceed. Mr. B usby. Governor Meyer, as you very well know, the object of our activity is to try to discover some remedy for the present very unsatisfactory financial condition in which the people of our country find themselves, and also, if possible, to discover some fundamental method or set-up whereby we can prevent a recurrence of this very unsatisfactory condition. I am sure you are as familiar as almost anyone else with the suffer ing and distress that is in existence from one end of our land to the other. To my mind it is very clear that there is a breakdown, because of the nature of the set-up of the currency and credit system of the country; and I might add that, if we remain on the present currency and credit set-up, I see no way of preventing the thing from recurring at shorter intervals in the future as in the past to a like deplorable financial condition. It is not necessary, under our set-up, to recur to similar periods of depression as this, and I wish you would give us any light that you may have regarding the subject of securing stabilization that will prevent it. Governor M eyer. I am not, Mr. Congressman, a believer in the idea that you really want to achieve a static position, in all respects, economically speaking. No matter how much a steady condition appeals to anyone as an ideal, I think when you get down to it, any business man will try to go ahead, and want to go ahead in the world. You want your boy to go ahead. We have internal competition and instability "of economic factors between each part of the country, in a way, as well as international competition and the instability of economic factors: For instance, take Texas and Oklahoma, which are 119391—32---- -4 543 544 STABILIZATION OF COMMODITY PRICES The national banking system now comprises only a small part of the total banking resources, and is really not entitled to the name “ national banking system/’ because it is not national. Mr. B usby. Well, now, I do not care to pursue that issue any further. # # . Governor M eyer. You asked me what I think is the important thing, but when it comes to what kind of banking system you ought to have, I think you can very much better determine what the sys tem should be—whether it should be a State-wide branch banking system, or a system without any branch banks, or with regional banks, or other kinds of banks—when you have a system that permits a proper definition of the functions of commercial banks, in the first place, and adequate laws, regulations, and supervision in the second place. # . . Mr. B usby. Whatever the banking system may be, its primary function is to sell banking credits to people who want those cred its— Governor M eyer. It ought to be. Mr. B usby. In order to transact business. Governor M eyer. It ought to be. Mr. B usby. These credits ought, primarily, to be related to values, ought they not, in order to have proper security for them? Governor M eyer. Yes. Of course, as related to that----Mr. B usby. N ow, I do not know what your observation has been, but I have never seen any section of the country where banks have failed very extensively but what in that particular section values fell prior "to the time the banks started failing. Take that whole section of the Northwest from 1921 to 1929, and even Georgia, Flor ida, and South Carolina territory, after the boom, and so on. Now, I might add to that the entire country, the entire United States, where we have had in the last 10 or 11 years losses of more than 6,000 banks and where the national wealth undoubtedly has depreciated $100,000,000,000 to $150,000,000,000; and whereas in measuring values by the scheme or set-up of currency we used, the annual actual income that the people have been accustomed to receiv ing has dried up at the rate of more than $3,000,000,000 a month, or $750,000,000 a week, compared with 1928 and 1929, do you not think there is something wrong besides the bank credits? Governor M eyer. Well, you asked me what steps I would suggest that seemed important to "my mind as a way of improving the situation, and I was frank to tell you; that is all. I think if you place commercial banking under national charter and national supervision and have the functions of banking defined and restricted within proper limits, you will begin to avoid a great many of the maladjustments and difficulties due to the excessive use of credit and the subsequent reactions of disastrous character, such as those from which we are suffering. I do not mean to say the present situation is exclusively the result of any one thing, but bad banking is certainly a factor that has contributed to the situa tion and rendered much more acute a situation which probably would have reacted in a milder degree. Mr. B usby. I notice that Mr. Whitney is reported to have stated before a Senate committee investigating the New York stock market, that the securities listed on the New York Stock Exchange lost more than $6,000,000,000 in value in the last two weeks. STABILIZATION OF COMMODITY PRICES 545 Governor M eyer. You mean in price? Mr. B usby. I mean in price, yes; I do not say in value, because I want to use that in another way in a moment. Would you attri bute that to a lack of proper financing through banking credit, or through a fundamental weakness in the currency set-up, which holds and prevents an ability to contract through our banking credit and currency set-up, in order to use it? Governor M eyer. I do not know whether I would attribute it to any specific thing. I think there are probably things that were not mentioned at the hearing that might have had something to do with it. Mr. B usby. N ow, it is my opinion that the currency and banking set-up with which we have been afflicted throughout our national systems—that they will not stand great use in peace or war time, without getting out of joint and being followed by a financial crisis, such as we are now experiencing. What is your suggestion along that line? Is it your suggestion that the system is working all right if there is no special use of it out of the ordinary, but if it is used in peace or war time to any great extent, then it shows its efficiency following any extraordinary use? Governor M eyer. I am in sympathy with some of the criticism of the existing banking system. I do not think you could tell how the system woidd work, though, until you have a truly national banking system, with its functions restricted to commercial banking and activ ities of a character that properly can be added to the function of receiving deposits and making loans, for the most part for commercial purposes and business purposes, and avoid the undue use of the volume of credit for speculative purposes. Speculation goes on in business at times as much as it does in securities, or otherwise. It is very hard to draw a line of demarcation between one part of business and call it legitimate, and another part and call it speculative; because in speculative times, there is a stimulation of legitimate busi ness into speculative activity. You can not entirely separate legiti mate business and speculative business during an inflation. Mr. B usby. Well, in 1838 there began a very serious money and credit panic, and there was no war on at that time, and had not been, except the political wars such as we experience always in America. In 1860 the banking and credit structure, with the national bank set-up being tried out for the first time, caused a period of great use of banking and credit systems. Following that, we had a time similar to this. Within the 1890’s we had another period of depres sion, and nothing was said about any war. Then, in 1921, those who had no better excuse to offer said it was the result of the war, and I hear many people in this present time, 1932, saying that we are just now adjusting ourselves after the war, as the result of the destruction of property by the war. What would you have to suggest with regard to those effects, and what caused them? What I am trying to do is to get at the fundamentals that are involved in our set-up, and the manifest necessity to change from it so as to secure such light as we can in looking forward to a proper move in making that change. Governor M eyer. There are certain periods of great activity in the growth of a youthful nation. When this country was expanding to the west, new lands were being brought into cultivation, railroads were being built, construction activities were being stimulated, and 547 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES with the successful results and profitable rewards for people engaging in these enterprises, there was, of course, a tendency for speculation to develop. Mr. B usby. What do you regard----Excuse me. Go ahead. . Governor M eyer. An economically youthful country, with a rap idly growing population, is likely to have periods of extreme activity and of speculation at the end of it, and reactions and depressions after that. . I think that now we are more matured and our population is more settled and will increase less rapidly, with the restrictions on immi gration, and the reduced birth rate, I tliink that is one of the im portant fundamental factors in the situation. Mr. B usby. Will that stabilize our commodities, though? Governor M eyer. No, it will not; but I will say this, that those violent movements, which are the characteristics of rapid growth, and the interruption in that growth, on account of overdoing the rate of growth, economically, in proportion to the fundamental sta bility of the country, ought to be now more susceptible of control in the direction of relative stability. . But I think that what we have talked about as normal, in the United States in the past has been a rate of growth of population and of industrial and agricultural production—a rate of about 3 per cent per annum, compounded. Now, that is what we have called in the past normalcy in the United States. I doubt very much if that is going to be the normal measure of progress in the future, because the population is not increasing as rapidly as it did before. . Mr. B usby. I have examined, for 100 years, the question of the normalcy of 3 per cent increase in business, in the growth of popu lation, and in the gold production, and I find that each one of them is about as variable as you could imagine, and that you must take a period of 30 to 40 years in order to get anything like a substantial rule on your 3 per cent increase in commercial development. " Governor M eyer. Well, I think it is more general than you refer to. You can see an increase of about 3 per cent in the cotton pro duction of the United States up to 1914. Mr. B usby. Why do you regard it as being necessary for the United States to relate its money to the value of gold? Governor M eyer. Why do I regard it as necessary? Mr. B usby. Yes. Governor M eyer. The law states it. Mr. B usby. I am not talking about the law. We are figuring on changing the law. Governor M eyer. I see. Mr. B usby. Because the law, or something, has caused too much suffering and privation and inequality in the money, when we are supposed to have an equal chance in the game of commerce, to obtain a livelihood, and the other things necessary for us to have, if we are going to live here. Governor M eyer. Y ou want to ask me why the gold standard is the standard for the country? You know that, I am sure, fully as well as I do. Mr. B usby. I asked you this: Why do you regard it as being necessary to relate the money of our country to the value of gold, independent of the statute to which you have recurred—the commodity value of gold? _ ~ Governor M eyer. I suppose the justification for making gold the basis of the standard of value is the fact that it is one commodity which has been accepted by more people in the world as the basis or standard of value than anything else. Gold can be used anywhere in the world for the purpose of exchange. It is a standard of value more than any other commodity. . . Mr. B usby. But it happens that onty about four countries in the world to-day can claim to be on the gold standard, and you have got 45 countries in the world which, through their exchange rates, have their currency related to gold, when they have not got the gold. Governor M eyer. But you can go with an ounce of gold into any one of those 45 countries, and you can get a corresponding amount of whatever money they have in exchange for the gold; but you can not take what they have as money and come into a gold standard country and in everv case get gold for it. In other words, gold, as far as I can see, is the standard of value for the greater part of the world, even in countries where they have not the gold standard, and the reason for that is that it is apparently more suitable for the purpose of a standard of value and a medium of exchange than any other product which has been heretofore used in human experience for those purposes. . I do not think that the value of gold has been made by its use as a medium of exchange. Mr. B usby. Y ou do not? Governor M eyer. N o ; I think it is the standard of value and the medium of exchange because it is universally accepted as such, even in countries where they do not have the gold standard. Mr. B usby. The universality of it----. Governor M ey' er . I think you can go to a native in the heart of Africa and, if you have gold in the form of gold dust, can get what you want. . . . , Mr. B usby. That might be true with the existing statute but Governor M eyer. They do not know anything about the statute in the jungles of Africa. Mr. B usby. I t is my information that about $1 out of every $14 mined is used commercially, and the other $13 are taken care of by the statute, which declares that the forty-five, plus, grains of fine gold shall be the unit of value here; and because the United States and and France have maintained that kind of statute, gold is acceptable in these other places that you mentioned. Governor M eyer. I can not quite agree with that. Gold has always had a purchasing value----Mr. B usby. That is what I am talking about. Governor M eyer. Going back to Biblical days, you will find it was good then. If you were to go back to prehistoric days, and you could find out what happened then, you would probably find that it was always acceptable as having a value in a small, compressed form, and I do not----. Mr. B usby. I concede all of that; and the world has been in trouble with gold as the measure of value ever since the days you mentioned. 546 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES Do you not think that 784 commodities, associated together like the strands of a rope, when some go up and some down, and some in and some out, and yet all of them go along in a reasonably straight line, dependable year in and year out, because humanity has to acquire these commodities in utility, in order to exist, when taken together and their composite value determined in a scientific way, such as by the Bureau of Labor Statistics, would be a better value to which we should relate the currency, than one commodity, gold, simply because gold, out of habit, has been accepted throughout the world? Governor M eyer. Mr. Busby, I have this feeling about that: I think it is easy to see the evils we know, but it is difficult to see the difficulties of a different standard that we might adopt. Of course, we all know that the gold standard has weaknesses, and I believe that any standard would have weakness, because----Mr. B usby. Do you not think that gold and the gold standard can be manipulated so as to cause an apparent scarcity of gold and thereby a raise in the gold dollar, much easier than the prices of all commodities could be manipulated and thereby swing our currency out of relation, such as we find it now, to the true values? Governor M eyer. I do not really think that the gold supply of the world is subject to manipulation. I think there is a fair amount of gold scattered around over the world. Mr. B usby. The Federal Reserve Board, of which you are governor, makes a calculation in its March number, where it discloses that our country has sufficient gold to issue $3,500,000,000 of additional Fed eral reserve notes, and yet retain the 40 per cent basis for the currency ; and I think it is common knowledge that France needs $1,100,000,000 of gold, and has practically $3,000,000,000. Now, if the currencies of the world are going to be based on gold, does not it seem to you that the United States and France have gotten things a little bit out of balance by acquiring this gold that each one does not nefed and will not use? Governor M eyer. How did the gold go to the United States and France? Mr. B usby. I know how it got here, because we were a creditor nation, and they owed us, and we continued to get it here. Governor M eyer. We became the recipient of the bank balances of the central banks and private banks of foreign countries. The gold which came over here in periods when we had an inordinately large supply of the world’s gold was largely gold deposited here for foreign account. While it was called our gold, it was not our gold, because there was a demand liability against it. If we had used that gold as if it were our gold----Mr. B usbyl I am not talking about that. Governor M eyer. If we had used this gold as if it were our gold, and absorbed it into our credit structure, we would have been in a very difficult position when the gold was demanded. Mr. B usby. I admit that, but I am talking about something else. Governor M eyer. This inordinate amount of gold over here was not our gold. , . Mr. B usby. I am talking about the inordinate amount that is here now, when we roughly need about $2,500,000,000 less than that with which to stabilize our currency, and we have got roughly $4,350,000,000, in rough figures. We have got more than $1,300, 000,000, according to your bulletin----Governor M eyer. Surplus reserves. Mr. B usby. Yes; surplus reserves. Governor M eyer. Yes; and the required reserves----Mr. G o l d s b o r o u g h . You still maintain a 40 per cent reserve? Governor M eyer. Yes. . Mr. B usbyl Well, what I am getting at is this: Gold has gotten into the hands of two nations, with 162,000,000 people, to the extent of practically 70 per cent of all of the gold in the world, and the other 45 nations are having to use makeshifts and get along without this gold, this very desirable gold standard of monetary set-up. . . . . Do you regard that as being a desirable situation ? Governor M eyer. I do not think you can consider it from the point of view of desirability, because it was not a desire on our part that brought it about. Other people’s desires brought it about more than ours. . . _ . Mr. B usby. That is what I am getting at, the weakness ol the set-up, because we can not control our own situation. Governor M eyer. I think we could have a little more than we did. Mr. B usby. With the international working of credit, so much so that those foreign credits controlled our domestic supply of bank credits and finances, and threw us entirely out of line----- Governor M eyer. I am not quite in accord with that opinion. I think we could have controlled it more than we did, and I think that was one of the mistakes in the banking administration. The o-old exchange standard, which seemed to be a practicable and feasible thing, was built up in this period through which we have just passed, in the 1920’s, and then suddenly came along Germany and France and their needs, and there was built up the idea that deposits in foreign countries, invested in bills or securities or anything else, was the equivalent of gold in the vaults of the central banks. Mr. B usby. That was for the small countries. Governor M eyer. Well, the big ones, too. There were huge deposits built up here one way or another, and they were counted as equivalent to gold reserves by the foreign central banks, until they were waked up by the German and English incidents, and found that maybe they were and maybe they were not. . Mr. B usby. Well, now, there have been built up credits in the nations using the gold-reserve basis, or a supposedly additional amount of $2,000,000,000 of gold, which was really an exchange against the countries that had sufficient reserves of gold in the central banks? That was the practical effect at that time, was it not? When thev woke up to this, and that gold prop was taken out from under the inflation of gold itself, then there was a shrinkage not only of the $2,000,000,000, or 19 per cent of the world’s gold supply, and that acted naturally to bring about this catastrophe, but the shrinkage of credit also, that was based on that fixation \\ as not that a part of the world catastrophe? Governor MYy'ER. Yes; I think that is true. I think it was unfortunate that the gold exchange standard per mitted pyramiding of reserves and caused a good deal of inflation 548 549 551 STABILIZATION OF COMMODITY PKICES STABILIZATION OF COMMODITY PRICES during the 1920 period—I mean 1920 to 1930. That is what you are indicating? . Mr. B usby. Yes. Governor M eyer. I quite agree with you, but I think that should have been avoided. I do not say that we want to establish control over foreign bank deposits in the United States down to a fine point, but I do think that it is a matter in which the public interest and public policy should determine the hospitality which our banking structure should afford to foreign banks desiring to deposit. Mr. B usby. That seems to be agreeable to everybody. Governor M eyer. The attitude generally seemed to be one of welcoming indefinitely the deposits that foreign banks and bankers built up here. . . . Mr. B usby. What I am coming to as my last question is, that if we should base our currency and use gold as we have used it, as the yardstick to make our international exchanges, and in some way to limit the amount of our currency by that yardstick measure, and applying the true values, and those true values determined by com modities as we now determine them through the Bureau of Labor Statistics—would not that be a safer plan than one working alone on gold, on the assumption that gold exists, which we have just discussed? Governor M eyer. Well, I say this to you, Mr. Congressman: I am not prepared to answer that, because I do not feel as though I have any definite views as to whether or not the commodity base for money is workable and practicable, and I have not been able to figure it out to its ultimate conclusion. I can see the weaknesses of one system. I can see the weaknesses of the^ maladjustment in our economic structure, many of which are attributable to other things than the gold standard; and I can also say that I can not see where some weakness would develop under a new system, and I do not believe you or anybody else can, but a whole lot of these maladjust ments come from neither one standard nor another, but from the conduct and behavior of people; and sometimes a large number of people, en masse, get optimistic together, and overdo things; then they get pessimistic and overdo things on the other side. I think that all you can safely do is to try to restrain and limit the extremities of the expansion and contraction of credit by the mechanism of the banking systems, both in the commercial banks and in the Federal reserve system, and I come back to the thought that no better thing can be done for better behavior of our economic mechan ism than establishing a sound banking system, which I say can only be arrived at by a national or unified banking system. Mr. B usby. In all of your statements, I gather that 3~our view is that credits should be the basis of our activities, and that those credits are based largely on—I do not want to say manipulations, but actions in banking circles, and pressures of different types, like dis counts and interest, and buying Government securities, and so on, which system is as dependable as any we can get; but my idea is, if you turn around and relate the flow of those two values, which are commodities that are usable, and the price is determined according to the supply and demand for those commodities, you would have a more substantial thing than the ephemeral things you speak of as credit, which depend on the humor or disposition or attitude of somebody, independent of the things themselves. Governor M eyer. I accept vour statement on behalf of yourself, but I must protest against your interpretation of my views, because what I want to say is that the banking and credit structure should serve in the accommodation of business. Mr. G o l d s b o r o u g h . Mr. Prall, you were engaged this morning, and have not had the benefit of Governor Meyer’s extremely inter esting statement, but you may have some questions that jrou would like to ask. . . Mr. P rall. I would like to ask Mr. Meyer one question: Assuming that 784 commodities make the standard of value, could the pro ducers of those commodities, by any form of combination, raise the prices to any extent that they might produce fictitious values? Governor M eyer. Mr. Congressman, I do not want to appear unwilling to answer that, but I can not say that I consider myself an expert on the commodity index basis for currency or the medium or standard of exchange. I would like to have more time to study it. In fact, I have been terribly busy with a lot of administrative ques tions, and I had to ask the indulgence of the committee in postponing my appearance, and I do not feel that I can properly answer your question with the background of study and thought that I think you are entitled to have, if I make any answer to you at all. Mr. P rall. Well, the question was brought up here as to the con trol of gold, how it might be manipulated, and I wondered if there would be any change in that situation if the producers of these com modities could, by any combination, bring about a similar situation. Governor M eyer. You mean by----Mr. P rall. By rigging the values. # Governor M eyer. I should not think anybody could rig 780 com modities, or 680, or any such number of commodities. I would not think so. I do not see how it would be possible to do it. Of course, if you are speaking of the value of commodities in terms of some other value, you mean some other measure of value, or some standard of value. Mr. P rall. That is all. Mr. G oldsborough. Mr. Strong? Mr. Strong. Governor Meyer, I noticed you used the language of the statute, “ accommodation of business.” That is what the language of the statute is in regard to the use of the rediscount privilege, that it shall be used for the accommodation of business and commerce. In the original act, instead of that language was the word that it should be used for the stabilization of the price level. That language went out in conference and the language “ for the accom modation of business and commerce ” inserted instead. In my original bill, five or six years ago, I used the words of the original language of the bill, stating that the powers of the Federal reserve system should be used for the stabilization of the price level, and ever since then I have been using the words “ for the stabilization of the purchasing power of the dollar,” which, of course, you know, means the same thing, but I used this language in order to get rid of the charge of price fixing, which I do not think can be done or should be done in this country. My idea is that the law of supply and demand is a very safe law, upon which we can base most of our activities in commerce and business. If that is true, the regulation of the supply and demand 550 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES o f m o n e y la r g e ly t e n d s to f ix it s p r ic e , a n d it s p r ic e is w h a t i t is w o r t h in c o m m o d it ie s in g e n e ra l. T h e r e fo r e , i t se e m s to m e w it h th e p o w e rs w e h a v e g iv e n th e F e d e r a l R e s e r v e B o a r d , to r e g u la t e th e v o lu m e o f m o n e y a n d la r g e ly th e p r ic e o f m o n e y t h r o u g h th e r e d is c o u n t p r i v i leg es, th e F e d e r a l'R e s e r v e B o a r d c o u ld r e g u la t e th e v o lu m e o r s u p p ly a n d d e m a n d o f m o n e y ; a n d i t is o n t h a t b a s is t h a t I h a v e , f o r th e p a s t fiv e o r s ix y e a r s , a d v o c a t e d t h a t th e F e d e r a l R e s e r v e B o a r d s h o u ld u se it s p o w e rs to s t a b iliz e th e p u r c h a s in g p o w e r o f m o n e y , r e g u la t in g it s p o w e rs t h r o u g h th e a m o u n t o f s p e c u la t io n . N o w , G o v e r n o r S t r o n g o f th e F e d e r a l R e s e r v e B o a r d in t im a t e d to m e a n d t h is c o m m it t e e t h a t h e h a d u s e d th o se p o w e rs in o p e n - m a r k e t o p e ra t io n s to b u y a n d s e ll b o n d s o n th e r e d is c o u n t r a t e q u it e s u c c e s s f u lly f o r th e p a s t tw o o r t h re e y e a r s , o r u p u n t il th e t im e o f h is d e a th , a n d h e h a d s e v e r a l o th e rs w it h h im , a m o n g w h o m w a s G o v e r n o r H a r r is o n , w h o w a s h e re y e s t e r d a y , w h o f r a n k l y a d m it t e d t h a t h e b e lie v e d in a n d w a s s y m p a t h e t ic w it h t h is t h e o ry , a n d h e t h o u g h t th e F e d e r a l r e s e r v e o u g h t to o p e ra t e a lo n g t h is lin e , b u t h e o b je c t e d to u s d ir e c t in g th e F e d e r a l R e s e r v e B o a r d to d o so. I w o u ld lik e to a s k y o u w h a t o b je c t io n y o u see i n C o n g r e s s a s k in g th e F e d e r a l R e s e r v e B o a r d to u se it s p o w e rs f o r s u c h s t a b iliz a t io n ? W h y s h o u ld n o t th e C o n g r e s s , h a v in g g iv e n th e se p o w e rs to th e F e d e r a l re s e r v e s y s t e m , d ir e c t th e u s e o f th e m ? G o v e r n o r M e y e r . W e ll, I t h in k th e a u t h o r iz a t io n o f p o w e rs w h ic h C o n g r e s s o b v io u s ly in t e n d s to be u s e d to a c c o m p lis h th e p u r p o se w it h in th e lim it s o f p o s s ib ilit y s h o u ld b e u s e d ; b u t w h e n y o u g iv e d ir e c t io n s to a b o d y to a c c o m p lis h a r e s u lt , a n d g iv e t h e m t h e m e a n s , a n d m a k e i t m o re o r le s s m a n d a t o r y t h a t fchejj s h a ll a c c o m p lis h th e r e s u lt , w h ic h d e p e n d s o n a g o o d m a n y c o n d it io n s , t h e n y o u a re r a is in g a d if f ic u lt q u e s t io n . I t h in k p r o b a b ly G o v e r n o r H a r r is o n in t e n d e d to c o n v e y th e id e a t h a t y o u w e re c h a r g in g th e s y s t e m w it h th e r e s p o n s ib ilit y f o r th e r e s u lt s as w e ll as f o r th e d is c h a r g e o f a f u n c t io n . I t h in k th e F e d e r a l r e s e r v e s y s t e m h a s a lw a y s e n d e a v o r e d to d o ju s t e x a c t ly w h a t w e a re t a lk in g a b o u t , o r w h a t y o u a re t a lk in g a b o u t, w it h in th e lim it s o f p o s s ib ilit y ; b u t , f o r in s t a n c e , le t u s s a y t h a t i n 19 2 1 a n d 1 9 2 2 t h e re w e re o p e r a t io n s c o n d u c t e d w it h th e v ie w o f in c r e a s in g th e o u t s t a n d in g s u p p ly o f c r e d it a n d s t im u la t in g it s use, a n d y o u c o m e in t o s u c h a s it u a t io n a s I s h o w e d y o u p r e v a ile d a t t h a t t im e , w it h th e b o o m i n th e b u ild in g o f h o u s e s a n d p a r t m e n t s a n d o ffic e b u ild in g s , p la n t s , a n d e v e r y t h in g else, t h a t m o n e y w o u ld b e im m e d ia t e ly e ffe c tiv e i n s t im u la t in g in d u s t r y i n a n e x t r a o r d in a r y w a y . T h e s a m e a m o u n t o f m o n e y p u t o u t in th e m a r k e t t o - d a y u n d e r p r e s e n t g r e a t ly c h a n g e d c o n d it io n s w o u ld h a v e d iff e r e n t effe cts, i n m y o p in io n . M r . S t r o n g . W e ll, I g r a n t y o u t h a t. G o v e r n o r M e y e r . I t h in k t h a t is w h a t G o v e r n o r H a r r is o n h a d i n m in d . . M r . S t r o n g . A n d I re a liz e t h a t p e r h a p s y o u s a id th e m a r k e t o p e r a t io n s a n d r e d is c o u n t p r iv ile g e s w o u ld n o t, u n d e r o u r c o n d it io n s , b r in g a b o u t s t a b iliz a t io n . I c a n re a liz e t h a t . . . G o v e r n o r M e y e r . E s p e c ia l ly i f th e o v e r u s e a n d o v e r e x p a n s io n i n th e p e r io d h a s le d to e x p e n s iv e s p e c u la t iv e a c t io n s , w h ic h c a u s e r e a c t io n s o f a d e p lo r a b le c h a r a c t e r . M r . S t r o n g . O f c o u rs e , m y a n s w e r to t h a t w o u ld b e t h a t w e d id n o t s e ll b o n d s a n d r e d u c e th e a m o u n t o f m o n e y i n c ir c u la t io n a n d p u t u p th e d is c o u n t ra t e e n o u g h to s t o p t h a t e x p e n s iv e s p e c u la t io n . G o v e r n o r M e y e r . T h a t g e ts d o w n to a v e r y fin e p o in t ; a n d o f c o u rs e y o u k n o w i t is n o t o n ly a q u e s t io n o f th e q u a n t it y o f b a n k c re d it t h a t is a v a ila b le , b u t a lso o f th e v e lo c it y o f th e t u r n o v e r o f t h a t s a m e v o lu m e , a n d th e u se t h a t is m a d e o f it. I n o t h e r w o rd s , y o u g e t d o w n to th e f a c t o r o f h u m a n ju d g m e n t . C r e d it p o lic y d o e s n o t o p e ra t e i n s t a n t a n e o u s ly , a n d th e e ffe c t o f a n in c re a s e in v o lu m e o f c re d it t o - d a y d o e s n o t a p p e a r t o - d a y o r t o -m o rro w , b u t a f t e r a p e r io d o f tim e . A c o n s id e ra b le t im e m u s t e la p s e b e fo re a n y k in d of f in a n c ia l w o r k h a s it s e ffect. . N o w , th e n , t h e re c o m e s in th e e le m e n t o f h u m a n ju d g m e n t , in d e c id in g h o w m u c h to do, a n d h o w f a r to go, a n d h o w f a s t to k e e p it u p , w h e n to s to p , a n d w h e n to re v e rs e . M r . S t r o n g . B u t y o u g e n tle m e n h a v e a p r e t t y g o o d id e a n o w , a f t e r th e se y e a r s o f o p e ra t io n s , o f a b o u t w h e re to s to p , a n d a b o u t w h e n to s to p , to r e a c h a c e r t a in c o n c lu s io n , a c e r t a in o b je c t iv e p o in t . G o v e r n o r M e y e r . I w o u ld lik e to fe e l t h a t y o u a re r ig h t o n t h a t. B u t I w o u ld h e s it a t e to a g re e w it h y o u t h a t a n y o f u s h a s in f a llib le ju d g m e n t . M r . S t r o n g . Y o u k n o w I h a v e a g re a t d e a l o f c o n fid e n c e in y o u r ju d g m e n t , a n d I h a v e a lw a y s f e lt t h a t w a y , e v e r s in c e o u r e x p e rie n c e i n th e W a r F in a n c e C o r p o r a t io n ; b u t I d o t h in k , in th e o p e ra t io n a n d u se o f th e se p o w e rs o f th e F e d e r a l re s e r v e s y s te m , w h ic h w e h a v e u s e d n o w f o r th e se y e a rs , t h a t w e c o u ld g iv e — t h a t i n g iv in g a n y d ire c t io n , w e s h o u ld g iv e t h e m a m e a s u re to fo llo w . F o r in s t a n c e , I t h in k , if w e s h o u ld d ir e c t t h e m to u se t h e ir p o w e rs t o w a rd s t a b iliz a t io n o f th e p u r c h a s in g p o w e r o f m o n e y , w h ic h w a s th e la n g u a g e w o r k e d o u t b y G o v e r n o r S tro n g , a n d th e n s a y to th e m to a c c e p t a s th e m e a s u re o f v a lu e o f th e p u r c h a s in g p o w e r o f th e d o lla r th e in d e x n u m b e r s s e t u p b y th e B u r e a u o f L a b o r S t a t is t ic s , w it h th e la r g e n u m b e r o f c o m m o d it ie s t h a t a re u s e d in a r r iv in g a t th e in d e x n u m b e r, t h a t w o u ld b e a p r e t t y g o o d m e a s u re to d ir e c t th e R e s e r v e B o a r d o r s y s t e m to fo llo w . " N o w , as to h o w lo n g t h e y s h o u ld p ro c e e d , a n d w h e n t h e y s h o u ld s to p , w ill b e a m a t t e r o f ju d g m e n t , w h ic h I a m w illin g to t r u s t y o u o n ; b u t i t d o e s se e m to m e t h a t th e re o u g h t to b e so m e m e a s u re o f v a lu e t h a t t h e y s h o u ld b e d ir e c t e d to fo llo w . # N o w , I w a n t to a s k y o u t h is q u e s t io n : T h e R e c o n s t r u c t io n F in a n c e C o r p o r a t io n a n d th e G la s s - S t e a g a ll b i ll h a v e f o r t h e ir p u r p o s e s th e e n la rg e m e n t o f th e c r e d it s t ru c t u r e , so as to b r in g m o re c r e d it in t o u se , a n d in a m a n n e r a n in fla t io n , o r w h a t p r o b a b ly y o u m ig h t t e rm a r e f la t io n o f th e d e f la t io n ; is n o t t h a t as p r a c t ic a l a t h in g as i f w e d ir e c t e d y o u to u se th e p o w e rs to s t a b iliz e th e p u r c h a s in g p o w e r o f m oney? I f m o n e y w a s u n s t a b le , c r e d it w a s u n s t a b le a n d th e c o u n t r y w a s p a r a ly z e d ; b e c a u s e o f s u c h c o n d it io n w e c o m e to th e C o n g re s s , a n d as th e r e s u lt o f a n E x e c u t iv e p ro p o s a l, w e p a s s e d th e R e c o n s t r u c t io n F in a n c e b i ll a n d th e G la s s - S t e a g a ll b ill, a n d t h a t w a s d o n e f o r th e p u rp o s e o f t r y in g to im p r o v e th e p r ic e le v e l, w a s i t n o t ? G o v e r n o r M e y e r . A s I s a id t h is m o rn in g , th e re is th e t im e e le m e n t, w h ic h i t is v e r y d if f ic u lt to re g u la t e . I t h in k th o se m e a s u re s h a v e c e r t a in ly te n d e d to im p r o v e th e s it u a t io n , y e s ; a n d I t h in k i t w o u ld 552 553 554 STABILIZATION OF COMMODITY PRICES h a v e b e e n w o rs e t h a n i t is, i f t h e y h a d n o t b e e n p a s s e d . T h e re has n o t b e e n a n y d e fin it e u p w a r d t re n d , b u t I t h in k it h a s s lo w e d u p th e d e c lin e , a n d I d o n o t t h in k -------M r . S t r o n g . G o v e r n o r H a r r is o n t o ld u s y e s t e r d a y t h a t f o r th e f ir s t t im e in a n u m b e r o f m o n th s th e d e c lin e o f b a n k c r e d it s h a d b e e n b r o u g h t to a h a lt . G o v e r n o r M e y e r . Y e s ; I t h in k t h a t is s ig n ific a n t . M r . S t r o n g . A n d b r in g in g t h e m to a h a lt is p r o b a b ly p r e t t y g o o d e v id e n c e t h a t t h e y a re lia b le to t u r n u p w a r d . G o v e r n o r M e y e r . T h e } 7 h a v e to s to p g o in g d o w n b e fo re t h e y b e g in g o in g u p . M r . S t r o n g . N o w , h e a lso t o ld u s t h a t t h e y w e re b u y in g $ 2 5 ,0 0 0 ,0 0 0 o f b o n d s e a c h w e e k . G o v e r n o r M e y e r . Y e s ; t h a t is p u b lis h e d w e e k ly . M r . S t r o n g . T h a t is c o n t in u in g n o w , a n d h a s s t o p p e d th e lo w e r in g o f c re d it , b a n k c r e d it . I f t h a t c o n d it io n k e e p s u p , a n d y o u k e e p o n b u y in g $ 2 5 ,0 0 0 ,0 0 0 a w e e k , a t u r n w ill p r o b a b ly co m e , w ill it n o t ? G o v e r n o r M e y e r . Y o u a re g e t t in g m e in th e p o s it io n o f p r o p h e s y in g . I h o p e y o u a re r ig h t . I p e r s o n a lly a m in f a v o r o f a lit t le s t ro n g e r p o lic y t h a n y o u a re. M r . S t r o n g . W e ll, fin e . I h o p e y o u r d e s ire p r e v a ils . G o v e r n o r M e y e r . B u t y o u see th e re a re s e v e r a l t h in g s t h a t e n te r in t o th e s it u a t io n in m a k in g a p r o g r a m — w h a t i t a s u it a b le a m o u n t , w h e t h e r i t is b e t t e r to k e e p p u r c h a s in g m o d e ra t e a m o u n t s o v e r a lo n g p e rio d , o r to d o it a ll in a s h o r t t im e in la r g e r a m o u n t s , in a d d it io n to w h ic h y o u h a v e to t a k e in t o a c c o u n t -------M r . S t r o n g . T h e u se o f it ? G o v e r n o r M e y e r . Y e s , th e u s e o f it . A n d fu rth e rm o re , w e h a v e b e e n g e t t in g a r e t u r n flo w o f c u r r e n c y f r o m h o a r d s s in c e th e b e g in n in g o f F e b r u a r y , a m o u n t in g to a b o u t $ 2 5 0 ,0 0 0 ,0 0 0 , a n d a s id e f ro m a lit t le in t e r r u p t io n o n A p r i l 1 o n a c c o u n t o f t a x a s s e s s m e n ts , a n d th e flo w h a s c o n t in u e d n o w f o r a g o o d m a n y w e e k s . I f th e e x p a n s io n o f th e p r o g r a m o f G o v e r n m e n t b o n d p u r c h a s e s , w h ic h w a s r e fe rr e d to b y G o v e r n o r H a r r is o n h e re y e s t e r d a y , is c o n t in u e d a n d th e h o a r d e d c u r r e n c y c o n t in u e s to c o m e in , I t h in k w e c a n lo o k f o r w a r d to im p r o v e d c o n d it io n s . B u t w e s t ill h a v e lo t s o f p r o b le m s ; th e p e r io d is d if f ic u lt in m a n y , m a n y d ir e c t io n s , a n d I w is h as m u c h as y o u d o t h a t I k n e w a s im p le f o r m u la o f t u r n in g a s im p le t r ic k t h a t w o u ld c h a n g e e c o n o m ic c o n d it io n s a ll o v e r th e w o r ld . M r . S t r o n g . I f y o u c o n t in u e to p la y y o u r c a r d s as y o u a re d o in g r ig h t n o w th e c h a n g e w ill co m e . G o v e r n o r M e y e r . W e ll, s ir , I a m h o p e f u l t h a t th e c h a n g e w ill c o m e a t h o m e a n d a b ro a d . M r . S t r o n g . A lo n g t h a t lin e , G o v e r n o r , y o u m ig h t n o t w a n t to a n s w e r t h is q u e s t io n , b u t in a s p e e c h la s t n ig h t G o v e r n o r S m it h m a d e a p r o p o s a l t h a t f o r e v e r y h u n d r e d m illio n d o lla r s in t r a d e b e tw e e n f o r e ig n c o u n t r ie s a n d th e U n it e d S ta te s w e r e m it o r c r e d it t h a t c o u n t r y w it h $ 2 5 ,0 0 0 ,0 0 0 o n a c c o u n t o f t h e ir d e b t to u s. D o y o u t h in k t h a t is a g o o d p r o p o s it io n ? D o y o u t h in k t h a t w o u ld s t im u la t e t ra d e ? G o v e r n o r M e y e r . T h e p e o p le w h o c a n p a y d e b t s a re p a y in g th e m . T h e p e o p le w h o c a n b u y g o o d s a re b u y in g th e m . I do n o t k n o w e x a c t ly w h o se d e b t s s h o u ld be c a n c e lle d f o r t h is p u r p o s e a n d w h o s e g o o d s s h o u ld be s o ld . W o u ld y o u w a n t to be c h a ir m a n o f a c o m m itt e e STABILIZATION OF COMMODITY PRICES 555 w h e n s o m e b o d y ’s d e b t s a re c a n c e le d to s a y w h o s e g o o d s s h o u ld be s o ld f o r t h a t p u rp o s e ? M r . S t r o n g . N o , I d o n o t t h in k I w o u ld . G o v e r n o r M e y e r . I t is o n e t h in g to g e n e ra liz e a n d a n o t h e r t h in g to g e t d o w n to b u s in e s s. M r . S t r o n g . A n d w h e n y o u h a v e g iv e n t h is b o n u s o r t h is m o n e y t h a t w a s lo a n e d to E u r o p e a n d t h a t is e x h a u s te d , t h e n w h a t w o u ld y o u d o ? L e n d t h e m so m e m o re m o n e y so as to g iv e t h e m so m e m o re o p p o r t u n it y to h a v e th e a m o u n t re m it t e d to t h e m ? G o v e r n o r M e y e r . I d id n o t h e a r th e g o v e r n o r ’s sp e e ch . H e m ay h a v e so m e g o o d id e a s . M r . S t r o n g . I w o u ld lik e to a s k y o u w h a t, i f y o u k n o w , c a u s e d th e re c e s s io n in b a n k c re d it s d u r in g J a n u a r y ? W h y d id t h e y go d o w n ? G o v e r n o r M e y e r . T h e y w e re g o in g d o w n b e fo re th a t, a n d i t w a s a c o n t in u a t io n o f a m o v e m e n t t h a t w a s in p ro g re s s a n d h a d n o t b e e n c h e c k e d . B a n k c lo s in g s in J a n u a r y a g g re g a te d 3 4 2 in n u m b e r, a n d t h a t w a s n o t o n ly a n in t r in s ic f a c t o r b u t a n im p o r t a n t p s y c h o lo g ic a l fa c t o r. B e g in n in g i n F e b r u a r y b a n k c lo s in g s w h ic h w e re h e a v y in t h e b e g in n in g o f th e m o n t h s lo w e d u p a n d a t t h e e n d o f th e m o n t h t h e y w e re v e r y m u c h s m a lle r. I t h in k in th e m o n t h o f M a r c h t h e re s o u rc e s o f b a n k s t h a t o p e n e d w e re as g re a t as th o s e o f b a n k s t h a t w e re c lo se d . I d o n o t m e a n to s a y t h a t th e re w ill n o t b e m o re b a n k f a ilu r e s ; b u t a n y w a y t h e y h a v e "been less, a n d J a n u a r y w a s a b a d m o n t h f ro m t h a t p o in t o f v ie w . M r . S t r o n g . T h e n i f w e h a d c o m m e n c e d a lo n g in O c t o b e r a n d N o v e m b e r a n d b o u g h t G o v e r n m e n t s e c u rit ie s , w o u ld n o t w e h a v e b e e n a p t to h a v e c h e c k e d th o s e f a ilu r e s t h a t h a p p e n e d in J a n u a r y a n d p re v e n t e d th e re c e s s io n in b a n k c re d it s ? G o v e r n o r M e y e r . T h e r e w e re so m a n y o t h e r c o m p lic a t io n s , M r . S t r o n g ; b e g in n in g w it h th e s u s p e n s io n o f g o ld p a y m e n t s in E n g la n d , y o u h a v e h a d a s e rie s o f e v e n t s w h ic h w e re v e r y c o m p lic a t e d . W it h in a fe w w e e k s a ft e r S e p t e m b e r 2 1 , $ 7 5 0 ,0 0 0 ,0 0 0 w a s w it h d r a w n b y fo re ig n c o u n t r ie s f ro m t h e ir b a la n c e s h e re a n d t a k e n in th e f o r m o f g o ld . N o c o u n t r y in th e h is t o r y o f th e w o r ld h a s e v e r b e e n a b le to s t a n d t h a t k in d o f d r a in o f g o ld . I t is t r u e t h a t d u r in g t h a t p e rio d w e a lso im p o r t e d s o m e g o ld b u t in v ie w o f th e la rg e d r a f t s o n t h is c o u n t r y b y fo re ig n e rs , c h ie fly d u e to r e p a t r ia t io n o f fo re ig n c e n t r a l b a n k r e s e rv e s a n d , I b e lie v e , e v e n so m e r e m it t a n c e s b y A m e r ic a n s o u t o f th e c o u n t r y f ro m f rig h t , p u r c h a s e o f s e c u r it ie s b y th e r e s e rv e b a n k s a t t h a t t im e w e re im p r a c t ic a b le . W e c o u ld n o t u n d e r t a k e a n y t ilin g o f t h a t c h a r a c t e r in O c t o b e r w it h o u t in c r e a s in g t h e lo s s o f g o ld . T h a t is m y o p in io n . Y o u w ill r e m e m b e r a t t h a t t im e w e h a d to r a is e th e d is c o u n t r a t e f ro m 1% to 2% a n d 3 % p e r c e n t . P u rch a se s a t t h a t t im e w o u ld n o t h a v e h a d a s t a b iliz in g e ffe ct. T h e y w o u ld h a v e te n d e d to n e u t r a liz e th e e ffe c t o f th e a d v a n c e s in th e d is c o u n t ra t e , w h ic h w a s a n im p o r t a n t in t r in s ic a n d a lso a n im p o r t a n t p s y c h o lo g ic a l f a c t o r a t t h a t tim e . > M r . S t r o n g . I f C o n g r e s s s h o u ld see f it to p a s s a b i ll o f t h is k in d d ir e c t in g th e F e d e r a l R e s e r v e B o a r d to u s e th e p o w e rs w e h a v e g iv e n i t t o w a rd th e e n d t h a t w e s h o u ld h a v e as n e a r as p o s s ib le th e s t a b ili z a t io n as to p u r c h a s in g p o w e r o f m o n e y , w h a t h a r m c o u ld y o u se e c o m in g f r o m it ? , _ G o v e r n o r M e y e r . I t is a f a c t t h a t w e u n d e r s t a n d t h a t i t is o u r d u t y to p r e v e n t in f la t io n to th e e x t e n t t h a t it is fe a s ib le , a n d to s to p th e d e f la t io n a r y fo rc e s as f a r as p o s s ib le t h r o u g h o u r m a c h in e r y . 556 STABILIZATION OF COMMODITY PRICES M r . S t r o n g . Y o u w o u ld go a lo n g as y o u a re d o in g n o w , w o u ld y o u ? G o v e r n o r M e y e r . I d o n o t t h in k w e c a n d o a n y t h in g m o re t h a n w e a re d o in g , if y o u m e a n t h a t. M r . S t r o n g . T h a t is w h a t I m e a n . G o v e r n o r M e y e r . O n th e o t h e r h a n d , I d o n o t t h in k y o u w o u ld lik e to be o rd e re d to r u n a r a c e o f 10 0 y a r d s in 10 se co n d s. M r . S t r o n g . W e ll, I n e v e r r a n t h a t f a r w it h in t h a t tim e . G o v e r n o r M e y e r . I k n o w y o u d o n o t e x p e c t im p o s s ib ilit ie s to be a c h ie v e d ; b u t I t h in k in s e t t in g c e r t a in s t a n d a r d s y o u o u g h t to se t s t a n d a r d s t h a t a re p r a c t ic a b le , a n d w h a t y o u h a v e in m in d is t h a t w e s h o u ld b e c h a r g e d w it h d o in g w h a t w e a re d o in g n o w to th e e x te n t t h a t it is p o s s ib le . I d o n o t lik e e it h e r b y d e fin it e o r im p lie d a u t h o r i z a t io n o r d ir e c t io n to le a d p e o p le to b e lie v e t h a t a t h in g c a n b e d o n e i f i t c a n n o t be d o n e u n d e r a n y a n d a ll c ir c u m s t a n c e s , e v e n t h o u g h i t m a y be w it h in o u r p o w e r to w o r k in t h a t d ir e c t io n . M r . S t r o n g . I w o u ld lik e to a s k a n o t h e r t h in g . C o n g r e s s is b e in g a s k e d to p a y o ff in a d v a n c e th e c e r t ific a t e s w e is s u e d to s e r v ic e m e n o f t h is c o u n t r y d u e in 19 4 5. I t is b e in g u rg e d t h a t w e c a n d o t h a t b y is s u in g p a p e r m o n e y b a s e d u p o n w h a t g o ld is n o w in th e T r e a s u r y . I w is h y o u c o u ld g iv e u s y o u r o p in io n a b o u t t h a t. I t is a m a t t e r t h a t is v e r y p e r p le x in g to M e m b e r s o f C o n g r e s s w h o w o u ld lik e to p a y th e c e r t ific a t e s i f t h e y c o u ld . G o v e r n o r M e y e r . I s u p p o s e th e re is a c o m m itt e e s t u d y in g t h a t, M r . C o n g re ssm a n . M r . S t r o n g . I k n o w , b u t y o u k n o w a b o u t th e g o ld in th e T r e a s u r y a n d w h a t it c o u ld do, a n d I t h in k y o u r o p in io n w o u ld b e v e r } 7 v a lu a b le i f y o u c a re to g iv e i t to us. G o v e r n o r M e y e r . A s a n o ffh a n d o p in io n , I fe e l t h a t th e b a la n c in g o f th e B u d g e t is b e c o m in g a f u n d a m e n t a lly im p o r t a n t f a c t o r in r e b u ild in g c o n fid e n c e in b u s in e s s . I s h o u ld b e r e lu c t a n t to see a v e r y h e a v y e x p e n d it u r e w h ic h c o u ld n o t b e p a id f o r o u t o f t a x a t io n a t t h is tim e . B u t I r e a lly h a v e n o t b e e n g iv in g t h a t p a r t ic u la r q u e s t io n s p e c ia l th o u g h t, a lt h o u g h I h a v e se e n i t m e n t io n e d in th e p a p e rs . I t h in k th e b a la n c in g o f th e B u d g e t h a s b e c o m e o n e o f th e m o s t im p o r t a n t t h in g s f o r t h is c o u n t r y . M r . S t r o n g . T h a t is to p r o t e c t o u r c r e d it a t h o m e a n d a b r o a d ? G o v e rn o r M e y e r . Y es. A n d I t h in k in f la t io n a r y d e v ic e s w h ic h m ig h t be a s s u m e d to be b e n e fic ia l a re d a n g e ro u s , b e c a u se t h e y m ig h t h a v e a v e r y d iffe re n t e ffe c t f r o m w h a t is e x p e c te d . M r . S t r o n g . C a n y o u t e ll u s h o w m u c h g o ld th e re is in th e T r e a s u r y w h ic h w o u ld be fre e to be u s e d in g u a ra n t e e in g s u c h c u r r e n c y ? " G o v e rn o r M e y e r . I a m t o ld t h a t i t is $ 2 0 ,0 0 0 ,0 0 0 . M r . G o l d e n w e i s e r . T h a t is n o t in c lu d in g th e re s e rv e s o f the re s e rv e b a n k s . M r . S t r o n g . W e ll th e n , w it h t h a t s it u a t io n w o u ld y o u c a re to s a y w h a t p e rh a p s w o u ld h a p p e n i f w e s h o u ld is s u e $ 2 ,5 0 0 ,0 0 0 ,0 0 0 w o r t h of paper m oney? G o v e r n o r M e y e r . I t h in k t h a t i t w o u ld be m o s t u n fo r t u n a t e fro m th e p o in t o f v ie w o f th e m a ss e s o f th e p e o p le o f t h is c o u n t r y . M r . S t r o n g . W o u ld it be lia b le to h u r t o u r c r e d it in fo re ig n c o u n t rie s ? G o v e r n o r M e y e r . N o t o n ly in fo re ig n c o u n t r ie s b u t a t h o m e . M r . S t r o n g . Y o u r e a lly t h in k i t w o u ld be a n u n w is e t h in g to do th e n ? ‘ STABILIZATION OF COMMODITY PRICES 557 G o v e r n o r M e y e r . I do. M r . G o l d s b o r o u g h . G o v e r n o r M e y e r , in v a r io u s d is c u s s io n s o f t h is p ro p o s e d le g is la t io n i t h a s b e e n s p o k e n o f as a n in f la t io n a r y m e a s u re ? # _ G o v e r n o r M e y e r . T i n s b ill? _ M r . G o l d s b o r o u g h . Y e s ; I h a v e seen it s p o k e n o f as a n in f la t io n a r y m e a s u re . . G o v e r n o r M e y e r . W e ll, y o u k n o w t h a t is a w o rd t h a t is p u lle d on e v e ry b o d y . I f i t is p u lle d o n us, M r . C h a ir m a n , w h y -------M r . G o l d s b o r o u g h . I t is in t e n d e d as a re fle c t io n o n th e p r o p r ie t y o f th e p ro p o s e d le g is la t io n . S e c t io n 3 1 , w h ic h is th e f ir s t s e c t io n o f th e b i ll— I t h in k y o u h a v e i t r ig h t th e re , h a v e y o u n o t, in f ro n t o f you? " G o v e r n o r M e y e r . N o ; t h is is n o t t h a t. M r . G o l d s b o r o u g h . T h e f ir s t s e c t io n o f th e b i ll d ir e c t s th e F e d e r a l R e s e r v e B o a r d a n d th e F e d e r a l re s e r v e b a n k s to t a k e a ll a v a ila b le s t e p s to ra is e th e p re s e n t w h o le s a le c o m m o d it y le v e l o f p r ic e s as s p e e d ily as p o s s ib le to th e le v e l e x is t in g b e fo re th e p r e s e n t d e fla t io n a n d a f t e r w a r d s to u s e a ll a v a ila b le m e a n s to m a in t a in s u c h w h o le s a le c o m m o d it y p r ic e le v e l. I f y o u w ill t u r n to s e c t io n 2, w h ic h re a d s : If, in carrying out the purposes of the preceding section, the Federal Reserve Board and/or the Federal reserve banks, in selling securities, should exhaust the supply, the Federal Reserve Board is authorized and directed to issue new debentures. T h e o b v io u s p u r p o s e o f s e c t io n 2 is to a s s is t th e F e d e r a l re s e rv e s y s t e m i f i t s h o u ld r u n o u t o f b o n d s t h r o u g h th e p ro c e s s o f fe e d in g t h e m b a c k in t o th e m a rk e t , a n d p r o v id e s f o r a n is s u e o f d e b e n t u re s in o rd e r to p r e v e n t th e p r ic e le v e l f ro m g o in g a b o v e th e p re -d e f la t io n p r ic e le v e l. I d ir e c t y o u r a t t e n t io n to t h a t b e c a u s e I t h in k i t is im p o r t a n t f o r th e C o n g r e s s a n d th e c o u n t r y to k n o w t h a t t h is is n o t in t e n d e d to b e a n in f la t io n a r y m e a s u re . I t is in t e n d e d to b e a s t a b iliz in g m e a s u re , a n d t h a t th e m e a s u re h a s n o m o re in t e r e s t in r a is in g th e p r ic e le v e l t h a n i t h a s to k e e p th e p r ic e le v e l f ro m g o in g b e y o n d a p r o p e r a n d le g it im a t e p o in t . N o w , i f I m a y f o r j u s t a m o m e n t, I w a n t to r e a d f ro m a s p e e c h t h a t I m a d e ju s t 10 y e a r s ago , o n M a y 2 3 , 19 2 2 , in th e H o u s e o f R e p r e s e n t a t iv e s , o n a b ill p r o v id in g fo r s t a b iliz a t io n : I firmly believe that the purchasing power of money can be stabilized. I be lieve that the solution when we have it will be found to be simple, and I trust that that solution will soon be embodied in legislation. I never want to see agricultural and industrial enterprises struggling in the agony of a long period of falling prices or to see the young, active, bright business man, naturally uninformed as to political science, feel that he is rising to prosperity on the tide of rising prices only to find his business bankrupt and his hopes blasted in the inevitable crisis just beyond the peak. I r e a d t h is to a c c e n t u a t e th e f a c t t h a t t h is c o m m it t e e a n d I p e rs o n a lly a re n o t in t e re s t e d i n in f la t io n b u t s im p ly in a n e n d a v o r to c re a t e a f a i r a n d p r o p e r r e la t io n — re e s t a b lis h a f a i r a n d p r o p e r r e la t io n s h ip b e tw e e n d e b t o r a n d c re d it o r, a n d a f t e r t h a t r e la t io n s h ip is re e s t a b lis h e d to m a k e it im p o s s ib le , b e c a u s e o f th e se s t a b iliz in g in flu e n c e s , f o r b u s in e s s to e x p a n d in a n u n h e a lt h y m a n n e r. N o w , t h a t is th e p u rp o s e o f th e p ro p o s e d le g is la t io n . T h i s m o r n in g in a v e r y f u ll a n d in t e r e s t in g s t a t e m e n t jm u c a lle d th e c o m m it t e e ’s a t t e n t io n to th e f a c t t h a t o t h e r in flu e n c e s o t h e r t h a n q u a n t it y o f m o n e y a n d c r e d it 558 STABILIZATION OF COMMODITY PRICES a n d it s v e lo c it y o p e ra t e d o n p r ic e le v e ls , a n d y o u u n d e r t o o k a n d d id v e r y c le a r ly s ta te w h a t so m e o f th o se in f lu e n c e s ' w e re . N o w , th e re a s o n I a m m a k in g t h is s t a t e m e n t is b e c a u s e I w a n t y o u to c o m m e n t u p o n it. T h i s s u b c o m m itt e e , I t h in k , f u lly r e a liz e s th e v a li d i t y o f i n flu e n c e s w h ic h y o u m e n t io n e d . T h e y r e a liz e f u lly t h a t u n d e r u n c e r t a in c o n d it io n s i t w o u ld ta k e m o re a c t iv it y o n th e p a r t o f th e F e d e r a l r e s e rv e s y s t e m in th e m a tt e r, f o r in s t a n c e , o f p u r c h a s in g s e c u r it ie s , t h a n i t w o u ld a t a n o t h e r t im e in o r d e r to a c h ie v e th e s a m e r e s u lt . B u t I b e lie v e t h a t th e s u b c o m m it t e e fe e ls t h a t u n d e r a n y t h in g lik e o r d in a r y c o n d it io n s , w it h th e e n o rm o u s c r e d it f a c ilit ie s o f th e F e d e r a l r e s e rv e s y s t e m t h a t b y a p p ly in g it s p o w e rs c o u r a g e o u s ly e n o u g h a n d s t ro n g ly e n o u g h th e r e s u lt c a n be a c h ie v e d . A m a n m a y be s t e e r in g h is s h ip a n d b e c a u s e o f c o n d it io n s o f w in d a n d tid e it m a y be m o r e d if f ic u lt f o r h im to r e a c h a g iv e n p o in t t h a n i t w o u ld be u n d e r o t h e r c o n d it io n s , b u t i f h e p u t s e n o u g h p re s s u re o n th e r u d d e r h e c a n r e a c h h is p o r t in s a fe ty . T h i s s u b c o m m it t e e d o e s n o t t h in k t h a t i f th e C o n g r e s s d ir e c t s th e F e d e r a l r e s e r v e s y s t e m to s t a b iliz e a t a g iv e n p o in t t h a t th e F e d e r a l r e s e rv e s y s t e m c o u ld k e e p a lw a y s th e le v e l a t t h a t p o in t ; b u t i t b e lie v e s i t c o u ld m e a s u r e a b lv do t h a t ; a n d i t a lso b e lie v e s t h a t i f th e p r ic e le v e l c o u ld be m e a s u r e a b lv s t a b iliz e d t h a t b u s in e s s w o u ld be a c c o m m o d a t e d , a n d t h a t a g r e a t m a n y o f th e se e v ils a n d d iff ic u lt ie s w h ic h y o u s p e a k o f w o u ld be o b v ia t e d . W e fe e l t h a t i f s t a b iliz a t io n w e re m a d e th e N o r t h S t a r o f th e F e d e r a l r e s e r v e s y s t e m t h a t y o u w o u ld th e n h a v e th e p o w e r to p r e v e n t th e se p e r io d s o f in f la t io n a s w e ll as p e r io d s o f d e fla t io n f ro m g o in g b e y o n d a n d g e t t in g o u t o f h a n d , a n d t h a t is th e t h e o r y I a m s u re u p o n w h ic h th e s u b c o m m it t e e is c o n s id e r in g t h is b ill. G o v e rn o r M e y e r . Y ou u n d e rsta n d , M r . C o n g re ssm a n , th a t th e o p e n m a r k e t c o m m it t e e w h ic h d e a ls w it h o p e n m a r k e t o p e r a t io n s is c o m p o s e d o f th e g o v e r n o r s o f th e 12 b a n k s . M r . G o l d s b o r o u g h . I f t h e y w ill n o t a c t, y o u h a v e th e p o w e r to c h a n g e to a n o t h e r c o m m itt e e ? G o v e r n o r M e y e r . T h e F e d e r a l R e s e r v e B o a r d c a n o n ly a p p r o v e o r d is a p p r o v e th e o p e n m a r k e t p o lic ie s a n d o p e r a t io n s p ro p o s e d b y th e b a n k s . M r . G o l d s b o r o u g h . T h e F e d e r a l re s e r v e b a n k s a re a u t h o r iz e d to d o th e s a m e t h in g ? G o v e r n o r M e y e r . Y e s ; b u t in t a lk in g o f th e b o a r d I w a n t y o u to u n d e r s t a n d t h a t i t is n o t a c e n t r a l b a n k . M r . G o l d s b o r o u g h . I f y o u h a v e a n y s u g g e s tio n to m a k e a n d c o u ld p u t in t h is b ill in o r d e r to g iv e y o u p o w e r------G o v e r n o r M e y e r (in t e r p o s in g ). Y o u w o u ld f in d t h a t t h a t w o u ld b e o p e n in g a v e r y in t e r e s t in g s u b je c t , w h ic h w a s d is c u s s e d w h e n t h e b ill w a s p a s s e d , a n d y o u w o u ld n o t t h in k i t a d v is a b le f o r a m e m b e r o f th e b o a r d to c o m e u p h e re a n d u rg e t h a t th e p o w e rs w h ic h n o w re s id e in th e b a n k s s h o u ld b e t r a n s fe r r e d to th e b o a r d , w o u ld y o u ? M r . G o l d s b o r o u g h . I do n o t k n o w . A s a m a t t e r o f fa c t , i f w e p a s s le g is la t io n w e u se t h is la n g u a g e : “ F e d e r a l R e s e r v e B o a r d a n d F e d e ra l re se rv e b a n k s .” W e h a v e th e id e a t h a t th e re w o u ld be a s p ir it o f c o o p e r a t io n a n d t h a t w o u ld a c c o m p lis h th e p u rp o s e . G o v e r n o r M e y e r . W h e n w e g e t to t a lk in g a b o u t th ese t h in g s w e s o m e tim e s fo rg e t t h a t th e o r g a n iz a t io n o f th e s y s t e m w a s d e t e r m in e d a f t e r th e m o s t c a r e f u l s t u d y b y c o m m itt e e s o f C o n g re s s . T h e re a re * STABILIZATION OF COMMODITY PRICES 559 so m e p o w e rs re s e rv e d to th e b o a r d a n d so m e to th e b a n k s , a n d so m e lo d g e d in th e b a n k s w it h th e a p p r o v a l o f th e b o a rd . > M r . G o l d s b o r o u g h . I t w a s s u g g e s te d to th e c o m m it t e e y e s t e r d a y b y G o v e r n o r H a r r is o n t h a t t h is le g is la t io n w a s u n n e c e s s a ry b e c a u s e th e s y s t e m w a s n o w d o in g e x a c t ly th e t h in g w h ic h w a s c o n t e m p la t e d b y th e le g is la tio n . _ G o v e r n o r M e y e r . W h e n w a s t h is ? M r . G o l d s b o r o u g h . T h i s w a s y e s t e rd a y . # G o v e r n o r M e y e r . O h , y e s . W e ll, I t h in k t h a t is th e p u rp o s e . _ M r . G o l d s b o r o u g h . A n d w e a s k e d G o v e r n o r H a r r is o n w h e n it b e g a n , a n d h e s a id i t b e g a n y e s t e r d a y . _ . . . G o v e r n o r M e y e r . I t h in k h e w a s m is u n d e rs t o o d i f t h a t is w h a t h e a p p e a re d to s a y . I t h in k i t h a s a lw a y s b e e n th e o b je c t s in c e I h a v e b e e n o n th e b o a r d to w o r k in th e d ir e c t io n y o u a re t a lk in g a b o u t ; b u t i t h a s b e e n a s t ru g g le a g a in s t c o n d it io n s a t h o m e a n d a b r o a d a n d , as f a r as t h e p a r t ic u la r p re s e n t m o v e m e n t, b u y in g G o v e r n m e n t s e c u rit ie s , is c o n c e rn e d , i t w a s s t a r t e d so m e w e e k s ag o — s e v e n w e e k s ago. . , , . . ,, M r . G o l d s b o r o u g h . B u t h e s a id th e p o lic y h a d c h a n g e d m t h e la s t d a y o r so. ’ G o v e r n o r M e y e r . A s a r e s u lt o f a c o n fe re n c e c a lle d a w e e k o r 10 d a y s ago . N a t u r a lly , t h e g o v e r n o r s h a v e to c o m e f ro m a ll o v e r th e U n it e d S t a t e s — so m e o f t h e m a re s e v e r a l d a y s ’ d is t a n t a n d it t a k e s t h e m q u it e a lit t le w h ile to g a t h e r f o r a m e e tin g . I t w a s a q u e s t io n a t th e t im e — s e v e n w e e k s ago — as to w h a t s h o u ld b e th e ra t e a t w h ic h G o v e r n m e n t s e c u r it ie s s h o u ld b e p u r c h a s e d . . M r . ' G o l d s b o r o u g h . D o y o u o b je c t to s a y in g w h a t th e r a t e is n ° G o v e r n o r M e y e r . T h e r e is n o t a n y fix e d ra t e , M r . C o n g r e s s m a n ; i t is m o v a b le a n d c h a n g e a b le . I d o n o t h a v e c h a rg e o f th e o p e n m a r k e t o p e ra t io n s , as y o u k n o w . . . . . . . , M r G o l d s b o r o u g h . N o w G o v e r n o r M e y e r , i n t h is t im e of a b s o lu t e e c o n o m ic d e s t it u t io n , d o y o u n o t b e lie v e i t w o u ld b e a t re m e n d o u s lv h e lp f u l t h in g i f t h e F e d e r a l r e s e rv e s y s t e m c o u ld d e c la re a p o lic y , i f t h e y c o u ld u n d e r t a k e to s a y t h a t t h e y w e re g o in g to p u is u e a d e fin it e p o lic y in t h e p u r c h a s e o f G o v e r n m e n t s e c u r it ie s t il l a c e r t a in g o a l is re a c h e d ? I t a lk to th e b a n k e r s in m y d is t r ic t a n d t h e y s a y , “ O h , y e s ; w e k n o w t h e y h a v e b e e n b u y in g $ 2 5 ,0 0 0 ,0 0 0 o f G o v e r n m e n t s e c u r it ie s a w e e k f o r th e la s t fe w w e e k s, b u t t h e y m a y s t a rt ^ s e llm g t h e m n e x t w e e k ; a n d , t h e re fo re , w e d o n o t k n o w w h a t to d o . G o v e r n o r M e y e r . I d o n o t t h in k t h e y b e lie v e t h a t . l o re v e r s e a p o lic y a n d s t a r t to d o in g it th e o t h e r w a y n e x t w e e k h a s n e v e r b e e n e ^ ° M r . G o l d s b o r o u g h . B u t th e s y s t e m d o e s r e v e rs e it s p o lic ie s ? G o v e r n o r M e y e r . Y e s ; w it h c h a n g e o f c o n d it io n s , b u t n o t w it h ju s t a w h im s ic a l t h is -w e e k o r n e x t -w e e k a t t it u d e . T h a t is o u t o f th e q u e s t io n ; a t le a s t, as f a r a s I k n o w . . . . M r . G o l d s b o r o u g h . N o w t h e n s u p p o s e t h is b i ll w e re p a s s e d , t h is s e c t io n 1 a n d s e c t io n 2 . I w ill le a v e o u t o f c o n s id e r a t io n s e c t io n 3 f o r th e t im e b e in g , a n d th e re s p o n s ib le o ffic ia ls o f th e F e d e r a l re s e rv e s y s t e m s h o u ld s a y to th e p re s s , “ W e h a v e b e e n d ir e c t e d b y C o n g r e s s to ra is e th e p r ic e le v e l to a c e r t a in p o in t , a n d w e a re g o in g in t o th e o p e n m a r k e t a n d b u y G o v e r n m e n t s e c u r it ie s a t th e r a t e ot, w e w ill s a y , $ 2 5 ,0 0 0 ,0 0 0 a d a y , e v e r y b u s in e s s d a y , t il l t h a t p o in t is re a c h e d . 560 STABILIZATION OF COMMODITY PBICES D o y o u n o t b e lie v e t h a t t h a t w o u ld h a v e a lm o s t a m a g ic a l e ffe c t in r e s t o r in g c o n fid e n c e a n d w o u ld c a u s e h o a r d e d m o n e y to b e w it h d r a w n a n d th e m o n e y p u t in c ir c u la t io n a n d c a u s e th e r e t a ile r to b u y f ro m th e w h o le s a le r a n d th e w h o le s a le r f r o m th e m a n u f a c t u r e r a n d th e m a n u f a c t u r e r f ro m th e r a w p r o d u c e r a n d p u t p e o p le to w o r k ? G o v e r n o r M e y e r . I a m d o u b t f u l o f th e a d v a n t a g e a n d e x p e d ie n c y o f t a lk i n c o n n e c t io n w it h th o se m a tt e rs , b e c a u s e th e m a t t e r s s p e a k f o r t h e m s e lv e s . M r . G o l d s b o r o u g h . N o ; y o u d o n o t u n d e r s t a n d m e . I m e a n it to s a y a n d d o it , b o th . G o v e r n o r M e y e r . A g r e a t m a n y t ilin g s h a p p e n to in t e r r u p t a n d m a k e ch an g e s n e ce ssa ry . I t h in k y o u a s k e d t h a t q u e s t io n o f G o v e r n o r H a r r is o n . I r e a d i t in th e p a p e r. I d o n o t t h in k I w o u ld e x p re s s i t d if f e r e n t ly f ro m h is v ie w . I t h in k y o u w o u ld tie t h e ir h an ds. I t ta k e s f le x ib ilit y o u t o f th e p r o g r a m . I t h in k f le x ib ilit y is v it a l a n d y o u k n o w j u s t as w e ll a s I d o t h a t c o n d it io n s c h a n g e f r o m t im e to tim e , a n d i f y o u a n n o u n c e a p r o g r a m lik e t h a t y o u d e p r iv e y o u r s e lf o f f le x ib ilit y w h ic h y o u o u g h t to r e t a in . I w o u ld n o t c o n s id e r t h a t a g o o d o r h e lp f u l t h in g to d o . M r . G o l d s b o r o u g h . Y o u do n o t t h in k i t w o u ld r e s to re c o n fid e n c e a lm o s t im m e d ia t e ly ? G o v e r n o r M e y e r . N o ; I w o u ld n o t t h in k s o . I w o u ld n o t c o n s id e r it a d v is a b le . M r . G o l d s b o r o u g h . H e r e is a q u e s t io n , M r . S t r o n g su g g e s te d , a n d I t h in k it is a g o o d o n e . I d o n o t k n o w w h e t h e r y o u c a re to a n s w e r i t o r n o t. T h e q u e s t io n is w h e t h e r y o u fe e l t h a t th e F e d e r a l R e s e r v e B o a r d s h o u ld h a v e c h a rg e o f th e o p e n m a r k e t o p e r a t io n s ? G o v e r n o r M e y e r . I d o n o t, to t e ll y o u th e t r u t h . B u t you know b e t t e r t h a n I t h a t th e fu n c t io n s o f th e b o a r d a n d th e b a n k s h a v e b e e n d e fin e d a f t e r v e r y c a r e f u l c o n s id e r a t io n a n d in v e s t ig a t io n a t th e t im e o f th e p a s s a g e o f th e a c t, a n d a t v a r io u s s e s sio n s o f th e C o n g r e s s s in c e th e n . I d o n o t t h in k i t w o u ld b e s o u n d to t r a n s fe r th o se p o w e rs . O n th e o t h e r h a n d , y o u h a v e to r e a liz e t h a t w it h th e a d v a n t a g e o f d e c e n t r a liz a t io n o f p o w e rs y o u g e t so m e s lo w n e s s in th e w o r k in g o f th e m a c h in e r y . T h e w h o le b a n k in g s y s t e m is b a s e d o n th e id e a o f d e c e n t r a liz a t io n o f p o w e r. I t h a s b e e n th e h is t o r ic p o lic y o f th e p e o p le o f th e U n it e d S t a t e s n o t to a llo w too g r e a t c e n t r a liz a t io n o f p o w e r, p a r t ic u la r ly in b a n k in g . I a g re e w it h t h a t p o lic y ; b u t y o u c a n n o t e x p e c t th e s a m e q u ic k a c t io n a n d th e s a m e p r o m p t d e c is io n s f ro m a d e c e n t r a liz e d p o w e r t h a t y o u w o u ld f ro m a c e n t r a l b a n k , as c o n d u c t e d in E u r o p e a n f in a n c ia l c e n t e rs , w h e re th e b o a rd o f d ir e c t o r s o f o n e b a n k d ir e c t s th e o p e ra t io n s . I n th e in t e r e s t o f e f fic ie n c y a n d w is e a d m in is t r a t io n th e re is, o f c o u rs e , a c o n s t a n t d r if t t o w a r d c e n t r a liz a t io n o f p o w e r. I n th e w ise c h e c k s p la c e d u p o n c e n t r a liz e d p o w e r w h ic h a re f u n d a m e n t a l in o u r C o n s t it u t io n , w e d o d o n o t p e r m it th e c e n t r a liz a t io n o f p o w e r— a n d I d o n o t t h in k as a w h o le w e a re w r o n g in t h a t , t h o u g h s o m e tim e s i t c o s t s tim e a n d in e ff ic ie n c y as w e ll a s d e la y . W e h a v e to s t ic k to g o o d p r in c ip le s , e v e n t h o u g h w e h a v e to p a y f o r t h e m a t tim e s . M r . G o l d s b o r o u g h . I g a t h e r f ro m w h a t y o u h a v e s t a t e d t o - d a y s e v e r a l t im e s t h a t y o u fe e l w e s h o u ld h a v e a c e n t r a l b a n k in g s y s t e m , u n ifie d b a n k in g s y s t e m ? G o v e r n o r M e y e r . I a m n o t t a lk in g a b o u t a c e n t r a l b a n k in g s y s te m ; I a m s a y in g t h a t b a n k s o f d e p o s it a ll o v e r th e U n it e d S t a t e s STABILIZATION OF COMMODITY PRICES 561 s h o u ld b e f e d e r a lly c h a r t e r e d ; n o w p a r t a re so c h a r t e r e d a n d p a r t a re c h a r t e r e d b y th e S ta te . T o u c o u ld m a k e it a n y k in d o f s y s t e m v o u w a n t. Y o u c o u ld m a k e i t u n it b a n k in g o r s t a t e - w id e b a n k in g . I f th e F e d e r a l G o v e r n m e n t w e re s u p e r v is in g a n d o r g a n iz in g th e b a n k in g o f th e c o u n t r y , so f a r as c o m m e r c ia l b a n k in g w a s c o n c e rn e d , i t c o u ld d e t e rm in e w h a t k in d o f b a n k in g s y s t e m y o u s h o u ld h a v e . A s i t is n o w , i t is d e t e rm in e d b y th e F e d e r a l G o v e r n m e n t a n d 48 S ta te s , e a c h d e t e r m in in g f o r it s e lf w h a t i t w a n t s to h a v e . M r / G o l d s b o r o u g h . G o v e r n o r M e y e r , t h is b i ll p r o b a b ly a m e n d e d in c e r t a in w a y s , is g o in g to b e c o n s id e re d in e x e c u t iv e s e s sio n b y th e s u b c o m m it t e e a n d a c t e d u p o n , a n d a lso a c t e d u p o n b y th e f u ll c o m m it t e e . I t m a k e s n o d iffe re n c e w h a t o u r r e p o r t is th e f u ll c o m m it t e e w ill t a k e it s a c t io n o n t h a t re p o rt . . N o w , w e a re e x t re m e ly a n x io u s in w r it in g th e m e c h a n ic s o f t h e b ill i f w e d e c id e to r e p o r t it , to m a k e i t as e ffe c tiv e as p o s s ib le , a n d w e w o u ld lik e to h a v e th e b e n e fit o f a n y s u g g e s tio n s y o u c a n g iv e u s ? G o v e r n o r M e y e r . I f I c a n t h in k o f a n y s u g g e s tio n s b y w a y o f m o d i f ic a t io n o r a m e n d m e n t o r o th e rw is e I w i ll c o m m u n ic a t e w it h y o u , M r . C o n g re s s m a n , I d o n o t lik e to o ffe r o ff-h a n d s u g g e s tio n s f o r le g is la t io n . , , _ _ , . , ., M r . G o l d s b o r o u g h . Y e s . T h e o th e r d a y — I d o n o t k n o w w h o it w a s — s h o w e d m e a t y p e w r it t e n s t a t e m e n t a b o u t t h a t lo n g [ in d ic a t in g ] w h ic h in v o lv e d a c h a n g e in th e re s e rv e s o f m e m b e r b a n k s , w h ic h c h a n g e s d e p e n d e d u p o n th e c h a n g e in th e d e p o s it s ’ c o n d it io n a n d t h e r a p i d i t y o f c ir c u la t io n ? . . G o v e r n o r M e y e r . T h a t is th e r e p o rt I g a v e y o u t h is m o rm n g . M r . G o l d s b o r o u g h . A n d i t m ig h t b e in c a r r y in g o u t th e p u rp o s e o f t h is le g is la t io n a s e c t io n o f t h a t k in d w o u ld b e v e r y h e lp fu l. G o v e r n o r M e y e r . I t o ld y o u t h is m o rn in g , M r . C h a ir m a n , t h a t I t h o u g h t s e rio u s c o n s id e r a t io n o f t h a t r e p o r t w o u ld b e w o r t h w h ile as o n e o f th e t h in g s to h e lp a c h ie v e w h a t y o u h a v e i n m in d , s t a b ilit y ; b e c a u s e i f i t s h o u ld w o r k as i t is e x p e c te d a n d in te n d e d , i t w o u ld h a v e th e v a lu e o f c h e c k in g u n d u e e x p a n s io n a n d u n d u e c o n t r a c t io n a u t o m a t ic a lly i n so f a r as i t c a n b e d o n e t h r o u g h m o n e t a r y m e a n s . A n a u t o m a t ic d e v ic e w o r k in g in th e r ig h t d ir e c t io n w ill b e h e lp f u l in n o t h a v in g to d e p e n d e n t ir e ly o n th e e x e rc is e o f h u m a n ju d g m e n t . M r . G o l d s b o r o u g h . T h a t is w h a t w e t h in k — to g iv e so m e d ir e c t io n to t h e F e d e r a l R e s e r v e B o a r d w h ic h w e fe e l w o u ld be h e lp fu l. H a v e y o u a n y p la n w h ic h y o u w o u ld p r e fe r to t h is , a s s u m in g t h a t C o n g r e s s is g o in g to a d o p t o r a t t e m p t to a d o p t a s t a b iliz a t io n p la n ? H a v e y o u a n y t h in g in m in d w h ic h y o u p r e fe r to t h is ? G o v e r n o r M e y e r . W e ll, o n ly th e t h in g s a b o u t w h ic h I s p o k e t h is m o r n in g , M r . C o n g r e s s m a n — a b e t t e r b a n k in g s t r u c t u r e , a n im p r o v e d m e th o d ^ o f r e s e rv e s a n d b e t t e r b a n k in g s u p e r v is io n , e x a m in a t io n s , w h ic h c o u ld be a c c o m p lis h e d w it h a u n ifie d s y s t e m a n d b e t t e r m e n in p u b lic s e rv ic e . . . . . . M r . B u s b y . Y o u a re in t r o d u c in g m o re u n c e r t a in t y to o u r a lr e a d y u n c e r t a in s t a t u s . . M r . G o l d s b o r o u g h . I n c lo s in g , I w o u ld lik e to s a y t h is : I h a t w e do" n o t h a v e in m in d t h a t a n y h u m a n in s t it u t io n c a n a c t p e r fe c t ly , a n d w e re a liz e f u lly t h a t y o u w ill h a v e th e d iff ic u lt ie s t h a t y o u h a v e s p o k e n o f a n d p o s s ib ly d iff ic u lt ie s t h a t y o u h a v e n o t t h o u g h t o f a n d c a n n o t v ix u a liz e a t t h is tim e . T h e r e a re s p ir it u a l d iff ic u lt ie s a lw a y s to c o n fro n t , b e c a u s e h u m a n s e lfish n e ss is o p e r a t in g a ll th e t im e a n d 562 STABILIZATION OF COMMODITY PRICES \\ e a re c o n fr o n t e d w it h t h a t. B u t t h is is o n e t h in g w e h o p e m a y a s s is t r e s t r a in in g h u m a n s e lfis h n e s s a n d p ro m o t e ju s t ic e as b e tw e e n d iffe re n t c la s s e s o f s o c ie t y . T h a t is th e p u r p o s e o f it , a n d w e b e lie v e a lso t h a t a n y le g is la t io n t h a t is p a s s e d w ill b e s y m p a t h e t ic a lly a d m in is t e re d b y th o se in c h a rg e o f it . T h e r e is ju s t o n e q u e s t io n t h a t h a s b e e n s u g g e s te d to m e . H a s it b een n e c e s s a r y to in v o k e th e m o r e lib e r a l re d is c o u n t p o w e rs o f th e G la s s - S t e a g a ll b i ll y e t ? G o v e r n o r M e y e r . Y o u m e a n s e c t io n 1 0 a a n d 10 b . T h e re h ave b e e n a fe w a p p lic a t io n s u n d e r 1 0 -b . I n m o s t c a s e s b a n k s t h a t w o u ld h a v e b o rro w e d u n d e r 1 0 -b a re u s in g th e R e c o n s t r u c t io n F in a n c e C o r p o r a t io n . T h e r e h a v e b e e n a fe w c a s e s w h e re lo a n s h a v e b e e n o b t a in e d u n d e r 1 0 -b , b u t n o t m a n y . I t h a n k y o u v e r y m u c h f o r y o u r c o u r t e s y to m e h e re . M r . G o l d s b o r o u g h . W e a p p r e c ia t e v e r y m u c h .y o u r k in d n e s s in t h is d is c u s s io n , w h ic h h a s b e e n v e r y in t e r e s t in g , a n d I t h in k it w ill b e o f h e lp to u s. G o v e r n o r M e y e r . I a m a f r a id I h a v e n o t b e e n a b le to c o n t r ib u t e a s m u c h as I w o u ld lik e to c o n t r ib u t e . STATEMENT OF E. A. GOLDEN WEISER, DIRECTOR OF DIVISION OF RESEARCH AND STATISTICS, FEDERAL RESERVE BOARD M r . G o l d s b o r o u g h . T h e s u b c o m m it t e e u n d e r s t a n d s t h a t y o u a re o n th e s t a ff o f th e F e d e r a l R e s e r v e B o a r d , a n d do n o t c a r e to d is c u s s it s p o lic ie s , a n d w e t h in k t h a t is p r o p e r. Y e w ill d ir e c t o u r d is c u s s io n fo f a c t u a l m a t t e r s f o r t h a t re a s o n . I , as o n e m e m b e r o f th e s u b c o m m itt e e , w o u ld lik e to h a v e e x p la in e d th e p la n f o r ch an g in °* th e m e t h o d o f r e s e r v e s f o r m e m b e r b a n k s . . M r . G o l d e n w e i s e r . I s h a ll b e v e r y g la d to g iv e y o u so m e e x p la n a t io n o f it . I w a s a m e m b e r o f th e c o m m itt e e a n d h a v e s o m e f a m il i a r i t y w it h it. T h e q u e s t io n o f m e m b e r b a n k r e s e r v e s h a s b e e n o n e r e c e iv in g s t u d y in th e F e d e r a l re s e r v e s y s t e m f o r a n u m b e r o f y e a r s , a n d th e re w a s a la rg e a m o u n t o f a c c u m u la t e d e x p e rie n c e o n it . O u r c o m m itt e e a f t e r w o r k in g o n i t f o r th re e m o n th s , f o u n d th e re w e re e s s e n t ia lly th re e fe a t u re s in it . T h e m e m b e r b a n k s , as y o u k n o w , m u s t h o ld a ll t h e ir le g a l re s e rv e s as b a la n c e s o n d e p o s it w it h th e F e d e r a l r e s e r v e b a n k s , a n d t h e y m u s t n a v e 3 p e r c e n t o n t im e d e p o s it s a n y w h e r e in th e u n it e d S ta te s , a n d 7, 10, a n d 13 p e r c e n t o n d e m a n d d e p o s its , d e p e n d m g o n w h e t h e r th e b a n k is lo c a t e d in a c o u n t r y d is t r ic t o r in a r e s e rv e c it y , o r in o n e o f th e tw o c e n t r a l r e s e r v e c it ie s , N e w Y o r k a n d C h ic a g o . T h i s s y s t e m h a s b e e n in o p e r a t io n f o r a n u m b e r o f y e a rs , a n d i t h a s n o t w o r k e d s a t is f a c t o r ily . T h e m a in p o in t in wrh ic h i t h a s n o t b e e n s a t is f a c t o r y a re t h a t , in th e f ir s t p la c e , th e 3 p e r c e n t r e s e rv e o n t im e d e p o s it s h a s e n c o u r a g e d a la rg e a m o u n t o f t r a n s fe r s fro m d e m a n d d e p o s it s to t im e d e p o s its , b e c a u s e i t is a d v a n t a g e o u s to b a n k s to h a v e as la rg e a p a r t o f t h e ir d e p o s it s o n t im e as p o s s ib le , s in c e th e re s e r v e s a re s m a lle r . . A s G o v e r n o r M e y e r p o in t e d o u t t h is m o r n in g , t h is h a s r e s u lt e d in a c o m p e t it io n fo r t im e d e p o s it s a n d in c r e a s in g ra t e s p a id o n t im e d e p o s its , v d t h th e c o n s e q u e n c e t h a t th e b a n k s w e re o b lig e d to s e e k m o re a n d m o re p r o fit a b le in v e s t m e n t s , a n d a n in c r e a s in g y ie ld a lm o s t i n v a r i a b ly c a r r ie s a n in c r e a s e d r is k , so t h a t th e r i s k o f th e b a n k in g b u s in e s s in c re a s e d . T h a t w a s o n e f a c t o r in th e s it u a t io n — t h e STABILIZATION OF COMMODITY PRICES 563 e v a s io n o f re s e rv e r e q u ir e m e n t s t h ro u g h th e in c re a s e d c la s s ific a t io n o f d e p o s it s w h ic h w e re in f a c t s u b je c t to d e m a n d , as t im e d e p o s it s . I t m a d e it p o s s ib le f o r b a n k c re d it s to grow* w it h o u t c o r r e s p o n d in g g ro w ffh in re s e rv e re q u ire m e n t s . T h e o th e r b a d fe a t u re o f e x is t in g r e s e rv e r e q u ir e m e n t s w a s t h a t i t w a s in e q u it a b ly d is t r ib u t e d b e tw e e n th e m e m b e r b a n k s . T h e s e in e q u a lit ie s g re w u p ; t h e y w e re n o t a n t ic ip a t e d b u t e x p e rie n c e h a s d e m o n s t ra t e d th e m . T h e r e w e re p r i m a r i ly tw o o f th e m . O n e o f t h e m a ro se fro m th e f a c t t h a t c a s h in v a u lt d id n o t c o u n t as re s e rv e s w h ic h re s u lt e d in a d is c r im in a t io n in f a v o r o f th e b a n k s lo c a t e d in a c it y w h e re th e re is a F e d e r a l r e s e rv e b a n k o r b ra n c h , b e c a u s e t h e y c o u ld g et a lo n g w it h a v e r y s m a ll a m o u n t o f c a s h s in c e t h e y c o u ld g e t c a s h a t a n y t im e b y m e s s e n g e r fro m th e re s e rv e b a n k ; w h ile th e c o u n t r y b a n k s w h e re i t t o o k a d a y o r twro to g et c a s h h a d to h a v e a m u c h la r g e r a m o u n t o f c a s h in v a u lt in o r d e r to m e e t e m e rg e n c ie s . S in c e t h is c a s h d id n o t c o u n t as re s e rv e , th e c o n s e q u e n c e w a s t h a t th e a c t u a l re s e r v e b u rd e n o n th e c o u n t r y b a n k s w a s m u c h g re a t e r t h a n i t wras o n th e c it y b a n k s , a n d t h a t w a s n o t a n t ic ip a t e d w h e n in 1 9 1 7 th e la w w a s p a s s e d w h ic h p re s c rib e d t h a t n o t h in g b u t b a la n c e s in r e s e rv e b a n k s s h o u ld c o u n t as re s e rv e s i t w a s a s s u m e d t h e n t h a t a b o u t 5 p e r c e n t w o u ld be k e p t in c a s h ’ a n d s in c e t h is a m o u n t w a s n o t g o in g to be c h a n g e d it m ig h t as w e ll be le f t o u t o f th e la w . A s a m a t t e r o f fa c t, th e a m o u n t h a s d im in is h e d t re m e n d o u s ly , fro m a b o u t 5 p e r c e n t to a b o u t 2 p e r c e n t, a n d t h a t d e c re a s e h a s n o t b e e n e q u it a b ly d is t r ib u t e d . I t h a s b e e n a d e c re a s e in th e F e d e r a l re s e rv e c it ie s w h e re t h e y h a v e th e f a c ilit ie s o f F e d e r a l re s e rv e b a n k s , a n d n o t in th e c o u n t r y b a n k s . T h e r e h a s b e e n as m u c h as fiv e o r s ix h u n d r e d m illio n d o lla r s d e c re a s e in r e s e rv e s as a re s u lt o f d im in is h in g th e c a s h , a n d it h a s w o rk e d in e q u it a b ly . T h e o t h e r f e a t u re t h a t h a s m a d e o u r re s e rv e s w o r k in e q u it a b ly h a s b e e n th e m e t h o d b y w h ic h b a n k s fig u re t h e ir n e t d e p o s its a g a in s t w h ic h t h e y h a v e to h a v e re s e rv e d . T h e y a re p e rm it t e d to d e d u c t c h e c k s in p ro c e s s o f c o lle c t io n a n d b a la n c e s h e ld w it h o t h e r b a n k s o n ly f ro m a m o u n t s t h a t o t h e r b a n k s h o ld w it h th e m . A s th e law’ s a y s it, t h e y c a n o n ly d e d u c t “ d u e f r o m ’s ” fro m “ d u e t o ’s . ” T h e b a n k s in th e c it ie s c a r r y la rg e b a la n c e s f o r c o u n t r y c o rre s p o n d e n t s a n d h a v e p le n t y o f “ d u e t o ’s ” f ro m w h ic h to d e d u c t t h e ir “ d u e f r o m ’s . ” C o u n t r y b a n k s , o n th e h a n d , h a d b a la n c e s w it h th e c it y b a n k s w h ic h t h e y h a d to h a v e as a m a t t e r o f o p e r a t io n ; b u t t h e y h a d n o t h in g f ro m w h ic h to d e d u c t t h e ir b a la n c e s b e c a u s e n o o t h e r b a n k s d e p o s it e d m o n e y w it h th e m . A s a c o n s e q u e n c e t h a t a lso w o rk e d a g a in s t th e c o u n t r y b a n k s . N o w ’ , th e se w e re th e tw o p r in c ip a l fe a t u re s o f in e q u a lit y . In a d d it io n to t h a t, a n d t h a t is m u c h m o re im p o r t a n t , th e p a r t is t h a t r e s e rv e r e q u ir e m e n t s d id n o t c h a n g e w it h th e c o n d it io n s o f b u s in e s s . In s t e a d o f in c r e a s in g w h e n b u s in e s s in c re a s e d , t h e y w e re li k e ly to d im in is h w h e n b u s in e s s in c re a s e d , a n d in s t e a d o f d e c lin in g w h e n b u s in e s s b e c a m e s la c k t h e y w e re lik e ly to in c re a s e w h e n b u s in e s s b e c a m e s la c k . T h e re a s o n f o r t h a t w a s p a r t ly t e c h n ic a l, b e c a u s e w h e n b u s in e s s wras s la c k th e c o u n t r y b a n k s w o u fd s e n d t h e ir d e p o s it s to th e c it y b a n k s w h ic h w o u ld m e a n th e re w o u ld b e a d u p lic a t io n o f d e p o s its , th e d e p o s it w it h th e c o u n t r y b a n k b y th e c u s t o m e r a n d w it h th e c it y b a n k b y th e c o u n t r y b a n k ; a n d th e la t t e r re s e rv e wras in th e 13 p e r c e n t c la s s . So t h a t w h ile b u s in e s s w o u ld go d o w n th e v o lu m e STABILIZATION OF COMMODITY PBICES STABILIZATION OF COMMODITY PRICES o f re s e rv e s w o u ld go u p . W h e n b u s in e s s w o u ld b e c o m e m o re a c t iv e , a n d in t e re s t r a t e s w o u ld rise , so m e o f th e c o u n t r y b a n k s w o u ld w it h d r a w so m e o f th e se d e p o s its to u se a t h o m e o r to p la c e in th e m a rk e t , th e d u p lic a t io n w o u ld be e lim in a t e d , a n d r e s e rv e r e q u ir e m e n t s w o u ld d e c lin e . t T o s u m u p , th e e x is t in g la w o n re s e rv e s is s u s c e p t ib le o f e v a s io n , it w o rk s in e q u it a b ly as b e tw e e n b a n k s , a n d w o r k s c o n t r a r y to the t re n d o f b u s in e s s c o n d it io n s a n d to F e d e r a l r e s e rv e c r e d it p o lic y . W e t h o u g h t, th e re fo re , t h a t i t w o u ld b e w ise to m o d if y e x is t in g r e s e rv e re q u ir e m e n t s , a n d a f t e r a g re a t d e a l o f f ig u r in g w e fo u n d t h a t o n e o f th e r e a l d iff ic u lt ie s o f th e s it u a t io n w a s t h a t it a p p lie d to re g io n s ; t h a t is, to b a n k s in c e n t r a l r e s e r v e c it ie s , in re s e r v e c it ie s , a n d to c o u n t r y b a n k s ; w h e re a s th e re w e re g re a t d iffe re n c e s b e tw e e n b a n k s in th e s a m e c it y . T h e r e a re b a n k s in N e w Y o r k C i t y t h a t d o a c o u n t r y b a n k b u s in e s s a n d b a n k s in th e c o u n t r y t h a t d o m o re o f a c it y b u s in e s s . T h e b e s t w a y to d o w a s to f in d a w a y b y w h ic h e a c h b a n k c o u ld b e ju d g e d b y it s o w n b u s in e s s , a n d , e v e n f u r t h e r t h a n t h a t , b y w h ic h e a c h a c c o u n t c o u ld b e ju d g e d b y it s o w n b e h a v io r . If a b a n k h a s a s a v in g s a c c o u n t t h a t d o e s n o t t u r n o v e r o n c e a y e a r-— it d o es n o t r e q u ir e a g re a t d e a l o f r e s e rv e . O n th e o th e r h a n d , i f it is a d e p o s it t h a t is u t iliz e d a l l ‘th e tim e a n d c ir c u la t e s a ll th e tim e , th e n i t s h o u ld c a r i y a h ig h e r r e s e rv e . W e w o r k e d o u t a p la n b y w h ic h w e d o a w a y w it h th e c la s s ific a t io n o f c itie s , d o a w a y w it h th e c la s s ifi c a t io n o f d e p o s its , m a k e p r o v is io n f o r c o u n t in g c a s h in v a u l t to a v o id o n e o f th e d iff ic u lt ie s I m e n tio n e d , a n d a ls o e q u a liz e th e m a t t e r o f d e d u c t io n s . A f t e r b r u s h in g a ll th e se t e c h n ic a l d iff ic u lt ie s o u t o f th e w a y , w e c o m e o u t w it h t o t a l n e t d e p o s it s a ll o f w h ic h c a r r y a 5 p e r c e n t re s e rv e p lu s 5 0 p e r c e n t re s e r v e o n th e a v e ra g e d a ily t u r n - o v e r o f th e d e p o s its . I w o u ld lik e to s h o w y o u a c h a r t t h a t s h o w s y o u h o w th e se r e s e r v e r e q u ir e m e n t s w o u ld h a v e w o rk e d , c o m p a r e d w it h h o v T e x is t in g r e q u ir e m e n t s h a v e w o r k e d s in c e 1924 . T h e s o lid lin e show ’s h o w p r e s e n t r e s e rv e r e q u ir e m e n t s h a v e w o rk e d , a n d th e b r o k e n lin e s h o w s h o w o u r p ro p o s e d r e q u ir e m e n t w o u ld h a v e w o rk e d . Y o u c a n see t h a t d u r in g th e p e r io d o f v e r y r a p id e x p a n sio n , th e a c t u a l r e s e r v e r e q u ir e m e n t s w e re g o in g d o w n , n o t v e r y r a p id ly , b u t g o in g d o w n . The p ro p o s a l w’h ic h w e h a d w rnuld h a v e m a d e th e m go u p . M r . G o l d s b o r o u g h . I t wro u ld h a v e h a d a s t a b iliz in g e ffe ct? M r . G o l d e n w ’ e i s e r . Y e s ; as th e b o o m d e v e lo p e d i t w o u ld h a v e c o n s t a n t ly m a d e th e b a n k s h a v e to b o r r o w m o re fro m th e F e d e r a l R e s e r v e a n d g iv e th e F e d e r a l R e s e r v e t h a t m u c h b e t t e r c o n t r o l o v e r th e s it u a t io n . T h e r e w’as a b o u t $ 4 0 0 ,0 0 0 ,0 0 0 m o r e t h a n t h e y w o u ld h a v e h a d to b o rro w ’ , a n d i t w o u ld h a v e f a lle n e x a c t ly o n th e b a n k s w h ic h n e e d e d to b e c o n t ro lle d , b e c a u s e i t wras th e b a n k s w h ic h h a d th e la r g e s t a m o u n t o f s p e c u la t iv e a c t iv it y a n d b r o k e r s ’ a c c o u n t s , w’h ic h t u r n e d o v e r s e v e r a l t im e s a d a y . T h e y a re th e o n e s t h a t w 'o u ld h a v e b e e n h it b y it . T h e lit t le c o u n t r y b a n k s wro u ld n o t h a v e b e e n h it . I n 1 9 2 0 a n d 19 21 w’h e n m o s t o f t h e s p e c u la t io n w’ as c o m m o d it y s p e c u la t io n i t w’o u ld h a v e b e e n a d iffe r e n t se t o f b a n k s . T h i s c h a r t d o e s n o t c a r r y i t b a c k t h a t fa r. Y o u w ill n o t ic e t h a t o u r d e p re s s io n s t a rt e d a t th e e n d o f 19 2 9 a n d c o n t in u e d t h r o u g h 1 9 3 0 a n d 1 9 3 1 . 1 o u wdll n o t ic e t h a t th e e x is t in g r e s e r v e r e q u ir e m e n t s s t a y u p a n d s h o w r e la t iv e ly lit t le c h a n g e t ill th e v e r y la s t p e r io d . D u r i n g th e la s t p e rio d , w it h a d e c lin e o f d e p o s it s t h a t is a b s o lu t e ly u n p r e c e d e n t e d in h is t o r y , th e r e s e rv e r e q u ir e m e n t f in a lly d id go dowm . B u t t h e y s t a y e d u p w it h b u s in e s s g o in g d o w n a n d p r ic e s g o in g d o w n f o r a lo n g p e rio d o f tim e . W h e re a s , th e o t h e r p la n w o u ld h a v e g iv e n y o u a d e c re a s in g r e s e r v e re q u ire m e n t . I n o t h e r w o rd s , i t w’o u ld h a v e b e e n e q u iv a le n t to p u r c h a s e o f t h a t m u c h G o v e r n m e n t s e c u r it y r ig h t s t r a ig h t t h ro u g h t h is p e r io d ; so t h a t a t th e p re s e n t tim e w e w o u ld h a v e a b o u t $ 2 0 0 , 0 0 0 ,0 0 0 le s s re s o u rc e s t h a n u n d e r e x is t in g la w . I t is a s y s t e m b y w h ic h re s e rv e s a re d is t r ib u t e d m o re e q u it a b ly a m o n g th e b a n k s , a n d u n d e r w h ic h t h e y in c r e a s e w h e n b u s in e s s is e x p a n d in g a n d d e c re a s e wdien th e re is a d e p re s s io n . I t w o u ld b e a h e lp fu l d e v ic e . 564 565 MEMBER BANK RESERVE REQUIREMENTS UNDER DEBIT FORMULA M r . G o l d s b o r o u g h . D i d y o u re d u c e t h is t h in g to a f o r m a l p ie c e o f le g is la t io n ? M r . G o l d e n w e i s e r . I n t h is r e p o r t w d iich w’ as g iv e n to y o u , t h e re w’ as a p r o p o s a l o f th e c o m m itt e e o n th e la s t p a g e , b u t I w’o u ld lik e to a d d t h a t a f t e r t h is r e p o rt wra s p u b lis h e d w’e h a v e g iv e n t h is m a t t e r a g o o d d e a l o f a d d it io n a l s t u d y a n d a m e n d e d th e p ro p o s a l in s o m e p a r t ic u la r s . T h e a m e n d e d p r o p o s a l w’a s in c lu d e d in th e r e p o r t w h ic h th e F e d e r a l R e s e r v e B o a r d m a d e to th e S e n a te C o m m it t e e o n B a n k in g a n d C u r r e n c y ; a n d i f y o u wra n t to c o n s id e r th e le g is la t io n I s u g g e s t t h a t y o u t a k e t h is la t e s t v e r s io n r a t h e r t h a n th e o t h e r o ne, b e c a u s e th e re " a re so m e im p o r t a n t a m e n d m e n t s w’h ic h h a v e d e v e lo p e d . M r . G o l d s b o r o u g h . O n y e s t e r d a y G o v e r n o r H a r r i s o n e x p la in e d to u s s o m e t h in g t h a t h a d b e e n d o n e , so m e p r a c t ic e t h a t h a d b e e n a d o p t e d in a n a t t e m p t to c o n t r o l c re d it s u s e d f o r s t o c k - m a r k e t s p e c u la t io n , a n d f r a n k l y I d id n o t c a t c h — I a m s u re I d id n o t c a t c h e x a c t ly w h a t h e m e a n t. D o y o u know ’ w h a t h e h a d re fe re n c e to ? 566 STABILIZATION OF COMMODITY PRICES M r . G o l d e n w e i s e r . I b e lie v e w h a t y o u a re r e fe r r in g to is a r u le a d o p t e d b y th e N e w Y o r k C le a r in g H o u s e . T h e r u le a d o p t e d b y th e N e w Y o r k C le a r in g H o u s e t h a t n o m e m b e r o f th e c le a r in g h o u s e c a n p la c e lo a n s in th e m a r k e t f o r a c c o u n t o f o u ts id e c o r p o r a t io n s . In o t h e r w o rd s , th o se lo a n s f o r a c c o u n t o f o th e rs w h ic h w e n t to s u c h e n o rm o u s e x te n t in 1929, a re n o w o u t la w e d b y a r u le o f th e c le a r in g h o u se . M r . S t r o n g . T h a t is , b a n k s o u t in Io w a a n d K a n s a s c o u ld n o t s e n d t h e ir re s e r v e s in h e re ? . M r . G o l d e n w e i s e r . N o , i t d o e s n o t a p p ly to b a n k s . I f a b ig c o r p o r a t io n s h o u ld d e c id e b e c a u s e th e c a ll r a t e h a p p e n e d to b e 6 o r 7 o r 8 p e r c e n t to s a y : “ T h e r e is n o u se in k e e p in g o u r m o n e y o n d e p o s it in th e b a n k a t th e s m a ll in t e r e s t r a t e w e g e t ; l e t ’s p u t i t in th e c a ll m a rk e t .” T h o s e lo a n s w e re a n e v il in 19 2 9 b e c a u s e t h e y g o t in w it h o u t b e in g u n d e r c o n t r o l o f t h e r e s e r v e b a n k s . T h e y d id n o t in c r e a s e d e p o s it s a n d d id n o t in c r e a s e b a n k lo a n s . M r . S t r o n g . D o y o u n o t t h in k t h a t r u le o u g h t to be a b o lis h e d to p r e v e n t b a n k s f r o m o t h e r S t a t e s s e n d in g in d e p o s it s ? M r . G o l d e n w e i s e r . I p r e fe r n o t to d is c u s s t h in g s t h a t m ig h t be p ro p o s e d , b u t I m ig h t a d d t h a t th e re is a n a m e n d m e n t in th e G la s s b i ll w h ic h m a k e s t h is r u le o f th e N e w Y o r k C le a r in g H o u s e a p a r t o f th e p e r m a n e n t la w . M r . G o l d s b o r o u g h . I s t h a t ju s t b a n k s ? M r . G o l d e n w e i s e r . N o . I m e a n i t r e fe rs to n o n b a n k in g le n d e rs . M r . G o l d s b o r o u g h . S in c e th e p a s s a g e o f th e G la s s -S t e a g a ll b ill, h o w m u c h re s e rv e h a v e y o u ? M r . G o l d e n w e i s e r . F r e e g o ld o n th e la s t e s t d a te w h ic h I h a v e , w h ic h w a s A p r i l 12, w a s $ 3 2 3 ,0 0 0 ,0 0 0 . M r . G o l d s b o r o u g h . $ 3 2 3 ,0 0 0 ,0 0 0 ? * M r . G o l d e n w e i s e r . Y e s , s ir. M r . G o l d s b o r o u g h . H ow m u c h re se rv e ? M r . G o l d e n w e i s e r . W e h a v e ex ce ss r e s e r v e s o f a b illio n a n d a h a lf . M r . G o l d s b o r o u g h . T h a t m a ke s a to ta l of h ow m u ch ? M r . G o l d e n w e i s e r . O n e in c lu d e s th e o t h e r ; $ 1 ,5 0 0 ,0 0 0 ,0 0 0 is th e f u ll a m o u n t w e h a v e . M r . G o l d s b o r o u g h . N o w , h o w m u c h d o es i t t a k e to m a in t a in y o u r f u ll 4 0 p e r c e n t re s e rv e , w h ic h v o u h a v e a r ig h t to w a iv e , i f y o u see f it ? " M r . G o l d e n w e i s e r . I h a v e n o t th e fig u re s h ere, b u t a b o u t a b illio n d o lla r s is w h a t w e n e e d f o r r e s e r v e a g a in s t n o te s, a n d a b o u t s e v e n h u n d r e d m illio n s a g a in s t d e p o s it s ; so t h a t w e h a v e a b o u t a b illio n s e v e n h u n d r e d m illio n t h a t is r e q u ir e d , a n d th e o t h e r is e x ce ss re s e rv e s . M r . G o l d s b o r o u g h . A b o u t h o w m a n y g o ld c e rt ific a t e s a re th e re o u t t h a t y o u c o u ld u s e f o r r e s e r v e s i f y o u w a n t e d to ? M r . G o l d e n w e i s e r . A b o u t $ 8 0 0 ,0 0 0 ,0 0 0 in g o ld c e r t ific a t e s . M r . G o l d s b o r o u g h . H o w m u c h is t h a t in a ll? M r . G o l d e n w e i s e r . Y o u c a n a d d to y o u r $ 1 ,5 0 0 ,0 0 0 ,0 0 0 a b o u t 60 p e r c e n t o f th e g o ld c e r t ific a t e s w e c a ll in , b e c a u s e w e w o u ld h a v e to p u t o u t n o te s a g a in s t th e m . So y o u c a n a d d 6 0 p e r c e n t o f $ 5 0 0 ,0 0 0 , 0 0 0 . T h a t is a b o u t $ 3 0 0 ,0 0 0 ,0 0 0 . T h e a c t u a l a n d p o t e n t ia l e x ce ss re s e rv e s a m o u n t to a b o u t $ 1 ,8 0 0 ,0 0 0 ,0 0 0 . M r . S t r o n g . I u n d e r s t o o d y o u to s a y t h e g o ld to b e u s e d to p u t b a c k * o f th e c e rt ific a t e s f o r th e s e r v ic e m e n w o u ld b e a b o u t $ 2 0 ,0 0 0 ,0 0 0 . STABILIZATION OF COMMODITY PRICES 567 M r . G o l d e n w e i s e r . T h e q u e s t io n , as I u n d e rs t o o d it , w a s h o w m u c h g o ld th e T r e a s u r y h a d ? M r . S t r o n g . O h , y e s. M r . G o l d e n w e i s e r . I t h in k I o v e rs t a t e d i t th e n . T h e re s t is e it h e r in t h e F e d e r a l re s e rv e s y s t e m o r im p o u n d e d 1 0 0 p e r c e n t a g a in s t g o ld c e rt ific a t e s . _ M r . S t r o n g . T h e r e is a p p r o x im a t e ly $ 1 ,8 0 0 ,0 0 0 ,0 0 0 o f re s e rv e s , in c lu d in g g o ld c e rt ific a t e s a n d e x ce ss r e s e rv e s ? M r . G o l d e n w e i s e r . Y e s , s ir. M r . S t r o n g . T h i s is e x ce ss re s e rv e s ? M r . G o l d e n w e i s e r . Y e s , s ir. t # M r . S t r o n g . T h e F e d e r a l re s e r v e s y s t e m h a s a r ig h t to d is p e n s e w it h re s e rv e s , i f i t sees fit ? M r . G o l d e n w e is e r . Y e s. M r . S t r o n g . H o w m u c h is t h a t ? _ M r . G o l d e n w e i s e r . H o w m u c h is th e r e s e rv e w e h a v e ? M r . S t r o n g . Y e s. M r . G o l d e n w e i s e r . A b o u t $ 1 ,7 0 0 ,0 0 0 ,0 0 0 . M r . S t r o n g . T h a t is a b o u t $ 3 ,5 0 0 ,0 0 0 ,0 0 0 ? M r . G o l d e n w e i s e r . Y e s ; I s h o u ld t h in k so. M r . S t r o n g . S o t h a t it is p o s s ib le in c a se it b e c a m e n e c e s s a ry f o r t h a t $ 3 ,5 0 0 ,0 0 0 ,0 0 0 to b e u s e d as a 4 0 p e r c e n t b a s is f o r th e is s u a n c e o f F e d e r a l re s e rv e n o te s ? M r . G o l d e n w e i s e r . Y e s ; if w e s u s p e n d — n o t o n ly s u s p e n d e d b u t d id a w a y w it h a ll r e s e rv e r e q u ire m e n t s . M r . S t r o n g . W h ic h y o u h a v e a r ig h t to d o ? M r . G o l d e n w e i s e r . T h e F e d e r a l R e s e r v e B o a r d h a s a r ig h t to d o i t ; b u t h a s to c h a rg e a n e n h a n c e d ra te . I t is n o t a p a in le s s p ro c e s s . I t w o u ld m a k e m o n e y v e r y e x p e n s iv e . O n t h a t b a s is y o u c o u ld is s u e c lo se to $ 9 ,0 0 0 ,0 0 0 ,0 0 0 , b u t o n c e r e s e rv e r e q u ir e m e n t s a re re m o v e d t h e y ce a se to b e a c o n t e n t io n a n d t h e re w o u ld r e a lly b e n o lim it to th e n o te s th e F e d e r a l r e s e rv e b a n k s c o u ld is s u e . M r . S t r o n g . I n F e d e r a l r e s e rv e n o te s i f y o u h a d to ? M r . G o l d e n w e i s e r . Y e s , s ir. M r . B u s b y . I n y o u r o ffic ia l b u lle t in f o r M a r c h , o n p a g e 14 3 o f t h a t b u lle t in , y o u go in t o th e fig u re s t h a t M r . G o ld s b o r o u g h w a s s t r ik in g a t in h is q u e s t io n s ? M r . G o l d e n w e i s e r . Y e s , s ir. M r . B u s b y . I n a r a t h e r c a r e fu l w a y ? M r . G l o d e n w e i s e r . Y e s , s ir. W e d id d is c u s s t h a t i n c o n n e c t io n w it h th e p a s s a g e o f th e G la s s -S t e a g a ll b ill. M r . B u s b y . I f th e c h a ir m a n d o es n o t h a v e a n y o b je c t io n , I w o u ld lik e to re a d th e f u ll w o r k in g o u t o f th e fa c t s as re la t e to t h a t q u e s t io n . M r . G o l d s b o r o u g h . A l l r ig h t . M r . B u s b y . F r o m t h a t b u lle t in I r e a d as f o llo w s : On February 24, for instance, reserves of the Federal reserve banks were $3,140,000,000* Federal reserve notes in actual circulation were $2,643,000,000, and deposits $1,973,000,000. The 35 per cent reserve against deposits would be $691,000,000 which would have absorbed all of the $102,000,000 in reserves other than gold and in addition $489,000,000 of the gold. M r . G o l d e n w e i s e r . T h a t is r ig h t . 568 STABILIZATION OF COMMODITY PRICES M r . B u s b y ( r e a d in g ) : And the 40 per cent reserve against Federal reserve notes would be $1,057,000, 000, so that the total reserve requirements would be— A s I u n d e r s t a n d f o r a ll o u t s t a n d in g F e d e r a l r e s e r v e n o te s -------M r . G o l d e n w e i s e r . A n d d e p o s its . M r . B u s b y . A n d d e p o s it s o n h a n d w it h t h e F e d e r a l r e s e r v e b a n k s — “ a t o t a l o f $ 1 ,7 4 8 ,0 0 0 ,0 0 0 ; a n d e x ce ss r e s e r v e s ,” w h ic h I u n d e r s t a n d to be g o ld t h a t w o u ld n o t be e m p lo y e d i f th e G la s s - S t e a g a ll b ill w e re p u t in t o o p e ra t io n , th e a m o u n t o f $ 1 ,3 9 2 ,0 0 0 ,0 0 0 ? M r . G o l d e n w e i s e r . Y e s . T h a t h a s g o n e u p s in c e th e n to $ 1 ,5 0 0 ,0 0 0 ,0 0 0 . M r . B u s b y . T h a t a m o u n t o f g o ld h a s in c r e a s e d s in c e t h is b u lle t in w a s p u b lis h e d to $ 1 ,5 0 0 ,0 0 0 ,0 0 0 ? M r . G o l d e n w e i s e r . Y e s , s ir . M r . B u s b y . O f c o u r s e t h a t w o u ld in c r e a s e y o u r a b il it y to in c r e a s e c u r r e n c y a g a in s t y o u r a d d e d a m o u n t o f g o ld ? M r . G o l d e n w e i s e r . Y e s , s ir . M r . B u s b y . Y o u r b u lle t in c o n t in u e s : On the basis of these excess reserves the Federal reserve banks could issue $3,500,000,000 of credit, if the demand were for currency, and $4,000,000,000 if it were for deposits at the reserve banks. T h a t is r ig h t . N o w , w it h th e in c r e a s e o f g o ld y o u m e n t io n e d , th e se fig u re s w o u ld be in c r e a s e d s o m e w h a t ? M r . G o l d e n w e i s e r . In c r e a s e d s o m e w h a t. M r . B u s b y . S o t h a t, to m y m in d , is a s u g g e s tio n t h a t w it h y o u r p re s e n t s e t -u p , p r e s e n t g o ld h o ld in g s , i f y o u p u t in t o o p e r a t io n th e G la s s - S t e a g a ll b ill, y o u c o u ld is s u e a n d g iv e to th e c o u n t r y s a fe ly $ 3 ,5 0 0 ,0 0 0 ,0 0 0 a d d it io n a l c u r r e n c y i n th e f o r m o f F e d e r a l r e s e r v e n o te s ? M r . G o l d s b o r o u g h . I n a d d it io n to t h a t, i f y o u re d u c e th e r e s e r v e r e q u ire m e n t , b y r e d u c in g th e r e q u ir e m e n t b e lo w 4 0 p e r c e n t, in p r o p o r t io n as y o u re d u c e th e r e q u ir e m e n t b e lo w 4 0 p e r c e n t y o u c o u ld c o n t in u e to in c re a s e y o u r F e d e r a l r e s e r v e is s u e s t il l y o u c o u ld r e a c h a m a x im u m o f s o m e th in g lik e $ 9 ,0 0 0 ,0 0 0 ,0 0 0 ? M r . G o l d e n w e i s e r . N in e b illio n s , o r a n y o t h e r a m o u n t . T h e re w o u ld b e n o lim it . I w o u ld lik e to m a k e j u s t o n e c o m m e n t o n t h is ; t h a t is, t h a t th e F e d e r a l r e s e r v e b a n k s c a n is s u e F e d e r a l r e s e r v e n o te s o n ly to th e e x te n t t h a t th e n o te s a re r e q u ir e d b y th e b u s in e s s o f th e c o u n try . F e d e r a l re s e r v e b a n k s h a v e n o c h a n n e l f o r is s u in g n o te s j u s t o n th e b a s is o f t h e ir re s e r v e s w it h o u t so m e a sse t c o m in g in . They c a n is s u e F e d e r a l r e s e r v e n o te s i f b u s in e s s in c re a s e s , a n d i f p e o p le w a n t m o re F e d e r a l r e s e r v e n o te s, t h e y c a n o b t a in th e m . The F e d e r a l r e s e r v e b a n k s , o w in g to th e se re s e rv e s , a re in p o s it io n to m e e t th e d e m a n d . T h e y h a v e n o w a y h o w e v e r, n o t e v e n t h r o u g h o p e n m a r k e t p u rc h a s e s , to is s u e c u r r e n c y , u n le s s th e re is a d e m a n d f ro m th e o u ts id e . I w o u ld lik e to e la b o ra t e t h a t. A s s u m in g th e F e d e r a l r e s e r v e b u y s $ 1 0 0 ,0 0 0 ,0 0 0 G o v e r n m e n t s e c u r it ie s a n d t h e r e b y p la c e s $ 1 0 0 ,0 0 0 ,0 0 0 a t th e d is p o s a l o f s o m e m e m b e r b a n k s . T h ose b a n k s , i f t h e y o w e m o n e y to th e F e d e r a l r e s e rv e , w ill u s e t h a t to p a y i t u p ; i f t h e y do n o t o w e it , a n d i f n o o n e e lse o w e s i t so t h a t i t d o e s n o t g e t a r o u n d a n d p a y o ff in d e b t e d n e s s to th e r e s e r v e b a n k , i t is a d d e d to th e re s e r v e o f th e m e m b e r b a n k s , a n d th e n t h e y h a v e t h a t m u c h e x c e ss r e s e r v e ; t h a t is a ll th e F e d e r a l r e s e r v e c a n a c c o m p lis h ; STABILIZATION OF COMMODITY PRICES 569 a n d t h e n th e m e m b e r b a n k c a n , b e c a u s e o f it s e x ce ss r e s e rv e c o n d it io n , g o o u t in t o th e o p e n m a r k e t a n d m a k e lo a n s ; t h a t is a n o t h e r ste p . A t n o s ta g e in th e p ro c e e d in g c a n th e F e d e r a l r e s e rv e b a n k is s u e F e d e r a l r e s e rv e n o te s . P r a c t ic a l ly th e o n ly w a y i t c a n is s u e F e d e r a l r e s e rv e n o te s is, i f th e re is a d e m a n d f o r th e m , b e c a u s e o f in c re a s e d p a y r o lls , b e c a u s e b u s in e s s is b ig g e r, o r in r e t a il tra d e , o r in h o a r d in g . M r . G o l d s b o r o u g h . Y o u h a v e b e e n b u y in g $ 2 5 ,0 0 0 ,0 0 0 G o v e r n m e n t s e c u r it ie s f o r s e v e r a l w e e k s ? M r . G o l d e n w e i s e r . Y e s , s ir : M r . G o l d s b o r o u g h . H o w do y o u do th a t? • M r . G o l d e n w e i s e r . T h e m e c h a n ic s o f it a re v e r y s im p le , f o y t h e N e w Y o r k b a n k w h e re th e p r in c ip a l m a r k e t is, b u y s th o se s e c u rit ie s a n d p a y s f o r t h e m w it h a c a s h ie r ’s c h e c k o n th e F e d e r a l r e s e rv e b a n k . M r . G o l d s b o r o u g h . I p r o b a b ly m is u n d e r s t o o d y o u . I u n d e r s t o o d y o u to s a y t h e y c o u ld n o t e v e n b u y u n le s s th e re w a s s o m e d e m a n d f o r F e d e r a l re s e rv e n o te s ? M r . G o l d e n w e is e r . N o, th e y c a n b u y b u t th e y do n o t p a y to r t h e m w it h F e d e r a l r e s e rv e n o te s, u n le s s th e d e m a n d is f o r F e d e r a l r e s e r v e n o te s . . , I w o u ld lik e to g e t t h a t p o in t c le a r. T h e F e d e r a l re s e rv e b a n k h a s n o w a y o r m e a n s o f is s u in g s o -c a lle d F e d e r a l re s e rv e n o te s u n le s s t h e re is a d e m a n d f o r th e m . T h e y b u y th e G o v e r n m e n t s e c u rit ie s o n t h e ir o w n in it ia t iv e . . . . . . M r . G o l d s b o r o u g h . S u p p o s e t h e y b u y it o n t h e ir o w n in it ia t iv e . C a n t h e y n o t p a y f o r i t w it h F e d e r a l r e s e rv e n o te s o n w h ic h t h e y p u t u p G o v e r n m e n t b o n d s as s e c u r it y u n d e r th e G la s s -S t e a g a ll A c t ? _ M r . G o l d e n w e i s e r . T h e y c a n u n d e r th e la w ; b u t th e p o in t is t h a t w h e n a d e a le r h a s te n m illio n d o lla r s w o r t h o f s e c u rit ie s a n d s e lls t h e m to th e F e d e r a l r e s e rv e b a n k h e d o e s n o t w a n t F e d e r a l re s e rv e n o te s . W h a t h e w a n t s is c r e d it o n t h e ir b o o k s ; a n d s u p p o s e t h e y g iv e h im F e d e r a l re s e rv e n o te s f o r th e m , w h ic h w o u ld b e a n a w f u l n u is a n c e a n d p r a c t ic a lly w o u ld n o t b e d o n e — b u t s u p p o s e t h e y do , h e w o u ld t a k e th e se n o te s im m e d ia t e ly to th e b a n k a n d d e p o s it t h e m a n d t h a t b a n k w o u ld f in d i t h a d m o re c a s h t h a n it re q u ire d ,^ a n d im m e d ia t e ly w o u ld re d e p o s it t h e m i n th e F e d e r a l re s e rv e b a n k . That is w h y I s a y t h a t t h e y c a n n o t is s u e n o te s u n le s s th e re is a d e m a n d fo r t h e m b e c a u s e t h e y im m e d ia t e ly c o m e b a c k . # _ S in c e I a m h e re , I w o u ld lik e to c a ll y o u r a t t e n t io n to t h is o n e c h a r t a n d I w o u ld lik e to in c o r p o r a t e i t i n th e r e c o rd , b e c a u s e i t b r in g s o u t a p o in t t h a t m ig h t b e u s e f u l to y o u . T h i s lin e s h o w s th e t o t a l a m o u n t o f d e p o s it s i n th e b a n k s . T h i s o t h e r lin e s h o w s h o w m a n y t im e s in th e y e a r a d e p o s it is u t iliz e d . W h e n i t is d o w n h e re it m e a n s t h a t th e d e p o s it is u s e d a t th e r a t e o f t w e n t y t im e s a y e a r, o r a t th e r a t e o f a b o u t 18 d a y s to a t u r n o v e r . T h e t h in g I w a n t to s h o w y o u i n i t is t h a t th e d e p o s it s i n th e se b a n k s s t a y e d f a i r ly s t e a d y in 19 2 8 a n d 19 2 9 . T h e y in c r e a s e d in 1 9 3 0 n o t w it h s t a n d in g th e d e p re s s io n . T h e y d id n o t b e g in to d im in is h t il l th e la t t e r p a r t o f 1 9 3 1 ; w h ile th e t u r n o v e r b e g a n to go d o w n v e r y c le a r ly a t th e p e a k i n 1 9 2 9 — w e n t d o w n f ro m f if t y - f iv e o r f if t y - f o u r t im e s a y e a r to t w e n t y t im e s a y e a r . And w h ile a t t h is le v e l t h e y s t ill h a d th e s a m e a m o u n t o f d e p o s it s , t h e ir a c t u a l b u y in g a c t iv it y — th e a m o u n t o f b u s in e s s t h e y d id h a d b e e n c u t m o re t h a n in tw o . T h i s is th e it e m o f v e lo c it y w h ic h e n te rs in t o th e s it u a t io n a n d th e o n e o v e r w h ic h t h e re is m u c h le s s d ir e c t c o n t r o l t h a n t h e re is o v e r th e v o lu m e . 570 Mr. B usby. It is my recollection that for New York City the velocity of deposits was tremendously out of proportion in 1929 to the velocity of deposits in the rest of the country. Mr. G oldenweiser . Yes, sir. You are quite correct about that. Here is a chart for New York, where it is up as high as 110 in 1929, and is now down to 33. In the country as a whole outside of New York it went up to 25 and is now down to 13. It is perfectly true that the great growth in velocity was in the speculative market. It is also true that there has been a cutting in two of the velocity outside the speculative market. t Mr. B usby. Outside the city of New York all along from 1923 to 1932 there is no great variation except in 1929 it is a little higher? Mr. G oldenweiser . That is a little higher. M r. B usby. Would th at include the Chicago section as well as San Francisco? REPORTING MEMBER BANKS IN LEADING CITIES 571 STABILIZATION OF COMMODITY PRICES STABILIZATION OF COMMODITY PRICES DEPOSITS Millionso rdollars REPORTING MEMBER BANKS IN NEW YORK CITY RATEOf TURNOVER ( TimesPffl ahhum» RATEOf TURNOVER REPORTING MEMBER BANKS OUTSIDE NEW YORK CITY 10 M r. G oldenweiser . I t includes all the leading cities, but not the country banks. We have not the information for country banks. This is for the leading city banks. M r. B usby. Have you any information whether or not the two large cities mentioned, San Francisco and Chicago, would not also increase the velocity of turnover to bank credits as shown by your chart for banks outside of New York City? M r. G olden-weiser . Yes, sir; they would. Mr. B usby. That might account in some degree for the shooting up in velocity as shown on your chart there for the year 1929? M r. G oldenweiser . Yes, sir. I t is a factor. M r. B usby. I would like very much to see those three charts placed in the record. M r. G oldsborough. W ithout objection, they will be placed in the record a t this point. (The charts referred to are as follows:) 0t POSITS ......... ^y )ov 0 vV y/ , A // yv~A [v V RAT or T RNOVER Annum iTimcsperU \ V 1923 1929- 1925 1926 1927 1923 1929 1930 1931 1932 (Thereupon the subcommittee adjourned.) X * "S Stabilization bills which trof. Irving to prepare in supplementary file . fisher helped > S Restoring and M aintaining the Average Purchasing Power of the D ollar ') f H E A R IN G S BE F O R E T H E COMMITTEE ON BANKING A N D UNITED STATES CURRENCY SENATE SEVENTY-SECOND CONGRESS ♦ F IR S T S E S S IO N ON H . R. 11499 A N A C T F O R R E S T O R IN G A N D M A IN T A IN IN G T H E P U R C H A S IN G P O W E R O F T H E D O L L A R S. 4429 A B IL L TO RESTO RE AND M A IN T A IN THE AVERAGE P U R C H A S IN G P O W E R O F T H E D O L L A R B Y T H E E X P A N S IO N A N D C O N T R A C T IO N O F C R E D IT S A N D C U R R E N C Y , A N D FO R O TH E R PU RPO SES M A Y 1 2 , 1 3 , A N D 18 , 1 9 3 2 P rin te d fo r th e use of th e C o m m itte e on B a n k in g a n d C u rre n c y G O V E R N M E N T P R IN T IN G O F F IC E 12029!) W A S H IN G T O N : 1932 CONTENTS S ta te m e n t of— Al f Z ncit¥rSYorki r " ec0n0mist of th e C h « = N a tio n a l B an k N ir t io V a f G r a n g e l aPrticfedbvMOTriS A” Pr°feSSOr of«onomi«;UnTve‘ r8ityof MoWgan^ E lb e rt, R o b e rt S., N ew Y ork C itv F ish er, P rof. Irv in g " G oldsborough H on. T." Al'an (R epr'esenta'tW e) G regory, C. V ., e d ito r, C hicago, 111 n t 31 ?94 276 124’ 289 3 K ing, W illfred I ___________________________________ 22 M t o n ? 5 ° c ' _ A; C '’ me^ b e r o f'th e' F e d e ra l Res"er"ve"Boa'rd;"Washing: Mpip’rFffderi^ pro^essor of economics,Columbia"University- 9*1 M f S n H D .‘ C Ugene’ g° v ern o r of th e F e d eral R eserve B o ard , Wash-" P ^ ^ e n ™ ! ^ ‘fiO S hibley, G eorge, W ash in g to n , D . C S te rn , J . D av id , P h ilad elp h ia, P a_ S tro n g , H on. Ja m e s G. (R e p re s e n ta tiv e ) 29^ 88 w t t T M fn: sYi°„taCity$ J S ™ n h P 5 f- G e°rg e F red erick , C ornell U n iv ersity W h ite, C. R ., p re s id e n t N ew Y ork S ta te F a rm B u r e a u " " ." .: : : : : : : : : : in it tl 94 RESTORING a n d m a i n t a i n i n g t h e a v e r a g e PURCHASING POWER OF THE DOLLAR THU RSDA Y, M AY 12, 1 9 3 2 U nited S tates S enate, Committee on B anking and C urrency, Washington, D. C. The committee met, pursuant to call, at 10 o’clock a. m., in the hearing room of the Committee on Banking and Currency, Senate Office Building, Senator Peter Norbeck presiding. Present: Senator Norbeck (chairman), Goldsborough, Townsend, Walcott, Carey, Couzens, Fletcher, Wagner, Gore, and Hull. The C hairman. This hearing is on H. R. 11499, the Goldsborough bill, which has passed the House; also on Senator Fletcher’s bill, S. 4429, being an identical bill, except that it has one additional section; section 3 not being in the House bill as it comes over to us. I ask that the Goldsborough bill and the Fletcher bill be printed in the record at this point. (H . R. 11499 is here printed in full as follows:) [H. R. 11499, Seventy-second Congress, first session] AN ACT For restoring and maintaining the purchasing powe? of the dollar Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, T h a t th e F e d e ra l reserv e a c t is am ended by a d d in g a t th e end th e re o f a new section to read as fo llo w s : “ Sec. 31 . I t is hereby declared to be th e policy of th e U n ited S ta te s th a t th e av erag e p u rch asin g pow er of th e d o lla r a s a sc e rta in e d by th e D e p a rtm e n t of L ab o r in th e w holesale com m odity m a rk e ts fo r th e p eriod covering th e y e a rs 1 9 2 1 to 1 9 2 9 , inclusive, sh a ll be re s to re d an d m a in ta in e d by th e co n tro l of th e volum e of c re d it an d cu rre n c y .” S ec . 2. T he F e d e ra l R eserve B o ard , th e F e d e ra l reserv e ban k s, and th e Secre ta r y of th e T re a su ry a re hereby ch arg ed w ith th e d u ty of m aking effective th is policy. S ec . 3. A cts a n d p a rts of a c ts in c o n siste n t w ith th e te rm s of th is A ct a re hereby repealed. P assed th e H ouse of R ep re se n ta tiv e s M ay 2, 1 9 32 . A tte s t: South Trimble, Clerk. (S. 4429 is here printed in full as follows:) [S. 4429, Seventy-second Congress, first session] A BILL To restore and maintain the average purchasing power of the dollar by the expansion and contraction of credits and currency, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, T h a t it is hereb y declared to be the policy of th e U n ited S ta te s t h a t th e a v erag e p u rc h a s in g pow er of th e d o llar a s a sc e rta in e d by th e D e p a rtm e n t o f L a b o r in th e w holesale com m odity m a rk e ts 1 2 3 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR fo r th e y e a r 1 9 2 6 sh a ll be re s to re d a n d m a in ta in e d by th e ex p an sio n a n d con tra c tio n of c re d its a n d c u rre n c y th ro u g h th e pow ers of th e U n ited S ta te s an d its agencies. S ec . 2. T he F e d e ra l R eserv e B o a rd , th e F e d e ra l reserv e b an k s, a n d th e Secre ta r y of th e T re a su ry a re h ereb y ch arg ed w ith th e d u ty of m a k in g effective th is policy. S e c . 3. To en ab le th e F e d e ra l reserv e b a n k s to achieve th is end th e y a re hereby given th e rig h t to receive, a n d th e F e d e ra l reserv e a g e n ts a re d ire c te d to delivex*, F e d e ra l re se rv e n o tes a t p a r fo r U n ited S ta te s o b lig atio n s dep o sited as se cu rity th e re fo r. T h en th e question aro se a s to w h a t could be done. T he F e d e ra l reserv e system u n d e r th e le a d e rsh ip of B en jam in S tro n g , fo rm e r g overnor of th e F e d e ra l R eserv e B an k of N ew Y ork, m ea su ra b ly stab ilized fo r sev eral y e a rs, th e p rice level by open m a rk e t o p eratio n s, a n d by a d ju s tm e n t of th e red isco u n t ra te s of th e F e d e ra l reserv e b an k s. T he F e d e ra l reserv e system h a s been accu m u latin g gold a t th e a v erag e r a te of $ 2 0 0 ,0 0 0 ,0 0 0 a y e a r fo r a b o u t six y ears, and is now in a m uch stro n g e r position th a n it w as a t th e tim e of th e open m a rk e t o p eratio n s ju s t re fe rre d to. I t is in a position to p u t in to th e m a rk e t $ 4 ,0 0 0 ,0 0 0 ,0 0 0 in F e d e ra l reserv e notes, a n d still m a in ta in its 4 0 p e r cen t reserv e req u irem en ts. B y u tiliz in g its pow er to low er re se rv e re q u ire m e n ts of th e F e d e ra l reserv e b an k s th e system could p u t in to th e m a rk e t n e a rly $ 9 ,0 0 0 ,0 0 0 ,0 0 0 of F e d e ra l reserv e no tes. E ith e r sum , if th e c o u n try knew th a t because of a congressional m a n d a te , th e F e d e ra l reserv e system w as going to ra ise th e price level to th e p o in t in d icated , w ould be m uch m ore th a n sufficient to ra ise it, because as soon a s th e co u n try u n d ersto o d w h a t th e policy of th e F e d e ra l reserv e system , a s provided by law , w as, confidence am ong th e b an k s an d bu sin ess m en w ould be re sto re d , b an k lo an s w ould ex pand, th e re ta ile r w ould buy fro m th e w h o lesaler, th e w h o lesaler w ould buy from th e m a n u fa c tu re r, th e m a n u fa c tu re r from th e p ro d u cer of ra w m a te ria ls, a n d th e ipasses of th e people w ould find em ploym ent, so th a t th ro u g h b u ying of se c u ritie s by th e F e d e ra l reserv e b an k s and th ro u g li th e re s to ra tio n of confidence as above in d ic a te d , th e noi-mal bu sin ess a c tiv ity of th e c o u n try w ould very speedily be re e stab lish ed . E ven m ore im p o rta n t th a n its em ergency fe a tu re th e com m ittee deem s th e sta b iliz in g fe a tu re of th e bill. I t w ould be th e d u ty of th e F e d e ra l reserv e system u n d e r th e bill, if en acted in to leg islatio n , to co n tro l th e c re d it an d cu rren cy of th e c o u n try in a m a n n e r to s a tis fy th e leg itim ate needs of b u si ness. an d p re v e n t unw holesom e an d u n ju stified expansion. I f u n ju stified an d unw holesom e expansion w ere controlled, p erio d s of in flatio n a n d depression w ould also be controlled, because perio d s of deflation an d depression alw ay s follow p erio d s of unw holesom e o verexpansion an d sp eculation. In co n fo rm ity w ith section 2 a of R ule X I I I of th e H ouse, th e re is h e re w ith p rin te d in ita lic s th e proposed new section (sec. 3 1 ) to be add ed a s an am en d m e n t to th e F e d e ra l reserv e a c t : “ S e c .31. It is hereby declared to be the policy of the United States that the The C hairman. In view of the fact that the House has held exten sive hearings and has gone into this matter very fully, it does not seem necessary for this committee to go over the whole ground. I think the whole matter might be simplified by printing in the record the report made by the House as a summary of the matter; and if there is no objection, that will be done. (The report by Representative Goldsborough, from the Committee on Banking and Currency of the House of Representatives, is here printed in full as follows:) [House Report No. 1103, Seventy-second Congress, first session] R estoring and M a in ta in in g t h e P urchasing P ower of t h e D ollar T h e C om m ittee on B an k in g a n d C u rren cy , to w hom w as re fe rre d th e bill (H . R. 1 1 4 9 9 ) to am end th e F e d e ra l re se rv e a c t by a d d in g a t th e en d th e re o f a new section, a n d fo r o th e r purposes, h a v in g considered th e sam e, re p o rt fa v o r ab ly th e re in w ith reco m m en d atio n th a t th e bill do p a ss w ith o u t am en d m en t. W ith in th e scope of a com m ittee re p o rt it is n o t possible to d iscuss in d e ta il th e tech n ical econom ic p rin c ip le s involved in H . R . 1 1 4 9 9 , b u t it is possible to d eterm in e th e a n tic ip a te d w o rk in g s of th e a ctio n of th e p rin c ip le if i t is c ry stallized in to leg islatio n . T he bill h a s twro f e a t u r e s ; a n emei'gency fe a tu re an d a p e rm a n e n t fe a tu re . T h e em ergency fe a tu re c o n tem p lates a rise in th e g e n e ra l com m odity p rice level to th e a v erag e e x istin g b etw een 1 9 2 1 a n d 1 9 29 , inclusive, a n d th e su b s ta n tia l m a in te n a n c e of th a t p rice level. A s to th e em ergency fe a tu re a ll a u th o ritie s ag ree, first, th a t it is im possible fo r th e debts of th e c o u n try to be p a id a t th e p re s e n t price level, a n d th a t u n less th e price level is ra ise d th e b u sin ess of th e c o u n try is h ead ed fo r in ev itab le b a n k ru p tc y ; a n d , second, th a t th e p re s e n t p rice level is u n ju s t to d eb to rs. S peaking rou g h ly , b u t w ith s u b s ta n tia l a ccu racy , th e d o lla r w ill p u rc h a se a b o u t $ 1 .6 0 m o re of com m odities th a n in th e 1 9 2 1 - 1 9 2 9 p erio d , a n d a b o u t $ 1 .5 6 m ore of com m odities th a n it w ould p u rc h a se betw een th e p erio d of 1 9 1 8 -1 9 3 1 a n d th e first q u a rte r of 1 9 32 , in clu siv e. I t w ould p u rc h a se now w h a t it w ould have ta k e n $ 1 .2 5 to p u rc h a s e a b o u t a y e a r ago, w hich m ean s th a t th e p ro d u cer— th a t is, th e d eb to r— is being c o n fro n ted w ith an ev er-in creasin g b urden. H is debts, p rin c ip a l a n d intei*est, re m a in fixed. T h e com m odities he sells a n d w hich w ould have p u rc h a se d a given n u m b er of d o lla rs w hen he borrow ed th em have d ecreased in th e ir p u rc h a sin g pow er. To go one step fu r th e r, u nem ploym ent is c o n sta n tly in creasin g , because on a co n stan tly d eclining m a rk e t b u sin ess can n o t go on. I t is im possible to p ro duce below th e cost of p ro d u ctio n . T he C om m ittee on B an k in g a n d C u rren cy , a f te r a m ost p a in s ta k in g a n d c a re fu l in v estig atio n by a sub co m m ittee, re ach ed tw o co n clu sio n s: F ir s t, th a t th e av erag e p rice level from 1 9 21 to 1 9 2 9 w ould re e sta b lish s u b s ta n tia l ju s tic e betw een deb to r a n d c re d ito r; a n d , second, t h a t a rise to th e p rice level of 1 9 2 1 - 1 9 2 9 w ould m ak e low er s ta n d a rd s of liv in g u n n ecessary , w ould ju s tify s a la rie s a n d w ages a t th e p re-d ep ressio n lev el; in sh o rt, w ould m ak e u n necessary th e pro cess of p a in fu l econom ic re a d ju stm e n t, w h ich w ill h av e to be consum m ated if th e p rice level is n o t ra ise d . T he com m ittee also reach ed th e conclusion th a t u n less th e p ric e level w ere ra ise d s u b s ta n tia lly to th e p o in t above in d ic a te d , th e b u rd e n o f d eb t w ould n o t only serio u sly h a m p e r p ro d u ctio n a n d d e stro y th e p ro d u cin g class as now co n stitu te d , b u t t h a t th e c re d ito r class, being u n ab le to collect th e ir fixed o bligations, w ould also go dow n in th e craslx. average purchasing power of the dollar as ascertained by the Department of Labor in the wholesale commodity markets for the period covering the years 1921 to 1929, inclusive, shall be restored and maintained by the control of the volume of credit and currency. “ S e c . 2. The Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury are hereby charged with the duty of making effective this policy. “ S e c . 3. Acts and parts of acts inconsistent with the terms of this act are hereby repealed." The C h a i r m a n . The first witness will be Representative Golds borough, who has assured us that he wants only 5 or 10 minutes. We have a large number of witnesses, and we are going to try to hold them down pretty close as to the time allotted. STATEMENT OF HON. T. ALAN GOLDSBOROUGH, A REPRESENTA TIVE IN CONGRESS FROM THE FIRST DISTRICT OF M A R Y L A N D Representative G oldsborough. Mr. Chairman and gentlemen of the committee, I am going to take only a few minutes, and shall rely upon the witnesses who are not Members of Congress. This measure does not grow out of the emergency situation. The principle involved in the bill was first introduced into the House in 1922, in the Sixty-seventh Congress, and afterwards in the Sixtyeighth Congress. We had very extensive hearings. Also, extensive hearings in the Sixty-ninth Congress and the Seventieth Congress on the Strong bill, which embodied the same principle. We have also held very extensive hearings, both pro and con, during the 4 M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR present Congress. So that this is not proposed legislation which is of a mushroom kind growing out of the depression. The principle of the bill is simply a declaration of policy by the United States that commodity price levels should be raised to the 1921-1929 level, inclusive, and maintained at that level. The respon sibility for doing this is placed upon the Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury. Senator T ownsend. Then you have no definite plan? The plan of working that out is left with those bodies ? Representative G oldsborough. That is true. I can, however, if you would like me to, give you the powers they have. There are two things they can do----Senator F letcher. I would be glad, Mr. Goldsborough, if you would suggest how they can accomplish what you have in mind; and you might refer to section 3 of S. 4429 in which I have at tempted to state the process by which they might accomplish it. Representative G oldsborough. I think I should say that I know of no objection to section 3 of S. 4429, introduced by Senator Fletcher, of Florida. The only reason that it was left out of the House bill was because the subcommittee thought that sufficient elasticity was given by the Glass-Steagall bill, and we felt that if the House bill were passed the Congress would make the GlassSteagall bill permanent legislation. As far as I know, Senator Fletcher, there is no objection to section 3 which is embodied in j7our bill. Answering Senator Townsend, there are two methods of con trolling the price level. One is by the control of the rediscount rates. That was a method that they used in 1920. In February of 1920 the Federal reserve system decided that the price level should be lowered and that the process should go into operation on the 20th of May. They did not disclose to the public the fact that this was to be done. They did not, in my judgment, consciously intend to do what they did do, but their operation was that rediscount rates, par ticularly in country banks, were made exceedingly high. I remember that in one case in Alabama it was as high as 87 per cent. They made them so high----Senator T ownsend. The Federal Reserve Board did that? Representative G oldsborough. Yes; or the Federal reserve bank that the Alabama bank was doing business with, under the direction of the Federal Reserve Board. The Chairman. They established a pyramiding rule where loans in excess of a certain amount carried a penalty rate. That is what you have reference to. It was not any large volume of loans, but it was a loan they kept stepping up until one loan reached that point. That is right, is it not ? Representative G oldsborough. Yes. They did adopt that policy unquestionably. That is indisputable. I make that statement with out any possible qualification. They did adopt that policy. Senator C ouzens. Can you describe how they did it in that par ticular case ? Representative G oldsborough. Yes, sir. They did it, as I said before, by raising the rediscount rates on country banks. Senator Couzens. Just tell us how they did it and what raised the rates up to such pyramided heights. M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR 5 Representative Goldsborough. The rates ran from 7 per cent to 40 or 50 per cent, and in one case, as I said, as high as 87 per cent. Senator Couzens. By the edict of the bank itself, or by the indi vidual banks ? How did it work ? Representative G oldsborough. When the member bank would send an obligation to the Federal reserve bank for rediscount, it would be charged such an exorbitant rate that it would be unable to redis count its paper. Senator Couzens. Give us an example of it. You just make gen eral statements. I want some specific information as to what redis count rate the bank actually charged to bring it up to 87 per cent. Representative G oldsborough. I did not know that that question would be asked, Senator Couzens, at this meeting. Senator Town send introduced the subject and I was undertaking to tell him how it had been done in the past. The result of the process was such that not only a great many country banks failed, but the farming industry in the United States was destroyed. Senator T ownsend. I s it your charge that the banks failed for the reason that the Federal Reserve Board insisted on these excessive rates ? Representative Goldsborough. Yes. I t is not a charge, it is a fact. I t has been known to be a fact for so many years that it has long ceased to be a charge; it is a fact. In 1922 Benjamin Strong, who was then governor of the Federal Reserve Bank of New York, combined with the governor of the Federal Reserve Bank of Philadelphia, the governor of the Fed eral Reserve Bank of Boston, and the governor of the Federal Reserve Bank of Chicago, and afterward with the governor of the Federal Reserve Bank of Cleveland, set up what they called an open-market committee, which undertook to stabilize the purchasing power of the dollar. As long as it was allowed to operate as he intended it should operate, it did stabilize the dollar to such an extent that conditions in the country were so normal that the Federal reserve system had very little to do. Then Governor Strong went to Europe and while he was there the Federal Reserve Board decided to take these open-market opera tions out of his control, and they made up an open-market com mittee consisting of the governors of the 12 Federal reserve banks and the advisory board, a rather unwieldy body. But, as long as Governor Strong lived, the stabilization process continued with very great advantage, not only to business but to every element of society; and, as I said before, it was so cogent in stabilizing the business of the country that the Federal reserve system had very little to do. Senator Gore. I s it not rather difficult to tell which was cause and which was effect? Representative Goldsborough. I do not think so, Senator Gore. I realize the fact that there are human elements which enter into the consideration and which have a great deal to do with these periods of inflation and deflation; but I have no doubt whatever that if the Federal reserve system would use its restraining influence in periods of rising prices and periods of lowering prices before the swing gets away from them, an immense amount could be done to avoid 6 M A IN TA IN IN G AVERAGE PURCHASING POWER OP DOLLAR M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR these periods of inflation and speculation and these periods of depression and despair. Senator G ore. If they happened to guess right on it, you are probably right. But I saw a statement the other day to the effect that the Federal Reserve Board or system had undertaken this very process and had bought bonds in order to increase the banks’ re sources, and in each of two cases the banks had used their increased resources to reduce their debt at the Federal reserve bank and it had no effect on prices. Representative G oldsborough. That is what they are doing now. May I say, Senator Gore, that the Federal reserve system, since the open market operations began the last time, have purchased about $500,000,000 of Government bonds and of that $500,000,000, $300, 000,000 has gone to pay the debts which the member banks owed to the Federal reserve banks, and about $200,000,000 has gone to increase the reserves of the member banks with the Federal reserve banks. Yesterday I was down to the Federal Reserve Board and saw a chart showing the increases of the reserves of the member banks of the Feneral reserve system since the beginning of these open-market operations, and, strange to say, the increase is not confined to New York banks or banks adjacent to New York; that increase is practi cally the same in every Federal reserve district except Dallas. I noticed that the rise in the Dallas district of reserve deposits was not as great as in other districts. But the beneficial operations of the Federal reserve system in buying bonds in the last few weeks has resulted in raising the reserves of member banks all over the United States. Senator Cottzens. What good did that do industry? Representative G oldsborough. I can answer that, I think, in two ways, Senator Couzens. My opinion is that if there had been no open-market operations at all we would have had another flood of closed banks much more severe than the first one. Senator C ouzens. I was not speaking of that; I was speaking of the fact of the----Representative G oldsborough. I am coming to the next factor. Senator C ouzens. All right. Representative G oldsborough. The next thing would be this, that when these banks accumulate reserves they are forced to find, if possible, an outlet for them. Senator G ore. Right on that point: You say they bought $500, 000,000 and retired debts with $300,000,000, leaving $200,000,000 available for other purposes. The statement that I saw said that it placed the banks under an urgent necessity to find some outlet for the surplus funds or reserves, and that was one thing which con tributed to the inflation. Representative G oldsborough. W hat inflation do you have refer ence to, Senator Gore? Senator G ore. I mean, in 1928-29; that they had these available reserves on hand and had to find an outlet for them, and that ac celerated the movement, the lending for speculative purposes. Representative G oldsborough. May I suggest, Senator Gore, that at that time it seems to me the Federal reserve S3rstem should have adopted a different policy than they did. They should have then adopted a restrictive policy. But now it seems to me that the liberal policy which they are adopting is resulting in an accumula tion of funds in the member banks of such a character that they will have to find an outlet for those funds. Senator G ore. Of course. The first use of the funds was to pay off their debts. Representative G oldsborough. Yes, naturally. Senator F letcher. D o you think the effect of that will be to in crease the circulating medium? Representative G oldsborough. It is bound to, because when a bank has funds that are not drawing any interest, it immediately tries to find a place to put those funds. Not only that, but the fact is those funds increase their confidence and make it easier for borrowers to borrow from the institution. I have consulted a great many commercial bankers. I was in New York last Monday and consulted several very distinguished and prominent commercial bankers. I have never seen a commercial banker who was not also engaged in the investment business, who was not in favor of this legislation. They give as their reason, that uniesss something is done to raise the price level, not only will the debtor be unable to pay his debts, but as he is unable to pay his debts the banks will have to fail. Then I say to them, “ Why, then, can you not appear before the committee and make this statement? ” And their answer is, “ You know our condition; you know we are loaded up with securities which, if sold now, would not liquidate the bank. You know we are allowed by the Comptroller of the Currency to carry these securities at inflated prices, and we are not in position to antagonize the Federal reserve system at this time.” I want to say this, gentlemen, that in all of this discussion since the 5th of December I have never received a letter or a telephone call or a communication of any kind from a commercial banker opposed to this legislation—not a single one. I do not want to be in the position of taking up much time, but I want to add just one thing. The commercial bankers also say this to me: 7 W e know w h a t th e F e d e ra l reserv e system is doing n o w ; we know th a t now th ey a re buy in g a t th e r a te of a b o u t one h u n d re d m illion a w eek, b u t w e do n o t know w h a t th e ir fu tu re policy is going to be. W e can n o t tell w h a t influences w ill be b ro u g h t upon them . W e believe in th e ir p ro b ity ; w e believe in th e ir h onor, in th e ir comm on sense, b u t th ey a r e ju s t as h u m an as w e a re or anyone e lse; an d w e can n o t te ll w hen th e p o in t w ill be reach ed t h a t influences w ill be b ro u g h t to b e a r upon them to stop th is p u rc h a s in g of G overnm ent bonds. B u t if you give th em leg islativ e d irectio n , if you p ass a law w hich re q u ire s th em to ra ise th e p rice level to a c e rta in p o int, th e n w e h av e th e a ss u ra n c e th a t th a t policy w ill be c a rrie d o ut, an d th a t im m ed iately re a s su re s th e com m ercial b a n k e rs of th e c o u n try an d re a s su re s business. Gentlemen, just as soon as you reassure the banks of the country and they begin to make loans, then this rise of the price level will take place of itself. My judgment is no better than that of anyone else, of course, but I believe that if this law were passed and were on the statute books of the country now this whole situation would be cured in 90 days. I believe the country would know within 90 days that we were on the up-swing. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator G ore. N ow, Congressman, you say we can give them legis lative power. That is undoubtedly true. But you can not give them legislative power to----. . . . Representative G oldsborough. I mean legislative direction. Senator Gore (continuing). Legislative authority to exercise superhuman wisdom or to suspend the fundamental laws and tend encies of economics that are a little stronger than congressional enactments. Your theory goes on the assumption that they will have wisdom enough to exert this power to accomplish the result, without taking into account the limitations on human wisdom and the limitations imposed by economic conditions and forces that are superior to them. • Representative G oldsborough. Senator Gore, it is always, of course, the part of unwisdom for a lawyer to undertake to antagonize the judge----Senator G ore. Y ou may feel at perfect liberty here to express your views. . Representative G oldsborough. I just want to say this, Senator, that you will see that the Federal reserve system, without legislative authority, has undertaken to exercise these open-market operations in accordance with their own will. This is a power that is more vast than any oriental despot ever exercised. This legislation is a measure of restraint, because it says to them, “ You can not use your own judgment as to how to manipulate the currency of the country. You must direct it to a certain point.” So it does restrain them. I t has a restraining influence. Senator Gore. Y ou can give them power and directions to accom plish certain things, and I think they can accelerate tendencies either up or down. I am not certain they can arrest them and reverse them. I think there is the trouble. You are setting them up against tendencies that are more powerful than they are, or any power that you can give them. Here is what I have in m ind: I think it was between 1919 and 1927 that the bank deposits in this country went up from $27,000, 000,000 to $42,000,000,000, an increase of 52 per cent. That is poten tial currency, we will say. Gold increased, if I remember rightly, from about 1920 to 1927, 50 per cent. During those nine years we had an increase in bank deposits of 54 per cent; and that is potential currency. We had an increase in gold of 50 per cent, and that is the basis of $10 of credit to one of gold. During the same nine years, taking 1919 as “ sea level,” as 100 per cent, wholesale prices cleclined from 100 to 72 per cent, against all this increase in money and credit and gold and actual and potential currency. Is not that movement contrary to your theory ? Representative Goldsborough. I do not think so. Senator Gore. Ought not prices to have gone up, with all that? Representative Goldborougii. Senator, to be, of course, frank, as I must be, I have not the same picture of the deposits of the country that you have. You have been so precise in your statement as to the deposits that I am not going to controvert it, of course. Senator Gore. I think I am correct about that. Representative G oldsborough. But I have not that same picture. In the hearings before the House committee—and I think this may throw some light upon your inquiry—Governor Harrison agreed that an increase in credit had a very definite effect on raising the price level, and a decrease of credit had a very definite effect on lowering the price level. I asked him this question, in substance: “ Governor Harrison, late in the fall of 1929 I made the suggestion to the Federal Reserve Board, that due to the collapse of the New York Stock Market there was apt to be a feeling of apprehension throughout the country, and that it seemed to me that the com modity market should be supported for psychological reasons, if for no other.” I said: “ If you will remember, the Federal reserve system did support the market through the first three months of 1930 and it looked as if we were going to get back to a normal con dition, when there was a reversal of policy which caused the be ginning of this present depression. Why was that done ? ” He said that they were afraid that the New York Stock Market would get away from them again, and for that reason they reversed the policy. Of course we may have to pass other legislation. The Federal Reserve Board might come down and say, “ We are in a period of incipient stock-market inflation and we have got to have some sort of legislation which will be an attempt to separate the commercial banks from the stock market.” Congress will have to meet that issue if it arises. But all through the period of which you speak, Senator Gore, if I may remind you, it was a period of increasing stock-njarket prices----Senator Gore. And declining commodity prices. Representative G oldsborough. Correct. A great many economists thought that the crash in the stock market would come in 1925. That condition continued from about the middle of 1923 until Octo ber, 1929. Money was being taken out of commercial and com modity activities and used in the stock exchange. Senator Gore. Y ou are right. Security prices went up during those nine years. Taking the general trend for the period, com modity prices went down during that period; that is, wholesale commodity prices. Why ? Because wholesale commodity prices are on a world basis. Primarily, what we all would like to see brought about is an increase in the prices of cotton and wheat. Do you figure that by any sort of domestic manipulation—and I use that word not offensively—-you can increase the price of wheat and cotton when those commodities must sell in a world market and on a world basis ? Representative Goldsborough. Of course, Senator Gore, I am go ing to try to answer your question, but I think I ought to say that it is a difficult question to answer, for this reason, that we are not attempting to regulate the price of any commodity. W hat we are attempting to do is to create a commodity dollar. Senator Gore. I know; but unless it increases prices, it is just a vain thing. Representative Goldsborough. Yes, I know; but there are 784 com modities involved in the index number of the Bureau of Labor Statis tics. Wheat and cotton are only two of those commodities. Now I want to try to answer your question, if you will allow me. Practically all of Europe, except France, if off the gold standard. Switzerland is still on ; Holland is on, in a modified form, but they are insignificant. France is the country on the gold standard. As 8 9 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 10 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR far as our transactions with England and the other countries off the gold standard are concerned, we can raise our commodity prices without controlling the world market, because the exchange of money between a country off the gold standard and the money of the United States will take care of the differential in price. As fa r as France is concerned, it might be that we would have some trouble. I t might be that we would. B ut in a short time, if conditions were such th at some of our gold went to France in exchange for her commodities, that would 'soon cause a leveling process and turn the tide in our favor. Senator G ore. T hat is the point I was coming^ to. As you say, there are seven hundred and some odd commodities. I think it is conceivable, at least, that as to those commodities, or some of them, which enjoy a protective tariff, the price of them might possiblye be raised; but I do not see how you can raise the price of wheat and cot ton and farm products which do not have an effective protective tariff to bolster up their prices. And if you did raise the price of protected articles and did not raise the price of farm commodities, you would just m ultiply the burden of the farm er, because he would have to still sell in an unprotected world market at low prices and have to use those low prices to buy manufactured products th at do enjoy protection. . Representative G oldsborougii. I am sure th a t your argument would not hold good as to countries off the the gold standard, and I think the effect Would be negligible as to France, because, as I indi cated before, as soon as she sold to us for a while her prices would become just about ours, so th at there would not be any detrimental influence. But let me suggest this, that a rise in the general commodity level which would restore the productive power of the country—I leave farm ing out for the moment—would give an added buying power for the commodities of wheat and cotton th a t you mention, not only in this country, but world wide. Senator Carey. A s to the products on which we have a surplus and which are exported, you do not figure they would raise the price, do you ? # Representative G oldsborougii. Yes, sir. I do not think we can do it as immediately; I do not think the effect would be as immediate as it would on products which are simply sold in this country, but I think the effect would be very prompt. Senator C arey. B ut where we have an exportable surplus our prices are more or less regulated by the world market, are they not? Representative G oldsborough. Yes. Senator Carey. D o you think we could do it as to these exportable products ? Representative G oldsborough. I may not have made myself plain in my answer. In the first place, my answer would be th at we would have no difficulty in countries which are off the gold standard, be cause the exchange between our money and theirs would take care of the differential. So we are confronted only with France, which I do not think would be sufficient to pull our prices down to any great extent. I f th at were done and French goods were let in here and our money went to France, th at would soon equalize prices be tween those two particular countries, and I think the effect would 11 be negligible. I f all Europe were on the gold standard I could very well see why we would have to build up prices all over t e W°Senator G ore. England, while she is not on the gold standard, is evidently accumulating gold in prospect. I do not know whether th at is true in Scandinavian countries or not. B ut suppose you raised prices away above the world level, would not gold immediately leave here and go to a country where it would buy more ( Representative G oldsborouc-h . N o. I t is dollars, Senator Gore, th at foreign countries want, not gold. Let me illustrate, l o r in stance, an Italian buys some American product and h e ro e s to his exchange to get dollars to pay for them and he finds that dollars are selling at a premium. The reason they are selling at a premium is because we have a balance of trade. Not only are we exporting more than we are im porting, but in addition to th a t we have a tremendous balance of foreign debts due us, and therefore there is a demand for American dollars. T hat is what they want—not gold, but dollars. They go for this dollar, and they find that they have to pay more for it than they have to pay for the gold. So instead of buying dollars they buy gold, and pay m gold instead of m dollars, because dollars cost them more than gold. Senator G ore. D o vou think it would have the same effect here as in England if we went off the gold standard? Representative G oldsborough. I f we went off the gold standard, instead of our dollar becoming cheaper than gold, it would become higher than gold, because the demand is for the dollar; and when an^Italian or an Englishman who had bought American goods nad to pav for them, he could not say he would not pay the premium. He would just buy dollars and pay th at way, because if we were off the gold standard he would have to buy dollars, and dollars would be at a premium ... j Senator G ore. Y ou think th a t if we went off the gold standard dollars would be at a premium? Representative G oldsborough. Of course I do. Senator T ownsend. D o you think it would be of any advantage •to the United States? . , _ . , Representative G oldsborough. N o, sir; and I made no such sug gestion. The Senator asked me a specific question as to what the effect would be. I t is unnecessary for the United States to go on the o-old standard. The United States can issue $5,000,000,000 of Federal reserve certificates and still m aintain about 45 per cent of her gold reserve; an inconceivable sum, enough to take the price level clear through this roof. Senator G ore. Do you not think th at gold would leave the country and shrink the world basis of credit? Representative G oldsborough. W hy ? . . , Senator G ore. Because it would buy more in other countries than Representative G oldsborough. I f the price level rose? Senator G ore. Yes. I f you run prices up in any such porportions as that. , , , u Representative G oldsborough. I did not suggest we should do that. 12 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator G ore. I f you run prices up substantially, gold will go where it can buy more than it can buy here, and shrink the basis of credit until the sea level is restored. Representative G oldsborough. I can not follow th at at all, Sena tor Gore. I do not see any reason why that should be. The history of all countries where the price level has raised, and therefore money has been cheapened, has been that exports have been in creased and not imports. In other words, if our price level is raised th at means our dollar is cheaper. I t is cheaper in English money and cheaper in French money, and therefore our goods would tend to go there rather than for their goods to come here. Senator G ore. I f our price level were raised, gold would go to this country where it was dearer in proportion and where it could buy more. I f you make gold cheap here, it will go where it is dear and can buy more. Representative G oldsborough. I think we can well afford to meet that contingency when it arises. Senator G ore. I f you raise prices here it tends to attract goods to this country to get the benefit of the high prices. Representative G oldsborough. In my judgment, th at is a con tingency so infinitely remote th at we need not consider it. B ut let us assume th at it should arise: Congress can declare an embargo on gold in 24 hours and stop the exports, if th at became necessary. Senator G ore. Yes; th at is true. Those arbitrary and artificial regulations, I think, are responsible for our present plight, to a large extent. You m ultiply the causes of our grief instead of diminishing them when you extend the artificial interference of government. Senator Couzens. Y ou do not concede that at this time it would be necessary to put an embargo on gold ? Representative G oldsborough. Not at all. I have not the slight est idea of that, Senator Couzens. I only suggested th at if that possibility, which I do not regard as even a possibility, did take place, we could declare an embargo on gold immediately." Senator Carey. D o you not believe th at an inflation of our cur rency would cause a withdrawal of gold from this country—that is, if there were a great inflation? Representative G oldsborough. My conception of it is th at we would be lowering the price of the dollar. I f we make commodity prices higher, then we are making the dollar cheaper. In other words, it is not an inflation of the dollar but a lowering of the price of the dollar. T hat is what you do when you raise the price of commodities. Senator Carey. Under the provisions of this bill it would be an inflation, would it not? We would have more money in circulation, and that would necessarily mean an inflation of the currency? Representative G oldsborough. I t would mean an increase in the price level, and it would mean a fu rther extension of credit. Senator Carey. Would it not require more dollars to do that? Representative G oldsborough. N o. Perm it me to give my reason for that, if you please. We have now, Senator, about $8,000,000,000 of discountable paper of member banks which has not been sent to the reserve banks for discount at all. In the first place, all of th at paper could be used MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 13 for the purpose of extending credit for business before anything else would have to be done. In addition to that, the reserves of the mem ber banks could be used up in extending credit. So I really can not conceive of a condition where there would have to be any inflation except the extension of credit due to the resumption of the normal business of the country. Senator Carey. I t would contemplate the Federal reserve banks issuing additional Federal reserve notes, would it not? Representative G oldsborough. Of course, Senator, if the banks with their present resources and with the discountable paper had their confidence restored now without any action at all of the Federal Reserve Board and would begin to lend money and production started up, the price level would rise immediately, and there would be no necessary action at all on the part of the Federal reserve system. The purpose of this legislation, in so far as the emergency aspect is concerned, is to put money or credit into the market to take the place of the frozen loans of the country and to restore confidence among the banks and business men, because the very knowledge that the Federal reserve system had been instructed to do this thing would enable the country to resume its normal functioning, and it would then be unnecessary for the Federal reserve system to further operate in the m atter. Senator Carey. W hat would be the mechanics of this? Would the Federal Reserve Board continue to buy bonds in the market and to issue currency? Representative G oldsborough. Yes. I can think of other things th at would be more immediately effective, but that, in my judgment, would do it in 90 days. Senator Carey. T hat would really be the only way that this could be put into effect? Representative G oldsborough. Under the law as it is at present, yes. . Senator G ore. D o you not think th at the excessive use and abuse of credit was one of the causes of the collapse ? Representative G oldsborough. I certainly do. The large invest ment houses, the big private bankers who are the only private organ izations that I know anything about that are opposing this legisla tion, are responsible for this whole situation. They are the people that are responsible for unloading 17,000,000,000 of foreign bonds on the people of this country. They are the very people who are opposing this legislation. I was talking to a broker in Baltimore the other day, and I said to him, calling him by his first name, “ W hat in the name of God did you mean by selling these foreign bonds? D idn’t you know they were worth nothing when you sold them ? ” He said, “ I did.” I said. “ Why did you do it, then ? ” He said, “ We are all members of a syndicate and we are sent a certain amount of this stuff to sell, and if we don’t sell it we are kicked out of the syndicate.” O f course, all th at detail was new to me. B ut it is my deliberate judgment that they brought this country to destruction and despair, and they are the forces who are opposing this legislation now. Senator Couzens. May I ask you, Congressman, just how you ex pect these three agencies to function? In section 2 of your bill there 1 2 0 2 9 0 —3 2 ------ 2 14 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR are three authorities to make this effective, the Federal Reserve Board, the Federal reserve banks and the Secretary of the Treasury. Ju st what have each of those agencies to do to make this effective ? Representative G oldsborough. The Federal reserve banks, acting under the direction of the Federal Reserve Board, issue Federal re serve notes on the collateral of any discounted paper which they have, or on Government bonds, as they see fit, under the Glass-Steagall bill, and they buy Government bonds with it. In other words, you take out of the market Government bonds which are interest-bearing and which are not a circulating medium, and replace them with a noninterest-bearing circulating medium. Senator Couzens. Ju st what does the Secretary of the Treasury do in the m atter? W hat are his activities? Representative G oldsborough. The reason that was put in, to be perfectly frank about it, was this. In our previous hearings there was a very strong intimation that, due to the very high office occu pied by the Secretary of the Treasury who was ex officio a member of the Federal Reserve Board he exercised a dominating influence. Senator Couzens. That is quite true. Representative G oldsborough. And we therefore felt th at it was proper to place upon him th at responsibility so th at he would be unable to exercise his influence adversely to this legislation. T hat is the cold-blooded tru th of the matter. Senator Couzens. Supposing these authorities did not agree. How do you get action from these three authorities set up in this bill ? Representative G oldsborough. Senator Couzens, of course if the Federal Reserve Board are not sympathetic with the legislation they can arbitrarily say th at they are doing what they can to carry out the wishes of Congress. I understand that. Senator Couzens. T hat is the reason I think your bill is weak, be cause it does not go into detail enough with respect to what these agencies are to do to accomplish the purpose desired. Representative G oldsborough. All they have to do, Senator Couzens, is this—because they have had 18 years experience, th a t is, they and their predecessors, and they know perfectly well th at their two agencies have been the adjustment of rediscount rates and their open m arket operations. They can not contradict that. We felt, on the Banking and Currency Committee, th at we had no right to assume that if the act were passed they would not operate it sympa thetically. Senator Couzens. I think you have a right to assume that. Senator F letcher. They know how to do it if they want to. Representative G oldsborough. Absolutely, Senator. Senator T ownsend. D o you feel th a t the Federal Reserve Board and the Federal reserve banks at present, under the Glass-Steagall bill, are doing exactly wThat you require under this bill? Representative G oldsborough. I can say no. Senator T ownsend. Y ou do not think they are? Representative G oldsborough. N o ; but I should like to explain my answer, because if I did not I would not be expressing the true view th at I have. Senator T ownsend. I understood from your former statement th a t you did feel they are doing that. Representative G oldsborough. I have to amplify my statement in order that you may understand what I mean when I say “ no.” Under the Glass-Steagall bill they began purchasing twenty-five millions a week, which it seems to me anyone would know would be totally ineffective. When this particular legislation became im minent in the House, and not until then and not until numerous con ferences with them, did they begin to buy at a hundred millions a week. When I asked Governor H arrison about it, he said, “ W hy do you want to pass this legislation, the emergency p art of it, when we are doing exactly what your bill contemplates that we should do?” I said, “ When did you begin ? ” He said, “ Day before yesterday.” That is the reason. Unless some legislation is passed—and as I said before, I do not mean anything improper; these gentlemen are friends of mine; but they continue this for a little while and some influence is brought to bear upon them, saying, “ You have gone far enough. The big people can pay their debts. The big bankers are going to be safe, and maybe you had better not go too far into teaching people that there is some other way to correct their eco nomic difficulties besides borrowing money. You had better stop.” The public does not know what they are going to do or when they are going to stop, and neither do the commercial banks know what their future action will be. Senator T ownsend. W hat has been the amount of their purchase? Representative G oldsborough. Five hundred millions. Senator T ownsend. I f they continued to purchase the present amount of $100,000,000 a week, do you think th a t would cover the situation ? Representative G oldsborough. Senator Townsend, if what they are doing now is protected by such legislation as will enable the public to know what they are going to do, what they are compelled to do, I think it will, unquestionably. B ut now nobody knows whether they are going to buy a hundred millions next week or sell a hundred millions next week. Senator G ore. T hat has to be governed by circumstances, even under your bill? Representative G oldsborough. Oh, yes. Senator G ore. By the exigencies and requirements? Representative G oldsborough. Yes. Senator Couzens. W hat would you say if we amended your bill and left this all to the Secretary of the Treasury ? Representative G oldsborough. In what way? Senator C ouzens. I mean, to take out of section 2 the words “ the Federal Reserve Board, the Federal reserve banks ” and provide th a t the Secretary of the Treasury “ is hereby charged with the duty of making effective this policy.” Representative G oldsborough. I would say this, th a t if the Federal Reserve Board and the Federal reserve system, which are really the fiscal system of the country, were not to operate the act, I would rather it be given to some entirely separate organization. I do not think th a t the set-up at the Treasury is such th at they could operate without a great deal of additional legislation. I do not see how they could, because the Treasury has no authority to go into the open m arket or to regulate rediscount rates. 15 16 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator G oldsborough. May I ask you if a letter was addressed by your committee or subcommittee to the Secretary of the Treasury or the Federal Reserve Board asking their opinion on the measure? Representative G oldsborough. Yes, sir; you may. Senator G oldsborough. And your answer to it? Representative G oldsborough. I am very happy that you ask me that. When these hearings were about to be held I had several talks with Governor Meyer over the telephone about coming down and appear ing at the hearing. He said he was busy over in the Senate with other measures and did not have time. He said also th at he would like to have an opportunity to read the first hearings before he came down. So, as soon as I got the first p rint, before the hearings were bound, I immediately sent a special messenger up to him with the hearings and asked him when he thought he would be ready, and he said, in about a week. So we put it off for about 10 days, and as soon as this [indicating] was printed I sent it to him. The Chairman . Speaking of the first volume of the House hearings ? Representative G oldsborough. Yes, sir. Governor Meyer ap peared and his testimony is in the second volume; and Governor Meyer will tell you that every possible consideration was shown him. We had difficulty in getting him to the hearing, Senator Goldsborough. He did not seem to care particularly about coming. He did not come until he had the hearings and until he had taken his own time. We wanted to get the bill on the floor, but we delayed it and we were severely criticized by members of Congress for delaying it. Senator F letcher. Does your question also have reference to the Secretary of the Treasury? Senator G oldsborough. Yes. Representative G oldsborough. The Secretary of the Treasury, so far as I know, was not spoken to about the bill. I know th at was not intentional. We would have been only too happy to have had the Secretary of the Treasury before us. We felt, I am sure—and there are some members of the subcommittee here—th at Governor Mever would speak for the Federal reserve system. Senator G oldsborough. My only purpose in asking the question was that I think it is customary for the chairman of a committee to address such communications on measures of this kind to the Secretary of the Treasury and to the Federal Reserve Board. I think th at is the custom of this committee, is it not, Senator Norbeck? The C hairman . Yes. T hat is the plan we have followed here. Senator G oldsborough. T hat was my only purpose in asking the question. Representative G oldsborough. In answer to th at, Senator Golds borough, I went up to see Governor Meyer and talked to him about it and begged him to come down, did everything I knew how to do to induce him to come before the committee. Senator F letcher. D o you think it is entirely practical, with this index figure showing the wholesale commodity market for this period, for the board to devise some means by which the value of the dollar may become increased? 17 Representative G oldsborough. There is no possible question about it with the enormous reserves th at the Federal reserve system now has. You see, Senator Fletcher, without reducing their gold reserve they could issue five billions of Federal reserve notes. They can not onlv do that, but under the Federal reserve act they have a right to do away with all reserves, so that after that, if they wanted to exercise power they actually have, they could issue Federal reserve notes indefinitely. All they would have to do would be to buy either Government bonds or securities from member banks to place as collateral to the notes. . , , , , Senator F letcher. T hat refers to the power they have to control the volume of currency, and there is no doubt but what they have th at power? . Representative G oldsborough. R o, sir. , . Senator F letcher. And then the other point was as to its being practicable to fix the wholesale commodity market prices lo r this ^R epresentative G oldsborough. Y ou mean, after the price level is reached, have they the ability to sustain it at that price? Senator F letcher. Yes. Representative G oldsborough. I will tell you what was done between 1922 and 1928 by Governor Strong and the other members of the open-market committee. W hat they did was this. When the market went up to above the point which they thought was correct, they immediately put Government bonds into the market to pull it down, and when it went down they bought Government bonds. And may I interpolate right there, because I think it is only fair to say that there was no possible question about what was done. „ . In 1926 and also in 1927 Governor Strong came before our com mittee and asked us not to pass this legislation, because he said th at he and his committee were attem pting to stabilize the market and had done it very successfully; and I think he was right. But he overlooked the fact, as we all do, that lie was not immortal, and he has passed to where beyond these voices there is peace. . In a speech that I made in 1924, Senator Fletcher, at A tlantic City before the M aryland Bankers’ Association, which was two years before I had definite information on this stabilizing process, but when it seemed to me perfectly apparent that it was going on, I made this statement—it will take me only a moment to read it [reading] : N ot so g en erally u n d ersto o d is tlie fa c t th a t th e o p en -m ark et o p e ra tio n s of th e F e d e ra l reserv e b a n k s in th e first h a lf of 1 9 2 3 ten d ed to cu rb th e inv o lu n ta r y m ovem ent a n d in th e second h a lf of th e y e a r ten d ed to su s ta in b u siness on its new level. E a rly in J a n u a r y th e F e d e ra l reserv e ban k s^ held openm a rk e t acceptances a n d U n ited S ta te s se c u ritie s to th e v alu e of $ 7 3 4 ,0 0 0 ,0 0 0 . T h e se they reduced ste a d ily th ro u g h o u t th e p eriod of in c ip ien t bu sin ess boom. By J u ly th e to ta l holdings w ere less th a n $ 3 0 0 ,0 0 0 ,0 0 0 . B etw een O ctober 1 7 a n d th e end o f th e y ear, how ever, th e holdings in creased from ab o u t $ 3 0 0 ,0 0 0 ,0 0 0 to $ 4 7 3 ,0 0 0 ,0 0 0 . T h u s th e o p en -m ark et o p eratio n s took m oney o u t of g e n e ra l c irc u la tio n a t a tim e w hen, according to o u r indices, m oney in c irc u la tio n w as in c re a sin g fa s te r th a n th e volum e of tra d e , and la te r in th e y e a r w hen th ese sam e guides began to p o in t in th e o th e r d irectio n th e openm a rk e t o p e ra tio n s p u t m ore m oney in to c irc u latio n . W e w ere ca u tio u s in 1 9 2 3 because w e h a d h ad a recen t lesson. W e w ill be less ca u tio u s a s tim e goes by, an d in a very sh o rt tim e, w hen c re d it begins to be dem anded a ll over MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR th e co u n try fo r developm ents o f a ll so rts, th e F e d e ra l R eserv e B o a rd w ith o u t legislative a u th o rity , w ill n o t be able to re s tra in a p erio d o f in flatio n g re a te i, pro b ab ly , th a n a n y we h av e e v er know n. Senator G ore. I f the problem were as simple as that, your solu tion might be all right. But you remarked in your speech at A tlantic City, which was a very wise speech, that as time passed the demand for money or credit for development purposes would increase and become irresistible. Between 1927 and 1928, speaking roughly, bank loans did increase to one and a half billion dollars in a year, and those increased loans were for the purchase of securities. Commer cial loans declined during that year $250,000,000. Representative G oldsborough. T hat is true. As I indicated be fore, Senator Gore, unless this legislation will act as a restraining influence to hold back an incipient, unw arranted business expansion, which leads to speculation—unless it will do that, as I firmly believe it will, then it may be necessary for us to have other legislation which will separate the credit of the commercial banks from the New York stock market. Senator G ore. I think th a t probably ought to be done, but I.a m afraid your additional legislation, Congressman, will have to repeal the laws of human nature and prevent people from buying on a ris ing market and prevent them selling on a falling market. I f you can do that, you can solve this problem. Representative G oldsborough. Senator Gore, all legislation that I know anything about is based on the fact th at you have to control human selfishness. This is one attem pt to control human selfishness and to establish justice. Nobody claims that we are going to create a Nirvana by legislation. I know perfectly well that if you were to take a shovel and pour gold dollars in the streets and on every coun try road, if everybody was in a state of fear and panic and would not pick them up and use them, you could not change this situation a bit. B ut the first thing we have got to do is to make an honest effort to reestablish the confidence of the country, and I believe that it can be done if the banks of the country know that the Federal reserve sys tem is specifically directed by law to continue to do just exactly what it is doing until it achieves a certain definite en d ; and I believe that when that time comes these periods of inflation and speculation and of depression can be very greatly modified by the restraining in fluence of the Federal reserve system when they see an incipient un healthy boom coming, because these periods of deflation always follow periods of speculation. Senator W agner. Have they not th at power now, to some extent, of controlling rediscount rates to arrest excessive expansion? Representative G oldsborough. They are given authority by the Federal reserve act to adjust rediscount rates for the purpose of accommodating commerce and business. T hat is very nearly the exact language of the act. They are given no express legislative authority either to adjust rediscount rates or to conduct market operations for the purpose of controlling the expansion and contrac tion of business or the raising or the lowering of the price level,, but they are exercising the very authority you are speaking of, and I think that their operation should be directed toward a given point, first, to reestablish a price level which will be fair as between debtor and creditor, and start production and employment, and then continue on a measurably even keel so th at when business becomes adjusted to th at price level there will not be these terrible wrenches that come when there is either a rise or fall. A rise beyond a fa ir 18 Senator C arey. Has not the Federal Reserve Board the power to do this thing now? 1 Representative G oldsborough. Senator, they really, in my judg ment—I did not come here, of course, to criticize them from th at standpoint—they really, in my judgm ent, usurped power when they initiated their deflation policy in 1920 and when they instituted their open-market operations from 1922 to 1928. There is nothing in the Federal reserve act which contemplates giving them authoriooQt fi rc£Jll{fte fTlce levels, but they did do it, and from 1922 to tfiey helped the country immeasurably by doing it. Senator C arey. They can do it by selling securities and buying bonds, can they not ? Representative G oldsborough. They can do it, but the difficulty as I see it, is this, that, in the first place, they really have no au thority to use open-market operations for th a t purpose. There is no authority given them by the act to do so; and the second thing is this, th at there never has been such a thing as a benevolent despot, and it does seem that their activities ought to be addressed to a particular point which indicates fairness to debtor and creditor and which indicates some sort of stability in our economic system, so that we will not have terrible wrenches, one of which we are goinothrough now. I do not think any man now is justified in goin^ into business or in borrowing money, not having the slightest idea what the situation will be five years from now. Senator F letciier. One purpose is to raise the commodity price level and the other purpose is to stabilize it ? Representative G oldsborough. Yes; and that is really the most im portant thing. I lie only reason the emergency feature is put into this legislation is this. 2vot only all economists agree, but Governor H arrison and Governor Meyer agree th at with about two hundred and tin ee billions of debts there was no way for those debts ever to be paid unless the price level is raised. In other words, th at the present price level was so unfair to the debtor that the debts could never be paid, and that production would be terribly retarded by vutue of the fact that the producer was so encumbered with debt Senator G ore There is the rub—the increased burden of debt. How to meet it, I do not know. Representative G oldsborough. This is an attem pt to achieve jusice as between debtor and creditor, to allow the country to resume its normal production, and then to so stabilize conditions th at we will not have these economic wrenches and these terrible periods of unemployment one of which we are passing through now We do not claim that the bill is perfect. The bill is not what I v ouid prefer, but it seems to me that it .is a tremendous advance over anything we have ever had before, because, Senator Gore if nothing else, it does show to those who have been in control verv largely of the medium of exchange by their control of credit, that the people propose in so far as they can to assume their own control over their own medium of exchange, not to let some one else decide to bSaled!" PnC6S "* t0 be inCreaSCd °r When they are 19 20 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR point is very hard on the person with a fixed income, salaried person and the laborer, because wages and salaries are not raised as fast as these prive levels are raised. On the other hand, as soon as you have a period of declining prices from a reasonable price level, pro ducers are unable to produce with profit, and they have to stop their operations and throw people out of work. Senator G ore. And that is the reason that the banks will not loan money. They do not see any business th at can promise a profit on its operation. Senator T ownsend. Ju st in connection with that, may I ask you this question? W ill you point out to the committee what can be accomplished under that bill that can not be accomplished under the Glass-Steagall bill, just in a word? Representative G oldsborough. W hat the Glass-Steagall bill does, Senator Townsend, if you will permit me-----Senator T ownsend. All I want to know is what can be accom plished under your bill th at can not be accomplished by the GlassSteagall bill. Representative G oldsborough. I am going to try to answer as briefly as I can. The Glass-Steagall bill simply furnishes resources to the Federal reserve system. I t tells the Federal reserve system, “ You do not have to issue notes only on paper th at you rediscount. You can use Government bonds as collateral.” I t also allows the Federal reserve banks to rediscount paper from member banks which were not previously eligible. In other words, it gives power to the Federal reserve system to be very liberal in its credit policy. This act directs what the activities should be in so far as the price level is concerned—which is a very different proposition. Senator T o w n s e n d . Could they not accomplish the same thing as set forth in your bill, if they desired to do so, under the Glass-Stea gall bill? Representative G oldsborough. O f course the Glass-Steagall bill is the only means th at they have in addition to those they previously had to expand the credit of the country. Senator T ownsend. Exactly. Representative G oldsborough. T hat is true. You do not know and I do not know how they are going to exercise the powers th at the Glass-Steagall bill gives them. Senator F letcher. I t is not permanent legislation. Senator T ownsend. I recognize that, Senator. The C hairman. In other words, the purpose of that bill is to give them a mandate to follow out a policy and to adhere to it for a specific purpose. Representative G oldsborough. Yes. The C hairman . Using every provision of law available, including the Glass-Steagall bill, for that purpose. Representative G oldsborough. That is very concisely stated, Mr. Chairman, and much better than I could have stated it. Senator G ore. I s it your feeling that the fundamental need of the country is more money or more credit, or both, or either? Representative G oldsborough. There is no way to get it into cir culation under our system. We do business entirely on a credit MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 21 basis, Senator Gore, and the only thing that any legislation can do----Senator G ore. Well, I had in mind the issuance of Federal reserve notes or the extension of credit. Representative G oldsborough. Y ou see what happens to Federal reserve notes. Bonds may be bought from the banks directly, in which case the Federal reserve notes go to the banks. Or the Federal reserve banks may buy from a private individual and give him Federal reserve notes, but he deposits them in some bank, so they go to the banks. W hat the bank does with that money is th is : If it owes any money to the Federal reserve bank because of rediscount, it pays off its debt to the Federal reserve bank. T hat is the first thing it does. The second thing it does, if it has any money left, is to deposit th at money in the Federal reserve bank as a reserve. Senator G ore. Or let some other bank take it to pay off its debts. Representative G oldsborough. Correct. And then, of course, when it establishes sufficient reserve to put itself in what it believes to be a sound position, then it looks for an outlet for its reserves. Senator G ore. That is the trouble now. They do not see any business in sight th a t promises to earn a profit on its operations. That is the reason they do not make business loans. It brings it back to the point that we have to restore confidence. Representative G oldsborough. That is one of the major things we are trying to do by this legislation. Senator F letcher. Y ou had before your committee, and his state ment appears in the hearings, Dr. W illfred I. K ing, professor of economics, New York University. Doctor K ing writes me a letter— and I will ask to have this letter go into the record—saying that you had in your original bill a provision something to this effect: If, in c a rry in g out th e purpose of section 1, th e gold reserv e is deem ed by th e F e d e ra l R eserv e B o ard to be too n e a r to th e p rescrib ed m inim um , th e b o a rd is a u th o riz e d to ra is e th e official p rice of gold if th e o th e r m ethods a lre a d y a u th o riz e d a p p e a r in a d e q u a te ; if, on th e o th e r h a n d , th e gold reserv e ra tio is deem ed to be too high th e F e d e ra l R eserv e B o a rd is a u th o riz e d to low er th e official price of gold if th e o th e r m eth o d s a lre a d y a u th o riz e d a p p e a r in a d e q u a te . He thinks that that provision ought to go into any bill th at is passed here; and I just thought I would like to ask you what you think about the importance of th at provision. Representative G oldsborough. Senator Fletcher, I drew th at bill myself; it was my bill; the suggestion was not given me; and, there fore, when I put the gold clause in it, I put it in there because I thought it ought to be there. I reached two conclusions: F irst, that I could never get a bill out of the Banking and Currency Committee go the House with the gold clause in i t ; and the second conclusion I reached was this, that in all human probability we would never, within many, many years, need the gold clause because of the tremendous amount of gold reserve that we now have, and th a t it really was not necessary as an emergency proposition. Senator F letcher. Y ou do hot regard it as a very essential p art of this legislation ? Representative G oldsborough. Not at the present time; no, sir. Senator F letcher. I will ask to have that letter inserted in the record. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR The C hairman. T hat may be done. (The letter referred to and submitted by Senator Fletcher is here printed in full as follows:) The C hairman. I would like to ask you one question just to get it clear in my own mind. The thing aimed at in this bill is to bring up the general price level without any regard to inequalities th at exist in commodity prices at the present time? Representative G oldsborough. Yes. There are 784 commodities involved, and this would simply result in the raising and lowering of the index number constituting the whole 784 commodities. The laws of supply and demand, of course, would be completely operative as to any individual commodity; but if you could keep the credit of the country at a parity with the business of the country, you would have a stabilized price level. The C hairman . I think I understand the purpose, and I think you have made a very good presentation before the committee. I just want to make this clear. I f an inequality appears in the ex change value between agricultural goods and manufactured goods, the passage of this bill would have no relation to that? Representative G oldsborough. T hat would have to be corrected by some other legislation. Senator G ore. The manipulation of the number of grains in a gold dollar would not help and could not be applied to Government debts or corporation debts or farm mortgage debts and others that are made payable in gold? Representative G oldsborough. In my opinion, they could not. Senator G ore. Y ou do not know the aggregate amount? Representative G oldsborough. W hat the Supreme Court would say about it, I do not know. Senator G ore. I think they have already passed on it. Senator H ull. Have you the commodity price levels of the d if ferent im portant countries measured by a common yardstick, so th a t we can see what they are? Representative G oldsborough. N o ; I have not, Senator H ull. The C hairman. We thank you very much, Congressman. (W itness excused.) The C hairman. I see that this hearing can not be concluded this forenoon, and we will arrange to continue this afternoon, starting at 2.30, over in the Capitol Building in the room of the Committee on Interstate Commerce, Senator Couzens’s room, which is on the west side, one floor above the Senate Chamber. We have two Congressmen here who have made a study of this bill and would like to make brief statements, and we shall have time for that, at least, before we recess. I will first call on Congressman Strong of Kansas, who has made a long study of this proposed legislation and who is a member of the House Banking and Currency Committee. 22 S ch oo l of N e w Y ork U n iv e r s it y , C o m m er c e , A c c o u n ts , a n d F in a n c e , Washington Square East, New York, May 9, 1932. H on. D u n c a n U. F l e t c h e r , United States Senate, Washington, D. C. M y D ea r S en a to r F l e t c h e r : T h a n k s fo r y o u r le tte r of M ay 4. I w as d elig h ted to re a d th a t th e G oldsborough b ill p assed th e H ouse by such an overw helm in g m a jo rity . I hope th a t it, o r y o u r bill, w ill go th ro u g h th e S e n a te w ith eq u al speed. . I se n t you a few d ay s ago a s u b s titu te sectio n to m a k e y o u r b ill effective in case th e gold re se rv e s of th e F e d e ra l re se rv e b a n k s sh o u ld p ro v e in a d e q u a te . T h e section w hich w as d eleted fro m th e o rig in a l G oldsborough bill b efo re it p assed th e H ouse w a s: “ If, in c a rry in g ou t th e p u rp o se of section 1, th e gold re se rv e is deem ed by th e F e d e ra i R e se rv e B o a rd to be too n e a r to th e p resc rib e d m in im u m , th e b o ard is a u th o riz e d to ra ise th e official p ric e of gold if th e o th e r m eth o d s a lre a d y a u th o riz e d a p p e a r in a d e q u a te ; if, on th e o th e r h a n d , th e gold re se rv e ra tio is deem ed to be too h ig h th e F e d e ra l R e serv e B o a rd is a u th o riz e d to lo w er th e official p rice o f gold if th e o th e r m eth o d s a lre a d y a u th o riz e d a p p e a r in a d e q u a te .” F o r th e re a so n s w hich I h av e p rev io u sly sta te d , I believe th a t som e such section sh o u ld be re in se rte d by th e S e n a te ; f o r by so doing, th e F e d e ra l R e serv e B o ard w ould be enabled to c a rry o u t th e d ire c tio n s of C ongress u n d e r difficult a s w ell a s u n d e r easy cond itio n s. W ith b e st w ishes fo r y o u r success, I re m a in , V ery sin cerely y o u rs, W il l fr e d I . K in g , Professor of Economics. Senator G ore. W hat do you mean by the price of gold ? Representative G oldsborough. W hat would be done would be th is : In case the gold clause were used, the Federal reserve system would get in out of the market all its gold and would use nothing but gold certificates. Then it would measure this gold. How many grains are there in a gold dollar now ? Senator G ore. 25.23; fine gold, 25.8. Representative G oldsborough. W hat they would do, as a m atter of calculation, would be to increase or decrease the gold content of the gold dollar. Senator G ore. I s th at what you contemplate here ? Representative G oldsborough. T hat is what would have to be done. Senator G ore. W hy not just change the number of pounds in a bushel of wheat or the number of pounds in a bale of cotton? I f a man owes a thousand bales of cotton of 500 pounds each, let him pay the bill with a thousand bales of 400 pounds each. ^Representative G oldsborough. Y ou are getting away from the principle of this legislation-----Senator G ore. I f th at is afield I would not want to detain you or the committee by going into it. Representative G oldsborough. The situation is this. W hat we have now-----Senator G ore. T hat is, the Fisher plan? Representative G oldsborough. Yes. B ut the Fisher plan, th at is, the change of the gold content in the dollar, is not involved in the present legislation. Senator G ore. N o ; I understand that. 23 STATEMENT 0E HON. JAMES G. STRONG, A REPRESENTATIVE IN CONGRESS OF THE FIFTH DISTRICT OF KANSAS Representative S trong. Mr. Chairman and Senators, I think I ought to say first th a t I have never had any banking experience. I am not a banker, though I have been an attorney for little banks. My life has been devoted as a lawyer and business man and farm er. I came to Congress in 1919, went on the Banking and Currency Com mittee and watched the price level rise. Then after May 20, 1920, I watched the deflation process. 24 MAINTAININ'} AVERAGE PURCHASING POWER OP DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 25 [H . R. 1 1 806, Seventieth Congress, first session] You referred, Senator Fletcher, to Doctor King. He has ex pressed the opinion th a t in the deflation the owners of property in this country lost $40,000,000,000, the amount of the cost of the war. I began to study the cause and the prevention of inflation and deflation. My attention was called to the fact th at when the Senate passed the Federal reserve act it provided that the discount rate should be used not for the accommodation of business but for the stabilization of the price level. In conference the language was changed to the accommodation of business and commerce. I introduced a bill asking or directing the Federal Reserve Board to use their powers for the stabilization of the price level. That was in 1926. We had hearings upon th at bill. I found th at those whoopposed it were trying to educate the country to the belief that I was trying to fix prices, which was not my purpose at all, except to fix the purchasing power of money. In the next Congress I introduced a bill for the stabilization of the purchasing power of the dollar; my idea being that the people having in the Constitution given Congress the right “ to coin money—and to regulate the value thereof,” we never had regulated it or never had any chance to regulate it until we had the Federal reserve system. The C hairman. Was that bill of yours along this same line? Representative S trong. Yes; and for the same purpose and the bill now under consideration. Among the many economists and financiers who came before our committee in the years 1926 and 1927 was Governor Strong, the then governor of the Federal Reserve Board. He referred to the fact that he had been using these powers for stabilization for several years with success, but took the position that we ought not to direct the Federal Reserve Board to so use them. I went to lunch with him one day, he trying to persuade me to abandon the bill and I trying to persuade him to help me with his great ability to prepare a proper bill th at he thought he could sup port. In the course of the conversation he said, “ I am doing this thing now th at you want done.” I said, “ That is true. I f you always were to continue at the head of the board th at bought and sold the Government securities, and at the head of the Federal re serve system, I would be willing to withdraw the bill. But th at is not going to happen, so I would like to have you help me.” I said to him, “ Where were you on May 20, 1920 ? ” Fie said, “ I was in W ashington.” I asked him if he was with the Federal Re serve Board, and he said he was; and he looked me in the eye and said, “ W ith all the energy that I could possibly command 1 tried to prevent the passage of that deflation legislation.” Then I said, “ Well, Governor, if this law had been on the statute books at that time you might have pointed the members of the board to the law, and, you dare not pass such a resolution.” From th at time on I got his assistance and help; and the bill that I introduced on March 6, 1928, was a bill that he had a large p art in the prepara tion of. Senator G ore. W ill you attach that bill to your statement in this record ? Representative S trong. Yes, Senator. (The bill referred to is as follows:) _A BILL To amend the act approved December 2 3 , 1 9 1 3 , known as the Federal reserve a c t ; to define certain policies tow ard which the powers of the Federal reserve system shali be directed ; to fu rth er promote the m aintenance of a stable gold s ta n d a rd ; to promote the stability of commerce, industry, agriculture, and em ploym ent; to assist in realizing a more stable purchasing power of the dollar, and for other purposes Be it enacted by the Senate and House of Representatives of the United Htates of America in Congress assembled, T h a t th e a c t approved D ecem ber 23 , 1 9 13 , know n a s th e F e d e ra l re se rv e a c t, a s am ended, be f u r th e r am ended as fo llo w s: A dd to section 1 4 th e follow ing p a r a g r a p h s : “ (g ) T he te rm ‘ F e d e ra l re se rv e sy stem ,’ a s used in th is a c t, sh a ll m ean th e F e d e ra l R eserv e B o ard , th e F e d e ra l reserv e ban k s, a n d a ll com m ittees, com m issions, ag en ts, a n d o th e rs u n d e r th e ir d irectio n , sup erv isio n , or control. “ ( h ) T he F e d e ra l reserv e system sh all use all th e pow ers a n d a u th o rity now o r h e re a fte r possessed by it to m a in ta in a sta b ie gold s ta n d a rd ; to p ro m o te th e sta b ility of com m erce, in d u s try , a g ric u ltu re , and em ploym ent; a n d a m ore s ta b le p u rc h a sin g pow er of th e d o llar, so f a r a s such purposes m ay be accom plished by m o n etary an d c re d it policy. R e la tio n s a n d tr a n s a ctio n s w ith foreign banks sh a ll n o t be in c o n siste n t w ith th e p u rp o ses expressed in th is am en d m en t. “ ( i ) W henever a n y decision a s to policies is m ad e or w h enever an y actio n is ta k e n by th e F e d e ra l reserv e system te n d in g to affect th e a fo re sa id purposes o f th is am en d m en t, such decision o r actio n a n d reaso n s th e re fo r sh a ll be th e re a fte r pu b lish ed by th e governor of th e F e d e ra l R eserve B o ard a t such tim e, place, an d in such d e ta il a s m ay be deem ed by him to be m ost effective in fu rth e rin g such purposes, an d a t le a s t once each y e a r in th e A n n u al R ep o rt of th e F e d e ra l R eserv e B o ard to th e C ongress.’’ S ec . 2. A fte r section 2 8 a d d th e fo llo w in g : “ S ec . 28A . T h e F e d e ra l R eserv e B o ard an d th e F e d e ra l reserv e b an k s a re h ereby a u th o riz e d a n d d irected to m ak e an d to co n tin u e in v e stig a tio n s an d s tu d ie s fo r th e g u id an ce of th e sy stem ’s policies, a t le a s t to th e e x te n t a n d in th e m a n n e r described in p a ra g ra p h s 1, 2, 3, 4, an d 5 of th is section, an d to such f u r th e r e x te n t a s th ey m ay deem to be d e sira b le ; nam ely, “ ( 1 ) Of th e m a n n e r an d e x te n t to w hich o p e ra tio n s of th e F e d e ra l reserv e sy stem affect ( a ) th e volum e of c re d it an d cu rren cy , (b ) th e p u rc h a sin g p ow er of th e d o llar, (c ) th e g e n e ra l level of com m odity prices an d of o th e r re le v a n t p rices, ( d ) th e p rices of stocks a n d bonds, a n d ( e ) bu sin ess a c tiv ity ; th ro u g h changes of ra te s of discount, p u rc h a se s, a n d sales of se c u ritie s in th e open m a rk e t, re la tio n s a n d tra n s a c tio n s w ith o th e r b an k s of issu e, or th ro u g h a n y o th e r m eans. “ ( 2 ) Of th e influence of a c tiv itie s of agencies of th e G overnm ent of th e U n ited S ta te s o r of dom estic o r of fo reig n b an k s n o t u n d e r th e co n tro l or influence of th e F e d e ra l reserv e system , o r of an y o th e r agency o r agencies upon th e p u rc h a sin g pow er of th e d o lla r; a n d of th e influence e x e rte d upon th e policies an d a ffa irs of th e m em ber b an k s an d of th e ir custom ers by m eans o f d ire c t re p re se n ta tio n s, by p u b licity , o r o th e rw ise ; a n d of th e effect*of such o p eratio n s a s a re conducted by th e F e d e ra l reserv e b an k s w ith fo reig n b anks. “ ( 3 ) Of th e effect upon th e p u rc h a sin g pow er of th e d o lla r o f changes in th e supply of an d d em and fo r gold, e ith e r a c tu a l or prospective. “ ( 4 ) Of e x istin g m ean s an d proposed p lan s, b oth n a tio n a l and in te rn a tio n a l, h av in g fo r th e ir aim th e sta b iliz a tio n of a g ric u ltu re , in d u s try , com m erce, em ploym ent, a n d th e p u rc h a sin g pow er of m oney. “ ( 5 ) Of ex istin g o r proposed in d ex nu m b ers of p rices or o th e r m e asu res of th e p u rc h a sin g pow er of m oney, w hich a re used o r m ig h t be used, singly or in com bination by th e F e d e ra l reserv e system a s a g uide in ex ecu tin g its policies. “ S e c . 28B . T h e F e d e ra l R e serv e B o a rd sh a ll re p o rt to th e C ongress from tim e to tim e, a n d a t le a st a n n u a lly , th e m ethods p u rsu ed an d th e conclusions reach ed , e ith e r final o r o th erw ise, re s u ltin g from th e a fo re sa id in v estig atio n s, a n d an y leg islatio n w hich w ill, in its ju d g m e n t, b est p rom ote th e purposes of th is am en d m en t to th e F e d e ra l re se rv e act. “ S ec . 28C . A cts an d p a rts of a c ts in c o n sisten t w ith th e te rm s o f th is a c t a re R ereby re p ealed .” Representative S trong. The bill provided th at all the powers of the Federal reserve system should be used for the maintenance of the gold standard and the stabilization of industry, agriculture, and MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 26 27 M A IN T A IN IN G AVERAGE P U R C H A S IN G P O W E R OF DOLLAR business, and for the. Si He fame6 E e l ? wanted the co m m tee on th a t bill.. Previous to that time he arranged for “ “ " " o p e ' ' ' t T ^ v e might induce them Reserve Board W e b t r a ^ e co n feto n ^ l little after 10 i2i « £ dtro u X “ethatntihePrre ■^ aTsom e hope that the Federal Reserve ^ ^ t r G o v e f n o f y i r g ^ L ^ r f r o ^ r committee and the ,ues- used?! a measure of value and for the purpose of exchange between S S I s r i f e S s - a a S ^ s a E b1 - h ^ b i l » nfollows the law of I l i l s H l l 3 ing Po™er has largely increased, S & 3 hen the tam e S bushels. It reason* the farm organizations, realizing the impossiS K S & s s r d t e a « b s sft economists and began to study this question and th at is the reason thev are here to-day to urge you gentlemen to pass this bill. I^respect the members of the Federal Reserve Board very high y. Thev have been my friends. As a member of the Banking and Currencv Committee I have worked with them these 13 years; but I do not know whether appointment on the Federal Reserve Board gives a man superhuman power that enables him alone to decide when to buy or sell Government securities. Ihey started in to buy twentv-five millions a week about two months ago and they ad m itted before our committee th at they were not going fast enough. Then they commenced to buy a hundred millions a week; but it you talk with them they say, “ When we get so many hundred mil lions we have got to quit.5 # . Who told them so? Where did they get that inform ation as to the time to quit? The only time I see for them to quit is when they have deflated the dollar, so that people who are m debt can get hold of those dollars to pay their debts with. I f they say, We have bought seven hundred millions now and we are going to quit, there w ilfb e a flunk. I f they keep it up there will be a gam—m what? In the price of labor and of commodities in general. T hat is what we want by this b ill; th at is what we want to secure. • . Senator W agner. Y ou mean, if they keep it up even without this direction and legislation? , Representative S trong. Yes; if they would; and if they had used the powers that Congress had given them for stabilizing the pur chasing power of the dollar in 1926, we would not be m the condi tion we are now in in 1932. But they did not do it. Somebody influenced them to believe th at they should not go on with it. Mil lions have been made by those who still own the dollars, but millions have been lost, yes, billions, by those who had to exchange their prop erty for the high-priced dollars. The man who has money is per fectly satisfied because his dollars are worth two or three times as much as they used to be, but the man who is in debt and must pay it by his labor and the things he produces is not satisfied; and there is discontent all over the country and it is going to continue until something is done to change this condition; and the only way I know of ?s to increase the supply of money and reduce interest rates. Senator Couzens. W hat would you say if we provided by legisla tion that they were to buy a hundred million dollars of Government bonds every week up to December 1, 1932? Representative S trong. I would not know whether th at was the place to stop or not. , . __ Senator C ouzens. Who can tell them whether they should keep on or whether they should stop? I just want to know if you wanted to assume responsibility. »T v Representative S trong. N o. B ut we have a Departm ent ot Labor in this country th at weekly puts out a price level, a price level of wholesale commodity prices. When the dollar goes up the commod ity price level goes down, and when the dollar goes down the com modity price level goes up. I would like, as this bill proposes, to o-overn the use of their powers by the condition of the price level as published each week by the D epartm ent of Labor. Senator G ore. On th a t point I appreciate your description o± the condition and the end that you are trying to arrive at, but there are 28 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR two or three things that puzzle me, and I would like to get your mwmwm reTChe first week"in Oetober we had in this country $5,015,000,000 of rnrnmm^ money and yet a ternfic dro^in oft e L Ta d pnce^° J}lat time the sentiment settled over the Nation and people y j^ a r d in g t h e ir ^ ^ n X V o L ^ y ^ ^ o i n t ^That it is lack of confidence instead of lack of money ^ ®!'®di * th But jf the people of this country Re^erv^Boar^to^sta^fiize^the dollar is entirel/analogous to cm- iBSSSilB gress and the Farm Board to stabilize the price of cotton and wheat* MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 29 Representative Strong. No. But everybody but those who are hoarding it is hoping and praying that this high-priced dollar shall be reduced. I got very little encouragement in 1920. Why? Be cause the dollar was down, as I term it, on speaking acquaintance with everybody. But now it has got so high in its purchasing power and it takes so much labor and so much the people produce to pur chase it, that everybody wants it stabilized. You are going to find a great demand for this bill. Senator Gore. The point I was making a while ago was that the volume of money had increased and yet prices went down. Representative Strong. I know. Money went into hoarding. In any credit structure it is a good deal like a fire company running a fire hose and attaching the hose and turning on the water. If there is a leak the water does not come out of the nozzle until the pressure overcomes the loss. It takes time. The Federal Reserve Board commenced to pour money into the credit structure. They might not see a reaction for two or three months. The governor of the Federal Reserve Bank of New York said, “ We have been pur chasing $25,000,000 of bonds for seven weeks.” Only day before yesterday there was a cessation in the falling of bank credits that had been going down for a year and a half. You can’t just buy a few hundred million dollars’ worth of bonds and see a reaction the next week. The first thing a banker does that sells his bonds to the Federal reserve system and has the money in the bank, is to go over to the Federal reserve system and pay his indebtedness. The Federal reserve system thus only takes money out of one pocket and puts it into the other. There is no change in the amount of money in circulation. But if they keep on, the banks are sooner or later going to try to loan the money, because there is nothing on earth that a bank hates as much as having money in the bank that is drawing no revenue. The people will sell their bonds and put the money in the bank, and if you keep pouring into the credit structure additional money by buying bonds it will get out into investment and production and a restoration of better times, the dollar will come down to a reasonable price, as it should be in comparison with the things that it buys. I want to repeat: There are two classes of people—those who want to use money and do use it as a commodity on which they make a profit, and those who want to use it as a means of exchange and a means of measuring the value of what they buy and sell. Senator W agner. D o you think it would resist the deflationary movement in wages that is going on now ? Representative Strong. Why, absolutely. If you will bring the dollar down to a reasonable price, then there will not take so much labor to purchase a dollar or so much of the commodities that labor must produce. Senator W agner. The wage earner now is being cut both ways. You are giving him-----Representative Strong. Y ou would probably stop the wage cut ting in the United States if you would bring the dollar down to where the day’s work would bring more dollars. Senator W agner. The tendency is the other way just now. Representative Strong. Yes; certainly, because the dollar is high. 120290—32-----3 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator T ownsend. Y ou were a member of the conference com mittee on the Glass-Steagall bill; you remember that ? Eepresentative Strong. Yes; day and night. Senator Townsend. In your judgment, can the express purpose of this bill be accomplished under the Glass-Steagall bill? Eepresentative Strong. Certainly. That is what we passed the bill for. That is what we passed the Eeconstruction Finance Cor poration bill for, to do the very thing that this bill will do. Senator W alcott. D o you have any way of bringing pressure on the banks to make them do what we expected them to do ? Eepresentative Strong. No. But when they get so much money in their vaults that is not bringing in any revenue, they will find a way to get interest on it. Senator W agner. Would that perhaps result in undue expansion again ? Eepresentative Strong. If so, then you would turn around and use the purpose of this bill and sell bonds in the open market and take the money out of the market and raise the discount rate. I do not want inflation: I want to deflate the high-priced dollar and keep it upon a fair basis at a stabilized purchasing power, as compared with the things that a dollar will buy, as measured by the com modity price level issued by the Labor Department. Senator T ownsend. D o you think the Federal Eeserve Board and the banks are doing exactly what you desire them to do under your bill when they are purchasing Government bonds every week now? Eepresentative Strong. Yes; right now; but I want them to keep it up until the dollar comes down where we can get acquainted with it again, where it will have only the purchasing power it had in 1921 to 1929. Senator Gore. In your division of people into two classes, the first class was those who use money to make money ? Eepresentative Strong. Yes. Senator Gore. And would you include in that class the bankers? Eepresentative Strong. Yes, certainly; they use money to make money out of it. They handle it as a commodity, to make a profit. Senator Gore. They will get busy to make their money earn money ? Eepresentative Strong. Yes. If you take away their bank. You understand that in England and in France they do not allow a banker on the board of directors of their great banks. Why? Be cause they do not feel that it is a proper thing to put on the board of directors of their great banks men who deal in handling money for profit. They put business men on as directors. Senator Gore. I was wondering about the banks. I think the de posits are about forty-seven billions, and yet they are hoarding it. Eepresentative Strong. Because they are afraid. They do not know when this policy of buying bonds is going to stop and money retain its high purchasing power. Senator Gore. They lack confidence in the future. Eepresentative Strong. If they knew that the Federal Eeserve Board was going to keep on buying bonds and keep the interest rate down until the dollar was reduced in price in comparison with what the dollar used to be, there would be plenty of confidence in this country. Senator Fletcher. Your idea is to make it mandatory for these Federal agencies to accomplish this purpose, and not leave it simply in their discretion? Eepresentative Strong. Certainly. We have left it in their hands for several years and had these periods of inflation and deflation which have cost us much more than the wars we have had. It seems to me that it is time that Congress should tell the agencies that they create to use the power we have given them in the way that we think it ought to be used. To stabilize the purchasing power of our dollar. (Witness excused.) 30 31 STATEMENT OF HON. JEFF BUSBY, A BEPBESENTATIVE IN CONGBESS FBOM THE FOUBTH DISTBICT OF MISSISSIPPI The Chairman. Mr. Busby is also a member of the Banking Com mittee of the House. Eepresentative Busby. Mr. Chairman and Senators, I might sug gest this to the distinguished body that I am now facing, that if we believe conditions in this country are satisfactory and if we believe it is better to drift than it is to try to do something, I concede that this legislation is a useless effort on the part of the House and Senate; but if. on the other hand, a contingency and emergency face us, that we feel as responsible agents of the people we should try to solve, I believe we should approach it with such a sympathetic attitude—an attitude that will cause us to question the things that be, and to work on something that may bring about better conditions. I will direct your attention primarily to the Goldsborough bill and the provisions of it relating to conditions that are now confronting the country. The Goldsborough bill does two things: First, it declares it to be the policy of the Government to have a dollar with the purchasing power, on the average, of the period of 1921 to 1929, which practically settles around the year of 1926. There is a reason for that: Because the country entered into debt to a large extent during that time; because the standard of living was acceptable at that time; because we had advanced over the 1913 period to such an extent that we found our commercial conditions, our living and our home life and our advancement in a general way, through the automobile, transporta tion, and radio, and other things, at a very satisfactorv level during that time. 6 That is the reason, as I see it, why we should select that period. Varying price levels are not new. About 1834 John C. Calhoun called attention to this in these words: Place the money power in the hands of a combination of a few individuals and they by expanding or contracting the currency mav raise or sink prices at their pleasure. In 1929 there was practically $60,000,000,000 of bank credits work ing which served as a type of currency on mediums of exchange. These bank credits had a velocity of turnover of about 25 times per annum in 1929. If you multiply the $60,000,000,000 by the 25, which was the velocity, you would have the equivalent of 1,500 times 1,000, 000,000 working. In 1931 our bank credits were reduced to $45,000,000,000, with a velocity shrinkage from 25 to 13, giving us, if we multiply the 45 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR by the 13, 585 times that 1,000,000,000 would be working. In other words, we would have just exactly the efficiency of the bank credits of 1929 compared with 1931, of 38 per cent, a reduction in efficiency of 62 per cent of the business activity of checks and bank credits. That is equivalent to taking out of use bank credit to the extent of 62 per cent or leaving only $38 of each $100 of 1929. That would cause a scarcity of our currency and this would slow down our trade, because when you reduce the activity of the dollar you certainly cur tail its effectiveness in business. It is true we had about a billion dollars more of issued and coined currency in 1931 than we had in 1929. But $1,000,000,000 added, where you have $14,000,000,000 of bank currency subtracted, would leave you a net loss of $13,000,000,000 of effective currency, and if you divide that so as to have your velocity of 25 reduced to 13, you would certainly reduce the efficiency of the “ currency ” again. In order to have a proper amount of currency it ought to relate to the needs of business. If you have too much currency, as they did in Germany, in relation to the requirements of business, the money will become cheap. If you have too little bank credits and currency, as in the United States now, in relation to the business needs, of course the money will become high and dear in relation to com modities and labor. Last week’s commodity price index showed farm commodities to be around 42 per cent of what they were in 1926. In 1926 if you had made a debt and expected to pay it with farm commodities— and other commodities work very similarly, but not to the same ex tent—you would pay two or three times as much as you planned to pay when the debt was made. That is the trouble to-day in this country— the debts are fixed and remain so, regardless of the price of com modities or the earning power of the people. Professor Pierson and Professor Warren, who are here, both of Cornell University, state that the debts, private, public, and all kinds, in this country in 1929, were $203,000,000,000. Those were fixed absolutely. The national wealth was $362,000,000,000. It was not fixed. The debts at that time were 56 per cent of the wealth. Since that time the wealth has shrunken greatly, but the debts have remained the same. To accept a lower standard of living than that at which the debts were made and make it possible to reproduce properties at a lower cost decreases the national wealth by that standard. As the cost of reproducing the things we have, railroads, steamships, houses, fences, machinery, or wdiat not, the wealth of the Nation is lowered. It will tend to resolve this country into a con dition of bankruptcy as the national wealth is reduced; and if we accept a condition of bankruptcy we will do it with full knowledge of the fact that the debts are fixed and unchangeable under our present plan and under our present system. We will arrive at the point where receiverships become general when conditions of living are much lowered or labor becomes available at three-fourths or twothirds or one-half of its present price. That makes it possible to reproduce these things we call property at that much lower figure, and no property is worth more than it costs to reproduce it new. When we lower the wealth of this country 25 or 30 per cent we have certainly resolved this country into a condition of bankruptcy, because when we owe in this country more than our assets are worth, even on a market that is not affected by enforced sales, there is noth ing that will absolve us from that condition except a period of general bankruptcy which will wipe out the debts. I assure you that I am going to take but just a little more time. I am trespassing on the committee now. The Chairman. No ; the committee is very glad to hear you. Use your own judgment as to the length of time you will take. Representative Busby. I will stop at the end of five minutes, Mr. Chairman. The Chairman. That will be entirely satisfactory to everyone, I am sure. Representative Busby. Referring to the wholesale commodity index price as determined by the Bureau of Labor statistics, you will find in the House hearings, if you care to examine them, on page 257 that Mr. Ethelbert Stewart, Chief of the Bureau of Labor Statistics, tells you about the method that is used in obtaining wholesale com modity index prices. On page 267 you will find that he quotes from Mr. Sloan of the Standard Statistics Co., where Mr. Sloan says that the very best price index is that obtained through the Bureau of Labor Statistics. That is, the Standard Statistics Co. handling that type of business believes it is the best, and Mr. Sloan of that company says so. On page 358 of the House hearings Doctor Fisher was asked the question by Mr. Prall, of New York, “ What do you consider the best index price?” Doctor Fisher discussed that at some length and said: I have my own, and others have their index prices, but I am convinced that the Bureau of Labor Statistics’ wholesale commodity index price is the best that I know of. And so I merely call your attention to those things so that you can examine that point, because it is involved in the bill. Senator F letcher. Doctor Fisher gives, I believe, about 14 ways in which this can be handled. Representative Busby. I know, but he comes down to the point exactly, Senator. Senator Fletcher. I understand that. He says it is possible to accomplish what you desire here, and practicable to do it. Representative Busby. And none of those several ways varies very much from the thing desired. The final clause of the bill directs the Secretary of the Treasury, the Federal Reserve Board, and the Federal reserve banks to assume responsibility of trying to bring the purchasing power of the dollar back to a desirable level. If we are at a desirable level, there is no use in worrying about this bill. If the people in our districts are employed, if the people back home have the things they need to keep them enjoying life, there is no use of our worrying here in Washington. But we have recently found, in drafting a revenue law, a situation where the springs of revenue in this country have so dried up that the revenue acts which formerly produced a surplus do not produce half enough revenue. We have recently passed and are now preparing new reve nue laws which will bring sufficient revenue to balance the Budget. If we balance the Budget this year and do not restore the purchasing power to the people through this method or some other method, be 32 33 34 MAINTAINING AVERAGE PURCHASING POWER OP DOLLAR cause of a very deficient set of revenue raising laws—and there is no way around it, because when the springs dry up the streams dry up—we are certainly driven from bad to worse, because you notice week after week commodity prices drying up at the rate almost of 1 per cent a week, and that indicates that the consuming power of the people is being dissipated and that more people and more people are being sold out of house and home and turned on the streets and into the roads to travel from the place where they lived to some other place, they are not certain where, to become recruits to the great army of the unemployed, members of the under-consuming classes that this country is confronted with to-day. There is nothing in sight; there is nothing to indicate the slightest ray of hope. I am pretty familiar with all of the details. When we go to offer some suggestion of hope there is no hope in sight. For that reason the members of the committee, Mr. Goldsborough, Mr. Strong, and myself of the subcommittee, the active members of the subcommittee, with Mr. Frail and Mr. Beedy who were with us part of the time, have thought we might come before you and assist in any way we could in offering, if nothing more, a spirit of interest in the subject. Senator Gore, Let me ask one question, because you represent my old district in Mississippi. I agree with all you say, Congressman, about the burden of these debts—and the tragedy of it is that they have got to be paid two or three or four times over—but the thing that puzzles me and the thing that I am trying to settle is which is the cause and which is the effect. You state correctly that during the last three or four years the volume of money has increased more than a billion dollars. Bank credits or deposits have declined 14 billions. The velocity or efficiency of money and bank credits has declined about 60 per cent. Now, have the velocity and the effi ciency of money and credit decreased because business decreased, or has business decreased because the velocity and efficiency of money and credits have decreased ? There lies the point in this problem. Representative B usby. I am very glad to give you my reaction to that proposition. Business during the period from 1920 to 1929 went along in an accelerated sort of manner until we reached the climax in 1929. That w^as due largely to the velocity of credit. It was due largely to the fact that people overbought their ability to pay through the modern methods of selling. Senator Gore. The overuse of credit? Representative B usby. Yes; the overuse of credit. Senator W agner. Buying on installments? Representative Busby. Yes; and the people overconsumed in re lation to their ability to meet their obligations. The high-power salesmanship induced people that wanted real estate to buy to the extent that we had $35,000,000,000 of amortized real estate loans. We perhaps had that much of deferred or installment obligations which mortgaged the future income of millions of people to the extent that the slightest reverse in conditions would throw them into a servile attitude toward their creditors, so that a person would have to take everything over and above a bare living to apply to the promises he had already made. It took millions of people out MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 35 of the consumer class and they became simply slaves to their own debts. As that condition increased through this very lax credit period, and it became more depressing, and as it became more distressing the creditors, wanting their obligations met, began to press for payment, and as the payments were forced, commodities, properties of all kinds, became available at a lower figure, and as they became more available and as the price lowered, the trouble was accelerated, and as we came on down the line to this point where the forced sales have become more numerous, receiverships, bankruptcies more gen eral, the debt situation that existed then, which was not altogether easy even in the best of times, has become, as I pointed out, the thing that has enslaved the people. . Senator Gore. For 10 years prior to the war there was a hue and cry in this country with regard to the increase in the cost of living. It got so that we just referred to it by initials, “ H. C. L.” Representative Busby. Was not that later? Senator Gore; No. I remember making a campaign speech in 1912, myself, on that point. # . The Chairman. Y ou were committed to a policy of reducing the cost of living, were you not, in 1912? Senator Gore. Yes. The prices of things were going up and the value of the dollar was going down, and everybody was complaining about it. It simply illustrates that our psychology goes in cycles, so to speak, and that we do not have the sea level that we used to have. . . Representative B usby. I believe this—leaving out of consideration the debts or fixed charges—that the thing would work out nicely if you could depend upon the level‘ Senator Gore. It is the debts that constitute the difficulty in the problem. , . Representative B usby. If we could make our obligations in rela tion to our ability and the price of the commodities at that time and disregard the ones that we made out of relation to the commodity level, we would have no trouble. If you swap eggs for bacon you come out all right, but you have got to complete your transaction. If you swap one commodity for another commodity you will find it pretty much the same way-----The Chairman. But if you swap eggs for a pair of shoes, it takes a basketfull or a wagonload of eggs, does it not ? # Representative B usby. It certainly does. But the price of some thinsis do not yield as readily, and you find that farm commodities, being perishable in their nature and being hard to house and carry over, always hit the slump much more decidedly than steel and iron and other things that are not of a perishable nature. Senator Gore. That is true of raw materials generally, because manufacturers can stop all at once. The Chairman. I want to close pretty soon, but I can not resist the temptation of asking one or two questions. I do not challenge the correctness of your theories at all. I think you have brought out a very important point', that some commodities do not yield to the law of supply and demand. That is one of our difficulties, that we have so much price control in certain commodity lines that such commodities do not yield to the law of supply and demand. 36 M A I N T A I N I N G AVERAGE P U R C H A S I N G P O W E R OE DOLLAR M A I N T A I N I N G AVERAGE P U R C H A S I N G P O W E R OF DOLLAR Representative B usby. That is largely true, but that same price control if followed by interested parties will ultimately, with this period continuing and persisting, bring bankruptcy to the people who are involved in the scheme. I call attention to the fixed price of rentals. That is largely true because most of the apartment properties were built and mortgaged up to the limit, and the present ostensible owner only has the legal title and he must get so much rent all along or quit; and he holds those prices up until the foreclosure comes and he is squeezed out. The Chairman. I s not one of our real serious difficulties the fact that so many of the commodities are price-controlled now? Representative' B usby. That is undoubtedly a serious difficulty, but I do not believe that, that being the fact, we should surrender any effort to take care of the whole situation because of that develop ment— The Chairman. I am not suggesting that, but I am suggesting that it will take a great deal more than this to bring about a normal condition. Representative Busby. I believe you are right about that. Senator Gore. Let me interject one remark there. I was talking to a man, Mr. Chairman, yesterday, who told me that he had a solution for this question. His solution was that the farmers raise horses and mules and use them instead of tractors. He said that would solve the whole problem. Representative Busby. I want to say this, that the wholesale commodity index price is made up from the prices of 784 com modities. To my mind, those commodities taken as a whole represent a great rope of many strands, and on some days you will find this strand on the top of the rope. At other points you will find it on the bottom; and so the different commodities will play up and down and in and out, like wheat and cotton do, and a large crop un doubtedly will put them on the bottom of this great rope and tend to pull the level down, while others will go to the top and tend to pull the level up. But taking them as a whole, you will find re markable stability in the wholesale commodity index price, because it goes right along and it is not controlled by any one or two things, but is made of so many things that there is little variation. The Chairman. But to the extent that it includes price-controlled commodities, to that extent the index is misleading, is it not ? Representative Busby. It would be slightly misleading; but Professor Fisher said that it would be—I believe I am quoting him correctly; he is present and can correct me later if I am not—he said that he thought it would not be of sufficient weight to cause any trouble whatever, on the whole. Senator Gore. It is the farm products that I want to see primarilv go up. Representative Busby. I believe, Senator, with a rise in all of these commodities, the index price, you will find farm commodities will go right along up with them, and at a more accelerated rate, because they are more sensitive, for the reason I spoke of a while ago. But you can not raise them unless you put the consuming power in the people. As long as people are walking up and down Pennsylvania Avenue starving and freezing for lack of clothes and food, and as 37 long as there are 25,000,000 to 40,000,000 people in this country who are underconsuming, losing weight because they have not the staff of life, we are an underconsuming Nation. The Chairman. Just one more suggestion and I am going to let you close, because it is getting late. There has been a great deal of emphasis here on the lack of ability of the farmer to pay his mortgage, but there has been very little emphasis put on his lack of ability to buy. I think it is admitted here that this does not change the proportion of the purchasing power of agriculture as compared with industry. Am I right? Representative B usby. Yes. I could take a little bit of time, which I am not going to do, but I think I could very clearly demon strate to you how this would affect the farmer and give him pur chasing power. The Chairman. If Doctor Fisher or others do not bring that out, we will ask you to come back. Representative B usby. I think I can demonstrate it very thoroughly. Senator Gore. I do not want to raise the price of what the farmer has to buy, because that would aggravate his burden. Representative B usby. Y ou would not do that by this bill. Senator F letcher. Y ou might increase his purchasing power. Senator Gore. Y ou can not do that unless you increase the price of what he sells. Representative B usby. It is hard to get a lever that will operate on it. Senator W agner. If we can put 8,000,000 people back to work the farmer would naturally-----The Chairman. If the farmer had been earning anything he would have been buying enough machinery and implements to keep the factories going and the people would have been working. Representative B usby. There is no use putting the factories to work and running them 30 days, with the present condition of the buying power of the people. They would have to shut down in a very short time because there is no consuming power. I he Chairman. They would shut down for lack of customers. Senator Gore. The farmers did not have money enough to pay their debts, their taxes, and their freights when those 8.000,000 peo ple were employed at high wages. Representative B usby. I think you are largely correct in that, because since 1920 farm prices have been woefully out of line. Senator W agner. There is no question about that. Senator Gore. The farmer has been on the toboggan for 10 to 12 years. (Witness excused.) The Chairman. I would like to ask Mr. Stern whether he would like to be heard now or at 2.30. I realize that a great many of the members have already left the committee room. Mr. Stewart. I would rather come back at 2.30. The Chairman. We will take a recess, then, until 2.30. (Whereupon, at 12.30 o’clock p. m., a recess was taken until 2.30 o’clock p. m.) 38 MAINTAININ'G AVERAGE PURCHASING POWER OF DOLLAR AFTERNOON SESSION The committee resumed its session at 2.30 o’clock p. m., pursuant to the recess. The Chairman. I s Mr. Stern here? Mr. Stern. Yes, sir. # The Chairman. If you will take a place opposite the committee reporter, we will go ahead and do the best we can. STATEMENT OF J. DAVID STERN, PUBLISHER OF THE PHILA DELPHIA RECORD, PHILADELPHIA, PA. Air. Stern. I appreciate the honor, Air. Chairman, of being asked to come here. . I thought I might give you the result of my experience, as I believe we are the only paper in the East which is advocating such a policy as you are now considering, and we have for the past six months. When we first proposed it, in November or December of last year, we were a lone wolf howling in the wilderness. Business leaders and bankers of Philadelphia and of the country generally looked askance. There has been a tendency to change their opinions, as evidenced by my personal contact with leaders in that com munity and by letters to the editor, and in other ways. The public is becoming gradually educated to this principle as a solution of their problem. Some of our business men and most thoughtful bankers are adopting this principle of inflation. I believe it will come inevitably, if it does not come too late to help in the situation. It will bring about a change in the condition which is now tending to destroy us. I believe that you will find that the leading bankers of New York are tending toward inflation as the only solution. To maintain the integrity of its currency is a fundamental duty of government. The Goldsborough bill recognizes that obligation and applies it to modern conditions. Alaintaining the integrity of currency is more than the ancient duty of preventing sweating of coins, counterfeiting of paper tokens. It is just as disastrous to allow currency to appreciate as to depreciate. It is the duty of the Government to keep the value of currency stable in relation to commodity prices. Abnormal change in a nation’s money unit, whether up or down, entails the greatest injustice and can eventually destory its whole economic structure. Distortion of the money unit will eventually bankrupt all debtors, and thus in turn all creditors. The debtor goes broke first and in turn wrecks the creditor bank. Who is guilty of this terrible injustice? The Government which failed to stabilize the value of its monetary unit. Confusion in the discussion of currency arises from the natural tendency to think only of cash currency issued by the Government. This country’s medium of exchange is largely credit currency. Actual currency plays a very minor part in our economic system. In normal times we have more than $65,000,000,000 of bank de posits, counting savings deposits, as against less than $5,000,000,000 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 39 of actual currency in circulation. The business of this country is done by the exchange of bank credits. Even the housewife and the boy at college have checking accounts. The value of the dollar is fixed by a combination of four elements: (1) The quantity of credit dollars on deposit in banks, eliminating interbank deposits; (2) the quantity of cash currency in circulation; (3) the velocity with which these credit dollars and cash dollars cir culate; that is, the frequency with which they change hands; (I) the amount of wealth that is for sale. The fewer dollars, both credit and cash, the higher prices. But even more important than quantity of dollars is the velocity of dollars. . . . I do not believe it has been mentioned at this hearing this morn ing that the bank clearings of 179 reporting cities dropped from $700,000,000,000 per annum to a rate of less than $300,000,000,000 per annum at present; and I think that drop in bank clearings is a more important factor in the value of the dollar than quantity of dollars. If the dollar becomes sluggish and does not change hands, it becomes harder to get and therefore more valuable. There has been more of a drop in the velocity of the dollar than there has been in the quantity of the dollar. The process of deflation is self-accelerating; that is, as the dollar becomes more valuable prices go correspondingly lower—and every merchant to-day will say that one reason business is declining is because people are waiting for the prices to go lower, because they have seen them declining from month to month. The longer people hold their dollars the more the condition tends to intensify itself. First, because the owners of dollar sense that their dollars are becoming more valuable, or that prices are going continually lower. Therefore, they use their dollars less and less frequently, and bank clearings continue to go down. Secondly, because as debtors become bankrupt creditors are forced to wipe out credits and to refuse new credit, and so the general volume of bank credit shrinks. A dollar, whether it be hoarded or left idle in the bank, has a velocity of zero, and therefore might as well not exist. The only way to arrest this process of deflation is to make the owners of dol lars feel that their dollars are becoming less valuable and therefore should be changed into other forms of wealth. The moment prices start to go up, and the value of the dollar starts to go down, these sluggish dollars will start to change hands with increasing rapidity. The people will go to the stores to change their dollars into mer chandise, to the markets to change their dollars into securities or real estate. Business will revive and the deflation will have been cured. While the Goldsborough bill is right in principle, it will be dan gerous in execution unless joined with it is some protection to the gold reserve of the Nation. The Philadelphia Record took this stand six months ago and, as far as I know, is the only eastern newspaper in this position. We believe that during the process of bringing the dollar down to its former value, our gold reserve should be protected by an embargo 40 MAINTAININ'G AVERAGE PURCHASING POWER OF DOLLAR similar to that declared by President Wilson in 1917. The Presi dent should be given the right to declare an embargo if necessary. The Goldsborough bill, as originally introduced in the House, pro posed that the same result should be accomplished by allowing the Federal Reserve Board to vary the gold content of the dollar. I will not discuss the relative merits of these two methods. But one or the other is essential to the orderly accomplishment of stabilization of the dollar. Just as too much thought has been given to actual currency instead of credit currency, so too much emphasis has been placed upon the importance of maintaining our gold standard. We are apt to think in terms of several generations ago, when the business of the country was largely transacted in cash currency. Credit currency in banks played a secondary role previous to 1890. Through the past several decades that condition has been completely changed. The value of gold is really fixed by the condition of credit currency. Strange as it seems, the value of the gold dollar varies according to quantity and velocity of credit dollars. Ours is as much a managed currency to-day as if we had no gold standard. Whether the world eventually is to remain on the gold standard or adopt some other standard is not pertinent to the problem before this committee. What is pertinent is the immediate effect of inflat ing the currency upon our gold reserve. The more currency, whether it be paper notes or credit, that is issued by any country against a given gold reserve, the more tendency to put gold at a premium and therefore to drain it from the Treasury. Because inflation has been allowed to go so far it will be necessary for the Federal Reserve Board and the Secretary of the Treasury to issue great quantities of new currency in order to arrest and re verse the process. It would immediately cause a gold raid on our Treasury. In the process foreign and domestic investors would dump their securities at any price in order to exchange them for gold and take gold out of circulation in this country. This could cause an intensification of deflation until all the gold was gone. The Wilson administration recognified this obvious principle of economics. President Wilson asked Congress to authorize a gold embargo, and Congress granted him this powder in June, 1917. He exercised it on September 8, 1917, the day after the House had unanimously passed an $11,000,000,000 war credit. It is the Record’s slogan that we must fight the depression as we fought the war, that we must declare a gold embargo or some other form of gold protection at the same time that we increase our cur rency to stabilize the value of the dollar. If we do not provide such protection, we will be eventually forced off the gold standard under the most destructive and humiliating cir cumstances. The Chairman. That is very interesting, and we appreciate your coming down and are very glad to have you with us. thank you for coming, and we will excuse you now. Is Mr. Wallace here? Mr. W allace. Yes, Mr. Chairman. The Chairman. Mr. Wallace, of Wallace’s Farmer, of Iowa, will be the next witness. We MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 41 STATEMENT OF H. A. WALLACE, EDITOR OF WALLACE’S FARMER AND THE IOWA HOMESTEAD, DES MOINES, IOWA Mr. W allace. My name is H. A. Wallace. I am editor of Wal lace’s Farmer, Des Moines, Iowa, a paper that has about 250,000 cir culation, largely in Iowa, but in many other States in the Middle 0st« I also have been vice president of the Stable Money Association since 1921. . The Chairman. Y ou may proceed in your own way, Mr. Wallace. Mr. W allace. I noticed from your morning discussion that there was question as to whether the purchases of the Government securi ties would really take effect on the price level. And there seemed to be confusion in some of the Senators’ minds as to the precise machinery by which it would take effect. Anticipating that discus sion, I prepared some figures showing the way in which the credit lw ttiA Gnvp/mnruvnt niirnhases thus far had been abThe $500,000,000 of purchases of Government bonds since March 1 has been absorbed, first, by the paying off of about $350,000,000 of indebtedness to the regional banks. Next, it has built up during the past month about $200,000,000 additional in demand and time de posits. This is in the weekly reporting member banks. There has not been, as yet, any expansion in the total loans and investments, and that is the part which has effect on the price structure. There may have been this past week—I have not seen the reports this past week—but it is right on the point of taking effect there, because the borrowings from the regional Federal banks have been now cut down to such a small amount that the increases in deposits should soon flow over into increases in loans and investments. I would say, from my own study of Federal reserve credit, that the thing would spill over into loans and investments in a very short time. I would like to call the attention of the committee to the way in which loans and investments of weekly reporting member banks have acted during the past four years. You have here a chart covering the period from 1929 to date. You will notice that up to May, 1931, the loans and investments did not vary greatly but that, beginning in May, 1931, loans and investments took a nose dive, until in late April of 1932 the low figure of $19,033,000 was reached, which is nearly $4,000,000,000 less than a year ago. This continuous nose dive in the loans and investments (the most active indication of credit) has been alarming since May? 1931. It is a thing altogether unprecedented in modern banking history. Those of us who have stood for this Goldsborough bill have been exceedingly pleased by the active open-market operations of the Federal reserve system since the 1st of March, and especially during the past four weeks. We feel that if this activity is continued steadily for several months—we would not care to say just how long—it would accomplish the objective which we have in mind. Senator Couzens. 'When would you say the objective would be reached? What would be the objective? _ s Mr. W allace. In the Goldsborough bill the objective is stated to be a price level. Senator Couzens. Yes, I know that. maintaining average 42 PURCHASING POWER OF DOLLAR 43 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Mr. W allace. In my own mind, Senator Couzens, I would feel it somewhat more desirable if the objective were to restore loans and investments of the member banks to where they were when the depression began. Senator Couzens. That would be more specific, would it not? Mr. W allace. It seems to me it more nearly describes the mecha nism. # Senator Couzens. D o you think that could be reached in several months, did you say? Mr. W allace. The first effect of further purchases of more Gov ernment securities would be increased deposits. That is the first effect. That thing has already taken place to the extent of $200,000, 000 in these reporting banks. And their borrowings from the regional banks are now so small that there will not be any more pour ing of water down that rat hole. Then, the pressure will be for further loans and investments. Therefore, it would seem to me to be altogether probable that another $100,000,000 of purchases of securi ties would be reflected in loans and investments. In other words, credit would be on the way to be cheap and abundant. It would be crying for use, and the fact that it is cheap and abundant would shift the psychology of our people from “ credit ” to tangible physical things. _ Senator Couzens. Y ou would amend the bill in that respect? Mr. W allace. Yes; I have the draft of a bill here which I think more nearly describes the mechanism. Senator Couzens. Will you read it into the record? Mr. W allace. I have some whereases here which are not alto gether appropriate, I think. Senator Couzens. Read it anyway. Mr. W allace. It reads like this: Whereas the Federal reserve system has ceased properly to function as an agency for accommodating commerce and stabilizing prices and has allowed deposits to decline by $10,000,000,000, thus crippling commerce, disorganizing agriculture, and throwing labor out of employment, the Congress of the United States hereby directs the Federal reserve system to raise the price level by the following means: 1. Restore the reserve balances of the member banks to the 1927-28 level. To bring this to pass the Federal reserve system shall, within three months of the passage of this act, purchase whatever volume of Government bonds are necessary to acccomplish this end. 2. Thereafter reserve balances of the member banks shall be held at the 1927-28 level as a minimum. 3. Furthermore, these reserve balances shall be increased at the same per centage rate of growth as the long-term rate of growth in production of physical goods. And you might put in a fourth, providing for a variable gold standard, if you felt unusually cautious. That is essentially the reciprocal of the Goldsborough bill. It looks on physical production as being a safer criterion of expansion than the price level. According to our studies of past prices in relation to credit, we would conclude that the actual working out would be identical. Senator Gore. Would be what? Mr. W allace. Would be identical; you would get the same result. Senator Gore. I did not catch the word. Mr. W allace. I have noticed since the passage of the Golds borough bill in the House a number of inspired articles in the ^Senator Couzens (interposing). What do you mean by inspired articles ? Senator Gore. Are you a newspaper man, Mr. Wallace? Mr. W allace. Yes; I happen to be the editor of Wallace’s Farmer and the Iowa Homestead. The Chairman. Y ou know what a newspaper means, then; you can pick them out when you read them, can you? Senator Couzens. Frankly, I would like to have your definition of an inspired article while you are here. Mr. W allace. Well, there are a number of newspaper men present. I have a friendly feeling for them, of course. . Senator Couzens. This is a good time for an open confession. [Laughter.] _ The Chairman. Y ou do not have to answer, unless you want to. — .-l i P J1 . . I 1. 1- n ^ i i 1 ^1 11 1t /\ 4 /-v n n T7A T7A 11 answer. ' . Senator Couzens. Mr. Chairman, I insist on it. Mr. W allace. Well, the point is that many editorial writers are true to their bread, are true to their salary; and many publishers are also true to their financial backers; and that the financial backers, in turn, are true to their original source of support, and that that original source of support feels that it has more to gam from having credit periodically scarce and high priced, and periodi cally abundant and low priced; that that fundamental source of support prefers to allow the—shall we say the insurance of price structure—to be borne by the producers of commodities, rather than to have that insurance of uncertainty which is characteristic of all things borne by the banking system. Therefore, I do not blame these folks for being true to their bread all along the line, but I thing it is wise to recognize the way in which some of these things originate. _ . , Senator Couzens. I am looking for information. When you read one of those articles, just how can you tell whether it is genuine or inspired, if that is the distinguishing factor? Mr. W allace. Of course, you learn to know that this paper repre sents one thing, and this another interest; and you may know the men who write these things. And you know how they feel them selves internally, and how they write. • Senator Couzens. I am trying to leam so that I will know when an article is inspired. , Mr. W allace. Of course many of these writers feel honestly about the thing, so far as that goes. _ A ~ ., The situation is that at the present time if we adopt the Goldsborou<di plan there is danger that we will engage in inflation like the Germans did; an inflation like this country engaged in following 1837 the Andrew Jackson inflation; or we may get into an inflation of uncertainty, like 1873; or that we may get into a free silver and fiat money campaign, as we did in the nineties. The suggestion is made that we are now in another situation nice that, and that the farmers and others are prepared to do very foolish 44 MAINTAININ'G AVERAGE PURCHASING POWER OF DOLLAR things which will lead toward a shaking of the confidence of the entire world in the financial structure of this country. I would call the attention of the members of the committee to this fa c t: That at the present time the relationship of the United States to the rest of the world is totally different from what it was in any of those three preceding periods, and totally different from the Ger man situation which began at the close of the war; that we have 40 per cent of the gold of the world; that we are, from a financial and economic standpoint, the storm center of the world; that what we do with our money here can determine the price structure of the entire world. . Senator Couzens. I s it not a fact that this is the first great depres sion that we have gone through when we were a creditor nation ? Mr. W allace. ^ es; it is true that this is the first depression that we have gone through when we were a creditor nation. Senator Couzens. And that is what I would wish the public to understand, that we do have a different situation. Mr. W allace. We are not in a situation of peril with respect to our fundamental soundness as we were at the time of those other price depressions. And it is very important, I think, for these bankers and this committee to recognize that fact. Of course, you gentlemen are perfectly familiar with the fact that we have been on the gold standard in the past 10 years, on a super gold standard; that if we had been on the old-fashioned gold stand ard our prices would have gone up and our gold would have flowed out to the other countries. I t may have been wise to sterilize this gold. You are familiar with that, of course. The Chairman. D o not assume that we are familiar with any thing, and go ahead. Senator W agner. I was going to suggest that. The Chairman. Y ou state your point briefly to cover that very ground so that it will connect up with the rest of your statement. Mr. W a l l a c e . Well, before the war this country had about 1 8 pei cent of the gold of the world. Since the war we have had, at vary ing times, from 3 8 to 46 per cent of the gold of the world. We have gold which, if used with the utmost economy, would have permitted a price structure anywhere from two times to three times what we have now. I am, to some extent, giving that statement on the basis of a state ment made to me by the statistician of one of the leading Federal reserve banks. Senator Gore. N ow, have you figured out in that connection how much our trade and production have increased as related to the trade and production of the rest of the world ? . Mr. W allace. This particular gentleman is an expert on calculat ing the volume of total production in this country and the total pro duction in the rest of the world, and I am sure, in making that state ment he had that in his mind. In this money problem the first thing, of course, is to hold an even handed justice between classes and between nations. The second one is to handle it so as to make possible as high a standard of liv ing as possible. And the third thing is to prevent, as much as pos M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR 45 sible, purely monetary things entering into production problems and disorganizing them. I think we all realize that the reason we are so badly offcenter now is because of the war, and we do not want to blame on the money system things that have grown out of the war. But we also realize when a great war comes along, that every thing is thrown so badly offcenter that monetary mismanagement can produce a continuing offcenter influence. The men who feel that everything revolves around money have been in a position to minimize the shock to themselves, and the result has been that the shock has been passed on to those who are engaged in the production of goods. Senator Couzens. In the consideration of that question, have you given any consideration to what we should do with our surplus earn ings ? That is, not only in the production system. . Mr- W allace I think you are quite right, and if you were going into that I would have some man like Mr. W. T. Foster, who is well versed in consumption economies, come before the committee and tell you about savings of that kind. Senator Couzens. I mean by that, do you think we have gotten past the point where we should take our surpluses and put them into productive industry ? Mr. W allace. Y ou are getting around to planning, of course? Senator Couzens. Not exactly that, but here is a class of business that is called productive, and some is not productive, and the theory that we have been going on for years is that our savings, and all of our savings, should be used m productive industry. Does it not occur to you that the place we are at now indicates that we have car ried that too far? Mr. W allace. You mean there is an overproduction in certain classes of goods? Senator Couzens Obviously. Mi. W allace. And that that should be shifted over to other classes of goods ? Senator Couzens. Not exactly, but to the building of schoolhouses and theaters, and institutions for the common good, that are not productiveMr. W allace. I would say the place where I would step in is to bolster up the export market—you see, I am speaking from the agri cultural viewpoint; I am from the agricultural country. I would first bolster up the export demand for our surplus cotton, which is one-half, oui surplus wheat, which is one-fourth; and our surplus automobiles, which are one-tenth, so that the foreign demand for those paiticular products would restore purchasing power to our farmers and thus put the laborer to work. Being from the agricul tural region, I approach it from that angle. I appreciate!3 from Senator Gore’s questions of the morning, that there is trouble in Oklahoma because of surplus wheat and cotton. Senator Couzens. Since you make that proposal, how are those countries going to pay us back ? M i. W allace. Of course, that gets you into the field of gradually reducing the tariff. J 1 2 0 2 9 0 —3 2 ----- 4 46 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR Senator W agner. Are we not going to have to face that problem sooner or lciter ? Mr. W allace. I think, Senator Wagner, regardless of whether we are Republicans or Democrats, we must decide whether we are go ing to go the route of isolation or the route of world cooperation. Senator Gore. In other words, swap surpluses. . Mr. W allace. Yes; and I think that thing is so big and so crucial that it must be approached without regard to party. Senator W agner. I s not that confronting us now ? Mr. W a l l a c e . I think it is even greater than the money thing. Senator Couzens I s not the money thing the second thing ? Mr. W allace. I think the money thing is exceedingly important, and in view of the present emergency the decline in loans ancl invest ments which has taken place in the last nine months, which is going beyond all resistance points I would say, from the short-time point of view, that the money thing is the most important immediate problem. At the same time we should endeavor to decide between the path of isolation and the path of world cooperation. But it may take several years before we get to facing that clearly. Senator Couzens. In the meantime we had better follow the isola tion policy, in the three or four years? Mr. W allace. That is what Dean Donham of Harvard says. I would not say we should be bound irrevocably to that policy. Senator Couzens. We do not bind ourselves irrevocably to any policy. We have to make a policy as circumstances arise. Mr. W allace. In the meantime you have a very, very acute PrSenator W agner. I have a question, Mr. Wallace, and perhaps • you can answer it. Mr. W allace. Pardon me. . Senator W agner. W hat are we going to do with our surpluses of wheat and cotton? . . Mr. W allace. Y ou mean if we go the isolation route s Senator W agner. Yes; and is not that a shaking up of our eco nomic structure? . Mr. W allace. Decidedly so. What that brings you to is this: Either revolution, or State socialism. On the one hand you are going to beat the farmers over the head with low prices until you get less production; and on the other hand you are going to have a system of bureaucracies to say that this State shall grow 8,000,000 acres of corn instead of 10,000,000 acres; that this county shall grow 100,000 acres of corn, instead of 150,000 acres; and this farmer shall plant 40 acres instead of 50; and those farmers that have been displaced are to be moved by a population bureau to certain fac tories. And you are going to have to develop unemployment insur ance and similar devices from one end of the Nation to the other. I am not condemning the thing; I am just saying that you must have infinite bureaucracy if you are going to go Senator Couzen’s route. . Senator Couzens. Just a minute. You call it my route. I call to your attention that yesterday Senator Robinson of Arkansas intro duced a bill that is the most socialistic bill that has been presented, calling for the loaning to the State of $2,000,000,000 for industries M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR 47 that are self-supporting, and various other features. That is not my idea. Senator F letcher. That has nothing to do with the isolation. That is an emergency matter, is it not ? Senator Gore. The force in your point is that each nation shall become independent as an economic unit. You do not have in the back of your idea that each farm shall become an economic unit and stop trading with the neighbors? Mr. W allace. We are trending that way. I deplore it, but we are fast trending in that direction. Senator Gore. D o you not think that one is as bad as the other as a final policy? Mr. W allace. Yes. Senator Couzens. We are not talking about a final policy; we are talking about conditions. Senator G ore. I realize we do not have a choice as to what other nations do to us. They enforce their ideas on us more or less. Mr. W allace. Senator Gore, the idea the bankers have is to be thrifty and not spend any money. We have all been naughty and have been spending too much money, and the idea is that we shall not spend our money. Senator Gore. W hat money? Mr. W allace. The money that we owe the bankers, is what they are talking about. They would lead us back to pioneer days—they would lead us straight back to the cave, in an ever descending spiral of liquidation and reduced consumption and reduced production. Senator Couzens. And they are trying to force the Federal Gov ernment into the same policy. Mr. W allace. Yes, as Congressman Busby said this morning, when you get prices lifted, prosperity will return automatically and you will not have to worry so much about budgets and cuts. I think I had better return to the bill, do you not think, gentlemen ? Senator F letcher. You do not advocate a policy of extravagance, instead of thrift ? Do you not think this whole thing depends largely on the practice of each and every man ? Mr. W allace. Senator Fletcher, I believe we have a scientific un derstanding, mechanical knowledge, and methods of mass production sufficient to enable us to enjoy a standard of living at least twice as high as we had in 1929. And I think we can have such a standard of living when our hearts are in the right place and we have up-to date machinery for industrial and social justice equivalent to our in dustrial progress and development. Monetary policy is a part of that machinery. Senator Gore. D o you not think, Mr. Wallace, that in 1929 we were in a speculative delirium, and that that is what is the trouble with us; that is what we are going through now? The judge and the janitor and the waitress and the heiress were all dealing in this stock market, and they knew nothing about the earning capacity of the stocks, and cared less about it, as long as they could buy one day and sell the next at a profit. Did we not run away with ourselves ? Mr. W alace. Did your farmers in Oklahoma do that, Senator Gore? 48 M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR Senator G ore. I do not believe the farmers did it so much; they were broke long ago; they took theirs in 1921. They are on the board of trade a little, but I do not think they are in this stock delirium. Mr. W allace. Senator Gore, wouldn’t you suggest, to control that, certain powers of moral suasion located in the Federal reserve? Senator Gore. I remember, in 1921, there were suggestions that the Federal reserve take steps to correct that delirium, and I think the public would be ready to keep the admonitions of the Federal leserve. The Chairman. I t was in the spring of 1928 that this committee recommended a resolution asking the hederal Reserve Boaid to take action. Senator Gore. In 1928? . The Chairman. Yes; and we could get no support in the Senate, much less the Federal Reserve Board. Senator Gore. Yes; nobody wanted to stop the runaways. Mr. W allace. In conclusion, I would like to give you this, gentle men, which appeared in our issue of May 14. I t is merely a sug gestion that we are getting ready out our way to look at this problem from a moral and religious standpoint. You see, we live in what H. L. Mencken calls the Bible belt out there. Some of us still read the Bible out there. We believe in the message of the old prophets about justice between classes and justice between nations, and we look on this money thing as fundamentally a problem of that kind. And this particular article gives quotations from some of the old prophets, including, incidentally, that one from Leviticus, about the year of jubilee. „ i And bringing the matter up to date we quote from the Royal Bank of Canada— C an i t be th a t b a d th e g ro w th of c re d it p a ra lle le d th e in c re a se in th e volum e of p ro d u ctio n a n d tra d e , th e re w ould h av e been no s u b s ta n tia l ch an g es in th e g e n e ra l p rice level, no m a jo r b u sin e ss cycles, n o r booms, no sev ere dep ressio n ? These comments are made relative to a chart which proves these facts. [Continuing reading:] T h is is indeed a s ta rtlin g concept, affo rd in g th e hope t h a t th e social in ju stic e s w hich a re in h e re n t in a ll m a jo r ch an g es in th e g e n e ra l p ric e level m ig h t be avoided by a p ro p e r co n tro l of c re d it. T h is is su re ly a counsel o f p e ite c tio n w hich is n o t fu lly a tta in a b le in h u m a n a ffa irs, h u t i t is c le a rly w ith in th e pow er of th e g re a t c e n tra l b a n k s, th ro u g h a p p ro p ria te r a te s o f in te re s t an d o p en-m arket policies, to contro l, w ith in c e rta in reaso n a b le lim its, too ra p id a n in crease in th e volum e of c re d it, a n d also to p re v e n t c o n tra c tio n of th e n o rm al g ro w th of c re d it, w hich is th e b a sis of th e p re s e n t w o rld tra g e d y . There are many others to speak here, and I do not want to take any more of the committee’s time. Senator Gore. D o you want that in the record? The Chairman. D o you want that published in our record, Mr. Wallace? Mr. W allace. Y ou can use your own judgment about that. _ The Chairman. I t is not long. I suggest that you have it printed following your remarks. Mr. W allace. Thank you, gentlemen. The Chairman. Thank you, Mr. Wallace. . (Article from Wallace’s Farmer, presented by Mr. Wallace, is printed in the record in full, as follows:) M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR 49 W allace ’s F armer and I owa H omestead , Des Moines, Iowa, May Ilf, 1932. DRAGONS THAT DEVOUR PROSPERITY— THE ROAD TO HIGH STANDARDS OF LIVING (B y H e n ry A. W allace) T h e Je w ish p ro p h e ts of old u n d o u b ted ly lived in tim es so m ew h at lik e these. T h ey cried o u t fo r ju s tic e h u t knew t h a t ju s tic e could n o t com e u n til th e s p ir it o f fa irn e ss a n d u n d e rs ta n d in g p e rm e a te d th e h e a rts o f a ll th e people. W ith a far-seein g s p iritu a l eye, th ey looked to w a rd th e day w hen th e re w ould he ju s tic e betw een th e classes a n d ju s tic e betw een th e n atio n s, a n d u n iv e rsa l p eace w ould p rev ail. T o-day th e peoples of th e w o rld h ave in th e ir h e a rts in te n se p reju d ices, p re ju dices w hich w ork o u t to cause them in ten se suffering. W hen w e h a te fo reig n n a tio n s a n d re fu se to low er o u r ta riffs an d re fu se to lend th em m oney, th ey m u s t of necessity re fu se to buy an y la rg e q u a n titie s of w h e a t, la rd , or cotton, o r a n y th in g else, fro m us. A nd th e n th e very fo lk s w ho h a te th e fo reig n n a tio n s a re faced w ith low p rices fo r th e stu ff th ey h av e to sell. T hey sq u irm a ro u n d , n o t know ing w h a t h a s hap p en ed to them . I f i t is suggested th a t th ey sh o uld stu d y th e w o rld s itu a tio n an d a d ju s t th e ir p ro d u ctio n to a dom estic m a rk e t in s te a d of to a w orld m a rk e t, th e y become a n g ry . P re ju d ic e , ignorance, a n d fe a r a re th e only th in g s w hich now keep u s from en jo y in g a s ta n d a rd of liv in g a t le a s t tw ice as h igh a s t h a t w h ich w e h ad a t th e b est tim e d u rin g th e p a s t 1 5 y ears. W e h av e th e n ecessary m ach in ery , th e in v en tiv e genius, th e scientific u n d e rs ta n d in g , a n d m ass p ro d u ctio n of a ty p e w hich w ould en ab le u s to tu r n o u t tw o or th re e tim es a s m uch goods p e r c a p ita a s w e a re now consum ing. M oreover, th is p ro d u ctio n could be accom p lish ed w ith o u t it being n ecessary to w o rk m ore th a n seven h o u rs a day. T he drag o n s w hich s ta n d betw een u s an d th e p rom ised la n d a re h a tre d , p re ju d ice, an d fe a r. T h ese g re a t d ra g o n s a re s trid in g back an d fo rth acro ss th e e n tire w orld, a n d a re m ak in g them selves fe lt ju s t a s m uch in th e C orn B e lt a s th ey a re in W ash in g to n o r N ew Y ork C ity o r F ra n c e o r G erm any. To slay these dragons, w e need u n d e rs ta n d in g people w ith to leran ce in th e ir h e a rts , w ho a re h u n g ry fo r a m ach in ery fo r social ju s tic e . M ore a n d m ore, th is in te n se desire fo r ju s tic e is becom ing a p assio n in th e h e a rts of th e people. B u t w e h av e y e t to see w h e th e r th is o r th e b itte rn e ss w hich m ak es fo r rev o lu tio n w ill grow th e fa s te r. T h e Je w ish p ro p h e ts only w e n t p a r t w ay in th e ir search fo r ju s tic e . F ro m a re lig io u s p o in t of view th ey w e re d o u b tless p e rfe c t in th e ir p re s e n ta tio n , b u t fro m a n econom ic p o in t of view it is n ecessary to w ork o u t a definite m ach in ery . F o r th e first tim e in th e h is to ry of th e w o rld such m ach in ery is now possible. W e now know how to m e a su re definitely th e ph y sical p ro d u ctio n of goods a ll over th e w orld a n d th e p ro d u ctio n of effective h an k c re d it. W e now know in a definite w ay th a t prices a re a d ire c t ra tio betw een th e q u a n tity of c re d it on th e one h an d a n d th e q u a n tity of goods on th e o th er. T he R o y al B a n k of C a n ad a, in w ritin g a y e a r ago on th is id e a of m ach in ery fo r social ju stic e , s a i d : “ C an i t be t h a t h ad th e g ro w th of c re d it p a ra lle le d th e in c re a se in th e volum e o f p ro d u ctio n an d tr a d e , th e re w ould h av e been no s u b s ta n tia l changes in th e g en eral p rice level, no m a jo r b u sin ess cycles, no boom s, no severe d ep ressio n s? T h is is indeed a s ta rtlin g concept, affording th e hope th a t th e so cial in ju stic e s w hich a re in h e re n t in a ll m a jo r chan g es in th e g e n e ra l p rice level m ight be avoided by a p ro p er co n tro l of c re d it. T h is is su rely a counsel o f p erfectio n w hich is n o t fu lly a tta in a b le in h u m a n a ffa irs, b u t i t is c le a rly w ith in th e pow er of th e g re a t c e n tra l b an k s, th ro u g h a p p ro p ria te ra te s of in te re s t a n d o p en-m arket policies, to co n tro l, w ith in c e rta in reaso n ab le lim its, to o ra p id a n in c re a se in th e volum e o f c re d it a n d also to p re v e n t c o n tra c tio n o f th e no rm al g ro w th of c re d it, w hich is th e b a sis of th e p re s e n t w o rld tra g e d y .” A ju s t m o n etary m ach in ery is, of course, only a p a r t of th e problem w ith w h ich th e w orld is co n fro n ted . W e m u s t a t th e sam e tim e h av e a ju s t social m ach in ery so th a t w e m ay p la n m ore ac c u ra te ly th e a d ju s tm e n t of p ro d u ctio n to consum ption y e a r by y e a r. T o som e e x te n t th is m ay p erh ap s m ean a ty p e o f b u re au cracy , b u t, a f te r a ll, b u re a u c ra c ie s a re n o t so te rrib le ex cep t w hen th e y a re lazy an d selfish o r w hen th e y a re ru n fo r p riv a te g a in by w e alth y o u tsid e in te re sts. 50 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR W hen o u r people g et over th e ir “ g rab b y ” p io n eer ten d en c ies a n d becom e genuinely convinced of th e d e sira b ility of ju s tic e in th e d is trib u tio n of th e n a tio n a l incom e, w e m ay ex p ect to see a reco n ciliatio n betw een c a p ita lism and com m unism w hich w ill be q u ite su rp ris in g in th e re s u lts th a t i t achieves. C hanges d u rin g th e n e x t 1 0 y e a rs w ill be ra p id , a n d i t is v e ry im p o rta n t th a t th e su fferin g d u rin g th is p eriod sh o u ld finally b rin g a b o u t so cial ju s tic e in stead of th e d iso rg a n iz a tio n w hich so o ften re s u lts fro m su d d en rev o lu tio n . The Chairman. He is subject to call at any time. Senator Gore. Yes. Senator Couzens. I think it is unwise to put a statement into the record when Senators are present to hear it and to ask questions if they care to. I think it is a bad policy, and I would not permit it if I were chairman. The Chairman. It is one we have been driven to by lack of time. We would all prefer to have him discuss it at length. Mr. O’Neal. I would be glad to do it. But I think that you would get more from hearing the statement of the distinguished economist, Doctor Warren, of Cornell. The C hairman. There is no conflict between you and the doctor? Mr. O’Neal. No ; none at all. The Chairman. Then we will ask him some questions. Mr. O’Neal. I will be glad to answer questions at any time. Senator F letcher. I think the statement should go into the record. The Chairman. Unless there are objections, it will be printed in the record. [After a pause.] I t is so ordered. (The statement of Mr. O’Neal is here printed in the record in full, as follows:) THE VOICE OF THE PROPHETS “ W oe u n to th em th a t * * * tu rn a sid e th e needy fro m ju d g m e n t, an d * * * ta k e a w a y th e rig h t from th e poor of m y people, th a t w idow s m ay be th e ir p rey a n d th a t th ey m ay rob th e fa th e rle s s .”— Isa ia h . “ H e a r th is, O ye th a t sw allow up th e needy, even to m ak e th e po o r of th e la n d to fa il. S aying, W hen w ill th e new m oon be gone, th a t w e m ay sell corn? A nd th e S a b b a th , th a t w e m ay se t fo rth w h e a t, m a k in g th e e p ah [th e H ebrew b u sh e l] sm all a n d th e shekel g re a t, a n d fa lsify in g th e b alan c es by deceit? T h a t w e m ay buy th e p o o r fo r silv er a n d th e needy fo r a p a ir o f shoes.”— Amos. “A nd ye sh a ll hallo w th e fiftie th y e a r a n d proclaim lib e rty th ro u g h o u t a ll th e lan d s u n to a ll th e in h a b ita n ts th e r e o f ; it sh a ll be a ju b ile e u n to y o u ; a n d ye sh all re tu rn every m an u n to h is p ossession.”-—L ev iticu s. “A nd he sh all ju d g e am ong m any people, a n d reb u k e stro n g n a tio n s a f a r o f f ; an d th ey sh a ll b e a t th e ir sw o rd s in to plough sh a re s a n d th e ir sp e a rs in to p ru n in g hoo k s; n a tio n s sh a ll n o t li f t up a sw o rd a g a in s t n a tio n , n e ith e r sh a ll th ey le a rn w a r a n y m ore. B u t th ey sh a ll s it ev ery m an u n d e r h is v ine a n d u n d e r h is fig tr e e ; a n d none sh a ll m ak e th em a f r a id ; fo r th e m o u th of th e L o rd of H o sts h a th spoken i t .”— M icah. The Chairman. Mr. O’Neal, president of the American Farm Bureau Federation, is the next witness. STATEMENT OF E D W A R D A. O’NEAL, PRESIDENT OF THE AMERI CAN F A R M BUREAU FEDERATION, CHICAGO, ILL. Mr. O’Neal. My name is Edward A. O’Neal. I am president of the American Farm Bureau Federation, with headquarters at Chicago, 111. Senator Norbeck and Senators, as we have such a distinguished committee here and a large number of the committee, I just want to say very briefly that I think this is the most important question be fore the Nation. If you gentlemen in Congress do not settle it, I do not know what is going to happen to the country; and I want to say this, that I would like to file my statement here, otherwise I shall read it out; but time is so valuable to you gentlemen. We are very whole-heartedly for the Goldsborough bill, and for Senator Fletcher’s bill. But I would like you gentlemen to devote your time to this matter, and I yield my time to one of the most distinguished economists of the Nation and of the world, who will throw more light on this in his discussion than I would if I talked all day. I refer to Doctor Warren. That is all I will say, unless some body wants to ask me some questions. Senator Couzens. I do not know how we can ask you any questions if we do not know what you are going to say. Mr. O’N eal. Senator, all I wish to say is that I am for this bill. Senator Couzens. I do not like a statement going into the record without a chance to examine the witness. Mr. O’Neal. I hate to take this time. At some subsequent time I can read you my statement and submit to any questions. 51 S tatem ent of E dward A. O'N eal , P resident of t h e A merican F arm B ureau F ederation , C hicago , I I I . In ap p e a rin g before you th is m o rn in g to su p p o rt th e so-called G oldsborough bill, H . It. 1 1 49 9, I am not ac tin g fo r an o rg an izatio n w hich h a stily h a s come to th e conclusion th a t som ething needs to be done in re g a rd to esta b lish in g th e p u rc h a sin g pow er of m oney. T h is problem h a s been d iscu ssed in o u r o rg a n iz a tio n fo r sev eral y ears. In 1 9 2 7 w e s ta te d “ W e in d o rse th e effort now being m ade in C ongress to effect a sta b iliz e d p rice level a n d sta b le p u rch asin g pow er of m oney th ro u g h a d d i tio n a l in s tru c tio n s to th e F e d e ra l R eserv e B o a rd .” In 1 9 31 a t o u r la s t a n n u a l convention w e ad o p ted a very com plete a n d s tu d i ous sta te m e n t in re g a rd to th e m o n etary problem , w hich I d esire to in c o rp o ra te in to th e record b u t w ill n o t re a d a t th e p re s e n t tim e u n less m em bers of th e co m m ittee desire to h e a r th e reso lu tio n . “ T he p re se n t p eriod of depression an d th e fa llin g p rice level h a s in creased th e b u rd en of ta x e s, in te re s t, debts, a n d o th e r fixed costs on a ll p ro d u cers to a n in to le ra b le degree. I t now re q u ires 4 5 p e r cent m ore of all com m odities, a n d 7 0 p e r cen t m ore o f fa rm com m odities, to p ay th ese costs th a n i t d id a few y e a rs ago. T he long-continued deflation is c ru sh in g fa rm e rs , m e rch an ts, tr a n s p o rta tio n agencies, an d a ll m a n u fa c tu re rs except a few m ost fa v o ra b ly s itu a te d a n d h as cau sed a d eclining price of p ro p erty to such a n e x te n t th a t it lias la rg ely e lim in ated eq u ities an d is effecting b asic se c u ritie s to such an e x te n t a s to serio u sly im p a ir th e sta b ility of o u r b an k in g an d in su ra n c e in stitu tio n s,, th ereb y en d an g erin g th e w e lfa re of th e g en eral public. I t is cau sin g a lo w er ing of all w ages an d sa la rie s, a process w hich h a s only s ta rte d a n d w hich m u st of necessity low er th e s ta n d a rd of liv in g if continued. “ T h e p rin c ip a l cau se of th is d eflation of v alu es is m o n e ta ry . W hen th e p rice of a n y one com m odity fa lls, m any cau ses m ay be responsible. W hen th e a v erag e p rice level of all com m odities fa ll w ith th e ra p id ity o f th e la s t few y ears, th e p rin c ip a l cause is a sh o rtag e of m oney an d c re d it in a c tu a l use. C om m odity p rices a re ex p ressed in th is c o u n try in te rm s of d o llars. E v ery p u rc h a se a n d sale is th e exchange of com m odities fo r d o lla rs. W hen d o llars a re scarce, it ta k e s a la rg e r am o u n t of com m odities to get th em . In o th e r w ords, m oney is a t one end of th e b alance, com m odities a t th e o th er. A dd to th e effective supply of m oney a n d prices go up. R educe th e effective su pply an d p rices come dow n. T h e above sta te m e n ts a re ju stifie d a n d su p p o rted by th e in co n tro v ertib le evidence com ing fro m th e experience of all. fo rm e r d ep ressio n s. 52 53 M A IN TA IN IN G AVERAGE PURCHASING POWER OP DOLLAR M A IN T A IN IN G AVERAGE PURCHASING POWER OP DOLLAR “ T h e problem d iv id es its e lf in to tw o p a r t s ; first, th e re s to ra tio n of th e p ric e le v e l; an d second, th e s ta b iliz a tio n of th e p u rc h a sin g pow er of m oney.” P r io r to th is actio n on th e p a r t o f th e A m erican F a rm B u re a u F e d e ra tio n th e re h a d been set u p a com m ittee to stu d y th e g e n e ra l problem now c o n tain ed in H . R . 11 4 9 9 . T h e re s u lt of six m o n th s’ a c tiv ity on th e p a r t of th is com m itte e w a s a defin ite sta te m e n t of p o sitio n of o u r e n tire o rg a n iz a tio n a s con ta in e d in o u r la s t reso lu tio n ju s t above offered. W e a re follow ing th is p ro g ram th ro u g h a t W a sh in g to n . W e h av e a p p e a re d before th e H ouse C om m ittee on B a n k in g a n d C u rren cy alo n g w ith th e o th e r tw o fa rm o rg a n iz a tio n s— th e N a tio n a l G ran g e a n d th e F a rm e rs U nion— to g e th e r w ith m uch su p p o rt fro m m an y sources. T h a t co m m ittee h a s re p o rte d , a n d th e H ouse h a s ad o p ted , w ith a g ra tify in g m a jo rity , th e b ill now p e n d in g be fo re th is com m ittee in re g a rd to sta b iliz in g th e p u rc h a s in g pow er of m oney. A n in d icatio n of p u b lic se n tim e n t a n d of th e stu d io u s c o n sid e ra tio n w hich h a s been given th is m e a su re is h a d in o b serv in g th e speed w ith w hich th e b ill h a s m oved th ro u g h th e u su a l process on th e H o u se side a n d th e alm o st o v er w helm ing v ote w ith w hich th e H o u se a p p ro v ed it. T h is evidence of su p p o rt, how ever, is no g re a te r th a n th a t given th e id ea co n tain ed in th is m e a su re by th e g en eral public. E d ito ria l w rite rs in o u r b est m ag az in es a n d in o u r d a ily p re s s a r e n o t u n a n i m ously in fa v o r o f th e id ea co n tain ed in th is bill b u t a re so o b serv an t of th e g en eral good effects of th e m e a su re th a t few definite p o in ts of opposition a re discovered. S in g u la r to s ta te , th e few op p o n en ts w hich th e m e a su re seem s to h av e a re v e ry la rg e ly in those c e n te rs to w hich re fe re n c e com m only is given by n am in g th em th e m oney m a rts . T h e q uestio n is lo gical in o u r m in d s w h e th e r o r n o t th is N a tio n sh o u ld go m uch f u r th e r alo n g w h a t seem s to be its p re s e n t course o f fo rm in g a ll leg isla tion to benefit first th e ag g re g a tio n of w e a lth . In th is connection m ay I th e re say th e re a re tw o w ay s to ap p ro a c h a le g islativ e problem such a s t h a t w hich w e a re co n sid erin g to -d ay . F ir s t, it m ay be ap p ro ach ed in re g a rd to its effects on w h a t I m ay call g ia n t in d u s tr y ; o r in a second w ay, it m ay be a p p ro a c h e d in re g a rd to its effects on th e people a s a w hole. I m ay be p e rm itte d to observe t h a t le g isla tio n th u s f a r p assed th is session of C ongress seem s la rg e ly to be of th e first classificatio n . H . R . 11 4 9 9 , how ever, w ill h av e its beneficial effect on th e g re a t m asses of o u r people in b rin g in g m ore n e a rly in to e q u ilib riu m th e p rices of th e com m odities p u rc h a se d an d sold by th e p eo p le w h e th e r on th e fa rm s or in th e c itie s w ith th e p rices of o u r m o n e ta ry sta n d a rd . T he A m erican F a rm B u re a u F e d e ra tio n in a ll of its a p p ro a c h e s to le g isla tiv e p ro je c ts su rv ey s th e ir effects on th e com m on people. I t is o u r b elief th a t if th e people can be m ade to be th r if ty a n d p ro sp ero u s in du e tim e a ll else in o u r N atio n w ill becom e p ro sp ero u s. W e an ta g o n iz e th e seem ingly c u rre n t idea t h a t a ll m u s t be m ad e w ell fo r g ig a n tic a g g re g a tio n s of w e a lth , a f te r w hich th e com m on people w ill be m ade serv ilely h ap p y by in filtra tio n of p ro sp e rity fro m above, by th e d ro p p in g s o f crum bs, so to sp eak , b e n e a th th e L a z a re a n ta b le s of th e rich . T h is bill is, how ever, w hen scien tifically ex am in ed , n o t a p o o r m an b ill. N or is it, a s I h av e ju s t s ta te d , exclusively a fa rm m easu re. I t is a bill w hich w ill ^ sta b iliz e o u r e n tire economic s tru c tu r e so f a r a s m oney m a tte r s c a n sta b iliz e th a t s tru c tu r e a ll th e w ay fro m th e b iggest b an k o r tr u s t com pany in o u r N atio n dow n to th e le a s t conspicuous in d u s tria lis t o r fa rm e r in o u r N atio n . T h e ten d en cy o f th e m e a su re w ill be in effect t h a t w hen a citizen h a s so m eth in g to sell, w h e th e r it be h is tim e ex pended in lab o r, h is p ro d u cts ra ise d on th e fa rm , o r h is in d u s tria l p ro d u c ts fa b ric a te d in h is p la n ts, a condition w ill be b ro u g h t to p a ss w hich in sellin g th ese com m odities in ex change fo r a u n it of v a lu e w ill be fa ir e r th a n it is now , a n d o rd in a rily h a s been in tim es p a st. T o show th e need o f th is leg isla tio n on th e p a r t o f b a n k s a s w ell a s th e a v e ra g e citizen, m ay I s ta te th a t in ex cess o f 8 ,0 0 0 b a n k s h av e closed since 1 9 2 3 in th is N a tio n of ours. T h e A m erican F e d e ra tio n o f L ab o r gives u s v a rio u s e stim a te s a s to th e unem ployed, w hich e stim a te s ru n fro m five to seven m illio n in d iv id u a ls, I believe. In M ississippi, acco rd in g to re cen t p re ss re p o rts, on e-fo u rth th e fa rm s in th a t S ta te a re b eing foreclosed u n d e r th e sh e riff’s h a m m e r fo r ta x e s . T h ese in c id e n ts show th a t o u r b a n k in g in te re sts, lab o r, a n d a g ric u ltu re a re a lik e in d e sp e ra te condition. A m ong th e causes, d ifferin g in n am e a n d n a tu r e , w hich h av e b ro u g h t on such a cala m ity , a m ain c o n trib u tin g cause is t h a t th e people of th e co u n try h a v in g som ething to sell, w h a te v e r i t m ay be, on account of th e h ig h p rices of th e d o llar, a re re q u ire d to exchange m ore u n its of w h a te v e r com m odity th ey offer fo r sale to secure th e d o llar. W e a s s e rt th e p rev io u s in flex ib ility o f th e v alu e of th e d o lla r is a fa lse s ta n d a rd if w e re a lly d e sire to secure s ta b ility in o u r econom ic s tru c tu r e a n d a m ore n o ticeable eq u ilib riu m in th e p rices w e secure fo r w h a te v e r com m odity w e m ay produce a n d sell. A ll th is h a s caused a slogan to be u sed k n o w a s th e h o n est d o llar. W e do n o t m ean to a s s e rt th a t th e p re s e n t d o lla r o f its e lf is d ish o n est b u t m a n i fe s tly does c re a te a fa lse s ta n d a rd w hen com m odities o f an y form a re re q u ire d to be exchanged fo r i t y e a r a f te r y ear. T h e bill now p en d in g does n o t check, does n o t even in fe r, t h a t th e re sh a ll be an y fu n d a m e n ta l change in o u r m o n etary system , so f a r a s th e basis, gold, of th a t system is concerned. In fa c t the p en d in g m e a su re is a n effort to fit in to o u r m o n e ta ry system , w h a te v e r i t m ay be, a recognition o f com m odity v alu es a s w ell a s a co n tin u a tio n of m o n etary v alu es of undo u b ted in te g rity . W e a re n o t ask in g a n ab an d o n m e n t of p re s e n t m o n etary sta n d a rd s . W e a re m erely asked, an d in th e ask in g , expecting, t h a t C ongress w ill re a liz e th e n ecessity to p u t a t w o rk a ll in s tru m e n ta litie s a n d pow ers re s id e n t w ith in th e F e d e ra l re se rv e system to sta b iliz e p rices so m ew h at on t h a t a v erag e w hich e x isted betw een th e y e a rs 1 9 2 1 - 1 9 2 9 inclusive, a s s ta te d in th e p re s e n t law . I h av e a su p p lem en tal sta te m e n t to th e above in tro d u c tio n to o u r p osition w hich I sh a ll be g lad to file fo r inclusion in th e record. “ M oney, th e love of it, is th e ro o t o f a ll evil, a n d th e love o f it, a n d th e d e sire fo r i t a re th e ch ief so u rces of o u r w orld tro u b les to -d ay .” O ur w o rsh ip o f th e golden c a lf h a s b ro u g h t d is a s te r upon th e w orld. T h e w hole w o rld h a s lo st fa ith a n d confidence in its m oney as m edium of exchange. W e h av e a p p lied science in a ll o u r econom ic affa irs, w hich h a s helped g re a tly th e ad v an ce m e n t of th e h u m an race, b u t n o t to o u r m o n e ta ry system . A n tiq u a te d m e th ods, no scientific developm ent to m eet th e dem an d s of m odern a ffa irs a re found to e x is t in o u r m oney a ffairs. A re w e going to le t th is d estro y o u r civ ilizatio n ? Now, th e r e a re those w ho say t h a t o u r c a p ita listic system h a s fa ile d . W h a t is th e cause? T h e m a n ip u la tio n of m oney in th e selfish c o n tro l of a few is one cause. A s th e R ig h t H o n o rab le W in sto n C h u rch ill sa id in a n a d d re s s on th e w o rld econom ic c r i s is : “ T he hid eo u s processes o f deflation h a v e b u t to go on to iso la te th e n a tio n s a n d red u ce th em to th e b a rb a ria n a n d b a r te r of th e d a rk ages * * F ra n k ly , I th in k w e a re a ll in th e sam e m oats. * * * W e h av e slipped off th e ledge o f th e precip ice a n d a re a t th e bo tto m . T h e only th in g now is n o t to k ick each o th e r w hile w e a re th e re .” W orld tr a d e h as broken dow n. C om m odity p rices h av e tu m b led , a ll because th e re is no a d e q u a te m edium of exchange. T h e supply of gold, th e b a sis of w o rld exchange, h as ru n low . I t is in th e h a n d s of p ra c tic a lly tw o n a tio n s— F ra n c e a n d th e U n ited S ta te s. H ow can o th e r n a tio n s tr a d e w ith us, w hich h av e no gold? T h e re s u lt is th e te rrib le in c re a se in th e p u rc h a sin g pow er of gold. I t is th e cause of th e g re a te r p a r t of o u r su fferin g to-day. T he h a r d sh ip s u n d e r w hich so m an y m illio n s of o u r people a r e lab o rin g a r e chiefly due to th e fa c t t h a t p rices h av e so te rrib ly dropped, b rin g in g tro u b le a n d so rro w a n d d is a ste r by th e g re a t fa ll in th e g e n e ra l p rice level in th e la s t th re e y ears. T h e p ro d u cers of th e w e a lth o f th e w o rld h av e lo st fa ith in th e ir comm odities! E conom ists tell u s th a t th e deflation of th e F e d e ra l R eserv e B o a rd in 1 9 2 1 b ro u g h t ab o u t th e confiscation o f w ealth fro m its rig h tfu l ow ners am o u n tin g to $ 4 0 ,0 0 0 ,0 0 0 ,0 0 0 . T h e p re s e n t deflation of com m odity p rices i t is e stim a te d , be cause of confiscation of w e a lth in th is N atio n h a s re s u lte d in th e loss of over $100,000,000,000. . N ot only th e loss of w ealth , b u t suicides, th e w reck ag e of hom es, th e d estru c tio n of hap p in ess, a n d th e g e n e ra l d isc o n te n t h a s b ro u g h t ab o u t d is a s te r in th e N atio n . A re c e n t s ta te m e n t show s t h a t th e v a lu e of o u r d o lla r is 1 6 1 in o u r basic com m odities. H ow is A m erica going to liq u id a te on th is b asis? T h e co tto n fa r m e r p ays h is d eb ts w ith c o tto n ; th e w h eat fa r m e r w ith w h e a t, th e hog fa rm e r w ith hogs a n d so on. T h is golden d o llar w ill d e stro y him . D octor W a rre n , of C ornell U n iv ersity , in his F e b ru a ry re p o rt show s th e e s ti m ated public a n d p riv a te d eb ts o f th e U n ited S ta te s to be over $ 2 0 0 ,0 0 0 ,0 0 0 ,0 0 0 . 54 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR H e goes on to say th a t “ m ost of th e in d eb ted n ess doubles since 1 9 2 2 a n d is a b o u t fo u r tim e s th e p re -w a r a m o u n t.” H ow a re we going to pay th em ? H e goes on to say “ th e to ta l d eb t is ap p ro x im a te ly $ 1 ,7 0 0 p e r c a p ita , or a b o u t oneh a lf of th e n a tio n a l w e a lth .” M ight I say to-day I th in k it is m ore th a n we w o u ld sell fo r u n d e r th e h am m er. W e fa rm e rs can n o t p ay in th e com m odities w e pro d u ce th a t th e w o rld m u s t hav e. U nless o u r com m odity p rices a re ra ise d , A m erican a g ric u ltu re is ru in e d . T h e p a p e rs w e see d aily a re say in g th a t th e fo re ig n n a tio n s a re n o t going to p ay th e ir d eb t to u s. H ow can th e y , w ith o u r h ig h-priced d o lla r? W h a t does th is m ean ? I f th ey c a n ’t p ay u s, a re we iso la te d , or a re w e to ta k e th e o th e r a lte rn a tiv e ? A re w e going to h av e to fight o th e r n a tio n s of th e w o rld to collect th ese debts? T h is w a s th e old w ay. A h o rrib le th o u g h t. W ould it n o t be b e st th a t we h a v e a f a ir d o lla r, one th a t o u r fo re ig n d eb to rs m ay p ay us? I f th ey don’t a n d th e h e a v ie r ta x b u rd e n is p u t on u s, as I sa y — th e re m ay be rev o lu tio n . I f w e do n o t h av e a n h o n est d o lla r, c a p ita lism is th re a te n e d . T h e re s u lt— rev o lu tio n — bolshevism . T w enty-five p e r c en t of th e fa rm s in M ississippi w ere foreclosed fo r ta x e s. T h e S ta te becam e th e ow ner o f th e p ro p e rty n o t so m uch b ecause ta x e s w ere too high o r th a t p ro p e rty ta x e s w ere o u t of p ro p er p ro p o rtio n w ith o th e r ta x e s, b u t, p rim a rily , b ecause com m odities produced on th e fa rm s of M ississippi a re so low in v a lu e th e y can n o t m eet th e ir fixed oblig atio n s. W h a t w ill become o f th is la n d a n d th ese people? O th e r g re a t sections of o u r N a tio n , w h ile n o t in q u ite as b ad sh ap e, a re th re a te n e d w ith th e sam e s itu a tio n . F ra n c e h a s been th e w onder of th e w orld since th e F re n c h R evolution. H e r lead e rs h av e p ro te c te d h e r fa rm e rs ; a n d t h a t h a s been th e p rim e o b ject of h e r sta te sm a n sh ip , n o t th e b u ild in g of in d u s try a n d com m erce. T hey w ere w ise eno u g h to know th a t in p ro te c tin g h e r ru r a l people w ould m ean n o t only su c cess b u t a su rv iv a l o f th e n a tio n an d th e n a tio n ’s w elfare. T h e policy of G re a t B rita in h as been to b u ild in d u s try a n d com m erce p r i m a rily a n d how she h a s su ffered a n d is suffering. L e t u s a d o p t th e policies of F ra n c e a n d w e w ill su rv iv e th ro u g h th e c e n tu rie s as she h a s. She is th e w onder of E u ro p e a n d th e w orld. T he C hicago T rib u n e of S u n d ay , M ay 8, in a lead in g a rtic le , S teel L e a d e rs A sking H ig h e r T a riff W all, goes on to sa y th a t th e A m erican steel m a n u fa c tu r e rs , led by th e iro n a n d ste e l in s titu te , h av e lau n ch e d a co n certed d riv e fo r th e exclusion o f fo reig n ste e l. T h ey a re d e m an d in g h ig h e r ta riffs to p re v e n t dum ping of E u ro p e a n steel on o u r m a rk e ts ; as one of th e ir le a d e rs said , “ T a k in g w o rk rig h t o u t of th e h a n d s of A m erican w age e a rn e rs .” T hey say, “ W hile a n y in creases w hich a re o b tain ed w ould be p a rtly offset by th e d e p re c ia te d cu rre n c ie s of sev eral E u ro p e a n n a tio n s, th e A m erican Iro n a n d Steel In s titu te a n d m an y steel ex ecu tiv es a re u rg in g th e p assag e of an em ergency bill w hich w ould a d ju s t th e ta r iff to th e d ep re c ia tio n in fo reig n ex ch an g e.” H a d n ’t th e se le a d e rs b e tte r jo in h a n d s w ith th e fa rm e rs in o rd e r th a t we m ay h av e an h o n est d o lla r? T h is w ould help solve th is problem of th e irs . O th er groups in th is N atio n w ill be m ak in g th e sam e a p p eal, to ra ise th e ta riff, if w e co n tin u e o u r p re s e n t d ish o n e st d o llar. A ccording to th e p ress, som e of o u r b a n k e rs a n d p o litic a l le a d e rs a re fighting o u r h o n est-d o llar bill. W ish you w ould all re a d th e M ay n u m b er R eview of R e v ie w s ; on page 10 , A lb e rt S haw says, “ T h is, of course, is good as f a r a s it goes. T h e local b a n k s do n o t d esire to be loaded up w ith u n sa la b le f a r m s ; w hile, in tu r n , th e fa r m e rs ’ fa m ilie s sh u d d e r a t th e th o u g h t o f losing th e ir hom es a n d th e ir fa m ilia r possessions. T hey a ll w ork d e sp e ra te ly to p a y th e m o rtg ag e in te re s t, b u t a ll th e ‘ fa rm re lie f ’ th a t w e a r e re a d in g a b o u t does n o t em an c ip a te th e fa rm e r from an y p a r t of h is b u rd en of in d eb ted n ess. I t does not red u ce h is o b lig atio n s in p ro p o rtio n to h is a b ility to pay. N o th in g can reliev e h im ex cep t h ig h e r p rices fo r w h a t he h a s to sell.” In sp ite of a ll th e m easu res th a t h a v e been p assed by C ongress to re s to re con fidence, none o f them have gone to th e g ra s s ro o ts; none of th em have helped to re s to re com m odity prices. On th e com m odities w e p ro d u ce w e base th e w e a lth of o u r N atio n . T h e la s t re p o rt of A p ril 2 9 from th e D e p a rtm e n t of A g ric u ltu re , show ing th e a v erag e p ric e o f fa rm p ro d u c ts up to A p ril 1 5 la s t, gives th e fa rm -p ric e in d ex as 5 9 ; p rices p a id by fa rm e rs 1 1 4 ; ra tio of p rices received to p rices p a id 5 2 ; a g ra d u a l decline in th e fa rm -p ric e in d ex , s till going dow n. U nless th e re is some ra d ic a l ch an g e th e p rice th e fa rm e r receives fo r h is p ro d u c ts w ill n o t p ay h is fre ig h t to th e n e a re s t consum ing m a rk e t. T h e p assag e of th e G oldsborough bill th ro u g h th e H ouse, larg ely on a n o n p a rtis a n b asis, w as a g re a t v icto ry fo r organized a g ric u ltu re . T he th re e n a tio n a l fa r m o rg an izatio n s fo u g h t h a n d in h a n d fo r th is m e a su re ; 2 2 9 to 59, a non p a r tis a n vote. I t w as a vote to stab ilize th e buying pow er of th e d o lla r an d re s to re com m odity prices. C ongress lay s dow n a m a n d a te to th e F e d e ra l R eserve B o ard to u se its pow ers to sta b ilize th e p u rch asin g pow er of th e d o llar an d re s to re com m odity p rices to th e a v e ra g e p rice level fo r th e y e a rs 1 9 2 1 to 1 9 2 9 . T h is is d ecla red to be th e policy of th e U n ited S ta te s. T he bill h a s th e double purp o se of re s to rin g com m odtiy p rices a n d re ta in in g t h a t n o rm a l p rice level once it is a tta in e d . W e re g re tte d th e om ission of section 3 in th e o rig in al G oldsborough bill t h a t said , “ If, in c a rry in g o u t th e p u rp o ses of section 1, th e gold reserv e is deem ed by th e F e d e ra l R eserv e B o ard to be too n e a r to th e p rescrib ed m inim um , th e b o ard is a u th o riz e d to ra ise th e official p rice of gold if th e o th e r m eth o d s a lre a d y au th o riz e d a p p e a r in a d e q u a te ; if, on th e o th e r h an d , th e gold reserv e ra tio is deem ed to be too high th e F e d e ra l R eserv e B o ard is a u th o riz e d to lo w er th e official price of gold if th e o th e r m ethods a lre a d y a u th o riz e d a p p e a r in a d e q u a te .” F ra n k ly , g entlem en of th e co m m ittee, I feel t h a t th is m u st be done in o rd e r t h a t w e m ay co n tro l our m edium of exchange. I th in k th a t cu rren cy a n d c re d it co n tro l w ill go a long w ay to stab ilize o u r p rice levels b u t le t’s do th e job th o ro u g h ly by changing o u r gold s ta n d a rd . L e t’s d e th ro n e th e golden c a lf a n d m ak e gold a s e rv a n t of h u m a n ity . T h is w ill give us a n h o n est d o lla r; a n h o n e st m edium of ex ch an g e; re sto re com m odity prices. T h is w ill go a long w ay to open o u r com m erce w ith n a tio n s of th e w orld a n d b rin g b ack confidence to u s all. A d istin g u ish ed frie n d , a M em ber of C ongress, w ho is a g re a t ad v o cate fo r th is bill, said , “ W e m u st first h av e a n elev a tio n in th e g en eral level of com m o d ity p rices an d th e r e a fte r sta b ility in com m odity p rices. T his bill, if en acted in to law , w ill d ire c t th e F e d e ra l R eserv e B o ard , th e F e d e ra l reserv e b an k s, a n d th e S e c re ta ry of th e T re a s u ry by th e ir control over th e volum e of c re d it a n d cu rren cy to re s to re th e a v e ra g e com m odity p rice level to th e sam e level th a t ex isted w hen th e fa rm e rs an d o th e r p ro d u cers co n tra c te d th e ir d eb ts.” 55 WHAT ENGLAND HAS DONE D u rin g th e w a r E n g lan d , w h ile th e o re tic a lly hold in g th e gold s ta n d a rd , a c tu a lly abandoned th e gold s ta n d a rd becau se of h e r heavy obligations ab ro ad . T he pound ste rlin g w as pegged a t a b o u t $4 .7 6 , o r slig h tly below p a r ($ 4 .8 6 6 5 ). T h is w ent along u n til th e w a r closed, th en th e pound w a s unpegged by th e w ith d ra w a l of th e G overnm ent s ta b iliz a tio n o p eratio n s. T he v alu e of th e pound dropped from $ 4 .7 6 to $ 4 .4 3 in 1 9 19 , $ 3 .6 6 in 1 9 2 0 . In th e period 1 9 2 1 1 9 2 4 th e v alu e of th e pound rose so m ew h at, due to a m ore fa v o rab le p o sitio n ■ of G re a t B rita in in its in te rn a tio n a l p ay m en ts, w hich in itse lf h ad a tendency to in crease th e v alu e of th e pound. In 1 9 2 5 th e g o v ern m en t d ecided to re s to re th e gold s ta n d a rd . In s te a d of co n tin u in g th e reduced v a lu a tio n of th e pound, it a tte m p te d to rev alu e i t on a p re -w a r b a sis of $ 4 .8 6 in o u r m oney. T h e effect of th is action w as to low er p ric e s an d th e re b y m ake it m ore difficult to pay d eb ts a n d in te re s t c h arg es. U nem ploym ent w as in creased a n d bu sin ess w as sta g n a n t. T he m a in te n a n c e of th e pound on a $ 4 .8 6 b asis caused a co n tin u a l d ra in on th e gold supply o f G re a t B rita in . D esp ite g re a t effo rts to m a in ta in th e gold s ta n d a rd , it w as fo u n d n ecessary to ab andon it on S eptem ber 20, 1 9 3 1 , on acco u n t of th e d is a stro u s co nditions c re a te d follow ing th e re v alu in g of th e pound in 19 25 . W hen E n g lan d aband o n ed th e gold s ta n d a rd a n d th e a tte m p t to v alu e th e p o und a t th e $ 4 .8 6 level, th e effect w as to in crease p rices fo r dom estic p ro d u c ts in E n g lan d . L a rd a t L iverpool in creased from 42 sh illin g s in e a rly D ecem ber to 5 3 sh illin g s in la te D ecem ber. D u rin g th e sam e period, w hen th e U n ited S ta te s w as p u rs u in g a^d efiatio n policy, la rd a t C hicago dropped in p rice from $ 7 .5 0 a h u n d red to $5 a h u n d re d . W hile th e re w ere no in creases in th e p rices of n u m ero u s com m odities, th e s h a rp decline in prices w hich h a d been going on in E n g lan d w as g re a tly checked as a re s u lt of th is action, an d th e unem ploym ent s itu a tio n w as reliev ed to a n a p p reciab le e x te n t. T h e re w as a ls o som e im provem ent in th e e x p o rt tr a d e , p a rtic u la rly in th e case of te x tile s a n d m a n u fa c tu re d goods. T he benefits to th e B ritis h e x p o rt tr a d e w ould h ave 56 57 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR been s till la rg e r h a d it n o t been fo r c o u n te rv a ilin g d u tie s p u t on by c o u n trie s im p o rtin g B ritis h goods. In o th e r w ords, th e ab an d o n m e n t of th e effo rt to m a in ta in a r b itr a r ily a h ig h v alu e fo r th e pound, a n d th e decision to le t it be v alu ed by su p p ly a n d d em and h a s reduced th e ex ch an g e v alu e o f th e pound, b u t h a s re s u lte d in in creased prices in E n g la n d , g re a te r a b ility to p a y d eb ts, stim u la tio n o f th e b u sin ess, a n d im p ro v em en t in th e e x p o rt tra d e . ment, and I think perhaps we will gain time if the questions are left until I run through it. All of the available statistical evidence indicates that this is much the most serious economic crisis that has ever occurred in this country. The most violent drop in prices that ever occurred in the United States came in 1920-21, but at that time, as in 1815 and 1865, the high prices had not lasted long enough to cause debts and taxes to be adjusted to the high price level. The depressions of 1837 and 1873 were comparable to the present -crisis, except in degree. In the first three years of the panic of 1837 wholesale prices of all commodities declined 24 per cent. In the first three years of the panic of 1873 they declined 18 per cent, and in the last three years they have declined 31 per cent, showing it is much more serious. Every per cent of decline in commodity prices destroys more equities than the previous per cent decline. That is, the bank ruptcies caused by a 30 per cent decline are much more than twice as numerous as those caused by a 15 per cent decline. I have here a table showing these changes in wholesale com modity prices during three major panics. Senator F letcher. D o you separate agricultural commodities from other commodities in that table? Mr. W arren. Not in this table. I have them separately. But this is all commodities. Senator F letcher. D o you know how agricultural commodities compared with other commodities? Mr. W arren. They dropped more. Basic commodities dropped much more. (The table presented by Mr. Warren is as follows:) WHAT FRANCE HAS DONE F ra n c e , in s te a d of p u rs u in g a d e fla tio n a ry policy such a s w as follow ed by th e U n ited S ta te s a n d su ch a s w as follow ed by G re a t B rita in in 1 9 2 5 , re v a lu e d th e fra n c a t a level o f one-fifth of its p re -w a r v alu e. I t d id th is by re d u cin g th e w eig h t o f gold in th e fr a n c to one-fifth th e p re -w a r am o u n t, re d u cin g it fro m 3 2 2 .5 8 m illig ra m s of gold 9 0 0 / 1 0 0 0 fine to 6 5 .5 m illig ra m s of gold 9 0 0 / 1 0 0 0 fine. T h is a ctio n w as ta k e n by th e F re n c h G o v ern m en t on J u n e 25 , 1928. I f F ra n c e h a d a tte m p te d to re v a lu e th e fra n c a t th e old p re -w a r ra tio , it w ould h a v e p re c ip ita te d a te rrific decline in p rices becau se th e p re v a ilin g p rices w ere b ased on th e p re v a ilin g v alu e of th e fra n c w hich w as a b o u t onefifth of th e p re -w a r level. O bviously a n in c re a se in th e v alu e of th e fra n c to five tim es th e p re v a ilin g level w ould h av e re su lte d in ev ita b ly in a c ra s h in com m odity p rices w hich a r e v alu ed in te rm s of cu rre n c y . F ra n c e th e re fo re avo id ed a d e fla tio n a ry policy by re v a lu in g its fra n c a t one-fifth of th e p re -w a r level. A s a re s u lt no serio u s decline in p ric e s took place u n til 1 9 3 0 -3 1 . D eb ts could be re p a id w ith o u t p a y in g back a g re a t d eal m ore th a n w as borro w ed . F a rm la n d h a s a h ig h e r v a lu e th a n b efo re th e w a r. T he follow ing e x tr a c t fro m special c irc u la r No. 1 4 3 p u b lish ed by th e U n ited S ta te s D e p a rtm e n t of Com m erce, c o n ta in s th e fo llow ing a n a ly sis of th e fa v o r ab le re s u lts exp ected to follow th is a ctio n in F r a n c e : “A f u r th e r re v iv a l of econom ic a c tiv ity w h ich is, w ith few exceptions, a lre a d y a t a sa tisfa c to ry level, m ay reaso n a b ly be ex pected a n d , if p o litic a l sta b ility an d th e eq u ilib riu m o f th e b u d g e t c an be m a in ta in e d a n d th e sound policies th a t have been s tric tly ad h e re d to by th e p re s e n t G o v ern m en t a re c o n tin u ed , F ra n c e sh o u ld en jo y a p erio d of in c re a sin g p ro d u c tiv ity a n d gro w in g p ro s p e rity .” T h e actio n of F ra n c e show s how a g o v ern m en t can av o id th e evils of defla tio n an d sta b iliz e com m odity v a lu es a t a re a so n a b le level so t h a t d eb to rs can re p a y th e ir d eb ts, em p lo y ers can keep th e ir fa c to rie s ru n n in g , a n d fa rm e rs can sell th e ir p ro d u c ts a t p ric e s som ew here c o m m en su ra te w ith th e ir tr u e v alu e. . T able 1.— Changes in wholesale commodity prices during three major panics The Chairman. Doctor Warren, please come forward. STATEMENT OF GEORGE FREDERICK WARREN, PROFESSOR OF AGRICULTURAL ECONOMICS, CORNELL UNIVERSITY, ITHACA, N. Y. The Chairman. Give your full name, your residence, and your occupation, and your experience, please, and then proceed in your own way. Mr. W arren. My name is George Frederick Warren. I am pro fessor of Agricultural Economics, Cornell University, Ithaca, N. Y. I have been working on the price question for a considerable period of time. I have been in this position for 26 years. I brought a very brief statement, and if you do not object to pro ceeding in that way I should like to read it, and then perhaps go over the details afterwards, if that is satisfactory. I have a couple of copies for the record. I thought perhaps some of the Senators might want to follow it as I go through. This is a very brief state [1910-1914=100] Panic of 1837 March, 1837............................ March, 1840............................ March, 1843............................ Per cent decline: In 3 years........................In 6 years......................... Panic of 1873 127 March, 1873........................ 97 March, 1876...................... 73 March, 1879........................ 24 43 Panic of 1929 139 114 87 140 96 18 37 31 Mr. W arren. Index numbers of wholesale prices for 135 years are shown on the following pages. The index numbers since 1890 are the Bureau of Labor statistics index numbers of wholesale prices of all commodities converted to a 1910-1914 base. Those before 1890 were prepared by Professor Pearson and myself and are compa rable with those of Bureau of Labor statistics. (The index numbers referred to are here printed in the record in full, as follows:) 58 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR Index numbers of the wholesale prices of all commodities— C ontinued Index numbers of the wholesale prices of all commodities [1910-1914=100] Year Year Jan. 1797............................ 1798........................... 1799________ _____ 1800_______ ______ 1801__________ ____ 1802____ __________ 1803............... .......... 1804_______ ______ 1805____ __________ 1806______________ 1807______ _______ 1808..................... . 1809______________ 1810________ _____1811....................... . 1812............................ 1813........... ................. 1814........................... 1815............................ 1816-.----------- ------------1817......................... 1818............................ 1819........................... 1820........................... 1821........................... 1822__________ ____ 1823............................ 1824.................. .......... 1825..................... — . 1826........... ............ 1827............................ 1828. ......... .......... 1829.............. ............ 1830......... .................. 1831............................ 1832............................ 1833............................ 1834.................. ........ 1835...... ...............— . 1836............................ 1837............................ 1838............................ 1839________ _____ 1840............................ 1841.......................... 1842............................ 1843........................... 1844...... ........... .......... 1845............................ 1846............................ 1847............................ 1848............................ 1849............................ 1850............................ 1851............................ 1852.........................1853............................ 1854........................... 1855............................ 1856........................... 1857........................... 1858............................. 1859........................... 1860................ — . -----1861........................... 1862............................ 1863............................ 1864........................... 1865............................ 1866.................. ......... 1867........................... 1868............................ 1869............................ 1870..................... . 1871 .......................... 1872............................ 1873..................... . 1874.................. .......... 1875............................ 1876..___ ________ 1877............................ 127 124 127 140 126 113 123 140 137 131 124 124 12S 132 127 150 186 193 160 152 149 141 114 100 109 104 98 97 103 99 98 102 91 91 100 96 92 92 107 123 112 117 99 93 90 76 76 79 89 84 85 83 83 87 83 96 105 107 108 111 93 95 94 92 98 126 153 223 182 168 157 155 142 131 133 136 130 121 114 115 Feb. Mar. Apr. May June July Aug. Sept. Oct 125 123 125 142 121 113 123 141 137 133 119 126 130 128 129 152 184 185 160 155 151 137 113 99 108 104 97 98 102 99 97 100 91 92 98 94 92 93 108 129 100 119 99 93 88 74 77 79 87 90 85 83 84 87 85 97 112 107 107 113 93 99 94 90 99 147 156 217 177 167 158 157 138 135 133 139 130 121 114 112 123 123 125 144 119 114 124 145 134 132 115 135 128 127 128 153 182 176 158 156 149 134 109 98 108 1C3 97 98 100 99 95 99 91 93 97 93 90 94 112 127 108 118 97 91 86 73 77 81 86 92 84 83 85 86 87 97 109 109 106 115 95 99 94 90 98 141 161 206 174 166 163 154 135 137 135 139 130 121 114 107 123 122 123 145 117 114 122 144 132 130 112 133 129 127 126 157 182 166 151 156 144 130 106 98 108 103 96 102 100 99 94 99 89 95 93 94 88 97 116 120 108 119 97 90 84 74 78 83 85, 93 84 82 84 85 86 95 109 111 105 114 95 98 93 89 98 137 168 179 167 167 165 151 134 132 138 139 128 122 113 110 121 123 125 146 116 115 120 142 133 131 112 132 131 128 122 160 179 164 150 157 142 125 108 100 107 102 97 106 98 98 94 97 90 95 93 94 88 100 115 110 109 116 95 91 83 75 78 83 83 93 83 81 S4 84 86 94 109 114 102 115 94 97 93 88 95 130 174 169 171 168 163 149 136 129 138 136 127 119 109 112 119 124 127 147 117 116 121 143 132 131 112 132 130 124 125 158 179 165 150 154 144 124 106 99 107 103 98 107 99 CO 94 97 91 94 92 93 88 102 111 110 107 114 93 89 82 75 77 82 81 95 80 80 84 82 86 93 110 115 99 114 92 97 91 85 94 126 189 159 173 169 158 147 135 127 137 132 124 117 106 106 120 126 129 148 117 118 122 140 136 130 112 129 133 124 128 159 178 163 150 149 142 121 104 100 106 104 98 106 101 96 95 93 91 93 92 93 88 1(M 110 113 107 111 92 90 81 76 77 82 79 91 79 81 84 81 88 93 106 109 102 114 92 95 92 83 98 127 219 161 175 158 157 148 135 127 135 132 125 117 106 107 120 126 131 146 116 122 124 138 135 129 113 129 132 126 133 161 177 165 149 153 147 119 107 103 104 104 98 105 98 96 95 92 92 92 92 95 89 104 112 111 107 109 93 92 79 76 77 83 78 88 79 81 83 81 90 95 108 109 104 115 94 92 92 85 105 127 225 168 176 168 158 153 134 125 136 132 124 118 107 103 120 127 133 145 116 123 128 139 135 129 113 130 134 124 135 164 177 166 148 147 146 119 106 105 104 103 98 106 98 96 96 92 93 94 93 96 90 102 115 107 110 108 94 95 77 77 77 85 78 89 81 83 83 81 91 97 110 109 103 114 94 91 92 86 107 123 225 179 174 158 157 152 134 128 137 132 124 117 108 102 124 121 129 134 139 115 123 130 139 133 128 113 127 133 125 137 171 183 166 144 145 151 120 103 107 104 102 99 105 98 96 99 92 92 95 94 96 90 101 120 107 115 106 94 93 77 75 77 95 82 88 82 82 84 81 91 101 105 109 105 106 93 90 93 89 111 134 207 190 180 159 154 149 133 130 134 129 122 117 110 102 Nov. Dec. Year 127 122 130 135 136 113 119 134 140 129 127 117 129 133 124 142 178 187 168 145 144 149 117 100 108 106 99 99 104 98 96 99 92 91 96 95 96 90 102 122 110 115 104 94 92 75 77 78 88 83 89 80 81 85 81 93 102 108 111 107 101 92 92 93 92 120 142 216 189 176 156 153 149 131 130 138 125 121 116 111 100 59 126 123 130 134 129 111 122 139 139 130 126 121 128 131 122 144 186 193 163 149 146 145 114 100 109 104 100 98 103 98 99 101 91 90 96 96 95 91 106 123 114 116 102 94 91 76 77 78 91 83 87 80 82 85 81 95 103 107 112 108 98 93 93 91 94 123 148 222 184 170 155 153 147 128 133 136 128 121 115 113 100 122 120 129' 142 117 118 126 141 134 130 115 130 131 126 131 162 182 170 151 151 147 125 106 102 106 103 98 103 99 98 97 96 91 94 95 95 90 100 114 115 110 112 95 92 82 75 77 83 83 90 82 82 84 83 89 97 108 110 105 111 93 95 93 89 104 133 193 185 175 163 158 151 135 130 136 133 126 118 110 106 Jan. Feb. Vlar. 4,pr. May June ruly \.ug. j Sept. 89 88 90 93 94 97 .......... 1878.. 86 85 86 86 87 87 1879 .......... 97 99 97 102 106 105 1880 .......... 101 100 100 101 99 100 100 1881....................... 110 111 110 109 ms 108 107 1882.. .......... 98 105 106 105 104 103 100 1883 ......... 92 93 93 95 97 97 97 1884 ......... 84 83 85 gg 87 86 87 1885 ......... 80 79 80 82 R 4 83 84 1886 ......... 83 84 85 85 85 85 84 1887.................... 84 85 86 87 88 87 82 82 80 80 85 1888...................... 80 83 84 ......... 1889 81 81 81 80 80 80 80 1890 ......... 81 82 84 85 84 83 82 1891.................... 76 74 74 74 75 77 77 1892 ......... 76 78 80 81 82 84 83 ......... 1893 69 69 69 69 69 71 72 1894..................... 73 74 73 72 69 69 69 1895 ......... 66 66 67 68 69 69 70 ........ 1896 66 66 66 67 68 68 6 8 1897 ........ 70 71 76 71 71 71 70 1898. ........ 76 75 74 74 73 73 71 1899. ........ 82 81 84 82 84 84 1900. ........................................ 80 79 79 79 80 80 1901..................... 86 86 84 85 83 83 1902.................... 86 86 86 88 88 91 1903-................... 85 85 85 87 88 89 1904................... 87 87 88 87 88 89 1905-................... 87 90 90 89 89 89 1906 ....... 97 97 96 94 94 95 1907 ....... 92 91 91 91 90 90 1908. ........................................ 95 99 99 98 97 95 1909. ........................................ 105 104 104 107 106 104 1910 ....... 93 92 92 92 95 94 1911 ....... 99 102 102 101 101 97 1912-.................. 102 101 101 102 102 102 1913. ........................................ 99 98 99 98 99 3 100 ....... 1914. 3 100 100 100 101 100 101 1915. ....... 122 1 121 121 119 117 2 115 1916. ....... 9 153 157 167 176 178 180 1917. ....... 3 1 179 185 187 187 188 193 1918 ............... 6 190 192 194 198 198 206 1919 ............... 0 229 232 242 244 243 242 1920 ............... 7 153 150 144 141 136 136 1921 ............... 4 136 136 136 140 141 145 1922 ............... 9 151 153 152 149 147 144 1923 ............... 5 146 144 142 140 139 140 1924. ........................ . 0 152 152 149 148 150 152 1925 ............... 1 149 147 147 147 147 145 1926 .............. 1 140 138 137 138 137 138 1927 .............. a 140 139 141 142 141 142 1928 ........................................ 0 139 140 139 138 139 141 1929 .............. 130 127 123 5 134 132 131 1930.......................... 4 112 111 109 107 105 105 .............. 1931 1932 .............. 1933 ............... 1934........................... — — . -— 1935............................ .......... 'I ....... Warren, G. F., ana rearson, r . a ., vvuoiesuie rnces m ™ 90 80 97 103 111 98 92 84 81 84 85 80 84 81 77 73 71 72 66 69 70 77 81 81 85 86 86 88 89 97 92 100 103 96 102 102 101 100 124 182 196 211 236 137 144 143 142 152 145 139 143 141 123 105 Dct. 90 89 98 107 108 97 91 83 81 85 85 81 85 80 77 76 72 72 66 71 70 80 82 82 86 87 87 87 90 97 92 101 102 97 103 103 103 100 127 180 201 206 227 136 145 146 142 151 146 141 144 140 123 104 '•Tov. D 89 94 98 108 107 97 90 83 81| 84 86 81 85 80 77 77 70 72 68 70 70 81 81 82 92 86 87 87 92 98 93 103 99 97 103 103 99 103 133 178 199 207 211 137 145 145 143 151 145 141 141 139 121 103 Year 86 91 88 90 99 100 99 103 107 108 106 101 97 96 93 87 88 86 85 84 82 82 81 85 87 85 86 87 87 81 82 81 82 83 83 79 82 79 76 80 79 78 74 75 69 70 70 71 71 72 68 70 70 63 70 70 71 71 70 83 77 82 80 81 82 ?? 84 83 ?? 90 89 85 87 85 89 87 89 88 89 88 94 90 93 95 92 94 95 92 94 99 104 105 97 • 105 97 95 95 96 101 103 102 1 102 102 10 99 98 99 101 105 108 125 145 142 172 179 180 191 199 199 202 211 | 220 226 195 | 176 148 138 136 141 147 147 14? 144 143 143 145 148 151 153 151 146 144 143 139 141 141 141 140 140 139 137 136 126 119 116 107 103 100 _____ ______ ^------- n0^ K ° G 32FP; ^ p i S n ! 6F bAr: Revised Index Numbers of Wholesale Prices. Farm Economics, Mr. W a r r e n . A given amount of decline in prices is much more serious than it was in 1873, because a greater dependence is placed on credit than was the case at that time. The various units ox goveminent perform more services, hence taxes are more important and farmers as well as others are less self-sufficient than they were 50 years ago. Communities are also less self-sufficient. Progress of society depends on division of labor, commerce, and credit. 1 he more highly developed society becomes, the less able it is to with stand a breakdown in the exchange system. Most measures of industrial activity are 40 to 50 per cent below normal. During the depression of 1921, Ayres s index of American 60 M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR industrial activity fell to 27 per cent below normal. The panic of 1893 was the only other one in which business fell as much as 20 per cent below normal. The credit structure is primarily based on commodity prices— livestock on the farms, goods in the stores and warehouses, and com modities in the more permanent forms such as fences, steel rails, box cars, homes, and the like. A drop in the price level under mines the credit structure. I f the cost of building a house is reduced a third, the houses already built decrease in value one-third, and wipe out owners with small equities. This throws such properties on the market, and prospective buyers are frightened by the losses that their friends have suffered. Such a situation might cause the market price to drop a half. This would destroy the equities of all those who had paid a half down and throw many of these prop erties on the market. There are no buyers and many sellers, and it is very easy to have the price level drop to one-half. That wipes out the equities of those who paid a half down, and throws many of those properties, as I said, on the market, and thus continues until the liquidation is completed, because you lower the value of the properties already built. They are not worth any more than the cost of building new ones. And when you lower the values of the properties already built, they are thrown on the market, not at cost of production, but at any price. For example, a house in Kochester that sold for $14,000 was just foreclosed. The owner has lost all his payments. The second-mortgage holder has lost $2,500. The first-mortgage holder got it at $5,000. That is not the cost of producing that house, but probably it could be bought for less than $5,000 now. _ # # This explains why the more reductions in wages in the building industry we have the less building there will be until liquidation is completed. The public is clamoring to have Congress take the lead in reducing wages, not realizing that every wage reduction destroys values and causes bankruptcies until liquidation is completed. Those who expect wage reductions to restore prosperity will be disap pointed. I have a few facts here on the debt situation. The Chairman. Would you mind if I asked you some questions at this time? Mr. W arren. N o ; I would be glad to have you do so. The Chairman. I do not find myself in disagreement with you. I have been hoping that our higher cost levels could prevail. But what is your thought of equalizing agriculture with industry under the high wage scale ? Mr. W arren. I think that that will be easily done. I have some data just a few steps further along that will take that up. The Chairman. Very well. I want you to go into the relation of wages to commodity prices while you are here. Mr. W arren. I will do that just a little later on, if you do not mind. I have a statement on debts here first. This is in relation to deflation and debts. In 1929 the national debt was about sixteen billion, and State, county, and local debts about seventeen billion. The sum of these two which had to be paid .by taxes amounted to about 9 per cent of the total wealth. The total 61 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR o f a ll p r iv a t e d e b t s w a s e s t im a te d a t a b o u t o n e h u n d r e d a n d s e v e n t y b i l l i o n , o r t h e t o t a l i n d e b t e d n e s s w a s a b o u t $ 2 0 3 ,0 0 0 ,0 0 0 ,0 0 0 . T h e n a t i o n a l w e a l t h a t t h a t t i m e w a s e s t i m a t e d a t $ 3 6 2 ,0 0 0 ,0 0 0 ,0 0 0 . T h e d e b ts w e r e 5 6 p e r c e n t o f th e n a tio n a l w e a lth . T h e d e b ts in 19 1 2 w e r e 3 4 p e r c e n t o f th e n a tio n a l w e a lt h ; th o s e o f 1922, 42 p e r cen t. D e b t s in 1 9 2 9 w e r e r a t h e r h ig h e v e n f o r t h e p r ic e le v e l a t t h a t t im e , but m ost of th em c o u ld have been p a id w ith o u t d iffic u lty if th e p r ic e le v e l o f th a t tim e h a d c o n tin u e d . T h e w e a lth a t th is tim e to -m o r r o w . p h y s ic a l o f t h e c o u n t r y is s h r in k in g s o m u st b e B ut I p ro p e rty a gu ess th in k , of th e and as a if w ild U n ite d r ig h t fa s t th a t to -d a y gu ess, if S ta te s you to -d a y a n y e s tim a te w o u ld w ere at be to w ron g s e ll th e t o - d a y ’s p r ic e s , y o u w o u ld b e fo r t u n a te i f y o u g o t h a lf o f w h a t it w a s w o r t h in 19 29. I f t h a t is t h e c a s e , t h e d e b t s a r e e q u a l t o t h e v a lu e o f t h e p r o p e r t y . S e n a to r F l e t c h e r . H o w a b o u t th e in c o m e s ? M r . W a r r e n . T h e in c o m e s I h a v e n o t fig u r e d , S e n a to r . S en a tor W ag n er. I n 1 9 2 9 a b o u t $ 9 0 ,0 0 0 ,0 0 0 ,0 0 0 . M r . W a r r e n . I h a v e th e d e b ts in t a b u la te d fo r m . S e n a to r G ore. B r e a k in g th e m d o w n in t o d iffe r e n t k in d s ? M r. W arren . Y es. (T a b le s 3 and 4 on d eb ts, p resen ted by M r. W arren , are here p r i n t e d i n t h e r e c o r d in f u l l , a s f o l l o w s :) T a b l e 3 .— E s t i m a t e d d eb ts in U n ite d S ta tes in 1929 1 T otal debts National______________________________________________$16,000,000,000 State, county, and local________________________________ 17, 000, 000, 000 Corporation___________________________________________ 76, 000, 000, 000 Urban mortgages______________________________________ 37,000, 000, 000 Bank loans___________________________________________ 42, 000, 000, 000 9, 000, 000, 000 Farm mortgages----------------------------------------------------------Life insurance policy loans and premium notes____________ 2, 000, 000, 000 Retail installment paper________________________________ 3, 000, 000, 000 Pawnbrokers’ and similar loans________________________ 1,000,000, 000 Total-__________________________________________ 203, 000, 000, 000 T a b l e 4 .— E s t i m a t e d p u b l i c a n d p r i v a t e d e b t s i n Year Public debts 1912.............................. $5,000,000,000 1922.............................. 31,000,000,000 1929.............................. 33,000,000,000 U n ite d Total debts $58,000,000,000 105,000,000,000 170,000,000,000 $63,000,000,000 136,000,000,000 203,000,000,000 o f lo e a lth to S ta te s , 1 9 1 2 -1 9 2 9 Public Private Total debts per debts per debts per capita capita capita Private debts T a b l e 5 .— R e l a t i o n Year th e $53 282 272 $610 956 1,400 d eb ts Estimated wealth of the United States ° Estimated pub Per cent lic and private indebt debts edness 1912.................................................................................................... $186,000,000,000 $63,000,000,000 1922........................................ ............................................. 321.000. 000.000136.000. 000.000 1929................................... 362.000. 000.000203.000. 000.000 ° Estimate of National Industrial Conference Board. i W arren, G. F ., and Pearson, F. A., Effect of Declining Prices on Debts. Economics No. 74, p. 1 6 6 7 , February, 19 32. 120290—32----- 5 $663 1,238 1,672 34 42 56 F arm MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 62 M r. W arren . M a n y m u st p a y ta x es. erty in fa r m and hom e ow n ers are out o f MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR d eb t, b u t I f p u b lic d e b ts a m o u n te d to 9 p e r ce n t o f th e p r o p 1929, th ey are p r o b a b ly th e p r o p e r ty h a s sh ru n k . n ea rer 20 per cen t to -d a y , beca u se T a x e s d o n o t y ie ld th e a n tic ip a te d in c o m e a n d e x p e n d it u r e s f o r r e lie f a r e w h ic h m e a n m o r e p u b lic d e b ts . h ig h . T h is r e s u lts in p r ic e s r is e or a lto g e th e r . I f we c o u ld re sto re The C h a ir m a n . Y e s ; b u t is it not a fa c t th a t th e fa ll, d is p a r ity in p r ic e r e la t io n s h ip s M r . W a r r e n . T h e y in c r e a s e d s o m e w h a t le s s . a g r e a t e r in c r e a s e in e ffic ie n c y o f la b o r . re The C h a ir m a n . B u t a re n o t th e h ig h w h ic h fa r m e r s M r . W a r r e n . T h e y a r e p a r t ly a r e fle c tio n o f th e p a r t ly o f th e q u a n t it y o f fr e ig h t b e in g h a n d le d . n e a r ly 20 per c e n t, p r ic e s cen t. C o n v e r s e ly , w h ic h fa rm e r s w hen r e c e iv e de The T h e f o l l o w i n g a re s o m e fa c t s fr o m th e in d e x n u m b e r s f o r th e e n tir e U n ite d S ta te s. F rom A m e r ic a n -g r o w n fo o d June, 1916, to June, rose 42 p e r cen t. th e sa m e fo o d rose 73 p e r cen t. J u n e , 1 9 2 1 , r e ta il p r ic e s to tio n . N ow fa r m e r s fe ll 50 p e r ce n t. F rom 1917, r e ta il P r ic e s p a id to J u n e, 1920, to p a id p r ic e s fix e d a c tu a lly fo r or r a is e d fe ll 29 per T h e n , a g a in , in cen t ch an ge very th e s lo w ly . p a n ic s In of fa c t 1920 C h a ir m a n . Y e s. ca se s th a t h a s r e s u lte d in r e v e n u e , h a s it n o t ? p r ic e s The a d e fla tio n s itu a M r. W arren . It recen t years th ere in a lo s s of revenue s h o u ld be is i m p o r t a n t , I done or n o t to has of d e c id in g d u r a t io n of an and e ffo r t an in c r e a s e w h e th e r s im ila r any p a n ic s . T h e p a n ic s o f 18 1 5 , 18 6 5 , a n d 1 9 20 w e re n o t s im ila r t o th e p re s e n t o f re d u ce d b u ild in g a n d a ft e r su ch a s h o r t p e r io d o f h ig h p r ic e s t h a t p u b lic a n d p r iv a t e d e b ts ra tes w ere w e r e n o t a d ju s t e d The sam e w e r e s i m i l a r t o t h e p r e s e n t o n e b u t m u c h le s s s e v e r e . 1929. been in s te a d t h in k , in see th e s it u a t io n , b e c a u s e t h e y c a m e a ft e r a p e r io d to w a g e s c a le C h a ir m a n . G o a h ead . th in g fe ll 57 ch a rg es ten d fr e ig h t and O f p re M r. W arren . Y es. and t h is d i s p a r i t y is t h a t d is t r ib u t in g fo llo w in g ra tes m a d e t o in c r e a s e th e f r e ig h t r a te t o in c r e a s e th e r e v e n u e , a n d in s o m e ta k e th e d e fla tio n s id e : F r o m fe ll 3 6 p e r ce n t, a n d p r ic e s p a id to fa r m e r s f o r th e sa m e f o o d p e r cen t. r e m a in of fa r m e r s f o r A u g u s t , 19 29, t o M a r c h , 19 32, th e r e ta il p r ic e s o f fo o d T h e reason fr e ig h t fr e ig h t ra tes th a t n o w v a il a d ir e c t r e fle c t io n o f t h e w a g e s c a le t h a t p r e v a ils ? r is e 1929, O f cou rse th ere w as F o r e x a m p le , i f t h e r e t a il p r ic e o f f o o d r is e s 1 0 p e r c e n t , p r ic e s r e c e iv e p r ic e in c r e a s e d a lm o s t in p r o p o r t i o n t o t h e w a g e in c r e a s e ? s u lts . r e ta il p r ic e s d e c lin e 10 p e r c lin e a lm o s t 2 0 p e r ce n t. th e 1921 to w e c o u ld p a y th e fr e ig h t ra te s a n d th e r a ilr o a d s w o u ld h a v e p r o d u c t s t o h a u l. d e fic ie n c ie s C o m i n g t o t h is q u e s t io n o f p r i c e d i s p a r i t y , w h ic h is y o u r q u e s t io n , S en a tor N orb eck . W henever M r. W arren . N o ; n ot le v e l t o th e c o m m o d it y p r ic e le v e l t h a t p r e v a ile d fr o m 63 t o th e p r ic e le v e l. The p a n ic s of 1837 In and 1873 e a ch o f th e p r in c ip le a p p lie s t o a ll b a s ic c o m m o d it ie s w h e n c o m p a r e d w it h m a n u p r e v io u s ca se s th e d e c lin e s la s te d f o r s ix y e a r s , a n d th e a f t e r e ffe c ts fa c tu r e d g o o d s . T h e la w , w h ic h o f g r a v i t a t i o n , is a s f o l l o w s : c o n tin u e d W hen p r ic e s r is e , is ju s t a s f u n d a m e n t a l a s t h e q u ic k ly p r o d u c e r s ’ p r ic e s r is e th a n r e ta il p r ic e s . W h e n p r ic e s fa ll, h ig h e r p e r c e n t a g e th a n r e ta il p r ic e s . In oth er w ord s, i f y o u S ta te s a t th e p re s e n t t im e w ere s e llin g fo r 30 cen ts fo r n ia m a n g o t 20 cen ts. d ro p p e d to of 20 cen ts, o r o n e -th ir d . The by by 20 a la r g e r p rod u cers’ p ercen ta g e p r ic e s fa ll by a w ere of p e r cen t, y o u fo o d w ill in th e U n ite d . r a is e th e fa rm in N ew N o w th e N e w fr o m 30 cen ts C a lifo r n ia p r ic e cen ts, o r a d r o p o f 50 p e r ce n t. Y ork to 20 C ity . The p r ic e a t w h o le s a le h a s cen ts. d rop p ed T h is fr o m 20 is a cen ts 10 C ity fr o m 2 0 ce n ts t o 3 0 c e n ts , th e 10 cen ts to 20 cen ts. T h a t is , th is p r ic e th e and d e fla tio n T he p rocess of is “ ju s t a r o u n d in p r ic e s r e s to r e s th e b a la n c e . p rocess M r. W arren . N o ; r e s p o n d v e r y s lo w ly . . The it is becau se C h a ir m a n . W e ll, y o u in g b een th a t? in c r e a s e d in recen t spok e years. to th e th e^ r do o f th e W hat not respon d. W a o -e s to fr e ig h t ra te h ere as h a v is your e x p la n a tio n T hey w h a t th ey d id h a u l a ll th e w a y b a c k d u r cou rse, be at u n n ecessa ry. if we ended w h ic h I f th e T h is is a lo n g fo llo w d eb ts p resen t th e tim e to p resen t do- part th e you say? th e im p o r ta n t m ortg a g e liq u id a tio n is very c o r n e r .” T h ere are no s lo w . m arket is not p la c e p le te u n til W hen over by th e c r e d ito r s , c o m p le te . ow ner th a t be. p a r tly fo r e c lo s u r e s th e lo s t w ill th is not m an do lik e The of F or several q u o ta tio n s can fo r e c lo s u r e s lo s t The expen ses. s e ll. do W e occu r, c r e d it o r s , p a r t ly I h is and w ant in th e p r o p e r tie s th em . 1921. M any T h ese m u st fo r have th e lo s s , e x p e c t a t io n pass do not o f in t o been h e ld becau se hom e. know are th e th e The of w hen of th e secon d - h o ld e r is not has com th a t w ill ta k en bu yers s itu a tio n . and B e fo r e it s e ll a t m a r k e t p r ic e s hands fa rm s c o m m o n ly c o m m o n ly d e a rth n o t r e a liz e th e b a ck are m e n tio n e d , liq u id a tio n p r o p e r tie s c r e d it o r s s till h o ld ju s t fir s t -m o r t g a g e The becau se b e ca u se th e c r e d ito r s d o p ro p e r tie s h ou se ow ner e v e r y th in g . pay occu r, th e is c le a r e d u p , th e c r e d it o r s m u s t b e w il l i n g t o M r . W a r r e n . B e c a u s e th e r a ilr o a d s w e re n o t m a k in g m o n e y . . T h e C h a ir m a n . W o u ld th a t r u le h o ld g o o d in g t h e 15 y e a r s o f r a ilw a y r a te in c r e a s e s ? o f over m ortg a g e a h a d le s s t o h a u l a n d s o t h e y r a is e d t h e r a t e s o n sam e of le v e l p r o c e s s is c o n t in u e d , it w i l l t a k e th e by resp on d liq u id a tio n th e h o m e s , h o t e ls , a n d o ffic e b u i l d i n g s , s o t h a t n e it h e r p a r t y r e a liz e s t h e W hen w ages m ake c o u ld , to y e a r s b o r r o w e r s a n d le n d e r s b o t h h o ld o n , e x p e c t in g th a t p r o s p e r it y ta k en th e p a n ic p r ic e s s it u a t io n , it se e m s t o m e , a t th is m o m e n t, w it h c i t y r e a l e sta te . s itu a tio n . # T h e C h a ir m a n . A s s u m in g th a t in flu e n c e s a s o t h e r s , y o u m e a n ? The c o m m o d it y W a r r e n . B a n k r u p tc ie s . d is p a r it y is a n in e v it a b le r e s u lt o f a d e c lin e in p r ic e s a n d a r e c o v e r y I t w i l l a ls o b r i n g la b o r b a c k in t o lin e . years. in S e n a to r W a g n e r . B e c a u s e o f w h a t, d id M r. d rop to r is e c o m p le te th e b a n k r u p tc y p r o c e d u r e , n o t h in g o r la is s e z f a ir e p la n . C a fi- N o w , i f w e t u r n it a r o u n d a n d r a is e t h e w h o le s a le p r ic e in N e w Y o r k C a lifo r n ia p r ic e w ill g o fr o m Y ork m any a m o v e m e n t o f c u t t i n g w a g e s , t a x e s , a n d e v e r y t h in g e ls e s o a s t o c o m F o r e x a m p le , n o t so v e r y lo n g a g o e g ^ s w h o le s a le fo r by con tra cts p le te w i l l r a is e th e p r ic e p r ic e s b y a b o u t 40 p e r ce n t. la w of p erson s th a t w ere ta k en u n w illin g n e s s o f p r o fit, o r fe a r o f b r e a k in g to who over accept th e m a rk e t. B e- 04 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR f o r e t h e s it u a t io n is c le a r e d hands th e of p erson s p rocess u s u a lly o f s o ld w ho u p , th ese p r o p e r tie s m u s t p a ss in to th e w ant liq u id a tin g on th e MAINTAINING AVERAGE PURCHASING POWER OF COLLAR th em . p r ic e s m arket o f T h is o f th e is e n t ir e ly stock s day and on stock and d iffe r e n t bonds not ta k en th a n w h ic h over p e o p le w h o a re in te r e s te d in th e The b e lo w have It to esta te jo b M r. W arren . N o. a c r e d it o r w h o h a s lo a n e d t h e lo a n , h e k n o w s it. over. is s o ld be to done som e over. th e c r e d ito r fin d s th e sto ck fa llin g B ut it ta k es H e h as to is and done over th e fo r th e jo b is th a t tim e . p h y s ic a l w a it to fin d done. T h e C h a ir m a n . th ese you p la n s . w o u ld T h ere are c e r ta in t o w o r k , b r in g c e r t a in r e s u lts . tim e n a tu ra l to th e and T h a t is th e w hy fo rce s in t e r fe r e n c e s w h ic h , i f B u t I w o u ld s a y th a t th e d e b ts a re m u c h h a r d e r Y es. B u t w h a t, do M r. W arren . I if you w o u ld a r e in te r e s te d in C h a ir m a n . I e le m e n t in D o m an th is p la n a p art in of a s u b s ta n tia l w a y ? th e p ic tu r e , a n d v a lu e o f d o lla r s in t e r fe r e s w it h th e s it u a t io n . a r is e in th e T h e m o r e c o m p lic a te d o u r c iv iliz a t io n g e ts t h e m o r e n u m e r o u s t h e d e b t s w h ic h a r e fix e d . T h e C h a ir m a n . A n d T h e C h a i r m a n . A n d t h e le s s e ff e c t iv e t a l k i n g a b o u t ; i s n ’t t h a t r i g h t ? The C h a ir m a n . Y e s ; are r e m e d ie s we are d e a lin g are o n ly th ey w ith I f a lo t o f th a t are not to th e s itu a tio n . we are g o in g The b ig g e s t to d e fla te s itu a tio n w h ic h is t h e h a r d e s t t o d e fla t e , is d e b t s . T h e C h a ir m a n . Y e s . e v e r y th in g d o w n th a t is not d e fla te d , a n d The a g e is g o i n g u p in s t e a d o f d o w n . The m a te r ia l th ey buy is a ls o The lik e t o c a ll a t te n tio n t o th e w a g e q u e s tio n , am in te r e s te d c o m m o d it y m u ch in it p r ic e s . in te r e s te d in o n ly in A s s u m in g w h e th e r th e th is , as th e con th a t th e la b o r in g w ages fo r la b o r are you you sp eak a b o u t th e m a in ta in a h ig h p rod u cts la b o r ? I at a w age p r o fit th a t w is h you q u e s tio n p r o d u c tio n com e w o u ld r e la t in g c o s t in in th is c o m p e t it io n e n lig h te n to a g r ic u l co u n try w ith th e c o m m itte e and ch eap on th is . of T h e r e is a d iffe r e n c e b e t w e e n la b o r s te a d ily C h a ir m a n . T h a t w ages and d eb t. The in c r e a s e s . m ay be tru e as an average, but are th ere T h a t is o n e o f t h e c o s ts . a w a g e le v e l th a t d o e s n o t c h a n g e m ovem ent of th e tr a in s but in P ost th e e a s ily — n o t o n ly p r o d u c tio n o f t h e tie s in M r . W a r r e n . V e r y la r g e ly . The say b ig t h e ir b o n d s , a n d w hat we c a ll o n th e fa r m ? o ff 20 per cen t o f see s o m e c o n c e r n in C o n n e c t ic u t in its hands d u r in g th e 1921 h a d la id d e p r e s s io n , a n d th ey th e 80 p e r ce n t th a n th e y h a d w ere fr o m th e 10 0 p e r c e n t o f th e e m p lo y e e s b e fo r e . T h e p o in t b e in g th a t th e 80 jo b s per cen t w ere a fr a id of lo s in g th e ir and in c r e a s e d th en M r . W a r r e n . W e m a d e a s t u d y o f t h a t o n 5 0 0 fa r m s in N e w Y ork e ffic ie n c y . T h e C h a ir m a n . V e r y la r g e ly . le v e l, is it n o t ? d eb ts. to M r. W arren . Y es. g e ttin g m o re la b o r o u tp u t fr o m T h e C h a i r m a n . Y e s ; b u t is it n o t a f a c t t h a t m o s t o f t h e r a ilw a y e s p e c ia lly T h e C h a ir m a n . Y ou m e a n t h a t th e la b o r in g m a n m ilk s m o r e c o w s th a n 20 y e a r s a g o ? S e n a to r G ore. I are a p p ly S e n a t o r G o r e . Y ou m e a n t h a t th e e ffic ie n c y o f la b o r g o e s u p ? M r. W a r r e n . D e c id e d ly . and re v e n u e g o e s d ir e c tly o r in d ir e c tly to la b o r ? w o u ld not M r. W a r r e n . Y e s ; a b o u t th e sam e ra te as th e a v e ra g e o f in d u s tr y . R a ilr o a d M r . W a r r e n . Y e s , t h a t is t r u e ; b u t it is a ls o t r u e t h a t t h e r e o th e r re a so n s w h y th e y d o n o t c o m e d o w n q u ic k ly . W arren. I it M r . W a r r e n . N o ; it a p p lie s g e n e r a lly . th e b u ild in g o f th e c a r s a n d t h e l o c o m o t iv e s ; is t h a t n o t t r u e ? la b o r . T h e C h a ir m a n . D o e s it a p p ly s lo w ly . T h e C h a ir m a n . T h e y a re g o in g to co m e d o w n s lo w ly b eca u se th e y are b a sed on in t e r e s t o n to i t --------- T h e C h a ir m a n . D o e s m a c h in e p r o d u c t io n ? ra te s a re g o in g to c o m e d o w n p r e tty s lo w ly . w ages but m e. n o t v e r y n o ta b le e x c e p t io n s t o t h a t ? T h a t m e a n s b a n k r u p tc ie s . M r . W a r r e n . N o w , te le p h o n e ra te s w ill c o m e d o w n M r. pay M r. W arren . Y es. M r. W arren . I f th e w hen e ffic ie n c y are. th ose w ith to M r . W a r r e n . I w o u ld lik e t o a n s w e r ju s t a lit t le fu r t h e r o n w a g e s c o n tr o lle d . p re -w a r so a t th is p o in t . b u t t h e le s s e ff e c t iv e c o n tr o lle d , y o u A nd fo r e ig n a ll th e s e M r . W a r r e n . N o ; th e m o r e th e s e r e m e d ie s a r e n e e d e d . th e se is n o t p rod u ce M r . W a r r e n . E v e r y t h i n g is le s s e la s t ic . fig u r e s h e r e goes $ 5 a d a y o r $ 1 0 a d a y , b u t h e is in t e r e s t e d in w h a t t h e w a g e w i l l b u y . tu re, ca n t h e le s s e la s t ic t h e s it u a t io n ? reven u e S e n a to r C o u z e n s . W e ll, th a t is in c lu d e d in th e 80 p e r c e n t. The are r a ilw a y o t h e r 2 0 p e r c e n t g o e s t o in te r e s t o n b o n d s a n d d iv id e n d s p r a c t ic a lly . tr o llin g W arren. T h ey th e la b o r. f o r in s ta n c e , is th e e ffe c t o f th e m o n o p o lis t ic c o n t r o l o f c e r t a in c o m th e y n o t in t e r fe r e w ith of n o t h a ve th e C h a ir m a n . D ir e c t m o d itie s o r th e fix in g o f w a g e s b y th e G o v e r n m e n t o r b y a g r e e m e n t? M r. W o u ld y o u m in d p u t tin g in t o y o u r re m a rk s p ercen ta g e S e n a to r C o u z e n s . E ig h t y p e r c e n t o f th e in c o m e o f th e r a ilr o a d s g o e s t o la b o r . The w ith w hat M r. W arren . I p e r m itt e d T h a t seem s q u ite s im p le . o f th e in te r e s t o n b o n d s a n d w h a t p e r c e n t a g e g o e s f o r o t h e r p u r p o s e s ? y o u o n th e g e n e r a l t h e o r y v e r y w e ll, som e p art real e x a c tly la r g e ly d evote la r g e r W it h T h e C h a ir m a n . W o u ld y o u p a r d o n m e i f I in t e r r u p t e d y o u ? w is h th a t th e h ere M r . W a r r e n . C e r ta in ly . I say m ay n o s e llin g ta k e s p la c e . T h e C h a ir m a n . I ca n fo llo w to It p ro p e rty a b u yer. m ean to re d u ce th a n th e w a g es. O r d in a r ily h e d o e s n o t ta k e th e s to ck real bu yer o fte n is n o t fin is h e d . but C h a ir m a n . D o y o u r a ilw a y r e v e n u e g o e s t o p a y in te r e s t o n th e d e b t? c r e d ito r s . W hen h a v in g fr e ig h t ra te s r a is e d w e r e b o n d h o ld e r s o f r a ilr o a d s , fin a n c ia l in s tit u t io n s . are by 65 I t t h e r e fo r e is a m a tt e r o f a w a g e S ta te o v e r a 2 0 -y e a r p e r io d , a n d th is : T h a t p r o b le m I th in k o f th e th e you c h ie f d iffic u lty r a ilr o a d s w o u ld fin d is to w e fo u n d th a t th e average ra te o f is not in c r e a s e pay th e fa r m s , w a s k e e p in g p a c e a lm o s t e x a c t ly w it h th e in c r e a s e in e ffic ie n c y th a t th e c h ie f or in e ffic ie n c y , c o w s m ilk e d o u tp u t p er c a p ita in th e per m an, and U n ite d S ta te s , w h ic h so is fo r th , on 1 .7 p e r th ese cen t a 66 year. tity O v e r a lo n g p e r io d o f t im e in t h is c o u n tr y th e p h y s ic a l q u a n o f o u t p u t p e r w o r k e r in c r e a s e s 1 .7 p e r c e n t p e r y e a r . A nd on t h e a v e r a g e t h e p u r c h a s i n g p o w e r o f w a g e s i n c r e a s e s 1 .7 p e r c e n t p e r year. S e n a t o r C o u z e n s . I s th e r e a n y r e la t io n s h ip H ow F le t c h e r . Y ou say th e T h e ir v a r io u s s c a le s o f w a g e s ? M r . W a r r e n . T h e ir w a g e s w o u ld b e a p p r o x im a t e ly ou tp u t in c r e a s e s 1 .7 per w a g e s in c r e a s e d in b u y in g pow er S e n a to r cen t. w o u ld th e w a g e in c r e a s e ? M r. W arren . T h e 1 .7 p e r c e n t . C o u ze n s . Y ou s it u a t io n ? M r. W arren . Y es. C o m p a r in g w a g e s n o t w ith m o n e y , b u t w a g e s w it h th e a ctu a l p r o d u c t c o s t o f liv in g o f la b o r , w h ic h is n o t m o n e y , b u t c o m m o d it ie s . th e T h e r e is a s e r io u s m is c o n c e p t io n a b o u t w a g e s . is t h a t i f go to th e c o m m o d it y p re -w a r. That ca u se it h a s b e e n p r ic e w o u ld a lo n g le v e l g o e s t o be tim e an s in c e T h e p r e v a ilin g id e a cost o f th is in c r e a s e in p roceed ed th a t w ith per u n iv e r s ity c e n t in p r ic e stru ctu re s h o u ld w a g e s w o u ld b e in go to th is p e r io d , bu t th a t w o u ld a litt le be d e fla tio n w reck s th e th e a v e ra g e at an o f 20 per m ore th e r a p id ly n orm al m a c h in e r y . th a n in c r e a s e . F or 1931 A nd That n orm al I f th ere in had th e average if you S e n a to r sta n t lik e S e n a to r and s o ld 107. g o t 100 w o u ld h a v e b e e n n o r m a l. th em at la b o r e r n e e d s th e average p r ic e of F o r h im , w a g e s o f 13 7 i f h e h a d B u t w it h h is p r ic e a t 10 7 h e c o u ld h a v e p a id 1 4 7 f o r la b o r a n d d o n e b u s in e s s . m a d e g o o d p r o fits . B u t th e a b u y in g In fa c t , h e w o u ld h a v e a t th e c o s t o f liv in g fig u r e , w h ic h w a s 151. cen t above p re H e buys A n d to b u y 137 p ro d u cts a t a p r ic e le v e l o f 151 c a lls f o r w a g e s o f 20 7. N o w , t h a t is t h e in e v i t a b l e t h i n g y o u M r. W arren. In if one and w e th row th e g e t in to w h e n y o u r a is e th e th a t th e m a n u fa c tu r e r can n o t see H e is a s k in g t o o m u c h . w h a t is th e m a tte r A n d th e la b o r e r ca n n o t tio n r e s u lt cost o f liv in g every tim e g o e s so lo w r e m a in s u p th a t h e, h im s e lf, p ro d u c e s . you d rop he can and S in c e u n iv e r s ity m is c e lla n e o u s w o u ld th e p r ic e not pay le v e l. m u ch th e la b o r e r ca n fo r not buy The w ages. m anu The th e p r o d u c t e x tre m e , to th e be— I it e m in h a v e n ’t th e th e th e B u re a u up and c la s s and of c lo th in g , th e o f L abor dow ns w ork ers lo w e s t and th ere th e fig u r e s . is a con w h it e -c o lla r d u r i n g n o r m a l t im e s , is i t ? get yes. B ut th e se v a r io u s w ork m an a d ju s t m e n t and a g a in lin e t h e y you th in k so. if th e in we ahead lo w e s t g r o u p 10 o r w ill c o m e go c la s s e s — t h e 15 y e a rs. w ith w h it e of day T h a t is , b a ck , b u t it m a y be s a y it w o u ld b e th e n e x t g e n e r a t io n I t h in k i f w e g o a h e a d w ith o f th e n e x t g e n e r a tio n th e d e fla m ay be born o u t o f d e b t , u n le s s t h e y a s s u m e t h e i r f a t h e r ’s d e b t s . S e n a to r F le tc h e r . C a n w e n o t d o s o m e th in g to c h e c k th a t d e fla W e w a n t r e fla tio n , d o w e n o t ? M r. W arren. I r e fla tio n and tio n . to I be th e th in k oth er fin is h e d . ask ed The th is are tw o w ays liq u id a tio n liq u id a tio n of to p roceed . w o u ld m u ch ta x es ca n d e b ts , w h ic h c ity re a l esta te Y ou you say w as a you n orm al One o f can pay has and ta k e th e ta x a h o t e l m a n , th e m a n a g e r o f q u ite a c h a in t h is q u e s t io n : “ H o w w hat th ere is h a s n o t r e a lly b e g u n . and T h i s is a n w o n ’t p ro c e s s , th a t th e c h ild r e n c o u ld p a y 2 p e r cen t. f a c t u r e r ’s p r i c e th e lit t le b e s id e s f o o d tim e s ; S e n a to r C o u ze n s. W o u ld W e h a v e a s ta le m a te . A n d it ta k e s y e a r s to o v e r c o m e it. oth er in d u s tr ia l out o f s e e w h a t is t h e t r o u b l e w i t h t h e m a n u f a c t u r e r ; h e is p a y i n g t o o l it t le . in e v it a b le is a b o u t 2 0 th e b u d g e t. a b ou t h a lf o f b e fo r e w e g e t b a c k o u t o f t h is c o n d it io n ? esta te g e n e r a lly H e has to h a ve w ages th e average th in g s begun So I m ad e a stu d y o f is liv in g m ore th a n n orm al p rop er T h e c o n s u m e r c a n n o t b u y a t th a t w a g e le v e l. w ith th e la b o r e r . la s t in th e n e x t g e n e r a t io n . tio n ? T h e m a n u fa c t u r e r c a n h ir e la b o r a n d g o a h e a d th e is v e r y p r o b a b ly a n d d o b u s in e s s a n d m a k e m o n e y , la s t y e a r , s a y , a t a 1 5 0 w a g e le v e l. at 200. o f o f m is c e lla n e o u s , th is . M r. W arren . I p o w e r o f 37 p er w a r to con su m e o u r p ro d u c ts , a n d h e d oes n o t b u y at 107. v a lu e o f th e d o lla r . e x a m p le , th a t ite m , w h ic h fo r of C o u zen s. B u t I m ean la b o r e r — in t o p rod u cts, o n e ite m F or average M r . W a r r e n . W e ll , y o u see th e r e la t io n is t h r o w n o u t o f jo in t in a s it u a t io n c o lla r fa r m an I n o t h e r w o r d s , th e w h it e -c o lla r w o r k e r ’s to liv in g b etw een # If th e cost th e w ork ers ? of a ll th e p r o d u c t s o f A m e r ic a la s t y e a r , in c lu d w ill g o r e la t io n o f a ll c o m m o d it ie s w a s 10 7, w h e n p r e -w a r is 100. a ll c e n t th e ir w age. as a t th is tim e . m oney of fa r e s , a n d t e le p h o n e c h a r g e s , liv in g C o u z e n s . S o th a t, in d e fla tio n s , w e 1931 h e w o u ld h a v e r e c e iv e d 151 a n d so fo r th . ab ou t 200 t h e ir c o s t o f liv in g h a s d e c lin e d h a v e g iv e n y o u h e r e o n a 1 9 1 0 -1 9 1 4 b a se , th e a v e r a g e w h o le s a le p r ic e in g of h a lf la b o r , w h e re th e w h o le s a le p r ic e s , a c c o r d in g t o th e B u r e a u o f L a b o r in d e x , th e o n e I a m an p rod u ced in d e x spend stu d y T h e w h i t e - c o l l a r w o r k e r ’s of A nd cost o f fig u r e in m in d — a b o u t 17 0. N o w , wre h a v e b e e n n o w a r a n d i f p r ic e s h a d s ta y e d a t p r e -w a r , w a g e s a t 13 7 w o u ld b e in a d ju s t m e n t w it h p r ic e s a t 10 0. But stea d p re -w a r a d ju s t m e n t , n o t o u t w o u ld ta k e c a r e o f th e n o r m a l in c r e a s e in e ffic ie n c y . e ffic ie n c y sta n d s p ro fe s s o r s . in t h is lin e . a c o s t o f li v i n g d e c lin e s m o r e s lo w ly t h a n th e B u r e a u o f L a b o r fig u r e . o f a d ju s t m e n t , b u t in a d ju s t m e n t a t 3 7 p e r c e n t a b o v e p r e -w a r . in c r e a s e d in d e x A nd S e n a to r G o r e . S ta te t h a t a g a in . p r o b a b ly w ith p re -w a r. s h o u ld g o to p r e -w a r w e w o u ld e x p e c t w a g e s t o b e a t 37 p e r c e n t a b o v e p re -w a r . w h o le fig u r e a n d n e w s p a p e r s , a n d d o c t o r s ’ fe e s , be It th e liv in g fr o m a h ig h e r in w h ic h th e r e a re b o o k s , a n d r a ilr o a d s itu a tio n , o th e r w o r d s , i f th e p r ic e le v e l o f c o m m o d it ie s th ere, th en B u t I w ill s a y t h is . le s s , s o h e n e e d s u n s ta b le p ro fe sso rs M r. W arren . I f an sw er p r e -w a r , w a g e s s h o u ld w o u ld m e a n a n d g e t a d ju s t e d th a t y e a r — it is le s s n o w , o f c o u r s e — i n c lu d e s w it h ju s t o u r n o r m a l in c r e a s e in e ffic ie n c y , ju s t m u lt ip ly in g t h a t o u t In fa lls m ake e n t ir e ly b u y i n g p o w e r o f w a g e s , 1 .7 p e r c e n t p e r y e a r , i f w e h a d 137. b e tw e e n t h o s e fig u r e s th a t y o u h a v e b e e n g iv in g u s, a n d th o s e o f th e w h it e -c o lla r w o r k e r s ? T h a t is o v e r a l o n g p e r i o d o f t im e . S e n a to r 67 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR on ta x ? ” is not real s itu a o f h o te ls , a h o te l n o r m a lly , W e ll, he s a id he S e n a to r C o u z e n s . O n th e v a lu e ? M r . W a r r e n . O n th e f u l l v a lu e . w as a r e a s o n a b le ta x . H e has a H e fig u r e d it o v e r a n d s a id t h a t c h a in of h o te ls in a c itie s . S e n a t o r C o u z e n s . W h a t b a s is o f in c o m e w o u ld t h a t b e ? num ber o f 68 maintaining average purchasing power of dollar M r. W per a r r e n cen t th ose on . I do not know . th e fu ll v a lu e . h o te ls n o w a d a y s ? ” m o r e th a n o n e -h a lf.” 1 w o u ld not £ iv e I I d id ask ed “ W e ll” In n o t a sk h im . h im , h e s a id , “ t h e y fo r it .” S u ppose oO p e r c e n t ; i t h a s a t a x r a t e o f 4 p e r c e n t . do c o u ld cu t you are not not stop . t h in k th em p a id I you to fo r ; can do have has c o n n e c tio n w h o w as m ore w ith d rop p ed a sk e d h im of been la id , m any th e real esta te o r le s s f a m i l i a r w it h and k in d s . H e G ore. In H e s a id , It s a id M r. W a r r e n . S c a r c e ly b e g u n . h e re r e c e n tly it, b u t 1 w ill c e r ta in ly in A nd be p retty s a fe in am “ P rew a it liq u id a tio n , stock M r. W arr en . Y es. is liq u id a tio n H e is g o n e . S e n a to r C o u ze n s. I t h as been y o u th a t. so fa r • it. who A got C ou zen s. A re you ness. m an tim e , I can assu re g o in g to te ll u s h o w S e n a to r G ore. A r e y o u p a s s in g o n fr o m M r. W arren . Y es. we can stop 1 th e i f a n y le g is w ages n ow ? S e n a to r G o r e . W o u ld y o u m in d i f I a s k y o u a q u e s tio n r ig h t h e r e w o u ld n o t b e 5 c e n ts a p o u n d . c o n t in u e d m ig h t c a ll it th e e q u a tio n I h a v e a c o n c r e te ca se in m y m in d . S ta te h a d had h is a p lu m b e r co m e h e lp e r w ith a b o u t 4 5 b u s h e ls o f w h e a t a t p r e s e n t p r ic e s . th is e q u a tio n , i f you cu t dow n th is A fa rm e r out and h im . H e N o w , t h a t w a s a h a l f a b a le o f c o t t o n a t p r e s e n t p r ic e s . in g d o h is ch arged T h at w as N o w , th e n , in c o n s id e r $15 a little , th is f a r m e r ’s p u r c h a s in g p o w e r t h a t h e is g e t t in g o u t o f 5 -c e n t c o t t o n a n d 3 0 -c e n t w h e a t w o u ld g o a lit t le fa r t h e r fr o m b r in g ba ck an a p p r o x im a t io n of h is s t a n d p o in t . som e so rt. D o N ow you w ant you not th a t b o t h o u g h t to m o v e a lit t le in o r d e r t o e s ta b lis h t h a t ? co tto n . T h e r e fo r e , som e tim e . an d co tto n T h e u n d e r c o n s u m p t io n o f c o t t o n h a s The r e s u ltin g h ig h stock s c o u ld n ot be S en a to r G ore. Y es. a little h ig h fo r a c ity a t a n y tim e . S e n a to r G o re. H e ca m e o u t o f a c ity . M r . W a r r e n . B u t i f it w a s h ig h t h a t w i l l g e t a d ju s t e d . T he gen e r a l w a g e le v e l w a s n o t b a d ly o u t o f lin e . S e n a to r G o r e . L e t m e a sk y o u th is . W e are ta lk in g a b o u t r e d u c in g th e s a la r ie s o f G o v e r n m e n t e m p lo y e e s , s a y , 10 p e r c e n t. S e n a to r G ore. A G o v e r n m e n t e m p lo y e e w h o n o w A 1 9 2 9 w i t h $ 1 ,0 0 0 . g ets a th o u s a n d c le r k w it h $ 9 0 0 c o u ld b u y m o r e N o w , c o n s id e r in g th is e q u a t io n th in k o f p u r c h a s in g p o w e r , th ese fa r m e r s h a v e to p a y th e g o v e r n m e n ta l s e r th a t s a la r y w ith th e p u r c h a s in g pow er a c q u ir e d fr o m th e s a le c o t t o n a t 5 c e n ts a n d th e s a le o f s te e rs a n d h o g s a t 3 c e n ts . pay o f N ow , if th a t w a s c u t d o w n $ 1 0 0 d o lla r s , w h a t litt le p u r c h a s in g p o w e r h e g e ts o u t o f th e se p r e v a ilin g p r ic e s w o u ld g o M r . W a r r e n . I d o n o t t h in k th a t y o u c a n e v e r fin d it. S e n a to r m in d . G ore. I t illu s tr a te s a litt le fu r th e r . it w o u ld th e m ake enough p o in t. That M r . W a r r e n . T h e r e is o n e o b je c t i o n t o t h e w a g e s , w h ic h h a s n o t h in g t o d o w it h w a g e s . S e n a t o r G o r e . T h e r e is m o r e p lo y e d k n o w s. M r. W a r r e n . W e ll, th e p e rso n p ro p e rty . he fo r M r. W arren . P erh ap s S e n a t o r G o r e . I t is t h is , D o c t o r , a n d I in m y buy d is p o s e d o f a t o n ce . A n d i f th e p lu m b e r w a s a t $ 1 5 — th a t s o u n d s a l i t t l e h i g h f o r a r u r a l r e g i o n --------- to a co u n ty not it w a s in 1 9 2 1 t o 1 9 2 9 — I a m n o t p a r t ic u la r w h e th e r th e se e x a c t y e a r s M r . W a r r e n . P e r h a p s it w o u ld b e b e st t o a sk it h e r e , S e n a to r . in c o u ld I f w e c a n r e s to r e th e v a lu e o f th e d o lla r t o s a y w h a t b e u s e d — th a t w o u ld r e s to r e th e b u y in g p o w e r f o r c o tt o n o r w o u ld y o u r a th e r h a v e m e a sk th e q u e s tio n w h e n y o u g e t t h r o u g h « d a y s w ork I su ppose $ 1 5 f o r t h e d a y ’s w o r k . T h e r e fo r e , th e y v ic e s o f th is p a r t ic u la r c le r k t h a t I h a v e in m in d , t h e y h a v e t o M r . W a r r e n . I t h in k th e r e a re s o m e fu n d a m e n t a l q u e s tio n s h e r e t h a t w ill n e e d s o m e fu r t h e r d is c u s s io n . dow n ou t. t o -d a y th a n in is n o t d o n e . S e n a to r F le tc h e r . I n oth e r w ord s, w e w a n t to k n o w la t io n c a n h e lp o u t th a t s itu a tio n . to w ent c o t t o n is c h e a p . ow ner M r. W a r r e n . T h e re are m a n y w ays. o f p u r c h a s in g p o w e r . W e h a v e in c r e a s e d th e v a lu e o f m o n e y a n d s t o p p e d b u s i T h e r e fo r e m o s t o f th e p lu m b e r s w e r e n o t w o r k in g th e d a y t h a t d o lla r s u n d e r t h a t w o u ld g e t $ 9 0 0 . a lo n g I B u t w e h a v e a n o th e r M r. W arren . Y es. o r ig in a l M r . W a r r e n . T h e jo b w ill n o t b e c o m p le te d u n til th e c r e d it o r s ca n s e ll. S e n a to r d e fla tio n ? s it u a t io n . th e ir I t is n o li q u i d a as th e B u t th e jo b done fo r t h in k s o m e w e r e o u t o f a d ju s t m e n t e v e n th e n . th e g u ess th a t th e c r e d it o r s g o t it. T h e n it h a s n o t b e e n liq u id a t e d . tio n . I h e c r e d it o r s d o n o t w a n t it. . S e n a to i C o u zen s. I t is c o n c e r n e d . I M r . W a r r e n . O f c o u r s e w e h a v e a q u e s t io n w h e t h e r t h a t p l u m b e r ’s w a g e s w e r e in a d ju s t m e n t w it h t h e p r ic e s it u a t io n in 19 21 t o 1 9 2 9 . liq u id a t io n s n o t c e r ta in m a k in g can g o t to th e re a re tw o ste p s in W a s h in g to n ; I he th ey s a y y e s t e r d a y th a t th e s p e c u la to r s h a d ju s t a b o u t c o m p le te d liq u id a t io n a n d th e in v e s t o r s h a d ju s t s t a r te d t h e ir s . h o t e l s o ld th e r e d u c in g ta x e s, h o w have o b lig a tio n s h otel I of dow n W e l l , h e d i d n ’t t h i n k sew ers is t h e in have a m an v a lu e gone h otel w o rth ?” S en a tor “ W hat T hen can th em ? ” th e th e C1S5 V ^ b r in g in g . N o t h in g .” N ow , vou u n til fin a lly s o m e b o d y w ill b u y o n e o f th o se . h ea rd ask ed, c ity a ll y o u cu t 3, becau se th e is t h e fa c t , h e c ite d o n e v e r y g o o d on e . a n y th in g n e x t q u e s tio n : “ N o w , i f y o u m u ch B u t h e s a id 2 “ W hat 69 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR th e G overn m en t th e w hat I had G overn m en t on e, as e v e ry b o d y in c u ttin g w ho is e m w h o o u g h t to b e th e c h ie f o b je c to r w ages is T h e G o v e r n m e n t is lo o k e d w a g e s itu a tio n . T hen c u ttin g th a n is d iffe r e n c e so th e m an upon w ho ow ns p h y s ic a l as th e k e y m o v e r in th e A n d i f it w ill c u t w a g e s , t h e n w e w ill a ll c u t w a g e s . b u ild in g tra d es s h o u ld be cu t. T hen th e h ou se th a t th e la b o r e r p e r h a p s h a d p a id 50 p e r c e n t d o w n o n , c a n b e r e p r o d u c e d f o r s a y r 5 0 p e r c e n t le s s . S e n a to r G ore. Y es. M r. W arren . H e h a s lo s t h is e q u ity . In oth er w o rd s , th e c h ie f o b je c tio n t o c u t t in g w a g e s a t t h is p a r t i c u l a r t im e is t h a t it d e s t r o y s th e v a lu e d eb ts. o f th e p h y s ic a l p r o p e r ty o f A m e r ic a w h ic h u n d e r lie s o u r S e n a t o r G o r e . Y e s ; b u t i f y o u k e e p w a g e s a r t i f i c i a l l y h i g h t h a t is a n a r t ific ia l m a in te n a n c e o f t h e p r ic e s . M r. W a r r e n . P r ic e s a re a r tific a lly io w . 70 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR S e n a to r G ore. W e ll, on e w a y o r th e oth e r. S h o u ld w e m o v e b o th w ays? M r . W a r r e n . I t is e s s e n t ia l t h a t y o u r a is e t h e p r i c e le v e l, b e c a u s e it is S en a tor th a t y o u not m e r e ly w ages, but d eb ts and in n u m e r a b le oth er th in g s . fig u r e t h a t h a s a p r ic e in v o lv e d 30 p e r c e n t w e m ig h t p r o c e e d — w e ll, t h a t , o f c o u r s e , is p u r e ly v is io n a r y . It can n ot be d on e. S e n a to r G o re. T h e y a re th e b ig th a t you do not a d v oca te, w h e th e r w a g e s o u g h t to be S e n a to r W a g n e r . Y e t y o u d o s a y t h a t o u r r e d u c tio n o f w a g e s w ill c a u s e a fu r t h e r d e p r e s s io n . M r. W arren . Y es. S e n a to r W a g n e r . N o w , w e o u g h t n o t t o d o a n y th in g w h ic h m ig h t a d d t o o u r d iffic u ltie s , s h o u ld w e ? fa c t o r s in th e e q u a tio n . M r. W a r r e n . I f w e are to fo llo w M r. W arren . Y es. o u t th e d e fla tio n p r o p o s a l, th e n , o f cou rse, w e h a ve to cu t w ages an d g o th ro u g h b a n k ru p tcy . S e n a to r G ore. B u t I w a s w o n d e r in g i f y o u c o u ld p e g w a g e s. S e n a to r W a g n e r . Y ou m e a n g o t h r o u g h a c o m p le te d e fla tio n ? M r. W a r r e n . W e ll, w a g e s a re n o t p e g g e d . M r. W arren . Y es. go up as th e p r o d u c tio n per c a p ita . w a g e s r is e o r f a l l le s s r a p i d l y . a re n o t a c o m m o d it y . I n t h e l o n g r u n v ra g e s W henever p r ic e s T h a t is n o t p e g g i n g . r is e or fa ll B ecau se w a ges I t h a p p en ed a cen tu ry a g o. F o r e x a m p le , in fr o m a n y o f o u r p e g g in g w a r p e r io d d e c lin e d in E n g la n d o f th e w age s it u a tio n — in p r ic e s d e c lin e d th e N a p o le o n ic o n e -h a lf a n d th e w age I f we are to d e fla te e v e r y t h in g dow n to th e p r e s e n t c o m m o d it y p r ic e le v e l, w e h a v e a lo n g jo b a h e a d . S e n a to r W a g n e r . W e ll, d o y o u n o t th in k th a t o u g h t to b e a r r e s te d ? D o y o u th in k w e o u g h t to g o so fa r as th a t ? th e N a p o le o n ic w a r p e r io d in E n g la n d , w h ic h c e r t a in ly g e ts i t a w a y M r. W arren . I th in k w e o u g h t t o h a v e sen se e n o u g h n o t to h a v e g o n e th is fa r . le v e l S e n a to r W a g n e r . I th in k so , to o . 15 p e r c e n t. M r. W arren . A n d not h a v in g done it b e fo re , w e s h o u ld ch an ge S e n a to r G ore. P r e tty m u ch th e sam e a fte r th e C iv il W a r , to o . now . M r. W e c a n n o t a ffo r d t o g o t h r o u g h it. N o w , t h e g e n e r a l im p r e s s io n is h e ld t h a t d e p r e s s io n is d u e t o o v e r W arren. It w as th e w a g e s d e c lin e d 15 p e r ce n t. sam e. P r ic e s d e c lin e d o n e -h a lf T h en th ey tu rn ed u p w a rd . A nd and p r ic e s N o t h a v in g w ent on dow n . W h e n w a g e s tu r n e d u p w a r d a n d p r ic e s w e n t o n d o w n , p r o d u c tio n . it we on w as becau se crea sed e ffic ie n c y , had th en w ages reach ed w ere not a p o in t out of w a g e s a t th e le v e l o f t o -d a y lo n g e n o u g h cause of th e m o d itie s . W hen I in c r e a s e d le a v e t o w ages T o e ffic ie n c y ; t h e y do n ot know you g e t ba ck h a s t o k e e p s o lv e n t. I say as to M r. W arren . N o. D eb ts, n ot w a g e s , a r e t h e m a jo r s it u a t io n in t h is m a t t e r . you a p o s itio n re d u ce d o r n ot. N o w , i f y o u c a n c u t w a g e s 3 0 p e r c e n t o v e r th e w h o le U n it e d S ta te s , a n d c u t d e b ts 30 p e r c e n t o v e r th e w h o le U n it e d S ta te s , a n d c u t e v e r y W ag n er. P ro fe s s o r, a re n o t ta k in g 71 h im . o v e r th e I w h e th e r I to th e p r o p e r tie s w o u ld w ill to b u ilt h o ld th e y w o u ld b e t o o lo w o f s ta tin g do in r is e r e la t iv e to be com a p a r tic u la r e m p lo y e r , h e w hat th e o f w ith o u t a gen eral co u n try . w ages r e d u c tio n N ot to one fir m . w a g e s r e d u c e s t h e v a lu e s a c o r r e s p o n d in g of r e d u c tio n of in T h e r e fo r e u n d e r m in e s th e e q u itie s , u n d e r m in e s th e b a n k s . D o n ’t t h i n k red u ced . a lr e a d y we th e a n s w e r e d y o u r q u e s tio n o r n o t. th e c o u n tr y , a g e n e r a l r e d u c tio n th e d eb ts. I f w ith w h a t h e p e r s o n a lly s h o u ld d o w ith m e r e ly co u n try lin e . s h o u ld th e q u e s tio n A nd am w h ere, th a t I I am am s a y in g th a t w ages s h o u ld or s h o u ld n ot be m e r e ly s ta t in g t h a t w a g e r e d u c tio n is n o t a s o lu tio n . I t is a s o lu t io n t h a t g e t s u s in t o a w o r s e d iffic u lty . S en a tor F letch er. O f cou rse, th ere is som e on th a t. year, w e s h o u ld th e ch an ge next year. S o m e c h a r ts w e r e p r e s e n te d in th e h e a r in g in th e H o u s e 10517, p a g es 220 to 229, w h ic h I w h ic h w e re p r e p a r e d b y P r o fe s s o r P e a r s o n p h y s ic a l v a lu e of p r o d u c tio n in th e d id not p resen t, a n d m y s e lf, w h ic h U n ite d S ta te s and but sh ow in th e w o r ld fo r m a n y y e a rs, a n d th e y sh o w th a t th ere h a s b een n o u n u su a l p r o d u c tio n . B u t t h e d e p r e s s io n is c a u s i n g u n u s u a l u n d e r p r o d u c t i o n . S e n a to r C o u z e n s . W o u ld y o u d is c r im in a te th e re b e tw e e n th e f a c i l it ie s f o r p r o d u c t io n a n d th e a c tu a l p r o d u c t io n ? I s th e re n o t a d iffe r en ce th ere? M r . W a r r e n . Y e s ; t h e r e is a d iffe r e n c e b e tw e e n a ctu a l p r o d u c tio n , b u t I in g ly o u t o f lin e w it h do th e n o t th in k th a t th e a ctu a l p r o d u c tio n fa c ilitie s a n d fa c ilitie s w hen we are are th e s tr ik w o r k in g in a n o r m a l s itu a tio n . S en a tor C o u zen s. A re you ta lk in g now as an is o la t io n is t or an in t e r n a t io n a lis t ? S e n a to r w hen M r. W arren. O h , no. C o u zen s. I do n o t th in k you can t a lk as an is o la tio n is t it is e v id e n t t h a t m a n y o f t h e c o u n t r ie s o f t h e w o r l d can not p u r c h a s e p r o d u c t s w h ic h w e h a v e fa c ilit ie s fo r . S e n a to r F l e t c h e r . T h e tim e c o m e s w h e n you can n o t a d o p t th a t r u le . M r . W a r r e n . W e ll , t h e r e a re o t h e r c o u n t r ie s b e s id e s u s s u ffe r in g u n d e r th e sa m e d iffic u lty . M r. W arren . I I am am s a y in g n o t s a y in g w h a t th e th a t y o u e ffe c t is on e m p h a s iz in g is n o t w a g e s , b u t th e t h in g I s h o u ld c itie s . n o t cu t w ages W hat I am at r e a lly w a n t to b r in g o u t b y c o n tr a s t is d e b ts . S e n a t o r G o r e . T h a t is o n e r e a s o n w h y t h e r e n t s a r e s o s t u b b o r n in g o in g R. th is M r. W a r r e n . E ith e r on e. lim it a t io n Y o u ca n n o t c a r r y th a t to o fa r . a ll. H . ch an ged dow n. The c a p ita liz a tio n M r. W arren . Y es. in b u ild in g s . I f a m a n h a s a m o rtg a g e on a b u ild in g h e d o e s r e d u c in g ren ts. W e dow n. h ave em p ty W e h a v e a g r e a t r e s is ta n c e t o p r o p e r tie s b e fo r e we r e d u ce ren ts. I t is ju s t a r e s is ta n c e w h ic h is n o t th e fa u lt o f a n y b o d y . B u t ta k e th e sh o e in d u s tr y , fo r w e ca n use. C e r ta in ly th e y are o v e r p r o d u c e d , a n d th o se fa c to r ie s c a n n ot be used in becau se not p u r c h a s in g got n o t w a n t r e n ts t o g o d o w n , a n d i f th e o w n e r th in k s h e h a s a n e q u ity h e d oes n o t w a n t ren ts to g o S en a tor C o u ze n s. Y e s. in s ta n c e . T h a t in d u s t r y h a s a c a p a c it y f o r t w o o r t h r e e tim e s as m a n y s h o e s a s to th ey w a it have and keep got on th e th e e x p a n d in g , th e o r ie n ta l a n d or p ow er. m u st p rod u cts o f oth er c o u n tr ie s , N ow , we be have we is o la tio n is ts e n o u g h t o c o n s e r v e o u r fa c ilit ie s f o r o u r o w n c o n s u m p t io n ? M r. W a r r e n . W e ll, o f cou rse, to a very la r g e e x te n t th e w h o le w o r ld s itu a tio n h a s b e e n b r o u g h t o n b y th e sa m e s itu a tio n as w e h a v e , w h ic h I t h in k I c a n s h o w a little fu r t h e r a b o u t o n th is p o in t . A nd MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 72 it is u n d e r c o n s u m p t io n c u lt y , I th in k . S e n a to r G ore. In ra th er th a n c o n n e c tio n o v e r p r o d u c tio n w ith w h ose t h a t is t h e sta tem en t d iffi w ere th ese c h a r t s p r e s e n te d in th e H o u s e h e a r in g ? w h ic h I h a v e h a n d e d t o y o u . S e n a to r G ore. I n M r. T h e y a r e in th is b u lle tin , A nd I w ill g iv e you th e c o n c lu s io n s very th e U n it e d S ta te s n o r m a lly in c r e a s e s a b o u t 4 p e r c e n t p e r y e a r . in c lu d e s e v e r y t h in g . e v e r y th in g . A ll th e a g r ic u ltu r e and a ll th e That lu m b e r and S e n a to r C o u z e n s . T h e r e w e r e s o m e in d u s tr ie s th a t e x p a n d e d at a S e n a to r we have gone as in d u s tr y p rod u cts o f fa r beyond th e p o in t w h ere we can con su m e th e in d u s tr y ? W arren. I th in k a s h o r t tim e not w e have F o r e x a m p le , d u r in g over a p e r io d expanded th e p a st fe w our o f 30 liv in g or 40 years, bu t a litt le too y ea rs th ere has b een s lo w ly . a vast p o r g o t w h a t p ercen ta g e th e a u to m o b ile is p h y s ic a l v o lu m e th e ir o n of b a s ic p r o d u c t io n , w h ic h a n d n o t w h a t w a s d o n e w it h it. an d so on. in c lu d e s a ll I t in c lu d e s a ll th e lu m b e r T h e p r o d u c t io n o f m a n u fa c t u r e s in c r e a s e s m o r e r a p id ly . S e n a t o r G o r e . T h a t is in t h e U n it e d M r. W arren . Y es. ra tes fo r 1839 to T h e w o r ld p h y s ic a l v o lu m e o f p r o d u c t io n n o r p er cen t p er year. som e grou ps in The w as n e a r ly m e ta ls , o t h e r th e p r o d u c tio n 6 th a n per fu e l w a s in te r U n ite d S ta te s are as and A nd p ow er, if 7 we per ta k e cen t. fo llo w s : w as ta l in v e s tm e n t? and A ll p rod u cts put A nd fo r th e w o r ld , Y ou see w e are s te a d ily b e c o m in g I t i s a b o u t 1 .7 p e r c e n t i n c r e a s e i n p r o d u c t i o n m ore e ffi p e r c a p ita p e r S e n a to r C o u zen s. W h a t d o y o u h a v e t o s a y t o t h a t q u e s tio n th a t I a s k e d th e p r e v io u s w itn e s s w it h r e s p e c t t o w h e th e r w e c a n k e e p o n e a r n in g s out of in d u s tr y and s a v in g th em fo r fu r th e r q u ite r a p id ly W arren. I t h in k th a t we p u t o u r e a r n in g s in to m oney p r im a r ily . I t g iv e s had T h a t is l e f t o v e r f o r c a p i in m in d , S e n a to r ? keep it on not be g o in g in t e r e s tin g in p lo w in g to a s c e r ta in ba ck in to how in d u s tr y a ll th e s u r p lu s e a r n in g s ? M r. W arren . Y es. tren d of s a v in g ; M r. out s a v in g and W a r r e n . N o th in g of lin e v a lu e s a v in g a n d n o t c o n s u m in g o f th a n w hat m oney. N ot th row s we are ju s t to put o r b u ild in g th e p o in t g e ttin g in to m ore enough of r ig h t m a n u fa c tu r e r s , v ie w of now . but p r o d u c tiv e o f n o n p r o d u c t iv e p e o p le The r is e m ore in in d iv id u a ls . th e That S e n a t o r G o r e . I t is a b u y e r ’s s t r ik e , d o n ’t y o u t h i n k ? th e w o rd . cau gh t a g a in w ith o u t S e n a to r have p r o b a b ly c o n s u m p t io n . not T h a t is , th e r e a r e m i l W agner. Y e s; p o in t o f v ie w . to n o t th e m u st A are any b e lo w th e sta n d a rd num ber of ju s t ifie s u s in h a v in g . lig h t s , of p e o p le w hat th e h ou ses in th e e ffic ie n c y u n p a in te d , c itie s o f who th e poor are hou ses. liv in g A m e r ic a n fa r p e o p le N o w , s o m e w h e r e y o u h a v e t o b r in g a b a la n c e u s in g t h e y e a r ’s e a r n in g s — a b a la n c e b etw een th a t y e a r a n d w h a t y o u p u t in to fa c ilit ie s f o r m e r e ly e x p r e s s in g a n o p in io n . C o u zen s. T h e ban k ers c a l l i t a b u y e r ’s s t r i k e . A nd som e of th em spend. save A nd m ost th a t o ld con su m e fu tu r e p r o d u c tio n . I I d o n ’t lik e w ill n e v e r b e sa y , “ W it h o u t m ust used p lo w to ba ck be m ade your by in d u s e a r n in g s in to to m any of th em so of we g o in g a lo n e , b u t th e w hat fig u r e are on we earn. s a v in g ju s t a g e n e r a tio n to get now . to get over in to th e s itu a tio n in d iv id u a ls , fig u r in g A th a t t h is is n o t g o i n g t o m an w ho h e re a fte r. H e is g o in g does not o f th a t w e th rou g h w ant tO' S e n a t o r C o u z e n s . W h a t d o y o u t h in k a s t o c o n s u m e r ’s c r e d it a s a n e ffe c t o n M r. W th e s itu a tio n ? ar r e n en orm ou s. . It is ra th er m in o r . That F o r e x a m p le , in th is lis t o f is , d e b ts in th e s itu a tio n is so 19 29 th e r e ta il in s t a l l m e n t p a p e r is e s t i m a t e d a t $ 3 ,0 0 0 ,0 0 0 ,0 0 0 o u t o f $ 2 0 3 ,0 0 0 ,0 0 0 ,0 0 0 . S en a tor I h a v e n o fig u r e s o n th is . sta tem en t you w hat you is g o i n g a good w ill ta k e u s m an w h o has been ca u g h t b y c a p it a lis t c la s s g e t c a u g h t a g a in . e le c tr ic T h ere can m o n e y .” M r . W a r r e n . N o w , it a w ith o u t you T h e p e o p le h a v e s u ffe r e d , a n d t h e y s a y “ I th is w hat you C o u ze n s. W o u ld fu r th e r w e ca n lio n s o f fa r m s in th e U n it e d S ta te s w it h o u t a n y fa c ilit ie s f o r t a k in g and of M r . W a r r e n . I h a v e n o s t a t is tic s o n t h a t s u b je c t . w ant p r o d u c tiv e in d u s tr y ? t r ia lis ts in s ta b ility m o n e y in t h e h o u s e .” y e a r in th e U n it e d S ta te s . S en a tor of w e m u s t n o t s p e n d th e m o n e y w e g e t ; w e m u s t k e e p it. M r. W arren. Y es. b a th , m ust A ls o b e w a s w o n d e r in g i f y o u h a v e fig u r e s as t o w h a t T h a t is M r. W arren. Y e s ; enough th e ir we S e n a t o r C o u z e n s . T h a t is w h a t I m e a n t ; y e s . fa c ilitie s . m in e r a ls d id it? our becau se is e a r n e d p e r y e a r t h a t is n o t c o n s u m e d ? F u el and a ll S e n a t o r F l e t c h e r . T h a t d id n o t e x c e e d th e in c r e a s e in p o p u la t io n , ta k in g S om ew h ere fir s t t h is g r o u p a jo l t a n d t h e n t h a t g r o u p a jo lt . in d u s tr ie s 3 .1 5 p e r c e n t . M r. W arren. It a n d fe e d o f fo o d O f a g r ic u ltu r e , 3 p e r ce n t. cen t. to g e t h e r , th e a v e r a g e r a te in c r e a s e d 4 p e r c e n t. c ie n t. p r o d u c tio n . S e n a t o r C o u z e n s . M y ju d g m e n t is t h a t w e h a v e g o n e o f f o n a w i l d s in c e th e w a r . 1 9 1 4 th e r a te in c r e a s e in p r o d u c t io n cro p s w as 3 p er cen t p er year. pow er as w e ll, th a t h a v e n o t in c r e a s e d w ith S e n a to r W a g n e r . T h e y d id n o t e a rn e n o u g h t o d o th a t. m u ch S ta te s? fe r e d w it h b y th e w a r a n d h a s b een lo w The accord an ce h a v e a b a la n c e b e tw e e n c a p it a l fa c ilit ie s a n d c o n s u m p t io n . S e n a to r B u t a b o u t 4 p e r c e n t p e r y e a r is t h e n o r m a l in c r e a s e f o r a ll. i n c r e a s e s 3 .1 5 th e r u r a l c itie s in S e n a to r W a g n er. I per year? M r . W a r r e n . T h e a u t o m o b ile in d u s t r y is n o t in c lu d e d in t h is f i g It fa rm s , b u t in c o n s u m p t io n I t t h r o w s t h e e a r n in g p o w e r o f d iffe r e n t c la s s e s o u t o f lin e . C o u zen s. H a v e y o u in d u s tr y e x p a n d e d am w onder a s w e a r e ju s t ifie d in g o i n g b a c k a n d p l o w i n g o u r e a r n in g s b a c k in t o M r. M r. W arren. Y es. in I tw e e n in c r e a s e d c o n s u m p t io n a n d in c r e a s e d le is u r e . g r e a te r ra te th a n th a t, w ere th e re n o t? F rom in d u s tr y . t io n o f th e p o p u la t io n , n o t o n ly in th e r u r a l c o m m u n itie s a n d o n th e T h e p h y s ic a l v o lu m e o f p r o d u c t io n o f a ll k in d s o f c o m m o d it ie s in m a lly w h e th e r p r o d u c tiv e over b r ie fly . u re. a n d p u ttin g y o u r m o n e y b a ck in to M r. I t s h o w s th e o r ig in a l fig u r e s a ls o . th is b u lle tin ? W arren. Y es. y o u r b u s in e s s a n d k e e p o n e x p a n d in g e x p a n d in g M r . W a r r e n . I t h in k w it h M r . W h i t e ’s. 73 s p e c ific C o u zen s. Y e s ; fig u r e s as th e but I w as p s y c h o lo g ic a l not s p e a k in g in flu e n c e on so m u ch th e o f th e p o p u la t io n 74 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR w h e th e r y o u s p e n d it in c a s h o r w h e t h e r y o u s p e n d it o n in s ta llm e n t 1860. b u y in g . th in g s c o n tin u e d Y ou had s u m e r ’s c r e d it . it p rea ch ed in t o you day in and day ou t— c o n I t u s e d t o b e a d is g r a c e t o b e in d e b t , so t h e y c h a n g e d M r . W a r r e n . B u t i f w e g o o n w it h d e fla tio n , it w ill b e a d is g r a c e to b e in d e b t a g a in . S e n a t o r G o r e . D o n ’t y o u in th e co u n try th in k th a t th e re a so n w h y th e sta n d a rd h a s la g g e d b e h in d is t h a t th e in s ta llm e n t c r e d it b u y in g d id n o t c o m e o u t in t o th e c o u n t r y as m u c h as it d id in W arren. I t h in k it w as p r im a r ily becau se of th e d is p a r ity b e tw e e n p r ic e s b r o u g h t a b o u t b y th e f a l l o f p r ic e s in 1 9 2 0 . p r ic e s n e v e r g o t f u l l y b a c k in p r o p o r t io n h a d n o t e v e n r e a c h e d t h a t in 1929in to in c r e a s e w h ile g o ld v a lu e s t e a d ily ro se . 1915. in g , b u t g o ld P r o d u c tio n The in flu e n c e h e a r in g s (p p . h ere. P r o b a b ly you d e c lin e d a n d its th e n b e g a n t o in c r e a s e a n d r e a c h e d S in c e th a t tim e it h a s b e e n lo w . p r o d u c tio n H ou se on e o r tw o T h e p r o d u c tio n o f o th e r p r o d u c tio n I t is n o w in c r e a s is s t i l l le s s t h a n t h a t o f 2 3 y e a r s a g o . o f g o ld s u p p ly on 2 2 9 -2 3 8 ), do not p r ic e s a ls o th e care sam e to w a s p resen ted m a te r ia l read it. w h ic h B ut I in th e we have w ill ju s t g iv e p o in ts . S e n a to r G o re. W a s th a t r e c e n tly , D o c t o r ? th e c it y ? M r. lo n g p e r io d o f d e c lin e th e n set in . a p e a k in t o c o n s u m e r ’s c r e d it . o f liv in g A 75 e ffe c t fe e d in g th e c ity t o th e r e ta il p r ic e s . S o th a t th e fa r m u n r e a s o n a b ly T h e fa rm c h e a p ly . T hey p o p u la t io n w a s That happens in M r . W a r r e n . Y e s ; in th e h e a r in g s o n th e sa m e b ill in th e H o u s e . S e n a to r F le tc h e r . D o c to r , m a y I tio n is s t ill c o n t in u in g ? That a s k : I s it y o u r v ie w th ere has been no t h a t d e fla ch eck or stop in d e fla tio n ? M r. W arren . Y es. T h ere has been n o ch eck . e v e r y ca se w h e n p r ic e s d e c lin e . A n d in e v e r y ca s e th e fir s t d e fla t io n , S e n a t o r F l e t c h e r . Y ou t h in k it is s t ill g o i n g o n ? a s in a s in M r . W a r r e n . T h e r e is n o e v id e n c e t h a t I h a v e se e n o f a n y c h e c k . 1920, an d as in 1865, an d 1 8 1 5 , t h e fir s t e ffe c t o f th e d e S e n a to r F l e t c h e r . D o y o u th in k th a t i f w e t r y to p a ss so m e le g is p r e s s i o n is t o d r o p r e t a i l p r i c e s w i t h t h e c o s t o f d i s t r i b u t i o n r e m a i n in g u p . T h e fa r m e r th e n g e ts a s m a ll p r o p o r t io n . sh orta g e of b u ild in g you h a v e th is s itu a tio n . t h e c i t y f o r le s s t h a n h is n o r m a l s h a r e . in g b o o m . and The 1920 sh are. w a s th e T hen th e fa c t c itie s , th a t th e not fa r m e r w h ic h fo llo w e d 1865 fa rm e r k n o w in g got th a t le s s t h a n th is la tio n h e re w e m ig h t c h e c k th a t? M r. W arren . I fe e d in g T h a t a ccen tu a tes th e b u ild N o s m a ll fa c t o r in th e b u ild in g b o o m fo llo w e d n orm al A n d th e n w ith a w as h is not a its n a tu ra l causes, can n o t see if you th in k we had a b u s in e s s c y c le b a s is o f c h e a p f o o d , w h ic h c o u ld n o t b e p e r m a n e n t . w it h ? a tte n tio n to th a t r e p e a te d ly p a n ic w a s c o r r e c t ly s in c e fo r e c a s te d by about th e 1916. fa c t th a t I n c id e n ta lly , fo llo w in g th e W a r it w a s e x a c t ly n in e y e a r s a ft e r d e fla tio n b e g a n b e fo r e th e b r e a k cam e. R e tu r n in g to th e p h y s ic a l v o lu m e o f p r o d u c t io n th a t I h a v e m e n t io n e d . duced In 104. 1914 we p rod u ced T h e p r o d u c tio n 74 p h y s ic a l o f th e N a tio n u n its . In rose fr o m 1929 we 74 to In S en a tor M r. W a r r e n . P r o d u c tio n a b ou t 85. is I t is v e r y lo w . E n t ir e ly out B ut th is S e n a to r T o w n s e n d . A n d th is y e a r it w ill b e v e r y m u c h lo w e r t h a n b u s in e s s la te r we r e c o n s t r u c t io n v a r io u s of is la s t y e a r . I th in k oth er d e te cte d th a t _ w ill be a b le fin a n c e m easu res act th a t to te ll and we th e have a d o p te d , y o u d o n o t t h in k th e y h a v e h a d a n y e ffe c t y e t ? M r. W arren. W e le n d in g p la n , and can have U n le s s p r ic e s not fo r e x a m p le . not pay h is a in g th e d ebt bu rd en th e fa r m e r in s ta llm e n t , h e A nd r is e , t w o stop p ed I f d e p r e s s io n . ow es can th e get in s ta llm e n ts fr o m one w ill n ot be Take F ederal a n o th e r n e x t y e a r h e w ill h a v e tw o n e x t y e a r th a n o n e w a s t h is y e a r . . s to p p in g re a l esta te W e m ig h t g e t a little r e c o v e r y . ^ I of good needed. a n d th e se p a y th e in s ta llm e n t . T o w n s e n d . T h a t is p r o d u c t i o n ? o f lin e . W arren. O ne G la s s -S te a g a ll A c t bank 1931 it w a s a b o u t 85. c ity g o t a m ic r o s c o p e th a t y o u w h e th e r it w a s a c y c le . S e n a to r F l e t c h e r . W it h p ro 104. d e fla tio n u n til I t w o u ld n e e d a m i c r o s c o p e , w o u l d n ’t it ? M r. th is C iv il of th a t, la s t y e a r t h e r e w a s a lit t le b u s in e s s im p r o v e m e n t , w h ic h w a s a c y c le o n t o p o f t h e d e p r e s s io n . S e n a to r G ore. H a v e y ou W e h a v e c a lle d ch an ce th em liq u id a t e d , w h ic h is s e v e r a l y e a r s . n o t k n o w in g th a t, th e y b e g a n to e x p a n d th e ir h o u s in g n e e d s o n th e p e rm a n e n t t h in g , a n d th a t p r o s p e r ity h a d n o t b e e n m a d e p e rm a n e n t, any c a ll any lo a n to a n o th e r to in s ta llm e n ts . e a s ie r t o H e is m e r e ly p u t t i n g it o ff . agen cy th e la n d does n ot pay S h ift pay th e o t h e r w o r d s , in s te a d o f o v e r p r o d u c in g w e d eb t. . S e n a t o r G o r e . T h e b r e a k in th e s t o c k p r ic e s in th e la s t s ix w e e k s a re s o m u c h m o r e b e lo w n o r m a l th a n e v e r b e f o r e in th e h is t o r y o f th e s in c e th e s e m e a s u r e s w e r e e n a c t e d h a s b e e n th e w o r s t b r e a k w e h a v e co u n try . had. A b o u t 37 p e r cen t. M r. W a r r e n . T h e r e are o n ly th a t ? M r. W arren . Y es. In S e n a to r T o w n se n d . I f w e fo llo w th a t c y c le a lo n g ? M r. d e fla tio n W arren. I f th a n th a t. 85. we go on w ith we w ill b e even lo w e r A g r i c u l t u r e h o ld s u p , o f c o u r s e , a n d in d u s t r y is le s s t h a n W a g n e r . W e l l , i s n ’t t h e r e i f t h is d e fla t io n a danger of s o c ia l th in k th ere is g r a v e dan ger. I t h in k d e fla tio n . g o ld on th e The W e h a v e m a d e a s t u d y o f th e r e la t io n o f g o ld t o p r ic e s f o r a lo n g d eb ts w ere in c u r r e d , and th e oth er is fo r vogue fin d in g d eb ts. One a t th e tim e som e m oney to o r g o in g b a n k ru p t. L e t m e p ic k o u t fr o m it is s o m e t h i n g "we m u s t c a r e f u l l y c o n s i d e r b e f o r e w e g o a h e a d w i t h T h e w o r ld cu res M r . W a r r e n . W e l l , t h a t is r e s t o r in g t h e p r i c e le v e l. T r y in g to cu t e v e r y th in g d o w n . o f tim e . p o s s ib le S e n a to r G o r e . O r d o in g lik e F r a n c e d id . u p h e a v a ls c o n tin u e s ? M r. W arren . I p e r io d th e tw o is t o r e s t o r e t h e p r i c e le v e l t o t h e o n e i n p a y th em E v e r y t h in g p u t t o g e t h e r is 85. S e n a to r o f th em p r o d u c tio n w a s h ig h fr o m 1848 to ou n ces. g o ld w o r ld B y th is s t u d y o f m a n y y e a r s t w o o r th r e e p o in t s s itu a tio n . to ta l stock o f m on eta ry g o ld in 1870 w as 1 3 1 ,0 0 0 ,0 0 0 1 8 9 0 t h i s h a d i n c r e a s e d t o 1 6 9 ,0 0 0 ,0 0 0 o u n c e s . T hen as 76 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR now som e p e r s o n s s a id th e tr o u b le c o u ld n o t be g o ld M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR as th ere w as w o u ld ca u s e a fir s t p e r io d o f p r o s p e r it y a n d th e n a p e r io d o f c o lla p s e m o r e g o ld th a n e v e r b e fo r e in th e h is to r y o f th e w o r ld . I f th ese w o r ld w ith g o ld sta ck s a re p la c e d 1 8 8 0 -1 9 1 4 a s 1 0 0 , th e fig u r e T h ese w ere th e r e la t iv e n u m b ers o f th e w ere and 42 th in g s . I f we a m o u n ts o f p r o d u c tio n 74. G o ld d iv id e fo r of an in d e x g o ld in th e a ll c o m m o d it ie s stock s th e on g o ld in c r e a s e d by th e oth er fo r th e 73 u n its by get a r a tio of 99. 7 4 u n its A nd p r ic e s of p r o d u c tio n fe ll to 98. of G o ld 115. T h is of tw o years o f th em oth er U n ite d 57 d iv id e d o th e r t h in g s began we to 19 14 th e r a tio in 7 5 -y e a r r e la t io n s h ip can p r o d u c tio n of s a id , p u b lis h e d oth er in be th in g s . th e expressed as fo llo w s : d iv id e d b y th e w o r ld H ou se The d e ta ils h e a r in g s . A of in th is graph are, as I s h o w in g It W a r r e n . 1689 is r e p r o d u c e d graph in in F orm E c o n o m ic s th e h e a r in g s on page th a t 232. you B y o n e w ill see t h a t th e p r ic e le v e l f o llo w e d have lo o k in g in th e U n it e d S ta te s fo r 30 years b e fo re th e c y c le s ; a T h a t le a d s m e t o q u e s tio n s o f lin e ? we ask . th is , w h ic h W hy w ere I th in k p r ic e s h ig h ? is t h e key to W hy w ere to g o ld a n d le a d s t o e n d le s s c o n f u s io n . and or s u p p ly d ecrease A n in c r e a s e fo r g o ld in of in A n The in c r e a s e dem and th e s u p p ly d ecrea ses th e fo r w h e a t. th e of p r ic e fo r w heat or of it. The in and in to a g o ld an in c r e a s e The in s u p p ly w as th a t A th e to fe w 40 to o f th e p r in c ip le a p p lie s to 50 on ta k en cen t to fu lly in t o th in k in g th a t g o ld g o ld T h is cra sh by tid e . The or a lm o s t d o u b le , w h a t ' it w h e a t. In h a s n o th in g th e 50 per to th e U n ite d co u n try c y c le The sou n d n ess c o n tin u a n c e 1925 o f to O n ly cam e A by of p r ic e s in 1929 a lo n g to th e m any fe w of th e b a s is , m o s t o f t h e m b e fo re had th e g o ld c y c le is r h y t h m ic a l flu c ju s t b u s in e s s or h e lp in g th e w o r ld sta n d a rd . p a n ic as a c y c le t id a l fo r g o ld w ave a s s u m p tio n and m ay le d to be th e I f t h e d e m a n d f o r g o l d is t o b e w a s d u r in g th e w ar p e r io d , th e v a lu e of a am ount o f T h e c o u n t r y w a s n o t s h o r t o f c o n fid e n c e in o th e r w o rd s , th e th in g p r ic e s b u t th e r is e in g o in g to d o a b o u t it ? to e x p la in p r ic e s . T hen to s u p p o r t th e p r ic e le v e l t o is n o t m e r e ly t h e d e c lin e in th e q u e s tio n is : W h a t are we E ffic ie n c y in t h e u s e o f g o l d is o n e o f t h e n e x t q u e s t io n s . de p r ic e s th is 40 and e ith e r F rom a fu ll g o ld a b u s in e s s on to w a s d u e to th e r e tu r n in g d e m a n d by a in o f th e g o ld e s ta b lis h e d w ere re tu rn le v e l E n g la n d b a s is . p re -w a r . th e we c o u n tr ie s a s s u m p tio n , b u t th e y w e r e n o t 1929, b u t th e w o r ld w a s s h o r t o f g o ld w h ic h b u s in e s s w a s a d ju s t e d . fo r o f p r ic e e c o n o m is ts th e above re sto re a The c o u ld a le a d in g p a r t in th e a s s u m p tio n per a c c o m p a n ie d T h e a m o u n t o f c u r r e n c y a n d c i r c u l a t i o n p e r d o l l a r o f g o l d is s h o w n in th e a c c o m p a n y in g t a b le . T h e m o n e ta r y c ir c u la tio n p e r d o lla r o f g o ld B ank of h a s s te a d ily r is e n . e c o n o m is ts a re m is le d have th e h o u s e , r a ilr o a d , o r a b u s h e l o f w h e a t is r e d u c e d , a n d n o w heat w h e a t p r ic e s as th e s u p p ly o f sam e of th a t th a t th e y e c o n o m is ts in m a jo r it y r e e s ta b lis h p re -w a r . b a s is , o b s e r v in g a ll c o u ld le v e l in e r r o n e o u s id e a t h a t p r o s p e r i t y is ju s t a r o u n d t h e c o r n e r . dem and g o ld above T h is g o l d p a n i c is n o t a b u s in e s s c y c le . T h is p r ic e s th e of cen t th e p r ic e b a s is , a s s u m e d A m e r ic a n s to o k debt tu a tio n . out dem and r a is e s per I t is n o t a q u e s tio n o f c o n fid e n c e . m any of 1 9 2 1 -1 9 2 9 a g o l d - e x c h a n g e b a s is . T h e g o ld s t a n d a r d w a s f u l l y e s ta b lis h e d . 1915 th ey p r ic e th e g o ld w h e a t. it a r e ju s t as im p o r t a n t in w heat and dem and fo r f o r o t h e r c o m m o d it ie s . M any by c o u n tr ie s h a d our is a r a t io o f th e s u p p ly o f g o l d a n d d e m a n d f o r w h e a t t o th e d e m a n d m and to 50 c o n fid e n c e c a n c h a n g e it. is a h a lf-t r u t h w heat to a c c o m p a n ie d I t is c o m m o n l y s a i d t h a t s u p p l y a n d d e m a n d g o v e r n p r i c e s . fo r sta n d a rd step s w ere little P r ic e s w e n t o u t o f lin e w it h th e 7 5 -y e a r r e la t io n s h ip , f r o m t o 1 9 3 1 , a n d t h e y a r e n o w b a c k a g a in . to a g o ld d eb ts w a s b a sed g o ld s u p p ly d iv id e d b y o u r p r o d u c t io n o f o t h e r t h in g s e q u a lle d o u r p r ic e s . T h e s h o r t t im e flu c t u a tio n s a r e l a r g e ly b u s in e s s o v e r e x p a n s io n a n d a lit t le u n d e r e x p a n s io n . g o ld g o ld a t th is w ar le v e l o n F rom 40 re tu rn p r ic e go o th e r th in g s fo r 75 y e a rs b e fo r e th e w a r. S im ila r ly to at th e p u b lic . h ere. th e r a tio o f g o ld U n ite d stood lis te n e d is on p a g e 1689. T h o s e o f y o u w h o w is h t o tu r n t o it m a y see it th e r e . S e n a to r G ore. W h a t p a g e ? M r. re tu rn b a s is . S ta te s c a lle d a tte n tio n t o th is fo o lis h have th is th e A ft e r th e w a r w as o v e r o n e a f t e r a n o th e r o f th e c o u n tr ie s b e c a m e in t e r e s te d in ce n t a b o v e p re -w a r . p h y s ic a l v o lu m e A s a r e s u lt, p r ic e s in b a s is r o s e t o o v e r 2 0 0 . in g to a g o ld d e s ir in g w as P r ic e s lo s t n e a r ly a ll o f t h e ir s u p p lie s . S ta te s o n a g o ld S ta te s P r ic e s th e n w e n t to 117 o n a n d 1880 to 19 14 b a se. E n g la n d e q u a lle d w o r ld g o ld w o r ld le ft th e g o ld th a n I f w e d iv id e th en c re a s e m o r e r a p id ly th a n o t h e r t h in g s so th a t in m o st o f th e g o ld -u s in g s ta n d a r d a n d m o s t o f th e c o u n tr ie s ce a se d t o b id f o r g o ld , a n d m a n y t h in g s , tn e T h e p r ic e s a t th a t tim e w e r e 13 1. F o r h a lf a g e n e r a tio n in d e x th ese b y th e 42 g iv e s 136. o f g o ld The r a p id ly a n d t o fa ll b e lo w th e 100 m a r k o n t h e d e c lin e . 1 8 9 0 is 7 3 . w o r ld . fo r le s s s o th a t p r ic e s w o u ld b e e x p e c t e d t o o v e r s h o o t t h e 2 0 m a r k o n th e r is e n u m b e r b a s is , 1 8 7 0 is 5 7 a n d 77 d e c lin e d . d e p o s its per d o lla r B u t th e re h a s b een n o s tr ik in g a n d s u d d e n n o t been fo llo w e d by a r e a c tio n . B e fo r e th e g o ld have in c r e a s e th a t h a s w a r, a to ta l o f about t o d o w it h th e p r e s e n t s it u a t io n , s in c e n o p h e n o m e n a l c h a n g e in th e $11 o f m o n e ta r y c ir c u la tio n s u p p ly o f g o ld dem and t o b e n o r m a l. a ffe c ts th e o f p o r t e d w it h o u t p a n ic , b u t n o p h e n o m e n a l in c r e a s e in t h e e ffic ie n c y in th e use o f g o ld h a s o c cu r re d . has occu rred v a lu e of g o ld s in c e th e 1929. sam e as T hey it fo r g e t a ffe c ts th e th a t p r ic e I f th e r e w e r e in th e w o r ld ju s t t w o c o u n t r ie s u s in g g o l d a n d e a ch o f th em c o n tin u e d u s in g g o ld oth er co u n try fir s t co u n try p r ic e s S u ch in th e w o u ld d e c id e d oth er phenom enal u sed h a lf o f it , a n d and d is c o n tin u e d be ex p ected to to r e e s ta b lis h co u n try ch an ges w o u ld in th e p ig s . as cu rre n cy i f o n e o f th e se c o u n tr ie s d is b id d in g d o u b le . fo r I f its cu rren cy be ex p ected c ir c u la tio n o f it, p r ic e s at a la te r and to be th e b id cu t fir s t in th e d a te th e fo r in A p p a r e n tly D e b ts, ta x es, a n d to a c o m m o d it y a ll th e fo rm e r m ost p r ic e d e p o s its p e r d o lla r a little m o re th a n oth er le v e l g o ld -u s in g and 40 b u s in e s s to w o r ld 50 th is c a n r e la t io n s h ip s per re tu rn s o f g o ld cen t to above g o ld , it now are seem ed be su p a d ju s t e d p re -w a r . is g o ld th ere h a lf! n o m e n a l in c r e a s e o c c u r s in t h e e ffic ie n c y w it h w h ic h g o l d is u s e d . co u n try is g o l d enough 120290—32----- 6 to m a in ta in p re -w a r p r ic e s , u n le s s I f d o u b tfu l som e if phe N o MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR such increase in efficiency is probable after 18 years of monetaiy chaos Decreased efficiency and prices below pre-war are more The chart shows the monetary circulation plus bank deposits per dollar of gold in a long time trend. They were high before the panic of ’97. In the early stages of the war we had an influx of gold, and so the circulation and deposits were very low per dollar of gold because a lot of gold suddenly came in. Our circulation and de posits were very high before the panic of 1920 occurred. They were high again in ’29. I t looks as if our gold was over used in 1929. Senator W agner. By “ over used” you mean what, more credit? Mr. W arren. Used so much that we got scared. Senator Gore. Just what idea do you attach to the world circula tion there, Doctor? Mr. W arren. I t is the monetary circulation as reported by the Treasury Department. Senator Gore. Oh, yes. 78 ^ F im ire 1 shows the total monetary circulation plus bank deposits in the United States per dollar of gold. The credit structure based on a gold dollar appears to have been too high in 1.920 and -L929. (Table 6 and a graph were here placed in the record as follows.) T ab le 6 .— M o n e t a ry g o ld , m o n e y in ^ w U t i o n m d b a n T c d e p o s its in th e U n ite d S ta te s o n J u n e SO, 18 8 0 -19 31 Year 1880___ 1881___ 1882___ 1883 1884 1885 1886 1887— 1888— 1889— 1890— 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900— 1901— 1902— 1903— . 1904.. 1905— 1906— 1907— 1908.. 1909— 1910— 1911— 1912.. 1913— 1914— 1915— 1916— 1917— 1918— 1919— 1920— 1921— 1922— 1923— 1924— 1925— 1926— 1927.. 1928.. 1929.. 1930». 1931 »- __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ .. . . . . Mone Total Total tary cir Mone Mone individ culation monetary tary gold tary cir Deposits coin and circula ual de culation per dollar and de posits 4 per dollar of gold posits per bulletin > tion ! dollar of of gold gold omitted) omitted) omitted) (000,000 (000,000 (000,000 352 478 507 543 546 589 591 655 706 680 696 647 664 598 627 636 600 696 862 963 1,034 1,125 1,193 1,249 1,328 1,358 1,476 1,466 1,618 1,642 1,636 1,753 1,818 1,871 1,891 1,986 2,445 3, 220 3,163 3,113 2,865 3,274 3, 785 4,050 4, 488 4,365 4,447 4,587 4,109 4,324 4,535 4,956 973 1,114 1,174 1,230 1,244 1,293 1,253 1,318 1,372 1,380 1,429 1,497 1,601 1,597 1,661 1,602 1,500 1,641 1, 838 1,904 2,081 2, 203 2,279 2,400 2,553 2,623 2,775 2,814 3,079 3.149 3.149 3,263 3,335 3,419 3, 459 3,320 3, 649 4,066 4,482 4,877 5,468 4,911 4,463 4,823 4, 849 4,815 4,885 4,851 4,797 4, 746 4,522 4, 822 2,134 2,539 2,756 3,305 3,419 3,776 4,061 4,197 4,665 4,627 4,651 4,921 4,945 5,095 5,688 6,769 7, 239 8,461 9,105 9,554 1 0,001 11,351 12, 216 13,100 12, 785 14,108 15,283 15,906 17, 024 17,476 18, 518 18,966 22, 526 26, 058 27, 716 32,629 37,268 34, 791 37,144 39,984 42,904 46, 715 48,827 51,062 53,245 53,158 53,564 50,485 2. 76 2. 33 2.32 2. 27 2,28 2.20 2.12 2.01 1.94 2. 03 2. 05 2.31 2.41 2.67 2. 65 2.52 2.51 2.36 2.13 1.98 2.01 1.96 1.91 1.92 1.92 1.93 1.88 1.92 1.90 1.92 1.92 1 .86 1.83 1. 83 1.83 1.67 1.49 1.26 1.42 1.57 1.91 1.50 1.18 1.19 1.08 1.10 1.10 1.06 1.17 1.10 1.97 .00 6.06 5.31 5.44 8.82 7.64 7. 76 5. 05 4.84 5. 55 5. 83 6.49 7.03 7. 74 7. 42 7.74 8.24 7. 32 6.60 7. 03 7.00 7. 52 7.63 7.65 7.53 8. 36 8.28 8.94 7.90 8. 59 9. 34 9. 07 9. 36 9.34 9.79 9. 55 9.21 8.09 8. 76 10. 48 13.01 10. 62 9.81 9. 87 9. 56 10. 70 10.98 11.13 12.96 12.29 11.81 10.19 7. 06 6. 78 7. 58 7.88 8.80 9.44 10. 41 10.07 10. 26 10. 75 9. 68 8. 73 9.01 9.01 9.48 9.54 9. 57 9. 45 10.29 10.16 10. 86 9.80 10.51 11.26 10.93 11.19 11.17 11.62 11.22 10. 70 9. 35 10.18 12.05 14.92 12.12 10.99 11.06 10. 64 11.80 12.08 12.19 14.13 13.39 12. 81 11.16 F „ and Pearson, F. A ., Money and Prices, Farm Economics No. 74, p. p. 1696 1696, February, February, ^S tatistical Abstract of the United States 1930, United States Department of Commerce, No. 52, pp. ^ F ^ m i s s o to 1899 inclusive, Statistical Abstract of the United States, 1923 No. 46, p. 605,1924; and from ibSi, and from 1915-1929 from Statistical 79 Circulation and deposits per dollar Figure 1.—Monetary circulation plus bank deposits per dollar of gold in the United States, 1900-1931. Apparently, the money and credit structure per dollar of gold was too high in 1920 and in 1929 Mr. W arren. The figures I am giving are monetary circulation plus deposits. We have added the two together. For example, the monetary circulation plus deposits in 1929 amounted to a little more than $13. In 1931 they were reduced to $11. Senator Gore. As related to gold? Mr. W arren. Yes; for a dollar of gold. My conclusions are as follows: A rise in commodity prices to the level that prevailed when public and private debts were incurred would quickly restore equities, stop bankruptcies, start the sale of commodities, and restore employment. This does not mean that any commodity would be freed from fluctuations in its value due to changes in the production of it or demand for it. A restoration of prices to the level to which debts are adjusted is commonly said to be injurious to creditors. This is not the case. A slight decline is a benefit to creditors, by the amount which it unjustly takes away from debtors, but a drastic decline such as the 80 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR present one leaves such a high percentage of the debts unpaid th at creditors lose. Even if creditors do lose an opportunity for an unjust gain, there would be few individuals who would not be benefitted by stable prices. Because there are only a few persons who are not interested in the prosperity of some industry or in employ ment and who do not have dependents thus interested. The person who owns a house and who has life insurance and a job is a capi talist, a lender and a wage worker. Commodity prices can be raised by increasing the amount of cur rency in circulation. A considerable amount is necessary for a time. Every bank is trying to improve its liquid position, which means that it is increasing its ratio of currency to credit. In many regions, there are no banks and persons much use currency instead of bank checks. The proposed tax on checks is also a deflationary measure, because it will cause some substitution of currency for checks. Under these circumstances, a material increase in currency is necessary to start recovery. The present situation is not merely bankrupting individuals and causing physical suffering, but is likely to place a severe strain on our social structure, which is based on private enterprise. This social structure should not be blamed for failure to invent a stable measure of value, any more than it is blamed for the present calendar. I t is not to be expected that a flawless plan can be instantly put into effect. All that is necessary to make a plan worthy of con sideration is that it work better than the present system is working. Sooner or later a stable measure of value must be established. The use of any given weight of any single commodity can never be a stable measure of value. I t makes money a fixed weight with varying value. I f we are to avoid having our social and business structure perpetually subject to accidental discovery of a single com modity or chaotic changes in world demand for that commodity, it is necessary to be in a position to allow the price of gold to vary with the supply of it and demand for it. This bill is a step in the right direction. I t recognizes first that the fall in commodity prices is the major source of the difficulty. That is an important contribution, the recognition of that fact. Second, it recognizes that when the whole price level falls it is due to money, which is another distinct distribution. I t attempts to use the present machinery as far as possible. Personally, I would say that this is good if you will do nothing more, but it does not go far enough. To really be sure of being able to take care of the situation it would be necessary to take the next step and allow the price of gold to vary, and to do that might require, in getting it started, authority to prohibit exports of gold. Senator W agner. Y ou mean an embargo? Mr. W arren. Yes; the same as we had during the war. I suspect that foreign countries might withdraw too much gold. The question in my mind is not whether this bill or any of these measures are ideal. The question is, what are you going to do about this situation we are in, which is also not ideal ? Senator G ore. I notice that. Senator F letcher. Y ou will agree, understand, Doctor, to the policy expressed in this bill ? Mr. W arren. Yes. I agree first that the commodity price level is the trouble. Money is the reason for the commodity price level. There are many ways of proceeding from that point, and this is one way. Personally, I would go considerably farther. I think it is. not far enough. The Chairman. Y ou think this bill does not go far enough? Mr. W arren. Not far enough. But it is much better than doing nothing. For one reason, if you will pass a bill like this we will try it and if it does not go far enough we can take the next step, and we will at least know whether this will be sufficient by trying it. My own judgment is that it is not sufficient. I think we will have to be in a position to vary the price of gold in order to solve the situation. The Chairman. In other words, we may have the quantity of cir culation but we will not be able to secure the velocity to bring about the desired result; is that it ? Mr. W arren. Y ou see, I am favorable to doing this rather than nothing. The Chairman. Yes; I understand. Mr. W arren. Now, the reason why I think this will probably not be fully successful, although partially successful, is that I do not believe there is enough gold in the world, with the amount of con fidence there is in the world, if England and other countries come back on the gold standard, to allow the world suddenly to have its price level 30 or 40 or 50 per cent higher than normal in propor tion to the world’s ounces of gold. The Chairman. In other words, our business has outgrown our gold, and credit has supplemented it and that will do it in periods of confidence; is that it ? Mr. W arren. I would change that a little. While you were out I called attention to the explanation which I would make of how we got adjusted to the high-price level; that about half of the gold using world stopped bidding for gold. They not only went off the gold standard, they didn’t care whether they had the gold or not. Then, regardless of the location of that gold, it became cheap, because of its reduced demand. Therefore, we having a large amount of gold available here or in other countries, much of which we owned although not located there, could have a price level rise decidedly on a gold basis, because a large supply of gold became available. Now the rest of the world wants the gold back again and they are bidding for it. The Chairman. And that creates a condition that you feel might have to be remedied only by arbitrarily changing the price of gold? Mr. W arren. I think so. The Chairman. I am very glad to get your idea. Now, as I understand this whole matter, the whole purpose of this bill is to change the relative prices between money and commodities as a whole ? Mr. W arren. Yes. The Chairman. And will have no appreciable effect where there is a discrepancy between commodities and their exchange, like be tween agriculture and industry? Mr. W arre n * I t will correct that, because raising the price level automatically raises the price level to producers as compared to con- 81 82 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR sumers’ prices. And not only that, it corrects the situation as be tween parts of the United States, which is extremely important. It is no accident that the western people in all these depressions, the people far from markets, raise most trouble, and a rise in prices corrects that. The Chairman. And speaking of prices, are you thinking of American prices or world prices? Mr. W arren. American prices. The Chairman. But is it not a fact that while we maintain here an American price on most of our commodities, certain agriculture staples are always on a world basis? Mr. W arren. Yes; but with some qualifications. The Chairman. And does not that create another problem there? Mr. W arren. Cotton is the best illustration of the point you are making, because it is shipped so cheaply. The chief difficulty with cotton at the present time is that we have stopped consuming it. I t is an industrial crop, and if we raised the price of it----The Chairman (interposing). But is it not also a fact that it costs more per pound to produce it than it has in previous years? Mr. W arren. Decidedly. The Chairman. And is that not the chief difficulty with cotton, as well as with certain other agriculture staples that have to be sold on the European basis? Mr. W arren. N o ; I would say the chief difficulty with cotton is unemployment, and raising the price of cotton----The Chairman (interposing). But if it could be produced cheaper there could be more of it bought ? Mr. W arren. I t is pretty cheap now. The Chairman. I think it is altogether too cheap, but I do recall; a southern Senator, when I asked how low had cotton been in previ ous years, said there was some time, 30 or 40 years ago, when it was lower than this. I said, “ Did they lose money on it then? ” And he said, “ No; it was profitable at that time.” In other words, the cost of living was less, the wages were less, and machinery was cheaper, and it was a different condition. Mr. W arren. If the wholesale prices of all commodities as re ported by the Bureau of Labor Statistics could be raised—I am not particular what level, whether it is 1921 to 1929, somewhere near to that—that would restore employment. Then people would begin to buy cotton and the price of cotton would rise because of demand here. And, furthermore, if we would do something which raises our price level we are influencing the whole world most decidedly at this time. England is largely waiting for action here to.see what will happen. The Chairman. Oh, there are certain relations, even though they are not close relations; of course, it has its effect. But if this will remedy the relative purchasing power between cotton and manu factured goods or wheat and manufactured goods, then it might be another way of saying that it was the cause of that relationship being wrong. Mr. W arren. I should say that it is primarily; that the primary cause- The Chairman (interposing). You do not attach any importance to the higher manufacturing cost coming into the picture so that it costs more for a binder or a fork or a suit of clothes or a pair of shoes than it did before then? Mr. W arren. If the price level is raised, the price of a binder would raise a very small amount. The Chairman. Of course, I can not analyze exactly what will happen in the future. I know what we have had in the past. Does this relation between money and commodities do two things ? Does it first fluctuate the general price level up and down? Second, does it create discrepancies between localities and commodities also? Mr. W arren. Exactly. The Chairman. Well, I do not think you made it clear. Does it send the freight rate up on wheat so we can not ship it to Europe, too? Mr. W arren. Yes. Let me back up a minute on that and take a few illustrations. For example, the price of a horse in Massachusetts was $150 and the price of a horse in Montana was $50. There is a difference of $100. That $100 still exists, but the price of horses in Massachusetts has dropped to $105 now and the price of a horse in Montana is sub stantially zero. Now, the Massachusetts price dropped a third. The Montana price—there is not any. The Chairman. Then, how in the world could this discrepancy develop when these changes did not take place in the monetary system ? Mr. W arren. They developed when it did take place. The C hairman. Then the change in the monetary system sends wheat up and shoes down, doesn’t it? Mr. W arren. The change in the monetary sj^stem and the rise in money reduces the price of shoes a little, but it reduces the price of hides immensely more. The Chairman. I do not see how anything can reduce the price of hides any. They are down to about nothing now, are they not? Mr. W arren. That is like the price of that horse in Montana. The Chairman. There is no danger there any more, is there? Mr. W arren. A very trivial rise in the price of shoes would put the price of hides back where they were. The Chairman. For instance, a labor group decides that they want a certain price for a certain kind of work, railway work or plastering, and they succeed with it. That is due to the monetary system, is it not? Mr. W arren. N o ; not necessarily. The Chairman. Then there are other causes in the picture; is that it ? Mr. W arren. Certainly. The Chairman. Then there must be other remedies necessary also. Mr. W arren. Remedies for what? The Chairman. For the inequality that exists. Mr. W arren. I would not want to make the statement that at all times in history the relative pay for a carpenter, say, a plumber, a janitor, a Congressman, were always in adjustment; correct adjustment. 83 M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR 84 85 M A IN TA IN IN G AVERAGE PURCHASING POWER OF DOLLAR The Chairman. No; but when you get one out of line, does that not tend to throw the balance out of line? Mr. W arren. Yes. , , ^ The Chairman. I s not the very fact that it costs more to build a house now than it formerly did one reason why people are holding back on further house construction? Mr. W arren. Not at the present time. The Chairman. Well, I don’t know. I had a Los Angeles man tell me that that was the feeling out there; that houses had already shrunk in value and wages were shrinking, and they had the feeling that with further shrink in wages, there would be shrink in the production costs and shrink in values and they did not like to be caught in it and they were holding off. , ., . Mr. W arren. I think that is the general opinion, but 1 think it is entirely wrong. , The Chairman. In other words, you think whether one pays plas terers $5 or $15 does not change the price of the house? Mr W arren. Yes; I think the less you pay the builders at this time, with the situation as it is to-day, then the less value tor all the houses built, and that those houses which are built and which already have debts on them are thrown on the market and will be sold tor less than whatever this new cost is, and, therefore, the more you reduce the wages, the less building you get until you get liquidated, which will be several years. The Chairman. All right; I can follow you on that all right. Therefore, as I said in the beginning, I should like to have main tained our high cost and our high prices, once having reached that level. But, of course, we were up against this thing; that we should be deflated out West because we had gone up during the war and the rest of the country should stay up because they belonged up. I am wondering how the change of the currency system would change that relationship. Mr. W arren. I t changed it most decidedly. I have some figures ^ T h e Chairman (interposing). We are up against this now. As you said, the cost of producing commodities is greater. Our mar ket. or rather, the farmers’ market, is the European market Other people with the high costs had the American market, which was a different price level from the other. How can a change m the cur rency system bring about anything like a situation similar to tn a ,. Mr. W arren. The major market for the American farm products is the American market. _ . , The Chairman. I t ought to be. May I ask now, what difference does that make, that we sell 99 pounds of butter in America and one in Europe, providing the one we sell in Europe fixes the price on the other 99 at home? T AA . i u i Mr. W arren. Well, it does not. I t is the total supply balanced against the total demand that fixes the price. The Chairman. Well, this you are agreed; that we cau not get any better price for a pound of butter consumed in New York than we can realize for it on export? . Mr. W arren. The biggest discrepancy in that situation is not as between America and Europe but between an American farm and an American export point. a The Chairman. All right; but, of course, it has been generally rec ognized, and I think you will agree to that, that Liverpool generally fixes the price of wheat in the world, and that we get Liverpool price less cost of transportation. Mr. W arren. No ; I can not agree with that. The Chairman. Generally. . Mr. W arren. No ; not generally true. I t would be just as true to say that Chicago fixes the world price. In fact, we know definitely; we have worked out a percentage basis on the relative importance of American production on American price and world production on American price and world production on world prices. The state ment that the Liverpool market fixes the price is not true. In fact, a great deal of the time, most of the time, our price is higher than Liverpool prices. . The Chairman. I realize that when the Farm Board tried to peg it, it had no relation to Liverpool. I realize that. But I am speak ing of the 30 or 40 years I have had experience in selling wheat. The Liverpool market is what has governed it. I will admit that the markets in every land have an influence, including the Chicago mar ket. I t seems to be a sort of a clearing house. However, we have never been able to get Liverpool prices except under extraordinary conditions. # . Mr. W arren. The most important effect of a decline in the price level to an American farm is the discrepancy that it injects between the American farmer and the American consumer’s price if he sells here, or on the American export point price if he sells foreign. Now, for example, when prices rise, prices in Saskatchewan as compared with eastern Canada I happen to have in mind, prices in western Canada trebled, Saskatchewan selling on the same market. The Chairman. Y ou are speaking of just recent years? Mr. W arren. Yes; in the rising-price period. Now, the same in the reverse. For example, take this egg situation. Eggs are 5 cents, I understand, in Texas. Those same eggs would be about 15 cents in New York. Now, a Rhode Island farmer—of course, he will have better eggs than that and he gets more—but, suppose he had the same eggs, and if eggs drop from 30 cents to 15 cents in New York the Rhode Island farmer would be getting half what he got, but the Texas farmer’s price would drop from 20 cents to 5. The Chairman. On account of the longer transportation ? Mr. W arren. The fixed charges in between. And here is an in teresting result of that----The Chairman (interposing). Let me ask, does that not also establish the domestic price in Texas? In other words, the New York market price fixes the domestic price in Texas? Mr. W arren. Always less a constant amount, and there is where----The Chairman (interposing). Oh, yes; but comparatively speak ing? Mr. W arren. Y'es; that is right. The Chairman. I think that illustrates the very point I was speak ing of about Liverpool and here. In other words, if you have a central clearing place----Mr. W arren (interposing). Provided they ship to that point. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR The Chairman. Yes; but the man who sells eggs in Texas that are eaten in Houston does not ship to New York, and still he gets the New York price, less transportation to New York. Mr. W arren. Provided most of the Texas eggs are shipped that would be tru e; but if most of them are eaten in Texas, that would not be true. # . That situation, or that discrepancy, is also illustrated by this point, that when we had this terrible agricultural depression which has lasted so long, the Federal land bank, up until recently at least, had never taken possession of a farm in the State of Rhode Island. Now, you may think that there are no farms there. # < The Chairman. I have been there. I t is quite a farming district. Mr. W arren. Yes. Senator Gore. I s all the farm in the State ? Mr. W arren. There is about the equal of three or four Oklahoma counties. . . Senator Gore. And if this one farm lay within the State oi Rhode Island----Mr. W arren (interposing). I t would be equal to two or three good counties. ^ But the point is this, that southeastern New York, northern New Jersey, Connecticut, and Rhode Island, when this depression came on, because they are near market and these distributing charges do not eat them up, have not had a real depression. Western New York is hit a good deal like the Western States, not so much. The Chairman. I agree absolutely with your statement as to the effect of shipping and transportation cost between New York and the interior of the country, only I insist that it is a general rule; it is not a special American rule; it is a rule any old place. Mr. W arren. Certainly. The Chairman. That if you sell goods, you have got to deduct the transportation charges. . Mr. W arren. That is certainly true; and when transportation charges remain fixed, then a drop in the price level which might not be serious near a market, becomes overwhelming when you reach Iowa, and when you reach Montana, things may have no value. Now, conversely, if you restore the price level it might raise very little the man near market, but to the man farther from the market it becames of supreme importance, and the difference is greater than is generally realized. We have worked that out for different regions in the United States, and it explains very definitely why in every period of depression it is the farmers far from market who are con sidered to be radical. I t is because they are hurt so severely. Now, you take right now----. . The Chairman (interposing). That is on the theory that it is the hungry man that is radical? Mr. W arren. Yes; that is it; the man that is hit becomes radical. The Chairman. In other words, there may not be anything the matter with his head; it is his stomach ? Mr. W arren. We have an interesting situation on that this year. The Department of Agriculture figures show that the incubation of eggs in California is decidedly down. For the United States about the same, I believe, as last year, and for the Eastern States it is rising. For instance, New York is incubating more eggs than before. New York competes directly with California on eggs; two competi tors in the same New York market. We will say a year ago they were both getting 30 cents in New York, and now prices have dropped to 20 cents. The California producer was getting 30, less about 10, or 20 cents. The New York farmer was getting about 28. Now California is getting 10, the New York farmer 18. My illustra tion is just a little too optimistic for New York City is now below 20. Rising prices, conversely, will help the California man more. The West had a stimulus to agriculture in the rising price period. It was the principal cause of the rise in price of land in the West. The Chairman. The West had the rising land values. Did any thing else rise in the West faster than it did in the East in the same period ? Mr. W arren. Yes. The land values rose decidedly in the West on farms. The Chairman. H ow much did they rise? Mr. W arren. Well, I haven’t the figure right here; about doubled. The Chairman. Seventy-five per cent; all right. Mr. W arren. Here is what has happened to farm values----The Chairman (interposing). W hat was the increase in the price of building in the East during that period? Mr. W arren. During that period relatively little. I t came later when they got cheap food. The Chairman. W hat was the cost of replacement of building at that very period in 1919? Mr. W arren. I think more than the price of buildings? The Chairman. In other words, if you were to rebuild a building in the East it would cost you at least 75 per cent more than it would a few years before ? . Mr. "Warren. I would have to look it up and check it. The Chairman. N o ; but you recall that in 1919, the high pro duction costs, and still you are talking about western lands going high. You will find your eastern stuff went higher than the western lands did, if you use the census figures. If you take a certain Iowa newspaper that wrote up the sale of a piece of land somewhere, of course you get a different idea. Mr. W arren. The figure I have taken is the comparison I wanted to make about eastern farm land and western farm land competing on the same products. The Chairman. That is hard to do, because that is often a ques tion of fertility. Land values are not based on acreage. I t is often based on soil conditions. So I will admit the difficulty in that. The rise was less than in the East. Mr. W arren. The rise in the East was less and the decline is now less. The Chairman. Of course, there was this element, that some of the eastern land like Connecticut and Rhode Island is really a resi dential section. I t is not so much dependent upon the earnings of the land. The other thing is the very thing you stated and that was this, that they did not suffer in earning power like the West did. They were closer to market. Mr. W arren. Yes. The Chairman. And does not that explain the very thing you are mentioning? 86 87 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Mr. W arren. If you had identical farms near market and far from market, a rise in prices causes a greater rise in prices of that farm which is far from market than the one nearest, and the decline in prices hurts the farm far from market much more than the farm near by. It may overwhelm it. The Chairman. I agree with that absolutely, but there is one more element in it. The production record shows the West and the South raise staples. They confine their market largely to Europe. This section products for local consumption, and the Industrial Confer ence reports show this, that when the western and southern farmer took a shrink of 15 per cent, New York State took only 12 per cent, Pennsylvania about the same, and that the New England farmer actually gained about 6 per cent in his current income over that sameperiod when the shrink was in the West. Was it not due to the fact that he had the ability to boost his price in proportion to the cost of production, and having a local market he was not dependent on Europe? e . . Mr. W arren. Well, you take the egg situation, which has nothing to do with Europe. You have the New York farmer competing di rectly with the California farmer, both using Iowa corn and selling in the same market. It is a much better market than anything that ever existed in Europe for eggs. They are absolute direct competi tors. Now, when the price level was rising it was a much greater stimulus to California and the Pacific coast pushed into the poultry business. Now, this stimulus has fallen and the eastern farmer is not so bad off as the Pacific coast, because the 10-cent intermediary charge sits there, and if prices in New York City drop to 10 cents the western farmer gets zero. The C hairman. Well, if you want us to admit a man remote from the market with a high transportation cost is in a risky business, I think we can all agree that the record should show that, and that raising eggs 3,000 miles from the market is more hazardous than raising them 30 miles from a market and it is bound to fluctuate more. I do not think we have any difference of opinion on that at all. And you will pardon me for so many interruptions here, but it is helpful "to me if it is not to the other members of the committee. Senator T homas of Oklahoma. May I ask some questions? The Chairman. Certainly, Senator Thomas. Senator T homas of Oklahoma. I am not a member of the com mittee, but for the benefit of Congressman Pettengill, of Indiana, I would like to ask these questions. You stated that you did not believe this bill would do as much as you would like to see done. As reflationary measures what are your views about the respective merits of the Goldsborough bill and the pending soldier bonus bill or bills? Mr. W arren. Y ou have two questions, if I may divide it. One is as to what would happen if you do a certain thing and the other is which is it desirable to do? The latter includes the question of expediency. The monetary effect of any two measures will depend on which causes the greatest increase in monetary circulation. That is equal amounts of additional currency put in circulation, for what ever reason, would have the same effect on prices. I f you were to take the soldiers’ bonus, say, with X dollars increase in the currency and we were to, say, change the weight of <mld in a dollar or by some other means increase the currency by X dollars, the effect on prices would be the same. Senator T homas of Oklahoma. Do you hold to the quantitative theory of money ? Mr. W arren. Yes. Senator T homas of Oklahoma. Do you not agree that the velocity of the money in circulation would have something to do with the commodity prices? Mr. W arren. Yes. Senator T homas of Oklahoma. In other words, the banks might be full of money but if that money could not be gotten out where the people could get it, it would not have any particular effect upon com modity prices? Mr. W arren. Under a situation such as we are in to-day, with banks of necessity having extremely high cash reserves and thereby in effect practically sterilizing money, many individuals fearing to put money in the bank, with a proposal to tax checks, which will tend to suggest payment with cash—all these different things show that a larger amount of currency than normal would be necessary to get normal price results, because much of it would be idle. After we have put out enough currency in some form to satisfy the cash reserve which the banks need, and the man who wishes to hoard, then we will get some effects of increasing currency. Senator T homas of Oklahoma. The Federal reserve at this time is buying approximately one hundred million dollars of bonds weekly. Do you not believe that it would be necessary for the Fed eral reserve to continue this operation until such time as they have bought enough bonds to permit the banks to liquidate their indebted ness with the Federal reserve, so that the excess notes will begin to coagulate or assemble in the banks, and that we must wait till that point is reached before we see any perceptible change in commodity prices ? Mr. W arren. I f they would buy enough securities and continue long enough, ultimately it would result in an increase in currency and accomplish the same result. Of course, we do not know how long they are going to continue that policy or whether they are buying fast enough. I f we had legislation such as this proposes, it would recognize two things: the importance of the commodity price level, and we would recognize what commodity price level to use, the United States Bureau of Labor statistic index of wholesale prices of all com modities, which is the best there is; that monetary means can raise it, and we expect our banking system to act with that in view. I f we adopted any such policy it would also have a psychological influence on prices. Senator T homas of Oklahoma. I f the Federal reserve policy is continued it will be away up in the summer, August or September, before we see any appreciable change in commodity prices. Do you not agree to that? Mr. W arren. I should hesitate to say at what date we would reach it with that particular sum. Apparently progress in effecting a price level is not in sight. Senator T homas of Oklahoma. Well, the facts show that the more bonds they buy the scarcer money is, because circulation shows that. 88 89 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Last week it decreased and the week before it increased, and it has fluctuated in that way from time to time. So the net results since the first of the year is that we have had a decrease in circulation of 200,000,000. This shows that we are going in the wrong direction. Mr. W arren. We are either going in the wrong direction or we are not going fast enough in the right direction. Senator T homas of Oklahoma. I agree with you thoroughly. The Chairman. I am quite impressed, Doctor, with your thought that after all there may not be gold enough in the world to meet the present business situation with the present state of mind and that these matters we are trying to work out may not have any where near the desired effect. What would be your thought as to the method of working that out? Supposing it should be found here by fall that we are not getting the increase in the price level that you hoped for ? Is it your thought that this country alone could change the ratio of gold in the dollar or the weight of gold in a dollar or that it would have to come in some other way. Mr. W arren. We can change it any time we wish. France changed hers, and is therefore on a certain price level. There is about a fifth as much gold in the franc as there used to be. Of course, we do not need to do anything so drastic. By the way, we changed the weight of gold in a dollar in this country in 1834 by congressional action. We reduced it by about 6 per cent, and that is the way we got on a gold basis without intend ing to. We changed the ratio of gold to silver by reducing the weight of gold. . , The Chairman. The discouraging thing to the layman is to have his attention called to the fact that so many things happen that we do not intend should happen as a result of certain acts. Senator Gore. That effort in 1834, the change in the weight of a coin, was intended to establish a parity between gold and silver, was it not? Mr. W arren. Yes. Senator Gore. And to reconcile the legal ratio ? Mr. W arren. But it went too far, because Europe had different ratios, and therefore we shipped silver and they shipped gold. Senator Gore. Yes; and we changed again in 1837. Mr. W arren. Pardon me. I do not think I answered you yet [addressing the chairman]. ” The Chairman. Yes; I think you did that very well, Doctor. You take the position that simply an act of our own Government will accomplish that purpose. # Mr. W arren. There are many ways in which you can increase the currency. The soldier bonus will do it. That is issuing money. The Chairman. That is simply by the inflation method ? Mr. W arren. Yes. The Chairman. By more money ? Mr. W arren. Yes. # The Chairman. May I ask this: Do you feel that an issue of $2,000,000,000 of Government currency at this time would still keep us on the gold standard? Mr. W arren. I should doubt it, as I should think we would have to put restrictions on the withdrawal of gold by foreign countries. The Chairman. Y ou think with that we might have inflation and still be on the gold standard of the present gold dollar, do you? Mr. W arren. Of course, there are various degrees of the gold standard. You might maintain a gold standard in this country but not allow export, as we did during the war. Yet we were on gold standard internally. There was a slight premium at one time on gold in Mexico, showing that they began to think that they would rather have gold than our dollar. But within the United States we were on a gold basis, although gold was not too easy to get. The Chairman. A s I understand it, then, there are two methods of inflation; one is to inflate on the gold standard, and the other is to cut the gold dollar and get the inflation that way? Mr. W arren. That would be one of a number of ways. The Chairman. And the third one would be to ignore the gold dollar and be on some other basis; is that it ? Mr. W arren. Yes; you could do it any number of different ways. A large part of the world has reduced the weight of gold in the monetary unit. France and Belgium and Italy and most of the Continent of Europe has done so. If England should finally decide to establish the pound on their approximate present ratio, she would cut down 25 per cent. Of course, it is within their power----The Chairman (interposing). Would we not be materially handi capped if we were on a different gold standard from the rest of the world? Would we not find it difficult to compete in the markets of the world with our commodities? Mr. W arren. If England reduces the weight of gold in the pound by 25 per cent it will help her in the competitive position in foreign countries rather than hurt her. Her pound then would be just as stable relative to our money as it was before the war, and by reducing the weight of gold in a pound she would reduce her costs of produc tion and make it easier to sell in foreign markets, just as France made it easier for her to sell in the foreign market when she stabilized the franc with one-fifth of its former weight of gold. Senator Gore. But that, Doctor, was virtually a repudiation, was it not ? That is what it was, was it not ? . Mr. W arren. Any such means, of course, means that the internal debt of the country is ordinarily reduced by that amount. Senator Gore. She reduced her external debt; that is, she paid people with her francs at full value? Mr. W arren. Yes. Senator Gore. There is no controversy about that. Now, I want to ask you a question or two about this changing the number of grains in a gold dollar, because I rather get lost in a moral and economic morass there. I think you put your finger on the correct spot when you say the debt is the chief trouble, but it seems to me that you bring us up against the choice of evils. Now then, supposing I enter into an agreement with you to pay you a thousand dollars in gold. Time passes and Congress decides that that is a little too heavy; that my debt is a little too heavy for me to pay. Under our agreement I would have paid you a thousand gold dollars 25 grains fine, say, 25 grains in round numbers. That would be 25 grains of standard gold, not fine gold. Congress comes along and says my debt is a little too heavy for me to pay and passes a law reducing the number of standard grains in the stnndnrd cmld 90 91 92 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR dollar to 20 grains, and says that I can pay you a thousand dollars with that kind of gold. I pay you with gold which would have paid $800 at that time. Now, then, at the time I made that contract with you to pay you a thousand gold dollars I agreed to deliver you a thousand bushels of wheat at the same time. Congress comes along and says that wheat debt is a little too heavy to pay, and Congress passes a law providing that I can pay you a thousand bushels of wheat with 800 bushels of wheat. And I also made a contract to pay you a thousand bales of cotton with a 500-pound bale. Congress says that debt is just a little too heavy to pay and passes a law that I can pay you a thousand bales of cotton with bales of cotton that weigh only 400 pounds. Now, is that honest? Mr. W arren. The situation as I see it is about this: That we have incurred debts which if paid would be very good for the creditor, but they can not be paid. Senator Gore. That is the pity of it, Doctor. Mr. W arren. The creditor was not expecting to use gold when he made the contract. Senator Gore. The trouble is a great many of them stipulate gold. Mr. W arren. Yes; but I mean the creditor was not expecting to use gold. He expected to use the buying power when the debt was returned. If the creditor gets the buying power which he antici pated when he lent the money there has been no injustice done him. Senator Gore. Then you think the 800 bushels of wheat—wouldn’t that be the shorter route, just to have that 800 bushels of wheat count for a thousand? Here is what I have in mind in my question: One king of France is reputed to have changed the weight of their standard of value seventy-one times in nine years. The Roman Empire increased the alloy in its coin in course of history down to three-fourths of the value of the coin, and the legal tender of the value of the coin stayed the same. When the French Revolution broke out they changed their unit of value from a lire to the franc. The standard of the lire at that time contained one-seventy-eighth of the amount of precious metal it contained when it was adopted as a unit of value. Now, you know kings who have done that have been reprehended in the course of history as being dishonest. Now then, I get your point and I agree with you that it is a great tragedy for these public debts to have to be paid three times and the farmers have got to dig three times as much out of the ground to pay these debts as they were worth when they were contracted. But if I shoot you accidentally it is just as bad for you as a misfortune, but if I deliberately aim a gun at your heart and shoot you dead it is a very different moral transaction from my point of view. How do you escape that moral phase of this problem? I know France repudiated, and I think it would be better and a little more straightforward for us to pass a law and say that $500 should pay a $1,000 debt. I t is mystifying to me. Mr. W arren. I should think that as a long-time policy ultimately we have got to come to an all-commodity dollar of some form, rather than a one-commodity dollar. This means varying the price of gold MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 93 from time to time so that all our currency will have a constant buying power instead of being a constant weight as it is now. Senator Gore. "Would it not be better to vary the amount ox the debt instead of tinkering with the gold dollar and changing a few grains now and then and taking a few away and putting a few back now and then; just pass a law and say you owe $1,000 and you can pay it off with $600? . Mr. W arren. Y ou would have to change too many other things. Senator Gore. That is all you have to change. Of course, you would have to stratify your debts in a way. Mr. W arren. I think we will eventually come to an all-commodity dollar which has a constant buying power but varying weight as the best dollar for society. The way in which it is feasible to change is a political and public question. The justice of it is not debatable. Senator Gore. That is true. I wondered about this and I would like to get your reaction to i t : When I was a youngster I used^ to tinker a good deal with perpetual motion. I tried to make a thing move all the time and it showed an uncontrollable disposition to stand still. In our efforts to change and vary this dollar are we not trying to make a thing stand still that has an ungovernable tendency to move? Are not the two things equally impossible? Mr. W arren. N o ; I should say not. A decided change in the weight of gold in the money, such as has been made by a large part of the world and promises to be made by most of the rest of the world, such a decided change as that, which looks ys if it were likely to be nearly world-wide, is only justified by being better for society than the next best alternative. Senator G ore. I am not certain that repudiation is always the worst of evils. I am not passing opinion on that. # Mr. W arren. But as a long-time proposition I think we have the wrong kind of a dollar. I t is a measure of weight, not a measure of value, and when I borrow a thousand dollars of you I lend you buying power. Senator Gore. Yes. Mr. W arren. Not gold. . Senator Gore. Surely, and if you could return the equivalent----Mr. W arren (interposing). I want to return to you the equiva lent buying power. . . Senator Gore. That would be ideal, but now, Doctor, is not th is a fundamental and insuperable difficulty, that value is not inherent in things? I t is not the property of things; it is a relation between different things, and our dollar attempts to measure that relation ship and used to do that which it does not do now. Mr. W arren. I f we took this Bureau of Labor index number that is the best measure of relationship as a standard. But I think really I should not be going on with this particular phase of the discussion. Senator G ore. Well, I beg your pardon. Mr. W arren. This is a thing that Professor Fisher or some one who has worked more in that field would be much better qualified to answer than I am. . . . ,. , .* The C hairman . The committee is in no hurry to adjourn, and if Mr. White will come forward we will be glad to hear him. 120290—32--- 7 94 MAINTAINING AVERAGE PURCHASING POWER OP DOLLAR STATEMENT OF C. R. WHITE, PRESIDENT OF THE NEW YORK STATE FARM BUREAU FEDERATION, IONIA, N. Y. Mr. W hite. C. R. White, president of the New York State Farm Bureau Federation, Ionia, N. Y. Mr. Chairman and members of the committee, I want to say that I am going to be very brief, because I am very close to Doctor W ar ren in the work he is doing, and I induced him to come down here to give you the actual facts and statistics in regard to this, which I thought would be very much more valuable than anything I might say. I want to say this, that I am a very strong supporter of the theory of an index dollar governed on commodity values, because the pur chasing power of commodities, a level price of commodities, is the basis on which we can arrange all of our human affairs. Our diffi culties and our distressing conditions come from the uneven condi tions that are brought about through decline or the enhancement of these values and the adjustment of all other things to correspond to the decline or the increase in the value. When we have a stable commodity price everything else finally adjusts itself to it. Wages, salaries, values of property, transporta tion charges, every last thing adjusts itself finally to commodity values. That is to say, if we should have a period of 10 years of a stable price level, that is, the average commodity price level should be stable, wre would finally find adjustment of all of these things and we would be in a very fine position as long as that remained. We have the example of that during Benjamin Strong’s adminis tration of the Federal reserve bank, where we had a very stable level of commodity values. Before that time when we were inflating, we were talking all the time about the “ vicious circle ” we were goinothrough. Labor was making its demands for increased wages! Salaries had to be increased, and you know the papers were full of the fact that we were going through a vicious circle. Wages only increased cost of commodities, and then it just went on and on. We are now in a “ vicious circle ” going back, and the vicious circle going backward is very much more tortuous because it is very much harder to adjust than where the vicious circle is going up. Because as has been pointed out here, our debts do not come down. Of course? in the going up the creditor or the person with fixed incomes were the ones to suffer, because they did not have income enough to buy the necessities of life. Now we have just the opposite case, where they can buy more but other people can not get enough to meet their obligations, and therefore we are in state of liquidation. I see no difficulty, especially through the more arbitrary means of changing the price of gold to correspond to an index level in raising the general price level. The Chairman. I am not sure I understood your last statement. Mr. W hite. I see no difficulty in having either a bureau in the Treasury or the Federal reserve bank change the price we pay for gold from time to time as shall be indicated on an index figure of commodity prices. The Chairman. Paper gold in commodities ? Mr. W hite . N o, what they would pay for gold in the dollar. We are paying $20.67 an ounce for gold. That was established in 1837. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 95 We have paid it ever since. I f we should pay $30 an ounce for gold now we would be approximately with the dollar on the same cor responding value of the English pound. They deflated their pound to the market value of gold, deflating it about one-third. If we paid $30 an ounce we would have 15.5 grains of gold in a dollar, which would be a deflation of the value of the dollar by about onethird, which means a corresponding increase of commodity prices. I think we have got to come and should come to a scientific basis of fixing a static value in the dollar. I just want to call your attention to this fact, that section 8, Article I of the Constitution places the burden of doing just that thing upon the Congress; that they should coin money and fix the value thereof on the value of foreign coin and establish weights and measures. And, gentlemen, when you study into the weights and measures that we have to-day and see how finely they are adjusted, and even the Bureau of Standards is not satisfied with adjustments that are so fine that to the layman they are almost beyond their comprehen sion, yet we have taken two plans of fixing the value of the dollar. One is that we will pay a constant price of gold regardless of what the world demand is or what the world supply is, and the other is that we will allow a banking institution, semiofficial and semibusiness, to, without any mandate or any particular standard that they shall work to, solely upon their judgment, increase or decrease the currency as they see fit. I want to say, gentlemen, it seems to me that is a tremendously dangerous power to place in the hands of any body of men. I do not believe that any group of men, public officials, ought to want such a power. I was for some years connected with the Department of Agriculture and markets of the State of New York, which is a regulative department very similar to the Agriculture Department in Washington in many respects, and I know that the officials in that department do not like to have laws passed by the State of New York which give them wide discretionary powers. I t is necessary to give them some discretionary powers, but they like to have the direc tion made in the statute just as clear as possible to govern them in the exercises of those powers. Because, when you grant broad dis cretionary powers to men they may be perfectly honest in the exer cise of that discretion, but if they err, why, they are subject to very severe condemnation. On the other hand, without any reflection on the Federal Reserve Board or anybody else, I can not conceive of an institution so close to great monetary interests that there might not be pressure brought to bear upon that body to do things which were contrary to the best interests of the people of the United States. It puts a man in a position of that kind in a very difficult situation indeed. I want to say there, as I said before, I am not reflecting on anyone and I do not want to cast a suspicion, but there is a possibility. I would like to just give a little illustration of my conception of money and say it is the lifeblood of trade. I t is just as essential to trade and commerce and all things that relate to the welfare of our people as the blood of the human body. But I want to make a contrast, gentlemen, upon how the blood of the human body circulates and how the circulating medium upon 96 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR which commerce is carried on circulates. The supply of the life blood of your body responds to your brain as to the action of the members of your body and does it properly. That is, you start and walk or run. I t is the inspiration coming from your mind that compels you to do it. But when you use those muscles your heart has to respond with increased circulation. And the opposite is true, and we all know, gentlemen, what hap pens when that heart takes a notion it wants to run the machine. You do not run and you do not walk, and the probabilities are you are gone. That is exactly what has happened in the United States. Senator Gore. Now, in your illustration, Mr. White, you say when a man runs his blood circulates faster. I t does not increase in quan tity; it just increases in velocity? Mr. W hite . Velocity, yes. But what I am getting at, Senator, is the fact that that power which dictated that is not the heart itself but is your brain. Therefore I want to bring this fact out, that it ought to be the brains of the commerce and the business of the United States that directs the amount of circulation and those things which direct the flow of lifeblood of business, and not some central organ which closes it down either because it can not function because some one’s desire or judgment keeps it from functioning. Senator Gore. I was wondering, your illustration being money as the lifeblood of the body economic, if it might not be the increase in the rapidity or velocity of circulation that would suffice there, like the increase of volume of blood in your veins. I t is not the volume of blood; it is the velocity. Mr. W hite. Y ou have to have quality of blood as well as velocity, which is a very essential thing, and that is the same thing as the quality of money. Senator Gore. Without any change in the volume or quality of blood, in your illustration a while ago about running, you accelerated the flow there. Mr. W hite . Yes; but it is the mental part of the body that dictated what the circulation should be, not the heart which does the pump ing. That is what I was getting at in this. I feel that the American business man and the American people are more competent to decide when they ought to do business and the flow of money into channels of trade than any body of men that can be selected by the President of the United States or by Congress or by anybody else. I believe we would be on a perfectly safe basis when money responds to the requirements of the people, rather than through any arbitrary power. The value of money I think should be maintained as static as possible, just as near comparable with our other units of measure as it is humanly possible to make it on a scientific basis. And, gentlemen, I have a very strong suspicion—I have not been to see them—that if you should ask the Bureau of Standards to set you up a dollar which would be static as their other measures are, those gentlemen would give it to you. When we get it out of the generalization of thought into a scien tific consideration, I think you would find a solution. You know it occurred to me sometimes as I hear the discussions over the country that so many people are about in the same position as the woman was who had a sick boy and sent for the doctor. The doctor came in and looked over the child and said, “ Well, he is a very sick child,” and the woman’s remark was, “ Lam in’ is a ver}r great thing.” That is the great trouble of this. Our learning is all right, but we have not got it boiled down to a scientific basis. And how much more necessary and material it is that this par ticular measure be accurate than any other measure we have. We use it pretty nearly as much as we use all other measures. We use it to make measurements, as the criteria to enter into bargains which last over long terms of years. I t certainly ought to be static. No manufacturer would care to make a contract for a given number of yards of cloth if he did not know whether his yardstick by which he measured it would be 24 inches long or 48 or 36. Senator Gore. I s that quite an applicable analogy, Mr. White? The point I made a minute ago—value does not inhere in commodi ties ; value is the relationship between different things, and if either one varies the relationship varies and therefore the value varies, and how can you have a fixed measure of value when value itself, being a relationship between different things, is constantly var 3ring? Mr. W hite. There will be between the individual things but with an average price level of 740 commodities as your index it will not. We want that dollar to agree to that index figure, because you can not make it agree to all different commodities any more----Senator Gore (interposing). And on your own theory you will have to change the number of grains in the gold dollar off and on from time to time. Mr. W hite. N o ; we would buy and sell. We would do just what France does, stop coining gold entirely, and would use it purely for redemption purposes, and we would redeem our money in the dollar of gold that carries the exact value that was indicated by the index figure. That is what we want. Senator Gore. Y ou do not mean that we fix the number of grains. You do that now. Mr. W hite. N o. It would fix the price of gold, which is the equivalent of determining how many grains the dollar would represent. Senator Gore. From time to time? Mr. W hite. Sometimes it would be one amount and some another. Senator Gore. Yes. Mr. W hite. But it would correspond to the value of gold and not the quantity. Senator Gore. Something has got to vary in this measure of value. If you stabilize your value and vary the standard, if that were a human possibility----Mr. W hite (interposing). You raised the question with Doctor Warren a few minutes ago, Senator, on the basis that if you had made a contract that would require a certain amount of gold and it ran for a certain period of years and then he wanted to pay you with half as much gold, if that half as much gold bought as many of the commodities and the things we require in life as double the amount bid when the contract was made, it was just, and that is exactly what we want to do, to scientifically adjust the dollar. We want to give you an amount of gold which will buy the same com modities that would correspond exactly with the same things that you could have bought when you made the obligation. 97 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAX MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator G ore. If you could buy only half as much with the gold when you paid me----Mr. W hite (interposing). Why, I ought to be placed where I would give you twice as much gold, and that is exactly what the index figure will do. I f prices went up, and up, and up, why, then the amount of gold that you redeem your dollars on would go up correspondingly, and that will give you gold enough to buy the same amount of commodities. Senator Gore. Why wouldn’t it be just as well, Mr. White, from time to time to provide that we pay it off with $500? Mr. W hite . That would be just if you happened to have a man who happened to be in the particular situation that you offer here. If it were a man who made a $10,000 salary and I loaned him $1,000, there would not be any particular reason why I should make any adjustment with him at all. As a matter of fact, there was an article in Forum Magazine some time ago where a man offered the plan based on the index, chang ing the amount of gold in a dollar to keep the dollar static, with the idea that we should adjust every transaction upon the index basis. That is, if a man gave a note for $1,000 due in six months, if commodity values increased he would give a correspondingly increased number of dollars. If they had gone down he would be let off with a correspondingly less amount of dollars. That would mean with hundreds of thousands and millions of transactions we are entering into every day among our people adjustments would have to be made all the time, and I am very fearful that the man who is very smart would probably get the best of the bargain. I think it is ‘a good deal better for the Treasury Department or the Federal Reserve Board to fix those adjustments in one item. I want to go back on just two matters. We go back to the Colony of Massachusetts and they recognized that exact point. There was a bond issued in the Colony of Massachusetts on which they used the index. They agreed to pay a certain number of Spanish mill dollars, and then they enumerated certain articles which were the articles of common production for use, and named the prices, and stated the amount should be less or more as the average price of the said commodities was less or more. In another case Franklin D. Roosevelt, when he was Assistant Secretary of the Navy, adopted an index number before the war broke out to determining of wages that the employees in the navy yard should get, and the first year their checks through the account ing department were changed five times to keep up with the amount of salary that was necessary to cover the index on the cost of liv ing, and they changed when it went the other way. I t all comes down to a scientific problem. I want to say this, that the favorable sentiment on this matter is gaining, Mr. Chairman, very rapidly in the State of New York. As a matter of fact, our people are understanding this proposi tion pretty well up there. The Chairman. And you think it has gotten so the creditor would rather take the commodity than foreclose on the property ? Mr. W hite . Well, Mr. Gannet, head of a chain of newspapers, I think some 12 or 14, came out with a very long article this week in which he is taking that position very strongly. The lieutenant governor of the State of New York, Mr. Lehman, who is one of the four members of the Lehman Bros, banking institution, made a speech in New York City to the Ad Club, in which he said we must have some inflation. And yesterday I happened to meet the governor and talked to him just as he was leaving the hotel where I was, and told him what I was coming here for and something about it, and he said, “ Well, we must have some inflation, Mr. White, but we do not want any fiat money business, but we must have some kind of inflation.” The Chairman. I f they do not want one kind they might get the other kind. Mr. W hite . They will, and that is what we fear. We want the right kind and not the wrong kind. I do not have anything more to say, but in closing I will say that we held a meeting of the secre taries and presidents of the farm bureaus and some other men of the States of New England, New York, Pennsylvania, and New Jersey, at Albany a short time ago, and they passed this resolution [reading] : 98 99 Resolved, T h a t we re ite i’a te o u r a p p ro v al of th e p ro g ram of th e A m erican F a rm B u re a u F e d e ra tio n in re la tio n of m oney a d ju s tm e n t an d re s to ra tio n of th e com m odity p rice level a s of 1 9 2 9 , as a sou n d m ean s of reliev in g econom ic d e p ressio n . T he d ecreasin g supply of gold w hich h a s caused gold to in c re a se in v a lu e 2 9 p e r cen t since 1 9 2 9 , h a s b ro u g h t com m odity p rices below p re -w a r levels. Resolved further, T h a t w e re q u e s t all groups in te re ste d in econom ic w e lfa re to stu d y th e m o n e ta ry problem an d n o te th e s itu a tio n w hereby th e supply of gold d e term in es th e level of com m odity p rices. Resolved further, T h a t w e u rg e su p p o rt of th is fa rm e r m ovem ent fo r “ th e h o n e st d o l l a r ” as a p ro te c to r of th e p ro p e rty a n d in v e stm e n ts of th e A m eri c a n people. Those in attendance were as follows: W illiam C. S pargo, p re s id e n t N ew J e rs e y F a rm B u re a u , M endham , N. J . ; G eorge M. P u tn a m , p re s id e n t New H a m p sh ire F a rm B u re a u , C oncord, N. H . ; N. M. F lagg, s e c re ta ry New H a m p sh ire F a rm B u re a u F e d e ra tio n , C oncord, N. H . ; H o w ard R u ssell, se c re ta ry M a ssach u setts F a rm B u re a u F e d e ra tio n , W ate rb u ry , C o h n .; G eorge H . M cK ay, se c re ta ry -tre a s u re r C onnecticut F a rm B u re a u F e d e ra tio n , D an b u ry , C onn.; A. H . P a c k a rd , p re sid e n t V erm ont F a rm B u re a u F e d e ra tio n , B u rlin g to n , V t .; J . E . C a rrin g to n , a c tin g ex ten sio n d ire c to r, B u rlin g to n , V t .; W . E . B eanblossom , se c re ta ry P e n n sy lv a n ia F a rm B u re a u F e d e ra tio n , H a rris b u rg , P a . ; C. R. W h ite, p re s id e n t New Y ork F a rm B u re a u F e d e ra tio n , Io n ia , N. Y .; E . S. F o ste r, s e c re ta ry New Y ork F a rm B u re a u F e d e ra tio n , Ith a c a , N. Y .; M. S. W in d er, s e c re ta ry A m erican F a rm B u re a u F e d e ra tio n , 5 8 E a s t W a sh in g to n S tre e t, C hicago, 111. Now, Mr. Chairman, I had a written statement that I wanted to put in and I dictated it day before yesterday just before I left Ithaca, but I failed to get it before I left. I had to go to Albany, and it has not arrived. I would like to have that put into the record. The Chairman. If there are no objections, when the committee meets it will be placed in the record. I shall be glad to offer it for the record as following your remarks. Mr. W hite . I t is short and concise along these lines that I have stated. I thank you very much. I d e sire to p lead fo r im m ed iate actio n on th e p a r t of th e S en ate to p e rm it re s to ra tio n of com m odity p ric e s to th e 1 9 2 1 - 1 9 2 9 level a s th e only sou n d a n d effective m eth o d of reliev in g th e u n p reced en ted econom ic depression a n d of re s to rin g re a so n a b le p u rc h a s in g pow er of th e A m erican people in th e ir e ffo rt to m eet th e ir oblig atio n s, a n d to m a in ta in th e ir eq u ities in A m erican 100 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR bu sin ess a n d p ro p e rty . T h e re h a s n e v er been a tim e in a ll h is to ry th a t th e A m erican people h a v e su ffered su ch g re a t econom ic loss as is being ex perienced a t th e p re s e n t tim e. A ll in d iv id u a ls a re lo sers d u rin g a p e rio d o f d eflation, a n d d ra s tic ste p s sh o u ld be ta k e n to p re v e n t f u r th e r loss. T em p o ra ry m easu res of checking deflatio n o r re sto rin g b u sin ess confidence can be effective to only a m inor degree, a n d n e v er u n til w e e sta b lish a scientific m eth o d of governing th e valu e of th e d o lla r c an w e hope to escape th e c a la m ity w hich re s u lts fro m overinflatio n a n d u n d u e deflatio n . T he A m erican people m u s t h av e a n “ h o n est d o lla r.” T h e “ h o n est d o lla r ” could be m ad e possible th ro u g h co n tro l of m oney v alu e. Such a d o lla r dem ands o f th e d eb to r th a t h e sh o u ld give a s m uch of h is p ro d u c ts o r h is serv ices a s h e w ould h a v e been called upon to give a t th e tim e th e o b lig atio n w as c o n tra c te d , a n d g u a ra n te e s to th e c re d ito r th a t he should receive p a y m e n t in d o llars w ith th e sam e p u rc h a sin g p o w er as th e d o lla rs w hich he loan ed . C om m odity p rices re p re se n t th e c e n te r of g ra v ity of a ll b u sin ess re la tio n sh ip s. W ages, sa la rie s, fees, in te re s t, ta x e s, p ro p e rty values, etc., a re e ith e r d ire c tly o r in d ire c tly , u ltim a te ly d e te rm in e d by th e g en eral com m odity p rice level. W h en th e g e n e ra l com m odity p rice level is p e rm itte d to flu c tu a te u n d u ly , corresp o n d in g re a d ju s tm e n ts m u s t be m ad e by all classes of society, b rin g in g a b o u t s tra in e d re la tio n sh ip s betw een d eb to r a n d c re d ito r, c a p ita l an d labor, th e people a n d su p p o rt o f govern m en t. T h e p u rc h a sin g pow er o f £he d o lla r sh o u ld be m ad e c o n sta n t in so f a r a s is h u m a n ly possible, th e re b y g u a ra n te e in g to p ro d u cers h o n e st v alu es fo r th e ir p ro d u c ts a n d serv ices w hile p ro te c tin g consum ers a g a in s t in fla te d p rices. T h e index of th e g e n e ra l com m odity p ric e level should be u sed to d e te rm in e th e p u rc h a sin g pow er o f th e d o lla r. T he G oldsborough bill is designed to in c re a se a n d sta b iliz e th e com m odity p rice level to t h a t e x istin g b efo re th e p re s e n t deflatio n . The C h a i r m a n . We thank you. That will conclude the hearings for to-day. We will try to continue to-morrow in this room at 2.30, and will if we can get a quorum. The committee has another meet ing on another matter to-morrow morning. That is why we can not have a morning meeting, but we will try to have one in the afternoon if we can, in the hope that we can complete the hearings to-morrow afternoon. (Accordingly, at 5.55 o’clock p. m., the committee adjourned to meet at 10 o’clock a. m. the next day, Friday, May 13, 1932, on a different matter, but to continue this hearing at 2.30 o’clock p. m.) RESTORING AND MAINTAINING THE PURCHASING POWER 0E THE DOLLAR E R ID A Y , M A Y 1 3 , 1 9 3 2 U n it e d S t a t e s S e n a t e , C o m m it t e e o n B a n k in g a n d C u r r e n c y , Washington, D. C. The committee met at 2.30 o’clock p. m. in the hearing room of the Committee on Interstate Commerce in the Capitol, Senator Peter Norbeck presiding. Present: Senators Norbeck (chairm an), Goldsborough, Townsend, Walcott, Blaine, Carey, Fletcher, and Gore. Present also: Senators Howell, of Nebraska; Smith, of South Car olina ; and Thomas, of Oklahoma; and Representative T. Alan Golds borough, of Maryland. The C h a i r m a n . The committee will come to order. I will ask Senator Fletcher to take the chair and take charge of the meeting. At this point I desire to submit for the record the report of the Secretary of the Treasury on Mr. Fletcher’s bill (S. 4429), which has just been received, as follows: T h e S ecretary of t h e T reasury , W a sh in g to n , M a y 13, 1932. H on. P eter N orbeck , C h a ir m a n C o m m i t t e e o n B a n k in g a n d C u r r e n c y , U n ited S ta te s S e n a te , W a s h in g to n , D . C . D ear M r. C h a ir m a n : In y o u r le tte r of A p ril 2 1 you req u ested a re p o rt from th e T re a su ry D e p a rtm e n t on S. 4 4 2 9 , e n title d “A bill to re s to re a n d m a in ta in th e av erag e p u rc h a sin g pow er of th e d o lla r by th e ex pansion a n d co n tra c tio n o f c re d its an d cu rren cy , a n d fo r o th e r p u rp o ses.” U n d er th e te rm s of th is bill th e F e d e ra l R eserv e B o ard , the F e d e ra l reserv e b a n k s, an d th e S e c re ta ry of th e T re a s u ry w ould be ch arg ed w ith th e d u ty of m ak in g effective a policy t h a t th e a v erag e p u rc h a sin g pow er of th e d o lla r in th e w holesale com m odity m a rk e ts fo r th e y e a r 1 9 2 6 sh a ll be re sto re d a n d m a in ta in e d by th e ex pansion a n d co n tra c tio n of c re d its a n d cu rren cy th ro u g h th e p o w ers of th e U n ited S ta te s a n d its agencies. In m y opinion, i t w ould n o t be possible fo r th e G ov ern m en t o f th e U n ited S ta te s to c a rry o u t such a m a n d a te . P ric e levels a r e d ependent upon a la rg e n u m b er of fa c to rs t h a t a re beyond th e co n tro l of th e F e d e ra l reserv e system , th e T re a s u ry D e p a rtm e n t, or a n y o th e r agency of th e G overnm ent, a n d I do n o t believe th a t it w ould be w ise to im pose upon th em a d u ty an d a re sp o n sib ility w h ich th e y could n o t d isch arg e. Such a n a tte m p t w ould ten d to u n d erm in e th e confidence of th e people in th e v a rio u s agencies of th e G ov ern m en t a n d th e re s u lt w ould be u n fo rtu n a te . In th is connection, a subcom m ittee o f th e C om m ittee on B a n k in g a n d C u r rency of th e H ouse of R e p re se n ta tiv e s held ex ten siv e h ea rin g s on th e su b je c t m a tte r of a bill h av in g a sim ila r purpose, w hich h a s passed th e H ouse of R ep re se n ta tiv e s a n d h a s been re fe rre d to y o u r com m ittee. D u rin g th e course of th ese h e a rin g s G overnor M eyer, of th e F e d e ra l R eserv e B o ard , an d D o cto r G oldenw eiser, c h ie f of its division of re s e a rc h a n d s ta tis tic s , a p p e a re d b efo re 101 102 MAINTAINING AVERAGE PURCHASING POWER OE DOLLAR t h a t com m ittee a n d testified v e ry fu lly a s to fa c to rs w h ich a r e beyond th e co n tro l of le g isla tio n o f th is c h a ra c te r a n d w h ich w ould re n d e r it ineffective. F o r y our convenience, I inclose a copy of th e p a r t of th e se h e a rin g s w hich c o n tain s th is testim o n y . I m ay ad d t h a t th e p assag e by th e H ouse of th e b ill re fe rre d to w a s a d is tu rb in g fa c to r b oth a t hom e a n d a b ro ad , a n d t h a t th e m em b ers of th e F e d e ra l R eserve B o a rd u n an im o u sly oppose th e en a c tm e n t of leg islatio n o f th is c h a r a c te r an d ap p ro v e th e p o sitio n ta k e n by G overnor M eyer in h is testim o n y on th is su b ject. V ery tr u ly y o u rs, O gden A. M il l s , S e c r e ta r y o f th e T r e a su r y . Senator F letcher (presiding). Mr. Gregory, please come forward to the table and state your name, place of residence, and occupation. STATEMENT OF C. V. GREGORY, EDITOR OF THE PRAIRIE FARMER, CHICAGO, ILL. Mr. Gregory. Shall I proceed, Mr. Chairman? Senator F letcher. Mr. Gregory, you have seen the bill H. R. 11499 and also the bill S. 4429 and examined them, I take it. You may proceed in your own way to give your view’s on the subject. Mr. Gregory. The purposes this bill seeks to accomplish are tw o: 1. To raise the average commodity price level to a certain specified point; and 2. To stabilize the price level at that point. I think that particularly after the testimony given to the com mittee on yesterday, and probably before that time, there is needed very little argument on the question of the desirability of a stable price level. I t seems to me after the experience of the last three years all of us are pretty well convinced, as I think most economists were before that time, that there is great advantage to the entire community in stability in the average commodity price level. On the other hand instability, where the price level goes up or down, creates a dislocation between prices, and causes the exchange of goods and services to face more difficulties and brings into being a great many economic strains that have serious consequences. So as I say I think we will all agree that stability is a desirable end to be achieved. The objective which the bill seeks to achieve, to raise the price level, presents a question whether or not, if we agree that stability is desirable, we shall attempt to stabilize prices on the present level or somewhere near that, as some people evidently believe should be done, or to raise them. The first and most obvious difficulty of course to seeking to stabi lize on the average of the level where we are now, is injustice to debtors—and any fall in the general price level brings about injus tice to debtors, just as a rise in prices brings injustice to creditors. But we are now beyond the situation of mere injustice to debtors. We have reached a point where a very large portion of the debts, not only private debts but many public debts as well, can not be paid on the present price level and on the basis of the present earning power of the community. You gentlemen are having a great deal of trouble in Congress now attempting to balance the Budget. I do not see how you can hope to balance the Budget until we can balance the budget of the tax MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 103 payer. I think we must raise the earning power of the people be fore we can balance the national Budget, and that any temporary balance will prove to be only temporary unless we increase the earn ing power of the people; and when we do that the balancing of the Budget will come about more or less automatically. The farmer in particular, and I am speaking particularly for the farm folks of the Middle West in appearing here; the farmer in particular faces a situation that is so difficult now as to be al most impossible. His products on the average are selling for about half I think now, or a little less than half, the price level of 1926, or as this bill puts it, the average from 1921 to 1929, which is about the same as 1926. That means that farm indebtedness which was incurred on that price level, and practically all of it carries over from that time, some of it being worse than that, some of it carrying over from the high price period before the deflation of 1920-21; that indebtedness now must be paid on the basis of 2 for 1. In other words, the farmer must raise and sell and market fully twice the amount of products to secure a dollar to apply on his indebtedness as the dollar would buy when that indebtedness was incurred. Now, as to this farm indebtedness—and when I speak of farm indebtedness I might say that that could be very easily expanded to cover practically all indebtedness, but I am speaking particularly in farm terms at this moment. This farm indebtedness was not exces sive at the time it was incurred. Practically all of it could have been paid as it came due on the basis of prices as they existed then. I t can not possibly be paid on the basis of present prices. If we are to accept the present price level as permanent, there is only one alternative for the farmer and for a large part of the business com munity, and that is to go through a period of deflation of debts. Now, there are two ways in which it can be done. I t can be done in a legal way, and it can be done in an extralegal way. A good deal of it has already been done in a legal way; that is, by the process of bankruptcy in the case of private debts or defaults in the case of public debts. There has already been a great deal of it. We have had out through the Middle West, the country with which I am most familiar, quite a large amount of defaulting in public debts, and there will be a great deal more if this situation now ex isting continues. Senator F letcher. What do you estimate the farm indebtedness to be? Mr. Gregory. I t is said to be somewhere around $10,000,000,000. Senator F letcher. I have seen the statement that there are $9,000, 000,000 of mortgages. Mr. G regory. I was referring to mortgages. Between nine and ten billions of dollars of mortgages. As to the short-time indebt edness I am unable to give you the figure. I think perhaps Doctor Fisher, who is to follow me, could give you that figure. Senator T ownsend. Have you any estimate of the amount of de faults in public debts out in your section of the country? Mr. Gregory. N o . I have not estimated that in order to get it down into the matter of figures. I am just speaking from cases that have come to my attention. Senator T ownsend. That is, of counties and towns and cities? 104 MAINTAINING AVERAGE PURCHASING POWER OF DOLIAR Mr. Gregory. I t may be possible that I might exaggerate that a little, coming from Chicago, where we have not paid our school teachers for so long that they have pretty nearly gotten used to get ting along without any pay. But it is a notorious fact, I am sorry to have to report here, that the city of Chicago is bankrupt, and there are several other large cities in this country that are practi cally in the same shape. In the matter of our smaller communities I will say that we have many communities in southern Indiana and southern Illinois particularly where the schools had to be closed this spring and are closed now, one or two months before the close of the school term, because they had no money with which to operate. _ Senator T ownsend. Has the city of Chicago defaulted on its interest ^ Mr. Gregory. I can not answer that question. I think they have on certain obligations, certain governments, the South Park board, I believe, defaulted on a recent interest payment. The city itself, I think, has not as yet defaulted on any interest. Senator Carey. D o you know of any cases where farmers have given up their farms on account of mortgages and buying other places for less money ? Mr. Gregory. We have had many cases of that land. And we have had many cases of debt reduction by private negotiation, where the holder of the mortgage has been willing to scale it down rather than accept the land. Some insurance companies have done that. . . , Senator F letcher. Speaking about the condition of the city of Chicago in a financial way, can you give us an idea as to the relation between that and the situation of agriculture? Mr. Gregory. Well, there is a very distinct relation as to that. I intended to get to that a moment later, but I can take that up right now just as well. . Senator F letcher. Y ou may pursue your own course. I will not interrupt you. o x Mr. Gregory. I can just as well go into that now. Some of us who have been rather close to the farm situation have felt for some time that the cities were bound to suffer if the farm situation were not remedied. We felt that even before the close of 1929. The deflation of 1920-21 hit the farmer more severely than it did the rest of the community. But it was a rather short period of defla tion. The superior resistance to deflation on the part of industry kept the cities from being affected as severely as the farmer was. Senator S mith . Have you any figures to show the aggregate in come or the aggregate value of farm products over a period of years, and you can take pre-war or postwar, as compared with their earnings for the last three years, to show the gross shrinkage of income5to the farmer and therefore the contraction of the currency in that respect? Mr. Gregory. I did not attempt to bring any figures here with me, Senator Smith, but I can give you that in general terms. The high point of farm income was 1918 and 1919, when it reached about $19,000,000,000. During the period from 1922 to 1929 it ran along, roughly, about $10,000,000,000. And it was down in 1931, if I remember correctly, to something like four and one-half billions m a in t a in in g average p u r c h a s in g pow er of dollar 105 of dollars, down to less than one-fourth what it was at the highest P°int. ,. . ., Senator S mith . I t would be very instructive and interesting if we could get the farm income from 1921 to 1929 as compared to what it has been from 1929 to the present date, showing the dis tribution of wealth. That is, all returns from sales of farm com modities have shrunk in such volume as to be felt in every depart ment of our commercial life. I think it is something like $5,000, 000,000. I think that is the shrinkage from 1928 when compared to the last three years. Can you tell me about that ? Mr. Gregory. Just about that shrinkage, I believe. The 1931 total farm income was less than half that of 1929. Senator S mith . N ow, we are attempting to inject back into the arteries of our commercial and economic life about two or three billions of dollars through legislation, whereas if there was any possibility of raising the price level back to where it was even just antedating 1929 you would have already provided something like four to four and a half billions of dollars in circulation. Mr. G regory. That is very true, Senator Smith. Now, in answer to Senator Fletcher’s question, this questioning has brought out the way in which farm income has shrunk. The farmer, like everyone else, has certain fixed expenses. First, he must pay the interest and make the payments on his indebtedness. Second, he must pay his taxes. Those are expenses that have to be paid and that can not normally be reduced in any degree. Whatever income he has over that certain amount goes for living expenses which is flexible. In times like these he can secure more of his living from the farm, so that those expenses can be reduced. Then he has his operating ex penses, such as fertilizer, farm machinery, and so on, and only after he gets beyond that expenditure in his earnings does he have any surplus left for general buying. Now, the situation at this time is this, and I am speaking not statistically but from observation. However, the statistics will bear this out if I had them here: That farm income has shrunk to the extent that the farmer has almost stopped buying equipment. Any farm machinery maufacturer knows that. He has been patching up his old equipment. The effect of that on the City of Chicago, where we have the largest manufacturers of farm machinery, is, of course, very direct and very considerable. Many thousands of men are out of employment in Chicago who normally are employed in the farm-machinery industry. Second, he revises his living expenses, and that affects concerns like Quaker Ooats and the food companies, and it affects the cloth ing companies and all concerns of that sort, of which we have many in Chicago, producing the daily necessaries of life, and which of course depend roughly upon 40 per cent of the people living in the country. While there is not 40 per cent of the population on the farm, there is about that percentage on the farm and in towns of under 5,000 population, and those towns go up and down in their buying power almost directly as the farmer himself does, because they depend almost entirely upon agriculture for their income. The net result of that is that the farmer’s buying power has shrunk to almost nothing. I t takes almost all of his income to take care of indebtedness and taxes and certain items of operating expenses MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 107 106 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR which can not be deferred. So that the general buying power of the farmer has almost evaporated. , , n The result of that situation, on Chicago particularly and to the balance of the country in general, is very direct. We often talk about our foreign markets and regret the shrinkage in them, -but the shrinkage in the farm market is far more important to any manufacturer in this country, it has a more direct influence on the unemployment problem, than any foreign market. We can lose all of the foreign markets and it would be only a small fraction of what we have lost in the farm market, a restoration of which could be brought about if we could restore the buying power of the farmer even to the point of 1929, which was still low as compared to his pre-war relationship. . A , , 9 Does that answer your question, Senator I letcher ? Senator F letcher. Yes. . , , A Mr. Gregory. Now, right at this point, if I may be permitted, and I do not think it is necessary to say much to you gentlemen as all of vou are closely in touch with conditions back in your States, but I do want to say th is: That in my own State of Illinois we are fac ing an extremely serious situation, which to my mind makes it im possible for us to think of continuing the policy of continued defla tion, or even of stopping deflation now and trying to stabilize on the PrLast faflCwe6 raised in the city of Chicago by public subscription ten and one-lialf millions of dollars to feed the unemployed, lh a t monev was all "one by February. The city and county had no credit The State came to the rescue and issued $20,000,000 of antici pated'warrants, practically all of which money went to the city of Chicago, and which will be entirely exhausted by the middle of A Now’ the State of Illinois still has some credit, but I do not be lieve the State of Illinois has enough credit at a reasonable rate of interest anyway to take care of the situation for another winter. 1 feel that if this present price situation continues you gentlemen are o-oin" to have to come to the rescue, not only of our city but of many cities5 next winter, because much as we regret having to do some things there is one thing I think the American people will not fail to do and that is to feed the people. I think m the matter of any other5evil we will decide when the time comes but almost anything is nreferable to the people going hungry. . , Now if we do continue, as some of my friends, particularly as some of my banking friends feel we should do, if we continue defla t i o n i f we accept the viewpoint that the job is not yet done, and that WP must take the consequences, it will mean not only a continuation S unemployment, a continued charge on the public, but it will in crease our financial difficulties. The one financial institution which is still stable and in which the public still has confidence, and that s iffe insurance, can not stand very many more months continuation of this situation. As all of you probably know, the life-insurance statements have all been made up on the basis of security prices as of 1 ulv 1 last. These has been a great deal of shrinkage since then, so life insurance companies are not nearly so solvent as their rep t t e mtg” fcate. A tremendous load of credit loans has been transferred from banks to life-insurance companies. Their position is such that further deflation is bound to affect them seriously, and I think you will all agree with me that the failure of even one large insurance company would be something that we could not contem plate at this time except with a great deal of trepidation. . 1 Senator S mith . I t is true that a good many securities in which they have invested surplus funds are jeopardized, they can not find a profitable market for the securities that they h a v e invested their money in, and that goes right back down to this situation, it is ^ Mr. Gregory. These things all come back to that. We have tempo rarily checked bank failures. But the United States Government or the Reconstruction Finance Corporation can not mdefim V underwrite the entire banking structure of this country. I t all comes down to this point, that fundamentally there is only one answer and that is to increase the earning power of the people. ‘ Now,’ there are two primary ways in which the earning power of the people can be increased, and they are very closely interrelated. One is to put the 8,000,000 or 10,000,000 idle men back to work. The loss from idleness is the biggest loss from this present condition. 1 Deflation of values, as long as we have the^ property,, does not make so much difference as to what we may call its worth. A transfer of wealth from debtor to creditor is not a loss, but the loss of laboi of workingmen is something that can not be made up. No man can do to-dav’s work to-morrow. . . The other thing that must be done to restore earning power is a increase in the price of farm products, restoring the farm buying power, and as I say that is so closely interrelated with the unemploy ment problem that the two are tied right up together. Some of you were not here on yesterday when Doctor Warren of Cornell University proved convincingly to all present that farm products and raw materials of all kinds have less resistance than anything else to inflationary or deflationary tendencies And the statistics which he gave were very convincing in proof of the tact that when the tendency is in the direction of price deflation raw materials bear the brunt of it, they have almost no resistance. And on the other hand when the tendency is inflationary their resistance is iust as small and they go up more rapidly than other prices. He estimates that farm products will go up in price about twice as rapidlv as other products when the current turns in that direction. I think perhaps all of you gentlemen will agree in the main with what I have said so far. Now we come to the question as to wliat c a n ‘be d o n e in c r e a s e the price levels, to start say ,m the d.rechon of raising prices, reversing this current of falling puces. I thinK there is very little disagreement among economists or business men ■ who have studied this question, as to this point, a n d th at is that.the is a very direct relationship between money and credit and the toen € ri U rther words, money responds to the law of supply and demand iust as directly as wheat does, or pig iron, or anything else. I f money is scarce it becomes more valuable. But the Government of the United States has fixed the price of money. Consequently any change in its value has to be reflected in the price of commodities. The result of that is that in times of money scarcity—and bank de posits when you are talking about money must be included as money 108 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR because they have the same economic effect; when there is a scarcity of money and money becomes more valuable the effect of it is shown in a falling price level. Supply and demand of course affect the price of any individual commodity, but when prices of all commodi ties go down or up the effect is very largely monetary. I t is true that there are many non-monetary causes of price changes, and those non-monetary causes, at least until recently, have received I think perhaps an undue share of attention. I am convinced that the more anyone studies this question the more he comes to the conclusion that the monetary factor is the overwhelming factor, that changes in the average commodity price level are very largely due to monetary factors, and that those mone tary factors are so important that they can be used in such a way as to largely minimize the effect of the nonmonetary factors. Now, the thing that this bill proposes to do is nothing more than is being done at the present time, with the exception of the end to be achieved. We have not had since the World W ar the old fashioned gold standard of money in the sense that we know it and learned to revere it. We have had since the war in this country, in common with almost every other commercial nation, managed money. Even though we have been on the gold standard our money has been very definitely managed. When the great inflow of gold was on towards this country last year we had at one time I believe about $1.05 worth of gold for every dollar in currency in circulation. Now, without a condition of management of money that would not have happened. That influx of gold would have caused a very rapid rise in prices, and that rapid rise in prices in turn would have caused gold to flow out. The chief advantage of the gold standard is that it is automatic in its effect, that it flows from nation to nation and tends to keep price levels of the various nations in adjustment. But we have stopped it from operating in the normal way. We have got managed money in this country. Senator F letcher. And that has been true ever since we passed the Federal Reserve Act, has it not? Mr. G regory. Yes. Of course we had the war conditions that were not normal, but it has been true even since that time. Senator S mith . Perhaps you would use the term “ mismanaged n instead of managed, but they are interchangeable. Mr. Gregory. Well, I am trying to be polite. Senator S mith . I see you are. Mr. Gregory. I think we must face this fact, that that condition is going to continue. We have the Federal Reserve Board with broad powers, and I think it is only reasonable to assume that the Federal Reserve Board will continue to manage money, and will continue to expand and contract credit, and very rapidly and severely at times, and the only question to my mind involved in this bill of any particular importance is th is: Shall the Congress of the United States, the policy-making body of this country, lay down a definite policy to guide the Federal Reserve Board in its management of money and credit? Or shall we leave the Federal Reserve Board free, as it is now, to manage it, and if so by what standards? The Federal reserve system is a sort of dual system. I t owes obligations not only to the Government but to the people who own it, the bankers of the country. And the question of profit to banks MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 109 can not help, and, legitimately, from having an influence on the policy of the Federal Reserve Board. There are many other questions that come up from time to time which are almost certain to affect the policy of the Federal Reserve Board. And without any criticism of the Board, and I am not de siring to make any criticism of the board in this connection, and without any criticism of the system, I will say that in the absence of any mandate from the Congress as to what should be the guiding factor in its policy, that guiding factor at certain times in the future as in the past, to be something that is not always compatible with the highest public interest. The question before you gentlemen, and the only important ques tion involved in this bill is : Shall the Congress lay down a policy to guide the Federal Reserve Board in its management of the credit and money of the country ? Or shall we leave it unguided, or rather guided by influences that are not always in the public interest ? Senator F letcher. H ow can we connect that up in a way that will accomplish the result and improve the situation? Will this legislation enable you to raise the price level and stabilize it? Mr. Gregory. Of course you all know that the Federal Reserve Board has two principal means of contracting and expanding credit. One is to change the rediscount rate, and the other is through open market operations. Rather recently the Federal Reserve open mar ket committee has been buying Government bonds. I think about four weeks ago their buying was accelerated to about $100,000,000 a week, and I understand it was contemplated there would be a con tinuance of that policy for several weeks, I believe seven weeks, and three weeks are still to run. The effect of that so far has been obscured. I t has resulted in improving the reserve position of the banks but very little of it has been translated into expanded com mercial loans, partly I think due to the policy of commercial bankers. I will say that commercial bankers have been through a great deal of punishment in this country. The ones that have not failed are naturally in a very conservative mood because they have seen so many of their fellow bankers fail and they are very cautious. They hesitate to expand loans, and the most of them are not doing so. Out in my country at any rate they are still liquidating, and are still refusing to make loans for business purposes to any extent even on the best of security. I will say that I know personally of a number of business concerns in Chicago and in the Middle West which could sell more goods than they are now making, could give employment to more men than they are now employing, if they could get even a fraction of the amount of credit which they normally enjoyed in 1929. But they are unable to get it. The banks still do not want to make new loans. They still do not want to renew old loans except in lesser amounts. In other words, in the minds of most commercial bankers with whom I am familiar, liquidation is still a desirable thing. Now, the open market buying policy on the part of the Federal reserve system runs up against that thing. My own opinion is, and it is only my opinion, that a continuation of open market buying at the rate of $100,000,000 a week will pump up enough credit, will create enough credit pressure, enough idle credit in the banks, so that 1 2 0 2 9 0 —3 2 ------ 8 110 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR sooner or later we will overcome that condition. I think perhaps even next month we will begin to see somo effect from that in the shape of expanded commercial credits, which will mean an expan sion of business activity. Senator S mith . Have you any figures as to the amount that these banks that are receiving this money in lieu of their bonds, I mean what is the total figure that they will absorb in adjusting their reserves and their indebtedness before there will be any overplus to reach the very object to which you are calling attention? Mr. Gregory. I think Doctor Fisher, when he comes on the sta nd, will be able to give you those figures. They are in the weekly reports of the Federal Reserve Board, If I remember the actual bank indebtedness to the board is down now to about a little over $200,000,000. Senator T homas of Oklahoma. I think it was $530,000,000 last week. Mr. Gregory. I t has been reduced very considerably. I t will take a few weeks more of this policy before that process is completed. I have just been informed that for the reporting member banks last week it was down to $200,000,000. But the reports for all banks do not come out as regularly as for the reporting member banks. Senator S mith . W hat assurance have we that the policy inaugu rated by the Treasury Department of its own initiative to supply this liquid currency in lieu of bonds will go on to the extent where it will give relief by way of creating an abundance of money. Mr. Gregory. T o my mind that is one of the principal arguments for a bill similar to this one you are considering. One reason why bank confidence has not been restored to the point where they are willing to cease liquidation and perhaps begin a credit expansion policy is that no one knows how soon this policy on the part of the Federal Reserve Board may be stopped or even reversed. The story is going the rounds that there is a gentleman’s agreement that it was to continue for seven weeks, but they may change their minds. Or, at the end of seven weeks we may not begin to see any effect. And there is no assurance that the}7 will not turn around and begin to sell. Senator S mith . Doesn’t that imply that there has been some under standing that this policy will only be pursued until the condition of financial institutions is relieved, and that so far as the public is concerned, that will have to depend upon some other process ? Mr. Gregory. Well, that is possible. I have not talked to any of the members of the Federal Reserve Board and I can not speak from first-hand knowledge as to what their policy is. Senator F letcher. Some of the banks claim there is no real de mand for loans, safe loans, and that that is one reason why they are not making them and they are storing up their funds. Have you any observations on that? Do you think there is a real demand on the part of business and on the part of industry and on the part of agriculture for new loans now? Mr. Gregory. That is a question I can not answer statistically, and probably no one else can. But I should like to give you just two instances on that: One is the case of a farmer down in Illinois, who last week went to his banker and wanted to borrow $500. He needed $500 for feed, some equipment, and one thing and another MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 111 connected with his season’s operations. This farmer has 160 acres of good black Illinois land, free of encumbrance, with no chattel mortgage or any other indebtedness. The banker refused to make him a $500 loan. I happen to know about that case concretely. But that case could be duplicated many times, so far as farmers are concerned. Senator S mith . Well, isn’t it a fact that under present conditions no one can say what is a safe loan? And who can judge as to what will be a safe loan? All our standards are submerged. Real estate has gone. The prices of commodities have gone, and no one .has any assurance as to what to-morrow will bring forth. Mr. Gregory. That is true, Senator Smith; but if a loan of $500 against a quarter section of Illinois land is not a safe loan, then we better shut up the country. Senator S mith . Well, we have shut it up now. You see we are giving away what we have and through this tax bill we are paying them something to boot to take it. Mr. G regory. Well, this thing is true, of course, that a loan to an industry, like agriculture, which is producing at a loss, is not a safe loan no matter how much the property back of it may be, because it is likely to become a frozen loan. Senator F letcher. Y ou may proceed. Mr. Gregory. Here is another instance that is a little more sig nificant, I think. I was talking last week with the manager of the industrial development department of the Chicago Association of Commerce. He told me that he has had repeated instances in the last few weeks of business men coming in to see him and telling him that they had definite and bona fide orders for goods, and that they would like to make those goods and give employment to more men, but that in order to do it they must have credit to meet their pay roll and to buy raw materials during the 30 days or so those goods were going through the manufacturing process, but that the banks of Chicago were not willing to make manufacturing loans at this time, which in normal times would be regarded as the best kind of commercial loans any bank could get. Senator S mith . And that immediately reflected itself upon the price of raw materials? Mr. Gregory. Certainly. Senator S mith . And that reflected itself upon the thing out of which the raw material was gotten. Mr. G regery. N ow, personally, I do not criticize commercial bankers so much for that, because the central banking policy of the country is so obscure. In fact, there is no policy so far as the public is concerned. There is a policy now of credit expansion, but there is no assurance that that may not be stopped or even completely reversed. Three weeks from now the Federal Reserve Board might sell $200,000,000 worth of bonds and contract the credit. It is that uncertainty which is a big deterrent to commercial expansion at this time. Senator F letcher. I f that would work in the way that this bill would provide, then it would increase the circulation. Mr. Gregory. I think there is no doubt about that. I f Congress sets up a guidepost for the guidance of credit expansion and con traction for the operators of the Federal reserve system, that guide- 112 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR, post being the price level as given each week by the Bureau of Labor Statistics, why, the country will then have assurance that we are at least going to follow a definite policy m our handling and management of money and credit. When you talk about confidence, this whole country is based on that and confidence is largely absent. What could give more confidence than assurance to the commercial public that we are going to have a certain definite credit policy in th SenatOTli.ETCHER. W hat do you think of the index of 1926? Mr. G r e g o r y . D o you mean as to whether that is proper or not s Senator F l e t c h e r . Yes. , . , , Mr. G r e g o r y . Well, I personally feel that that is about the right point. The correct point, of course, is the average point at which the present outstanding indebtedness was incurred, and 1 think it you were to figure that out statistically it would probably tall at about that point. I think, however, that is less important than that we have some substantial increase in the price level. Now, if this committee were to decide to amend that and say, “ We will go back 75 per cent of the way to that point,” I would feel that that is not a vital matter. '. . , ,. Senator F l e t c h e r . Well, we thank you. That is a very interesting statement. , , „ , Senator B l a i n e . Mr. Gregory, where do you find the power tor the Federal agency to carry out the public policy declared in this b lMr. G r e g o r y . Well, the Constitution gives to the Congress the power to fix the value of money, and the most accurate index of the value of money is certainly its purchasing power. Senator B l a i n e . Perhaps I did not make myself plain, th a t answer was not responsive to the question I intended to propound. Where is the power conferred upon the Federal agency, set forth in the bill, to carry out the public policy declared in the bill and im posed as a duty upon Federal agencies? . Mr. G r e g o r y . That power is implied rather than specific in the Federal reserve act. The Federal reserve act, as I recall it, giving the board the power of expansion and contraction of credit, is some what indefinite, and the guide given is the advantage to business and commerce, or something of that "kind, that they shall use those powers for the benefit of business and commerce. And I think that certainly would be proper to add to that stability of the price level. Senator B l a i n e . A Federal agency created by act of Congress has no implied powers. I t has only the powers expressly conferred by Congress. Mr. G r e g o r y . Well, I think there is perhaps some question as to whether or not the Federal Reserve Board has not exceeded its powers in some degree in the matter of expansion and contraction. Senator B l a i n e . The Federal Reserve Board, in some of its reports, disputed the power designed to be given in this bill. That dispute, I assume, will continue or else the matter will rest entirely upon the judgment of men as to whether they have the power or not. Why shouldn’t that power be expressly delegated in the bill, and then there will be no question about it. Mr. G r e g o r y . I think it would be important in the bill to do that. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 113 Senator S m i t h . Senator Blaine, what is it that you suggest we express in this bill, the power to do the thing that the bill con templates doing? Senator B l a i n e . Yes; and make it definite and specific, confer the power upon a Federal agency, the power to carry out the public policy declared by the bill. The duty is imposed upon them, but duty and power are two entirely different things. Senator S m i t h . And that is not included in the present Federal reserve act ? Senator T h o m a s of Oklahoma. Under the Federal reserve act, the board, through the banks, has the right to buy and sell bonds, and has the power to increase circulation by buying bonds, and the power to contract such circulation by selling bonds. Now, all that this bill does is to direct the board to exercise that power granted to them. That is my understanding of the bill. Senator B l a i n e . I appreciate that; but it seems to me like this bill declares a public policy. That is not a law. That is just a resolution. Senator F l e t c h e r . But section 2 provides for that, doesn’t it. Senator B l a i n e . Section 2 charges them with the duty of making effective this policy. I suppose that they have that duty now. But the complaint is that they have failed to do it. Mr. G r e g o r y . Well, they have not a definite policy. They h a v e not been asked to do it. . Senator B l a i n e . Not specifically as provided i n the bill; that i s true. I was just concerned about that. Mr. G r e g o r y . I think your suggestion is a good one, that an amendment to that effect would improve the bill. There is one other point I should like to make, and that is th is: That there has been some little consideration given in Congress to other means of in creasing currency and credit than by doing it through the Federal reserve system, such as that proposed in the soldier bonus bill, and in some of the suggested silver legislation. I want to make this remark in that connection: I realize that those measures are not before this committee now, but I do want to say that if the Congress were to decide to adopt some such form of increase in money and credit as is provided by those suggestions, that that, in the absence of this bill, might easily be entirely ineffective. For instance, if the Patman bill were passed and the Treasury Department were to issue $2,000,000,000 in unsecured paper money, the effect of it could be easily offset by the Federal reserve system by the sale of Government securities, and to a considerable degree the effect of the proposed silver legislation might be offset in the same way. Senator S m i t h . They might work just in proportion as that would be inverse. . Mr. G r e g o r y . Yes, sir. They have the power to do it, and there is nothing in the law to prevent them from doing it. Senator B l a i n e . That is exactly the proposition. The Federal Reserve Board now has the power to expand the currency and it has the power to contract the currency. I t has that power, and now if we confer upon them direction as to the operation of those powers in order to accomplish the purposes set forth in this bill it would make it specific. Mr. Gregory. Yes, sir. Senator B l a i n e . And it would prevent contraction expressly. 114 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Mr. Gregory. I think that would improve it. Senator F letcher. Your suggestion then is that it be charged with the duty and vested with the power of making effective this policy, Senator Blaine? Senator B laine. I have not considered the language. I mean I have not settled upon it. I have not really given serious considera tion to what language would prevent that beyond a peradventure of a doubt. I t may be effective as it is, but I was inquiring. Senator S mith . Suppose there is this power conferred upon them by the law in the Federal reserve act, and in pursuance of that law we give them a mandate to proceed to put into operation that law to the extent contemplated in this bill and they refuse to do it, wouldn’t they then be acting in violation of law ? Senator B laine. They certainly would. Mr. Gregory. N ow, there is one objection that is raised, and I understand it has been raised to this measure, by certain members of the Federal Reserve Board, and that is that they would be given by this bill a mandate to do something that is impossible for them to do. It seems to me the answer to that is this: That it is very apparent to anyone whether or not they are honestly trying to carry out this mandate. Their weekly reports would show verv definitely whether they are trying to do it or not. And I think after an honest effort, if it proved impossible, then certainly the logical thing for them to do would be to come back to the Congress and say, “ I f we are to carry out this mandate, we need certain additional powers.” And I am sure that they would be given every consideration by Con gress in that respect. I t seems to me that in these times the situation is so serious, so tremendously serious, not only in the way of business consequences— and we have suffered severely from them—but in the way of social consequences, governmental consequences, from a continuation of this condition for even another year, that it is so fraught with peril that we are justified in adopting legislation that might have an element of experiment in it. I am willing to grant that this pro posed legislation has that. But it does not have a dangerous ele ment in it. If it fails it can not leave us any worse off than we are now. At the most they can attempt to do this, which in effect they are doing right now, and probably it will do some good. If thev do not accomplish the entire purpose, it will help some. I can see nothing in here that would make the situation any worse than it is now. And if they make an honest effort to carry out this mandate and yet can not do it, I am sure the Congress will give them what ever powers they may feel are required to do that. Senator B laine. I t is experimental, but it could not be harmfully experimental, you say? Mr. Gregory. No. Senator B laine. The board very effectively exercised the same power in 1920 when farm commodities were so tremendously de pressed as well as farm values. They may have the power, but it was just an open question with me. ' Senator Gore. I will say that I think the House of Representa tives passed the original Federal reserve act with such a provision, and tne Senate took it out, and it then went to conference. Senator B laine. Was that it? MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 115 Senator Gore. } es. They put in a provision attempting to give this power. Mr. Gregory. I t was placed in the original bill by one of the Houses of Congress, but I do not remember which one. Senator B laine. My suggestions were intended to be helpful and not critical. Mr. Gregory. I think they are very helpful, Senator Blaine. I quite agree with you. Senator Gore. Mr. Gregory, you say this experiment could not do harm. I f it should cause a flight of gold from this country, and if it should cause a dumping of American securities in this country from abroad, might it not be harmful and defeat the very ends of this legislation? Mr. Gregory. Well, that, of course, leads into matters that are questions of opinion. Senator Gore. Yes. . Gregory. My own opinion is that, if the flight of gold resulted in this country going off the gold standard, it might be a very good thing. J Senator S mith . Senator Gore, may I ask you if, with the presence of gold here, we are in our present fix, where would we be if it were not here ? Senator Gore. I do not know. Senator S mith . Well, so far as I am concerned, we could not be any worse off. Senator Gore. Well, I am not certain that if this legislation were enacted, we might not remember these days as the good old days, bad as they are. Senator S mith . We are looking up now in order to see the bottom. Mr. Gregory. Senator Gore, there is one further remark I should like to make in that connection: That, while the temporary with drawal of gold from this country would scare certain people from a psychological standpoint, yet the effect of that would be very helpful, particularly to our farmers, because the transfer of gold abroad, where gold is very scarce, would have a price-raising influence abroad, and would tend to raise the world price of farm products, which would have a very definite tendency here in that direction. Senator Gore. Yes; that might be the only way it would help the farmers, too. Because if you raise the farm prices here, I think you must, by some sort of manipulation, raise the price of articles manu factured here. But I do not think by any sort of manipulation of the currency, so far as this country is concerned, you can raise the price of wheat and cotton. And I think anything' that would arbi trarily raise the price of manufactured products, that are protected by a tariff, would make the farmer pay more for those protected articles and would be an increased calamity to the farmers. Mr. Gregory. There is nobody in this country who has made a more thorough study than Doctor Warren, and his testimony given on yesterday was that, regardless of the international situation, a rise in the average price level in this country would cause more than an average rise in the price of farm products. Senator G ore. I understood his testimony. Mr. Gregory. I have not studied that subject as much as Doctor v\ arren has, but I have a great deal of confidence in his judgment. 116 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator Gore. S o have I. I regard him as one of the best econo mists, certainly agricultural economists, in this country. Senator F letcher. Doctor Warren said, if the price level were raised 10 per cent, the farmers would get a 20 per cent advance in their products. Mr. Gregory. There is another factor we should not overlook in discussing the foreign situation, and that is that, in spite of the fact that some people have blamed the world for our troubles, I think most economists agree that we are to a considerable extent to blame for the world’s troubles; that the severe deflationary process in this country has had a very great effect in deflating world prices, and that, when we take steps toward price restoration in this country, that will have a beneficial effect on world prices, particularly in view of the fact that many of the leading statesmen of England have ex pressed themselves very definitely to the effect that they will follow our policy in that respect. Senator F letcher. Representative Goldsborough, do you wish to ask any questions ? Representative G oldsborough. I believe not. Senator F letcher. D o any of the members of the committee want to ask any further questions? Mr. Gregory. W hat I want to say, in closing, is that this question which you have before you is an extremely live question all through the Middle West. Not only farmers, but business men, many bankers and country bankers, particularly, are deeply interested in this, and there is very little disagreement with the opinion that the only sal vation for us is to do something that will raise prices. There may be some differences of opinion as to the proper and expedient thing to do, but they feel that we can not stand a continuation of this defla tion policy. That is strongly the sentiment of the country. Senator F letcher. We are very much obliged to you for your extremely interesting statement. (Witness excused.) STATEMENT OF FREDERICK BRENCKMAN, WASHINGTON REPRE SENTATIVE THE NATIONAL GRANGE, WASHINGTON, D. C. Mr. Brenckman. Mr. Chairman and members of the committee, my name is Fred Brenckman, and I represent the National Grange. When this hearing was arranged, we invited Dr. Clarence Poe, edi tor and president of the Progressive Farmer and Southern Ruralist, also a recent master of the North Carolina State Grange, to testify in our behalf. Doctor Poe explained that, owing to a previous engage ment, it would not be possible for him to be present, but he is so deeply interested in this question that he prepared a very convincing and illuminating statement on the subject of monetary stabilization. He sent it to me, and in order that the members of the committee might have the benefit of it in advance of the printed report of the hearing, I had it mimeographed and have passed it around. If there is no objection, Mr. Chairman, I would like to have the statement inserted in the record at the conclusion of my remarks, which will be very short. I think that this article throws so much light on the subject that it is well worth printing. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 117 Senator Gore. I hope that will be done. I know Doctor Poe very well and have a very high regard for his opinion. Senator B laine. It contains very valuable information, Mr. Chairman. Senator F letcher. Then, if there is no objection, we will insert it in the record at the close of Mr. Brenckman’s remarks. Mr. B renckman. A t our last annual convention, which was held at Madison, Wis., in November, the Grange passed resolutions in favor of monetary stabilization. In outlining our program we had the benefit of the guidance and advice of Dr. John R. Commons of the University of Wisconsin, in whom we have great confidence. Our program asked the National Government and the Federal reserve system to take all possible steps to secure: (1) The restoration as nearly as may be of the wholesale price average to the level prevailing in 1926, or the average of 1923-1928, and (2) stabilization of the price level as nearly as practical at that point. Contributing to these ends the National Grange recommends: 1. Increased purchases of securities in large volume in the open market by the Federal reserve banks. 2. Reduction of rediscount rates by the Federal reserve banks. 3. Reduction of the legal minimum gold reserve ratios of the Federal reserve banks to points materially below the present 35 and 40 per cent established by law. 4. An international monetary conference for the purpose of (a) stabilizing the gold price of silver, and (b) stabilizing the purchas ing power of gold in terms of the average of wholesale prices of commodities. The Grange is heartily in favor of the Goldsborough bill, Mr. Chairman, because it is an attempt to raise the prive level of com modities. Unless that can be done, agriculture is sunk. We must restore the commodity price level to restore the purchasing power of agriculture and to enable the farmer to pay his debts and taxes. We have compiled a statement which shows that if the farmer borrowed a dollar in 1919, in order to pay back that dollar to-day at the prevailing commodity price level he must pay back $3.33. I f he borrowed a dollar in 1925, in order to repay it to-day in terms of commodities which he produces, he must pay back $2.17. Even if he borrowed a dollar as late as 1930, under prevailing conditions he must pay back $1.77. We all know that that is an utter impossibility. We are not ask ing for inflation, but we are asking for a restoration of values. President Hoover remarked, about the time of the beginning of the present session of Congress, that we must do something to reverse the processes of deflation. That is what we are in favor of. Senator B laine. I thought we had done that with the establish ment of the Reconstruction Finance Corporation. Mr. B renckman. Well, Senator Blaine, we think that something more is needed. Senator B laine. I said that, of course, in irony. Mr. B renckman. I was interested to note yesterday, Mr. Chair man, an article appearing on the first page of the Philadelphia Public Ledger, which was written by Raymond G. Swing, which shows that the people of Great Britain are thinking along the same MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR line as we are with reference to raising the commodity price level. I f there is no objection, I would like to read a few paragraphs of this article, because I think it will throw some light on the subject. I t is dated at London, May 11, and reads as follows [reading] : b e w o rth to fu tu re g en e ra tio n s all t h a t i t h a s cost th is g e n e ra tio n . On th e o th e r h an d , if w e fa il, w h ile th e fu ll sense of financial d is a s te r is upon us a n d Avhile th e im pulse fo r co rrectio n is s tro n g e st— if in th is situ a tio n w e fa il to w o rk o u t p e rm a n e n t a n d effective refo rm s, th e n no one ca n n am e th e d a y o r th e h o u r w hen h u m a n ity m ay n o t be called upon to a g a in go th ro u g h th e h e a rtb re a k of a n o th e r n a tio n a l an d in te rn a tio n a l “ d eflation.” W hen O wen D. Y oung said recen tly , “ T h e p ro p e r h an d lin g of p rice s ta b ility is one o f th e m ost im p o rta n t m a tte rs facin g th e c a p ita lis tic s y s te m ; in i t w ill b e fou n d th e roots of th o se m a la d ju s tm e n ts w hich re s u lt in u n eq u al a n d u n f a i r d is trib u tio n of w e a lth , in unem ploym ent, a n d o th e r serio u s p roblem s,” he u tte re d a trem en d o u s b u t th o ro u g h ly considered in d ic tm e n t of o u r u n sta b le m oney system . A nd w h a t he sa id of A m erica is p a ra lle le d by th e conclusion o f th e re c e n t M acM illan C om m ittee R e p o rt on F in a n c e a n d In d u s try in G re a t B rita in : “A stu d y of h isto ry w ould, w e believe, confirm th e opinion th a t it is th e •changes in th e level of p rices a n d in th e co n seq u en tial a lte ra tio n in th e position of d eb to rs an d c re d ito rs th a t th e m ain se c re t of social tro u b le is to be fo u n d .” U pon th e c o rrectn ess of th ese s ta te m e n ts an d th e need fo r som e such action a s th e G oldsborough bill proposes, I now w ish to in tro d u ce th e testim o n y of official s ta tis tic s a n d of lead e rs in a g ric u ltu re , b u sin ess, econom ics, an d sta te sm a n sh ip . 118 G re a t B rita in h a s in d ire c tly a sk e d th e U n ited S ta te s to ta k e p a r t in a conference to ra ise p rices. T h e in v ita tio n is vag u e a n d i t cam e th ro u g h W a lte r E llio t, th e F in a n c ia l S e c re ta ry of th e T re a su ry , w ho spoke a t th e close o f th e deb ate on th e second re a d in g of th e finance bill in th e H ouse o f Com m ons la s t n ig h t. B u t he spoke u n d e r th e stro n g p re ssu re of tw o fo rm e r C hancellors of th e E x ch eq u er, S ir R o b e rt H o rn e a n d W in sto n C h u rch ill, b oth of w hom u rg ed in te rn a tio n a l co o p eratio n a n d spoke w ith u n u su a l g ra v ity of th e d a n g e rs o f co n tin u ed deflation. “A ny a tte m p t a t frie n d ly co lla b o ra tio n ,” sa id M r. E llio t, “ to w ork m ore a n d m ore along p a ra lle l lines, to b rin g u s to re la tio n s w ith m en of good w ill w ho a re p u rsu in g a sim ila r policy to o u r ow n, w ould be w elcom ed, an d m ore th a n w elcom ed, by th e G o v ern m en t.” M r. C h u rch ill a sk ed w h e th e r such a n im p o rta n t s ta te m e n t w ould be m ad e know n officially to th e U n ite d S ta te s. E llio t rep lied th a t h e wra s sp eak in g fo r th e G overnm en t a n d h a d no d o u b t th a t h is sta te m e n t w ould be received w ith a tte n tio n b o th h e re a n d acro ss th e A tla n tic . A few h o u rs e a rlie r th e C h an cello r of th e E x ch eq u er, N eville C h am b erlain , h a d told th e B ritis h B a n k e rs A ssociation t h a t “ it m ig h t be ” th e policy of th e G overnm ent to ra is e p rices, b u t th a t th is w ould only be done by in te r n a tio n a l cooperatio n . T h is sam e speech w as n o tab le fo r its w a rn in g to th e B ritis h to ex p ect f u r th e r p a in fu l sacrifices a n d by a fo re c a st of econom ies a m o u n tin g n o m in ally to $ 3 0 0 ,0 0 0 ,0 0 0 . T hese s ta te m e n ts ta k e n to g e th e r a re co n sid ered h e re to be of re a l sig nificance. B u t th e y do n o t m ean th a t G re a t B rita in believes i t is possible to h old a conference w ith A m erica to ra is e p ric e s a t an e a rly d a te . T h e B ritis h G overnm ent know s t h a t C ongress a d jo u rn s on J u n e 11 a n d t h a t a p re s id e n tia l cam paign is on. I t k n o w s t h a t i t is im possible to g e t A m erican co o p eratio n before th e L a u sa n n e C onference. In order to conserve the time of the committee, Mr. Chairman, and appreciating your willingness to print the splendid statement prepared by Doctor Poe, I shall not continue my statement any further. Senator F letcher. We are very much obliged to you. (The statement by Clarence Poe, president Progressive FarmerRuralist Co., referred to and submitted by the witness, is here printed in full, as follows:) W h y A g r ic u l tu r e and B u s in e s s R e q u ir e S ta ble M o ney (B y C larenc e Poe, p re s id e n t P ro g re ssiv e F a rm e r-R u ra lis t Co., R aleig h , A tla n ta , B irm in g h am , M em phis, D a lla s ) To th e S e n a t e C o m m it t e e on B a n k in g and Currency, Washington, D. C. G e n t l e m e n : H a v in g been in v ite d by th e N a tio n a l G ran g e to a p p e a r as one o f its spokesm en in connection w ith th e h e a rin g s on th e G oldsborough bill “ F o r re s to rin g a n d m a in ta in in g th e p u rc h a sin g p o w er of th e d o lla r ” a n d finding it im possible to a tte n d in p erso n on th e day n am e d , I beg to a sk th e p riv ileg e of p re s e n tin g by le tte r th e v iew p o in t of so u th e rn a g ric u ltu re , a s I believe I know it, a n d to ask , if you w ill g ra n t it, th a t th e fa c ts be in clu d ed in y o u r p u blish ed re p o rt. In a d v o ca tin g th e G oldsborough b ill w e a re o f course concerned m ain ly w ith a p rin cip le an d a m o ral d u ty r a th e r th a n a n y p a rtic u la r ph raseo lo g y . T h e p rin cip le is s ta b le m oney. T h e m o ra l d u ty is t h a t o f e n a b lin g d e b to rs to p ay d eb ts w ith d o lla rs o f th e sam e v a lu e a s th e y received from th e c re d ito r. A m erica, a n d th e w hole w o rld in fa c t, h a s been th ro u g h a G eth sem an e of econom ic agony in re c e n t y e a rs, b u t i f o u t of it a ll w e le a rn th e c h ie f lesso n — n am ely, th a t th e tra g e d y is la rg e ly th e re s u lt o f a n u n sta b le a n d h ence d is h o n e s t m oney sy stem — th e know ledge g ain ed a n d th e re fo rm s in s titu te d m ay 119 I. HOW DEFLATION H A S DOUBLED FARM DEBTS E v e ry C ongressm an an d S e n a to r know s how trem en d o u sly a ll fo rm s of d eb t h av e in c re a se d in th e la s t 35 y e a rs— F e d e ra l debts, S ta te , county, m u n icip al, a n d p riv a te d e b ts ; debts to com m ercial b an k s, la n d b an k s, m o rtg ag e com panies, a n d a ll financial in s titu tio n s — an d all th e se debts, public a n d p riv a te , have p ra c tic a lly doubled because of th e in creased v alu e of m oney. A s N a tio n a l M a s te r T a b e r o f th e G range h a s p o in ted o ut, if a fa r m e r m ade a d ebt so recen tly a s 1 9 3 0 , it now ta k e s 7 7 p e r c en t m ore fa rm p ro d u c ts to p ay th e p rin c ip a l of th e d eb t th a n th en , an d M r. T a b e r h a s com piled th e follow ing ta b le show ing in te rm s of w h a t th e fa rm e r h a s to sell ju s t how m uch he now h a s to p a y in th e fo rm of fa rm p ro d u cts (in p rin c ip a l alone besides in te re s t) fo r each $ 1 0 0 b o rrow ed o r fo r each $ 1 0 0 of d eb t in c u rre d in a n y of th e y e a rs in d ic a te d in th e ta b le : Present amount in commodity values Y ear $ 1 0 0 b o rro w e d : 1 9 3 0 ____________ 1 9 2 9 ____________ 1 9 2 8 ____________ 1 9 2 7 ____________ 1 9 2 6 ____________ 1 9 2 5 ____________ 1 9 2 4 ____________ 1 9 2 3 ____________ $177 202 208 209 196 217 215 $200 Y ear $ 1 0 0 b o rro w e d : 1 9 2 2 ____________ 1 9 2 1 ____________ 1 9 2 0 ____________ 1 9 1 9 ____________ 1 9 1 8 ____________ 1 9 1 7 ____________ 1 9 1 6 ____________ 197 180 230 333 308 291 225 T h ere can be no econom ic recovery t h a t ignores th is fu n d a m e n ta l s itu a tio n . A s M r. Ja m e s C. Stone of th e F e d e ra l F a rm B o ard sa id r e c e n tly : “ T he fellow w ho is in d e b t a n d w hose d ebt w as c re a te d w h en com m odity v a lu es w ere m uch h ig h er th a n now h a s only th re e w ay s to get o u t. H e can re p u d ia te h is d eb t because he can n o t hope to pay it w hen th e com m odity upon w h ich lie based th e d eb t w as th en selling fo r fo u r tim es w h a t i t is now . F o r ex am ple, if a cotton g ro w er b o rrow ed m oney on h is lan d w hen co tto n w a s 2 5 c e n ts a pound, i t now ta k e s five bales to p ay th e d eb t w h ere i t took only one w h en th e debt w a s c re a te d — a n d i t is im possible fo r him to pro d u ce five bales Avliere he produced one th en . T he second w ay o u t fo r th e fa r m e r is fo r th e p ric e of th e com m odity to rise w ith in a reaso n ab le d ista n c e of w h ere i t w as w hen t h a t deb t w as created . T h e th ird a lte rn a tiv e is in som e w ay to pro v id e ch eap er m oney fo r him to p ay h is o b ligation. One of th ese th re e th in g s is going to h ap pen. W e a re going th ro u g h th e rep u d ia tio n sta g e now a n d h av e been fo r se v e ral y e a rs. I f t h a t con tin u es, i t w ill keep bu sin ess a n d finances u p set. A g re a t m an y people th in k th a t is th e n a tu r a l n o rm al w ay fo r it to a d ju s t itse lf, b u t p erso n ally I do n ot. O ne of th e o th e r w ays should be ad o p ted , a n d I do n o t believe i t w ill be n ecessary fo r us to go off th e gold s ta n d a rd to do it.” 120 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR “ One of th ese th re e th in g s is going to h a p p e n ,” as M r. S tone co rre c tly sa id — in creased com m odity p rices, c h eap er m oney, or re p u d ia tio n . T h e re is no o th e r w ay o u t fo r i t is p h y sically im possible to pro d u ce a n d sell enough e x tr a com m odities to eq u al th e volum e of d eb t u n ju s tly im posed by o u r p re se n t m oney system . I I . BUSINESS MEN INTERESTED E Q U A LL Y W IT H FARMERS A nd n o t only is it im possible fo r a g ric u ltu re to recover w ith o u t e ith e r in creased com m odity p rices o r d eflated deb ts, b u t th e sam e th in g is tr u e of a ll b usiness. F ro m no fa rm le a d e r, fro m no spokesm an of a g ra r ia n opinion, h a s C ongress h a d a n y w a rn in g m ore e m p h atic o r c lea r-cu t th a n th is voiced by th e a b le st o rg an o f A m erican b u sin ess, T h e B u sin ess W eek of New Y ork C ity, in its issu e o f F e b ru a ry 3, 1 9 3 2 : “ T h e only re m a in in g ro ad to recovery fo r ou rselv es a n d th e w o rld is by concerted a n d co u rag eo u s actio n , th ro u g h g o v ern m en ts a n d c e n tra l b an k s, to ra is e th e com m odity p rice level a n d red u ce th e v alu e of gold to th e level a t w hich it w a s w hen th e b u lk of th e w o rld ’s p ublic a n d p riv a te d eb t b u rd e n s w ere c o n tra c te d . O th erw ise u n iv e rsa l b a n k ru p tc y , d e fa u lt, a n d re p u d ia tio n a re unav o id ab le. . “ E v e ry m ean s to accom plish th is p u rp o se is ju stifie d , a n d ev ery influence th e U n ited S ta te s can e x e rt in th is d ire c tio n a s th e m ost p o w erfu l fin an cial force in th e w o rld to-day is in d isp en sab le. I f it can n o t be done by a ctio n of c e n tra l b an k s, o r c o lla te ra l agencies lik e th e R eco n stru c tio n F in a n c e C o rp o ra tio n in fo rc in g c re d it e x p an sio n th ro u g h o rd in a ry b a n k in g ch an n els, i t m u st com e th ro u g h d e lib e ra te d e v a lu a tio n o r d ire c t in flatio n of c u rre n c y .” ITT. T H E FU ND AM EN TAL D IS H O N ESTY AND IM M O R ALITY OF OUR PRESENT M ONEY SYSTEM I f th e “ u n iv e rs a l b a n k ru p tc y , d e fa u lt, a n d r e p u d ia tio n ” suggested by th e B usiness W eek a re n ecessary a s a re s u lt of follow ing rig id ru le s of h onesty a n d f a i r d ealin g , th a t w ould be one th in g . B u t w hen a ll th is d is a ste r is th e re s u lt r a th e r of a fu n d a m e n ta lly im m o ral a n d d ish o n e st s ta n d a rd of v a lu e s (o r absence o f s ta n d a rd s ) th e s itu a tio n becom es e n tire ly d ifferen t. W hen w e reflect th a t all d eb ts m u s t re a lly be p a id in com m odities, a n d w hen w e find th e financial co m m ittee of th e L eague of N a tio n s re p o rtin g t h a t w h e re a s in 1 9 2 8 i t took 1 0 0 u n its of com m odities to p ay a d eb t of 1 0 0 gold u n its, to -d ay i t req u ire s 1 7 0 u n its o f com m odities, w e m u st a g re e th a t th is is n o t only “ th e c ru x of th e c r i s i s ” b u t p re s e n ts a g h a stly a n d fla g ra n t p e rv ersio n of e sse n tia l m o rality . As C. V. G regory s a i d : “ I f C ongress h a d p assed a la w in 1 9 2 6 re q u irin g every d e b to r to p ay b ack $ 1 .5 0 fo r ev ery $ 1 he h a d borro w ed , besides in te re s t, w e w ould h av e h a d a rev o lu tio n . Y et th a t is ju s t w h a t d eflatio n h a s done. Suppose C ongress h a d p assed a la w in 1 9 2 6 doub lin g th e size of th e b ushel b a sk e t o r th e n u m b er of p o u n d s in a bushel, a n d h a d to ld u s t h a t in m e a su rin g ou t p ro d u c ts to p a y o u r d eb ts w e m u st give th e sam e n u m b er of bu sh els of g ra in b u t m e a su re it ou t in th e se new a n d en la rg e d b ushel b a sk e ts. B y fa ilin g to ta k e a ctio n to sta b iliz e th e v a lu e o f m oney C ongress h a s done w h a t am o u n ts to th e sam e th in g .” W hen such c o n d itio n s p re v a il a n d w hen a m a n m ay p ay a n d p ay on th e p rin c ip a l of a d eb t a n d still find h im se lf ow ing th e c re d ito r m ore in goods an d com m odity v alu es th a n a t first, th e n g o v ern m en t is sim ply p e rm ittin g an d p ro m o tin g robb ery u n d e r th e sa n c tio n of law . A s D r. Irv in g F is h e r, of Y ale U n i v e rsity , is q u oted a s h a v in g sa id b efo re a congressional co m m ittee re c e n tly : “ N ot only a re w e h av in g a tra g ic liq u id a tio n of deb ts th ro u g h fo reclo su res, e tc ., b u t i t is a liq u id a tio n t h a t does n o t liq u id a te . You m ay p ay $ 3 0 0 on a $ 1 ,0 0 0 debt, only to find t h a t you h av e in creased y o u r in d eb ted n ess to $ 1 ,1 0 0 in te rm s of com m odities. So in sp ite o f all th a t A m erica h a s p a id on its debts, th e re h a s been no re a l liq u id a tio n sin ce 1 9 2 9 . W e a re now in d e b t m ore th a n w e w ere th e n in te rm s o f w h a t w e h a v e to p a y w ith . W e a re to ld th a t th e n a tio n a l d e b t h a s been red u ced by 2 8 p e r cen t, b u t th a t is an illu sio n . T h e re m a in d e r m u st be p a id by ta x e s p a id by th e fa rm e r a n d fa c to ry in com m odities. In s te a d of o u r d e b t being re d u ced fro m tw enty-five b illio n s to e ig h teen billio n s, it now s ta n d s a t th irty -fiv e b illio n s in m a rk e t-b a s k e t d o lla rs— te n b illio n s m ore th a n i t w a s in 1 9 2 4 . O f A m erica’s g ro ss d eb t w e h av e liq u id a te d fifty b illio n s of tw o h u n d re d b illio n s in d eb ted n ess, b u t now find o urselves w ith a d eb t of tw o h u n d re d a n d th ir ty b illio n s in m a rk e t-b a sk e t d o lla rs. Some th in k t h a t w e a r e w o rk in g o u r w ay o u t, b u t w e a re w o rk in g o u rselv es in .” IV . 121 OUR PRESENT SYSTEM P U N IS H E S IN IT IA T IV E AND ENTERPRISE, DESTROYS AMERICA’S HOPE N ot only does o u t p re s e n t m oney sy stem u n ju s tly rob a ll d eb to rs b u t i t p en alizes a n d p au p erizes th e groups w ho h av e m ade A m erica g re a t, w hile it re w a rd s an d en rich es th e tim id , th e u n e n te rp risin g , th e in activ e. T he m en who h ad fa ith in A m erica an d w ished to serve it, th e m en w ho from 1 9 1 5 to 1 9 3 0 invested in fa rm s a n d hom es a n d fa c to rie s an d b u ild in g s an d m achinery a n d equipm ent— they h av e been d eflated o r b a n k ru p te d dow n to $ 5 0 o r less fo r each $ 1 0 0 invested. On th e o th e r h a n d , th e tim id m an who p u t h is m oney in a safety -d ep o sit box can ta k e i t o u t a n d find it w o rth $ 2 0 0 in p u rch asin g p o w er fo r each $ 1 0 0 it fo rm erly possessed. T he u n p ro fitab le se rv a n t w ho hid es h is m oney in a n a p k in w as condem ned by th e m a s te r, b u t he is th e v ery m an w hom o u r m oney system selects fo r its ric h e s t re w a rd s to-day, w hile th e m an of e n te rp rise a n d co u rag e is pu n ish ed fo r h is v irtu e s. A nd of a ll e n te rp ris in g A m ericans w ho suffer, th e fa rm e r su ffers m ost. T h is is tru e , because w hen h a rd tim es come a n d prices drop fa c to rie s sh u t dow n and c u t off p ro d u ctio n , b u t th e fa rm e r keeps rig h t on p roducing f o r h is fellow s in n o rm a l volum e a n d finds h is prices c u t m ore an d m ore because of th e su rp lu ses accu m u lated in th e face of a v an ish in g m a rk e t. V. W E NEED A M O NEY SYSTEM T H A T W IL L STIM U LA TE PRODUCTION In th is connection I w ish to s tre s s th e fa c t t h a t w e need a m oney system th a t w ill en ab le in d u s try a n d b u siness to re n d e r to m a n k in d th e a lm o st lim it less services th ey a r e p re p a re d to re n d e r, in s te a d of d e lib erately c u rta ilin g p ro d u ctio n a s o u r p re s e n t m oney system n e cessita tes. A bout th e m ost ab su rd figure in A m erica to-day is som e alleged s ta tis tic ia n p re s e n t c h a rts of th e d eflatio n th a t follow ed th e N apoleonic w a rs— in d ay s before a locom otive w as e v er in v en ted , a tele g ra p h ev er d ream ed of, h y d ro electric pow er ev er con ceived, a m odern fa c to ry ever b u ilt, o r a m odern tech n ician ev er tra in e d — a n d a rg u in g th a t because a long p eriod of n e a r s ta rv a tio n follow ed N apoleon’s w a rs w e m u s t su ffer sim ila r p riv a tio n now in p o st W orld W a r d ay s, w hen science h as rem ad e th e w orld, stu d d ed th e co n tin e n t w ith fa c to rie s, h arn essed th e riv e rs, bound a ll sections to g e th e r w ith ra ilro a d a n d te leg rap h , autom obile a n d a irp la n e , an d given th e keys of science a n d ed u catio n to high a n d low a lik e . On th is p o in t it is a p p ro p ria te to qu o te th e fo rcefu l w o rd s of P re s id e n t G lenn F ra n k , of th e U n iv ersity of W isconsin, w ho said recen tly in an ad d ress, T h e P roblem of E conom ic R eco v ery : “ T he suprem e b a ttle of th is g en eratio n is on b etw een th e d eflatio n ists an d th e co n su m p tio n ists. T h e d efla tio n ists a re those b u sin ess le a d e rs w ho th in k th a t th e w ay o u t of th e c u rr e n t econom ic m uddle lies in red u cin g th e s ta n d a rd s o f living. T h e co n su m p tio n ists a re those bu sin ess le a d e rs who th in k th a t th e w ay o u t of th e c u rr e n t econom ic m u d d le lies in ra isin g th e s ta n d a rd s of liv in g .” N o th in g C ongress can do to ra ise liv in g s ta n d a rd s is m o re im p o rta n t th a n sta b iliz in g th e v alu e of th e d o lla r a t a v e ra g e levels of th e decade 1 9 2 0 -1 9 3 0 , so th a t th e fa rm e rs of A m erica (a n d all o th e r c itiz e n s) can pay th e ir debts, w ith m oney of th e sam e v alu e as th a t p re v a ilin g w hen th e d eb ts w ere c re a te d . I t is not m erely th e b u rd en of deb t, b u t th e excess an d e x tr a b u rd en o f d e b t w hich h a s been ad d ed th ro u g h th e u n ju s t in c rease in th e v a lu e of m oney— it is th is w hich is m ak in g an y econom ic recovery impossible!. I f th e people could only p ay deb ts on th e b asis of com m odity v a lu e s p re v ailin g w hen th e debts w e re m ade, th ey w ould n o t only p ull th ro u g h , b u t th e m ere p ro sp ect o f th is re s u lt w ould g ive a new confidence t h a t w ould its e lf go f a r to w a rd re s to rin g p ro sp e rity . A nd J . M. K en w o rth y , a m em ber of th e B ritis h H ouse of C om m ons, 1 9 1 9 -1 9 3 1 , w ritin g u n d e r (h e title , “ T he W ay B ack to P ro s p e rity ,” in C u rre n t H isto ry fo r M ay, p o in ts to A m erica’s su p rem e o p p o rtu n ity to serv e a new age w h en h e says in la n g u ag e of such m em orable im p o rt th a t I q uote him a t som e le n g th : “ It w ould be possible to-day fo r th e F e d e ra l reserv e b a n k s to ra is e p rices in th e U n ited S ta te s to th e 1 9 2 7 o r 1 9 2 9 level by buying se c u ritie s in th e open m a rk e t. T h is w ould m ak e m ore fu n d s a v a ila b le fo r th e m em ber b a n k s; e ig h t o r ten tim es th a t am o u n t could be given in c re d it o r le n t o u t to in d u s try . B u t th is m ig h t w eaken th e d o lla r in th e w o rld m a rk e ts. F lu c tu a tin g ex ch an g es a re a n o th e r g re a t h in d ra n c e to in te rn a tio n a l tra d e . Y et if th e c e n tra l b an k s of a ll th e lead in g financial a n d in d u s tria l n a tio n s decided to e x p a n d c re d it MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR sim u ltan eo u sly , th e re w ould be no flu c tu atio n o r little flu c tu a tio n in th e e x changes a n d w o rld tr a d e w ould rev iv e. B e tte r still, th e ex ch an g es could bu pegged in re la tio n to one a n o th e r a n d flu c tu a tio n s th e re b y avoided. I f p rices ro se too high , by sellin g se c u ritie s th e c e n tra l h a n k s could re s tr ic t c re d its a n d check th e boom. T h e id e a l w ould be to keep p rices stead y , to en co u rag e th e g ro w th of p ro d u ctio n a n d to issu e enough c re d its a n d cu rre n c y to m e e t th e in creased needs of ex p a n d in g a c tiv ity . By th is m ean s w e could ste a d ily ra ise th e s ta n d a rd of life of th e people of a ll c o u n trie s, avoid a lte rn a te slu m p s a n d boom s a n d e v e n tu a lly ab o lish u n m e rite d p o v erty . “ T he econom ics of to-day, a s ta u g h t by th e o rth o d o x , a re o u t of d a te becau se th ey w ere m e a n t fo r a w o rld s itu a tio n in w h ich fa m in e a n d sc a rc ity w ere th e n o rm al co n d itio n s a n d in w hich m a n k in d w a s engaged in a fierce stru g g le a g a in s t th e fo rces o f n a tu re . M en h a d to save a n d h o a rd a n d p u t by fo r a ra in y d ay. B u t now m o d ern science a n d in d u s try , w ith b e tte r m ean s o f tr a n s p o rt a n d com m unication, h av e rem oved th e spectetr of fa m in e a n d w a n t. T h e need now is to spend, consum e, a n d th ereb y use up th e overflow ing a b u n dance w h ich ev ery civilized com m unity can produce. M ass p ro d u c tio n m u s t be accom panied by m ass consum ption, o th e rw ise society w ill e ith e r b a n k ru p t its e lf o r seek re lie f in w a rfa re an d d e stru c tio n . N ev erth eless, w e co n tin u e to u rg e th e p ra c tic e of t h r if t a n d p e n u ry , to deflate a n d r e s tr ic t c re d its, w h en m a rk e ts, w a reh o u ses, a n d g ra n a rie s a re choked w ith u n sa la b le goods. * * * “ T he te s t of w h e th e r o u r p re se n t civ iliz a tio n w ill su rv iv e depends upon o u r solving th e m odern problem of u n d erco n su m p tio n in a w orld m a te ria lly ric h e r th a n ever before. Is m an k in d re a lly to s it dow n a n d sta rv e , b ecau se of lack of lead e rsh ip a n d co u rag e in th e inv isib le g o v ern m en ts o f h ig h finance, or w ill th e comm on sense of th e comm on people d em an d th a t a w ay o u t of th e a p p a re n t im p asse be fo u n d ? ” I t w ould be im possible, it seem s, fo r th e genius of m an to conceive a n d b rin g fo r th a m ore g ig an tic a n d colossal in v en tio n fo r m ak in g “ th e rich ric h e r and th e poor p o o r e r ” o r fo r sh eer robbery of th e d eb to r class u n d e r th e fo rm of law th a n is such a n u n sta b le m e a su re of v alu e a s o u r d o lla r now is. I t is a system w hich m akes th e law a n a id , a n ally of th e ro b b er r a th e r th a n d efen d er of th e robbed. W hen, fo r exam ple, a d e b t is c o n tra c te d w hen th e d o lla rs loaned re p re se n t 1 0 bales of cotton o r 5 0 0 b ushels of w h e a t, an d th e g o v ern m en ts an d fin ancial sy stem s of th e e a rth m ake i t so t h a t th e cre d ito r collects d o lla rs th a t re p re se n t 3 0 bales of cotton o r 1 ,5 0 0 bu sh els of w h e a t (a n d in sim ila r p ro p o rtio n s as re g a rd s a ll o th e r c o m m o d itie s), in a d d itio n to h av in g a ll in te re s t p ay m en ts correspondingly in creased —w hen th is h appens, h a s n o t a robbery been p e rm itte d a s e sse n tia lly im m o ral a s th e b u rg la ry of a hom e o r th e holdup o f a bank? T h e re m ay be law , b u t th e re is no m o ra lity a n d no honesty in re q u irin g a m an to p a y in v alu es tw ice o r th ric e w h a t he received in p rin c ip a l p lus tw ice or th ric e in v alu es w h a t h e ag reed to p ay in in te re s t also. A nd here, too, is an am az in g c o n tra st. In 1 8 9 6 o u r c a p ta in s, lo rd s, a n d ru le rs in business a n d finance th u n d e re d in in d ig n a tio n a g a in s t “ p e rm ittin g 100-cen t debts to be p a id w ith 50-cen t d o ll a r s ” a n d ra llie d A m erica in b e h a lf of “ h o n est m o n e y ” to p ro te c t th e c re d ito r classes. B u t to-day from w h a t h igh q u a rte rs in p ress or p u lp it o r ro s tru m have w e h e a rd any N ation-sum m oning a la rm in b e h a lf of “ h o n est m oney ” to p ro te c t th e d eb to r classes— a n y so u l s tirr in g p ro te st, ten se w ith m o ral in d ig n atio n , a g a in s t th e im m o rality of re q u ir in g deb to rs to p ay w ith 150-cen t d o llars th e d eb ts th e y c o n tracted w ith 100-cent,. 80-cent, o r even 64-cen t d o llars? W h y th e difference? W hy is it th a t C ongressm an M cF adden can denounce th e G oldsborough bill w ith th e ch a rg e th a t it “ is d ish o n est to th e A m erican people, because i t w ill p e rm it bills c o n tra c te d in te rm s o f to -d ay ’s d o lla r to be p aid in te rm s of d o llars o f one-half th e ir p u rc h a sin g pow er a n d v alu es,” w hen fo r th re e y e a rs p a s t he h a s a p p a re n tly seen n o th in g even rem o tely d ish o n e st in re q u irin g th e fa r m e r’s debts c o n tra c te d in te rm s of y e ste rd a y ’s d o lla r to be p a id in d o lla rs o f tw ice th e ir p u rc h a sin g o r com m odity v alu e? W hy is it t h a t m en in h ig h posi tio n can see g re a t d an g er in “ u n co n tro lled in flatio n ” b u t h a v e a p p a re n tly seen none in th e long tra g e d y of u n co n tro lled d eflatio n w ith its fo reclo su res, its b a n k ru p tcies, its unem ploym ent, its s ta rv a tio n , its suicides? 122 V I. W H A T CAN CONGRESS DO ABOUT T H E S ITU A TIO N ? F a rm lea d e rs a n d o th e rs in te re ste d in a n “ h o n est d o lla r ” a re n o t a sk in g fo r th e ab an d o n m e n t o f sta n d a rd s of v alu e, b u t r a th e r fo r th e e sta b lish m e n t of re a l sta n d a rd s o f v alu e. A s P re s id e n t E d w a rd A. O’N eal, of th e A m erican F a rm B u rea u , sa id to a co n g ressio n al c o m m itte e : “ in ask in g th a t C ongress give u s a n h o n e st d o llar, we a re n o t a sk in g th a t w e abandon o u r s ta n d a rd . W e w a n t gold to be back of th e d o lla r, b u t w e w a n t i t to be back of a n h o n e st d o lla r. W e a sk t h a t you re g u la te th e v a lu e of o u r m oney so th a t m oney its e lf w ill n o t d is to rt th e exchange v a lu e of com m odities, b u t w ill serv e a s a n a c c u ra te m edium of exchange e x p ressin g th e tr u e exchang e v alu e of tw o com m odities o r tw o serv ices.” I f th e com m odity p rice level of 1 9 2 0 - 1 9 3 0 can be re sto re d a n d th e r e a fte r ste a d ily m a in ta in e d w holly by F e d e ra l re se rv e ac tio n , good a n d w ell. B u t m illions believe th a t it is going to be n e cessary to p rovide t h a t h e re a fte r th e q u a n tity of gold in o u r s ta n d a rd d o lla r sh a ll be in creased o r decreased so as to eq u al th e av e ra g e 1 9 2 0 - 1 9 3 0 p u rc h a sin g pow er of a d o llar. T h is could b e done by sto rin g gold bullion in th e U n ite d S ta te s T re a su ry a n d issu in g n o t coin b u t c e rtific a te s a g a in s t i t —ju s t as is now done w ith o u r silv e r c e rtificates. F a rm le a d e rs a n d o th e rs recognize th e d a n g e r of a sk in g th e G o v ern m en t fo r fiat, o r p rin tin g -p re ss m oney, w ith o u t in trin s ic m e ta llic v alu e b eh in d it. N o inflation beyond 1 9 2 0 - 1 9 3 0 levels sh o u ld be to le ra te d . W e w ish to h av e a genuinely ho n est d o lla r—ju s t to c re d ito rs as w ell as to debtors. V II.. A MORAL ISSUE TO STIR AMERICA A nd h e re indeed is a m o ral issu e th a t sh o u ld s t ir A m erica. F o r th is w hole problem h a s its ro o ts deep, v ery deep, in b asic a n d e sse n tia l m o ra litie s— in sh eer fu n d a m e n ta l comm on h o n esty a s b etw een m an a n d m a n . C e rta in ly every m an in A m erica o u g h t to see i t w ho p ro fesses to re v e re a God w ho h e a rs “ th e needy w hen he c rie th , th e p o o r also, a n d him th a t h a th no h e lp e r ” ; every m an w ho p ro fesses to serv e a God to w hom , “ a fa lse b a la n c e is a n ab o m in atio n b u t a ju s t w eig h t H is d e lig h t ” a n d w ho w ro te i t in to th e s ta tu te s of Is ra e l 4 ,0 0 0 y e a rs ago— “ Ye sh a ll do no u n rig h te o u sn e ss in ju s tm e n t, in m e te y a rd , in w eig h t, o r in m easure. J u s t balan c es, j u s t w eig h ts, a ju s t e p h a h , a n d a ju s t h in sh a ll ye h ave * * * n o t d iv e rs w eig h ts * * * n o t d iv e rs m e a su re s. B u t th o u s h a lt have a p e rfe c t a n d a ju s t w e ig h t; a p e rfe c t a n d ju s t m e a su re s h a lt th o u h av e.” V III. 123 W E M UST H A V E A PER M ANEN TLY STABLE SYSTEM OF M ONEY FROM NOW ON I s is n o t enough ju s t to rem edy or p a tc h th in g s up to m eet th e p re s e n t e m er gency. C ongress w ill be g u ilty of a n u n p a rd o n a b le crim e a g a in s t A m erica’s p re se n t a n d fu tu r e if it does n o t provide th a t p erm a n e n tly from th is tim e on th e d o llar sh all be a sta b le m e a su re of p u rc h a s in g pow er—a re a l y a rd s tic k of v alu e. W e have a s ta n d a rd of tim e th a t n ev er v a rie s— th e h o u r ; a s ta n d a rd of len g th t h a t n e v e r v a rie s— th e y a rd ; a s ta n d a rd fo r liq u id s th a t n ev er v a rie s— th e g a llo n ; a s ta n d a rd fo r m e a su rin g corn a n d w h e a t t h a t never v a rie s— th e bushel. A nd y e t o u r n a tio n a l s ta n d a rd of v alu e, th e d o lla r, in re a l p u rc h a sin g pow er, in te rp re te d in te rm s of w h a t i t w ill buy, w e p e rm it to be as v a ria b le a s w ould be a y a rd s tic k som etim es 18, som etim es 2 4 , a n d som etim es 3 6 inches long; a s v a ria b le a s w ould be a bushel m e a su re som etim es 2 pecks, som etim es 3 pecks, som etim es 4 pecks in c a p a c ity ; as v a ria b le a s if w e h a d h o u rs som e tim es 30 , som etim es 45, a n d som etim es 6 0 m in u tes in length. A nd in p ro o f of th is d e c la ra tio n one h a s b u t to look a t th e follow ing official s ta tis tic s of th e D e p a rtm e n t of L ab o r, B u re a u of L ab o r S ta tis tic s, show ing th e p u rch asin g pow er of th e d o llar expressed in te rm s of w holesale prices since 1 9 1 5 , ta k in g a v erag e 1 9 2 6 p rices as 1 0 0 o r $ 1 : Purchasing power of $1 Y e a r: 1 9 1 6 _______ . 1 9 1 7 — ________ 1 9 1 8 ____________ 1 9 1 9 ____________ 1 9 2 0 _ _ ____ 19 21 _ ___ ----1 9 22 1 9 23 _ _ _____ — 1 9 24 _ ___ .— 648 1. 0 2 5 1 034 . 994 __ 1 .0 1 9 _ Y e a r: 1925 1926 1927 1928 1929 1930 1931 1931 1932 --------------------------------- 0 . 9 5 6 _______________________1 . 0 0 0 --------------------------------- 1 .0 4 8 --------------------------------- 1 .0 2 4 _______________________1 .0 3 6 -------------------------------- 1 .1 5 9 ( J a n u a r y ) ____________ 1 . 2 9 9 (D e c e m b e r )___________ 1 .4 0 6 ( M a r c h ) _______________1 . 5 0 3 124 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR A fte r th e tra g ic ex p erien ces A m erica h a s ju s t been th ro u g h , a ll im provem ents w ill lag, all b u sin ess w ill h a lt, a ll e n te rp rise w ill be frig h te n e d , all develop m e n t on fa rm a n d in b u sin ess w ill be checked if ev ery m an m u st m ak e fu tu re p la n s w ith no a ss u ra n c e a s to w h e th e r th e d o lla r a t p ay tim e w ill be w o rth 5 0 cents, $1 , $ 1 .5 0 , o r $ 2 in com m odity v a lu es. On th e c o n tra ry , if, a s a re s u lt of th is depressio n , C ongress w ill fo r a ll fu tu re tim e pro v id e tw o such m e a su re s a s a re now u n d e r co n sid e ra tio n , ( 1 ) som e effective p la n fo r g u a ra n ty of b a n k d eposits, an d ( 2 ) a sta b le c u rren cy system based on av e ra g e 1 9 2 0 - 1 9 3 0 com m o d ity p rices, th e n both A m erican a g ric u ltu re a n d A m erican b u sin ess can at once go fo rw a rd to a n a ss u re d a n d p e rm a n e n t p ro sp e rity . STATEMENT OF PROF. IRVING FISHER, YALE UNIVERSITY, NEW HAVEN, CONN. Senator F letcher. Doctor Fisher made a full statement at the House hearings and it has been printed, and I do not suppose it is necessary to go over all that, Doctor, but whatever you desire to say will be very interesting. Doctor F isher. My statement took a day and a half, so I think I will not try to cover it all this afternoon. Probably the best way would be to try to answer some objections that have been raised and that have been in the public mind, rather than to try to repeat the statement I made. I have brought in some copies of that statement and would be very glad to give them to any member of the committee who would like to read it. Senator F letcher. I am sure the committee would be glad to have it. Doctor F isher. I have noticed that some of the newspapers have reacted to the Goldsborough bill as though it were the same sort of bill as the Patman bill. I t is not. Without going into the reasons for making that statement, I can simply say that I appeared in favor of the Goldsborough bill and I appeared against the Patman bill and gave my reasons for it at the hearing. Senator G o r e . I did not catch that. Doctor. Doctor F isher. I said, I was trying to separate in the public mind the Goldsborough bill from the Patman bill and other bills like that, and without trying to explain the differences I merely wish to say that I appeared in favor of the Goldsborough bill and appeared against the Patman bill. Senator G o r e . Y o u appeared before the House Ways and Means Committee against the Patman bill? Doctor F isher. Yes, sir; and you can find the hearings there if you want to go into the reasons. I have, probably as much as any writer, perhaps more than any writer, inveighed against unlimited inflation, in many books, includ ing The Money Illusion which, at the suggestion of the House com mittee I offered to any member of either branch of the Congress who would like to get it and read it. I have inveighed against inflation, so that I am on record as not being an inflationist. I do not regard the Goldsborough bill as being subject to criticism on that basis. On the contrary, it is to negative the deflation from which we have suffered, what Mr. Mills spoke of in his speech against the Patman bill as “ controlled credit expansion,” the object of which is to raise the price level. You can call it inflation, but MAINTAINING AVEBAGE PURCHASING POWER OF DOLLAR 125 it is “ reflation ” which means a great deal more than inflation. Reflation means inflation which is justified by virtue of its counter acting recent great and rapid deflation. Both inflation and defla tion are harmful and should be prevented, and the only way to prevent it is to correct any sudden, great and rapid inflation or deflation by a movement in the opposite direction. In order to answer objections 1 think we ought to start with the seriousness of the situation. I should like to make a few state ments dogmatically, and if I do not justify them in what I say later, I hope you will ask me questions and see if I can justify them then. I do not think the situation in this country has ever been as serious as in the last few weeks. I think we are at the parting of the ways, and it would not surprise me at all if within the next month we would know definitely which direction we are going. We have been on an even keel. I mean, the price level has stayed for the last few weeks about the same. I t has sunk just a little. My index number went down 0.2 this last week; but I think the indica tions are that it will either make a fairly quick turn up or a very big plunge down, and if we go down I want to emphasize this, that there is practically no bottom. It is a common idea—and that is one of the popular thoughts that I want to answer—that there is a natural resistance as you go down; that there is a sort of accumulation of pressure of some spring that will gradually stop the fall. There will be no such resistance until we have gone down a great deal farther than we are now. I t would be quite possible, according to economic theory, for the price level to go down to half of what it is now, to one-fourth, to one-eighth, to one-twentieth, before we would get to the bottom where it could not get any lower, and that would be when we have everyone bank rupt who is in debt at all. On the other hand, we may go up, and if I were to bet, I would bet that we are going up. That bet is based on two hopes—one is that the efforts of the Federal reserve system now being made will be successful. We have got a good chance there. The other, on which I count even more than that, is that Congress will mandate, through the Goldsborough bill, the Federal reserve to continue to do this thing and will pass any other necessary legislation to enable them to complete it. I f this mandate is not given we do not know what they will do, because they have always had some difference of opinion with regard to how far they should go in the open market opera tions. In this morning’s paper a representative of one of the big banks in New York seriously advised that they should stop now. To my mind that would be disastrous. If that is also the opinion of Congress it seems to me it ought to be crystallized into law so that the Federal Reserve Board will have no option in the matter. I do not believe that we ought to leave to the discretion of a dozen men what they shall do or may do. It is stated in the Constitution of the United States that Congress has the right and the duty to regulate the value of money. We have never exercised that right properly. Before I can answer the objections that have been raised, as I have heard them here to-day and yesterday, I think it might be 1 2 0 2 9 0 —3 2 ------ 9 MAINTAINING AVERAGE PURCHASING POWER OP DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR well very briefly to try to give you my diagnosis of the situation, because everything grows out of that. I listened yesterday with the greatest interest to what Professor Warren said, and I hope that you who heard him appreciate that he is one of the world’s authorities on this subject, very likely the greatest, and he has the greatest arsenal of facts which he has ac cumulated—he and his associate, Professor Pearson, who is here this afternoon. I do not think there is a syllable that he uttered that I did not thoroughly agree with a hundred per cent. So what I shall say will be merely rehearsing what he said, put ting it perhaps in a somewhat different light. I would say that we are suffering from two diseases, the debt dis ease and the dollar disease, and that the dollar disease has grown out of the debt disease, although it was not necessary. You know, when a man gets grippe he is likely to get pneumonia, but it is not necessary to get pneumonia just because he has grippe. We are not now discussing how we might have prevented the debt disease. I think it could have been prevented, and I believe that you can pre vent and cure the dollar disease. Let us see what those two mean and how they start. In the first place, in 1929 we had the largest accumulation of debt in the history of the United States. The best figures are those of Professor Warren and Professor Pearson that were given to you yesterday. The esti mate is that the total debt was $203,000,000,000. The debt was so large on account of, first, the war, and, secondly, speculation. Those two are the great reasons. The war, of course, left a great repara tion debt; a great intergovernmental debt, most of which the United States is concerned in; international debts due to the investing of the United States in attempting the recovery of Europe; the debts of our farmers who helped in the frenzied production during the war and the speculation in land that was caused by the inflation that went on at that time. And besides those war-engendered debts there were a great many more that came from speculation. That specula tion came very largely from the great prosperity that we had during the years 1921 to 1929. That prosperity was very largely due to a great flood of new inventions, so that people found great oppor tunities, as they thought, to make money out of these new inven tions—the automobile, General Motors, airplanes, radio, as well as all sorts of little inventions. Look at the names of the stocks on the New York Stock Exchange, and you will find a large number of them are named after the devices which those companies were organized to vend. Our Patent Office was choked by inventions. There had never before been so many inventions in the history of the United States. After the war, because of the example of Germany with her tech nological schools, our industries engaged scientists in a way never before done, so that the American Telephone & Telegraph Co. and other big companies spent millions of dollars and had thousands of scientists engaged solely for the purpose of making inventions. First, the people invested in those inventions and bought stocks in the companies that were exploiting them, and as they rose in value people began to invest—not for a long time, but for a short time—in other words, to speculate; and when people see their chance to make a big sum in a short time they go in debt for that purpose. So we got the tremendous stock-market debts, the brokers’ loans as well as the debts of banks, which were very largely for the same purpose. Then we had the device of installment buying, which was espe cially fostered, and which led to a great deal of overindebtedness on the part of the consumer. So, all together, we had over $200,000,000 on the basis of 2G0 billions estimated valuation of the real wealth of the United States. When we have a state of overindebtedness like that, something pricks the bubble. In this case it was the H atry disaster in London, as far as one pin could prick the bubble. You have an inflation, and it becomes progressive----Senator Gore. What was that disaster, Doctor? Doctor F isher. The H atry disaster. H atry was a fraudulent pro moter; and he tried, by forging securities, to keep on getting people to invest in his companies, and when it was finally discovered it led to a great collapse in the London Stock Exchange, and the Londoners began to unload, to get their cash, on the New York Stock Exchange, and the stock exchange in New York was already overloaded. The result was that people could not carry any more, and selling then went on in a torrential way. First, under those circumstances, conies the phenomenon called distress selling. It is different from normal selling, in that it is in duced, not by high prices, but by low prices. Normally people hold off until the price goes high enough to satisfy them before they sell; but when they are too much in debt it is just the opposite. As soon as anything disturbs this house of cards and it begins to tumble, then they try to preserve their solvency, which is more important than making a profit, and their solvency becomes the only thing to save. This distress selling in various ways tends to reduce prices, and as prices go down it brings more distress selling, and as you have more distress selling, the prices continue going down, and so on in a vicious spiral; and that has been going on ever since the stock mar ket crash up to the present moment. The price went down suddenly. That is because the stock-market loans are call loans. Then there was a shift to the banks. When the due dates came around, there was another wave of distress selling and another wave and another; and as it was explained to you yester day, there is imminent the liquidation of real estate and mortgages. That will take years, because mortgages run a long time. The proc ess of liquidation is not complete. In fact, it has not really started. When prices fall it is the same thing as saying the dollar rises. That is the dollar disease. What has really happened is that the dollar to-day has become $1.50 as of 1929, before the crash, in terms of com modities. The farmer’s dollar has become $2, so he has to pay twice as much in his wheat and cotton and other products to liquidate his debt, and he has less with which to pay it. Senator Gore. Sometimes five times as much. Doctor F isher. Yes; in many cases much more than twice as much. This could have been prevented if sufficient currency had been injected into the circulation to prevent it. I t should have been pre vented, in'my opinion. I think that it was a great pity that it was not seen in time and not prevented in tim e; but it was natural that it should be overlooked. We did not realize, until it was too late, that 126 127 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR this thing was going on in such a fierce way; and now we have this increase of indebtedness by 50 per cent that has vastly more than offset the liquidation. In other words, there has been no real liquida tion. The liquidation has been purely nominal. There has been a reduction in the number of dollars owed, but the dollar has increased faster than the number of dollars has decreased, so that the amount of commodities, which are the real things owed in the United States, is now greater. In other words, in spite of the fact, as I said, that in 1929 this county was more in debt than it had ever been before in its history, it is still more in debt now even than then, and is less able to pay than it was in 1929. _ . Senator T homas of Oklahoma. Would it disturb you if I asked you a question, Doctor? Doctor F isher. No ; not at all. Senator T homas of Oklahoma. You just stated that Doctor W ar ren’s estimate is that we have 203 billions of amassed indebtedness? Doctor F isher. That was in 1929. Senator T homas of Oklahoma. And do I understand you to say that we have less than 400 billions of value in the United States? Doctor F isher. Yes. Senator T homas of Oklahoma. And I understand you now to say that those debts had increased one-half? _ Doctor F isher. That the dollar has increased by 50 per cent in its value. Senator T homas of Oklahoma. Then would not that mean that those two hundred and three billions of debts, measured by com modity prices, are now more valuable than the assessed or real value of the United States? Doctor F isher. That is what I was coming to, Senator. There has been a certain reduction. The number of dollars now owed is apparently about one hundred and eighty billions. Senator H ull. That includes governmental and public debts? Doctor F isher. Yes. There has been a reduction from two hun dred and three billions to one hundred and eighty billions, approxi mately, as a rough estimate. Senator B laine. T o what year do you apply the four hundred billions? _ . , , _ .... Doctor F isher. 1929. Three hundred and sixty-two billions was the estimate of Professor Warren. Senator F letcher. And it has been reduced how much? Doctor F isher. T o about one hundred and eighty billions, ap proximately. But the dollar has been magnified 50 per cent so that in terms of the 1929 dollar the indebtedness is not one hun dred and eighty billions but about two hundred and seventy billions, about 50 per cent more. The estimated valuation of property has shrunk from three hun dred and sixty billions to about two hundred billions. So we are probably mortgaged, so to speak, over 100 per cent to-day on our real wealth. The only other asset against this debt is labor power, the personal wealth of the United States, which is not included in the estimate of the real, tangible wealth of the United States. You would not allow any city to get into debt in relation to the realestate valuation on any such basis as that. There has been only one of the many groups which has liquidated, and that is the stock market. And that has been more apparent than real, because lots of those debts have been shifted to the banks. There has been a liquidation of the stock market. W ith a few very trifling exceptions out of a dozen different cate gories that I have separated there has been no liquidation, but in stead there has been an increase. Now, apply this real increase of debt to the United States Govern ment. The United States Government to-day is more deeply in debt than ever before. Most people would, on first blush, say that my statement could not be proved, that we were in debt in 1919 twentyfive billions and now we are only in debt eighteen billions, and that there has, therefore, been a reduction of seven billions. But the dollar has been magnified twofold since 1919 so that in terms of 1919 dollars the debt of the United States is about forty billions— 50 per cent more than it was then—and we are poorer now than we were then. One of the curious paradoxes is that if you try to balance the Budget at this time you have a deflationary effect at once. The result is that if the price level should decrease by or by less than 6 per cent it would increase the debt from eighteen billions to nine teen billions, in effect, in the terms of the same dollar; that is, if we attempt to balance the Budget in that way, causing deflation, the effort to keep us from getting into debt will really put us deeper in debt.. t # You can not get anywhere on that subject unless you translate into real things, and that is the essence of the whole business. When you talk in terms of dollars you are fooling yourself with what I call the money illusion—that a dollar is a dollar, when really it is changing all the time. Senator T homas of Oklahoma. Supposing our national debt is 20 billions. Supposing that instead of raising a billion dollars in taxes, as proposed to-day on the floor of the Senate, we authorized the issuance of a billion dollars in bonds and put those bonds in the Federal reserve and issue money against them and put the money out in payment of our obligations, and supposing that that act would raise commodity prices 50 per cent, would not that $1,000,000,000 of additional indebtedness in effect actually reduce the value of the total indebtedness of the United States? I do not want to mix other questions here. I did not mean, really, to refer to balancing the Budget. The proper sequence is to reflate first and balance the Budget afterwards; and even if we now pass laws which will balance the Budget next year, between now and then we ought to reflate. Reflation is the lesson of the hour for every thing; for balancing the Budget as well as other things. Senator F letcher. The exact figures are not very material, but my recollection is that we had an indebtedness of 26 billions and we paid on that indebtedness 10 billions. That left 16 billions. Doctor F isher. It was 2 5 ^ billions—a little more, nearly 26—and we cut it down, in number of dollars, to 17 billions, if I remember rightly. But in the last year it has gone up again, so that it is 18 billions now, approximately, speaking in round figures. The most curious anomaly in the whole business is that this increase of the dollar has the effect of putting us in debt, trying to get out. 128 129 130 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR I f there had been a moratorium in 1929 by which it had been agreed that no one should try to get out of debt, we would have been much better off to-day. The effort to get out of debt has put us deeper into debt, when we translate it into real things. Of course, it is true that an individual who pays his debt of a thousand dollars, even if he only paid a hundred dollars on it, is out of debt more than he would have been if he had not paid that hundred dollars. But if, while he is paying that hundred dollars, millions of other people are also trying to pay their debts, then his $900 debt has been magnified by their action; so that instead of being ninetenths of his original debt it may be 50 per cent more. I t may be the equivalent in the original dollar of $1,500. So please do not misunderstand me as saying that any individual would have been better off if he alone had not paid something on his debt. He would have been worse off, perhaps, than he is; but the fact that other people put him deeper in debt by trying to pay their debts at the same time is just like a crowd trying to get out of a burning theater. You can not blame the individual for trying to protect himself and his wife and children by getting out first. If everybody else would stay in their seats while he was doing it, they would probably escape. But if they are all scrambling, he can not afford to be left behind. The fact that they all scramble jams the doors and they do not get out as well as if they went more slowly. So the effort has been self-defeating. The more the debtors as a wThole have paid, the more they owe. There has been no liquidation. There has been only an apparent liquidation, a reduction in the num ber of dollars, but an increase in the actual amount of wheat and cotton, and so forth, that is actually owed. That is the fact with which we have got to reckon; and simple honesty and justice, throwing aside all technicalities, require that we should have some restoration of the dollar, to deflate the dollar, or inflate prices, or reflate, so that the present debtor will be able to pay his debts on something like the basis on which those debts were contracted. The object of the Goldsborough bill is to declare as the policy of the United States that that is the objective, that we should try to undo the injustice of deflation; and, after that is done, not to go on and inflate, the way Germany did—we would be worse off than we are now—but to stop at that point which is just, as between debtors and creditors, and then stay there, and forever after resolve that we shall never have another great inflation or deflation. I am writing a book on the depression, and while I am not at all well versed on the literature of depressions, I feel, as you heard Doctor Warren say yesterday, that this is the secret of this depres sion—the fact that overindebtedness lias led to distress selling and various other things that I shall not take your time to go into now, but which are fully covered in this pamphlet. We have magnified instead of reduced the debts by magnifying the dollar, and we have created a great injustice which should be rectified. It has been objected that this bill is merely a good resolution and that therefore it will do no good. That is not an objection. Granted that it is true, for the sake of argument—and I do not grant it as a matter of fact—but granted, as some of you may believe, that this MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 131 bill will do absolutely no good, nevertheless I think you ought to report it out and get it passed for the chance that it will do some good and that those of us who believe that it will do a great deal of good may be right after all. I will turn the argument around and say it can not do any harm, and for that reason, since some believe it can do a good deal of good, it should be passed. What good will it do? It will do good in two ways. In the first place, it will insure that the Federal Reserve Board will go on and not stop to-morrow, as has been proposed by one writer in this morning’s paper, that it knows where it is going and will not be swayed by sometimes one faction and sometimes another faction in the Federal reserve system. There has been a good deal of con troversy, particularly between the Bank of New York and the Federal Reserve Board here, differences of opinion between the Chicago bank and the Federal Reserve Board here, in regard to these very things in times past. Sometimes it made very bad blood within the system. All that can be avoided and we can be assured of a uniform policy if this bill is passed. It seems to me that that is something good and very important. I t would insure that we can get out of the Federal reserve all that there is to get out of it. We can not do very much until we have got a declaration of policy. I believe that other things should be done. I do not regard this bill as sufficient. It may be true that the Federal reserve will not be able to accomplish this objective, but they can certainly go on their way in that direction, and it will soon appear whether they can accomplish it or not. I t is claimed that they can not accomplish it. The head of the Federal Reserve Bank of New York said, in opposing this bill in the House, that he did not believe they could accomplish it, at least not alone. This bill does not say that they shall accomplish it alone. I t says that the responsibility shall be on the Federal reserve system and the Secretary of the Treasury representing the United States. I f the Federal reserve find that they can not do it alone, they will immediately come back to you and say, “ We need this or that or the other ” ; and I thoroughly believe that if the stabilization clause had been in the original'Federal reserve act, as proposed by Senator Owen, we would not have had this depression to-day, because we would have developed a technique to do the thing if it had been definitely in the act. I t was left out of the act. It was not thought of as of any prime importance, and it was stumbled on accidentally in 1922, after the great deflation which the Federal Reserve Board was responsible for, which was a great mistake. Governor Stiong, of the Federal Reserve Bank of New York, seeing the situation and seeing that we were in for a big inflation if we did not look out, began to sterilize the gold, as it were, to produce a stabilization, and he gave us the greatest prosperity that the country has ever seen, and which lasted as long as he lived, and would have lasted to-day if he had been willing, as he was, finally, when he was dying, to have it em bodied into law. I f it had been embodied in the law when the 1922 Goldsborough bill or the 1926 Strong bill was up, I do not believe we would have had this depression, at any rate, in anything like the degree that we have it now. 132 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR I regard this bill as of basic importance, not simply a gesture. I t is a platform on which you can operate. I would like to see half a dozen other measures erected on this platform, and if you like I will go into those. Senator B laine. Would you mention them briefly? Doctor F ischer. First, I am in favor of the Steagall bill as an emergency measure. I know there are arguments against it. I know the experience has been bad, but it is for the same reason that a great many insurance companies fail, because they were not set up right in an actuarial way. In Kansas and Nebraska they let in everybody, whether a good risk or a bad risk. I think it was in Nebraska they attempted to keep out a bank that they know was a bad risk, and the Supreme Court said they could not keep it out, under the law. Of course, that policy will bankrupt any insurance company. But the principle of insuring bank deposits is just as sound as the principle of insuring anything else. I think it would do a great deal to help the affairs of the banks, especially the little banks which are not able to extend the credit and not willing to extend the credit that they ought to extend now. Senator F letcher. It would tend to restore confidence, too, would it not? Doctor F isher. Yes. The second measure would have the same effect, and that is one that is proposed by the Federal Reserve Board. It was in the orig inal Glass bill and was taken out for some reason, I do not know what. I was told it was because it would not be understood and would be hard to pass through Congress. But, to my mind, it was about the best thing in the Glass bill. It was to base reserves on velocity, on rate of turnover, on activity of accounts, instead of hav ing it arbitrary. As you know, we have now three ratios: 7 per cent in the county districts, 10 per cent in moderate-sized cities, and 13 per cent in big cities. We have a 3 per cent rate on time deposits, and a different rate on checking accounts. All those differentiations are based on the idea of activity. Why not have a sliding scale of activity? The proposal is that a reserve shall be at least 5 per cent and not over 15 per cent, but between those two limits it shall move up or down with the activity, specifically that it shall be 5 per cent plus half of the daity turnover, so that if a bank had deposits of a hundred thousand dollars it would have $5,000 of reserves required, plus half of the daily turnover. I f the daily turnover of the last week or month or whatever period was taken was $8,000, half of that would be $4,000, which would be added to the $5,000 as the minimum, making their required re serve at that time $9,000. Next week it might be more or less. That would mean that when you got a period of speculation, as in 1928 or 1929, and were exceeding the speed limit, automatically the reserve would curb the bank. The bank would find it could not extend loans or increase its deposits beyond a certain point because it was going so fast that the legal requirement would automatically check it. That would have stopped speculation in 1928 and 1929 to a large extent. When there is a slump, when activity ceases, as at the present time, when it is almost zero, it would enable the banks to reduce their reserves nearly to 5 or 6 per cent and would again strengthen their confidence to go ahead. Senator F letcher. I think it is a sound measure and I think the committee were practically unanimously in favor of it. Most of the banks are coming to see it now. At first they objected, and that is one reason, I suppose, that it did not get through. Doctor F isher. I think it is important now. Third, I think that something along the line of Senator Wagner’s idea would help to get the consumer started, and with the efforts of the Federal Reserve Board to buy bonds would put the banks in better shape. Before any real effect on employment is had we have got to have this money go into the banks, or purchasing power or credit, and then the banks have got to hand it on to their custom ers who want to start up factories and so forth, and then they have got to hire new men. There may be a quicker way of getting men hired, even if the Government has to do it, and I am inclined to think that that can be done. Then, I think if we are going to have a high price level, as we should, it is absolutely necessary----Senator S mith . Excuse me. You sav you are in favor of sup plementing this by having the Government provide for public building? Doctor F isher. I did not mean, specifically. I have not studied the bills enough to say that I am definitely in favor of any particu lar bill. Senator S mith . I mean, that principle that they should go into the construction of public buildings? Doctor F isher. Yes; and more particularly projects which will repay their costs, as suggested by Owen D. Young and yesterday by the President. The point is to get purchasing power into the hands of the consumer and help the unemployed. I t will all work out ulti mately from the open-market purchases, if they are big enough, but it will take a longer time than if we work out both ends at the same time. Then, I think something might well be done to enlarge the base of precious metals behind our credit structure. Senator F letcher. D o you mean, to increase the purchasing power of silver. ' Doctor F isher. I mean, to have a larger reserve. Of course, there are many ways of doing it, but I have a specific way in mind, but it would take an hour or so to go into it in detail. Then, there is the Glass bill. And, then, there is another measure which I also will not try to go into at this time, especially as the author of it, the president of a large industrial concern in New York, is taking it up with men in Congress. I believe that it is a measure which would do the same thing as open-market operations are doing, but would speed it up very much faster. Senator B laine. W hat proposition is that? Doctor F isher. A s I said, I would rather not go into it, because this man has it in charge, and I know of it confidentially. I believe it is a very important measure. 133 134 Ma in t a in in g average pu r c h a sin g pow er of dollar MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator F letcher. Doctor, with reference to the Goldsborough bill, S. 4429 is very much the same, but it has a section 3 in it, providing— we can not raise our price level materially without at the same time raising the price level of all other gold-standard countries; and that is one of the objections that the Federal Reserve Board will have, that they can not be expected to do this alone. I t is true that they will be limited, and that a complete solution will require the coopera tion of the central banks of all of the gold-standard countries. But at the present moment the Federal reserve, in the first place, is the most powerful of all these banks. They could do it for the whole world, to a certain degree, anyway, even before the crash. Now they can do it more easily for two reasons. One is that so many countries are off the gold standard, including England. We can raise the gold-standard prices in this country without the Chinese having to raise their prices in terms of their silver stand ard, and, by the same token, we do not have to have England raise her prices in terms of their paper standard. All we have to do is to raise the prices in France and Switzerland and Holland. They are the other gold-standard countries. I f we did raise the price level, it would cause a flow of gold to those other gold-standard countries at first, and as soon as that caused a rise in the prices abroad, in France and other countries, then the processes of recuperation would apply there as here. France already has more gold than she wishes or needs. Ultimately the effect would be very much more easily achieved than before the depression. In other words, you have a smaller area on the gold basis than you had before. This is to be remembered, also, if you are thinking about the cotton and wheat producer, as I assume Senator Gore was thinking particularly. Senator G ore. Yes; I am. Doctor F isher. A rise of a very small amount in the interna tional market would help very materially the producer back home. That was brought out yesterday very emphatically by Doctor Warren, that an increase of 10 per cent in Paris and New York in the price of any international commodity would mean an increase of 20 per cent in the cotton and wheat producing States. Then I might add to that that, according to what we just heard, England is probably going to cooperate with us in her price level. I t should be independent of ours, but it will probably be made to go up and down with ours. And finally I would add that once you get this idea of stabilizing the price level and raising the price level started in this country, it is going to go like wildfire, because they need the same thing over there. You will find in this book [exhibiting a book to the committee] of Sir A rthur Salter, formerly head of the economic work of the League of Nations, the very same doctrine that you have heard here, that in order to solve this question of the depression we must do two things—raise the price level and stabilize it after it is raised. Reflation and stabilization are the program we have got to follow. That was also proposed in the Lord Macmillan report in Eng land, and I would like to quote from that just a little. It was published about a year ago. [Reading:] To en ab le th e F e d e ra l reserv e b a n k s to achieve th is end th e y a re h ereb y given th e rig h t to receive, a n d th e F e d e ra l reserv e a g e n ts a re d ire c te d to deliver, F e d e ra l re serv e n o tes a t p a r fo r U n ited S ta te s o b lig atio n s deposited as se c u rity th e re fo r. Doctor F isher. Yes. That is the same as the Glass-Steagall bill, perpetuated. The Glass-Steagall bill is an emergency measure for one year, and I think it should be permanent. Senator F letcher. The point is, whether you would regard it as worth while to amend the Goldsborough bill by putting that on, or just leave the whole subject open to the Federal Reserve Board to find a way. They know the way to do these things, I suppose. Of course, this would direct them to accomplish it in this way, par tially, anyhow. But whether it is worth while to put that into the bill or not, I do not know. Doctor F isher. My advice on a question of that sort would not be worth very much, as you men, being experts in legislative pro cedure, would know very much better than I. But so far as I have an opinion it would be that as time is of the essence it would be better to leave out anything that would require to revote on this in the House, and I would go right ahead and pass the Goldsborough bill as is, and then I would introduce this and the Federal Reserve Board proposal in regard to velocity of deposits, and some of these other things, in 1, 2, 3, or 4 bills, as seems best, and I think you would be making better speed, since you have momentum, to keep right on. Senator F letcher. I think the House would agree to it if we thought it was advisable to amend at all. Doctor F isher. I think Mr. Goldsborough would be glad to insert several things in the bill, but in order to get it through, they had to be left out. . Senator F letcher. The question is whether we should leave the whole field wide open for the Federal Reserve Board to do this thing in its own way, or whether we should specify one of the ways of doing it. Senator Blaine said that we have made it their duty to accomplish this thing but we have not told them how to do it. Senator B laine. Senator Fletcher, section 3 of jmur bill goes beyond the Glass-Steagall bill. Senator F letcher. I thought you had reference to another bill. Yes; this goes beyond that. Senator B laine. This makes Federal bonds the basis for the cir culating medium. Senator F letcher. Yes. Doctor F isher. I assume that the Federal reserve notes issued would be subject to the 40 per cent gold reserve laws, anyway. Senator B laine. That is probably true. Senator F letcher. This makes permanent the Glass-Steagall bill. Senator B laine. I see, now. I t probably makes it permanent. Doctor F isher. Senator Gore spoke a short time ago in regard to this as an international problem. I t is. The money price level is always an international problem, so long as there are other coun tries having the same standard as we. If we are on a gold standard, 135 T h u s o u r objective should be, so f a r a s i t lies w ith in th e pow er of th is c o u n try to influence th e in te rn a tio n a l p rice level, first o f a ll to ra ise p rices a long w ay above th e p re s e n t level a n d th en to m a in ta in th em a t th e level th u s reach ed w ith a s m uch s ta b ility a s can be m anaged. 136 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE FURCHASING POWER OF DOLLAR That was an extremely important report. I might say that the stabilization movement has gone very fast in the last few years. There is a Stable Money Association. Paul Warburg was one of the honorary vice presidents. Others who were connected with it were Bernard M. Baruch, R. Fulton Cutting, Pierre S. du Pont, George Eastman, Otto H. Kahn, Thomas Nelson Perkins, John J. Raskob, Alvin T. Simons, who apeared in favor of the Goldsborougli bill in the House. I do not know whether those other people would be in favor of it or against it. I am not saying anything about this bill now but about stabilization. Also Alfred P/Sloan, jr., Silas H. Strawn, and Owen I). Young. Among the honorary vice presidents are Nicholas Murray Butler, John W. Davis, Charles G. Dawes, William Green, Frank O. Lowden, Elihu Boot, Sir Josiali Stamp, and Paul Warburg. Reginald McKenna, who was one of the signers of the Lord Mac millan report, said, away back in 1922 [reading] : lize. That was reported in a Swedish journal from which I quote | reading]: T h e tr u th is o f co u rse th a t b o th (in fla tio n a n d d efla tio n ) a re h ad . W h a t is needed is s ta b ility , th e p o in t fro m w hich b o th a lik e proceed in o pposite d irectio n s. W hen w e h av e sta b ility of p rices w e h av e a b a sis upon w hich tr a d e can be c a rrie d on w ith confidence. 137 Such en d eav o rs should aim a t m a in ta in in g th e valu e of m oney, a s f a r as possible, c o n stan t. And that is what we are talking about. [Continuing reading:] T h is aim , of course, can be a tta in e d even w ith a p a p e r cu rren cy . T h e p ro p o sals on th ese lines su b m itted by sev eral w ell-know n p o litical econom ists— e. g., W icksell an d K eynes— th e e ss e n tia l fe a tu re of w hich is th a t th e value of m oney should be re g u la te d acco rd in g to a price index, a re now being tested in p ra c tic e by th e S w edish R ik sb an k . T he la tte r h as m ade a rra n g e m e n ts fo r th e com pilation of a price index, covering b oth w holesale an d re ta il p rices, a n d specially ad a p te d fo r serv in g th e purpose in d icated . I t is n o tew o rth y th a t th e rik sb a n k h a s th u s se t up a definite goal fo r its m o n etary policy in th e im m ed iate fu tu re . A nd a s th e Sw edish n a tio n a l b an k h a s previously succeeded in p u rsu in g a p re d e te rm in e d course of m o n etary policy w ith a free p a p e r cu rren cy , th e re is reaso n to expect th a t its sim ila r en d eav o rs to th e sam e end w ill m eet w ith success. I f sim ila r d e c la ra tio n s of policy w e re m ade also by o th e r co u n trie s w ith a p a p e r s ta n d a rd , first an d fo rem o st by G re a t B rita in , th is w ould g re a tly conduce to c lea r up th e p resen t m o n etary situ a tio n . Then I quote from a letter from the German economist W. A. Schulze-Gaevernitz, formerly a member of the Reichstag, and the first German to be on any committee of the League of Nations be fore Germany joined the League of Nations. He wrote to me, com ing over to this country September 27 last, from the steamer. I had never met him before. He says [reading] : Senator Gore. What is the date of that, Doctor Fisher? Doctor F isher. I am sorry, Senator Gore; I have not got the date here. I think it was about six months ago. Then, in regard to England, it looks very much as though the men in England feel that this would eventuate in a different policy for the English nation. Major Bellerby, in England, who is now a professor in one of the universities there, wrote me as follows [reading] : I t is w o n d erfu l, th o u g h v e ry p a in fu l, how y o u r th e o ry is verified by th e fa c ts. I re a lly believe th a t th e w o rld depression w as to be avoided if ac c o rd ing to y o u r ad v ices th e v alu e o f th e d o lla r w ould h av e been sta b iliz e d . B u t even now it m ig h t n o t be too la te . T h e ch ief th in g in o rd e r to give a tu r n to th e cycle seem s to be to c u t dow n th e v a lu e of th e d o lla r a n d by t h a t m ak e the p rices rise a g a in . A m erica w ith its enorm ous h o rd es of gold can do so w ith o u t leav in g th e gold s ta n d a rd . I am su re th a t you a n d y o u r a d h e re n ts h ave w orked o u t th e tec h n ic a l sid e o f th e m a tte r. I th in k you m ay ta k e it t h a t th is c o u n try h a s fa irly definitely in m ind tw o e n d s: T he first is to secure th e ex p an sio n of in d u s try th ro u g h th e ex pansion of cu rren cy an d c re d it, an d th ro u g h th e recovery of p ric e s; th e second is to in s titu te a system of s ta b iliz a tio n of th e price level w hen p rices h a v e reached a position a t w hich they yield an ad eq u ate m a rg in of profit a n d w hen unem ploym ent h a s fa lle n w ell below a m illion. T h ese tw o aim s w ere accepted by th e M acm illan com m ittee a s id eal. I t is fa irly sa fe to say t h a t th ey a re now th e accepted o bjectives of th e governm ent. Senator Gore. He did not elaborate that last point, did he, Doctor? Doctor F isher. I have only quoted a part of it. One of the first great steps in the stabilization movement was taken at Genoa at the Genoa Economic Conference in 1922. There are certain resolutions from which I would like to quote. At the eco nomic conference at Genoa in 1922 an epoch was marked by the unanimous adoption, by the representatives of more than 30 nations, of resolutions favoring such stabilization, and indicating some of the methods to be employed. These included cooperative action among the great central banks of the world concerning the use to be made of gold reserves and as to the discount policy to be pursued. These economic experts, at the Genoa conference, recommended [reading] : That is merely the opinion of an English professor. Senator F letcher. Y ou do not think it is necessary for the United States to wait for some international conference, do you? Doctor F isher. Most assuredly not. On the contrary, I think that we should take the lead. Other countries are more dependent on our lead than wre are on theirs. The correlation between trade and demand deposits, shown by various groups, you will find on pages 24 and 25 of my testimony before the House committee. There are some charts showing this very clearly. Unemployment is definitely related to deflation. That has been proven by various studies, including a very extensive one by the International Labor Office, at Geneva. I think I have already said too much, and I am willing to answer questions if anyone has any. Senator F letcher. We are certainly indebted to you, Doctor Fisher, for your statement and your views about this matter. The committee will not act just now, but will wait until the hearings are printed; but we hope to act very soon. T h e e ssen tia l re q u isite fo r th e econom ic re c o n stru c tio n o f E u ro p e is th e ach iev em en t, by each co u n try , of sta b ility in th e v alu e of its cu rre n c y . Then they proceeded to outline the specific steps which should immediately be taken, adding [reading] : T he p u rp o se of th e convention w ould he to c e n tra liz e a n d c o o rd in a te th e dem and fo r gold, a n d so to avoid th o se w ide flu c tu a tio n s in th e p u rc h a s in g pow er of gold, w hich m ig h t o th e rw ise re s u lt fro m th e sim u lta n e o u s a n d com p e titiv e effo rts of a n u m b er of co u n trie s to secu re m etallic reserv es. The most momentous step, I believe, has been taken by Sweden which has definitely decided, through its Riksbank, to try to stabi 138 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR So far as I know, that closes the hearings, does it not, Mr. Goldsborough ? . Senator Gore. Are you going to have somebody representing the contrary view? As I see it, this is all ex parte; it is all on one side. I t has been very fine, so far, but I would like to have the other side presented. Senator F letcher. D o you know of anyone who wants to appear? Senator G ore. I do not know of anyone. I know one or two who hold contrary views, but I do not know whether they are available or not. . „ . Senator F l e t c h e r . Everybody has had notice of these hearings. We did not exclude anybody. However, we will not close the hear ings at this time. . Senator Gore. I will speak to the chairman about it. Senator F letcher. Yes. I suppose when we adjourn we should adjourn subject to the call of the chairman. Senator G ore. Doctor Fisher, you have not elaborated your view about increasing the number of grains in the dollar this afternoon, you ? Doctor F isher. N o. That is not in the Goldsborough bill. But I have gone into that very extensively in writings. Senator G ore. Yes; I know that. I was called away from the hearing room part of the time when you were making your stateDoctor F isher. N o ; I said nothing about that. I think that what Mr. David Stern said here yesterday is well worth thinking of giving and entrusting to the President the authority to put an em bargo on gold, or to put back into the bill what was originally in it and&was taken out in order that it might pass; or, still better, to make a separate bill of that section. Section 3 originally, I think, in the Goldsborough bill in the House, provided that the Federal Reserve Board, I think it was, would be given authority to change the price of gold; and if I were writing it I would have it so that they could make a separate price for buying and selling price. I he prices of gold would be at the discretion of the Federal Reserve B Senator Gore. That is, with a view to stabilizing the price of gold? Doctor F isher. Yes. But also, Senator Gore, if it should be neces sary for us to safeguard our gold, or seemed to be so, by an embargo, a change in the price would do it. Senator Gore. I thought, Doctor Fisher, because I think I know your o-eneral views in regard to these international restrictions and limitations and prohibitions, that gold embargoes and the arbitrary control of foreign exchange, and tariffs, and all those things, obstruct trade and aggravate our present evil. I do not think we can ever escape these by mere local action. But, of course, I want your views. Doctor F isher. My views, I think, on that subject are quite the same as yours. Senator Gore. But I have not been able to figure out how you could change the values of gold. As I understand, the purpose is to stabilize the purchasing power of gold. Would you make it more universal and apply it to corn, coal, cotton, and everything else as well as gold? 139 Doctor F isher. N o ; I am very much opposed, Senator Gore, to the general idea of price fixing. Senator Gore. So am I; and I am so fixed in that, Doctor, that I can not quite separate it from this. That may be my confusion. Doctor F isher. I t is, to my mind, a separate matter. An indi vidual price and a price level are different kinds of things, just as different as velocity is different from momentum. A price level i 9 a scale or ratio, a percentage compared with a previous set of prices. It is not a price itself, at all. I t is easier to fix a scale of prices than it is to fix a price. For instance, of you should pass a law that every cent should be called a dollar—-which, of course, would be a foolish law—you would multiply prices by a hundred at once by changing the name of the cent to a dollar. I t is easy to change a scale of prices; it is too easy. I t is subject to abuse. But it is hard to change one price. I t is a great deal easier to double the general level of prices in this country than it is to change the price of cotton 10 per cent. Senator G ore. Yes. I have had this in mind with reference to this matter. This is a rather wild assumption, but suppose Senator Fletcher has a thousand dollars in gold, and I have got a thousand dollars in gold, and you come to me and say, “ I want to borrow a thousand dollars in gold,” and try to negotiate a loan. I say, “ Con gress has figured on stabilizing the value of gold money. I believe I will lay off and see what they do.” And I keep my gold locked up in a strong box. You go to Senator Fletcher and talk to him, and he loans you his thousand dollars in gold, payable a year from now. The year rolls around, and let us suppose that Congress in the meantime has cut the number of grains in the gold down one half. You go to Senator Fletcher and count out these little gold dollars, and the Senator says, “ That is not the sort of gold I let you have. I am getting back only half as much gold as I loaned you.” You say, u Yes; but Congress has changed the law, and these are dollars.” You pay him, and he has got half as much gold as he let you have. I have kept my thousand dollars, and Congress in changing the law has made my gold worth $2,000, and Senator Fletcher’s gold is worth only half. I do not know whether in morals or in law you ought to return the equivalent in purchasing power, or whether you ought to return what you got from him. * Doctor F isher. I t is obvious that you ought to do what was implied in the original contract, what was expected by the con tract. Presumably, it is purchasing power. Senator Gore. N ow, time rolls on a year longer, and you decide that you want to borrow another thousand dollars, and you go to Senator Fletcher and say you want to borrow it. The Senator might say, “ I don’t like those little dollars you paid back. If I let you have another thousand dollars you have got to agree to pay me back in gold dollars of the weight and fineness that I let you have.” I assume creditors are looking after their own busi ness, and as a rule the position of the creditor is to have a strategic advantage over the debtor. He can dictate his terms and keep his money. The borrower can accede to those terms or refrain from etting the money. I assume that every contract in the United tates would stipulate the sort of coin that the debt would be repaid g 140 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR in, and the Supreme Court would hold it was a valid contract. I do not think that you can start out with any idea that these changes are going to be able to make it possible that borrowers will pay only half of what they got. The Chairman. Might it not happen that the debtor, being un able to pay, the creditor gets the property and finds he has not got as much as he thought he had ? Senator Gore. I am going to come to that. Let us suppose that I am living in Buffalo, and I have a thousand dollars in gold of the fineness of 25.8 grains to the dollar. Suppose Congress passes a law making one-half of that much gold consti tute a dollar. I say I will not keep my gold in this country, but I will take it across the river into Canada. I do not know of any way that you can stop it, and I think that would be a natural reaction. Here is another illustration, and I do not think it is far afield and that is why I asked you if you would limit this effort to stabi lizing the purchasing power of gold. Suppose I hired a team of mules, at the outbreak of the war, worth $250 or $200. The war comes, the price goes up, and I hire them for a year. Fall comes along, and the price of the mules is $400 a span. I go up to your barn with one mule, and you say, “ Here, I let you have two mules.” I say, but you are getting back as much mule as you let me have- This one mule has as much purchasing power as the two mules you let me have, and I am returning equivalent value.” Doctor F isher. You Avill find quite a lot in regard to that in my book on stabilizing the dollar. Senator Gore. I have thought about it a great deal as an ideal. It seems to me it Avould be desirable. I just have not figured out as a practical thing that it could be done. I t seems to me as hopeless as perpetual motion. I agree with all that you have said about the burden of debts. I t is the tragedy of the age that they have got to be paid tAvo or three or four times o\rer. If there is any practical Avay to do it, I am anxious to do it. Senator F letcher. Y ou spoke about the promotion of installment buying. What Avas really behind that? Was an effort being made by some particular interest? Doctor F isher. I t is really an old deAuce, but it Avas particularly cultivated by the automobile manufacturers, and especially by Gen eral Motors. Senator F letcher. Y ou could buy anything on the installment plan. I do not knoAv whether it was an effort to make a showing of prosperity, even though it did not exist. Doctor F isher. It induced people to buy Avho could not otherwise buy. I t gave them a kind of credit and alloAved them to borroAv; and it is perfectly sound, but it happened to come when there Avere so many other debts and it Avas so oA7erdone itself that it increased this overindebtedness in 1929. The Chairman. I Avas out of the room when you Avere testifying about that. Do you think that in a great many families it resulted in their buying more than they were able to pay for ? Doctor F isher. Yes; but I don’t think that Avas the main tragedy. The main tragedy Avas that after this great burden of debt resulted in tremendous selling and reducing prices and therefore magnifying the dollar, then it made it impossible to pay, far more so than if the price level had been stable. The Chairman. But did not these people who were out selling on the installment plan ignore the limited purchasing power of their customers and oA’erride them in many cases? Doctor F isher. N o ; I do not think so, very much. There have been Arery few defaults. The Chairman. Yes; but did it not mean that the buyer had to quit a year or two to catch up on his earnings before he could buy any more? Doctor F isher. Yes. The Chairman. I s not that the same thing? Senator Gore. He mortgaged future earnings for present enjoy ment. I he Chairman. They thought they could sell a man more than he could pay for, but they found aftenvards that he Avas trading on the future years, and therefore the business sloughed off. Doctor F isher. Yes; they undoubtedly OA'ersold in some cases; but my point is this, that if the dollar had been kept the same it would have been tAvo or three times as easy as it has been to pay off. The Chairman. Oh, certainly. Senator Gore. Y ou say there have been A7ery few repossessions. That is true, but people have paid out a half or three-quarters and I d o n o t s e e t h e d if f e r e n c e i n e t h i c s b etA veen t h o s e tw o p r o p o s i t i o n s . Doctor F isher. If you make a contract in terms of mules, both parties knoAv that you are not talking about purchasing power. But when you make a contract in terms of dollars, that is an implied contract. People are not interested in gold as gold. You talked about my borrowing a thousand dollars in gold of Senator Fletcher or a thousand dollars in gold of you; but I venture to say that neither one of you has a thousand dollars in gold----Senator Gore. Double check, as far as I am concerned. Doctor F isher. Y ou may have a million dollars, but not gold. I do not want to borrow gold. I can not eat it and I can not Avear it. People are just using gold because it came down from the times when jewelry was used as a crude way of measuring value. Now we have better Avays. # Senator G ore. Our national bonds and State bonds are payable in gold. A great many farm mortgages are payable in gold. Do you think that if you went down to the Riggs Bank and borrowed a thousand dollars, if Congress changed the Aveight and fineness of the gold, the Riggs Bank would make a note that it shall be paid in gold of standard weight and fineness ? Doctor F isher. Such contracts, if made specifically that way should be fulfilled that way, I suppose. J’ Senator Gore. Yes. I figure they Avould all be made that way. Senator F letcher. They were a few years ago. That was the gen eral practice. Doctor F isher. That is not in this bill. Senator Gore. Oh, no; it is not in this bill, but I Avas just getting your reaction to that. 120290—32----- 10 141 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR they have been denying themselves other things in order to hold their equity in the things they had bought ? Doctor F i s h e r . Yes. Senator Gore. And that has discouraged the purchasing power of the people? Doctor F i s h e r . Absolutely. The C h a i r m a n . In other words, the strong-arm selling was trad ing on the future to the extent that it was bound to help to bring on trouble ? Doctor F i s h e r . Yes. Senator Gore. I think one trouble about the banks to-day is this. There are two sorts of credit. One is for consumptive purposes and the other is for productive purposes. I think the banks have almost absolutely shut down on loaning for consumptive purposes. On the productive side they have shut down because they can not survey the situation as it exists and see any business concern manufacturing any thing with the hope of being able to sell it for what it cost, and for that reason they will not make advances. Doctor F i s h e r . I do not think that point is as important as the banks are making it out to be. That is their excuse or alibi, that the business will not be-sufficiently productive. But their real trouble is that they are in trouble. They do not want to tell their customers that, that they can not loan because they are broke themselves. Senator Gore. I think it is a matter of contrast. As far as I am concerned, I do not much blame the banks or individuals for hoard ing, in view of this prevailing psychology. The C h a i r m a n . We are very much obliged to you, Doctor Fisher. (Witness excused.) Mr. Edward O’Neal, president of the American Farm Bureau Federation, has requested to have made a part of this record a pamphlet entitled “ Honest Money, an Explanation of the Relation of Money, Prices and Prosperity,” published by the American Farm Bureau Federation, Chicago, 111., January 7, 1932. Without objection, it will be inserted at this point in the record. (The document referred to and submitted by the chairman is here printed in full as follows:) h a rd s h ip s th a t h it fa rm e rs h a rd e s t o f a ll d u rin g a lte rn a te p erio d s of inflation a n d deflation, no m a tte r how h ap p ily w e m ay se ttle o u r o th e r problem s. I t is w ith th e hope of a ssistin g A m erican fa rm e rs to stu d y th is q uestion a n d p u t them selves in position to use th e ir influence in te llig e n tly to secure action by C ongress to solve it th a t th is booklet is being d is trib u te d . 142 H onest M onet — A n E xplanation of t h e R elation of M o n et , P rices , and P rosperitt FOREWORD T h is booklet, p re p a re d by th e com m ittee of th e A m erican F a rm B u re a u F e d e r a tio n on sta b iliz a tio n of th e u n it of v alu e, is in ten d ed to give to o u r m em bers a n d o th e rs a c le a r, sim ple e x p la n a tio n o f th e m oney questio n , a n d th e effect of m o n etary p olicies on a g ric u ltu re , b u sin e ss a n d lab o r. T h e policy of th e A m eri can F a rm B u re a u F e d e ra tio n on th is q uestio n is ex p ressed in th e re so lu tio n adopted a t o u r la s t a n n u a l m eeting, a n d re p rin te d h e re w ith . I t is o u r opinion th a t th e m oney q u estio n is of fu n d a m e n ta l im p o rtan ce, n o t only to a g ric u ltu re , b u t to a ll classes of o u r p o p u la tio n . W e do n o t assu m e th a t stab iliz in g th e p u rc h a sin g pow er of m oney w ill a u to m a tic a lly solve a ll o u r o th e r problem s. T h e re w ill s till re m a in m an y such q u estio n s a s ta x a tio n , tra n s p o rta tio n , ta riffs , m a rk e tin g an d su rp lu s co n tro l, w hich m u s t be se ttle d before a g ric u ltu re can live an d tra d e on te rm s of e q u a lity w ith o th e r in d u s trie s. T h e po sitio n of th e A m erican F a rm B u re a u F e d e ra tio n on th e se q u estio n s is w ell know n, a n d w e sh a ll co n tin u e to d em an d a f a ir so lu tio n o f a ll o f th em . W e do b elieve, how ever, t h a t th e m oney q u estio n is of su ch fu n d a m e n ta l im p o rtan ce th a t its p ro p e r se ttle m e n t w ill m ake a so lu tio n of a ll o th e r p roblem s m uch easie r, a n d th a t w ith o u t such a s e ttle m e n t we sh a ll s till be su b je c t to th e 143 E dw ard O ’N e a l , President American Farm Bureau Federation. T he U n ited S ta te s of A m erica is a co u n try of alm ost u n lim ite d n a tu r a l re sources—coal, oil, iro n , tim b e r; in fa c t, a lm o st every ra w m a te ria l needed to m ake goods to supply h u m an w a n ts. I t is a co u n try of fe rtile fa rm s a n d capable fa rm e rs . T h en can easily p i od u ce food a n d cotton an d w ill in such abun d an ce th a t everyone can have p le n ty to e a t a n d w e a r. I t is a co u n try of fa c to rie s a n d pow er, of m ass p ro d u ctio n , w ith p len ty or sk illed la b o r an d co m petent m anagem ent. F o r c e n tu rie s th e w o rld w as h u n g ry because i t could n o t produce enougn food. In fa c t, u n til recen t tim es th e w orld never h a d enough of a n y th in g , fo r e v e ry th in g h a d to be prod u ced by h a rd h a n d labor. T he U n ited S ta te s h a s solved th e problem of prod u cin g food a n d clothing a n d m a n u fa c tu re d goods. I t c an e a sily produce enough of e v e ry th in g so th a t everyone could live lik e a k ing. . T hen w hy a re m illions of people w ho a re capable a n d w illing to w orn, h u n g ry a n d cold a n d hom eless? W hy a re fa c to rie s closed w hen so m an y people need goods? W hy a re people o u t of w o rk w hen so m any o th ers need th e th in g s th a t th e y m ig h t be producing? W hy a re so m an y people h u n g ry w hen th e fa rm s a re g lu tte d w ith su rp lu se s . W hy a re h ard -w o rk in g , th r if ty people being sold o u t u n d e r th e h am m er, th e sav in g s of a liftim e lost? W hy all th is m isery a n d p o v erty a n d d esp air in a la n d of p len ty ? M illions o f people a re ask in g th ese q uestions. T h e f u tu r e of th e N atio n depends on finding th e rig h t an sw er. All th ro u g h th e ages m an k in d h a s stru g g led w ith tw o p ro b le m s : 1. T o produce enough. ' 2. T o d ivide up w h a t is produced. W e h av e solved th e first. W e h a v e fa ile d to solve th e second. W e do n o t d a re to p roduce too p len tifu lly , fo r w e do n o t know how to d iv id e u p w h a t w e p roduce so t h a t w e c an a ll use a n d enjoy it. W e know t h a t th e m ore w e p ro d u ce th e m ore w e a ll o u g h t to h av e. B u t som ehow it does n o t seem to w o rk o u t th a t w ay. W e p ro d u ce u n til th e w a re h ouses a re fu ll, an d th e n sh u t dow n fa c to rie s a n d tr y to s h u t dow n fa rm s, th ro w m en o u t of w ork, sh iv e r a n d grow th in , a n d w onder w h a t th e tro u b le is. MONET MAKES CIVILIZATION POSSIBLE W h a t is th e tro u b le ? ^ _ , To an sw e r th a t q u estio n w e sh all h av e to go b ack a few th o u s a n d y e a rs. I n p rim itiv e tim es th e re w as no m oney. T h e m an w ith a h e rd of cow s tra d e d w ith a m an w ith a field of w h eat, so t h a t b o th could h av e b re a d a n d b u tte r. A ll exchange of goods w as on a tr a d e o r b a r te r b asis. T h e re w ere no h a rd tim es except a s th e re s u lt of som e n a tu r a l c a la m ity or o f f a ilu re to w ork. B a rte r w as a clum sy a n d in co n v en ien t w ay of doing b u sin ess. W e could n o t possibly c a rr y on th e com plicated busin ess of to-day on a b a r te r b asis. So m oney w as in v en ted —sh ells o r b eads or pieces of m e ta l o r p a p e r— any a rtic le or token th a t w ould be g en erally accepted in exchange fo r goods because of its ow n v a lu e o r prom ises b ack of it. W e exch an g e o u r lab o r o r th e p ro d u cts w hich w e p ro d u ce fo r m oney, a n d exch an g e th a t m oney in tu r n fo r th e goods o r services of o th ers. M oney is th e oil w ith o u t w hich th e com plicated m ac h in e ry of m odern civ ilizatio n could n o t ru n . , W hile m an y d ifferen t m a te ria ls m ig h t be u sed fo r m oney an d h av e been so used, it w a s found th a t tw o m e ta ls w ere b est fo r th a t purpose— gold a n d silv er. B oth w ere scarce enough an d v a lu a b le enough in them selves to be gen erally accepted, re g a rd le ss of confidence in g o vernm ents o r b an k s. F o r a tim e th e lead in g com m ercial n a tio n s u sed b o th m e ta ls as th e ir basic m oney, w ith a definite ra tio of v a lu e betw een th e tw o. In th is co u n try th e ra tio w as 1 6 to 1. G ra d u a lly th e n a tio n s dropped silv er a s p a r t of th e ir b asic m oney, a n d b egan to use gold alone. T o-day C hina is th e only la rg e n a tio n MAINTAINING AVERAGE PURCHASING TOWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR u sin g th e silv er s ta n d a rd . A ll o th e r im p o rta n t n a tio n s a re a t le a st no m in ally on th e gold s ta n d a rd , o r w ere u n til recen tly . B u t as bu sin ess grew in volum e a n d com plexity, it soon becam e a p p a re n t th a t th e re w as n o t enough gold. F o r t h a t re aso n , a n d fo r re a so n s of con venience, g ov ern m en ts began to issu e p a p e r n o tes fo r u se a s m oney in ste a d of gold. T he v alu e of p a p e r c u rren cy is m a in ta in e d by m ak in g it leg al te n d e r in p ay m en t of debts, custom s, a n d ta x e s, by confidence in th e go v ern m en t, by lim itin g its q u a n tity , o r by g o v ern m en t prom ise to redeem i t in gold on dem and. A n atio n w hose p a p e r c u rre n c y is p a y ab le in gold on d em and is sa id to be on th e gold s ta n d a rd . Since go v ern m en ts m ay o r m ay n o t keep th e ir p ro m ises to redeem , it is e v id en t th a t th e v a lu e o f p a p e r m oney depends w holly on con fidence in th e g o v ern m en t. W h en ev er confidence in g o v ern m en t w anes, p a p e r m oney d ep rec ia te s in v alu e. In a n a tio n w ith a stiible g o v ern m en t in w hich its citizens h av e confidence, how ever, th e v alu e o f p a p er m oney depends upon its q u a n tity in re la tio n to th e need fo r it m ore th a n upon pro m ises to redeem it in gold. NOT ENOUGH GOLD W e o rd in a rily th in k of th e d o llar a s being an a c c u ra te m e a su re of value, as th e y a rd is an a c c u ra te m easu re of length, an d th e pound an a c c u ra te m easu re of w eight. T h a t is not tru e . I t is because th e d o lla r is such an u n c e rta in m e asu re of value th a t th e w hole econom ic m achine gets in to tro u b le every now an d th en . T he fu n d a m e n ta l reason fo r h a rd tim es is not overp ro d u ctio n n o r u n d erco n sum ption n o r an y of th e o th e r reaso n s so fre q u e n tly given. T h e re a l reason is th a t th e d o llar, by w hich w e m easu re all values, is such an in a c c u ra te m easu rin g stick. T he d o lla r is a fixed m e a su re of value only in one resp ect— it w ill alw ay s buy 2 3 .2 2 g ra in s of gold. B u t w h a t does th a t am o u n t to? W e can not e a t gold n o r w e a r gold, n o r w ill gold keep us w arm . W hen it com es to m e asu rin g th e v alu e of th e th in g s we do w a n t, th e d o lla r is f a r from being a fixed u n it of m easu rem en t. W h eat is o u r m ost im p o rta n t a rtic le of food. W e e a t ab o u t 4 b ushels apiece every y ear, an d could n o t very w ell get along w ith o u t it. W e m e asu re w h eat in bushels. A bushel of w h e a t is alw ay s th e sam e am o u n t. W e value w h e a t in d o llars, b u t a d o lla r’s w o rth of w h e a t v a rie s g re a tly . A d o lla r w ould buy less th a n h a lf a bushel of w h e a t in 19 19 , a bushel in 1 9 29 , and 3 bushels in th e e a rly sum m er of 1 9 3 1 . Y et each of u s needed h is 4 b u sh els of w h eat ju s t a s badly one y e a r a s an o th e r. I t is p lain th a t th e v alu e of w h e a t as h u m an food does not change from y e a r to y e a r. E ven its v alu e in re la tio n to its supply an d dem and does not v a ry in a n y such ra tio a s th e p rice changes of th e p a st 1 2 y e a rs w ould in d icate. C e rta in ly w h e a t in itse lf is m ore v a lu ab le th a n gold. Y et th e d o lla r th a t w ould buy e x actly th e sam e am o u n t of gold in 1 9 3 1 as in 1 9 1 9 w ill buy six tim es a s m uch w h eat. I t is p la in th a t a s a m easu re of th e v a lu e of w h eat th e d o lla r fa lls f a r sh o rt. A bushel b a sk e t th a t w ould hold 4 pecks one y e a r an d 24 pecks a n o th e r could not be called a n h o n est bushel. N e ith e r can a d o lla r w hose p u rc h a sin g pow er changes in th a t p ro p o rtio n be called an ho n est d o llar. In th e M iddle Ages th e y a rd w as th e d istan ce aro u n d th e k in g ’s m iddle. I t w as th en th e sam e k in d of a m e a su re a s th e d o lla r is now . You can im agine the difficulty of doing bu sin ess w ith a y a rd th a t w ould go a ro u n d T a f t in 1913, sh rin k in g to th e circu m feren ce of Coolidge in 1 9 28 . W e have been w ise enough to m ake th e y a rd a s ta n d a rd , u n v a ry in g m easu re o f len g th . Some d ay w e sh a ll be w ise enough to m ake th e d o lla r a s ta n d a rd m e asu re of value. MEASURING THE DOLLAR’S BUYING POWER 144 T he only w ay a g o v ern m en t can be su re of its a b ility to redeem its p a p er m oney a t a ll tim es is to keep a d o lla r’s w o rth of gold in its tre a s u ry fo r ea c h d o lla r of cu rre n c y o u tsta n d in g . No n a tio n does th is, fo r th e sim ple re a so n th a t th e re is n o t enough gold to finance th e b u sin ess of th e w orld. T he U n ited S ta te s h a s in c irc u la tio n $ 9 2 7 ,9 3 0 ,1 2 0 in gold certificates, backed by a n equal a m o u n t o f gold in th e t r e a s u r y ; $ 3 8 6 ,7 0 1 ,2 1 7 in silv e r certificates, redeem able in silv er d o lla rs a n d leg al te n d e r in p a y m e n t of a ll public obli g atio n s, such a s ta x e s a n d c u s to m s ; $6 54 ,8 0 S ,4 1 2 in n a tio n a l b a n k no tes backed by U n ited S ta te s b o n d s ; $ 2 9 4 ,4 4 7 ,1 3 8 in U n ite d S ta te s n o tes, backed by $ 1 5 6 , 0 0 0 ,0 0 0 in go ld ; $ 1 ,2 3 2 ,2 5 0 in T re a su ry no tes of 18 90 , redeem able in g o ld ; a n d $ 2 ,4 6 3 ,2 8 1 ,9 8 9 in F e d e ra l re se rv e n o tes, red eem ab le in gold a n d backed by a t le a s t 4 0 p e r cen t of th e ir v alu e in gold in th e v a u lts of th e F e d e ra l re s e rv e b an k s. T he a c tu a l gold re serv e is u su a lly co n sid erab ly g re a te r th a n th is leg al m inim um . All th ese v a rio u s k in d s o f p a p e r m oney c irc u la te a t p a r b ecause o f confidence in th e F e d e ra l G overnm ent, a n d th e public h a rd ly know s one k in d from a n o th e r. B u t even th is am o u n t of p a p e r m oney is e n tire ly in a d e q u a te to finance th e bu sin ess o f th e c o u n try . I t is supp lem en ted by “ b a n k m oney ”— checks a g a in s t b an k d eposits. S om eth in g lik e 9 0 p e r c en t o f th e b u sin ess of th e c o u n try is done w ith checks in s te a d of cash . F o r a ll p ra c tic a l p u rp o ses b a n k dep o sits su b ject to check a re j u s t a s m uch a p a r t of th e m oney supply o f th e co u n try a s cu rren cy o r gold. T h e re a re a b o u t $ 5 1 ,0 0 0 ,0 0 0 ,0 0 0 of b a n k d ep o sits su b je c t to check in th e U n ited S ta te s. M ost of th is g re a t volum e o f b a n k c re d it w a s n o t c re a te d by th e deposit of m oney. T h e m a jo rity of c re d its a re c re a te d by bo rro w in g . W h en W illiam Jo n e s borrow s a th o u sa n d d o lla rs from h is b an k , th e b an k sim ply gives him c re d it fo r $ 1 ,0 0 0 on i t s books. T he o u ts ta n d in g c re d its of th a t b an k a re $ 1 ,0 0 0 la rg e r th a n before, a n d $ 1 ,0 0 0 h a s been a d d ed to th e m oney supply (c o n sid e rin g b an k c re d it a s m o n ey ) o f th e c o u n try . W hen bu sin ess is tra n s a c te d by check, little a c tu a l c ash is used. I t is la rg e ly a m a tte r of bookkeeping in th e b a n k a n d betw een b an k s. F o r th a t reaso n b an k s can len d m oney (c r e a te c re d it) u p to so m eth in g lik e 1 0 tim es th e ir a c tu a l reserv es. In o rd er to m eet th e need s of b u sin ess w e h a v e b u ilt up a g re a t m one ta r y p y ram id (p a p e r m oney a n d b a n k c re d it) on a sm all gold b ase. T h e re q u ire d gold reserv es p ro v id e o nly $ 1 .6 0 in gold to m eet each $ 1 0 0 in p ro m ises to p ay gold. A ctu ally th e gold re se rv e s a r e so m ew h at la rg e r th a n th is. O ur w hole m o n e ta ry s tru c tu r e d epends on confidence r a th e r th a n on gold, how ever. I f th e re w e re a n y co n certed a tte m p t to co n v ert cu rre n c y a n d b ank c re d it in to gold, gold p ay m en ts w ould h av e to be stopped. T h e gold sta n d a rd is th e o re tic a l r a th e r th a n a c tu a l, a n d m u st be so u n less v a s t new su p p lies of gold a re discovered. WE MEASURE VALUES WITH MONEY T h e com m on no tio n a b o u t m oney is th a t i t is a m edium of exch an g e. T h a t is a c o rre c t b u t n o t a com plete definition. M oney h a s a n o th e r v ery im p o rta n t fu n c tio n . I t is a m e a su re o f v alu e. T he u n it of v alu e in th is c o u n try is th e d o lla r. W e m e a su re a ll v alu es in te rm s of d o lla rs. 145 W e h av e a m ethod of m ea su rin g changes in th e p u rc h a sin g pow er of the d o llar by w h a t is know n as th e w holesale com m odity p rice level. T h is price level is d eterm in ed each m o nth by th e U n ited S ta te s B u re a u of L a b o r S ta tis tic s by ta k in g th e a v erag e of the w holesale p rices of som e 5 0 0 com m odities, each figured according to its im p o rtan ce. T his w holesale com m odity p rice level is expressed by a p e rcen tag e figure called a n in d ex num ber. T he y e a r 1 9 2 6 is ta k e n as a base. T he price level of th a t y e a r is expressed by 100. F o r sev eral y e a rs follow ing 1 9 2 6 th e p rice level w as fa irly stab le. T hose w ere p rosperous y e a rs fo r everyone except fa rm e rs , an d fa r m p rices w ere ste a d ily com ing in to b e tte r re la tio n sh ip w ith o th e r p rices. In th e fa ll o f ' 1 9 2 9 th e p rice level w as 9 7 , only th re e p o in ts below 1 9 2 6 . D u rin g th e tw o y e a rs since th en it dropped to 6 8 . (N ovem ber, 1 9 3 1 .) $1.45 DOLLARS W e say th a t goods a re th a t m uch ch eap er. B u t w h a t h a s re a lly h ap pened is th a t d o lla rs a re w o rth m ore. A d o lla r w ould buy 4 5 p e r cent m ore goods in N ovem ber, 1 9 3 1 , on th e av erag e, th a n in 1 9 26 . T he 1 9 3 1 d o lla r, in te rm s of w h a t it w ill buy (a n d th a t is all th a t d o llars a re good f o r ) is w o rth $ 1 .4 5 . T h a t m eans t h a t if we borrow ed a d o lla r in 1 9 2 6 , w e m u s t p ay back (in te rm s o f goods) $ 1 .4 5 a t th e p rice level of N ovem ber, 1 9 31 . E v ery d o lla r in ta x e s, in te re st, an d o th e r fixed expenses h a s become $1 .4 5. T h e fa rm e r is even w orse off, fo r h is prices h ave dropped m ore th a n th e a v erag e. T he fa rm price index lias dropped to 58, and th e f a r m e r’s d o llar of d eb t an d ta x e s h a s become $1 .7 0 . W hen we borrow m oney we expect to pay it back, b u t we do n o t ex p ect to p ay back $ 1 .4 5 fo r each d o lla r we borrow . M ost of us can n o t do so. T he 146 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR debts of this country and of the world, public and private, can not be paid back in $1.45 dollars. The effect of the deflation since 1929 has been to increase public and private debts in this country (in terms of commodities) by $80,000,000,000. On the present price level, when we have paid off our debts on the basis of what those debts were worth in terms of commodities in 1926, we shall still have eighty billions more to pay. Even the most avaricious loan shark never dreamed o f legalized robbery in such terms as that. W orst of all, it is the most able and most ambitious part of the population which is in debt. This country has been built up by people who were willing to work and borrow and take a chance. The Nation can not afford to crucify this most virile and valuable portion o f its population. SUPPLY AND DEMAND The value of every product depends on supply and demand. That is just as true of money as it is of wheat and hogs. W hen the price of hogs goes down while other prices are stationary, the reason is that there are too many hogs in proportion to the demand for pork. But when the average level of all prices goes down, as from 97 to 68 in two years, that is not due to the supply and demand o f goods. It is hardly possible that there could be such a sudden increase in the production of all goods in two years, or such a sudden lessening of the desire of people for goods. The cause in such a case is a change in the supply of money and credit. The price of money can not change, for it is fixed by law. So when the supply changes the effect can only be shown by a change in the price of goods. Commodity prices not only must change to compensate for changes in their own supply and demand, but also to conpensate for changes in the supply of money and demand for it. Suppose we think of all the money and bank credit of the country as being on one end of a pair of balances and all the goods on the other end. Take off part of the goods, and that end of the balance goes up. That is, goods are scarce and prices rise. W e are all familiar with that result in the case o f individual commodities. W e are not so familiar with the fact that a change in the supply of money on the other end of the scale will have exactly the same effect. I f we take off some o f the money, the money end will go up and the goods end will go down. That is exactly what has happened during the past two years. The goods end of the scale has gone down— the average wholesale price level has dropped 29 per cent— not because we put too many goods on that end o f the scale but because there was not enough money on the other end. A s a matter o f fact, the amount of goods on the scale never varies much. The total production of goods in the world is about the same one year with another, excepting only times of world war and severe world depression. Even then the change— remember we are speaking of the total production of all commodities— is not so very great. Over a long term of years the annual production o f goods in the world has increased steadily at the rate of a little more than 3 per cent a year, with little change from that amount. The rate of production increase in the United States is about 4 per cent annually. The changes are chiefly on the other end o f-th e balance. The volume of money and bank credit, and hence its value in terms o f goods, varies greatly. That variation in the buying power of money is the cause of most of our busi ness troubles. BALANCE THE SCALE It is quite apparent that we should all be better off if the scale were kept in balance— if the average wholesale commodity price level were kept just about the same from mouth to month and year to year. A ll business could then plan for the future with much greater confidence, and we could all go ahead producing to somewhere near the full capacity of our farms and fac tories. That would mean real prosperity. Because we should produce more o f everything, everyone could have more. # W e can only go on producing when the goods produced are moved steadily into consumption. That means solving the problem of dividing up what we produce. W e can only do that when prices are in such relation to one another, that we can trade among ourselves on a fair basis. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 147 W hile such things as tariffs, wage and price-fixing agreements, etc., some times work against a fair price relationship, the tendency is always for prices to adjust themselves in a fair relationship to one another so that commodities can be exchanged freely when the average price level is stable. But when the average price level changes greatly, all these relationships are thrown out of joint. There are other causes than the supply of money and credit that tend to disturb price relationships. But these causes are of minor importance compared to the monetary factor. That is more important than all the others together— important enough so that, properly handled, it can largely offset the effect of all the others. W e can keep money constant in purchasing power— keep the average com modity price level stable— by maintaining just the right amount of money on the money end of the scale; in other words, by providing business at all times with just the amount of money it needs to keep going in a normal way. That means fitting the volume of money and credit to the volume of business, instead of having to close down factories and farm s and throw men out of work every now and then in order to fit the volume of business to an arbitrary volume of money. IDLE MONEY DOESN’T COUNT When we consider keeping the volume of money and credit in proper relation to the need for it, there is another factor that needs to be taken into considera tion. That is the amount of work that each dollar does— what economists call the velocity of circulation. The amount of work done by a crew of men depends on how hard they work. I f some of them sit in the shade, and others work only half-heartedly, they will not accomplish as much as if they all worked steadily. It is the same with money. The dollars that are idle, perhaps hidden away under the mattress or in safety deposit boxes, are not working. Neither is the credit which in times like these bankers are afraid to loan in a normal way. W e have already seen that by far the largest amount of “ money ” is not money at all but bank deposits created by borrowing. When the future is uncertain because no one knows what further changes may occur in the average price level, both borrowers and bankers are timid. The rate of turnover of demand deposits in 141 cities in August, 1929, was 5.83 times per month. In August, 1931, the rate of turnover in the same cities was only 2.44 times per month. A given amount of deposits in 1931 would finance only 40 per cent as much business as in 1929. W hen we talk about “ frozen assets ” we mean that the velocity of circulation of money is low. In other words, that confidence, on which our whole credit structure is built, is at a low ebb. So when we are talking about the necessary amount o f money and credit, we must consider velocity as well as quantity. W e have the right amount of money and credit when business is proceeding normally without any appreciable change in the average price level. W hen prices are going up and speculation is increas ing, we have too much. W hen prices are going down, factories closing, and men being thrown out of work, there is not enough. Enough money a t one time may be too much or not enough at another. The measure is its purchasing power— the average wholesale commodity price level. The problem, then, is to expand and contract currency and credit, not in accordance with the amount of gold we may happen to have but in accordance with the need£ of business. The monetary system of the United States is largely under the control o f the Federal reserve banks and the Federal Reserve Board, together known as the Federal reserve system. The Federal reserve system can expand or contract currency and bank credit at will in normal times, subject only to the limitations of the Federal reserve act relating to gold reserves, member bank reserves, and rediscount eligibility rules. In abnormal times lack of confidence may weaken the effectiveness of measures adopted by the Federal reserve system. When the Federal reserve act was adopted by the House of Representatives in 1913 it contained a provision directing the Federal reserve system to use its powers to stabilize the purchasing power of money. That provision was elimi nated in the Senate. The system has at various times used its influence to maintain stability. A t other times it has not. Its ability to maintain stability under normal conditions can hardly be questioned. Additioiml powers may be needed to enable it to maintain stability under abnormal conditions. 148 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR PRICE LEVEL MUST BE RAISED Two things are necessary at this time. 1. Restore the wholesale commodity price level to a point somewhere near that at the beginning of the present deflation. 2. Stabilize the price level at that point. The first is necessary in fairness to debtors and in order to prevent further wholesale defaults and bankruptcies. A large part of the outstanding indebted ness, both public and private, can not be paid on the present price level. An increase of 30 to 40 per cent in the price level would restore confidence, put men to work, stimulate business activity, and definitely put an end to the present depression. It would cause farm prices to increase faster and farther than others, just as deflation caused them to fall farther and faster. To start that process at a time like this is difficult. The chief inflationary powers now possessed by the Federal reserve system are as fo llo w s: 1. O p e r ^ m a r k c t o p e r a t i o n s .— W hen the Federal reserve banks purchase Gov ernment securities in the open market, the effect is to turn those securities into cash. And because o f the pyramiding of credit, an open-market purchase of $100 in Government securities makes available approximately $1,000 in bank credit. Early in 1931 the Federal reserve system bought large quantities of Govern ment securities in the open market, until it had accumulated more than $700, 000,000 worth of such securities and about the same amount of bankers’ ac ceptances. Such purchases were insufficient to start the price level upward, and the attempt has apparently been abandoned. 2. R e d i s c o u n t r a t e .— One of the functions of the Federal reserve banks is to make loans to member banks by accepting securities o f various kinds from them and issuing Federal reserve notes in exchange. The rate charged on such loans to member banks is known as the rediscount rate. W hen that rate is low, it is profitable for banks to borrow from the Federal reserve and reloan to customers. Low rediscount rates tend to expand credit. High resiscount rates tend to contract credit. During the summer of 1931, however, reducing rediscount rates to i y 2 per cent failed to have any appreciable inflationary effect because bankers lacked confidence to loan in a normal way. Rediscount rates have since been raised to around 3 1/£> per cent, which is still low compared with normal times. 3. R e d i s c o u n t e l i g i b i l i t y r u l e s .— Under the law the Federal reserve banks can rediscount for member banks only certain kinds of securities and commercial paper. By their own rules the Federal reserve banks can still further restrict the kinds of paper eligible to the rediscount privilege. Liberal rediscount rules tend to make money “ easy ” and to expand credit. Strict rediscount rules tend to restrict credit. A t the close of 1931 the reserve banks were following a “ tight-money ” policy as far as rediscount eligibility was concerned. They were reluctant to accept anything but Government securities for rediscount. It is apparent that the Federal reserve system could use its present powers, especially (1 ) and (3 ) above, more effectively in an effort to expand credit and start the price level upward. But even if used to the limit, they might not be effective with public confidence at the present low level. Certain additional powers would help, particularly broadening the redis count eligibility requirements. A large proportion of property owners, par ticularly owners of real estate, are now practically without credit. I f highclass, sound real-estate securities could be made eligible to rediscount tem porarily, a marked expansion of credit would be almost sure to result. Ad mitting debentures of the intermediate credit banks to rediscount would aid those banks in providing farm credit, which would also aid in credit expansion. President Hoover has proposed a system of emergency credit agencies, which to the extent it becomes effective will help to expand credit and raise prices. The National Credit Corporation is already in operation and has had a marked effect in checking the number of bank failures. His others— the home loan discount banks, the Reconstruction Finance Corporation, and a Govern ment subscription to stock in the Federal land banks— will all help to start the necessary inflation. Once started, inflation, like deflation, will move rapidly of its own momentum. That is why some people are so afraid of any inflationary move, even though they know that it is necessary to get business off dead center. They fear that once started, inflation will go too far before it is stopped. Those fears are unnecessary. The Federal reserve system has ample power to stop inflation, MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 149 and has learned how to do so. By selling Government securities in the open market, and by making rediscount rates abnormally high, it can contract credit so rapidly as to quickly put a stop to inflation once it has restored price levels to the desired point. OTHERINFLATIONARYMEASURES Some of the other inflationary measures that have been suggested are as fo llow s: 1. D e v a l u i n g t h e d o l l a r .— I f the price of gold were raised from $20.67 to $30 an ounce, which would mean that a dollar would be worth about 15.5 grains of gold instead of 23.22, as at present, the price level would be restored very quickly. The chief disadvantage of this plan is the fact that so many debts, public and private, are payable in gold dollars of the present weight. Devaluing the dollar would not help this class o f debtors. 2. P a p e r m o n e y .— A large issue (perhaps two or three billion dollars) or greenbacks (paper money not redeemable in gold), to be put directly into the hands of consumers by using them to pay Government salaries and other ex penses and for unemployment relief. This is perhaps the most effective remedy that has been proposed, although it is probably politically impossible because of the popular prejudice against irredeemable paper money. 3. S i l v e r . Restoration of free coinage of silver on a definite ratio with gold would be an effective plan of inflation, but would be impractical except by international agreement with the other leading commercial nations. 4. S y m m e t a l i s m — Under this plan both gold and silver would be basic money. Currency would be redeemable, not in either one alone, but in a definite amount o f each. This plan, too, requires international agreement. 5 Granting the national bank-note privilege to the one and one-half billions of Government bonds issued in the spring of 1931. That is, such bonds would be made the basis of a national bank note issue when deposited with the Treasury by national banks. The disadvantage of national bank notes is that they lack the elasticity of Federal reserve notes and can not be retired readily when they are no longer needed. When a patient is sick the chief consideration is to make him well. Any medicine that will accomplish that purpose is good medicine, and even certain unfavorable aftereffects can be tolerated if the medicine brings about a speedy cure. The present situation demands a speedy cure. Inflationary measures should be applied promptly and until results are secured. Deflation has reached the point where capital has been impaired so seriously as to threaten the whole financial structure of the country. Continued de flation may easily bring disaster, the wreckage of which can not be repaired in a generation. The results already have been bad enough. Tw o years more o f falling price levels might easily bring financial, political, and social conse quences that would wreck our civilization. This is not a time to be afraid of radical remedies. No remedy can be as radical as the disease. STABILIZE BUYING POWER OF MONEY After inflation has started prices upward and stimulated business activity, the price level should be stabilized at a fair level, preferably near that o f the fall of 1929. This stability of the price level and of the purchasing power of money is necessary in order to avoid a recurrence of the speculative boom of 1928 and 1929 and the deflation and hard times of 1930 and 1931. The principal stabilization measures that have been proposed are as follow s: 1. Amend the Federal reserve law directing the Federal reserve system to use all its monetary and credit powers to maintain a stable price level. W e have already explained what these powers are. To make its efforts more effective the reserve system should be directed to take the public into its confidence, so that instead of its moves being shrouded in mystery as is often the case now, the public will understand just what it is trying to do and why. 2. Amend the Federal reserve act to grant the following additional powers: (а ) To issue Federal reserve notes of its own volition against Government bonds in times o f emergency. (б ) To broaden the rediscount eligibility rules. (c) To raise or lower the reserve requirements of member banks. 150 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR (<Z) To raise or lower the gold reserve requirements of the Federal reserve bflnks (e) To raise or lower the price of gold. , . „ . 3 Amend the Federal reserve act to direct the Federal reserve system to expand credit steadily at the rate of 4 per cent a year in order to keep pace with the expansion of business. .... .. ^ 4. Hold an international conference to devise and put into operation plans to maintain world monetary stability. O f these, the first is the most important. Once we have adopted a definite national policy of stabilizing the purchasing power of money, international action will follow as a matter of course. It will be some time before the stabilizing efforts of the Federal reserve system will be endangered by lack ot gold, and before that time we may reasonably hope for international action to conserve gold and use it mainly for the settlement of international balances, or to adopt some practictal substitute for the gold standard. The recent aban donment of the gold standard by England, Japan, and 13 other nations shows how rapidly events are moving to force the world to find a solution ot its monetary problems. , , , , . . It is highly important that the principles of (1 ) above be enacted into law at the present session of Congress. It would be very desirable if part or all of the recommendations in (2) could also be written into the law. Humanity has been enslaved long enough by an unstable measure of value, resulting in misery and distress second only to that of war. Once we apply to our monetary system the same intelligence that has solved our production problems, another depression like the present one will have become impossible. QUESTIONS AND ANSWERS Q W h y is business always bad when prices are falling?— A No sane person will buy "except for immediate necessities when the price is likely to be lower next week. Merchants and manufacturers buy as little as possible when they face the prospect of having to resell at a loss. , , , Q. W h at happens when money and credit expand faster than production. A. Speculation, increasing prices, complaints about the high cost of living, and i a tendency to unbalanced production, with overexpansion of production faci ities and temporary overproduction of some commodities. Q W h a t happens when the expansion of money and credit fails to keep pace with production?— A . Production slows up, prices fall, men are thrown out of work and business enterprise and relationships are thrown out of balance. ^ Q. W h a t happens when the volume of money and credit is maintained m proper proportion to production?— A. Producers and merchandisers can plan for the future with confidence. From 1907 to 1915 the volume of credit expanded at almost exactly the same rate as the growth in production. Prices were stable and business was good. Q Does not stabilizing the price level mean price fixing, and has not Govern ment price fixing always been a failure?— A. Stabilizing the average whole sale commodity price level does not mean price fixing. The price of each indi vidual commodity would be free to fluctuate up and down in accoidance with the supply of that commodity and the demand for it. W hen the average price level is stable, if the price of any one commodity falls because of oversupply or failing dernnnd, capital and labor will promptly shift to some other field sufficiently to restore the balance. But when prices of all commodities are fa ll ing, capital and labor have nowhere to go. So capital goes into hiding and labor goes into the bread line, and a long period of hard times ensues. Such a state of affairs is due to insufficient money and credit, and can be prevented by keeping the supply of money and credit in proper relation to the needs o f business. Q. Is there not more money in circulation now than in 1929?— A. In Novem ber, 1931, total money in circulation was $44.40 per capita, as compared with $37.72 per capita the same month in 1929. Q. Then how can you say that our present troubles are due to a shortage of money?— A. “ Money in circulation ” is an uncertain phrase. It means money outstanding, but money behind the clock and in safety deposit boxes is not in circulation. The amount of our money held abroad also varies greatly. Bank deposits subject to check are the same as money for all practical pur poses, and are about 10 times greater in volume. When we speak of the volume o f money we mean the total volume of money and bank deposits subject to MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 151 check. From 80 to 90 per cent of bank deposits are created by credit extended by banks, which always shrinks when confidence declines. It is the effective supply of money and credit that counts, and money is effective only in proportion as it works. The actual circulation of money and credit is only 40 per cent as rapid now as two years ago, and it is therefore only 40 per cent as effective in creating purchasing power. Q. How much monetary gold is there in the world?— A. About $11,(525,000,000 worth. This gold was held as follows June 30, 1931: Amount United States............... F ran ce......................... England........................ $4,956,000,000 2, 212,000,000 793,000,000 Per cent of total 42.7 19.0 6.8 Amount Germany....................... Russia............................ 40 other countries___ $339,000,000 262,000,000 3,063,000,000 Per cent of total 2.9 2.3 26.3 Q. Howr rapidly is the world’s supply of monetary gold increasing?— A. Less than 2 per cent a year. The increase in monetary gold falls more than 50 per cent short o f keeping pace with the growth of production. That means that we must do one of the following th in gs: 1. Submit to a steadily declining price level for a long period of years. 2. Build up a still larger credit structure on the gold base. 3. Abandon the gold standard. Q. Are new gold discoveries probable?— A. Not large ones. The world has been thoroughly explored for gold. Some chemist may at any time discover a practical method of transmuting other elements into gold. Such a discovery would force the world to abandon the gold standard. Once gold could be man ufactured, it would become unsuitable for money because there would be no limit to its quantity. Q. W h at is meant by the gold standard?— A. A country which is fully on the gold standard buys and sells gold on demand through its treasury or its central bank, it redeems its currency in gold on demand, and sells foreign exchange freely on demand, payable in gold abroad. Q. W h at is the gold bullion standard?— A. A country which is on the gold bullion standard does not mint and circulate gold coins. It keeps its gold in bullion form, which it buys and sells freely, and with which it will redeem its currency on demand. It also sells foreign exchange on demand. Q. W h a t is meant by the gold exchange standard?— A. A country which is on the gold exchange standard does not redeem its currency with gold, nor does it buy and sell gold on demand. It sells foreign exchange, payable in gold abroad, freely in exchange for currency or bank checks. Q. W h at is the reason for the gold standard?— A. It is an automatic regu lator of finance. It imposes a limit on the quantity of money and credit. AVhen a nation continues to spend more than its revenue, balancing its budget by borrowing, or when it lives beyond its means by importing more than it ex ports, gold moves from it to other countries. This loss of gold serves both as a warning and as a means of forcing deflation and economy. W ithout more confidence among nations than at present, gold is the only satisfactory method of settling international trade balances. Q. W h at has caused so large a part of the world’s gold to move to France and the United States?— A. (1 ) Lack of confidence in other nations. People and nations feel that their money is safer in France or the United States. (2 ) “ Management ” of the gold supply. Since the war no nation has allowed the gold standard to operate freely. It has been managed in all sorts of ways, until some economists contend that we no longer have a gold standard at all, but a “ bankers’ standard.” A t times during the past year the United States has had more gold than the total amount o f outstanding currency. If this gold had been permitted to make its influence felt normally, it would have caused such a marked expansion of currency and credit as to have raised prices to twice the present level. Prices would not actually have gone that high, because as soon as they reached a certain point, the greater buying power of gold abroad would have caused us to lose part of our supply. When gold is allowed to work automatically it seeks its own level, distrib uting itself among the gold standard nations, and keeping world prices in such 152 MAINTAINING AVERAGE PURCHASING POWER OP DOLLAR adjustment among the nations that world commerce can proceed on a normal basis. The managed gold standard or the “ bankers’ standard ” interferes with this, causing excessive accumulation of gold in some countries and a serious short age in others, and seriously disrupting world trade. Q. W hy did England abandon the gold standard?— A. To keep from losing all its gold. A ll European countries abandoned the gold standard during the W orld W ar. When France went back on the gold standard in 1925, it devalued the franc. The gold value o f the franc before the war, in terms of our money, was 19.3 cents. In going back on the gold standard in 1925, France valued its franc at 3.93 cents in gold. The effect of that was to reduce the burden of its war indebtedness, incurred on an inflated price level, by 80 per cent. Relieved of this excessive debt burden, France was able to balance its budget, and by avoiding excessive taxation, its business became prosperous and its foreign trade balances were maintained. W hen England went back on the gold standard after the war, it disregarded the advice of its economists to follow the example of France (and all other European nations). Instead of devaluing the pound sterling and thus ridding itself of some of its excessive indebtedness, it placed the pound on the pre-war basis of $4.86 in our money. The resulting burden of interest, debt payments, and taxes was greater than it could bear. Business was stagnant, unemployment and the dole added to its difficulties, and maintenance of the pound on a $4.86 basis caused a con tinued drain on its gold supply. To stop from losing all its gold it had to abandon the gold standard and allow supply and demand to fix the value of the pound. I f and when England goes back on the gold standard, it will probably be with a pound that has been devalued to something like $3.50. Q. W h at happened to prices in England following the recent abandonment of the gold standard?— A. They advanced. Lard at Liverpool went up from 42 shillings in September to 53 shillings in late December. During the same period lard at Chicago went down from $7.30 to $5.65. Q. Since no nation can possibly have enough gold to redeem its promises to pay gold, what is the advantage of having any gold backing for its cur rency?— A. To act as a check against inflation. W ith no gold cover for its currency, the value of that currency is determined by its quantity. Experience in countries like Germany and Austria, which issued currency after the war in such excessive quantities that it became valueless, has created public fear o f currency inflation. Q. Is there any other method that could be used to help maintain the value of irredeemable paper money?— A. Y e s ; by making it full legal tender in payment of taxes, customs, and other legal obligations. The best method, however, is to limit its quantity. A rising price level indicates that the quantity is becoming too great. Q. How much money is outstanding in the United States?— A. At the end of November, 1931, $5,446,142,677, as fo llow s: $2, 463, 281, 989 Federal reserve notes----------294, 447.138 United States notes------------2, 851, 951 Federal reserve bank notes. 1, 232, 250 Treasury notes of 1890------654, 868, 412 National bank notes------------927. 930,129 Gold certificates------------------386, 701, 217 Silver certificates-----------------382,841, 032 Gold coin_____________________ 33, 226. 523 Silver dollars________________ 271, 718, 795 Other silver coins___________ 117, C43, 241 Minor coins__________________ Q. Can we not hope to have a more substantial basis for prosperity after prices have been deflated down to the pre-war level or lower?— A. No. W e can be ju st as prosperous on a high level as on a low price level, or vice versa. It is stability of the price level that makes prosperity possible, and changes in the price level that throw business out of adjustment and cause hard times. The only possible reason for lowering the price level is to bring demands for money and credit more nearly in line with a limited supply of gold. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 153 It is unnecessary and a form of economic insanity, however, to endure the suffering that would be necessary to cut down the world’s business to fit a limited gold supply. It is much better to solve the problem by rearing a larger credit structure on the gold base, adopting a combination gold and silver standard, or abandoning the gold standard altogether except for settling inter national balances. Q. Did not the American people definitely go on record against bimetallism (combination gold and silver standard) in 1896?— A. No. Both major parties favored bimetallism in 1896. The Republicans favored it only as a result of international agreement. The Democrats favored it for the United States regardless of international action. The Republicans won, but England blocked their attempt to secure bimetallism by international agreement. Discovery of vast gold fields in the Klondike and South Africa soon afterward relieved the gold shortage for a generation. W e are again facing the results of a gold shortage similar to that of 1896. Q. W h a t is meant by “ sym m etallism ” ? W hat advantages are claimed for it over bimetallism?— A. Under bimetallism a dollar in currency is redeemable in a given weight of gold or a given weight of silver. Under symmetallism the paper dollar is redeemable in a given weight of gold and a given weight o f silver. Under bimetallism there is always danger of one metal di’iving out the other. That is impossible under symmetallism, for both metals are always used together for redemption, never one separately. Q. During the period of 1923-1929, was there any abnormal overproduction of goods as a whole, or any abnormal falling off in the demand for goods?— A. No. W orld production increased at about the normal rate of 3 per cent a year, and there is no evidence to show that demand was other than normal. Q. D id the supply of gold keep pace with this normal increase in produc tion?— A . No. Increase in gold output during this period was only about two per cent a year. Q. W h a t was the effect of the adoption of the gold standard by India in 1927?— A . To put a further strain on the world’s gold supply. India drew $85,000,000 worth of gold out o f the world’s gold supply in 1928. It threw a large amount of silver on the market and this, combined with the sale of 50,000,000 ounces of silver by Great Britain as a result of debasing its silver currency, and the adoption of a partial gold standard by the French East Indies, demoralized the silver market, reduced the price from 65 to 30 cents an ounce, and paralyzed the purchasing power of China, the only large country to remain on the silver standard. Q. I f gold production has been insufficient from 1924 on, why did prices not drop sooner?— A . A market credit expansion in the United States, together with large American loans abroad, compensated for this shortage until the latter part of 1929. Q. Is not lack of confidence a more serious cause of the depression than lack o f money and credit?— A . Lack of confidence is a result rather than a cause. There was plenty of confidence in 1929. Q. W ould monetary stability help the mass of people?— A . Y e s ; monetary sta bility is necessary to business stability. Stable business, proceeding year after year at a normal rate, permits a wide distribution of national wealth and in come, accompanied by a high standard of living for everyone who is able and willing to work. Unstable business and widely fluctuating prices permit strong and unscrupulous individuals to accumulate an undue proportion of the national wealth and income. They take advantage of unstable prices and credit strin gency to add to their possessions until we approach the undesirable condition of great wealth for the few and poverty for the many. That is not a sound foundation on which to build the Nation’s future. Q. W hat is meant by inflation and deflation?— A. Inflation means expansion of money and credit. It is usually used to mean expansion of money and credit beyond the needs of business. The result is a rising price level and encouragement o f speculation. Inflation reduces the buying power of money, making money less valuable. Debts, taxes, interest, and other fixed expenses can be paid more easily because commodity prices are higher. People with fixed incomes begin to complain about the high cost of living, because their money will buy less, and there are demands for wage and salary increases. Rising prices stimulate business, increase profits, and there is little unemploy ment during such a period. Producers, especially producers of raw materials, find a ready market at good prices. Inflation generates confidence which soon 154 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR may become overconfidence. I f inflation continues long enough, speculation reaches the point where people forget production and thrift in their desire for speculative profits. . Ordinarily inflation is bad, though not as bad as deflation. The worst thing that can be said about it is that if carried too far, it is almost sure to lead to deflation. In a time like this, when a moderate degree of inflation would only restore the price level of two years ago, the results would be highly beneficial. Practically all medicine has some undesirable after effects, but that is no* reason for letting the patient continue to suffer from the disease. There is no other way except moderate inflation to end the depression except by a wearing out process that will take years and wear out a lot of the best people of the country. . Deflation is the reverse of inflation. The supply of money and credit is reduced or fails to expand to match the growth of business. Prices go down and profits vanish. Business has to be cut down to fit the supply of money and credit,' and unemployment results. This reduces purchasing power still more, and causes a further shrinkage of business and more unemployment. Farmers are hit hardest of all, because of the falling demand for their products and because they are least able to restrict production, control marketing, and resist falling prices. , . , , , . The future value of goods and property of every kind becomes uncertain. Money is more valuable than anything else, because it is increasing in value while everything else is decreasing. Everyone wants to turn property into cash and hoard that cash. Money is a safety deposit box involves no risk, and when its buying power is increasing, because of falling prices, faster than in terest would accumulate, there is no incentive to put it to use. Credit shrinks alarmingly. Bankers seek to collect all or part of their out standing loans, because the property on which those loans are based is shrinking in value. New loans are made reluctantly. This hoarding of money and shrinkage of credit cause still further deflation. It is a process which, once well started, is hard to stop. It can not be stopped by individual action, but only by action of the Government and the central banking system. Deflation benefits the creditor, because his interest and payments on loans are made in dollars that have greater buying power. W hen deflation goes so far as to impair or wipe out the security, however, as in the present in stance, many creditors join the class of sufferers from deflation. The ideal condition is neither inflation nor deflation, but a steady price level and an unchanging purchasing power of money— an honest dollar. Q. W h a t is meant by liquidity?— A . That is a word often heard in times of deflation. Liquid assets are those which can be turned into cash quickly. They include listed stock and bonds, and grain and other commodities for which there is an open market. Basic property such as homes and farms is not liquid because it can not be turned into cash readily in hard times. W hile liquid securities may depreciate in value faster than real estate, the banker always knows their cash price, and if the margin of security becomes too small, he can force the borrower to sell them and pay his loan. When that happens, however, the price is forced down still farther, throw ing more loans into distress, forcing more sales, and so on. A s a matter ot fact all prices are based on confidence, and only a small part of the property of the country can be turned into money. I f lack of confidence should extend to the Government, only gold would be really liquid, and gold payments would stopped as soon as any large number of people began to as for them. The demand for liquidity is just another name for fear— a selfish fear that causes a person or an institution to grab for what he can get, regardless of the effect on the general welfare. . ^ .. „ Q. W h a t is meant by the commodity dollar?— A. That is the term sometimes used to mean a dollar whose purchasing power is always the same in terms of average commodity prices. . , . „ Q W h a t is meant by a compensated dollar?— A. One plan that has been advanced to stabilize the commodity price level is to change the weight of trold in which a dollar is redeemable, as often and to the degree necessary to keep the commodity price level constant in terms of dollars. A dollar redeem able in varying amounts of gold according to the commodity price level is sometimes called a compensated dollar. .. nilOT1, itv Q W h at is meant by managed currency?— A. Currency, the quantity of which does not bear any fixed relation to the amount of gold or silver in the MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 155 country, but the purchasing power of which is kept constant by regulating its amount’ in accordance with the commodity price level. ^ . , Q W h at is the Federal reserve system?— A. Twelve independent regional Federal reserve banks and the Federal Reserve Board at Washington. There are eight members of the Federal Reserve Board the Secietm y oi the l i t a s ury the Comptroller of the Currency, and six members appointed by the Presi dent of the United States for 10-year terms. One of the six is designated as governor and one as vice governor. The present governor is Eugene Meyer, Jr. Q. W ho owns the Federal reserve banks, and how are they controlled?— A. They are owned by the member banks. A ll national banks must be members, and State banks are permitted to become members. Each regional Federal reserve bank is governed by nine directors. Three of these are chosen by the Federal Reserve Board and six are elected by the member banks. Each member bank is required to carry its reserve funds against deposits with the Federal Reserve Bank of its district. These reserves are 3 per cent of its time deposits and from 7 to 10 per cent of its demand deposits. The reserve banks must keep a 35 per cent gold reserve against these member bank reserves. Reserve banks may loan to member banks on notes secured by collateral or on self-liquidating paper and may make such loans in the form of Federal reserve notes— new money. Reserve banks must keep a gold reserve of at least 40 per cent of outstanding Federal reserve notes. Such loans are called rediscounts. Reserve banks may further restrict the paper eligible to redis count when they desire to do so. „ .. Q W hat is self-liquidating paper?— A. Evidence of debt based on a definite commercial or industrial operation which will automatically produce the money ^°Q . W hat is meant by the “ banker stan dard” ?— A. That is a term used by Prof. Lionel D. Edie, economist, to designate the money system as “ man a g e d ” bv the Federal reserve system and other central banks. Professor Edie points out that the supply of gold is relatively constant, in creasing at a fairly even rate year by year. “ The ultimate outcome of a prop erly working gold standard is to protect the community from * soaring 01>B u M hT adds that “'something has happened to the gold standard which lias destroyed its fundamental supply function. The link which unites credit growth to gold has been cut.” Central banks “ have sanctioned that excessive variability of credit volume which it was the very heart and soul of the gold standard to prevent.” „ It is this new condition that Professor E d e calls the “ banker standard, which term, he says, “ emphasizes the responsibility which the central bankers have usurped for themselves. They have arrogated to themselves the right and power to say during boom times that credit shall be allowed to expand two or three times as rapidly as the long-term rate of growth either of gold stocks or of industrial production. And equally they have arrogated to themselves the r i"h t and power to say during slump times that the reserve base of member bank Credit shall be allowed to shrink as fast as the mob psychology of a frightened community of private bankers dictates. . “ This banker standard has given the world the most unstable peace-time monetary structure and price level that the world has had in the past century. “ It is useless to pretend that the gold standard can endure under these cir cumstances. The banker standard is killing it.” Q. W hat is meant by the “ production stan dard” ?— A. That term is used by Professor Edie to describe a system which he recommends of expanding credit steadily year after year in the same ratio as the increase in production just about 4 per cent a year. In boom times credit is now expanded much more rapidly than that and in times of depression much less rapidly or is actually contracted. A steady expansion of credit at the rate of 4 per cent a year would do much to prevent* booms and depressions, in the opinion of Professor Edie and a number of other leading economists. In 1920, for instance, Federal reserve rediscounts reached a total of $2,780, 000 000, and then shrunk to $390,000,000 during the depression which followed. The peak of rediscounts in 1929 was $1,096,000,000 followed by a shrinkage to $149,000,000. W ith credit volume as unstable as that, it is no wonder that price levels fluctuate so greatly, with consequent disaster to bus ness. 156 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Q. Would a bill directing the Federal reserve system to use all of its powers to restore prices to the 1926 level result in corn prices going to where they were at that time?— A. No money bill can affect the price of any individual product except insofar as it affects all products. It is conceivable, for instance, that the general price level might be restored to the 1926 level and corn prices remain at 40 cents a bushel in case we have some exceedingly large corn crops. On the other hand, corn prices might be relatively better than they were ir» 1926. Nothing can be done through the money system to cause agricultural prices to advance relative to other prices. This part of the agricultural pro gram must be tackled through cooperative endeavor, systematic control of acreage, the equalization fee or some other scheme which will effectively con trol production, storage, and selling. SOME COMMENTS Carl statistician, New York Federal Reserve B a n k : “ It seems a blind fatuity to trust the smooth working of this vast and magnificent engine o f modern industry to the chance forces of production or maldistribution either of credit or of gold. Surely we can not permit the fortunes of the nations, their happiness and welfare, to be left to the caprice of finding new gold fields in South Africa or California, or conversely, to their inevitable exhaustion. W e may look forward, I hope, to the time when the scientific organization of cur rency and credit will be deemed as essential as the scientific organization of industry itself. “ Let us hasten the d a y ; for the world-wide disorganization which is now so vividly before us seems evidence enough that, as in the long ages, gold, not science, is still the arbiter of economic destiny.” John R. Commons, University of W iscon sin : “ Our own huge war debt has been reduced about one-third; but if we consider the fall in prices since 1920, the burden of the remaining two-thirds on taxpayers is greater than was the whole burden at the prices of 1920.” George F. W arren, Cornell U niversity: “ Extended studies of the gold ques tion by the League of Nations show that over a long period of time, when mone tary stocks of gold in the world have increased at the rate of 3.1 per cent per year compounded, commodity prices have been stable. For over a century prices have fallen when monetary gold has increased less rapidly than 3.1 per cent, and prices have risen whenever gold stocks have risen more rapidly.” Herbert Hoover (1921) ; “ There is no economic failure so terrible in its im port as that of a country possessing a surplus of every necessity of life in which numbers, willing and anxious to work, are deprived of those necessities. It simply can not be if our moral and economic system is to survive. * * * “ W h at our people wish is the opportunity to earn their daily bread, and surely in a country with its warehouses bursting with surpluses of food, of clothing, and with its mines capable of indefinite production of fuel, with suf ficient housing for comfort and health, we possess the intelligence to find the solution. Without it our whole system is open to serious charges of failure.” Daniel W illard, president Baltimore & Ohio R a ilw a y : “ The mere existence of the (unemployment) problem presents a serious challenge to our economic sys tem.” After discussing our natural and human resources, our productive capacity, and our surpluses he added: “And with all this surplus of wealth and resources, we have millions, so it is said, in dire need o f food and clothing— in short, more of everything to eat and wear than we can possibly use, and at the same time millions of human beings hungry and cold. That is another problem, although closely related to the first, and the two problems together— unemployment and the distribution of resources— bring into question the very foundations of our political and economic system.” . Sir Josiah Stamp, British economist: “ A stable price level is the most bit terly practical of all questions.” Lord D ’Abernon, British financier: “ The fall in prices which has occurred is nothing more or less than a rise in the price o f currency, or means o f pay ment. I f the means of payment had been available in adequate quantity with adequate dispersion, the general fall in prices would not have occurred.” T. B. Macaulay, president Sun L ife Assurance Co. o f C anada: “ That the purchasing power of currency depends on the amount of that currency and currency credits which may be outstanding can no longer be denied.” MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 157 Claude L. Benner, vice president Continental American L ife Insurance C o .: “ I am o f the opinion that as long as basic commodity prices remain where they are at present, there can be no large increase in business activity.” H . G. W e lls : “ The world requires (that money) must represent absolutely stable purchasing power.” E. W . Kemmerer, econom ist: “ The world sooner or later must either learn how to stabilize the gold standard or devise some other monetary standard to t&kB its place.” Owen D . Y o u n g : “ The proper handling of price stability is one o f the most important matters facing the capitalistic system. In it will be found the roots of those maladjustments which result in unequal and unfair distribution of wealth, in unemployment, and other serious problems.” Sir Charles Addis, director, Bank of E n glan d: “ It is simply intolerable that we should continue to sit with folded hands while industry and trade through out the world are becoming the sport of our ineffectual monetary systems. W e must be masters in our own house, the rulers, and not the slaves of money.” Lionel D . Edie, economist: “ The bankers have frightened everybody, includ ing themselves, away from doing anything.” T . E. Gregory, London School of Econom ics: “ The efforts of the politicians (to end the depression) must be seconded by the central banks— a concerted effort must be made, primarily through the financing of budgetary deficits through central bank credit, to cause a rise in prices.” George N. Peck, Moline, 111.: “ W e should have a measure o f controlled infla tion that debts may be paid with the 'same size dollar with which they were incurred, as far as that is possible.” Frank O. Low den : “A ll classes now agree that unless there is an improve ment in the general price level there can be no substantial relief from the un precedented depression in which we find ourselves. The question therefore is a vital one. W e have boasted in the past o f our ability to meet new situa tions as they arose. To say that nothing can be done in this matter is the counsel o f despair. “ W h y not give heed to the opinions o f the long line of eminent economists who believe that, without any disturbance to our gold standard, we have it within our power to erase some of the drastic deflation from which we are now suffering. And that deflation is the greatest in our history and it seems to be gathering momentum all the time. The decline in bank credit has been more rapid in recent months than at any time since deflation set in. Unless some way can be found to check this contraction o f credit, thoughtful students fear that we have by no means yet seen the worst.” AMERICAN FARM BUREAU MONETARY RESOLUTION The present period o f depression and the falling price level has increased the burden of taxes, interest, debts, and other fixed costs on all producers to an intolerable degree. It now requires 45 per cent more o f all commodities, and 70 per cent more of farm commodities to pay these costs than it did a few years ago. The long continued deflation is crushing farmers, merchants, trans portation agencies, and all manufacturers except a few most favorably sit uated, and has caused a declining price o f property to such an extent that it has largely eliminated equities and is affecting basic securities to such an extent as to seriously impair the stability o f our banking and insurance insti tutions, thereby endangering the welfare of the general public. It is causing a lowering o f all wages and salaries, and which must of necessity lower the standard of living if continued. The principal cause of this deflation of values is monetary. W hen the price of any one commodity falls, many causes may be responsible. W hen the average price level o f all commodities falls with the rapidity of the last few years, the principal cause is a shortage of money and credit in actual use. Commodity prices are expressed in this country in terms of dollars. Every purchase and sale is the exchange o f commodities for dollars. W hen dollars are scarce, it takes a larger amount of commodities to get them. In other words, money is at one end of the balance, commodities at the other. Add to the effective supply of money find prices go up. Reduce the effective supply and prices come down. The above statements are justified and supported by 120290—32---11 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 157 Claude L. Benner, vice president Continental American L ife Insurance C o .: “ I am of the opinion that as long as basic commodity prices remain where they are at present, there can be no large increase in business activity.” H . G. W e lls : “ The world requires (that money) must represent absolutely stable purchasing power.” E. W . Kemmerer, econom ist: “ The world sooner or later must either learn how to stabilize the gold standard or devise some other monetary standard to take its place.” Owen D . Y o u n g : “ The proper handling o f price stability is one of the most important matters facing the capitalistic system. In it will be found the roots of those maladjustments which result in unequal and unfair distribution of wealth, in unemployment, and other serious problems.” Sir Charles Addis, director, Bank of E n glan d: “ It is simply intolerable that we should continue to sit with folded hands while industry and trade through out the world are becoming the sport of our ineffectual monetary systems. W e must be masters in our own house, the rulers, and not the slaves o f money.” Lionel D . Edie, economist: “ The bankers have frightened everybody, includ ing themselves, away from doing anything.” T. E. Gregory, London School of Econom ics: “ The efforts of the politicians (to end the depression) must be seconded by the central banks— a concerted effort must be made, primarily through the financing of budgetary deficits through central bank credit, to cause a rise in prices.” George N. Peck, Moline, 111.: “ W e should have a measure o f controlled infla tion that debts may be paid with the 'same size dollar with which they were incurred, as far as that is possible.” Frank O. Low den: “ A ll classes now agree that unless there is an improve ment in the general price level there can be no substantial relief from the un precedented depression in which we find ourselves. The question therefore is a vital one. W e have boasted in the past of our ability to meet new situa tions as they arose. To say that nothing can be done in this matter is the counsel o f despair. “ W h y not give heed to the opinions of the long line o f eminent economists who believe that, without any disturbance to our gold standard, we have it within our power to erase some of the drastic deflation from which we are now suffering. And that deflation is the greatest in our history and it seems to be gathering momentum all the time. The decline in bank credit has been more rapid in recent months than at any time since deflation set in. Unless some way can be found to check this contraction of credit, thoughtful students fear that we have by no means yet seen the worst.” AMERICAN FARM BUREAU MONETARY RESOLUTION The present period of depression and the falling price level has increased the burden of taxes, interest, debts, and other fixed costs on all producers to an intolerable degree. It now requires 45 per cent more of all commodities, and 70 per cent more of farm commodities to pay these costs than it did a few years ago. The long continued deflation is crushing farmers, merchants, trans portation agencies, and all manufacturers except a few most favorably sit uated, and has caused a declining price of property to such an extent that it has largely eliminated equities and is affecting basic securities to such an extent as to seriously impair the stability o f our banking and insurance insti tutions, thereby endangering the welfare of the general public. It is causing a lowering of all wages and salaries, and which must o f necessity lower the standard of living if continued. The principal cause of this deflation o f values is monetary. W hen the price o f any one commodity falls, many causes may be responsible. W hen the average price level o f all commodities falls with the rapidity of the last few years, the principal cause is a shortage of money and credit in actual use. Commodity prices are expressed in this country in terms o f dollars. Every purchase and sale is the exchange o f commodities for dollars. W hen dollars are scarce, it takes a larger amount o f commodities to get them. In other words, money is at one end of the balance, commodities at the other. Add to the effective supply o f money and prices go up. Reduce the effective supply and prices come down. The above statements are justified and supported by 120290—32---11 158 M A I N T A I N I N G A V E R A G E P U R C H A S IN G P O W E R O F D O L LA R M A IN T A I N IN G the incontrovertible evidence coining from the experience of all former depres sions. The problem divides itself into two p a rts: first, the restoration of the price le v e l; the second, the stabilization of the purchasing power of money. Two alternatives face farmers and other business interests at this time • the first is wholesale bankruptcy for farmers, industrialists, transportation agencies, and mercantile establishments and the further deflation of wages and sa laries; the second is a rapid rise in the average wholesale commodity price level to a point near that at the beginning of the present deflation, thereby restoring confidence and making it possible for individuals, corporations, and governments to discharge their obligations and to proceed with their under takings. A ll the powers of the Federal reserve system and the executive officials of the Federal Government should be used to bring about the restoration of the price level near the average level at which the present long-time indebtedness was incurred. The most important of these powers are: 1. Open market purchases of eligible securities. 2. Lowering of rediscount rates. 3. Liberal interpretation of rediscount eligibility rules. In order to relieve the Federal reserve authorities and other agencies con nected therewith from discretionary authority, we recommend and insist that the Federal reserve law be amended so as to make mandatory the exercise of these powers so far as possible and to the extent necessary, to restore the average wholesale commodity price level to the point indicated. Permanent prosperity in this country demands that the dollar be made an accurate measure of value— that its purchasing power be always constant. This means stability of the average wholesale commodity price level instead of alternate periods of inflation and deflation which are the principal causes of business uncertainty and depression. Fluctuation in the purchasing power of the dollar causes serious losses to debtors in periods of deflation and to cred itors in periods of inflation, and benefits only the speculators. W e recommend the following action by Congress to stabilize the purchasing power o f m oney: 1. Direct the Federal reserve system to use all its powers, following restora tion of price level, to stabilize the purchasing power of money in so fa r as possible, using for that purpose all its monetary and credit powers, including currency and credit control, open market operation, and changes in rediscount rates and in rediscount eligibility rules. 2. Empower and direct the Federal Reserve Board to raise or lower reserve requirements of the Federal reserve banks and to raise or lower the price of gold. 3. Broaden the rediscount eligibility provisions of the Federal reserve act. NATIONAL GRANGE RESOLUTION The deflation of the past three years has injured farmers more than any other class of producers in the country. W hile the average o f all wholesale prices has fallen 30 per cent, the average price of farm products has fallen 45 per cent. This means that the burden of debts, most o f which were contracted more than three years ago, and of which there is estimated to be $11,000,000,000 secured by farm mortgages, has increased SO per cent in terms of the products which farmers sell. In view of this serious situation, we urge upon the Federal reserve system and the Federal Government to take all steps possible to secure: (1 ) Restora tion as nearly as may be of the wholesale price average as computed by the United States Bureau of Labor Statistics to the level prevailing in 1926 or the average of 1923-1928, and (2) the stabilization of the price level as nearly as practicable at that point. Contributing to these ends, the National Grange recommends the following m easures: 1. An increased purchase in large volume of securities in the open market by the Federal reserve banks. ' 2. Reduction of rediscount rates by the Federal reserve banks. 3. Reduction o f the legal minimum gold reserve ratios o f the Federal reserve banks to points materially below the present 35 and 40 per cent legal ratios to the end that the surplus gold in the United States may be exported with out endangering the gold standard. A V E R A G E P U R C H A S IN G P O W E R O F DOLLAR 159 4. An international monetary conference for the purpose of (a ) stabilizing the gold price of silver, and (b) stabilizing the purchasing power of gold in terms of the average of wholesale prices of commodities. BOOKS ON THE MONEY QUESTION The Banks and Prosperity. By Lionel D. Edie. Published by Harper & Bros., New York. The Money Illusion. By Irving Fisher, Adelphi, New York. America W eighs Her Gold. By James Harvey Rogers, Yale University Press. The MacMillan Report. By British Committee on Finance and Industry. His M ajesty’s Stationery Office, London. Money. By Foster and Catchings. Houghton & Mifflin, New York. The Chairman. The committee will adjourn, subject to the call of the chair. (Whereupon, at 5 o'clock p. m., the committee adjourned, subject to the call of the chair.) RESTOKING AND MAINTAINING THE PURCHASING POWER OF THE DOLLAR W EDN ESDA Y, M AY 18, 1 9 3 2 U C o m m it t e e S tates S e n a te , and C urrency, n it e d B on a n k in g Washington, D. C. The R oom c o m m itte e m et at 1 0 .3 0 o ’c lo c k a . m . in th e c o m m itte e 3 0 1 , S e n a t e O ffic e B u i l d i n g , S e n a t o r P e t e r N o r b e c k P re se n t: S e n a to rs N orbeck (c h a ir m a n ), B ro o k h a rt, room , p r e s id in g . T ow n sen d , W a lc o t t , B la in e , C o u z e n s , F le tc h e r , B a r k le y , a n d C o s tig a n . P r e s e n t a l s o : R e p r e s e n ta tiv e T . A ll a n G o ld s b o r o u g h , o f M a r y la n d . T h e C h a ir m a n . T h e c o m m itte e w ill c o m e to o r d e r . T h e fir s t w it n ess w ill b e G o v e r n o r M e y e r . STATEMENT OF HON. EUGENE MEYER, GOVERNOR OF THE FEDERAL RESERVE BOARD, WASHINGTON, D. C. The C h a ir m an . You Mr. M eyer . Mr. c o n s id e r in g th a t I has had d iffe r s a lr e a d y th e m ay proceed. C h a ir m a n in som e been p r iv ile g e a n d g e n t le m e n , th e d e ta ils b u t in c o n sid e r e d of by te s tify in g th e and th e h e a r in g gave h e a r in g s . of I f te s tim o n y th e reason s th e it fo r m y su b c o m m itte e p le a s e in c o r p o r a te d th e in H ou se th e o p p o s itio n , on b ill w h ic h of R e p r e s e n ta tiv e s . su b c o m m itte e of th e v o ic e d m y o p p o s itio n t o th e A p r il c o m m itte e , th is are b ill b e fo r e H o u s e on th e G o ld s b o r o u g h b ill, w h e n I b ill you g e n e r a l r e s e m b le s th e I h e a r in g , 13 w h ic h and w o u ld as it w ill are p rin te d 14, part lik e to save 2 have th e in of th e th a t tim e of y o u r c o m m itte e . T h e C h a i r m a n . I f t h e r e is n o o b je c t i o n , t h a t w i l l b e d o n e . ( T h e s ta te m e n t o f M r . M e y e r b e fo r e th e H o u s e o f R e p r e s e n ta tiv e s S u b c o m m itte e on B a n k in g and C u rren cy p a g e s 5 2 1 to 5 6 2 , in c lu s iv e , o f th e p r in te d in g s , is h e r e p r in t e d • on A p r il 14, 1932, b e in g re c o r d , P a r t 2 o f th e h e a r in f u l l a s f o l l o w s : ) S T A T E M E N T OF H O N . E U G E N E M E Y E R , GOVERNOR OF T H E FED ERAL RESERVE BOARD The C h a ir m a n . G overnor M eyer, w ill y o u sta te your c o n n e c tio n s fo r th e p u r p o se s o f th e re c o r d ? G overnor M e y e r . G overnor of th e F ed eral R eserve B oard and a ls o c h a ir m a n o f th e b o a r d o f d ir e c to r s o f th e R e c o n s t r u c t io n F in a n c e C o r p o r a tio n . M r. G o ld sb o r o u g h G overnor M e y e r . Y ou h a v e read H . R . . Y e s , M r . C h a ir m a n 10517, have you? 162 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR M r. G o l d s b o r o it g h . N G overnor, o w I th in k w hen you MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR appeared b e fo r e th e c o m m it t e e b e fo r e , y o u c o m p le t e d y o u r s t a t e m e n t a n d th e n num ber of s m a ll th e s u b c o m m itte e o r a n y m e m b e r as th e ca se m ig h t b e , m ig h t a sk y o u th e fa c t th is h e a r in g w ill s o p r o c e e d . b u s in e s s a n d G overnor M . e y e r T hat w o u ld p le a s e m e very m uch , M r. C h a ir I had th e o p p o r tu n ity , o f th e M r. C h a ir m a n , h e a r in g s c o n d u c te d by th e of r e a d in g c o m m itte e a part w h ic h of has th e been p u t in to p r in t. M r. G . o ld sb o r o u g h G overnor M have v o lu m e to th a t o f r e q u ire d under tra n sa c t cu rren cy. n orm al b u s in e s s . I m e n tio n checks on account of cou rse, w ith o ffs e ttin g th e d im in is h e d th a t is th e v o lu m e of th is m e r e ly becau se it b r in g s out been fo r r e g u la t in g th e v o lu m e o f c u r r e n c y w o u ld h a v e to c o n t e n d . I regard th e e ffic ie n c y of th e T h a t w as up to th e tim e G o v e r n o r H a r r is o n . e y e r so I th in k so . o c c u p ie d w ith T h e s u b je c t is s u c h a la r g e o n e a n d m y v a r io u s a d m in is tr a tiv e d u tie s— b e fo r e have not a prep ared sta te m e n t to g iv e M r. G M r. M a c a re fu l a n d fo r m a l re c o r d o f m y v ie w s, b u t ra th e r th a t I h a v e n o t h a d th e o p p o r tu n ity . . o ld sb o r o u g h G overnor, you s h o u ld If at lik e th e to c o n c lu s io n G overnor M . e y e r . e y e r th e w h o le C o m m itte e under th e o p p o r tu n ity ? d is c u s s io n th e q u e s tio n p ress at is one hom e a c o n tr ib u tio n sy m p a th y se r io u s of w ith and earn est w a y , im p o r ta n c e your has abroad to th e general and p u b lic p u rp ose. it is I a p p r e c ia te a n x io u s in te r e s t. I th a t so are a p p r o a c h in g th e are If been see I to m ake a have every d iffic u lt ie s w h ic h p e r h a p s y o u d o n o t q u it e v is u a liz e , i t is p e r h a p s d u e to m y s o m e w h a t in t im a t e e x p e r ie n c e w ith to a ffe c t m y th e m eans c o n ta ct and th e h ere a d m in is t r a t iv e s id e o f t h is s o r t o f w o r k e x p e rie n c e w ith p r a c tic a b ility of su g g e ste d o th e r fa c to r s a c c o m p lis h in g of c o n tr o l cu rren cy. your over w h ic h p u rp ose th e v o lu m e I th in k e n tir e ly of c r e d it by or # S t a b i l i t y a s I s e e i t is a f f e c t e d in a n i m p o r t a n t w a y b y t h e v o l u m e o f c u r r e n c y , in c lu d in g b o t h c r e d it a n d c u r r e n c y in th is g e n e r a l c o n c e p t . I d o n o t fe e l, h o w e v e r , t h a t i t is t h e o n l y f a c t o r , a n d I h a v e in m in d th a t a n y in s tr u m e n t s u c h p lis h in g o r a t t e m p t in g to s id e r e d in r e la tio n to a as th e v o lu m e a c c o m p lis h great m any o th e r F o r e x a m p le , I d o n o t th in k how cu rren cy m uch th a t h ave th a t been is a c tu a lly a m o u n t , b u t in c lo s e d w ith in o f c r e d it, if u s e d su ch s itu a tio n . in d ic a te v ie w im p o r ta n t a n y b o d y can h oard ed . of th e la s t tw o in a, p u r p o s e , h a s t o W e th e u se la r g e accom be con fa c to rs e s tim a te d num ber years, and in th e s a y r ig h t n o w of fig u r e s banks b u t in a la r g e a g g r e g a t e a m o u n t , i t is i m p o s s i b l e t o d e t e r m i n e o r e v e n h oarded m u c h o f th e s o -c a lle d b u t is m a d e n e c e s s a r y b y h o a r d e d c u r r e n c y is n o t r e a l l y b a n k c lo s in g s . T h e n , t o o , w it h t h e c h a n g e in t h e b a n k i n g s i t u a t i o n , th e r e h a s b e e n th e p a st y e a r a n d and C u rren cy, as fa r c r e d it I . th in k , b an k s. . On w h a t b ill w a s t h a t ? I t w a s in c o n n e c t io n w it h a b ill o n r u r a l c r e d it s w h ic h in A fte r th e e s ta b lis h m e n t a n a ly z in g th e of th e b a n k in g F ed eral stru ctu re in te r m e d ia te in 1923, as a r e s u lt o f a s t u d y o f th e 4 ,3 0 0 b a n k s to w h ic h th e W a r F in a n c e C o r p o c o m m itte e to th e b a n k in g stru c tu re o f th e c o u n tr y as a p r im a r y e le M a y I ju s t q u o te fro m t h in k i t is o f in t e r e s t a t th is p a r t ic u la r t i m e ? I sa id th e n : T h ere a re necessarily m a n y difficulties in v o lv ed in o u r d u a l sy s te m of b a n k in g W e h a v e a S ta te b a n k in g sy stem , a n a tio n a l b a n k in g sy stem , a n d a F ed eral reserve sy stem , th e la tte r h a v in g a m em b ersh ip d eriv ed from b o th th e S ta te a n d th e n a tio n a l sy stem s. T h e S ta te b a n k in g d e p a rtm e n ts su p erv ise th e S ta te b a n k s, a n d th e C o m p tro ller of th e C u rren cy supervises th e n a tio n a l b an k s, w hile th e F ed eral reserv e sy stem h as a su p erv isio n of its ow n for th e m em b er b an k s, a n d th e re h as been a t tim es som e d isp o sitio n to c o m p e titio n b etw een th e S ta te a n d th e n a tio n a l b a n k in g sy stem s. T h e S ta te b a n k in g law s fre q u e n tly p e rm it p ractices w hich n a tio n a l b an k s can n o t legally engage in . T h is is creatin g co m p e titio n betw een th e tw o sy stem s w hich can n o t be reg ard ed as w holesom e a n d m ay lead to th e g ra d u a l w eakening of b o th . T h e q u estio n of b ra n c h b an k in g is one t h a t is causing co nsiderable d iscussion a t th e p re se n t tim e . Som e of th e S ta te s p e rm it b ra n c h b a n k in g on a n u n lim ited scale. As a re s u lt, a g ita tio n is now' going on fo r a n a m e n d m e n t to th e n a tio n a l b a n k in g a c t to p u t n a tio n a l b an k s on a p a r w ith S ta te b an k s in t h a t resp ect. I do n o t pro p o se to discuss th e s u b je c t of b ra n c h b a n k in g h ere. B ran ch b a n k in g m ay be good or it m ay be b a d . I t m ay be good if carried on in a lim ited w ay a n d b a d if p e rm itte d on a n ex ten siv e scale. B u t, w h eth er i t is good or w h e th e r it is b a d , b ra n c h b a n k in g should be considered on its m erits a n d sh o u ld n o t be th e p ro d u c t of com p e titio n in th e en d e a v o r to ex p an d e ith e r th e S ta te or th e n a tio n a l b a n k in g o rg an izatio n s. T h e c o m p etitio n t h a t exists a t th e p re s e n t tim e b etw een S ta te a n d n a tio n a l b an k s can n o t fail to rem in d one of th e c o m p etitio n t h a t p rev ailed a g en eratio n ago am o n g th e v arious S ta te s seeking to becom e dom iciles for cor p o ra tio n s— a co m p e titio n t h a t w as based u p o n th e la x ity of th e law s governing in c o rp o ra tio n . N o th in g could be m ore d is a stro u s th a n c o m p e titio n b etw een th e S ta te a n d n a tio n a l b a n k in g gro u p s based u p o n c o m p e titio n in la x ity . th e c o n s e q u e n t g r e a t e r u s e o f c a s h in b u s in e s s , in s m a ll a m o u n t s in e a c h c a s e , p e r h a p s , to e s tim a te h o w B a n k in g t h a t h e a r in g fo r a m o m e n t , d a tin g b a c k a s it d o e s o v e r n in e y e a r s a g o , th a t and th e fa c t th a t th e m e m b e r s o f th e s u b c o m m itte e in e y e r b ecau se I w h o le in on m e n t in o u r e c o n o m ic a n d f in a n c ia l s t r u c t u r e . h a r d in a n y li m i t e d p e r io d to a t t e m p t t o d o ju s t ic e to it . p r o b le m im p o r ta n t r a t io n h a d m a d e lo a n s in t h e 1 9 2 1 - 2 2 p e r io d , I c a lle d a t t e n t io n o f t h is Y e s , s ir . . The e y e r b e fo r e i t is p r i n t e d , A n y t h in g th a t o c c u rs to m e ? . o ld sb o r o u g h re s u lte d , sta te m e n t, . Y es. o ld sb o r o u g h G overnor M your I th a n k y o u , a n d p o s s ib ly to a d d to it if I m a y ? o ld sb o r o u g h G overnor M of c o rre ct th e reco rd w e s h a ll b e v e r y h a p p y to g iv e y o u m uch an a s in J a n u a r y o f 1 9 2 3 , w h e n I s a id a f t e r a s t u d y o f th e b a n k i n g I d id n o t w a n t to ta k e th e tim e to m a k e M r. G as I h a d th e p r iv ile g e o f a p p e a r in g h e r e , n o t b e fo r e th is s u b c o m m itte e , but s t r u c t u r e o f t h e c o u n t r y ----------- M r. G stru c tu re p u r p o s e , to th e e x te n t it c a n b e u s e d , th e r e g u la tio n o f th e v o lu m e o f y o u in th e b e g in n in g , I h o p e y o u w ill u n d e r s t a n d t h a t i t w a s n o t t h a t M r. G b a n k in g c u r r e n c y a n d c r e d it. o th e r c o m m itte e s — t h a t, if I in by t h e l o w e r p r ic e l e v e l , i t t a k e s le s s m o n e y in c i r c u l a t i o n back to O f c o n d itio n s a n d i t h a s b e e n n e c e s s a r y a ls o f o r m e to b e p r e s e n t a t h e a r in g s b e fo r e th e p a id e le m e n t in a c h i e v i n g s t a b i l i t y in th e p r ic e le v e l , a n d in U s in g f o r t h a t a p p e a r e d b e fo r e th e c o m m it t e e y e s t e r d a y ? and are s o m e o f th e d iffic u lt ie s w it h w h ic h a n y o n e c h a r g e d w it h r e s p o n s ib ilit y record I th a t c h a r g e s im p o s e d b y b a n k s , a n d th a t m a y h a v e b e e n a fa c to r a ffe c tin g s u c h q u e s t io n s a s t h e y t h o u g h t s h o u ld b e a s k e d , a n d , if y o u so d e s ir e , m an. a cco u n ts 163 a h a lf o r t w o y e a r s a c o n s id e r a b le d e c lin e in th e I am m e n tio n in g C h a ir m a n , th is p a r tic u la r ly q u e s tio n at th is of tim e th e t h e in flu e n c e o f th e F e d e r a l r e s e r v e s y s t e m a m e a n s o f a ffe c tin g th e v o lu m e b a n k in g becau se you is a v ita l fa c to r in th e M r. u sin g o n th e v o lu m e o f c r e d it a s o f b u s in e s s and s e e m s to m e t h a t th e in s tr u m e n t th r o u g h w h ic h fu n c tio n s stru ctu re , c o n te m p la te e ffic ie n c y th e p ric e le v e l. It th e v o lu m e o f c r e d it w ith w h ic h th e F ed eral 164 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR reserve sy ste m can fu n c tio n , and th a t in s tr u m e n t is th e b a n k in g I n th e h e a r in g s w h ic h w e h a d a fe w m itte e c h e c k s a r e d r a w n a n d t h e t u r n o v e r o f d e p o s it s is g r e a t e r , a s is t h e c a s e in sy ste m . w ith regard to d a y s a g o b e fo r e th e G la s s c o m a m e n d m en ts to th e F ed eral reserve a c t, 165 an in fla tio n a r y p e r io d , a g r e a te r r e s e r v e w o u ld b e re q u ir e d based u p o n th e v e lo c ity o f th e se d e p o s its . M r. G th e . T h a t is in o ld sb o r o u g h G overnor M b o a r d , t h r o u g h m e , p r e s e n t e d it s v ie w s in f a v o r o f a u n ifie d n a t io n a l its t h e y w o u ld su p p ort of a t h a t if i t c o u ld b e in f a v o r o f i t . u n ifie d b a n k in g be b rou gh t ab ou t con The b o a r d , in d id so sy ste m , I reserves w ere It r e q u ir e d , w o u ld r e s u lt o v e r m o r e r a p id ly , w h ic h is p r o p e r . a ls o , in th e . T h o s e a re th e p r in c ip a l fe a tu r e s . T h e o th e r t h in g s a re t h a t i t a llo w s th e b a n k s to c o u n t as reserv es, u p to a c e r ta in p e r c e n ta g e , th e ir c a sh e x p r e ssin g u n a n im o u s ly . la r g e r ban k s. b a n k s e x p e c t in g la r g e r a v e r a g e d e p o s it s in t h o s e a c c o u n t s t h a t tu r n e d s titu tio n a lly th a t m em ber m it t e e d id n o t s e e m S e n a t o r G la s s a n d o th e r s sa id fa c t th e m e m b e r b a n k s? th e o w in g O n th e c o n tr a r y , th e is in b a n k in g s y s t e m , a n d I w a s r a th e r in te r e s te d t h a t m e m b e r s o f th e c o m to b e o p p o se d to th a t th o u g h t. to . T hat e y e r m e r e ly c a ll t h a t t o y o u r a t t e n t io n a t th is t i m e b e c a u s e I t h i n k t h a t it in v a u lt . is a v i t a l f a c t o r in w h a t y o u h a v e in m in d in a c h ie v in g a g r e a t e r s t a b i l th e o n e s t h a t m o r e fr e q u e n t ly n e e d to k e e p c a s h in th e ir v a u lt s b e c a u s e ity fo r b u s in e s s . o r g a n iz e d c o n tro l and of I th in k p r o p e r ly in fla tio n it can not s u p e r v is e d and d e fla tio n be d e n ie d b a n k in g of c r e d it, w i t h o u t f u n d a m e n t a l im p r o v e m e n t in th a t stru ctu re and an is e ffic ie n tly v ita l e ffo r ts to to th e th e y to are n o t so r e a d ily e x t e n t it w o u ld a p p lie s t o a c c e s s ib le a ll b a n k s , b u t c o u n t r y b a n k s a r e to th e reserv e b a n k s, and to th a t b e n e fit th e c o u n t r y b a n k s . . T h e r e a r e a fe w c a s e s w h e r e p e r h a p s it w o u ld in c r e a s e th e r e q u ir e d s ta b iliz e th e b a n k in g stru c tu re s e e m T h is p r o v is io n reserves of in d iv id u a l b an ks, but as a w h o le th e p r in c ip le a p p lie d m e n o t to p a y s u ffic ie n t a t t e n t io n to th e a g e n c y t h r o u g h w h ic h s o u n d w o u ld e x p a n d t h e r e s e r v e s in r e la t io n t o t h e e x p a n s io n o f b u s in e s s a n d p r in c ip le s c a n b e p u t in t o p r a c tic e . p a r tic u la r ly In th e r e p o r t w h ic h B a n k in g and C u rrency in c o r p o r a te d a new as a u n a n im o u s C o m m itte e r e c o m m e n d a tio n b an k reserves. a w e, board, of th e a new fo r p re se n te d S en a te th e re m eth o d of to th e w as a lso c a lc u la tin g I q u ite a p p r e c ia te th a t s u c h a n im p o r ta n t m a t t e r a s m eth o d o f c a lc u la t in g r e s e r v e s is c a re fu l s tu d y a n d reserve sy ste m a one th a t ought to be g iv e n th o r o u g h in v e s tig a tio n ; b u t w e h a d in th e F e d e r a l c o m m itte e w o r k in g a b o u t 18 m o n th s s tu d y in g th is It I t w a s th e r e s u lt o f a w o u ld a ls o do m ake so in s p e c u la t iv e c a ll lo a n s m ade to m a k e s e ttle m e n ts . O u r c o m m itte e fe lt ' th a t th e w o u ld have e x e rte d a s t r o n g in flu e n c e s p e c u la t iv e m o v e m e n t lo n g b e fo r e M r. G o ld sb o r o u g h . T hat is a c h ie v in g c r e d it th a t th in k s ta b ility and sy ste m w ay its th e y te ste d it over th is p r o p o s a l w o u ld and p r e v e n tin g c o n tr a c tio n , fr o m undue w h ic h a be we p e r io d of of fa c to r in h a v e som e e x p a n s io n of c o n s id e r a b le an im p o r ta n t s p e c u la tiv e are now s u ffe r in g . T h is I th e c r e a sin g th e reserv e th e m at a re q u ir e m e n ts tim e in a tim e of e x p a n s io n o f c r e d it c o n tr a c tio n , a n d and w o u ld , I de b e lie v e , e y e r . I r e p o r t w h ic h w as M r. G ju s t o ld sb o r o u g h how th e y e r fo r o th e rs, to a g rea te r e x te n t th a n th is b ill w h ic h d e a ls o n ly w it h t h e c o n t r o l o f th e v o lu m e o f c u r r e n c y a n d c r e d it . I d o n o t k n o w i f t h is c o m m i t t e e is f a m ili a r w it h t h a t r e p o r t o n b a n k r e s e r v e s , b u t , in a w o r d , it a b o lis h e s th e d iffe r e n c e b e t w e e n dem and tim e a n d d e p o s its so fa r a s th e ir c la s s ific a tio n fo r p u r p o s e s o f r e s e r v e s at th e m ade account d e p o s its , w o u ld th e of th e re fo r e s till b e p rop osed stu d ie s o f th e . of W hat an to by th e u s. I not of under in w o u ld th e v e lo c ity r e q u ir e c o m m itte e o n an reserves. \\ e and of bank # r ig h t a t th a t p o in t w a s r e s tr a in say w as w o u ld la w in o f th e lo a n s th a t not be fo r even o f th e th e lo a n s in reserves, tu r n o v e r w h ic h in ac r e fle c te d a d d itio n a l in c r e a s e th e v e lo c ity on _ to w h o le c o m p r e h e n s iv e t h a t th e q u e s tio n w o u ld p resen t th e you th is c o m m it t e e c o p ie s c o m m itte e cou rse, and a head. W ill . fa c t o r in I t is q u it e in te n d e d to in te r e s tin g . fu rn ish reserves w h ic h , r e fle c te d s p la n th e th e in fla tio n a r y . im p o r ta n t . W h a t I h a d in m in d e x p a n s io n th is c o n te m p la tin g check t h in k i t is i m p o r t a n t fo r th is c o m m i t t e e a s s is t in t h e a c h i e v e m e n t o f th e m o r e s t a b le c o n d it io n s w h ic h y o u in are i t is c o p ie s o f i t h e r e w ith c o u n t o f o th e rs? G overnor M e c o m m itte e th in k to r e s e r v e s s h o u ld b e th o r o u g h ly u n d e r s to o d . o f re se r v e s w o u ld te n d to s a fe g u a r d th e b a n k in g s tr u c tu r e b y in c r e a s in g 1929. r e s u lt in . r e q u ir e d reserves e x c e e d in g ly s it u a tio n , a n d I w o u ld b e v e r y g la d I and banks th e tim e w h e n it c a m e w e h a v e th e a ssu ra n c e fro m p a st years. 1928 th a n t im e w h e n lo a n s fo r a c c o u n t o f o th e r s r e a c h e d s u c h la r g e p r o p o r t io n s , v e r y c a r e fu l s t u d y , a n d w h ile it m a y p o s s ib ly h a v e s o m e w e a k n e s s e s , c o n s c ie n tio u s o th e rs a d d itio n a l e x p la in ? G overnor M th e m e n w h o h a v e b e e n s t u d y in g it in a p e r io d s , lik e by in c r e a s e d r e s e r v e r e q u ir e m e n t s b e c a u s e c h e c k s s till h a v e t o b e d r a w n q u e s t io n o f r e s e r v e s a n d t h e y m a d e a r e p o r t to w h ic h I t h in k s u ffic ie n t a tte n tio n h a s n o t b e e n g iv e n b y th e C o n g r e s s . w o u ld reserve. t u r n o v e r in under The r e la tio n is c o n c e r n e d , a n d I t h i n k in t h a t r e s p e c t t h e r e c o m m e n d a t i o n is w i s e , to lo a n s fo r a c c o u n t o f o th e r s in d ic a t e t h a t a v e r y s u b s t a n t ia l in c r e a s e becau se in t h e r e s e r v e s w o u ld h a v e b e e n m a d e n e c e s s a r y , e n t i r e ly a p a r t fro m in c r e a s e d 5 th e lo w 3 per tim e d e p o sito r s d e p o sits degree d e p o s its w h ic h carry a T h is h a s in d u c e d banks to in v e s t in t o g e t t h e la r g e r y i e ld fo r on fo r reserve. and reserve in d u c e m e n t tim e banks cent u n ifo rm tim e , of reserves tu rn o v er; to an and an undue a lo w e r s lo w e r a s s e ts in order n e c e s s a r y to m a k e a p r o fit o n th e h ig h e r ra te s per above In th e re fo r e , cent th e on net 5 p e r c e n t m in im u m a tr u e s a v in g s on d e p o s its , th a t b o th dem and are b a se d on d e p o s it th e r e w o u ld b u s in e s s th e re on th e d e p o sits, d e p o s it t u r n o v e r is w o u ld be and th e not be a 5 per U n d e r th is p r o p o s a l, w h e n b u s in e s s e x p a n d s , a n d m o r e becau se w ith th e re th e w h e th e r th e r e q u ire m e n t b a la n c e th e r e la te d lo a n s are to m ade w o u ld be per th e tu rn o v e r. fo r account of cent 1hat banks o r fo r a c c o u n t o f o th e rs. N ow , on r e v is io n o f r e s e r v e r e q u ir e m e n ts p r o v id e s fo r a of 5 tu rn o v e r. cen t reserve. up been _ prop osed m in im u m and v e lo c ity any th e b u ild h ig h e r in te r e s t r a te o f in te r e s t p a id . N ow , to has of m oney t h e b r o a d e r s u b j e c t , i t is t r u e , o f c o u r s e , t h a t th e v o l u m e a n d c r e d it in c ir c u la t io n is a n i m p o r t a n t f a c t o r in le v e l, b u t s o m e o f th e o th e r th in g s t h a t se e m n e c tio n w ith a s tu d y o f th e p r o b le m th e p r ic e to m e to b e v i t a l in c o n a re c o n d itio n s w h ic h I b e lie v e it is d iffic u lt fo r t h e F e d e r a l R e s e r v e B o a r d , o r a n y o t h e r h u m a n a g e n c y t h a t e x is ts o r t h a t c o u ld b e c a lle d in t o e x is te n c e , to c o n tr o l. 166 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR I f w e lo o k abn orm al back a t th e h isto ry c o n d itio n s at hom e o f th e la s t and abroad 10 or in 12 y e a r s w ith p r o d u c tio n and th e con s u m p t io n , a t th e c u r r e n c y s t a n d a r d s in v a r io u s c o u n t r ie s , a t t h e p o l i t ic a l as w e ll w e can as th e fin a n c ia l see fa c to r s n e v e r th e le s s can w h ic h not be one group r e la tio n s it se e m s to d e fin ite ly and m e , w h ile c o n tr o lle d s u b je c t to by any one co u n try or I o n e o f th o s e w h o a g r e e s t h a t th e U n it e d S t a t e s , w it h it s la r g e p o p s in g le n e v e r th e le s s its great m any a n a ly z e th e m or th e m in v ie w of fa c to r o th e rs, o u r r e la tio n s , b o t h we p r o d u c tiv e e c o n o m ic and a c o n s u m in g th e th e n a tio n a l a n d by and in any on e co u n try . am w ith in in flu e n c e , e c o n o m ic c h a n g in g c o n d itio n s in te r n a tio n a l, la tiv e fin a n c ia l m o v e m e n ts. th is p e r io d a very sta g e . T hat m any of we a n a ly z e w as we have bonds fo u n d had a been w ay to to th e 1921 th ro u g h a se r ie s of fin d th a t w e c o n s tr u c tiv e cam e o u t o f t h a t d e p r e ssio n d e v e lo p m e n ts in w o r ld r e la tio n s , W e c a m e o u t o f th e w ar a n d th e te m p o r a r y p o stw a r T hat in fla t io n , fir s t le d need to tw o a tre m e n d o u s m ovem ent of liq u id c a p ita l and in v e s t th e b a la n c e s a n d pened to c o m b in e in d iv id u a l d e p o s its a n d in v e s tm e n ts . T hat hap w ith c o n d itio n s ra th e r e x tr a o r d in a r ily a t h o m e fro m th e p o in t o f v ie w in d u s tr y , and th e a tte n tio n in p a r tic u la r th a t c o n n e c tio n fa v o r a b le o f th e p o s s ib ility o f m o n e y a ffe c tin g fe a tu r e is to w h ic h exp ressed in I th is w ant to c a ll your d ia g r a m . of 50 a c c u m u la te d fic ie n c y o ffic e in c itie s . d u r in g th e b u ild in g s , essary a fte r and th e w h ic h very le ft A s soon o ffic e fr o m y o u r stu d y of as o f e c o n o m ic s m ark et and over th a t y o u know th ere a I s m a ll s a v in g s of T o som e e x te n t, to to m eet a le g it im a t e n eed ; and and c o n s tr u c tio n a t p re se n t. b u ild in g c o n s e q u e n t in ju r y is g r e a t ly th e to T h ere in c e r ta in b u ild in g So th a t v o lu m e th ere areas in th e we at good w a g e s— g iv e s it b u y in g p ow er. It p u ts It we ever T h ese th in g s I m e n tio n becau se I m a l c o n d itio n s , m ig h t b e p o s s ib le . easy m oney m arket p r e v a ile d th in k I had fo r th e y som e p la c e s in lo c a litie s th e re m ig h t an yw h ere th e re a fe e lin g la s t y e a r , w h e n a n w h ere be th e re m ore th a t a c tiv ity , I th in k fro m m y o b s e r v a tio n general o v e r 3 5 y e a rs, th a n su re la b o r su b u rb s. w as a a c tiv ity need even fo r b u s in e s s a n y o th e r on a sou n d creased a n d h o u s in g a n d e x is te d . The becau se lik e m any o th e r g o o d b a s i s t o fill a l e g i t i m a t e n e e d . b u s in e s s b u s in e s s p la n t h a d began by fillin g a n o t. th in g s, it P o p u la tio n h a d in T h e re fo re , a n eed le g itim a te need, In w ere is a s u r p lu s everyw h ere; but h o u s in g is h ig h w a y s a n d a u to m o I th in k th a t th e r e is a lo n g t i m e tre n d in w ith th e in th e t h a t d ir e c tio n w h e r e y o u w ill s e e r e s u lt s w h e n c o n d i t io n s a r e a l i t t le m o r e s t a b i liz e d . I a ls o th in k th a t th e r e c e n t o v e r e x p a n s io n in b u i l d i n g is o n e of A b r o a d l a s t y e a r w e s a w a m a j o r fin a n c ia l c r is is in t w o o f t h e f o u r g r e a t c r itic a l A u s tr ia c lim a x , and p a y m e n ts W h e n th is a c t i v it y b e g a n , w e b e g a n to h a v e a n i m p r o v e m e n t in o u r began h o u s in g . n o w , if m o n e y T h a t is a p o s s i b ili t y t h a t I t h i n k w ill b e d e v e lo p e d fu tu r e , a n d r a il on e a c tiv ity . g e n e r a l le v e l o f p r o s p e r ity , m ig h t b ile s a n d b u s e s a re t a k i n g p e o p le o u t o f t h e c r o w d e d s e c t io n s in t o th e th e of th e re g r e a t e r a c t i v i t y in h o u s in g t i o n d o n e in s u b u r b s o f l a r g e c i t i e s w h e r e n e w a th e th e ir in to v o lu m e in to th e A s y o u k n o w , c o t t o n o r w h e a t h a v e a w o r l d m a r k e t , a n d i f t h e r e is s u r p lu s fin d s th o r o u g h ly we peace a v a ila b le in t h e m o r t g a g e m a r k e t o n a n a d e q u a t e s c a le . e c o n o m ic p o w e r s o f th e m ore in a re s o la r g e in several m o n th s, b e a n o p p o r t u n it y fo r s t im u la t in g a little m a te r ia l th e r e , a n d w ay seen im p o r t a n c e t h a t t h e y b a lk u s in a c h ie v in g r e s u lts w h ic h , u n d e r m o r e n o r r o a d s a n d e x p a n d s th e e m p lo y m e n t o f la b o r a n d its in th a t ease am on fin d to e m p lo y s tr a ffic due and flo w t h a t t h e r e is n o s in g le in d u s tr y . b u ild in g c o n s tr u c tio n w hen have is n o recen t p ast c r e d it o f th e to -d a y , th a t o v e r b u ild in g th e b re a k d o w n t h e m a j o r f a c t o r s in t h e p r e s e n t e c o n o m i c d e p r e s s i o n . b u ild in g b u ild in g th e p r e se n t c o n d itio n o f th a t is , b u t w ith b a n k in g , th e im p a ir e d . lo w e s t in d u s tr ie s to p u rch ase th e co u n try , s p e c u la tiv e B ut th a n th e lo c a lly . m a r k e t , o n a s c a le w h ic h h a d n e v e r e x a c t i v it y w h ic h p r o d u c e s a g r e a te r e m p lo y m e n t o f la b o r a n d a g r e a te r o f m a te ria l s c a le , d iffe r e n t, a n d e v e n la s t y e a r th e r e w a s c o n s id e r a b le h o u s in g c o n s tr u c d w e llin g s — a n d co u n try . th e a nec began to as of on to R e a l- t im e s w e a ls o fin d , I t h i n k , o n e o f t h e m o s t s ig n if ic a n t f a c t o r s in de su ch program began p riv a te th e s lo w 1922 p la n ts c o n s tr u c tio n m oney a ll w as u n til o th e r p e r io d , m o n e y a p a rtm e n ts c o n s tr u c tio n and la r g e th e b u s in e s s 1 9 1 7 -1 8 h o u s in g tig h t-m o n e y b u ild in g — b o th b u s in e s s a w hen p e r io d of sou n d . in to 1913 w ar c o n s tr u c tio n 1 9 1 9 -1 9 2 1 r e s id e n tia l F rom th e th a n b e fille d d e v e lo p m e n t T h i s is a g r a p h i c r e p r e s e n t a t i o n o f t h e p e r c a p i t a v a l u e o f b u i l d i n g p e r m its channel p r e s e n t d e p r e s s io n a n d d e fla tio n o f p r ic e le v e ls . a m o u n t o f g o ld b e in g im p o r te d in to th e c o u n t r y , r e p r e s e n tin g fo r e ig n bank a m o u n ts tilin g s : o v e r -s p e c u la tiv e have to new # to r e a l-e s ta te in v e s t e d o r it s m o n e y d e p o s it e d w a s s a fe r t h a n in a n y o th e r c o u n t r y . m e n t m o n e y to w a r d th e U n it e d S t a t e s , w h ic h r e s u lte d in a tr e m e n d o u s la r g e p r e v io u s ly N o w , i t is g e n e r a lly a s s u m e d I t h in k , fr o m th e d u stry le d a w h e r e th e b u s in e s s w a s c a r r ie d o n fo r th e p r o fit o f th e p e o p le w h o w e r e a n d f o r e m o s t , a s th e o n e c o u n t r y w h e r e th e w o r ld f e lt t h a t it s c a p it a l T hat of is t e d b e fo r e . to p a r tic u la r ly w ith r e s p e c t to o u r o w n c o u n t r y . know n t h r o u g h th e r e a l-e s ta te b o n d s it u a t io n fo r a m o m e n t , w h e r e w e h a d w h a t lo o k e d a t t h a t t im e lik e a we d e v e lo p m e n t B u t in t h is p e r io d o f r a p id d e v e lo p m e n t a n d p r o fit a b le a c t i v i t y th e r e in c e r t a in lo c a litie s . d e p r e ssio n th e e sta te d o in g it ra th e r a c u te w as la r g e a m o u n t s o f c a p it a l th r o u g h t h e r e a l-e s t a t e b o n d m a r k e t . d iffic u lt ie s t o m e e t a n d a d j u s t m e n t s t o m a k e , d e p e n d e n t o n t h e b e h a v m ost occu rred a c tiv ity p a sse d fr o m are in back d e v e lo p m e n t th e E veryw h ere a n d if w e g o fin a n c ia l th e le g itim a te s ta g e in to th e s p e c u la tiv e s ta g e a n d to s o m e e x te n t , th e dan gerou s io r o f h u m a n b e in g s in la r g e g r o u p s ; im p o r ta n t w h ic h w a s th e m e a n s b y w h ic h th e c o n s tr u c tio n o f th e flu c tu a t io n o f p r ic e , o r o f th e v o lu m e o f b u s in e s s in te r n a tio n a l a c tiv ity . In is are s tr ik in g , w h e th e r c h r o n o lo g ic a l p r o c e s s o r w h e th e r and T h ere c a p a c ity , w o r ld . m ore m o r e , a n d c u m u la tiv e ly o n a g e o m e tr ic r a tio , in to a tr e m e n d o u s s p e c u n a tio n s , any g re a te st o r a n y in s titu tio n b e tw e e n by u la tio n , of m en w ith in d e m a n d la r g e a n d th e p r o fits s u b s t a n t ia l, b a t it d e v e lo p e d 167 H u ngary. and heavy s ta n d s till, r e s u ltin g in m ig h t b e a rg u e d t h a t w o u ld w o r ld . fo llo w in g A t The G erm an d iffic u lt ie s th e end b o r r o w in g s , th e s o -c a lle d of th e s itu a tio n in th e B a lk a n a lo n g p e rio d G erm an fir s t c a m e S ta tes of s itu a tio n s ta n d s till a g r e e m e n t. t h a t if th e p r ic e le v e l h a d m a in t e n a n c e o f a n y p r ic e le v e l c o u ld have p re v en te d to in r e p a r a tio n s cam e to a I know it b e e n m a in ta in e d n ot have happened, bu t I d ou bt very m uch and perh ap s w h e th e r th e w h at happen ed 168 in MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR G erm an y w h e re th e re w as b o r r o w in g ; o n p a y d e b t s w h ic li c o u ld n o t b e li q u id a t e d in The E n g lis h a n a ly z e th a t a m o u n ts s itu a tio n s itu a tio n o f fo r e ig n fo llo w e d you not w ill fin d d e p o s its p a y a b le s h o r t-tim e o b lig a tio n s to a n y s h o r t p e r io d o f t im e . lo n g a fte r w a r d s, th a t th e on MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR and E n g lis h dem and, and if had th a t you had so draw al th a t of w hen th e ir cu m sta n ce s th e s tr a in s h o r t-tim e to c o n tin u e w as put o b lig a tio n s to m eet upon th e y th e ir th e m w ere th ro u g h u n a b le p a y m e n ts on in a w ith th e g o ld c ir b a s is . T h e r e h a s a lw a y s b e e n a d iffe r e n c e o f o p in io n w it h r e g a r d to th e E n g lis h s itu a tio n . The pound had been m a in ta in e d c lo s e to th e g o ld c o u n t r y a n d th e s a le o f in v e s t m e n t s . In F eb ru ary, 1920, I rem em ber t h a t th e p o u n d g o t d o w n to $ 3 .1 8 a t th e lo w p o in t . w age in c r e a s e s a fte r in E n g la n d th e E n g lis h had w h ic h c o u ld r e s ta b iliz e d u n a b le to m o d i f y t h e w a g e s c a le a n d w ith not be a t th e o ld e ffic ie n t. w h ic h The p r e -w a r r e s u lt E n g la n d w as had th e or w h o le d e v e lo p e d s itu a tio n . in w ard s. to p o r tio n . a ls o w ere b a s is u n d e r m in e d on in an . changed th e y e a rs o f th e 1 8 ,1 6 1 ,0 0 0 , th e w o r ld m ark et w a r a n d im m e d ia te ly in 1922, and lo o m s in about a fte r 1 0 ,4 1 5 ,0 0 0 , th e sam e p ro I n o t h e r w o r d s , in t h e w a r p e r io d , w h e n E n g l a n d 's c a p a c i t y exp ort v io u s ly p r o d u c tio n had a fte r w as depended s u p p lie s w e re e x is t w ar w ere p la n ts S p in d le s in I n d ia a n d J a p a n a n d C h in a g r e w f r o m 1915, fo r th e th in k , I r e c e n t ly lo o k e d u p w h a t h a p p e n e d in t h e t e x t ile i n d u s t r y th e F a r E a s t d u r in g in w h ere , d u r in g I T hey e c o n o m ic w as im p o r ta n t re sp e c t. D e v e lo p m e n ts b a s is . th e y b e c a m e u n a b le to c o m p e te th a t been s u s ta in e d , g o ld o th e r c o u n tr ie s w h e r e la b o r w a s c h e a p e r , m ore T h a t r e s u lt e d in fo rc e d th e h a n d ic a p p e d on to w ar. by b u ild A s th e se in te r r u p te d , E n g la n d a b a n k in g a re s u lt p ow er, o th e r o th e r c o u n tr ie s E uropean p r o d u c tio n L a n c a sh ire d e v e lo p m e n ts d e m a n d s w h ic h fo r m e r ly h a d E n g l a n d 's up or in w h ic h has o th e r w h ic h pre c o u n tr ie s fo r c o n tin u e d to been c o u n tr ie s e n o r m o u s ly to m eet th e fa c t th a t th e b e e n s u p p lie d b y E n g la n d . w h ic h w as b ased on th e p o u n d w a s th e a lm o s t u n iv e r s a l m e d i u m o f e x c h a n g e in t r a d e r e la t io n s w it h fo r e ig n c o u n t r ie s in p r e -w a r d a y s , b e c a m e le s s d o m i n a n t a f t e r t h e w ar. L e s s b a n k in g w e n t to E n g la n d a n d m o r e c a m e to th is a n d o th e r c o u n tr ie s . The a m o u n ts. A m e r ic a n in t e r e s t in fo r e ig n tr a d e w e n t u p b y la r g e S u b s t a n t i a l l y , in t h a t p e r io d w h e n a ll E u r o p e w a s e n g a g e d in w a r , A m e r i c a w a s c a lle d u p o n t o t a k e t h e p la c e o f m a n y c o u n t r ie s w h ic h and w ere p u t o u t o f th e b u s in e s s o f s u p p ly in g in d u s tr ia l m a r k e ts , th e s e fig u r e s in d ic a t e s o m e o f t h e fu n d a m e n t a l c h a n g e s t h a t o c c u r r e d in w o r ld e c o n o m ic r e la t io n s w h ic h c a n n o t b e ig n o r e d w h e n y o u approach th e th e fig u r e s : goods p r o b le m F rom im p o r te d c e n t o f th e 1913 in to to ta l to 27 per cen t to 46 to S o u th 26 p e r c e n t ; in C h ile f r o m V e n e z u e la , fr o m of how to a c h ie v e A m e r ic a p er c e n t. s ta b ility . I w ill g i v e you In grew in A r g e n tin a B r a z il, fr o m 16 fr o m per cen t 15 to per 30 1 7 p e r c e n t t o 3 2 p e r c e n t ; in C o l u m b i a f r o m p e r c e n t ; in 39 to 1 9 2 9 , t h e s h a r e o f t h e A m e r i c a n m a r k e t in P eru fr o m 29 to 42 per c e n t; and in 5 5 p er c e n t. I n A s i a , A f r ic a , a n d t h e O c e a n i c I s l a n d s , o u r s h a r e in g o o d s i m p o r t e d in to B r itis h I n d ia g r e w fr o m 3 p e r c e n t to 7 p e r c e n t ; in to C h in a , fr o m 6 p e r c e n t to 1 8 p e r c e n t ; in to J a p a n , fr o m 17 p e r c e n t to 3 0 p e r c e n t ; 10 per fr o m cent 14 per cent 19 per c e n t; to to 25 per in to ce n t; S o u th in to N ew A fr ic a , Z e a la n d fro m 10 to 19 c a p a c ity to p e r c e n t. T hat s u p p ly m eans th a t th e U n ite d S ta te s th e n e e d s o f a m a r k e t w h ic h n o rm a l sou rces been o f s u p p lie s , d u p lic a te d in th e th e o th e r p r o d u c tiv e and U n ite d d e v e lo p e d a fte r th a t p r o d u c tiv e S ta te s it c a m e c a p a c itie s . th e w a s te m p o r a r ily d e p r iv e d C e r ta in ly in to o f its c a p a c ity had c o m p e titio n w ith m a la d ju s t m e n t s in b u s i n e s s c o n d i t io n s a n d c o m p e t i t i v e c o n d i t io n s a n d p r ic e le v e ls m u s t flo w fro m b a s is d u r i n g t h e w a r t h r o u g h a r t i f i c i a l m e t h o d s , la r g e ly - b y b o r r o w i n g i n t h i s A u s tr a lia , fro m la r g e th ey b e e n m a k i n g la r g e a m o u n t s o f lo a n s a b r o a d o n le s s li q u id a n d lo n g e r te rm s, in to 169 su c h a m a jo r d e v e lo p m e n t as th a t. L e t m e ju s t s a y t h a t , in th e lig h t o f th e s e E uropean as a e c o n o m ic r e s u lt of th e m a la d ju s tm e n ts s tr u c tu r e , w h ic h w ar, we p r o c e e d in g w ere have had fro m th e to m a jo r d iffic u lt ie s in in h e r e n t in s tr u g g le p a ssio n s in th e th e th e s itu a tio n w 'o r l d w i t h o f w a r w h ic h d id not e n d w ith th e s o -c a lle d p e a c e ; a n d n a t io n a l a n im o s itie s a s w e ll a s in te r n a tio n a l e c o n o m ic a n d fin a n c ia l in s t a b ilit y h a v e b e e n v it a l fa c to r s in o u r h o m e s itu a tio n . I th in k th a t it w as th e la r g e S t a t e s , w h ic h w a s in g o o d d is tu r b e d c o n s tr u c tio n needed c o n d itio n , t h a t e n a b le d in th e U n ite d u s , in s p it e o f th e c o n d i t i o n s o f t h e w 'o r l d t o d e v e l o p w h a t a p p e a r e d t o b e a n in d e p e n d e n t p r o s p e r ity w h ic h we w ere a b le to m a in t a in rose fr o m fo r a p e r io d o f years. T o ta l b u ild in g $ 6 ,3 8 1 ,0 0 0 ,0 0 0 co n tra c ts in 1926, w ent dow n a re o n a s till lo w e r le v e l a t p r e s e n t. th e r e s u lta n t p u r c h a s in g a c tiv ity pow er t h a t flo w e d of th e of in d u s tr y , a n iz a tio n g o o d s, so w as th e W ith to in v a d e th a t g o in g on fo r w o r l d 's fo r e ig n S ta te s I m ean b a la n c e is of to and t h e r e v i v a l in b u ild in g a n d d e v e lo p e d m ore in d u s tr ia l it lo o k e d a n d c o u ld g o o n . W h at 1921 1931, in a la r g e w ay. th e tr e m e n d o u s e x p a n s io n in th e v o lu m e in d u s tr y , w ith a w h ile in in a ll t h e c h a n n e ls o f t r a d e , th e a n d la r g e r p r o d u c t io n u n it s , w a s p r ic e s a n d s ib le . A m e r ic a n $ 3 ,0 9 3 ,0 0 0 ,0 0 0 in to U n ite d B u t a t th e s a m e tim e , w ith $ 2 ,7 5 6 ,0 0 0 ,0 0 0 to d e v e lo p e d m ech m a r k e ts w ith m a n u fa c tu r e d as th o u g h s o m e th in g im p o s s ib le I t w e n t o n lo n g e r th a n s e e m e d p o s th a t w e w ere tra d e h ig h ly a b le to m a k e g o o d s a t lo w th ro u g h a la r g e e x p o rts c r e d ito r of raw a n n u a ll y in m a te r ia ls and m a n u fa c t u r e d g o o d s , a n d a t th e s a m e t im e w e w e r e c o lle c tin g in te r e s t o n d e b t s a n d i n v e s t m e n t s o n a la r g e s c a le . I t is i n t e r e s t in g a t t h is p o i n t t o p e r io d fr o m 1922 up to c a ll to y o u r a t t e n t i o n e x p a n s io n o f e x p o r ts o f c r u d e m a te r ia ls , in c lu d in g r a w fo o d s tu ffs . r ia ls F rom reach ed E x p o rts a $ 1 ,4 4 7 ,0 0 0 ,0 0 0 peak in 1925 o f m a n u fa c tu r e d $ 3 ,7 4 5 ,0 0 0 ,0 0 0 in t h a t , in th e th e p r e s e n t m o m e n t th e re h a s b e e n n o g r e a t 1929. of in m a te r ia ls and 1 9 2 2 , th e e x p o rt o f cru d e m a te $ 1 ,7 4 0 ,0 0 0 ,0 0 0 , g o o d s rose fr o m and th e n $ 2 ,3 1 8 ,0 0 0 ,0 0 0 d e c lin e d . in 1922 to I t h in k t h a t t h a t is a m e a s u r e o f th e a b ilit y o f th e A m e r ic a n m a n u fa c t u r e r to s e ll in w o r ld m a r k e t s a t a c o m p e t it i v e p ric e , w h ic h it se e m s to is m e in te r e s tin g to and b e e x tr e m e ly im p o r ta n t; b u t, at d iffic u lt fo r fo r e ig n th e sam e tim e , c o u n tr ie s to buy r a w m a te r ia ls to c o m p e te w ith a n in d u s tr ia l c o u n t r y w h ic h c a n e x p a n d its m a r k e t fo r m a n u fa c tu r e d w ith s ta n d in g a c h ie v e d fo r h ig h a la b o r c e r ta in goods on co sts. p e r io d a c o m p e titiv e T hat and to t i m e in t h e w o r l d ’s e c o n o m ic h i s t o r y . is a w lia t c e r ta in th e p r ic e le v e l n o t U n ite d e x te n t fo r S ta tes th e fir s t 170 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OP DOLLAR m in d — I w o u ld lik e to s a y M r. G . o ld sb o r o u g h Y a re n o t m a k in g a v e r y g o o d R e p u b lic a n ou h ig h ta r iff s p e e c h th is m o r n in g . G overnor M e y e r M r. S . I m ig h t in te r je c t t h a t th e D e m o c r a t s m a d e a s tr o n g e r tr o n g . M r . C h a ir m a n , I a m n o t m a k in g a n y ta r iff s p e e c h . ta r iff a r g u m e n t w h e n th e y b r o u g h t in th e ir b ill a n d th e ta r iff r a te s . G overnor M in d u s tr y . I th in k th e d o m e s t ic m a r k e t t h a n i t is t o it is m ore im p o r ta n t to p ro te ct in v a d e fo r e ig n m a r k e t s ; b u t w h a t I w a n t to s a y is t h a t , d u r in g t h is e x t r a o r d in a r y p e r io d , w e a p p e a r e d to be th e a b le to fu tu r e o p e ra te do b o th . m ay on th e A nd sh o w th a t b a s is of i t is n o t p o s s i b le th e U n ite d e x p o r tin g to S ta te s raw do can m a te r ia ls b o th . not and I th in k c o n tin u e to m a n u fa c tu r e d g o o d s a t th e s a m e t i m e , in t h e v o lu m e t h a t p r e v a ile d in t h a t p e r io d . M r. G . o ld sb o r o u g h A ll p o litic a l econom y te a ch e s th a t, does it n o t? G overnor M e y e r . Y es. B ut it w ent on fo r so lo n g it ap p eared to b e p o s s ib le . M r. G a p p a r e n tly 1929 e y e r . T so m e e x te n t. o c o n s tr u c tiv e t h a t th e w o r ld O f c o u rse, th ere w ere so m a n y d e v e lo p m e n ts in th is p e r io d fr o m w a s lu lle d in t o a s e n s e o f s e c u r it y . 1922 T h ere to in 1 9 2 3 , a n d t h e d e b a c le o f t h e m a r k ; t h e r e w a s t h e d e g e n e r a t io n o f t h e and its fin a l s t a b i liz a t io n ; b u t , in p e r io d s t h a t m e n a c e d m e n t in of E u ropean cu rren cy, w ith a of th e s e v e r a l c r itic a l th e la s t d e c a d e , th e re w a s a g r a d u a l im p r o v e w as h e lp e d e n o r m o u s ly to by th e s ta b iliz a tio n th e lo a n s we of m ade. t o b e a p r o s p e c t o f b e in g a b le t o g o o n a n d c o n t in u e c o n d itio n o b v io u s ly s p ite in te r n a t io n a l r e la tio n s d u e w h ic h T h ere appeared in th e im p o s s ib le ; fie ld th e re of is , in te r n a t io n a l fo r e x a m p le , fin a n c e no th a t now p o s s ib ility , in is m y o p in io n , o f G e r m a n y p a y in g c o n tin u o u s ly fo r a lo n g p e r io d o f y e a r s th e g r e a t a n n u a l s u m s c o n te m p la te d in th e Y o u n g p la n in 1 9 3 0 . B u t th e im p r o v e d t e n d e n c y a n d t h e s a tis fie d fe e lin g a t t im e s t h a t w e w e r e o n a sou n d b a s is w h ic h w as gave c o n fid e n c e fu n d a m e n ta lly to p e o p le u n sou n d everyw h ere m m a jo r tin u e d . I th a t re sp e cts . p a r tic u la r ly fe e l t h a t su c h w o r ld ’s in d u s tr ia l m a r k e ts m a tte rs b y our a c o n d itio n c o u ld be con # as th is g r e a t in v a s io n m a n u fa c tu r in g in d u s tr ie s o f th e are im p o r t a n t to c o n s id e r in c o n n e c tio n w it h s ta b iliz a tio n , b e c a u s e fo r s u c h a lo n g p e r io d it lo o k e d W e a s th o u g h s o m e th in g im p o s s ib le w a s p o s s ib le . a ll c r it ic iz e t h e o t h e r f e llo w , b u t w e w e r e a ll s u b je c t to d e lu s io n s w id e . and m is ta k e s in th o se p e r io d s, w ere m ade e sta te w as a c tiv itie s in on a sto c k s s c a le s p e c u la t iv e of great o f cou rse th e y w a s r e p r e h e n s ib le . th a t s h o u ld to degree. a p r o p o r tio n s and never a c tiv itie s I am of hum an w ere w o r ld great it in to lo a n s m ade. R eal been w ere o th e r s p e c u la tiv e u n sou n d n ess, sou n d ju s t m e n tio n in g , g e n t le m e n , a fe w put F o re ig n as m a n y and o f th e in te r o th e r b e in g s . b e im p o r t a n t in th e p ic tu r e . and have T h ere n a tio n a l r e la tio n s w e re ju s t a s fa r fr o m tio n becau se th e sa m e I t is w e ll t o lo o k b a c k w a r d w it h a b r o a d p o i n t o f v i e w . S p e c u la tio n e ffe c t th in g s t h a t s e e m to m e to I f i t w e r e p o s s ib le to ta k e y o u r r e s o lu and th in g fo r y o u to do som eb od y b ill c o n te m p la te s , e ls e s h o u ld it be seem s put to in m e, m y p la c e th a t a w ho s m a ll can. group of B ut th is m en w ill u n d e r s t a n d th in g s in t h e f u t u r e t h a t m e n n o w h e r e u n d e r s t o o d w it h in a c c o m p lis h th e r e s u lt you had gone to a d an gerou s e x te n t. lo t o f p e o p le d id n o t a g re e w ith to o . In In ta lk in g it m e. over I S o m e o f th e m fo u n d th a t a w e re v e r y w is e , B u t t h e y s a i d b u s in e s s is g o o d a n d w e c a n ’ t s t o p g o o d b u s in e s s . a t im e lik e w ho has any th is, o f a c u te d e p r e s s io n in p r ic e s , t h e r e is n o t a m a n d e c e n c y w h o w o u ld n o t w a n t t o s e e t h e p r ic e le v e l r is e i f 'a s o u n d m e t h o d w e r e a v a ila b le to r a is e i t fr o m In tim e s o f v ery h ard to g o o d b u s in e s s g e t p e o p le to th e p r e s e n t le \ e l. ^ a n d o v e r e x p a n s io n , l e t m e t e ll y o u i t is ag ree th a t th in g s are o v e re x p a n d e d , a n d i t is o f t e n h a r d f o r m e n , e v e n i f t h e y f e e l i t , t o h a v e th e co u ra g e to s a y t h a t i t is t h e t i m e t o p u t o n th e b r a k e s . M r. S tr o n g . T hat r . is Y th e ou a m a tte r o f ju d g m e n t . M r. S tr o n g . reason w ant th e la w th a t . c a n n o t a c c o m p lis h it b y la w Y ou If you we we are , b e c a u s e i t is c a n n o t s u p p ly ju d g m e n t b y la w . adopt a m easu re t h a t in d ic a te s w h a t s h o u ld w ere p e r io d s o f a c u te a n d c r it ic a l d iffic u lt ie s lik e t h e in v a s io n o f th e R u h r fra n c not p r o p o s in g to p a s s . G overnor M e y e . T h a t is t h e w a y t h e w o r ld o v e r , is i t n o t ? o ld sb o r o u g h G overnor M th is is th e th e la s t 1 0 y e a r s . . , . . . I fe lt in 1 9 2 8 t h a t th e in d ic a t io n s w e r e t h a t t h e e x p a n s io n o l c r e d it I b e lie v e in th e ta r iff fo r p r o t e c t io n o f A m e r ic a n a g r ic u lt u r e . a b s o lu te ly b e s t to h e lp to c a r r y o u t e v e r y p u r p o s e , o r if I c a n n ot change # e y e r and d id a n d I w ill d o m y 171 have in be done? G overnor M e y e r a n y fa ilu r e o n t h e p a r t o f t h e p e o p le in p o s it io n s o f r e s p o n s ib ilit y e n d e a v o r to I Take to try to g iv e th e p r o b le m c o m m o d itie s . you a little p ic tu r e In p r o b le m we I h a v e a lw a y s c o n s id e r e d th a t c o tto n 1921 we had th e p r ic e o f c o t t o n if y o u drop p ed to e x p o rte rs and bu t of W e had bad T h e e x p o r t tra d e w e n t d o w n a n d 10 w ill r e m e m b e r , and o f th is c o u n t r y a la r g e s u r p lu s o f c o t t o n . in te r n a tio n a l c u r r e n c y c o n d itio n s . c o o p e r a tiv e s th e I t is m o r e t h a n j u s t a m a t t e r o f s o m a n y m illi o n b a le s is o n e o f t b e g r e a t k e y c o m m o d i t i e s n o t o n l y th e w o r ld . of o f c o t t o n w h i c h is o n e o f t h e w o r l d ’s g r e a t o f c o tto n a t so m u c h a p o u n d . p o r a tio n , to a v o id u n s o u n d in fla tio n . ju s t w a n t have. , _ . , , . I d o n o t t h i n k t h a t t h e r e is n o w o r e v e r h a s b e e n ce n ts. we In th e n e g o tia te d c o tto n sta r te d W ar som e up F in a n c e la r g e q u ite C or lo a n s to p r o m p tly . B u t le t u s ta k e a fe w in d iv id u a l c o m m o d it ie s , b e c a u s e y o u r p ric e le v e l, is , a ft e r a ll, a to ta l o f in d iv id u a l c o m m o d itie s . T h is very la s t y e a r , t h e p r e s e n t c o t t o n y e a r , in s p it e o f a r e d u c t i o n o f a c r e a g e a n d a s u b s ta n tia l r e d u c tio n c lim a tic in c o n d itio n s , th e or u se o f fe r tiliz e r , P r o v id e n c e if th e y ie ld you lik e , per and acre, d u e absen ce w e e v il a n d fr o s t, w a s a lm o s t 2 0 0 p o u n d s , c o m p a r e d w ith th e year b e fo r e b e fo r e , th e b o ll and w as w e e v il sw ep t p o u n d s p e r a c r e is a 3 3 th e co tto n y ie ld la s t th e h ig h e st over y ie ld th e C o tto n p e r c e n t fa c t o r in year had been s in c e w hat w h ic h A r ise of th e o u tp u t o f c o tto n . it w as th e to b o ll 150 pounds 1914, B e lt. of year w as 50 If b e fo r e , in s te a d o f n e a r ly 2 0 0 p o u n d s p e r a c r e , y o u w o u ld h a v e h a d 1 2 ,7 5 0 ,0 0 0 b a le s o f c o t t o n in s te a d o f 1 7 ,0 0 0 ,0 0 0 b a le s , a n d y o u w o u ld have had a n e n t ir e ly d iffe r e n t p r ic e le v e l fo r c o t t o n in th e a b s e n c e o f 4 ,2 5 0 ,0 0 0 b a le s . C o tto n p e r h a p s w o u ld have sta y e d around th e 1 0 -c e n t le v e l if it h a d n o t b e e n fo r th e a b n o r m a l y ie ld s la s t y e a r . If you ta k e a c o m m o d ity lik e c o t t o n , i t is n o t o n ly o f im p o r ta n c e in t e r m s o f s o m a n y m illio n b a le s , b u t i t is a v i t a l f a c t o r in 13 S ta te s . 172 It OF DOLLAR M A IN TA IN IN G AVERAGE PURCHASING POWER M A IN T A IN IN G AVERAGE PURCHASING POWER OF DOLLAR 173 a f f e c t s t h e b u y i n g p o w e r o f t h e p e o p l e o f t h o s e S t a t e s , a n d i t is a v ita l fa c to r to th e in d u s tr ie s of th e N o rth w h ic h s e ll t o th e S o u th , a n d I fa il to s e e h o w i t is p o s s ib le t o a v o id p r ic e le v e l f a c t o r s o f m a jo r im p o r ta n c e e n te r in g in to th e s itu a tio n w here y o u have su ch v io le n t le t us ta k e th e 1921 y ie ld la s t y e a r ’s y ie ld o f 2 0 0 p o u n d s . a c re s, u s in g r o u n d tw e e n W e c a ttle th e 1921 have y ie ld a n o th e r in d u s tr y . F in a n c e fig u r e s . and D u r in g cent and acre of had a th e sa m e 1931 good y ie ld W e deal lo a n e d th e w a r th e sh eep th e c a ttle p o p u la tio n w a s th a t w h e n w e c a m e in to d ro u g h ts p o p u la tio n m ay lo w ' in sheep h e a d in p o p u la tio n th e w a r p e rio d b e e f c a ttle in d u s tr y , as so o n as a I tu rn and th e w o u ld to about do b e 6 ,0 0 0 ,0 0 0 had and w ith fa c tu rin g gone up in on th e W ar c a ttle had gone dow n 25 beef th e p er c e n t. and 25 The per r e s u lt th e p e r io d s p r o d u c tio n ; th a t you see and so w a s 4 5 ,0 0 0 ,0 0 0 till d rop p ed to th e beef th e th e m s e lv e s and in is b u y in g th e tie d e x p a n s io n In to c o n tr a c tio n p a rt, k n o w , M r . C h a ir m a n , I h a v e o n ly a o b se rv er fro m year and a h a lf. th e o u ts id e p r io r to p r o b a b ly h a s b e e n been in m anu th e p a s t and c o n s tr u c tio n tim e s and in th e la r g e e x t e n t , c o n tim e s. in th e F e d e ra l R e s e r v e I w as an in te r e s te d t h a t ; b u t th e la s t y e a r a n d th e m o s t d iffic u lt p e r io d c o u n t r y ; a lth o u g h a of in d u s tr ie s good to N a tu r a lly v ie w c e r ta in ly in th e h is to r y o f th e s y s t e m o f th e v o lu m e th e in in t h e s e in d u s t r i e s is w h a t c a u s e s b a d A s you tim e s . th e c o n s tr u c tio n p o w e r is g rea te st bad th e se tr a c tio n S y ste m in it tr o u b le s o f th e in fla tio n in g ie a te st fr o m a h a lf a b a n k in g p o in t o f a n d p e r h a p s in th e h i s t o r y th e re have been o th e r d iffic u lt VOLUME OF MANUFACTURINGPRODUCTION daily average aggregates in f. r. board index, adjusted for seasonal variation a ttr itio n , a lo n g p e r io d fo r th , an d w h ere m a n ife s t in d u s tr ie s w h o s e d u stry b a le s . t h a t is th a t $ 9 0 ,0 0 0 ,0 0 0 p o p u la tio n d iffe r e n c e ’ b e a n o r m a l tre n d d e fla tio n a s ta b iliz e d p e r io d o f n o r m a l c o n d itio n s p r o d u c tio n , 1921 b e a little h ig h e r th a n The and and w h ic h pou n d s, a c re a g e , th e t h e b e e f c a t t l e i n d u s t r y wTa s r e d u c e d t h r o u g h of 125 v it a l a g r ic u lt u r a l in d u s t r y , W e C o r p o r a tio n . sh eep . th e per L e t u s s a y i t is p r o d u c e d o n 4 0 ,0 0 0 ,0 0 0 On and in f lu c t u a t io n s in w o r ld p r o d u c t io n . N ow , c u r v e s fo llo w c a ttle 3 5 ,0 0 0 0 0 0 - it th a t a t th is tim e . w d ii c h had has gone up w o u ld gone s a y , is in c o m e s in th e d o w n to as h ig h a b o u t 3 6 ,0 0 0 ,0 0 0 a s 5 4 ,0 0 0 ,0 0 0 . a sou n d B ut s ta tis tic a l g e n e r a l s itu a tio n I th e p o s itio n , lo o k fo r an im p o r ta n t r e v iv a l a n d im p r o v e m e n t. I t h i n k i t is w o r t h w d iile t o n o t e p e r h a p s f o r t h e r e c o r d th is c h a r t w h i c h s h o w 's t h e a w a r d i n g o f b u i l d i n g c o n t r a c t s a n d h o w i t d e v e l o p e d in 1921 and 1922 fr o m s m a ll p r o p o r tio n s to th is la r g e e x p a n d e d area o f l a r g e p r o p o r t i o n s w h e n i t wra s b e i n g o v e r d o n e . M r. p o in t. G oldsborough . W i t h o u t o b je c t io n , p le a s e in s e r t t h a t (T h e r e w a s n o o b je c tio n . a t th is T h e c h a r t r e fe r r e d t o is a s f o llo w s :) p e r io d s. B ut a g a in , o u t o f 1 9 2 1 -2 2 e x p e r ie n c e e sse n tia l preceden t d e p r e ssio n s, board tio n w hen a b an k s, T h e chart on th e v o lu m e o f m a n u fa c tu r in g p r o d u c tio n s h o w s s o m e in t e r e s t in g fig u r e s . I t sh ow s h o w c lo s e ly s o m e o f th e m a n u fa c t u r in g you th a t pass w as th ere very c o n tr a c tio n The lo a n s w ere b a n k in g m o d e ra te or n o t, b e r ig h tm in d e d c o m m itte e fe lt a fte r sy ste m th e se or in th a t m em ber e a sin g w 'a s g o i n g o th e r th in g s . T h e w ork th e g o ld im p o r ts w h ic h fo llo w e d to peaks w h e th e r th e m e on— a and I and a b o u t th a t tim e , a n d th e r e la x in g fo r c e d o f th e c o r p o r a tio n , c o m b in e d d e v e lo p e d , e n a b le d w ith u s to a c h ie v e w 'e co u n try th in k in c o n tr a c tio n in C orpora nonm em ber b an k s; an and th e ir p u r p o s e h ere su p p o rte d th e s itu a tio n th e is o u r e c o n o m ic m a c h in e r y , a n d p r in c ip a lly som e fe a r a n d 1 2 0 2 9 0 —3 2 ----- 1 2 fe e l, a s I th e r e v iv a l o f th e W h r F in a n c e h e lp f u l in fo r c o n s tr u c tio n w h ic h h a d c o m e -b a c k . to I sou n d r e s o lu tio n s o f a d ju s t m e n t in of a a tte m p t th e ir e ffo r ts . num ber a lth o u g h fo r c e d any recom m en d ed la r g e c o r p o r a tio n th is e x p e r ie n c e stu d y , F e d era l reserve b a n k s as a m eth o d m ade th e I to w h e th e r o r th e o r in te llig e n t in 1921 and by w ith th e n e e d a q u ic k 174 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR I cam e here so m e w eek s ago an d ask ed y o u to m e n ts. a u th o r iz e , a n d y o u T h a t h a s b e e n fa ir ly s te a d y e x c e p t fo r o n e p e r io d w h e re th e re d id , a r e c o n s t r u c t io n fin a n c e a g e n c y , a n d a m e n d m e n t s to th e f e d e r a l w a s a l i t t le fla r e d u r in g t h e p e r io d reserve a sse ssm e n ts. have a c t, been and I w ant good— not to say a t th is as im m e d ia te , tim e th a t perh ap s, reserve c r e d it, or th in k th e r e su lts as m ig h t be h o p e d s o m e , b u t y o u c a n n o t ju s t p u ll a fin a n c ia l le v e r F ed era l reserve sy ste m I in th e R e c o n s tr u c tio n lo o k e d w it h d r a w a ls a ll o v e r w h e t h e r i t b e in t h e F in a n c e It not C o r p o r a tio n o n ly to our th a n our fe lt w ith th e ir c o r r e sp o n d e n ts, a n d im m e d ia te ly e n g e n d e r la g to d o b u s in e s s . to stu d y th a t p a r tic u la r asp ect q u ite c lo s e ly m any years in v e s tm e n t w o r ld , T h e r e is a l w a y s a a n d it ta k e s tim e fo r m o n e y to p r o d u c e its e ffe c ts o n b u s in e s s . u sed th e I m a rk e t, and in r e la tio n S o m e tim e s it m ig h t our to exchange lo g ic a l to by m o n th s la te r . Y ou c o u ld see in c o n s tr u c tio n th a t under a c tiv itie s n orm al about c o n d itio n s s ix days b e fo r e th e r e a l-e s ta te m o n t h s la t e r in b u s in e s s . bond m a r k e t, it w o u ld s h o w u p a b o u t s ix o th e r th is T h e r e is a la g b e t w e e n t h e e n t r y o f m o n e y e ffo r t to a r r e s t a d v e r s e te n w ith w h ic h o ld sb o r o u g h m em b ers p rop osed of . we a ls o on p u rsu e at th is p o in t, F e d e ra l reserv e le g is la t io n is n o t in te n d e d as b ill w a s b e in g d is c u s s e d p u b lic in te r e s t. I M y an sw er th a t banks w ill n o t c lo s e , b e c a u s e o c c a s io n a lly th e r e w ill b e b a n k s t h a t w ill c lo s e b e c a u s e o f e v e n t s t h a t a r e in th e p a s t , b u t I t h in k th e b a n k s t h a t h a v e r e o p e n e d — o p e n e d w ith in th e p a s t s ix w e e k s — h a v e h a d la r g e r a g g r e g a t e r e s o u r c e s t h a n t h e b a n k s t h a t c lo s e d in t h a t p e r io d . M r S t r o n g . T h a t is , i t t a k e s a li t t le m o r e t im e fr o m c o r n is p u t i n t o G overnor M . I th in k w a s s o m e w h a t s u r p r is e d w e r e a b le to and t h a t is a p r e t t y p le a s e d over o r g a n iz e th e R e c o n s tr u c tio n good ,. . ,u th e tim e th e w ay sp eed F in a n c e th e w h ic h C o r p o r a tio n . 1 we W e w e re a b le to o r g a n iz e i t a n d p u t i t in t o o p e r a t io n r a p id ly , s o t h a t lo a n s G overnor M M r. s m a ll to w n s, C h a ir m a n th e are e y e r . th e y N i n e t y -t w o p e r c e n t o f th e b a n k s to w h ic h lo a n s h a v e b e e n a u t h o r iz e d a r e lo c a t e d in to w n s o f le s s t h a n 1 0 0 ,0 0 0 p e o p le a n d 7 6 p e r c e n t in t o w n s o f le s s t h a n 1 0 ,0 0 0 p e o p le . T h e re are so m e lo a n s a ll o v e r t h e c o u n t r y in v i r t u a lly e v e r y S t a t e , I t h i n k . c o n s id e r a b le n u m b e r o f s m a ll b a n k s r e c e iv e lo a n s are a p p ly in g fo r m o n e y to be u sed n o t o n ly to and E very day a m ore of th e m p a y o ft in d e b t e d n e s s t h a t p r e s s e s o n t h e m b u t a ls o t o m e e t th e ir o t h e r r e q u i r e m e n t s . n o t lik e to p r o p h e s y a n d I d o n o t lik e to p r o m is e , b u t I am I do h o p e fu l, a . . I and th e w as tim e to tim e in th e G o v e r n o r H a rriso n knew to ld you y e ste rd a y , th a t th e F e d e ra l reserv e s y s te m as you has been p r o b a b ly e x p a n d in g fu tu r e , a lr e a d y c r e d it m th e b a n k s th r o u g h p u r c h a s e s o f U n it e d S ta t e s G o v e r n m e n t s e c u r itie s . T h ere has been about $ 2 5 0 ,0 0 0 ,0 0 0 of h oarded cu rren cy re tu rn e d a s n e a r ly a s w e c a n m a k e o u t u p to d a t e , a llo w in g fo r s e a s o n a l a d ju s t th e if we c a r r ie d over o u t, w h ic h hope you and u n d e rsta n d th a t th a t p erson al c r itic is m . I th e flo o r , I w a s a k s e d t h e I be a d m in is te r e d a b s o lu te ly w ay in b e lie v e d and th a t y o u r c o n n e c tio n it one w ith it. Y ou u n d e rsta n d to of fin is h are a ll e a r n e s tly d is p o s e d by r e s u lts th e s a y in g th a t c o m m itte e B oard we and th a t I have th a t I and had to search o u t h o w you th e am in in m in d , fin d th a t govern ors of a m e e tin g th is w e e k , each and every one can c o n tr ib u te to th e im p r o v e m e n t o f th e s itu a tio n . Y ou m u st to rem em ber c o n tro l a th a t, p ric e w hen le v e l you at ta lk any of th is p a r tic u la r o p e r a tio n p o in t, as you are t h i n k i n g in t e r m s o f a p r ic e le v e l w h ic h w a s e s t a b li s h e d b y t h e g r e a t a c tiv ity in th e h is to r y o f th e i t is t h e r i g h t p r i c e l e v e l , b u t i t w a s very e x tr a o r d in a r y b ack grou n d I do n ot know M r. G co u n try . I m ay be a p r ic e le v e l e s ta b lis h e d o f b u ild in g it o r th e a b ility to re sto re it I a m a c tiv ity . The th a t w ith ju s t ic e a of n o t d is c u s s in g h e re b e c a u s e fr a n k ly th e fu tu r e o f p ric e le v e ls . o ld sb o r o u g h . T h ere is not any s p e c ific p ric e le v e l m en t io n e d in t h e p a r t ic u la r b ill u n d e r d is c u s s io n ? G overnor M e y e r . N p r ic e le v e l m e n tio n e d o , not you can p r ic e le v e l, th e b ill; but are have seen th e 1926 It m ay I B u t if y o u g e t th e id e a l o f a fix e d p ric e c o n tr o l b y you I b e th a t it is . t h e w o r l d w a ll r e t u r n , a n d i t m a y n o t . w a r d o r d o w n w a r d a s p r ic e s th a t in a s th e id e a l, a n d it m a y le v e l w h ic h fro m of c o u n tr ie s . p o lic y , and w ill A m e r ic a n b a n k s , w ith w h o m occu rred , d e v e lo p I a th a t F ed eral R eserve b e th e p r ic e le v e l to w h ic h t h a t w it h y o u r h e lp w e h a v e m a d e a c o n tr ib u tio n o f r e a l im p o r t a n c e . lik e general m em bers o f th e w o u ld n o t p r o fe s s to k n o w . m ay in te r m a rk e t, rest w ere do a c t w o u ld p a tr io tic w o u ld w ith w it h a ll t h e v a r io u s th in g s t h a t a r e b e in g d o n e , a n d w h ile w e a r e n o t w h ic h to T h a t is a m a t t e r o f r e c o r d . g o in g to b e a b le to m a k e g o o d t h e ir r e c o v e r a b le lo s s e s t h a t h a v e a lr e a d y or to H a v e y o u fin is h e d y o u r s t a t e m e n t ? F e d e ra l reserve e s t b u ild in g D° G o v e r n o r M e y e r sy m p a th y s u ffic ie n t h a v e b e e n m a d e u p to d a t e to 1 ,3 9 2 b a n k s . M r . G o l d s b o r o u g h . M o s t o f th e m are m han I a p p r e c ia te th a t . o ld sb o r o u g h o th e r m e m b e rs to p u t it . w ith M r. G . e y e r t h a t is h o w w e f e e l. h e a rty t h e h o p p e r till t h e t i m e i t b e g in s to c o m e o u t ? e y e r G overnor M in th e re a so n s fo r s a y in g so w a s b e c a u se o f m ean a d m in is te r e d and I w as on b e lie v e d of m y not th e o th e r c e r ta in sy ste m w e a r e n o w a t t h e p o i n t w h e r e w e a r e g o in g to b e a b le to h o ld t h e lin e . does a little be That resp ect and a p o lic y very w o u ld I am T he our m oney b e tw e e n h o p e fu l th a t th e r e is a la g , a n d w ith and m a rk e t, su ch have R ig h t th e d ir e c t q u e s tio n w h e th e r th e d e n c ie s , a n d if y o u c a n h o ld th e lin e , y o u c a n tu r n it e v e n t u a lly T h e r e is a t i m e e le m e n t a n d but th in k I c a n a d d h e re th a t w h e n th e R e c o n s tr u c tio n F in a n c e C o r p o r a tio n n e s s in w a y s t h a t a r e o b v i o u s t o o b s e r v e r s o f b u s in e s s . t o d o is t o e x e r t e v e r y c o n d itio n s M r. G th e in t o c ir c u la tio n in t h e b a n k s a n d it s e ffe c tiv e n e s s in s t i m u la t in g b u s i T h e fir s t t h in g r e tu r n in g w e h a v e n o c o n tr o l. w hen m o n e y b e c a m e t i g h t a n d u n a v a i la b le in t h e m o r t g a g e m a r k e t , in a cc o u n t o f ta x not a p u r e ly n a tio n a l p o in t o f v ie w , b u t w e m ig h t b e h a m p e r e d in a c h i e v in g s u c c e s s , i f r e fle c t it s e lf but ou r co u n try w h a t is g o i n g seem c o u ld c o n s id e r i t fr o m ago, c o n d itio n s as b e tw e e n it o r d in a r ily 1 on w as a lm o s t e v e r y d is tr ic t. a n d I fo u n d t h a t w h e n m o n e y b e c a m e e a s y a n d a v a ila b le o n m o r tg a g e s w o u ld A p ril cu rren cy c o u n t r y in d o m e s tic n a tio n a l c o n d itio n s th e v around th o u g h d lin g o f o u r v o lu m e o f c u r r e n c y h a s g o t to b e c o n sid e r e d w ith r e s p e c t to m a k e lo a n s to c o u n t r y b a n k s , w h ic h fe e l e a sie r w it h th e c o r p o r a tio n c o n fid e n c e a n d a m o r e o p e n m in d as t h a t a p p a r e n t ly w a s in c o n n e c t io n w it h t a x m a t t e r s ; th e r e w e r e s o m e by t o e a s e c r e d it o r in c r e a s e t h e v o lu m e o l r e d e r a l lo a n s 175 a d ju s tin g m ove up or im m e d ia te ly th e dow n v o lu m e on c o n fro n te d th e of m oney average w ith th e up fro m fa c t we s a w so c le a r l y in t h e w a r , t h a t t o fix a p r ic e , w h e t h e r y o u d o i t d ir e c t l y o r in d ir e c t ly , is v e r y d iffic u lt u n le s s y o u M r. G o ld sb o r o u g h c o n tr o l p r o d u c tio n . . W e ll, w e can n o t d o th a t. 176 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR G overnor M ^ M r . G . e y e r N o ld sb o r o u g h G overnor M s ta b ilitv has not it got is n ecessary b e fo r e you can d is r e g a r d in g le v e l In tim e s .T h e r e th e to th e se we a ll say n o r m a l c o n d itio n s ; a n d is n o sam e lik e c r e d it o r c la s s a n d in t e r e s t ;-b e c a u s e th e no we o u r d o m e s tic th e c la s s has l o s s e s w h i c h .f a r o u t r u n a n y p o s s i b l e g a i n i n b u y i n g p o w e r a r i s i n g o u t o f c o n d itio n s o f th is k in d . b e n e fit fr o m T h e r e is n o b o d y th is s it u a tio n ; a n d in m y t h a t s ta n d s to p r o fit o r o p in io n , th e re fo r e , th e a is t h e d e s ir e o f e v e r y o n e . p e rm a n e n t, B u t to a s s u m e fr o m u n iv e r s a l, a n im a t in g m o tiv e of d e s ir e t h a t t h a t i t is hum an b e in g s m . th e lo n « - r u n I t h i n k is d a n g e r o u s , b e c a u s e w h a t d o e s e v e r y m a n u f a c t u r e r in th is co u n try lo w e r p r ic e s. c h e a p ly in do to "E very h is p r ic e ? fa r m e r is H e tr ie s tr y in g to to th e fie ld s of w ere fo r E uropean th e g r a in M is s is s ip p i p r o d u c in g happened w hen in te r e s te d t h e n in p rodu cer V a lle y ? g r a in th e W ere cheaper C a n a d ia n and in p r e -w a r one of fro m th a t and th e th in g s G o ld sb o r o u g h G overnor Y Ie th a t . Y up th e I am y e r it fe r tile s ta b iliz a tio n ? it cheaper opened. w as e x p o rte r. th e are ou W e W hat W e m w ere in v a d in g » ,, o u t o f th e ta k e n w as Canada not w o r ld a b le p r ic e to cam e se g r e g a tin g m o f w h e a t ls th e and s u p p ly -it, and s u tie r in g d o m e s tic M r*. c h o o s in g w heat in s te a d of th e p ic tu r e o f th e p r ic e le v e l? and c o tto n Y ou and a ll th o se c a n ta k e fr o m th in g s, becau se th e 7 8 4 c o m m o d i a s p r o v id e d b y t h e b ill, a la r g e n u m b e r o f c o m m o d it ie s , a n d th e y d o n o t h a v e th e w e ig h t th a t a fe w c o tto n and g r a in and e c o n o m ic s t o -d a y . M r. G oldsboro u g h w h e a t, you . N ow , M r. B u sby, have you u s b y te stim o n y have h a v e; and w hen you th e b ig g e s t fa c to r m ta k e w o r ld . , , , . Y e s ; a n d th e y *a re th e v e r y h e a v ie s t w e ig h te d in th e in d e x n u m b e r s , to o . M r. B o f th e m - . . to th e se c o m m o d itie s to w h ic h you have on w hat v a lu e p h ilo s o p h y of do to you our w hat base exchange our U , , r e g a r d o u r c u r r e n c y r e la te d , o r you cu rren cy? sy ste m , th a t Is our it your v ie w cu rren cy of s h o u ld th e be b a s e d o n c r e d it , o r s h o u ld i t b e b a s e d o n w e a lt h , o r s h o u ld it b e b a s e d on "o ld ? v a lu e I f n o n e o f th e s e t h in g s , w h a t is y o u r n o t io n o f t h e t a n g ib le exp ressed G overnor M by e y e r th e c u rr e n c y u se d u s b y q u e s tio n . I . I am u n d e rsta n d lo r e x c h a n g e p u r p o s e s ? ta lk in g th a t, but i . th a t i does a b o u t th e p h ilo s o p h y b a c k not of th e d o lla r . to th e fa c t th a t, I an sw er have m y o f th e s itu a tio n , c o u p le d y o u r p r e m is e to - I d id n o t in te n d to d o 't h a t . am g iv in g it s o m e u se one I d id n o t th in k w e ig h t, b e c a u se it a ffe c ts I our o of your e x p r e s s io n s , th a t th e d o m e s tic e y e r . u s b y Y ou . N ; L d i d » n o t ;s a y t h a t . o d id n o t s a y th a t ? . I d o n o t m e a n to s a y th a t y o u w ith in te r n a t io n a l c r e d it and th e w e lfa r e o f o th e r n a tio n s , a s i t r e la te s to . t h e ir d e a lin g in -c r e d it in t h is c o u n t r y ? . G overnor M e y e r . I d o , in so m e areas an d m a rk e ts. If you ta k e , f o r i n s t a n c e , c o t t o n , i n -w h ic h y o u r S t a t e i s l a r g e l y i n t e r e s t e d , r o u g h l y 5 0 p e r c e n t is f o r e x p o r t , a n d t h e c o n d i t io n o f t h e p u r c h a s in g n a t i o n s — th e ir in b u y in g pow er and cu rren cy th e m a r k e t fo r c o tto n . M r. B . u s b y I th in k c o n d itio n s — are e c o n o m ic fa c to rs U '! we had b e tte r go back to th e fir s t q u e s t io n : W h a t s h o u ld d e t e r m in e th e v a lu e o f c r e d it a s i t is a v a ila b le th r o u g h t h e b a n k i n g c ir c le s o f t h is c o u n t r y ? up S h o u ld it b e th e w e a lth b a c k in g t h e th in g s t h a t c r e d it r e p r e s e n ts ? n o tio n th a t w e c a ll “ c o n fid e n c e ” i n w o u ld you b ase th e d e v e lo p m e n t S h o u ld it a of be som e eph erm eal v a g u e sort o f w a y ? c r e d it th a t is u sed On fo r w hat n orm al p u r p o s e s , o r in b r in g in g i t to t h e u s e o f b u s in e s s a n d c o m m e r c e in th is c o u n t r y , n o t in fo r e ig n c o u n t r ie s ? G overnor M . e y e r The • , * F ed eral reserve r s y s t e m ' is b ased on th e th e o r y o f c o m m e r c ia l tr a n s a c tio n s a s th e b a s is o f c r e d it, o f c o u r s e . M r. B u s b y . W h a t v a lu e d o y o u r e g a r d m o n e y a s b e in g b a s e d o n g o l d t h a t is r e p r e s e n t e d b y t h e s t a t u t o r y r e q u i r e m e n t s on— or on com m o d i t i e s t h a t a r e r e p r e s e n t e d iri p o s s i b l y 6 0 p e r c e n t o f y o u r F e d e r a l reserve n o t e -is s u e s ? And th e v a lu e o f m o n e y ? G overnor M m e d iu m e y e r if not on th o se , on w hat w o u ld we base » . M oney has been th e sta n d a r d o f e x c h a n g e , b o t h ,; o f c o u r s e , a s y o u o f v a lu e a n d know th e a s w e ll a s I ; b u t w h e n it c o m e s to th e e x c h a n g e o f g o o d s a n d c o m m o d itie s y o u g e t b a c k to t h e f a c t t h a t r e a lly t h e b a n k c h e c k is t h e m e d i u m th e g re a te r in part th e of exchange fo r o f b u s in e s s ; a n d fo r th a t re a so n I g o b a c k to w h a t I th e b e g in n in g , th a t a s o u n d is real m o n e y b a n k in g s y s te m , w ith o f b u s in e s s , a s c u r r e n c y , is th e th e c h e c k , v ita l fa c to r in th e p u r p o s e s I t h in k t h e c o m m i t t e e h a s in m in d . M r. in B u s b y m in d . T h ere at c o m m o d itie s , to th e are tw o . o b je c t s , p resen t m ake th e m tim e : O n e com e back as I u n d e rsta n d o b j e c t is t o it, th a t r e v iv e s o m e w h a t in we v a lu e s in r e la tio n to our o u t s t a n d in g d e b t s , so t h a t w e c a n s e ll th in g s t h a t w e w o r k a n d p r o d u c e , and d is c h a r g e th e o b lig a tio n s w e h a v e a s s u m e d , a n d w h ic h w e c o u ld a t t h a t tim e r e a s o n a b ly b e lie v e w e r e in p r o p e r r a tio to th e c o m m o d i t y v a lu e s a s th e y s to o d th e n . Y ou . T h e la w p r o v id e s th e m e t h o d o f is s u in g c u r r e n c y I . T u sb y m in g le d have su g g e ste d 1926 N o w , t h a t is t h e fir s t id e a . a V h a v in g been m e n tio n e d a s b e in g th e fa ir le v e l to w h ic h w e s h o u ld r e tu r n . you a n d ----------M r. B sta n d a rd s a id t h a t , b u t d o y o u r e g a r d d o m e s t ic w e lfa r e a s b e in g tie d a n d in t e r have a d d r e s s e d y o u r s e lf. I w o u ld " lik e t o a s k . e y e r th a t. G overnor M w h ic h a n y q u e s tio n s ? s p e c ific th e s itu a tio n . B M r. B s a id . . I w a n t to a s k s o m e r a th e r g e n e r a l q u e s tio n s a s to th e r e la tin g fix e s c a llin g y o u r a t t e n t io n w e l f a r e i s t i e d w i t h t h e - i n t e r n a t i o n a l c r e d i t w e l f a r e ---------- / ite m s , . "W "e ll, I h a v e t h e m b o t h i n m i n d , M .r . C h a i r m a n , t h e y a r e b ig f a c t o r s , a ft e r a ll. tie s fo r s e llin g r e v o lu tio n R u s s ia d e v e lo p in g in y o u r o w n m in d but we opened is th e r e e n tr y o f R u s s ia in to th e w o r ld m a r k e t. M r. and if e n o u g tu d o th e y w e re in te r e s te d la r g e w hen t o -d a y c o sts S h e a lw a y s h a d b e e n a la r g e p r o d u c e r o f d ays— a dem and we w h e a t fie ld s w e r e s ta b iliz a tio n e c o n o m ic c ir c le o f n a t io n s . s u p p lie d lo w e r h is p r o d u c ts m o r e W h a t d id th e U n i t e d S t a t e s w hen w h a t h a d a lw a y s b e e n o u r m a r k e t. N o w , th e re w a s R u s s ia w h ic h b y w heat m ake o rd e r to m S k e m o r e m o n e y , b u t a c tu a lly m o r e c h e a p ly it b r in g s th e p r ic e d o w n . do to p rod u ce by e c o n o m ic a l w e lfa r e , y o u G overnor M w a s d o in g fo r a s ta b iliz e d c o n d itio n , b y w h ic h w e m e a n a r e tu r n to m o r e n o r m a l p r ic e s w h ic h E u r o p e a n d f o r e i g n c o n d i t i o n s .? . - d e b t o r c la s s c r e d ito r sta tu te in a ll o f y o u r d is c u s s io n s a b o u t t h e t h i n g s w h ic h h a v e h a d t o d o w it h w ant t h a t is th e m ig h t m a k e ' m y s e lf p la in . T h e r e w o u ld b e 7 8 4 c o m m o d itie s a ffe c te d ? m e a n s re tu rn d e s ir e o f e v e r y b o d y . th a t but . Y es. e y e r w h ic h ; o 177 by som e one I do not know w hat s a y a b o u t it b e in g t h e fa ir le v e l. G overnor M I do not know . e y e r . I w o u ld not say a n y th in g about it, becau se 178 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR M r. B . W o u ld y o u u s b y G overnor M . e y e r N m e n tio n , I o w o u ld MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 179 a n y o th e r p o in t? not know tim e , b u t w e how . I w o u ld lik e to b r in g a b o u t a n im p r o v e m e n t in th e p r e s e n t le v e ls . M r. B . H ow u s b y fa r w o u ld y o u w o u ld you carry th a t e y e r . I th in k it w o u ld depend a how great deal on d is c u s s th e s e v e r y fu n d a m e n t a l q u e s tio n s , y o u g r e a t d e a l a b o u t th e q u a n tity reserve q u a n tita tiv e c r e d it. The o f m o n e y , o r th e th e o ry is , q u a n tity of con cou rse, hear a o f F ed eral th e b a s is of m o s t o f o u r d is c u s s io n s a n d th e d is c u s s io n s o f p e o p le w h o are in te r e s te d p r o p o s itio n s th a t h a d c r e d it been b a s is , d o n e in in s te a d fin a n c ia l c o n d itio n th e U n it e d of an o f th e s io n , I b e lie v e , w o u ld I f th e a m o u n t o f b u ild in g S ta te s h a d u n sou n d c r e d it been b a s is , b u ild in g in d u s tr y and done th e th e on a sou n d p ic tu r e of th e p resen t dep res h a v e a n e n tir e ly d iffe r e n t a s p e c t. N o w , i t is n o t o n l y t h e q u a n t i t y t h a t h a s t o b e t h o u g h t o f , i t is t h e th e y see o b v i o u s l y d a n g e r o u s s p e c u la t iv e a c t iv it ie s in la r g e r a r e a s . s p e c u la t io n w a s , in it s e lf, a w a r n in g o f s o m e t h in g w r o n g in th e c r e d it s itu a tio n o f th e c o u n t r y ? M r. B you . L o o k in g u s b y w h y , a n d g iv e y o u G overnor M M r. B e y e r . u s b y and back w ard b o th , I a 2 -c e n t p o s ta g e s ta m p . m y id e a , a n d . I w o u ld go th a t w a y . to th a t, a n d if w e te ll y o u th e m a c h in e r y t h a t w e h a v e ; a n d if w e d id it , w e m ig h t n o t b e s u b je c t w ith is th e th e m e n tio n e d , c o n d itio n s c o n n e c tio n w ith m a c h in e r y t h a t w e h a v e ; a n d e v e r y tim e th e we of are o th e r th r o w n in to c o u n tr ie s , th e and in te r la c in g an s itu a tio n e x a m in a tio n of our th e c r e d its o f o th e r c o u n tr ie s . S o m e o f th e b e s t a u th o r itie s t h a t w e h a v e , h o ld t h a t w e h a v e , p e r h ap s, at le a s t $ 2 8 ,5 0 0 ,0 0 0 ,0 0 0 c o u n tr ie s h a v e in v e s te d in v e s tm e n t $ 7 ,5 0 0 ,0 0 0 ,0 0 0 in in c r e d it, th is w h ile fo r e ig n c o u n tr y , le a v in g u s a n e t o u t la y , w a r d e b t s a n d a ll, o f a b o u t $ 2 1 ,5 0 0 ,0 0 0 ,0 0 0 , a n d h o ld t h a t th e d e fa u lte d and b o n d s a n d s p u r io u s is s u e s o f th e ir c o u n tr ie s — t h e y p ro p e rty out of th is co u n try a m o u n tin g to got about $ 4 ,0 0 0 ,0 0 0 ,0 0 0 , a lr e a d y d e f a u lt e d , a n d t h a t th e r e is $ 1 1 ,0 0 0 ,0 0 0 ,0 0 0 o f w a r d e b ts , m a k in g a to ta l o f a b o u t $ 1 5 ,0 0 0 ,0 0 0 ,0 0 0 m ark ed o ff, a n d h ig h fin a n c ia l $ 6 ,0 0 0 ,0 0 0 ,0 0 0 p o s itio n s , or le a v in g $ 7 ,0 0 0 ,0 0 0 ,0 0 0 a of net a m o u n t, a ll c r e d it s we p o s s ib ly , have of e x te n d e d in a ll o f o u r e x p e r ie n c e w ith fo r e ig n c o u n tr ie s , t h a t w e c a n h o p e to c o lle c t. fo r w a r d It n ever cost m e even to t h a t is t h e a r g u m e n t , a s I u n d e r s t a n d i t , o f m o s t o f t h o s e w h o a r e in W o u ld n o t y o u , fo r in s ta n c e , lo o k in g b a c k w a r d , fe e l t h a t th e F lo r id a w as. are g o in g a n d h is c o n t r a c t s in r e la t io n a b le to h o ld i t w it h c r e d it q u a lit y , a n d it is a w a r n in g to th e b a n k in g a u th o r itie s w h e n la n d lo n g y o u 1 9 2 6 p r ic e , y o u r o n ly o b je c t i o n is t h a t w e m ig h t n o t b e a b le t o d o i t w ith in r e s to r in g t h in g s b y t h a t m a c h in e r y , w h e r e a s I fe e l t h a t m o r e t h o u g h t h a s to b e g iv e n to th e q u a lit y o f th e c r e d it. how to ta k e th a t c e n te r o f g r a v it y o f p r ic e s to a c e r ta in p o in t, if it b e th e T h a t g e t s d o w n t o a n o t h e r t h i n g t h a t is o f v i t a l i m p o r t a n c e , and w hen you not know th e c e n te r o f g r a v i t y o f v a lu e s , w h ic h is th e w h o le s a le c o m m o d i t y in d e x p r ic e , a n y f a r m e r in t h e c o u n t r y c o u ld c a lc u la t e h is im p r o v e m e n t; c o n tin u e th e w o r k to c a r r y th a t im p r o v e m e n t ? G overnor M d itio n s . fa r do I f w e g iv e y o u b e g la d th e n I can fe e l th a t I w a n t to it t e ll T h ere w ith q u e s tio n y o u . is a lw a y s G overnor to h e a r it. pow er T h e s e g e n t le m e n w h o h a p p e n to b e in th e T r e a s u r y — th e sam e p ic tu r e t h e w e lfa r e o f n a t io n s in fo r M I w as d is c u s s in g e x p o rts, . and I e y e r our of th e ban k ers c o n n e c tin g us th e o th e r p a r ts o f th e w o r ld . wra s th a t not in te rm s d is c u s s in g of it th e w ith b u y in g th e v ie w to a n y in t e r e s t w e w o u ld h a v e in t h e fo r e ig n c o u n t r ie s , e x c e p t s o fa r a n d I a m n o t s p e a k in g o f y o u , b u t o f th e g e n tle m e n w h o d e a l w ith th e as th e fin a n c in g a ffe c t in a broad a lm o s t w h o lly . r e la te d to sort of w ay, r e la te your te stim o n y to c r e d it, C r e d it s a r e a s u b s t a n t ia l t h i n g , in m y m in d , o n ly a s th e tru e v a lu e s , and t h a t is o n e tr o u b le w ith th e F lo r id a b o o m ; an d w e h a v e n o sy ste m t h a t is a c c e p t e d b y r e s p o n s ib le p e r s o n s lik e w h ose y o u r s e lf, and p a r tic u la r th in g , c r e d its r e la tio n in w ith o u t a n th e of o th e rs d e te r m in in g to th e m ; o b je c tiv e to but be b u s in e s s th e v a lu e th e sy ste m it of to th e se has a tta in e d , o r lik e ly is to d e a l w ith th is c o m m o d itie s a d r iftin g or a ttitu d e , be reach ed, or an y p u r p o s e in m a in t a in in g t h e s it u a t io n , u n le s s , f o r s o o t h , s o m e p e c u lia r o n ly c o n d itio n s our fro m I have w h ic h are a n d c u r r e n c y a n d c r e d it c a n b e r e la te d p r o p e r ly o n ly m y n o tio n ; an d a c c e p te d in th is we h a v e th e B u r e a u o f L a b o r S ta t is tic s co u n try , and th r o u g h o u t th e wro r l d , b e in g w h o lly a n d fa ir ly d e te r m in a tiv e o f c o m m o d it y v a lu e s . as I t is m y m o n th ly . and th o se th e tru e u tility fo r c ib ly c o m m o d ity and th e p o in te d v a lu e s . la w o u t; but d e fin ite ; a n d c u r r e n c y c o u ld of te r m , s h o u ld C e r ta in ly s u p p ly th o se and th e }7 are dem and, v a lu e s are be r e la te d d e te r m in e d w h ic h s o m e th in g you a n d c r e d it a n d f a i t h in b u s in e s s , t o m y m e a s u r e it s e lf, if it k n e w by w h a t m e a s u r e it c o u ld by have ta n g ib le to so and m in d , d e te r m in e its w o r th . I can p o in t. Y ou know T it q u a n tity is of im p o r ta n t e x p o rts, but not a ls o a tte n tio n of th e c o m m itte e h ere, 80 per cent th a t A t a th e th e co tto n le a v e s banks of buy c a r r y in g th e crop u sed e x p o rts, p r e s e n t I w o u ld w o u ld la r g e fin a n c e annual o n ly to th e say th a t about one- p r o b le m p rod u cers. in fo r T hat is th e w hy w e t h i n k t h a t th e c h a n g e in t h e t i m e e le m e n t is o n e o f th e r e s u lt s o f d is tu r b e d fo r e ig n c o n d itio n s , a n d s u p p ly , r e a lly g rea te r th a n t h a t is w h y t h e r e i s a l a r g e r v i s i b l e it o u g h t to be, b e c a u se o f th e d is tu r b e d c o n d itio n o f th e w h o le s c h e m e o f d is t r ib u tio n , a n d I f th e y It com e is j u s t W e in as b a d th in k th e tim in g get ou r sp ark a t th e w ron g fo r th e a p p a ra tu s p lu g s c o m i n g in tim e , y o u co tto n on t h e c h a n g e in t h e an a u to m o b ile is a t th e rig h t tim e . h a v e a g r e a t d e a l o f tr o u b le . m a rk e t, w h en its tim in g g e ts ou t of o r d e r , b e c a u s e it a ffe c ts th e p r ic e a n d s lo w s u p t h e m a r k e t . P e o p le d o n o t th in k v e r y m u c h o f th e tim e e le m e n t. M r. B u s b y . T h a t i s a f i n e i l l u s t r a t i o n , b u t I wro u l d n o t f o l l o w it to a n y e x t e n t , n o t t h a t i t is m y s t e r i o u s , b u t b e c a u s e i t d o e s n o t b e a r a n o t s e e , in d is p o s itio n of That th e im p o r ta n t, to th e th e Jan u ary. very u sed c a lle d fo re ig n e rs and have you th e b u y in g th e e le m e n t. you and of m o n th s o f S e p te m b e r to tim e s in c e v ie w p r o b a b ly id e a t h a t o u r c u r r e n c y a n d o u r c r e d it a n d th e q u a lit y o f o u r c u r r e n c y o u r c r e d it, of o c c a s io n a lly b e s o ld , to th e e x te n t tw e lfth is p o in t is s t a b i li z e d o n s o m e b a s is o r o t h e r a n d t h a t t h e c o t t o n p rod u cers v a lu e , c o u n t r ie s , p o litic a lly o r fin a n c ia lly , w o u ld i n y e a r s g o n e b y , t o t h e f a c t t h a t wrh e n c o n d i t i o n s a r e n o r m a l , e x c h a n g e n o tio n s h o u ld g e t in to th e m a jo r it y o f th e m a n a g e r s t h a t t h a t s it u a tio n N ow , m oney th e th o se c o m m o d itie s ; o f th e tim in g . w a s rig h t. to in export to th e d ir e c t m ay a ttitu d e th e sh ip of you ban k ers w h o com e o f fin a n c e t e ll u s w h a t w a y y o u to any p o in t, th in k y o u h ere, an y any o u g h t to d e fin ite go fo r a great deal o f lo g ic , in m y s u b je c t , w it h o u t c r itic iz in g m in d , you. ju s t to speak to th e p o in t on th e MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 180 G overnor M c r itic is m M r. B fo r e ig n new u s b y . I e y e r and am id e a s , su re and we I w ant am to a n x io u s be to fra n k . I le a r n . g e ttin g th e pay back to th e A m e r ic a n a d v a n c in g m o r e c r e d it, o r w o u ld y o u g o ld p e o p le s , o r w o u ld th e are b a s is , o r o n a f a ir ly c o m p e t i t i v e b a s i s ; b u t in t h e l a s t fe w p o u n d h a s flu c tu a te d fr o m fo r e ig n a ll p r a c tic a l th in g s , b u s i n e s s a n d a l l ---------G overnor M e y e r . I as we you exchange u n d e rsta n d , it but per e x p o rte r? W o u ld y o u d o it w ith T h ese w e lc o m e > . N o w , w h a t id e a s o r p la n s d o y o u h a v e fo r fin a n c in g th e s e e x p o rts, or fro m MAINTAINING AVEEAGE PURCHASING POWER OF DOLLAR 181 get m ore not u n d e r ta k e to endeavor to M r. B tim in g s o lv e th e th e p r o b le m s o f th e b r e a d k o w n in in te r n a tio n a l tr a d e . M r. B can pay u s b y . W e l l , w e c a n n o t s e ll c o m m o d i t i e s fo r th e m G overnor M back h om e, can w e? . The e y e r c h a n g e in carry th e c o m m o d itie s fo r w ere th in g to be if 80 6 ,0 0 0 ,0 0 0 per a lo n g e r p e r io d . b a le s in ce n t, or If th e e x p o rts o f c o tto n th e y e a r , it w o u ld 5 ,0 0 0 ,0 0 0 b a le s , w ere be a very e x p o rte d d iffe r e n t in th e fir s t fo u r m o n t h s o f th e y e a r in s te a d o f b e in g s p r e a d e v e n ly o v e r th e y e a r . M r. B u s b y . If e x p o r t it. G overnor M th e y can not pay fo r it at any tim e , y o u can not . T hey w o u ld pay g r a d u a lly ; and, of cou rse, if t h e y d id n o t p a y f o r i t a t a n y t i m e , t h e y c o u ld b u y ; t h a t is a ll t h e r e u s b y . T h a t is m o s t o f t h e e le m e n t. G overnor M m illio n s of e y e r b a le s . It of is b o t h , c o tto n , y e a r c o n s id e r a b ly m o r e are w o rse. M r. B u s b y som ew h at d e p r e c ia te d . I n o t it s a b ecau se, and th a n tr o u b le we w e d id fa c t th a t c u rr e n c ie s, n o w , in s te a d . a ll, w e a fte r e x p o rte d in th e o f th e th e tim e e x p o r tin g cu rren t c o tto n c o n d itio n s . c o u n tr ie s fo r e ig n fo r c o n s id e r a b ly th a t cu rren cy have exchange, m ore m oney in th e ir ow n m oney, and th e re b y u n d e r s e ll th e A m e r ic a n tr a d e r w h o s e e k s to g o in t o h is o w n m a r k e t . v a lu e s a n d if th o se G overnor M . Let e y e r us ta k e th e c o tto n u s b y . I know e ls e , b u t y o u keep as m u ch ta lk in g te x tile a n y th in g b u t c o tto n . G overnor M e y e r . ^ N in d u s tr y , th in k , but in d u s tr ie s in th is c o u n t r y . M r . B u s b y . I m ig h t a d d th a t is one of th e 1929 th e abroad , a ls o know th is: n o tw ith s ta n d in g A m e r ic a n c r e d it. G overnor M e y e r . I T hat we am m ost e x p o rts have not th e b u y in g g iv e n # fa v o r in g . c r e d it u s b y . G overnor M N o e y e r . N o ; we have ju s t dow n . fo r e ig n e r s, of under n orm al and and s e lls it to tra n sp o r ts it and C h i n a , o r s o m e w h e r e e ls e , a n d g i v e s in w h ic h to p a y fo r it . he v a lu e s , t a k in g th e q u a n t it y r e a s o n a b ly c o n sta n t and u n v a r y in g , and if th a t y o u h a v e p o in te d th e w o r ld o u t ; b u t in a n s w e r t o t h a t t h e r e is p r a c t i c a l l y n o but w hat has fa lle n tre m e n th e m fro m are th e w a lk in g la s t th e v e stig e s tre e ts, h a v in g of ta n g ib le been p ro p e rty , s o ld out and w h ile we ta lk e ffe c t o f fin e is in th e o r ie s a ll o f t h o s e t h i n g s . a c o n d itio n about W e sta n d a rd set u p b y sta tu te . g o ld r e q u ir e m e n t s h o u ld G overnor M u s b y c r e d its h a v e th e b y th e p re se n t o f b a n k ru p tc y , and th e la c k and of we are c o n fid e n c e la r g e s t p a r t o f th e g o ld in th e I t h a s b e e n su g g e s te d th a t n o m in im u m b e s e t u p in th e s ta tu te s o f th e c o u n tr ie s o f u s b y . e y e r N o m in im u m w h a t? . R e q u ir e m e n t. G overnor M M r. B . Y e y e r . A M ou m ea n as reserves? reserv es. s e y e r . W e ll, W h a t w o u ld y o u h a v e to s a y o n t h a t ? th e F ed eral R eserve B oard , under th e p r e s e n t la w , c a n s u sp e n d th e r e se rv e r e q u ir e m e n t. u s b y . I t h a s n o t d o n e it , th o u g h . G overnor M M r. B u s b y . T h e r e h a s b e e n n o n e e d to d o it . e y e r . D o y o u b e lie v e t h a t th e U n i t e d S t a t e s a n d F r a n c e c a n c o n t in u e to g a t h e r in t h e m o n e t a r y g o ld s u p p l y o f th e w o r ld a n d e v e r have a n y th in g G overnor M m in im u m p e o p le h a d th o se m a n u fa c tu r e s th e m p u b lic d e b t a n d m e a s u r in g t h e m w h ic h w o r ld , a n d i t is t h e m e a s u r e o f v a lu e s a t t h e p r e s e n t t i m e , u n d e r o u r M r. W h a t d o e s t h e m a n u fa c t u r e r in E n g la n d d o ? c o n d itio n s v a lu e s , c o m m o d i t y lik e a u n ifo rm g o ld cu rren cy ran ge th ro u g h o u t th e w o r ld ? H e b u y s fu t u r e c o t t o n , t o b e d e liv e r e d in th r e e m o n t h s , o r s ix m o n t h s , and of w ill, th e p r iv a t e a n d w ere $ 1 5 ,0 0 0 ,0 0 0 th e t o c a ll c o n f id e n c e , t h a t is a s u n s u b T h a t is t h e t r o u b le . o f i m p o r t a n c e in n a tio n a l w e a lth , a d isc u sse d . e y e r s ta b iliz e d G overnor ; b u t w e h a v e t a lk e d a b o u t i t a ll o f t h e t im e . c o n d itio n s o n o u r tr a d e . at th e t h a t w o u ld u p s e t t h e a p p le c a r t ; w h ile w e fin d o u r s e lv e s s a y i n g , i f y o u fo r B u s b y , i f t h a t is w h a t y o u h a v e in m in d . M r. B w hat . A n d i f th e c u r r e n c y a n d c r e d it w e re b a s e d o n th e tru e v a lu e s r e m a in e d se p a ra te d I h a p p e n to k n o w to but t h e w o r l d t h a t a r e o n t h e g o l d b a s i s , a n d ----------- im p o r ta n t o f c o tto n som e n o th in g t h e f a u lt o f t h e c o m m o d i t ie s , a n d i t is n o t t h e f a u lt o f t h e p e o p le t h o t d o n ’t k n o w p o w e r is b r o k e n th e m p le a s e d p r a c tic a lly d o u s l y in v a l u e , a s m e a s u r e d b y t h e g o l d c u r r e n c y d o l l a r , a n d i t is n o t M r. B t h a t in on t h a t p a r t o f y o u r s t a t e m e n t , I s a y to y o u . $ 9 2 0 ,0 0 0 ,0 0 0 , b e fo r e w e p a s s e d th e la s t ta r iff a c t. th a t, b u t I I # o based w e w o u ld n o t h a v e th is c o n d itio n y o u h a v e p o in te d o u t , a n d w e c o u ld M r. B b ecau se y o u flu c to g e t o v e r th is id e a , t h a t th e c r e d it s e t-u p b e in g n o t h a v e t h a t c o n d itio n a b o u t c o tto n , o f cou rse, as a n y b o d y a b o u t it overcom e t h a t c u r r e n c y w a s m e a s u r e d in r e la t io n to th e v a lu e s o f t h a t c u r r e n c y , i n s t a n c e , a n d l e t u s t a k e t h e p r o c e s s e s ---------M r. B u s b y s till s p in n in g in s e llin g c o m m o d it ie s h e r e , g e t th e ir m o n e y b a c k h o m e a n d e x c h a n g e it to a b o u t th e o r ie s a n d th e fin e -s p u n n o t io n s o f w h a t s o m e b o d y m i g h t d o are a y e a r a g o , a lth o u g h a s i t is r a t e d , have o f c o m m o d it ie s , lik e th e 7 8 4 u s e d b y th e B u r e a u o f L a b o r S t a t is t ic s — m illio n s M r. B m a n u fa c tu r e r s t o m a k e c o n t r a c t s ---------- c o m m o d ity e y e r tr ie d h a s r e c e n tly b e e n M r. B tim e e le m e n t— t h a t c o m p e ls I tim e , G overnor M # th e th e s ta n tia l as th e fa b r ic o f d r e a m s , ju s t as y o u p o in te d o u t, a n d n o b o d y u n le ss t h e y u s a t h o m e t o m a k e s o m e r e a d j u s t m e n t in o u r f in a n c ia l m a c h i n e r y t o . u s b y p resen t know s how ab road w h ere c a l c u l a t i o n s , b e c a u s e i t is u n c e r t a i n , i t h a m p e r s b u s i n e s s . w o r ld can W e ll, tu a tio n s o f t h a t m a g n it u d e a n d h a v e n o b a s is o n w h ic h to m a k e th e ir fo r g o o d s ? th a t c e n t. w e e k s, th e $ 3 .2 5 u p t o $ 3 .8 0 , w h ic h is a b o u t 1 5 o r 2 0 it s ix m o n t h s N o w , t h a t b u s in e s s is d o n e o n a m a n u f a c t u r i n g e y e r been s ta n c e s , th e g o ld M r. B . I t is o n l y a fe w a m o u n t o f g o ld , a n d u s b y . a b le to g e t it o u t ; has m oved to years th ey ago w o u ld th a t th e F r e n c h h a d not have and n ow , b y had it if th e a c h a n g e o f c ir c u m F ran ce. M o s t o f th a t c h a n g e w a s b r o u g h t a b o u t b y s ta b iliz in g h e r fr a n c a t 3 .9 1 7 5 c e n t s p e r f r a n c , i n s t e a d o f 1 9 .3 c e n t s , a n d s h e w a s a b le t o c a n c e l 8 0 p e r c e n t o f h e r d e b t s , a n d t h a t is t h e t r o u b l e in t h i s co u n try to -d a y . 182 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 183 I f w e c o u ld c a n c e l 8 0 p e r c e n t o f o u r d e b t s , p r iv a te a n d p u b lic , w e A F T E R N O O N S E S S IO N w o u l d h a v e n o t r o u b l e i n g e t t i n g a l o n g , b u t t h e d e b t s a r e w h a t is t h e b u r d e n o n th e p e o p le o f th e c o u n t r y , a n d th e fix e d c h a r g e s . G overnor M M r. B e y e r . Y es; . E very u s b y M r. G t h e r e is n o d o u b t a b o u t t h a t . c o u n t r y in ord er. th e w o r ld e x c e p t th e U n it e d S ta te s o ld sbo r o u g h . G e n tle m e n , M r. B u sby, you M r. B u s b y . th e su b c o m m itte e w ill com e to m a y p roceed. G o v e r n o r M e y e r , a s y o u v e r y w e ll k n o w , t h e o b je c t o f h a s s o m a n ip u la te d its c u r r e n c y w ith in th e la s t 15 y e a r s as to c a n c e l o u r a c tiv ity a ll t h e w a y f r o m u n s a t is fa c t o r y fin a n c ia l c o n d it io n in w h ic h t h e p e o p le o f o u r c o u n t r y up a t o t a l o f its in te r n a t io n a l d e b t s , s u c h a s R u s s ia d id t o a la r g e p o r t io n , s u c h a s h a s b e e n d o n e b y E n g la n d in g o in g o ff th e g o ld s t a n d a r d r e c e n tly . G overnor M . e y e r Is n o t th a t a fa c t? G e r m a n y is s t r u g g l i n g t o m a i n t a i n h e r c u r r e n c y a t th e p re se n t tim e . M r. B . She u s b y t im e , c a n c e le d her d o m e s tic e y e r . Y es; b u t t h e y are m a k in g , a s th e r e s u lt o f th a t e x p e r i e n c e , w h i c h y o u r e g a r d a s a h a p p y e x p e r i e n c e ----------M r. B u s b y G overnor w re tch e d . N M o ; I do n o t. e y e r e x p e r ie n c e in tre m e n d o u s s tr u g g le th e h is to r y now to a n o th e r e x p e r ie n c e o f a k in d M r. B . u sb y I do th e ir not p e o p le th e ir as th e m ost a re m a k in g cu rren cy, and a a v o id w h ic h t h e y a b h o r . regard th a t as a happy e x p e rie n c e , and h a v e s p o k e n in t h e H o u s e m a n y t im e s a n d h a v e n e v e r in t im a t e d th e m s e lv e s , a n d d is c o v e r s o m e rem edy a ls o , if p o s s ib le , to fo r th e p resen t v ery d is c o v e r s o m e p reven t a fu n d a m e n ta l re c u rr e n c e o f th is v e r y I a m s u .r e y ° u a r e a ? f a m i l i a r a s a l m o s t a n y o n e e l s e w i t h t h e s u f f e r in g a n d d is t r e s s t h a t is in e x is t e n c e f r o m o th e r. T o m y m in d i t is v e r y c le a r t h a t t h e r e is a b r e a k d o w n , b e c a u s e o f th e n a tu r e o f th e s e t-u p I a t s h o r t e r in t e r v a ls in fin a n c ia l c o n d it io n . one end o f th e c u r r e n c y and o f o u r la n d c r e d it s y s t e m to th e o f th e th e fu tu r e a s in th e p a s t to a lik e d e p lo r a b le I t is n o t n e c e s s a r y , u n d e r o u r s e t -u p , to r e c u r to s im ila i p e r io d s o f d e p r e s s io n a s th is , a n d I w is h y o u w o u ld g iv e u s a n y lig h t t h a t y o u m a y h a v e r e g a r d in g th e s u b je c t o f s e c u r in g s ta b iliz a tio n t h a t w ill p r e v e n t it . any s u c h th in g . G overnor M . e y e r I am n o t, M r. C on gressm an , a b e lie v e r in th e id e a t h a t y o u r e a lly w a n t to a c h ie v e a s t a t i c p o s i t io n , in a ll r e s p e c t s , G overnor M M r. B to a n d c r e d it s e t -u p , I se e n o w a y o f p r e v e n tin g th e th in g fr o m r e c u r r in g regarded o f th e w o r ld — t h e y m a in ta in try c o u n t r y ; a n d I m ig h t a d d t h a t , if w e r e m a in o n th e p r e se n t c u r r e n c y I beg you r pardon. . W h ic h to m e t h o d o r s e t-u p w h e r e b y w e c a n u n s a tis fa c to r y c o n d itio n . . h a s a lr e a d y , a t o n e a n d in te r n a l d e b ts . G overnor M fin d is e y e r . u s b y I . I m is u n d e r s to o d , th e n . have n ot com e to e c o n o m ic a lly t h a t c o n c lu s io n , n o r h a v e g e ste d a n y th in g o f th e k in d ; b u t I a m I su g s p e a k in g n o w d e a lin g w ith th e a p p e a ls to s p e a k in g . anyone N o m a tte r how m uch a ste a d y c o n d itio n as a n id e a l, I th in k w h e n y o u g e t d o w n to it , a n y b u s in e s s m a n w ill t r y t o g o a h e a d , a n d w a n t t o g o a h e a d in t h e w o r ld . s u b je c t o f a fa ir d e a l to th e A m e r ic a n d e b to r in th e s c h e m e o f th in g s Y ou u n d e r w h ic h w e tr y to c a r r y o n b u s in e s s a n d in s t a b ili t y o f e c o n o m ic fa c t o r s b e t w e e n e a c h p a r t o f t h e c o u n t r y , in a to liv e a n d g e t a liv e li w a n t y o u r b o y to g o a h ea d . W e h a v e in te r n a l c o m p e titio n h o o d , a n d n o t b e fo r c e d o u t in to th e c o ld , h o m e le s s , a n d w it h o u t th e w ay, h o p e o f o b ta in in g e m p lo y m e n t u n d e r o u r s y s te m . e c o n o m ic f a c t o r s : F o r in s ta n c e , ta k e T e x a s a n d O k la h o m a , w h ic h as w e ll as in te r n a t io n a l c o m p e titio n and th e and in s ta b ility of are T h a t is w h y I a llu d e to th o s e t h in g s . b ig c o tto n -p r o d u c in g S ta t e s . G overnor M w ill fin d t h a t t h e p r o p o r t io n o f c o t t o n g r o w n in th e W e s t h a s in c r e a s e d v ie w . e y e r . I t h in k w e a r e a ll s y m p h a t h e t i c to t h a t p o i n t o f I h a v e ju s t a n sw e re d th a t G e rm a n y ab h orred th e th o u g h t o f th e d e g e n e r a tio n o f h e r c u r r e n c y . M r. B u s b y M r. G o ld sb o r o u g h . I s h o u ld s a y s o . . e n o r m o u s ly and h a s ta k e n If you aw ay w ill g o b a c k 3 0 o r 4 0 y e a r s y o u th e m arket fo r a lo t o f th e c o tto n g r o w n in t h e C a r o lin a s a n d G e o r g ia . T h e y w e r e a ll w ip e d o u t . T h a t d o e s n o t a lt e r t h e f a c t t h a t r e la t iv e s t a b i l i t y is d e s ir a b le , a n d G o v e r n o r M e y e r , a s fa r a s I k n o w , th e fe e lin g lim its to th e area o f flu c tu a tio n are d e s ir a b le . T h e re fo re , I do not o f t h e s u b c o m m i t t e e is t h a t , a s n e a r l y a s t h e y h a v e b e e n a b le t o a s c e r th in k t h a t y o u a n d I d iffe r , a n d I o n ly m a k e th e d is t in c tio n b e c a u s e I ta in d o n o t b e lie v e th e h u m a n r a c e w a n ts t h i n k t h a t a n y h u m a n b e i n g ----------- up to th is tim e , th e d e b t o r a n d c r e d ito r . 1926 le v e l r e p r e se n ts a fa ir s it u a tio n as T h e r e h a s c e r ta in ly b e e n n o d is p o s itio n o n to th e p a r t o f a n y m e m b e r o f th e s u b c o m m itte e , o r M r . B u s b y , to c re a te a s it u a tio n t h a t w o u ld b e u n fa ir to th e c r e d ito r . N o w , i f 1 9 2 6 is n o t r i g h t , w e w o u ld lik e t o have a ll t h e a s s is t a n c e w e c a n g e t to fix th e p o i n t w h ic h is f a ir a n d w o u ld a llo w p e o p le to g e t fro m under th e ir e c o n o m ic u n its . G overnor M M r. G b u rd en s, and to resu m e th e ir n o r m a l p o s itio n s as T h a t is o u r p o s it io n . e y e r . G overnor M eyer, u s b y . D G overnor M o you th in k it w a n ts p o s itio n , a n d a r e c u r r in g we w o u ld lik e to a d jo u r n I c o n d itio n do not lik e th e u n h a p p ily p a s s in g th r o u g h ? e y e r . I c e r ta in ly d o n o t. M r . B u s b y . W e ll, n o w , w h a t d o e s y o u r v e r y fa r -r e a c h in g k n o w le d g e o f th e h a n d lin g o f d o m e s tic a n d in te r n a t io n a l c r e d it t o -d a y , a n d b a n k in g p r o b le m s , p o in t o u t to y o u a s a w a y t o p r e v e n t u s fr o m . T h a t is a f a ir e n o u g h p o s i t io n , M r . C h a ir m a n . o ld sb o r o u g h M r. B on e w e are n o w a sta tic to th is c o n d itio n . s a c r ific e in I th r o w in g th in k aw ay it is som e w o rth y fe tis h , of su ch us m a ld n g as th e r e c u r r in g a lm o s t any a n c ie n t id e a of u n t il 2 o ’c lo c k , a n d w e w o u ld lik e t o h e a r y o u a g a in , a s th e r e a re a fe w b a n k in g t h a t w e a re s till p la y in g t o , in o r d e r t o p r e v e n t th is c o n d it io n q u e s tio n s w e w o u ld lik e to a s k y o u . r e c u r r in g . G overnor M e y e r . I w ill b e v e r y g la d to c o m e b a c k . ( T h e r e u p o n a r e c e s s w a s t a k e n in t h e h e a r in g u n t il 2 o ’ c lo c k p . m . o f t h e s a m e d a y .) T h i s is a r e a l p r o b le m th e o r ie s . 11 s u b s ta n tia l. G overnor M v ie w . we can e y e r . la y I am a s id e w ith m e, th e o r ie s , e n tir e ly we and can sy m p a th e tic I do get to n o t b e lie v e in to so m e th in o 1 your p o in t of N o w , if y o u a sk m e w h a t I c o n sid e r th e m o s t im p o r ta n t fa c to r in a c h i e v i n g r e la t i v e s t a b i l i t y , w h i c h is w h a t v o u p o s s i b l e ---------- an d I b o th t h i n k is MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 185 184 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR M r. B . u s b y fe ll S u r e ly . G overnor M . e y e r W e do not th in k a b s o lu te s ta b ility is p o s s i b l e , b u t r e la tiv e s t a b ilit y w ith th e e lim in a tio n o f th e in fla tio n a n d s p e c u la tio n t h a t w e h a v e d is c u s s e d . in g s it u a tio n as m ost i n 'v i e w r e s e r v e b a n k a c t i v i t i e s a n d ----------M r. B sy ste m u s b y . Y ’ m e n tio n e d ou of th e c o n c e n tr a tio n of r e o r g a n iz a tio n of th e b a n k in g G overnor M M r. B u s b y . I e y e r . t h in k it is o n e o f th e m o s t im p o r t a n t fa c t o r s . A re yo u o f th e o p in io n t h a t th e c o m p t r o lle r ’s n o tio n s . W o u ld e y e r you m in d le ttin g m e t e ll you w hat I u s b y th a t . Y es; p h ase G overnor M b a n k in g u n ifie d but of . e y e r th a t you m a y h a v e th e m th e y on gu ards is under le g is la tio n do been Y ou in b e lie v e is , b an ks, or as is p a s s e d has th in k u s b y you put m uch tim e banks v a lu e s b y d r ie d up w h ic h are p ro p e r b a n k in g sa fe b e in g e n la r g e s th e ask ed u n ifo r m ity h ere, fu n c tio n a ll o t h e r k in d s o f b a n k s . Y ou u n d er su ch of s tr ic tly seem ed resou rces, now , and is r e a l l y becau se I 'd o th in k u se th e not to th e not care to p u rsu e fu r th e r . .. e n tir e th e ra te o f m ore com pared is s u e , a n y e y e r if . W e ll, y o u I to w a s fra n k you p la c e w ith in th e m in d c o m m e r c ia l and to have, I te m s h o u ld sy ste m , or th in k y o u can sy ste m w hat very m u ch b e — w h e th e r a m e it s h o u ld w ith o u t th in k is a S ta t e -w id e bran ch w h a t th e s y s bran ch ban k s, or w ith b a n k s , o r o th e r k in d s o f b a n k s — w h e n y o u h a v e a s y s t e m a d e q u a te la w s , r e g u la tio n s , a n d s u p e r v is io n and th e fr o m B . W h a te v e r u s b y is to s e ll th e b a n k in g b a n k in g c r e d its p e o p le . , i t s ----------G overnor M M r. B u s b y e y e r . . sy ste m to . in th e fir s t th e se c o n d be, w ant . its p rim a r y th o se cred p r e s e n t, s it u a tio n b a n k i n g is c e r t a in ly we are a fa c to r m uch but I have fa ile d very . e y e r N o w . Y es. O f c o u r s e , a s r e la te d , I do not know n e v e r seen e x te n s iv e ly a n y s e c tio n but w hat you not c r e d its ? a w ay of im p r o v in g th e m ore under fu n c tio n s w ill b e g in to a v o id to th e due re a c tio n s of s u ffe r in g . I th e n a tio n a l o f b a n k in g d is a s tr o u s do th a t h as d e fin e d a c h a ra c te r, one c o n tr ib u te d s it u a tio n great e x c e s s iv e n ot m ean re s u lt o f a n y a c u te -a c h a rte r to say tilin g , b u t to th e w h ic h s itu a p r o b a b ly u s b y . I n o t ic e t h a t M r . W h i t n e y is r e p o r t e d $ 6 ,0 0 0 ,0 0 0 ,0 0 0 G overnor M M r. B u s b y w a n t to b u te th a t e y e r . u se to I in . Y la c k Y o r k S to c k E x c h a n g e lo s t m o r e th e la s t tw o ou m e a n in p r ic e ? in p r ic e , y e s ; m ean t h a t in a v a lu e in I a n o th e r w a y in of p rop er to h a v e sta te d Y o r k sto c k m a rk e t, do w eek s. n ot say in a m o m e n t. fin a n c in g v a lu e , b e c a u se W o u ld th ro u g h you b a n k in g a ttr i c r e d it, or p re v e n ts an G overnor M a b ility e y e r . I M r. B s e t-u p u s b y w ith . N o w w h ic h sy ste m s— th a t I to do c o n tr a c t th ro u g h not know th in k th ere o u r b a n k in g w h e th e r I w o u ld su ch , i t is m y o p i n io n we th e y as w e are n o w are p r o b a b ly c r e d it a n d a ttr ib u te it to have w ill not been great th ro u g h o u t u se in b e in g fo llo w e d e x p e r ie n c in g . W h a t is y o u r s u g g e s t io n th a t th e c u rr e n c y a fflic te d sta n d th in g s th a t w e re n o t peace by a n d b a n k in g our or n a tio n a l w ar tim e , a f in a n c ia l c r is is , - a lo n g T h a t lin e ? th a t th e s y s te m is w o r k in g a ll r ig h t if th e r e e x tr a o r d in a r y u se ? I t o u g h t to b e . to sy ste m t h a t ---------- w h a t y o u r o b s e r v a tio n h a s b e e n , o f th e in th a t co u n try w h ere p a r tic u la r banks have s e c tio n G overnor M e y e r . I am in s y m p a t h y w ith s o m e o f th e c r itic is m th e e x is tin g b a n k in g s y s t e m . o u g h t t h e y n o t , in o r d e r to h a v e p r o p e r s e c u r it y fo r t h e m ? u s b y a m o n th , do w a r tim e to a n y g r e a t e x t e n t , th e n i t s h o w s it s e ffic ie n c y fo llo w in g a n y • T h o s e c r e d its o u g h t , p r im a r ily , to b e r e la te d to v a lu e s , G overnor M 1929, is n o s p e c ia l u s e o f i t o u t o f t h e o r d in a r y , b u t i f i t is u s e d in p e a c e o r M r. B M r. B and d iffic u lt ie s is e x c lu s i v e ly I s i t y o u r s u g g e s tio n .. e y e r . in th e m e n tio n e d a t th e h e a r in g t h a t m ig h t h a v e iia d s o m e t h in g to d o w ith it . G overnor M u s b y u sed , r e g io n a l I t o u g h t t o b e v. Jn o r d e r to tr a n s a c t b u s in e s s . . m ay w ho th e and su b seq u en t w h ic h rendered as p r o p e r lim its , y o u w ith o u t g e ttin g o u t o f jo in t a n d M r. we a n y s p e c ific t h in g . p la c e . fu n c tio n has w h ereas b a n k in g t h a t p e r m its a p r o p e r d e fin itio n o f th e fu n c tio n s o f c o m m e r c ia l b a n k s , in p la c e , a n d and t h r o u g h a fu n d a m e n t a l w e a k n e s s in t h e c u r r e n c y s e t -u p , w h ic h h o ld s . b e tte r d e te r m in e be any I U n ite d u n d o u b te d ly $ 3 ,0 0 0 ,0 0 0 ,0 0 0 1928 b a n k in g have and ask ed ou e n tire t e ll y o u ; t h a t is a ll. m a la d ju s tm e n ts th o se and to c u r r e n c y s e t - u p , i n o r d e r t o u s e it ? - Y th e a s k e d m e w h a t s te p s I w o u ld s u g g e s t m y im p o r ta n t . w h o le y e a r s lo s s e s o f m o r e o f cu rren cy th a n w ith you ought e y e r 11 w e a lth o r s e t-u p th e M or $ 1 5 0 ,0 0 0 ,0 0 0 ,0 0 0 ; th in g , b u t w h e n it c o m e s to w h a t k in d o f b a n k in g s y s t e m G overnor co u n try , 10 n a tio n a l to t h a t t h e s e c u r itie s lis t e d o n t h e N e w I th a t _ th e im p o r ta n t c r e d it as M r. B nam e i t is n o t n a t io n a l. th a t w o u ld h a v e r e a c t e d in a m ild e r d e g r e e . a s m a ll p a r t o f e n title d of of su ch th a n o n ly Take b e fo r e a S e n a t e c o m m it t e e in v e s t ig a t in g th e N e w c o n d itio n s . t h a t is t r u l y n a t i o n a l i n c o m p r is e s fa ilin g . 1 9 2 9 , a n d e v e n G e o r g ia , F lo r th e r e is s o m e t h in g w r o n g b e s id e s t h e b a n k m any can n o t m ake . . . now at a w eek, r e s tr ic te d th e y to th e la s t sch em e and tio n p assed . W e llj th a t bad Y ou th e s u p e r v is io n th a t th e in w here n a tio n a l s u p e r v is io n th r e a te n e d th e and I ch a rte rs, sta rte d 1921 $ 1 0 0 ,0 0 0 ,0 0 0 ,0 0 0 and n a tio n a l banks th a t a k in d th ro u g h th e n a tio n a l b a n k in g s y s te m , in s u r e to of th e except in c r e a s e d fr e q u e n tly to w ill g e t under a n a tio n a l b a n k in g s y s te m b a n k in g to o year “ n a tio n a l b a n k in g s y s t e m ,” M r. B if is n a tio n a l b a n k in g s y s te m to ta l up s ta b ility , o r g a n iz e d it e ffe c t , a s w e ll a s in n a m e . th e ta k e th a t y o u r e la tiv e th a t b a n k in g can h ave to th e add $ 7 5 0 ,0 0 0 ,0 0 0 th e n a tio n a l b a n k in g la w s , b e c a u s e s o m e S t a t e c o m m e r c ia l b a n k s , a n d real p ro gress not c o n sid e ra tio n . m o d ify has w ant w ith d r a w in g fr o m do, le g is la t io n a fte r y e a r , to not s ta b ility , n a tio n a l fr e q u e n tly w ill d o w h e n do sy ste m ; c o n tro l The 6 ,0 0 0 s itu a tio n , a n d I sh o w s b a n k in g I it. and as m ig h t G overnor M M r. B tim e a n n u a l a c tu a l in c o m e th a t th e p e o p le h a v e b e e n a c c u s to m e d to r e c e iv in g th in k ? w ith I d e p r e c ia te d or o f b r a n c h b a n k in g w it h in tr a d e a r e a s is th e p r o p e r s e t -u p ? G overnor M N ow , m e a su rin g o f th e c o u n t r y a s b e in g fu n d a m e n t a l in y o u r id e a . th e S ta te s, w h ere w e h a v e h a d th a n , th e to id a , a n d S o u th C a r o lin a te r r ito r y , a fte r th e b o o m , a n d so o n . I re g a rd th e r e o r g a n iz a tio n o f th e b a n k im p o r ta n t, p r io r s e c tio n o f th e N o r th w e s t fr o m v a lu e s I d o n o t th in k y o u c o u ld te ll h o w of th e w o u ld w o r k , th o u g h , u n til y o u h a v e a tr u ly n a tio n a l b a n k in g s y s t e m , w ith its fu n c tio n s r e s tr ic te d to c o m m e r c ia l b a n k in g a n d a c tiv itie s of a c h a ra c te r th a t p r o p e r ly can be added to th e fu n c tio n of MAINTAINING AVERAGE PURCHASING TOWER OF DOLLAR 187 186 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR I r e c e iv in g d e p o s its a n d m a k in g lo a n s , fo r th e m o s t p a r t fo r c o m m e r c ia l p u r p o s e s a n d b u s in e s s p u r p o s e s , a n d a v o id th e u n d u e u s e o f th e v o lu m e o f c r e d it fo r s p e c u la tiv e p u r p o s e s . S p e c u la t io n g o e s o n in b u s in e s s a t M r. B to d raw a lin e o f d e m a r c a t i o n b e tw e e n one part of b u s in e s s a n d c a ll i t le g it im a t e , a n d a n o t h e r p a r t a n d c a ll it s p e c u la t iv e ; b e c a u s e in s p e c u la t iv e t i m e s , th e r e is a s t i m u l a t io n o f le g i t im a t e b u s i n e s s in to s p e c u la tiv e a c tiv ity . Y ou can n o t e n tir e ly s e p a r a te le g iti M r. B . u s b y W e ll, in 1838 th e re began a very s e r io u s m oney except In th e 1860 s e t-u p of p o litic a l w a r s th e b a n k in g su ch and as c r e d it we e x p e rie n c e stru ctu re , w ith th e in A m e r ic a . n a tio n a l s im ila r to and c r e d it th is. sy ste m s. W ith in th e F o llo w in g 1 8 9 0 ’s w e h a d we of 30 had a are I ju s t th o s e e ffe c ts , a n d w h a t c a u s e d to g e t a t th e fu n d a m e n ta ls m a n ife s t n e c e s s ity th em ? W h at I am th a t a re in v o lv e d in to c h a n g e fr o m tr y in g to d o is o u r s e t-u p , a n d th e it so a s to se c u re su c h lig h t a s w e th e g ro w th to . T h ere e y e r are c e r ta in o f a y o u t h fu l n a tio n . p e r io d s W hen of great a c tiv ity b e in g b u ilt, c o n s tr u c tio n th is c o u n t r y w a s e x p a n d in g a c tiv itie s w e re b e in g stim u la te d , th e s e e n te r p r is e s , th e r e w a s , o f c o u r s e , a t e n d e n c y fo r s p e c u la t io n . G o G overnor M e y e r y o u th fu l c o u n tr y , w ith a rap i d l y g r o w in g p o p u la t i o n , is lik e ly to h a v e p e r io d s o f e x tr e m e a c t iv it y and end s p e c u la tio n at th e o f it, and r e a c tio n s a fte r th a t. s e ttle d and g r a tio n , a n d d e p r e s s io n s # I th in k th a t n o w w e are m o r e m a tu re d th e red u ced b ir th ra te , I th a t is one on of im m i th e im u s b y . G overnor M v io le n t e y e r . N o , i t w ill n o t ; b u t w h ic h in te r r u p tio n in are th a t th e and th e ra te o f g r o w t h , e c o n o m ic a lly , in I w ill s a y c h a r a c te r is tic s g ro w th , on account p ro p o rtio n b ility o f th e c o u n t r y , o u g h t to b e n o w U n ite d and cent I th in k S ta tes th a t in th e o f in d u s tr ia l a n d per annum , w hat p ast to th e th is , th a t th o se of r a p id g ro w th , of o v e r d o in g th e fu n d a m e n ta l s ta m o r e s u s c e p t ib le o f c o n t r o l in u s b y has have been ta lk e d a ra te com pounded. N ow , th e U n ite d th a t S ta te s. . in as fo r 100 years, b u s in e s s , in th e q u e s tio n th e g ro w th of th e of popu is g e t a n y th in g lik e a s u b s t a n t ia l r u le o n c o m m e r c ia l d e v e lo p m e n t. W e ll, I th in k S ta te s up to do e y e r . you W h y e y e r . I i t is m o r e g e n e r a l t h a n you r e fe r c o tto n p ro 1914. regard do th e it to as b e in g necessary fo r th e th e v a lu e o f g o ld ? I re g a rd it as n e c e ssa ry ? . T h e la w s t a t e s it . am n o t t a lk in g a b o u t th e la w . e y e r . W e a re fig u r in g o n I see. u s b y . B ecau se and p riv a tio n s u ffe r in g th e la w , o r s o m e t h in g , h a s c a u s e d and in e q u a lit y in th e to o m on ey, w hen m uch we are s u p p o s e d t o h a v e a n e q u a l c h a n c e in t h e g a m e o f c o m m e r c e , t o o b t a in a liv e lih o o d , a n d t h e o t h e r t h in g s n e c e s s a r y fo r u s t o h a v e , if w e G overnor M th e e y e r sta n d a rd are . fo r th e Y w a n t to ou co u n try ? ask Y ou m e know w hy th e g o ld th a t, I am sta n d a rd is su re , fu lly as th e of w e ll a s I d o . M r. B u s b y W h y do . I ask ed y o u you regard it th is: as b e in g n e c e s s a iy to r e la te m oney o u r c o u n t r y to t h e v a lu e o f g o ld , in d e p e n d e n t o f t h e s t a t u t e t o w h ic h h a v e re c u rr e d — th e c o m m o d it y v a lu e o f g o ld ? e y e r . I s u p p o s e th e ju s tific a tio n sta n d a rd o f v a lu e is t h e fa c t fo r m a k in g g o ld th a t it is o n e th e c o m m o d ity w h ic h h a s b e e n a c c e p t e d b y m o r e p e o p le in t h e w o r ld a s t h e b a s is o r sta n d a rd in th e o f v a lu e w o r ld th a n a n y th in g e ls e . G o ld fo r th e p u r p o se o f e x c h a n g e . M r. B . u s b y B u t it h a p p e n s th a t o n ly w o r ld t o -d a y c a n c la im 45 c o u n t r ie s in can be u sed an yw h ere I t is a s t a n d a r d o f v a l u e th e a b o u t f o u r c o u n t r ie s in th e to b e o n th e g o ld s ta n d a r d , a n d y o u h a v e g o t w o r ld w h ic h , th r o u g h th e ir e x c h a n g e r a te s , h a v e about as n o r m a l, o f g ro w th of in th e p o p u la tio n is w hat we have c a lle d e y e r . B ut you c a n g o w ith a n o u n c e o f g o ld in to any o n e o f th o s e 4 5 c o u n tr ie s , a n d y o u c a n g e t a c o r r e s p o n d in g a m o u n t o f w h a t e v e r m o n e y t h e y h a v e in e x c h a n g e f o r t h e g o l d ; b u t y o u c a n n o t t a k e w h a t t h e y h a v e a s m o n e y a n d c o m e in to a g o ld s t a n d a r d c o u n t r y and in can s e e , is even a g r ic u lt u r a l p r o d u c t io n — a r a te o f a b o u t 3 p e r in t h e p a s t n o r m a l c y in we of in c r e a s in g . Y es. G overnor M th e d ir e c tio n o f r e la tiv e s t a b ilit y . B u t u s b y M r. B W i l l t h a t s ta b iliz e o u r c o m m o d it ie s , t h o u g h ? m o v e m e n ts, not th e ir c u r r e n c y r e la te d to g o ld , w h e n t h e y h a v e n o t g o t th e g o ld . p o r t a n t f u n d a m e n t a l f a c t o r s in t h e s i t u a t i o n . M r. B n orm al m easu re is m o re th a n a n y o th e r c o m m o d ity . > th e r e s tr ic tio n s th in k e x a m in e d , o rd er to . W h y G overnor M a n d o u r p o p u la t io n is m o r e w ill in c r e a s e le s s r a p id ly , w i t h and u s b y b a s is o f th e ec o n o m ic a lly th e s e e a n in c r e a s e o f a b o u t 3 p e r c e n t in G overnor M ah ead. . A n be c h a n g in g th e la w . W h a t d o y o u r e g a r d ----------- E xcu se m e. e y e r can G overnor M you u s b y of Y ou M r. B and to d e v e lo p . M r. B y e a r s in G overnor M w ith th e s u c c e s s fu l r e s u lts a n d p r o fita b le r e w a r d s fo r p e o p le e n g a g in g in 40 M r. B in th e w e s t, n e w la n d s w e r e b e in g b r o u g h t in to c u lt iv a t io n , r a ilr o a d s w ere to p o p u la tio n g o in g to liv e h e r e . c a n in lo o k in g f o r w a r d to a p r o p e r m o v e in m a k i n g t h a t c h a n g e . G overnor M have p e r c e n t in c r e a s e M r. B W h a t w o u ld y o u h a v e to s u g g e s t w ith r e g a r d to I U n it e d S t a t e s to r e la te its m o n e y n o w a d ju s tin g o u r s e lv e s a fte r th e w a r , a s th e r e s u lt o f th e d e s tr u c tio n o f p r o p e r ty b y th e w a r. th e p e r c e n t in c r e a s e in d u c tio n o f th e U n it e d tim e b e tte r e x c u s e to o ffe r s a id it w a s th e r e s u lt o f th e w a r , a n d . of 3 G overnor M T h e n , in 1 9 2 1 , t h o s e w h o h e a r m a n y p e o p le in t h is p r e s e n t t i m e , 1 9 3 2 , s a y i n g t h a t w e to 3 to . a n o th e r p e r io d o f d e p r e s s io n , a n d n o th in g w a s s a id a b o u t a n y w a r . no th a t, t h a t is g o in g becau se a b o u t a s v a r ia b le a s y o u c o u ld im a g in e , a n d t h a t y o u m u s t ta k e a p e r io d bank b e in g tr ie d o u t fo r th e fir s t t im e , c a u s e d a p e r io d o f g r e a t u s e b a n k in g had a lw a y s if fu tu re , la t io n , a n d in t h e g o ld p r o d u c t io n , a n d I fin d t h a t e a c h o n e o f t h e m and c r e d it p a n ic , a n d th e r e w a s n o w a r o n a t t h a t tim e , a n d h a d n o t b e e n , m uch th e u s b y n o r m a lc y your m a t e b u s in e s s a n d s p e c u la t iv e b u s in e s s d u r in g a n in fla tio n . very in r a p id ly a s it d id b e fo r e . t im e s a s m u c h a s i t d o e s in s e c u r itie s , o r o th e r w is e . I t is v e r y h a r d doubt progress in reason of a every c a se g e t g o ld th e sta n d a rd c o u n tr ie s of w h ere fo r it. v a lu e th e y In fo r have o th e r w o r d s , g o ld , as fa r as I th e not g rea te r p a r t o f th e g o ld th e sta n d a rd , w o r ld , and th e f o r t h a t is t h a t i t is a p p a r e n t ly m o r e s u i t a b le f o r t h e p u r p o s e sta n d a rd of v a lu e and a m e d iu m of exchange th a n any o th e r p r o d u c t w h ic h h a s b e e n h e r e t o fo r e u s e d in h u m a n e x p e r ie n c e f o r t h o s e p u rp oses. I do not as a m e d iu m th in k th a t th e of exchange. v a lu e of g o ld has been m ade by its u se 188 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR M r. B . u s b y Y G overnor M m e d iu m in do n o t? ou . e y e r N ; I o t h i n k i t is t h e s t a n d a r d o f v a lu e a n d o f e x c h a n g e b e c a u s e i t is u n i v e r s a lly a c c e p t e d c o u n tr ie s M r. B w here . u s b y G overnor M th e y do not have th e g o ld th e as su ch , even sta n d a rd . T h e u n i v e r s a l i t y o f i t ---------. e y e r I th in k you can go to o f A f r i c a a n d , i f y o u h a v e g o ld in t h e f o r m a n a tiv e in th e heart o f g o ld d u s t , c a n g e t w h a t y o u w a n t. M r. B u s b y . G overnor M T h a t m ig h t b e tru e w ith . e y e r T hey do t h e e x i s t i n g s t a t u t e b u t ---------- not know a n y th in g about th e s t a t u t e in t h e ju n g le s o f A f r ic a . M r. B . u s b y I t is m y i n f o r m a t i o n 1t h a t a b o u t $ 1 o u t of every $14 m in e d is u s e d c o m m e r c ia lly , a n d th e o t h e r $ 1 3 a r e t a k e n c a r e o f b y th e sta tu te , w h ic h s h a ll th e be d e c la r e s th a t u n it o f v a lu e th e a n d F r a n c e h a v e m a in ta in e d in fo r ty -fiv e , h ere; and p lu s , becau se g r a in s th e o f fin e U n ite d g o ld S ta tes and t h a t k in d o f s t a t u t e , g o ld is a c c e p t a b le th e s e o th e r p la c e s t h a t y o u m e n tio n e d . G overnor M . e y e r I can not q u ite agree w ith th a t. G o ld has a l w a y s h a d a p u r c h a s i n g v a l u e ----------M r. B u s b y G overnor w as good . T h a t is w h a t I a m M . e y e r th e n . G o in g If you ta lk in g a b o u t. back to B ib lic a l days, you w ill fin d it w e re to g o b a c k to p r e h is to r ic d a y s , a n d y o u c o u ld fin d o u t w h a t h a p p e n e d th e n , y o u w o u ld p r o b a b l y fin d th a t it w a s a lw a y s a c c e p ta b le a s h a v in g a v a lu e in a s m a ll, c o m p r e s s e d f o r m , a n d I d o n o t ---------M r. B . I c o n c e d e a ll o f t h a t ; a n d t h e w o r ld h a s b e e n in t r o u b le u s b y w it h g o ld a s th e m e a s u r e o f v a lu e e v e r s in c e t h e d a y s y o u m e n t io n e d . D o y o u n o t th in k th a t 7 8 4 c o m m o d itie s , a s s o c ia te d t o g e t h e r lik e th e s t r a n d s o f a r o p e , w h e n s o m e g o u p a n d s o m e d o w n , a n d s o m e in a n d s o m e o u t , a n d y e t a ll o f th e m d e p e n d a b le th e se year in and c o m m o d i t ie s in year g o a lo n g in a r e a s o n a b ly s t r a ig h t lin e , o u t, u t i l i t y , in becau se order to h u m a n ity e x ist, w h e n has to ta k e n a c q u ir e to g e th e r and th e ir c o m p o s it e v a lu e d e t e r m in e d in a s c ie n tific w a y , s u c h th e B u reau we s h o u ld of Labor r e la te S ta tis tic s , th e cu rren cy, w o u ld th a n be one a M e y e r . M r. B u sby, I have v a lu e c o m m o d ity , b e c a u se g o ld , o u t o f h a b it, h a s b e e n a c c e p te d G overnor b e tte r to g o ld , as by w h ic h s im p ly th r o u g h o u t th e w o r ld ? th is fe e lin g about th a t: I t h in k i t is e a s y to se e th e e v ils w e k n o w , b u t i t is d iffic u lt to se e th e d iffic u ltie s o f a d iffe r e n t s t a n d a r d t h a t w e m ig h t a d o p t . O f c o u r s e , w e a ll k n o w I b e lie v e M r. B be th a t a n y u s b y . so a r a is e in c o m m o d itie s w o u ld have w e a k n e s s , b e c a u s e ---------- D o y o u n o t th in k t h a t g o ld a n d th e g o ld s ta n d a r d c a n m a n ip u la te d th e re b y t h a t th e g o ld s ta n d a r d h a s w e a k n e s s e s , a n d sta n d a rd as to th e g o ld c o u ld be cau se an ap paren t d o lla r , m u c h m a n ip u la te d and s c a r c ity e a s ie r th a n th e re b y of g o ld and t h e p r ic e s o f a ll s w in g ou r cu rren cy o u t o f r e la t io n , s u c h a s w e fin d i t n o w , t o t h e t r u e v a lu e s ? G overnor M w o r ld g o ld e y e r is s u b je c t to sc a tte re d M r. B u s b y . I d o n o t r e a lly t h in k t h a t th e g o ld s u p p ly o f th e m a n ip u la tio n . around over I th in k th e r e is a fa ir a m o u n t o f th e w o r ld . . T h e F e d e r a l R e s e r v e B o a r d , o f w h ic h y o u are g o v e r n o r , m a k e s a c a lc u la t io n in it s M a r c h n u m b e r , w h e r e it d is c lo s e s t h a t o u r c o u n t r y h a s s u ffic ie n t g o ld to is s u e $ 3 ,5 0 0 ,0 0 0 ,0 0 0 o f a d d itio n a l F e d e ra l r e s e rv e n o te s , a n d y e t r e ta in th e 4 0 p e r c e n t b a s is fo r th e c u r r e n c y ; a n d I t h in k i t is c o m m o n k n o w le d g e t h a t F r a n c e n e e d s $ 1 ,1 0 0 ,0 0 0 ,0 0 0 o f g o ld , a n d h a s p r a c tic a lly $ 3 ,0 0 0 ,0 0 0 ,0 0 0 . MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 189 N o w , if th e c u r r e n c ie s o f th e w o r ld a re g o in g to b e b a s e d o n g o ld , d o e s n o t it se e m to y o u th a t th e U n ite d S ta te s a n d F ra n c e h a v e g o tte n th in g s a little b it o u t o f b a la n c e b y a c q u ir in g th is g o ld t h a t e a c h o n e d o e s n o t n e e d a n d w ill n o t u s e ? G overnor M F ran ce? M r. B . I u s b y n a tio n , a n d th e g o ld w h ic h banks cam e la r g e s u p p ly d id how th e g o ld o f th e to th e U n ite d it g o t h e re , b e c a u se becam e and banks of fo r e ig n p e r io d s w h e n w o r ld ’s g o ld W h ile we we w ere a and c r e d ito r bank b a la n c e s c o u n tr ie s . had w a s la r g e ly g o ld i t w a s c a lle d S ta te s to g e t it h ere. th e r e c ip ie n t o f th e p r iv a te o v e r h e r e in a cco u n t. go u s, a n d w e c o n tin u e d . W e e y e r c e n tra l fo r e ig n know th e y ow ed G overnor M of . H ow e y e r The a n in o r d in a te ly d e p o site d h e re fo r o u r g o ld , i t w a s n o t o u r g o ld , b e c a u s e th e r e w a s a d e m a n d lia b ility a g a in s t it . I f w e h a d u sed th a t g o l d a s i f i t w e r e o u r g o l d ----------M r. B . I am u s b y G overnor M and e y e r ab sorbed n o t ta lk in g a b o u t th a t. . I f w e h a d u sed it in to th is g o ld as if it w e re o u r g o ld , o u r c r e d it s tr u c tu r e , w e w o u ld have been in a v e r y d iffic u lt p o s it io n w h e n t h e g o ld w a s d e m a n d e d . M r. B . I u s b y G overnor M a d m it th a t, b u t I e y e r n o t o u r g o ld . M r. B u sby. I . T h is am ta lk in g about h ere n o w , w h e n w e r o u g h ly n e e d w ith w h ic h to s ta b iliz e $ 4 ,3 5 0 ,0 0 0 ,0 0 0 , in our rough am in o r d in a te ta lk in g a b o u t s o m e t h in g e ls e . a m o u n t o f g o ld th e # , in o r d in a te over h ere am ount w as th a t a b o u t $ 2 ,5 0 0 ,0 0 0 ,0 0 0 le s s t h a n cu rren cy, fig u r e s . W e and have we have got m ore . is th a t got r o u g h ly th a n $ 1 ,3 0 0 , 0 0 0 , 0 0 0 , a c c o r d i n g t o y o u r b u l l e t i n ---------G overnor M M r. B e y e r G overnor M M r. G e y e r . Y e s ; a n d t h e r e q u i r e d r e s e r v e s ---------. o ld sb o r o u g h G overnor M M r. B G o ld . S u r p lu s r e s e r v e s . . Y e s ; s u r p lu s r e s e r v e s . u s b y e y e r . Y ou s till m a in t a in . W e ll, w h a t I a m u s b y h as g o tte n a 40 p er c en t reserve? Y es. in to th e g e t t i n g a t is t h i s : hands of tw o n a tio n s , w ith 1 6 2 ,0 0 0 ,0 0 0 p e o p le , to th e e x t e n t o f p r a c t i c a lly 7 0 p e r c e n t o f a ll o f th e g o ld in th e w o r ld , a n d th e o th e r 4 5 n a tio n s are h a v in g to u se m a k e s h ifts a n d g e t a lo n g w it h o u t th is g o ld , t h is v e r y d e s ir a b le g o ld s t a n d a r d o f m o n e t a r y s e t-u p . . . . D o y o u r e g a r d t h a t as b e in g a d e s ir a b le s it u a t io n ? G overnor M e y e r p o in t o f v ie w th a t . I do not th in k you can c o n sid e r it fro m th e o f d e s ir a b ilit y , b e c a u s e i t w a s n o t a d e s ir e o n o u r p a r t brou gh t it a b o u t. O th e r p e o p le ’s d e s ir e s brou gh t it about m o re th a n ou rs. M r. B u s b y . T hat s e t-u p , b e c a u se G overnor M M r. B th a t u s b y th o se we w hat I am g e ttin g a t, n o t c o n tro l o u r o w n th e w eak n ess of th e s itu a tio n . . I th in k w e c o u ld h a v e a lit t le m o r e th a n w e d id . W ith th e in te r n a tio n a l w o r k in g o f c r e d it, so m u c h so e y e r . is can fo r e ig n c r e d its c o n tr o lle d our d o m e s tic s u p p ly of bank c r e d i t s a n d f i n a n c e s , a n d t h r e w u s e n t i r e l y o u t o f l i n e ---------G overnor I th in k th a t we w as M e y e r c o u ld one of . I have th e am not q u ite c o n tr o lle d m is ta k e s in in it m o re th e accord w ith th a n w e d id , b a n k in g th a t and o p in io n . I th in k a d m in is tr a tio n . The g o ld e x c h a n g e s t a n d a r d , w h ic h s e e m e d to b e a p r a c tic a b le a n d fe a s ib le 120290—32----- 13 190 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR m a in t a in in g average p u r c h a s in g pow er of 191 dollar t h i n g , w a s b u ilt u p in th is p e r io d t h r o u g h w h ic h w e h a v e j u s t p a s s e d in th e and 1 9 2 0 ’s, th e ir fo r e ig n and n eed s, th e n and c o u n tr ie s , s u d d e n ly th e re cam e w as in v e s te d in b u ilt b ills a lo n g up or G erm an y th e id e a s e c u r itie s and th a t or a n y th in g w a s th e e q u iv a le n t o f g o ld in th e v a u lts o f th e c e n tr a l b a n k s . M r. B . u sb y G overnor M . e y e r W e ll, th e b ig on es, to o . T h ere e ls e huge reserves by th e fo r e ig n c e n tra l b a n k s, u n til as th e y w e re w a k e d u p b y th e G e r m a n a n d E n g lis h in c id e n ts , a n d fo u n d th a t m a y b e th e y w ere a n d m a y b e th e y w ere n o t. M r. B . u sb y n a tio n s W e ll, u sin g am ount of th e now , th e re g o ld -r e s e r v e $ 2 ,0 0 0 ,0 0 0 ,0 0 0 of have been b a s is , g o ld , or b u ilt a w h ic h up c r e d its s u p p o s e d ly w as r e a lly in th e a d d itio n a l an exchange a g a in s t th e c o u n t r ie s t h a t h a d s u ffic ie n t r e s e r v e s o f g o ld in th e c e n tr a l b an k s? W hen p e o p le , th e y w ere That w as th e th ey w ok e up to p r a c tic a l th is , a n d e ffe c t at th a t t h a t g o ld p r o p tim e , w as it n o t? w a s ta k e n o u t fr o m u any b o4 y f ° m ?i J,u c and & h ere o n e w a y o r a n o th e r, a n d th e y w ere c o u n te d g o ld er in T h a t w a s fo r th e s m a ll c o u n tr ie s . d e p o s its b u ilt u p e q u iv a le n t to S F ran ce d e p o sits en e ls e c a n , b u t a w h o le l o t o f t h e s e m a l a d j u s t - ^ e i t b ®r ° n e s t a n d a r d n o r a n o t h e r , b u t f r o m th e b e iia ™ r o f p e o p l e ; a n d s o m e t i m e s a la r g e n u m b e r o f m asse, get g e t p e s s im is tic o p tim is tic and overd o to g e th e r, th in g s on and th e overd o o th e r th in g s* s id e . th e n ’ e x t r c m b i o f n f fctL 1 7 ° U S a f° i y d o is t o t r ^ t o r e s t r a in a n d l i m i t t h e e x tr e m itie s o f th e e x p a n s io n a n d c o n tr a c tio n o f c r e d it b y th e m e c h a n is m F e d e v n lb r la n g b ( \t h T i n th e ^ im e r c ia l banks Z d in th e h e fdw Ih i V Q Ky S a ° m ’ u 1 COm e b a c k t0 th e th o u g h t th a t n o b e tte r th in & c a n b e d o n e fo r b e tte r b e h a v io r o f o u r e c o n o m ic m e c h a n is m th a n e s ta b lis h in g a s o u n d be a m v e d b a n k in g s y s t e m , w h ic h I s a y c a n o n lv a t b y a n a t io n a l o r u n ifie d b a n k i n g s y s t e m . 7 7 t k n i r ’ B r f B Y T I n i 5 \ ° f S ou r1 s t a t e m e n t s , I g a t h e r t h a t y o u r v ie w t h a t c r e d its s h o u ld b e th e b a s is o f o u r a c t iv it ie s a n d tl-m t is c r e d its a r e b a s e d la r g e ly o n — I d o n o t w a n t to s a y m a n ip u la t io n s but a c t io n s in d is b a n k in g c ir c le s , a n d p ressu res o f d iffe r e n t ty p e s lik e u n d e r th e in fla tio n o f g o ld it s e lf, th e n th e r e w a s a s h r in k a g e n o t o n lv of th e and $ 2 ,0 0 0 ,0 0 0 ,0 0 0 , th a t a c te d or 19 n a tu r a lly to per cent b r in g of th e about w o r l d ’s th is g o ld s u p p ly , c a ta stro p h e , but th e r S ? nr‘ s h r in k a g e o f c r e d it a ls o , t h a t w a s b a s e d o n t h a t fix a tio n — w a s n o t th a t a p a r t o f th e w o r ld G overnor M I th in k m itte d it c a ta stro p h e ? . Y e s ; I t h in k t h a t is tr u e . e y e r w as u n fo r tu n a te p y r a m id in g of th a t reserves and d u r in g th e 1 9 2 0 p e r io d — I m e a n in d ic a tin g ? M r. B . Y es. G overnor M e y e r have u sb y th e g o ld cau sed c r e d it, exchange a good 1 9 2 0 to 1 9 3 0 . sta n d a rd p er deal w h ic h depend on th e hum or or d is p o s itio n or fS s o m e b o d y , in d e p e n d e n t o f th e th in g s th e m s e lv e s o f in fla tio n G overnor M T h a t is w h a t y o u a r e w W e y e r . I accept you r sta te m e n t on d ° f b e h a lf o f v o u r s e lf Tm u s t F r,0 t e s t a " a i l,'s t y ° u r i n t e r p r e t a t i o n o f m y v i e w s ^ b e c a u s e in 't h e a c c o m m o d a t i o n . I q u ite a g re e w ith y o u , b u t I b e e n a v o id e d . I do not say t h in k t h a t s h o u ld th a t w e w a n t to e s ta b lis h c o n tr o l a n n a f e T o O T o v e r fo r e ig n b a n k d e p o s i t s in t h e U n i t e d S t a t e s d o w n t o a fin e p o i n t , but I do p u b lic th in k p o lic y t h a t i t is a s h o u ld s tr u c tu r e s h o u ld a ffo r d M r. B u sb y . G overnor M m a t t e r in d e te r m in e . w h ic h th e h o s p ita lity p u b lic in te r e s t a n d w h ic h our K ask6" 160*’ bU‘ y ° U “ ay W b a n k in g The w e lc o m in g in d e fin ite ly b u ilt u p h ere. b e a g r e e a b le , to a ttitu d e th e everybod y. g e n e r a lly d e p o sits th a t seem ed fo r e ig n to banks be one and of ban k ers some questions6& at™ o u would S to fo r e ig n b a n k s d e s ir in g to d e p o s it . T h a t se e m s to e y e r th e p r i c e s S t o f a n ^ e x t e ^ ^ a t 1V h S> b y T 7 ’ f° T ° f c o m b b ia t io n , r a is e P Govlr/MRYER. I t "c S s s m Pn rdofiCtiti°US ^ T u n w illin g to a n s w e r th a t , b u t F e a n n o t s ^ y t h a t T c o S e r M r. B u sb y . W hat I am c o m in g to as m y la s t q u e s tio n is , th a t if w e s h o u ld b a s e o u r c u r r e n c y a n d u s e g o ld a s w e h a v e u s e d it , a s th e y a r d s tic k to to m ake our in te r n a tio n a l exch an ges, lim it th e a m o u n t o f o u r c u r r e n c y b y a p p ly in g th e tr u e v a lu e s , a n d m o d itie s as we now th o se d e te r m in e and in som e tr u e v a lu e s d e te r m in e d th e m w ay th a t y a r d s tic k m e a su r e , a n d th r o u g h th e B u reau by of com exp ert on th e c o m m o d i t y in d e x b a s is fo r c u r r e n c y or t h S t a n d a r d Of e x c h a n g e . I w o u ld lik e to h a v e m o r e tim e I n f a c t , I h a v e b e e n t e r r i b l y b u s v w i t h n l n t rT o r i™ * * m y s X a n e m appearan ce, and I do not fle l th a t I S or to s t X 10 s t u d y tio n s , a n d I h a d to a sk th e i n d u l g e n " o f th e m y th e 7 it lt- q u -e s an ™ 1 p o s tp o n in g Labor S t a t is t ic s — w o u ld n o t t h a t b e a s a fe r p la n t h a n o n e w o r k in g a lo n e o n g o ld , o n th e a s s u m p tio n t h a t g o ld e x is ts , w h ic h w e h a v e ju s t d is c u s s e d ? G overnor I am M e y e r n o t p rep ared . W e ll, I say th is to you, M r. C on gressm an : to a n sw e r th a t, b e c a u se I d o n o t fe e l a s th o u g h I h a v e a n y d e fin ite v ie w s a s to w h e t h e r o r n o t th e c o m m o d i t y b a s e fo r m o n e y i s w o r k a b l e a n d p r a c t i c a b l e , a n d I h a v e n o t b e e n a b l e t o f io -u r e it out to its u lt im a te sy ste m ^ I e c o n o m ic stru ctu re , th a n som e can see c o n c lu s io n . th e m any o f w h ic h th e g o ld s t a n d a r d ; a n d w eak n ess w o u ld I can w eak n esses I can d e v e lo p of are see th e a w eak n esses a ttr ib u ta b le a ls o s a y under th e m a la d ju s tm e n t to o th e r o f &o n e in our th in g s th a t I c a n n o t see w h ere new sy ste m , and I do not M r . P r a l l . B y r ig g in g th e v a lu e s . G overnor M e y e r . I s h o u l d n o t t h i n k a n y b o d y c o u l d rio* 7 s n m o d itie s , or 6 8 0 , o r a n y su c h th in k s o . n u m b e r o f co7 i m o ^ i f e h I d o n o t se e h o w i t w o u ld b e p o s s ib le to d o it m m I &w o u l d O f ™ !, ™ t fc if y o u a re s p e a k in g o f th e v a lu e o f c o m m o d itie s in te r m s o f s o m e o th e r 192 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR v a lu e , y o u m ean som e o th e r m ea su re o f v a lu e , or s o m e MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 193 sta n d a rd of v a lu e . M r. P r a l l M r. G o ld sb o r o u g h M r. tr o n g of I S th e . T h a t is a ll. . of w ith in . M r . S tro n g ? G overnor sta tu te , la n g u a g e M eyer, I “ a c c o m m o d a tio n th e sta tu te is in 1921 n o tic e d of you b u s i n e s s .” regard to th e u se u sed th e T hat is of la n g u a g e w hat th e th e re d is c o u n t p r iv ile g e , t h a t it s h a ll b e u s e d fo r th e a c c o m m o d a t io n o f b u s in e s s a n d com m erce. I n th e o r ig in a l a c t , in s t e a d o f t h a t la n g u a g e w a s th e w o r d t h a t it s h o u ld la n g u a g e b e u sed w e n t o u t in fo r th e s ta b iliz a tio n c o n fe re n c e and th e o f th e p r ic e le v e l. la n g u a g e “ fo r m o d a t io n o f b u s in e s s a n d c o m m e r c e ” in s e r te d in s te a d . th e T hat accom I n m y o r ig in a l th e b ill, s t a t in g t h a t th e p o w e r s o f th e F e d e r a l r e s e r v e s y s t e m s h o u ld be u sed th e n I f o r th e s t a b i liz a t io n o f th e p r ic e le v e l, a n d e v e r s in c e been pow er of u sin g th e th in g , b u t I co u n try . th e w ords “ fo r d o l l a r /’ w h ic h , u sed th e s ta b iliz a tio n o f cou rse, y o u th is la n g u a g e in order to of th e g e t rid th e o f th e sam e charge of M y id e a is th a t th e la w o f s u p p ly and dem and is a very a n d b u s in e s s . in c o m m o d i t i e s i n g e n e r a l. w e h a v e g iv e n m oney d ia te ly The T h e r e fo r e , it se e m s to m e w ith th e p o w e rs a n d la r g e ly th e p r ic e o f m o n e y th ro u g h th e r e d is c o u n t p r iv i a n d d e m a n d o f m o n e y ; a n d i t is o n t h a t b a s is t h a t I h a v e , fo r th e p a s t fiv e o r s ix y e a r s , a d v o c a t e d t h a t th e F e d e r a l R e s e r v e B o a r d s h o u ld u s e its p o w e r s to s ta b iliz e th e p u r c h a s in g p o w e r o f m o n e y , r e g u la tin g it s p o w e r s th r o u g h th e a m o u n t o f s p e c u la tio n . to m e a n d th is c o m m it t e e t h a t h e h a d u s e d th o s e p o w e r s in o p e n -m a r k e t f u lly fo r th e p a s t tw o o r th r e e y e a r s , o r u p u n til th e tim e o f h is d e a th , several o th e rs w ith h im , am ong w hom w as H a r r is o n , w h o w a s h e re y e s t e r d a y , w h o fr a n k ly a d m itte d lie v e d in a n d w a s s y m p a th e tic w ith F e d era l reserve o u g h t to o p e ra te th is th e o r y , a n d h e a lo n g u s d ir e c tin g th e F e d e r a l R e s e r v e B o a r d I w o u ld lik e to s h o u ld not B oard th e to u se its C on gress, G overnor th o u g h t th e th is lin e , b u t h e o b je c t e d to to d o s o . p ow ers h a v in g fo r su c h g iv e n th e se s ta b iliz a tio n ? p ow ers to th e F e d e r a l r e s e r v e s y s t e m , d ir e c t th e u se o f th e m ? G overnor w h ic h M p ose w ith in g iv e d ir e c tio n s m ean s, e y e r . W e ll, I th in k C o n g r e s s o b v io u s ly in te n d s to and th e lim its to o f p o s s ib ility a body m a k e it m ore to th e a u th o r iz a tio n be u sed s h o u ld a c c o m p lis h to be u sed ; a r e s u lt, a n d o r le s s m a n d a t o r y of a c c o m p lis h but g iv e th a t th e y pow ers th e p u r w hen th e m you th e s h a ll a c c o m p lis h t h e r e s u lt , w h ic h d e p e n d s o n a g o o d m a n y c o n d i t io n s , t h e n y o u a re r a is in g a d iffic u lt q u e s t io n . in te n d e d th e I th in k p r o b a b ly G o v e r n o r H a rriso n to c o n v e y th e id e a t h a t y o u w e r e c h a r g in g th e s y s t e m r e s p o n s ib ility fu n c tio n . fo r th e r e su lts as w e ll w ere o u tsta n d in g p la n ts , e ffe c tiv e sam e M r. S has a lw a y s en d eavored to do as fo r th e d is c h a r g e w ith of a b u t , fo r in s ta n c e , le t u s s a y o p e r a tio n s s u p p ly co n d u c te d o f c r e d it and w ith th e t h a t in v ie w s tim u la tin g its of u se, M r. S and in am ount tr o n g of m oney changed e ls e , th a t m o n e y in d u s tr y put out c o n d itio n s in in an th e w o u ld w o u ld be im m e e x tr a o r d in a r y m ark et have to -d a y d iffe r e n t w ay. under e ffe c ts , in . W e ll, I g r a n t y o u th a t. M tr o n g e v e r y th in g s tim u la tin g . e y e r . And I th in k th a t is w hat G overnor H a r r is o n had I r e a liz e t h a t p e r h a p s y o u s a id th e m a r k e t o p e r a tio n s a n d r e d is c o u n t p r iv ile g e s w o u ld n o t , u n d e r o u r c o n d itio n s , b r in g a b o u t s ta b iliz a tio n . G overnor M I can r e a liz e th a t. . E s p e c ia lly if th e e y e r overu se and o v e r e x p a n s io n in th e p e r io d h a s le d to e x p e n s iv e s p e c u la t iv e a c tio n s , w h ic h c a u s e r e a c tio n s o f a d e p lo r a b le c h a r a c te r . M r. S . tr o n g O f cou rse, m y a n sw e r to t h a t w o u ld be t h a t w e d id n o t s e ll b o n d s a n d r e d u c e t h e a m o u n t o f m o n e y in c ir c u la t io n a n d p u t u p th e d is c o u n t r a te e n o u g h to s to p t h a t e x p e n s iv e s p e c u la t io n . G overnor M . T hat e y e r g e ts dow n to a very fin e p o in t; and of c o u r s e y o u k n o w it is n o t o n ly a q u e s t io n o f t h e q u a n t i t y o f b a n k c r e d it t h a t is a v a i l a b le , b u t a ls o o f t h e v e l o c i t y o f t h e t u r n o v e r o f t h a t s a m e v o lu m e , a n d th e u s e t h a t is m a d e o f it . to th e fa c to r o f h u m a n ju d g m e n t . s ta n ta n e o u s ly , tim e . and th e A c o n s id e r a b le In o th e r w o rd s, y o u g e t d o w n C r e d it p o lic y d o e s n o t o p e r a te in e ffe c t of an to -d a y or to -m o r r o w , in c r e a s e t i m e m u s t e la p s e b e fo r e in but v o lu m e of a fte r p e r io d a a n y k in d c r e d it of o f fin a n c ia l w o r k h a s its e ffe c t. N ow , th e n , th e re com es d e c id in g h o w m u c h in th e e le m e n t to d o , a n d h o w of hum an ju d g m e n t, in fa r to g o , a n d h o w fa s t to k e e p it u p , w h e n to s to p , a n d w h e n to re v e rse . th a t he b e a s k y o u w h a t o b je c t io n y o u s e e in C o n g r e s s a s k in g F ed eral R eserve th e G overnor in m in d . o p e r a t io n s to b u y a n d s e ll b o n d s o n t h e r e d i s c o u n t r a t e q u it e s u c c e s s had o f p o s s ib ility ; th e re to -d a y d o e s n o t a p p e a r N o w , G o v e r n o r S tr o n g o f th e F e d e r a l R e s e r v e B o a r d in tim a te d he lim its 1922 p r e s e n t g r e a tly m y o p in io n . th e F e d e r a l R e s e r v e B o a r d , to r e g u la te th e v o lu m e o f le g e s , th e F e d e r a l R e s e r v e B o a r d c o u ld r e g u la te th e v o lu m e o r s u p p ly W h y sy ste m t i m e , w i t h t h e b o o m in t h e b u il d in g o f h o u s e s a n d p a r t m e n t s a n d o ffic e I f t h a t is t r u e , t h e r e g u la t io n o f t h e s u p p l y a n d d e m a n d o f m o n e y l a r g e l y t e n d s t o f ix i t s p r i c e , a n d it s p r i c e is w h a t i t is w o r t h th e and b u ild in g s , p u r c h a s in g know , m eans s a fe la w , u p o n w h ic h w e c a n b a s e m o s t o f o u r a c tiv itie s in c o m m e r c e th e F e d era l reserve a n d y o u c o m e in to s u c h a s it u a tio n a s I s h o w e d y o u p r e v a ile d a t t h a t p r ic e fix in g , w h ic h I d o n o t t h in k c a n b e d o n e o r s h o u ld b e d o n e in th is and th e in c r e a s in g b ill, fiv e o r s ix y e a r s a g o , I u s e d th e w o r d s o f th e o r ig in a l la n g u a g e o f have th in k ju s t e x a c tly w h a t w e are ta lk in g a b o u t, o r w h a t y o u are ta lk in g a b o u t, M r. S a fte r tr o n g th e se . B ut years you of g e n t le m e n o p e r a tio n s , of have a about p re tty w here to good id e a sto p , and now , about w h e n to s t o p , to r e a c h a c e r ta in c o n c lu s io n , a c e r ta in o b je c t iv e p o in t. G overnor M B ut I w o u ld e y e r . h e s ita te I w o u ld to lik e to fe e l t h a t y o u a g re e w ith y o u th a t a n y are rig h t o n th a t. o f u s h a s in fa llib le j u d g m e n t. # M r. S tr o n g . L ou know I have a g r e a t d e a l o f c o n f id e n c e in y o u r j u d g m e n t , a n d I h a v e a lw a j^ s f e l t t h a t w a y , e v e r s in c e o u r e x p e r i e n c e in th e W ar F in a n c e C o r p o r a tio n ; but I do th in k , in th e o p e r a tio n a n d u se o f th e se p o w e r s o f th e F e d e r a l re se r v e s y s t e m , w h ic h w e h a v e u sed now fo r th e se years, th a t d ir e c tio n , w e s h o u ld g iv e th e m we c o u ld g iv e — th a t a m e a s u r e to fo llo w . in g iv in g any F o r in s ta n c e , I th in k , if w e s h o u ld d ir e c t th e m to u se th e ir p o w e r s to w a r d s ta b iliz a tio n of th e out p u r c h a s in g p o w e r o f m o n e y , w h ic h by G overnor m easu re of n u m bers set v a lu e up S tro n g , of by th e th e and th e n say p u r c h a s in g B u reau of w as to pow er Labor th e th e m of th e la n g u a g e to d o lla r S ta tis tic s , w orked accept w ith as th e th e th e in d e x la r g e n u m b e r o f c o m m o d i t i e s t h a t a r e u s e d in a r r iv in g a t t h e in d e x n u m b e r , MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR that would be a pretty good measure to direct the Reserve Board or system to follow. ^ Now, as to how long they should proceed, and when they should stop, will be a matter of judgment, which I am willing to trust you on; but it does seem to me that there ought to be some measure of value that they should be directed to follow. Now, I want to ask you this question: The Reconstruction Finance Corporation and the Glass-Steagall bill have for their purposes the enlargement of the credit structure, so as to bring more credit into use, and in a manner an inflation, or what probably you might term a reflation of the deflation; is not that as practical a thing as if we directed you to use the powers to stabilize the purchasing power of money? If money was unstable, credit was unstable and the country was paralyzed; because of such condition we come to the Congress, and as the result of an Executive proposal, we passed the Reconstruction Finance bill and the Glass-Steagall bill, and that was done for the purpose of trying to improve the price level, was it not? Governor M e y e r . A s I said this morning, there is the time element, which it is very difficult to regulate. I think those measures have certainly tended to improve the situation, yes; and I think it would have been worse than it is, if they had not been passed. There has not been any definite upward trend, but I think it has slowed up the decline, and I do not think----Mr. Strong. Governor Harrison told us yesterday that for the first time in a number of months the decline of bank credits had been brought to a halt. ^ Governor M eyer. Yes; I think that is significant. Mr. Strong. And bringing them to a halt is probably pretty good evidence that they are liable to turn upward. Governor M eyer. They have to stop going down before they begin going up. Mr. Strong. N ow, he also told us that they were buying $25,000,000 of bonds each week. Governor M eyer. Yes; that is published weekly. Mr. Strong. That is continuing now, and has stopped the lowering of credit, bank credit. If that condition keeps up, and you keep on buying $25,000,000 a week, a turn will probably come, will it not? Governor M eyer. You are getting me in the position of prophe sying. I hope you are right. I personally am in favor of a little stronger policy than you are. # Mr. Strong. Well, fine. I hope your desire prevails. Governor M eyer. But you see there are several things that enter into the situation in making a program—what it a suitable amount, whether it is better to keep purchasing moderate amounts over a long period, or to do it all in a short time in larger amounts, in addition to which you have to take into account----Mr. Strong. The use of it? Governor M eyer. Yes, the use of it. And furthermore, we have been getting a return flow of currency from hoards since the beginning of February, amounting to about $250,000,000, and aside from a little interruption on April 1 on account of tax assessments, and the flow has continued now for a good many weeks. If the expansion of the program of Government bond purchases, which was referred to by Governor Harrison here yesterday, is continued and the hoarded currency continues to come in, I think we can look forward to im proved conditions. But we still have lots of problems; the period is difficult in many, many directions, and I wish as much as you do that I knew a simple formula of turning a simple trick that would change economic conditions all over the world. Mr. Strong. If you continue to play your cards as you are doing right now the change will come. Governor M eyer. Well, sir, I am hopeful that the change will come at home and abroad. Mr. Strong. Along that line, Governor, you might not want to answer this question, but in a speech last night Governor Smith made a proposal that for every hundred million dollars in trade between foreign countries and the United States we remit or credit that country with $25,000,000 on account of their debt to us. Do you think that is a good proposition? Do you think that would stimulate trade? Governor M eyer. The people who can pay debts are paying them. The people who can buy goods are buying them. I do not know exactly whose debts should be cancelled for this purpose and whose goods should be sold. Would you want to be chairman of a committee when somebody’s debts are canceled to saywhose goods should be sold for that purpose? Mr. Strong. No, I do not think I would. Governor M eyer. I t is one thing to generalize and another thing to get down to business. Mr. Strong. And when you have given this bonus or this money that was loaned to Europe and that is exhausted, then wdiat would you do? Lend them some more money so as to give them some more opportunity to have the amount remitted to them? Governor M eyer. I did not hear the governor’s speech. He may have some good ideas. Mr. Strong. I would like to ask you what, if you know, caused the recession in bank credits during January? Why did they go down? Governor M eyer. They were going down before that, and it was a continuation of a movement that was in progress and had not been checked. Bank closings in January aggregated 342 in number, and that was not only an intrinsic factor but an important psychological factor. Beginning in February bank closings which were heavy in the beginning of the month slowed up and at the end of the month they were very much smaller. I think in the month of March the resources of banks that opened were as great as those of banks that were closed. I do not mean to say that there will not be more bank failures; but any way they have been less, and January was a bad month from that point of view. Mr. Strong. Then if we had commenced along in October and November and bought Government securities, would not we have been apt to have checked those failures that happened in January and prevented the recession in bank credits? Governor M eyer. There were so many other complications, Mr. Strong; beginning with the suspension of gold payments in England, you have had a series of events which were very complicated. Within a few weeks after September 21, $750,000,000 was withdrawn by foreign countries from their balances here and taken in the form of gold. No country in the history of the world has ever been able to stand that kind of drain of gold. It is true that during that period we also imported some gold but in view of the large drafts on this 194 195 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR country by foreigners, chiefly due to repatriation of foreign central bank reserves and, I believe, even some remittances by Americans out of the country from fright, purchase of securities by the reserve banks at that time were impracticable. We could not undertake anything of that character in October without increasing the loss of gold. That is my opinion. You will remember at that time we had to raise the discount rate from 1% to 2%, and 3 ^ per cent. Purchases at that time would not have had a stabilizing effect. They would have tended to neutralize the effect of the advances in the discount rate, which was an important intrinsic and also an important psy chological factor at that time. Mr. Strong. If Congress should see fit to pass a bill of this kind directing the Federal Reserve Board to use the powers we have given it toward the end that we should have as near as possible the stabili zation as to purchasing power of money, what harm could you see coming from it? Governor M eyer. It is a fact that we understand that it is our duty to prevent inflation to the extent that it is feasible, and to stop the deflationary forces as far as possible through our machinery. Mr. Strong. You would go along as you are doing now, would you? Governor M eyer. I do not think we can do anything more than we are doing, if you mean that. Mr. Strong. That is what I mean. Governor M eyer. On the other hand, I do not think you would like to be ordered to run a race of 100 yards in 10 seconds. Mr. Strong. Well, I never ran that far within that time. Governor M eyer. I know you do not expect impossibilities to be achieved; but I think in setting certain standards you ought to set standards that are practicable, and what you have in mind is that we should be charged with doing what we are doing now to the extent that it is possible. I do not like either by definite or implied authori zation or direction to lead people to believe that a thing can be done if it can not be done under any and all circumstances, even though it may be within our power to work in that direction. Mr. Strong. I would like to ask another thing. Congress is being asked to pay off in advance the certificates we issued to service men of this country due in 1945. It is being urged that we can do that by issuing paper money based upon what gold is now in the Treasury. I wish you could give us your opinion about that. It is a matter that is very perplexing to Members of Congress who would like to pay the certificates if they could. Governor M eyer. I suppose there is a committee studying that, Mr. Congressman. Mr. Strong. I know, but you know about the gold in the Treasury and what it could do, and I think your opinion would be very valuable if you care to give it to us. Governor M eyer. As an offhand opinion, I feel that the balancing of the Budget is becoming a fundamentally important factor in re building confidence in business. I should be reluctant to see a very heavy expenditure which could not be paid for out of taxation at this time. But I really have not been giving that particular question special thought, although I have seen it mentioned in the papers. I think the balancing of the Budget has become one of the most important things for this country. Mr. Strong. That is to protect.our credit at home and abroad? Governor M eyer. Yes. And I think inflationary devices which might be assumed to be beneficial are dangerous, because they might have a very different effect from what is expected. Mr. Strong. Can you tell us how much gold there is in the Treas ury which would be free to be used in guaranteeing such currency? Governor M eyer. I am told that it is $20,000,000. Mr. Goldenweiser. That is not including the reserves of the reserve banks. Mr. Strong. Well then, with that situation would you care to say what perhaps would happen if we should issue $2,500,000,000 worth of paper money? Governor M eyer. I think that it would be most unfortunate from the point of view of the masses of the people of this country. Mr. Strong. Would it be liable to hurt our credit in foreign coun tries? Governor M eyer. Not only in foreign countries but at home. Mr. Strong. You realty think it would be an unwise thing to do then? Governor M eyer. I do. Mr. G oldsborough. Governor Meyer, in various discussions of this proposed legislation it has been spoken of as an inflationary measure? Governor M eyer. This bill? Mr. G oldsborough. Yes; I have seen it spoken of as an inflation ary measure. Governor M eyer. Well, you know that is a word that is pulled on everybody. If it is pulled on us, Mr. Chairman, why----Mr. G oldsborough. I t is intended as a reflection on the propriety of the proposed legislation. Section 31, which is the first section of the bill—I think you have it right there, have you not, in front of you? Governor M eyer. N o ; this is not that. Mr. G oldsborough. The first section of the bill directs the Federal Reserve Board and the Federal reserve banks to take all available steps to raise the present wholesale commodity level of prices as speedily as possible to the level existing before the present deflation and afterwards to use all available means to maintain such wholesale commodity price level. If you will turn to section 2, which reads: 196 197 If, in c a rry in g o u t th e pu rp o ses of th e preced in g section, th e F ed eral R eserve B oard an d /o r th e F ed eral reserve b an k s, in selling securities, should e x h a u st th e su p p ly , th e F ed eral R eserve B o ard is a u th o riz e d a n d d irected to issue new d eb en tu res. The obvious purpose of section 2 is to assist the Federal reserve system if it should run out of bonds through the process of feeding them back into the market, and provides for an issue of debentures in order to prevent the price level from going above the pre-deflation price level. I direct your attention to that because I think it is im portant for the Congress and the country to know that this is not intended to be an inflationary measure. It is intended to be a sta bilizing measure, and that the measure has no more interest in raising the price level than it has to keep the price level from going beyond a proper and legitimate point. Now, if I may for just a moment, I want to read from a speech that I made just 10 years ago, on May MAINTAININ'G AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 23, 1922, in the House of Representatives, on a bill providing for stabilization: Mr. G oldsborough. The Federal reserve banks are authorized to do the same thing? Governor M eyer. Yes; but in talking of the board I want you to understand that it is not a central bank. Air. G oldsborough. If you have any suggestion to make and could put in this bill in order to give you power----Governor AIeyer (interposing). You would find that that would be opening a very interesting subject, which was discussed when the bill was passed, and you would not think it advisable for a member of the board to come up here and urge that the powers which now reside in the banks should be transferred to the board, would you? Mr. G oldsborough. I do not know. As a matter of fact, if we pass legislation we use this language: “ Federal Reserve Board and Federal reserve banks.” We have the idea that there would be a spirit of cooperation and that would accomplish the purpose. Governor M eyer. When we get to talking about these things we sometimes forget that the organization of the system was determined after the most careful study by committees of Congress. There are some powers reserved to the board and some to the banks, and some lodged in the banks with the approval of the board. Air. G oldsborough. It was suggested to the committee yesterday by Governor Harrison that this legislation was unnecessary because the system was now doing exactly the thing which was contemplated by the legislation. Governor M eyer. When was this? Mr. G oldsborough. This was yesterday. Governor AIeyer. Oh, yes. Well, I think that is the purpose. Air. G oldsborough. And we asked Governor Harrison when it began, and he said it began yesterday. Governor M eyer. I think he was misunderstood if that is what he appeared to say. I think it has always been the object since I have been on the board to work in the direction you are talking about; but it has been a struggle against conditions at home and abroad and, as far as the particular present movement, buying Government securities, is concerned, it was started some weeks ago— seven weeks ago. Air. G oldsborough. But he said the policy had changed in the last day or so. Governor M eyer. As a result of a conference called a week or 10 days ago. Naturally, the governors have to come from all over the United States—some of them are several days’ distant—and it takes them quite a little while to gather for a meeting. It was a question at the time—seven weeks ago—as to what should be the rate at which Government securities should be purchased. Mr. G o l d s b o r o u g h . D o you object to saying what the rate is now? Governor M eyer. There is not any fixed rate, Mr. Congressman; it is movable and changeable. I do not have charge of the open market operations, as you know. Mr. G oldsborough. N ow Governor Meyer, in this time of abso lute economic destitution, do you not believe it would be a tremen dously helpful thing if the Federal reserve system could declare a policy, if they could undertake to say that they were going to pursue a definite policy in the purchase of Government securities till a certain goal is reached? I talk to the bankers in my district and they say, 198 I firm ly believe t h a t th e p u rc h a sin g pow er of m oney can be stab ilized . I bp lieve t h a t th e solu tio n w hen we h a v e i t will be fo u n d to be sim ple, a n d I tr u s t t h a t t h a t solu tio n will soon be em bodied in legislation. I n e v er w a n t to see ag ric u ltu ra l a n d in d u s tria l en te rp rise s stru g g lin g in th e agony of a long perio d of falling prices o r to see th e y o u n g , a c tiv e , b rig h t business m a n , n a tu ra lly u n in fo rm ed as to p o litical science, feel t h a t he is rising to p ro sp e rity on th e tid e of rising prices only to find his business b a n k ru p t a n d his hopes b la ste d in th e in ev itab le crisis ju s t b ey o n d th e p e a k . I read this to accentuate the fact that this committee and I person ally are not interested in inflation but simply in an endavor to create a fair and proper relation—reestablish a fair and proper relationship between debtor and creditor, and after that relationship is reestab lished to make it impossible, because of these stabilizing influences, for business to expand in an unhealthy manner. Now, that is the purpose of the proposed legislation. This morning in a very full and interesting statement you called the committee’s attention to the fact that other influences other than quantity of money and credit and its velocity operated on price levels, and you undertook and did very clearly state what some of those influences were. Now, the reason I am making this statement is because I want you to comment upon it. This subcommittee, I think, fully realizes the validity of in fluences which you mentioned. They realize fully that under uncer tain conditions it would take more activity on the part of the Federal reserve system in the matter, for instance, of purchasing securities, than it would at another time in order to achieve the same result. But I believe that the subcommittee feels that under anything like ordinary conditions, with the enormous credit facilities of the Federal reserve system that by applying its powers courageously enough and strongly enough the result can be achieved. A man may be steering his ship and because of conditions of wind and tide it may be more difficult for him to reach a given point than it would be under other conditions, but if he puts enough pressure on the rudder he can reach his port in safety. This subcommittee does not think that if the Congress directs the Federal reserve system to stabilize at a given point that the Federal reserve system could keep always the level at that point; but it believes it could measureably do that; and it also believes that if the price level could be measureably stabilized that business would be accommodated, and that a great many of these evils and difficulties which you speak of would be obviated. We feel that if stabilization were made the North Star of the Federal reserve system that you would then have the power to prevent these periods of inflation as well as periods of deflation from going beyond and getting out of hand, and that is the theory I am sure upon which the subcommittee is considering this bill. Governor M eyer. You understand, Mr. Congressman, that the open market committee which deals with open market operations is composed of the governors of the 12 banks. • Mr. G oldsborougii. If they will not act, you have the power to change to another committee? Governor M eyer. The Federal Reserve Board can only approve or disapprove the open market policies and operations proposed by the banks. 199 200 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Oli, yes; we know they have been buying $25,000,000 of Government securities a week for the last few weeks, but they may start selling them next week; and, therefore, we do not know what to do.” Governor AIeyer. I do not think they believe that. To reverse a policy and start to doing it the other way next week has never been done. Air. G oldsborough. But the system does reverse its policies? . Governor M eyer. Yes; with change of conditions, but not with just a whimsical this-week or next-week attitude. That is out of the question; at least, as far as I know. Air. G oldsborough. N ow then suppose this bill were passed, this section 1 and section 2. I will leave out of consideration section 3 for the time being, and the responsible officials of the Federal reserve system should say to the press, “ We have been directed by Congress to raise the price level to a certain point, and we are going into the open market and buy Government securities at the rate of, we will say, $25,000,000 a day, every business day, till that point is reached.” Do you not believe that that would have almost a magical effect in restoring confidence and would cause hoarded money to be withdrawn and the money put in circulation and cause the retailer to buy from the wholesaler and the wholesaler from the manufacturer and the manufacturer from the raw producer and put people to work? Governor AIeyer. I am doubtful of the advantage and expediency of talk in connection with those matters, because the matters speak for themselves. Air. G oldsborough. N o; you do not understand me. I mean it to say and do it, both. Governor M eyer. A great many things happen to interrupt and make changes necessary. I think you asked that question of Gov ernor Harrison. I read it in the paper. I do not think I would express it differently from his view. I think you would tie their hands It takes flexibility out of the program. I think flexibility is vital and you know just as well as I do that conditions change from time to time, and if you announce a program like that you deprive yourself of flexibility which you ought to retain. I would not con sider that a good or helpful thing to do. Mr. G oldsborough. Aou do not think it would restore confidence almost immediately? . Governor AIeyer. No; I would not think so. I would not consider it advisable. Mr. G oldsborough. Here is a question, Mr. Strong suggested, and I think it is a good one. I do not know whether you care to answer it or not. The question is whether you feel that "the Federal Reserve Board should have charge of the open market operations? Governor AIeyer. I do not, to tell you the truth. But you know better than I that the functions of the board and the banks have been defined after very careful consideration and investigation at the time of the passage of the act, and at various sessions of the Congress since then. I do not think it would be sound to transfer those powers. On the other hand, you have to realize that with the advantage of decentralization of powers you get some slowness in the working of the machinery. The whole banking system is based on the idea of decentralization of power. It has been the historic policy of the people of the United States not to allow too great cen tralization of power, particularly in banking. I agree with that 201 policy; but you can not expect the same quick action and the same prompt decisions from a decentralized power that you would from a central bank, as conducted in European financial centers, where the board of directors of one bank directs the operations. In the interest of efficiency and wise administration there is, of course, a constant drift toward centralization of power. In the wise checks placed upon, centralized power which are fundamental in our Constitution, we do d® th® centralization of power—and I do not think as a whole we are wrong in that, though sometimes it costs time and inefficiency as well as delay. We have to stick to good principles, even though we have to pay for them at times. Air. G oldsborough. I gather from what you have stated to-day several times that you feel we should have a central banking svstem unified banking system? ' ’ Governor AIeyer. I am not talking about a central banking sys tem; I am saying that banks of deposit all over the United States should be federally chartered; now part are so chartered and part are chartered by the State. You could make it any kind of system you w a n t You could make it unit banking or state-wide banking. If the Federal Government were supervising and organizing the banking of the country, so far as commercial banking was concerned it could determine what kind of banking system you should have! As it is now, it is determined by the Federal Government and 48 States, each determining for itself what it wants to have. Mr. G oldsborough. Governor AIeyer, this bill probably amended m certain ways, is going to be considered in executive session by the subcommittee and acted upon, and also acted upon by the full com mittee. It makes no difference what our report is the full com mittee will take its action on that report. Now, we are extremely anxious in writing the mechanics of the bill if we decide to report it, to make it as effective as possible, and we would like to have the benefit of any suggestions you can give us? Governor AIeyer. I I I can think of any suggestions by way of modincation or amendment or otherwise I will communicate with you Air Congressman, I do not like to offer off-hand suggestions for legislation. Mr. G oldsborough. Yes. The other day—I do not know who it was—showed me a typewritten statement about that long [indicating 1 which involved a change in the reserves of member banks, which changes depended upon the change in the deposits’ condition and the rapidity of circulation? Governor M eyer. That is the report I gave you this morning. Mr. G oldsborough. And it might be in carrying out the purpose of this legislation a section of that kind would be very helpful. Governor M eyer. I told you this morning, Mr. Chairman, that 1 thought serious consideration of that report would be worth while as one of the things to help achieve what you have in mind, stability; because if it should work as it is expected and intended, it would have the value of checking undue expansion and undue contraction automatically in so far as it can be done through monetary means An automatic device working in the right direction will be helpful in n0™ia^ ng t0 depend entirely on the exercise of human judgment. . 1 lf * G oldsborough. That is what we think—to give some direc tion to the Federal Reserve Board which we feel would be helpful. Have you any plan which you would prefer to this, assuming that 202 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Congress is going to adopt or attempt to adopt a stabilization plan? Have you anything in mind which you prefer to this? Governor M eyer. Well, only the things about which I spoke this morning, Mr. Congressman—a better banking structure, an improved method of reserves and better banking supervision, examinations, which could be accomplished with a unified system and better men in public service. Mr. B usby. You are introducing more uncertainty to our already uncertain status. . Mr. G oldsborough. In closing, I would like to say this: That we do not have in mind that any human institution can act perfectly, and we realize fully that you will have the difficulties that you have spoken of and possibly difficulties that you have not thought of and can not vixualize at this time. There are spiritual difficulties always to confront, because human selfishness is operating all the time and we are confronted with that. But this is one thing we hope may assist in restraining human selfishness and promote justice as between different classes of society. That is the purpose of it, and we believe also that any legislation that is passed will be sympathetically adminis tered by those in charge of it. There is just one question that has been suggested to me. Has it been necessary to invoke the more liberal rediscount powers of the Glass-Steagall bill yet? Governor M eyer. You mean section 10a and 10b. There have been a few applications under 10-b. In most cases banks that would have borrowed under 10-b are using the Reconstruction Finance Corporation. There have been a few cases where loans have been obtained under 10-b, but not many. I thank you very much for your courtesy to me here. Mr. G oldsborough. We appreciate very much your kindness in this discussion, which has been very interesting, and I think it will be of help to us. . Governor M eyer. I am afraid I have not been able to contribute as much as I would like to contribute. , Mr. Meyer. I may say that after the hearing was printed, which was subsequent to the time the House considered the measure, the Federal Reserve Board passed a resolution approving and indors ing the position which I took in my statement before the committee. So the position which was expressed in the hearing in opposition to the measure has the indorsement and approval of the full mem bership of the Federal Reserve Board. Senator F letcher. Would you mind inserting in the record that resolution, Mr. Meyer? Mr. Meyer. What resolution? Senator F letcher. The resolution of the board. You said they passed a resolution. I supposed you had it there with you. Mr. Meyer. There was a motion made that the board approve and indorse the position taken by the governor in his statement before the committee, and that motion was carried. The proposed bill assumes that the Federal Reserve Board has the power to carry out the policy enunciated in the bill and instructs the Federal Reserve Board, the reserve banks, and the Secretary of the Treasury to make the policy effective. The attitude which I expressed in the hearing was that the board did not have this power and that the assumption therefore is not justified. MAINTAINING AVERAGE PURCHASING PO.WER OF DOLLAR 203 Of course, before I became a member and since, the board has been endeavoring to do what it could to stem the tide of contrac tion in business and deflation in prices. No one country, however, can determine the world level of commodity prices. We have, it is true, an unusually important position in world economic and financial affairs. Nevertheless, although we have a most important position among the world’s nations, we do not and can not, in my opinion, alone control the price level. The importance of our position I do not underestimate. We have 85 per cent of the world’s total of automobile production, 40 per cent of the world’s coal, G8 per cent of the world’s petroleum, 44 per cent of the world’s pig iron, 47 per cent of the steel ingots, 49 per cent of the copper production, 36 per cent of the lead, 39 per cent of the zinc, 10 per cent of the wool, 57 per cent of the cotton, 59 per cent of the corn, 19 per cent of the wheat, and 36 per cent of the world’s developed water power. I introduce these figures, which came from the Department of Commerce, to show that I understand and fully appreciate the im portant power that the United States wields in world affairs. Nev ertheless, it does not control the world price level, and in my opinion can not. The conditions which we confront at the present time are the most difficult, the most serious, that any of us in our lifetime have seen. The forces which have produced these conditions are world forces. The Federal reserve system, with your assistance in amend ing the Federal reserve act this spring, is at present engaged in operating to combat these forces in the field of credit with greater facility and greater elasticity than was previously possible under existing law. You passed the reconstruction act, which was a meas ure of courage and progressiveness on your part, in my opinion, and I feel that a great deal of good has been done by the operations under that authority. However, it takes time for financial measures to be reflected in business. Money or credit made available to banks and to industry does not immediately enter into activity, and there is always a con siderable lag in time between credit conditions and business condi tions. I t is true that when times are good and operations are being carried too far on a speculative basis—I mean not only in the security market but in real estate and in other lines of activity, such, for instance, as in the construction industries, which are so important in our economic situation—the availability of funds for that activity may diminish while the activity seems to go on for a certain length of time unimpaired; in the end, however, the unavailability of funds makes itself felt. So on the other side when funds are again made available to bank ing institutions, it takes time for those potential resources to enter into active circulation, producing an increased volume of business and an increased employment of labor and consumption of materials, which is what we call business improvement. Senator Couzens. Would you mind an interruption there, Gov ernor ? Mr. Meyer. Not at all, Senator. Senator Couzens. A s I understand, you are opposed to both the Goldsborough bill and Senator Fletcher’s bill? 204 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Mr. Meyer. Yes. Senator Couzens. During one of the hearings there was a Mr. H. A. Wallace, publisher of Des Moines, Iowa, who appeared before the committee, and he made a suggestion which did not instruct the Federal Keserve Board to raise prices to any specific level. He made this suggestion, and I would like to ask you what you thought of it. He says that “ the Congress of the United States hereby directs the Federal reserve system to raise the price level by the following means” : F ir s t, re sto re th e re se rv e b alan c es o f th e m em ber b a n k s to th e 1 9 2 7 - 2 8 level. To b rin g th is to p a ss th e F e d e ra l re se rv e sy stem sh a ll w ith in th re e m o n th s of th e p assag e o f th is a c t p u rc h a se w h a te v e r volum e of G overn m en t bonds a r e n ecessary to accom plish th is end. A nd second, th e r e a fte r reserv e b alan c es o f th e m em ber b a n k s sh a ll be held a t th e 1 9 2 7 - 2 8 level a s a m inim um . T h ird , fu rth e rm o re , th ese re se rv e b alan c es sh a ll be in creased a t th e sam e p ercen tag e r a te of g ro w th a s th e lo ng-term r a te of g ro w th in p ro d u c tio n of p h y sical goods. Now, perhaps it is pretty difficult to ask you to answer that off hand, but it seemed to me that there was a germ in there of a legis lative enactment that might be of some value. Mr. Meyer. There are in both the bills before you, Senator, as well as in that suggestion, the germs of some good ideas. But from the point of view of our power and ability to carry out a mandate expressed in those terms, I should say that it is inadvisable to enact such legislation, that it might be impossible to carry it out, owing to conditions which now exist or which might develop. Conditions change too much for it to be advisable, in my opinion, for Congress to commit itself to any specific mandate, such as is contained in either of these bills or in the suggestion of Mr. Wallace. Mr. Wallace rightly puts emphasis on the question of the re serves, and we have that in mind. But it is never possible to say in advance whether or not in administration it is going to be possible to carry out as fixed and rigid a program as is contemplated by the Goldsborough bill and the Fletcher bill or by a proposal of the char acter which Mr. Wallace suggests. I think the results are far too uncertain to make them the subject of legislative enactment. And furthermore, the board and the system are proceeding in that direction, and while they are dealing with the situation not entirely in accordance with the letter of the proposed mandate, they are pur suing a general policy of encouraging credit expansion. That was one of the things the system had in mind when you were asked to pass the Glass-Steagall Act. Obviously, it was with operations of that kind in mind, as well as other things, that the recommendation was made and your action was taken. (Thereafter the witness submitted a letter to the chairman of the committee amplifying his views concerning the proposal of Mr. H. A. Wallace, as follows:) F ederal R eserve B oard, H on. P eter N orbeck , Washington, May 23, 1932. The United States Senate, Washington, D. C. D ear S enator N orbeck : You m ay rem em b er t h a t S e n a to r C ouzens asked m e to com m ent in m ore d e ta il a b o u t a p ro p o sa l m a d e by M r. H . A. W allace, e d ito r of W alla c e ’s F a rm e r. T h is p ro p o sal, a c co rd in g to th e tr a n s c rip t, reads’ a s fo llo w s: MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 205 “ T he C ongress of th e U n ited S ta te s hereb y d ire c ts th e F e d e ra l re serv e sy s tem to ra ise th e p rice level by th e follow ing m e a n s : “ F ir s t, re sto re th e reserv e b alances of th e m em ber b an k s to th e 1 9 2 7 - 2 8 level. “ To b rin g th is to p ass th e F e d e ra l reserv e sy stem sh a ll w ith in th re e m onths o f th e p assag e o f th is a c t p u rc h a se w h a te v e r volum e of G overnm ent bonds a re n e cessary to accom plish th is end. “A nd second, th e r e a fte r reserv e b alan c es o f th e m em ber b an k s sh a ll be held a t th e 19 27—2 8 level a s a m inim um . “ T h ird , fu rth e rm o re , th e se re se rv e balan ces sh a ll be in creased a t th e sam e p e rc en tag e r a te of g ro w th a s th e long-term r a t e of g ro w th in p ro d u ctio n of p h y sical goods.” As I s ta te d in m y testim o n y , I am opposed to a ll p roposals th a t w ould im pose rig id re g u latio n s on th e m ethods to be follow ed by th e F e d e ra l reserv e system . O u r cre d it m ach in ery is e n tire ly too d elicate a n d responsive to too m any influences to m ake it d e sira b le to h av e an y one in d ic a to r, w h e th e r i t be the p ric e in d ex o r th e level of m em ber b an k reserv es, be th e sole g uide in d e te rm in in g c re d it policy. A t th e p re s e n t tim e M r. W a llace’s p roposal w ould m ean th a t th e F e d e ia l re se rv e sy stem ’s p u rc h a se s o f U n ite d S ta te s se c u ritie s sh ould be d iscontinued w ith in a few day s, b ecause m em ber b an k re se rv e b alan ces a re ap p ro ach in g th e 1 9 2 7 -2 8 level, t h a t he w ould p re sc rib e as a base. T h e re a re , how ever, o th e r reaso n s w hy M r. W allace’s p ro p o sal w ould n o t be p ra c ticab le. I t is based on th e assu m p tio n th a t th e volum e of m em ber b an k c re d it should alw a y s change a t ap p ro x im a te ly th e sam e r a te a n d t h a t changes *** m em ber b ank reserv e balan ces a c c u ra te ly reflect ch anges in th e volum e of th e N atio n s business. N e ith e r of th ese assu m p tio n s is in co n fo rm ity w ith experience. l o ta k e up th e q u estio n of m em ber b an k reserv es first. E x p erie n ce dem on s tr a te s th a t th e re h av e been a n u m b er of periods, such a s 1 9 2 5 a n d 1 9 2 6 , fo r exam ple, w hen m em ber b an k c re d it w as e x p an d in g ra p id ly w h ile m em ber b an k reserv e b alan c es rem ain ed unch an g ed . T h is is tr u e also of 1 9 2 9 u n til a f te r th e b re a k in th e stock m a rk e t. On th e o th e r h a n d , in 1 9 3 0 a n d in th e first h a lf of 1 9 31 m em ber b an k reserv e b alan c es show ed little change, w hile th e volum e of b an k c re d it w as declining. In a ll such cases i t w ould be d ire c tly o pposite to th e c re d it policy in d ic a te d by co n d itio n s to follow th e reserv e b alan ces a s a guide. O ne reason th a t th e m ovem ent o f re se rv e b alan c es does n o t correspond to th e g en eral m ovem ent of bu sin ess is th a t u n d e r e x is tin g reserv e re q u ire m e n ts th e re is a tendency a t tim es o f depression fo r b an k b alan c es to ac c u m u la te in c e n tra l reserv e cities— a n accu m u latio n w hich re s u lts in d u p licatio n of deposits a s w ell as in c o n cen tratio n of deposits in c itie s w h ere a 1 3 p e r cen t reserv e is re q u ired . A t tim es o f business ac tiv ity , on th e o th e r h an d , w hen fu n d s a re re q u ire d th ro u g h o u t th e co u n try , th e re is a m ovem ent of b alan c es from th e c e n tra l reserv e c ities w ith a consequent decrease in reserv e re q u ire m e n ts. T h is p a rtic u la r d efect in m em ber b ank reserv e b alan c es a s an in d ic a to r o f c re d it policy w ould be overcom e to a considerable e x te n t by th e ad o p tio n of th e F e d e ra l reserv e com m ittee’s reco m m en d atio n s on m em ber b ank reserves. T hese reco m m endations w ere in d o rsed by th e F e d e ra l R eserv e B o ard a n d su b m itted to y o u r com m ittee a s a p a r t of its reco m m en d atio n s on th e G lass bill. A dop tio n of th is m eth o d o f d ete rm in in g m em ber b an k re serv e b alan c es w ould m ake th e ir changes co n sid erab ly m ore responsive to business conditions. B u t even if m em ber b an k re se rv e balan ces responded a c c u ra te ly to changes in b usiness conditions, i t w ould still be u n d e sira b le to d ire c t th e F e d e ra l re serv e system to m a in ta in th e g ro w th o f th ese reserv es a t a r a te co rresponding to th e long-tim e r a te of g ro w th in p h y sical p ro d u ctio n of goods. E conom ic p ro g ress is n o t a ste a d y g ra d u a l g ro w th . Some y e a rs th e g ro w th is m ore ra p id and o th e r y e a rs i t is m uch slow er. A long-tim e av erag e, o r n o rm al, h as no re a l significance, p a rtic u la rly in a co u n try th a t is young like o u rs a n d h as been pro g ressin g a t a n e x tra o rd in a rily ra p id ra te . T h is r a te is likely to be come slow er as th e c o u n try develops fu r th e r, a n d it w ould be d istin c tly u n d e sira b le to w rite in to a law a re q u ire m e n t th a t th e a n n u a l g ro w th of m em ber b an k reserv e balan ces conform to a com puted n o rm al a v e ra g e in crease fo r p a st y ears. In term s of n av ig a tio n , th is p roposal w ould be sim ila r to a n o rd e r to a c a p ta in of a ship to ste e r his course in accordance w ith a definite n u m b er of deg rees of d ev iatio n from th e com pass, th e d ev iatio n being d eterm in ed by th e influence of know n c u rre n ts. A sh ip t h a t w as steered th a t w ay w ould never 1 2 0 2 9 0 —3 2 ------ 1 4 206 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR re a c h its d e stin a tio n a n d w ould be lik ely to go on th e rocks. T h is is fo r th e reaso n th a t in th e ocean th e re a re m an y c u rre n ts th a t have n o t been accu ra te ly m e a su re d a n d th a t, in a d d itio n , th e d ire c tio n a n d stre n g th of w in d s th a t m ay a rise can n o t be d ete rm in e d in ad v an ce. F o r sim ila r re a so n s a leg islativ e m a n d a te th a t th e c re d it m a ch in ery of th e co u n try be ste e re d w ith referen ce to a n y one fixed in d ic a to r w ould be c e rta in u ltim a te ly to lead to u n fo reseeab le a n d u n fo rtu n a te re s u lts . I sh all a p p re c ia te i t if you w ill h a v e th is le tte r in c o rp o ra te d a t th e p ro p er place in th e reco rd of th e h e a rin g s. V ery tr u ly yours, E ugene M eyer , Governor. Senator Couzens. But what I had in mind, Governor, was, is there any aversion to the policy of Congress establishing a policy and a principle as well as the Federal Reserve Board? Mr. Meyer. I t goes beyond that in the bills and also in the sug gestion, because it is not "only a policy but it is also a practice that has to be considered, and conditions often make it necessary to modify a policy. The proposals prescribe objectives for Federal reserve policy, which, from the administrative point of view, are so rigid as to be highly undesirable. Senator Couzens. I want to say that in all enactments of Congress they have to be administered by some one. Even in the criminal courts, judgment is left to the judges to determine to the extent that they will go within certain limits. W hat I am trying to bring out is whether or not it is advisable for Congress to put on the statute books a policy which of course makes its flexible, but which would be a mandate from the Congress to the Federal Reserve Board as to what Congress thought they ought to do. In other words, I disagree with the Goldsborougli bill to the extent of fixing prices on any specific level, but I do not find the same ob jection to establishing a policy which fixes reserves as I do to fixing prices, and I just wondered whether you thought there was any more likelihood that good would result by fixing reserves than by fixing prices. Mr. Meyer. I think fixing either is inadvisable. We are contend ing with unprecedented conditions at home and abroad. This coun try has had enormous foreign deposits of money here attracted by confidence in American currency. A great deal of that is being called back in the course of events, because with the breakdown in what is called the gold-exchange standard, these foreign countries now want to keep gold in their own vaults. Senator Couzens. What happens if they do that? Mr. Meyer. They are doing it. Senator Couzens. W hat happens when they do it? Mr. Meyer. Nothing happens, particularly. Senator Couzens. Then why do we find fault about it? Mr. Meyer. We don’t.' Senator Couzens. We are finding fault about it right along, be cause somebody is removing gold to their vaults. Mr. Meyer. I have not found fault with it. But in addition to that, there is the question of confidence at home and abroad, which is important to the United States, as it is to every country. When gold is exported on account of a state of fear it is a bad thing, no matter whose money it is and what the other conditions are. Cer tainly, the United States has not sought to establish any brakes or interferences with the free movement of gold or the withdrawal of MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 207 deposits by foreign central banks or bankers or individuals if they chose to recall their deposits. However, it is a different thing when a state of fear arises all over the world about the currency of any country. That has nothing to do with the United States particularly, or any other country, but applies to all alike. Senator Couzens. Let me make a concrete case, then. Just what would be the bad effect from restoring reserve balances to the 1927-28 level? Now that is a specific accomplishment. W hat would happen from that? Mr. Meyer. Y ou have already said that you would not ask me to give an offhand answer to a rather elaborate statement which I have not considered. I do not have in mind, as a matter of fact, Senator, what the 1927-28 bank reserves were. Senator Couzens. Would you look it up and advise us as to what effect that would have in your opinion if that were enacted into legislation? Mr. Meyer. I will be glad to do that, or have it done. I was ex pecting to be absent for two or three days and I may not be able to do it immediately. But what seems to me to be inadvisable is to commit the board or the Federal Reserve System to a policy on an assumption that the policy as expressed in the bill is a feasible policy. And I further more feel that, in general, legislation should not define administrative procedure beyond the necessity of laying down principles, in its proper capacity as the legislative body; it should not undertake to determine the details of the administration. Senator Couzens. A s a matter of fact, of course every administra tive officer does not like to have his powers prescribed. That is a perfectly human attitude of mind, is it not ? Mr. Meyer. N o ; I think, Senator, I quite respect a proper restric tion of power, and I feel that if we had the power that it is assumed we have I should not want to be entrusted with it. I do not think that any small group of men ought to be in possession of the power to control the price level. Senator Couzens. I am not talking about that; I am abandoning the idea of the price level. Mr. Meyer. Well, of course, I am addressing myself to this bill. Senator Couzens. I was addressing myself to the suggestion made by Mr. Wallace. Mr. Meyer. Which I would like to consider at greater length be fore I testify on it. Senator Costigan. Governor Meyer, may I ask you what the object of the Federal Reserve Board has been in purchasing Gov - eminent bonds ? Mr. Meyer. The object is to increase the reserves at the Federal reserve banks to the credit of the member banks, in the hope and expectation that they will be used. This has been successful up to a certain extent, and it has had, in part, the effect of reducing mem ber bank borrowings. The Reconstruction Finance Corporation also has been helping by making additional funds available to banks for use in financing agriculture and business. But naturally, after an experience such as the country—the bank * ers along with other people—has had in the last two years, with 208 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR continuous declines in deposits and prices and the volume of business, confidence has fallen correspondingly, and now we have the problem of restoring confidence as well as making funds available. Senator Couzens. I s there any lack of capital in the country ? Mr. Meter. There is probably lack of capital for some people or some enterprises in some places, and there may be surplus capital in other places. But, of course, what we are seeking to do is to get funds distributed so that they may be made more available through out. Senator Couzens. I did not ask if there was capital nor did I make any limited statement as to distribution of capital. But I asked you, in the country as a whole, is there adequate capital to run the country? Mr. Meyer. There is, in my opinion. Senator Costigan. Has any appreciable effect on prices from the bond-purchasing policy been observed? Mr. Meyer. Y ou mean in the commodity price level? Senator Costigan. In this country. Mr. Meyer. I think there has, but you can not see it in a rise. You see it in an arrest in the decline. I will say at this point that we were in conference with the gov ernors of the Federal reserve banks only yesterday, and some of the things we considered were the commodity price level and how the funds which are being made available by the Federal reserve system to the banks can be made available by the banks to business men, to agricultural interests, to commercial interests, and to construction interests throughout the country; and I think the governors on their return to their respective districts will seek to study ways and means more aggressively to effect such a result. You must not forget, gentlemen, in talking about the commodity price level, a subject I discussed at some length in the House hearings which will be reprinted here, that in conditions such as the present there are serious dislocations in business; there is a dislocation of the time element and a dislocation of the operation of the machinery for production and distribution of wealth. The foreign exchange demoralization—for instance, the fact that England has an unstable exchange—interferes materially with the marketing of our agri cultural products, because in a period of fluctuating exchanges in countries off the gold standard they naturally hesitate to make long time contracts and carry large stocks of commodities. That is reflected at the present time in the figures on cotton, where the present stocks outside of the United States, in England and on the Continent, are down as compared with a year ago, I think, by about six hundred and fifty thousand bales, in spite of the fact that total American exports for the current crop year (including exports to the Orient as well as to Europe) have gone up 1,500,000 bales. That means that the United States and other producing countries are carrying the stocks which ordinarily, in normal times, when cur rencies were stable, were being distributed all along the line of orderly marketing, in storage, conversion, and finishing. Now that creates a new situation in the producing country, and we are giving thought and study to new adjustments and new operations, with the view of making the carrying of our stocks financially more easy. I t even gets dowm sometimes to a warehous MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 209 ing problem. I remember certain times when we have had to carry cotton in inordinate amounts and we had a warehousing as well as a financial problem. The change of the time element is a vital factor. W ith your experience, Senator, you know perfectly wTell that the time element in the flow of commodities through a factory, the timing of the movement of the goods, is just as important as any factor in the whole operation. Senator Couzens. S o your conclusion is that until the bankers get a proper mental attitude there is not anything that Congress or the Federal reserve system can do to expedite the flow of money into industry ? Mr. Meyer. I think the Federal reserve system is doing and can do----Senator Couzens (interposing). I did not say that. Mr. Meyer. I thought you said the Federal reserve system. Senator Couzens. I said, no matter what the Federal reserve sys tem can do or the Government, there is no way of forcing the banks to loan money until they get into the proper mental attitude ? Mr. Meyer. Of course, there are a great many bankers, and I would not say that any one attitude was characteristic of the atti tude of every individual banker. Senator Couzens. Oh, I was speaking generally, of course. Mr. Meyer. I t is true, of course, that they have been through a trying period, and they along with the rest of the world lack op timism. It is characteristic of human nature for bankers and others, when a trend sets in, to believe that the trend is going to continue forever. When it is an optimistic trend, why, they see the sky as the limit. When it is a pessimistic and a downward trend, there is never any bottom until it occurs. Senator Couzens. Y ou did not answer my question. I said, is there nothing that Congress or the Federal reserve system can do to spread out the loaning of money until the banks get willing to do so ? Mr. Meyer. I think that what the Federal reserve system is doing tends to accelerate a change in the attitude of mind of bankers, and*, we hope, not only of bankers but of business men. ' Senator F letcher. When did the Federal reserve system be<nn that procedure, Mr. Meyer? Mr. Meyer. The Federal reserve system—you mean the purchase of Government securities ? Senator F letcher. Yes. Mr. Meyer. There were purchases of Government securities before I became a member of the board in 1930. There were some in 1929 and in 1930. Senator Costigan. Y ou have recently started a new definite pro gram, have you not, Governor? Mr. Meyer. I beg your pardon ? Senator Costigan. Y ou have recently started a program, of a defi nite sort? Mr. Meyer. 1 es; subsequent to the passage of the Glass-Steagall Act the system embarked on a program which was pursued at a moderate rate, beginning with the latter part of February and at an accelerated rate in April. 210 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR Senator Costigan. May I ask how fast and how far the program has proceeded since the passage of the Glass-Steagall bill ? Mr. Meyer. I should say the purchases of Government securities since the passage of the Glass-Steagall Act total about $645,000,000 or $650,000,000. Senator Costigan. Has it proceeded at the rate of about a hundred million a week? Mr. Meyer. I t did for five weeks. Doctor Goldenweiser has the chart here of Government security purchases. U.S. SECURITIES HELD BY FEDERAL RESERVE BANKS M ILLIONS or D OLLARS 14-00 1200 1000 eoo 600 4-00 200 0 Senator Couzens. Have you dropped off in the purchases now or are you slowing down? Mr. Meyer. I don’t know what the total will be this week. Senator Couzens. N o ; I am not asking what the total will be this week. Mr. Meyer. Up to this week, the total was at a rate averaging about a hundred million a week. Senator Couzens. W hat is your program for the next few weeks? Mr. Meyer. It is to continue at a rate to be determined as condi tions, which have to be judged from time to time, justify. MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 211 Senator Costigan. May I suggest for the purpose of the record, Governor, that you indicate from your chart how rapidly those pur chases have recently been made. Senator Couzens. In other words, it is a secret ? . Mr. Meyer. N o; it is not a secret at all. I t is an undetermined fact which has to be judged from time to time as conditions justify. Senator Couzens. When you say “ from time to time ”—how long from time to time? Mr. Meyer. Oh, from day to day, and week to week. Senator Couzens. Y ou have to settle this every day? Mr. Meyer. No ; I don’t settle it at all. The open market com mittee conducts the operation. But there is not any fixed schedule, and there ought not to be, because it is a question of fine judgment as to what the best policy is. Senator F letcher. Y ou have not fixed any time when you are to discontinue this operation? Mr. Meyer. N o. The question is a matter of judgment and ex perience as to whether a more rapid rate or a slower rate or a larger or smaller amount is best suited to conditions, and that gets back to this, that you have to bear in mind, Senator, that the results of the forces set in motion by the open market operations are seen only somewhat later. So it is a matter calling for very good and fine judgment and discretion as to whether or not a more rapid rate or a variation in amount is desirable from time to time. Senator Couzens. Could you call out the names now of the mem bers of the open market operation committee ? Mr. Meyer. The governors of the Federal reserve banks—the 12 governors. Senator Couzens. And are any of the members of the Federal Reserve Board on this open market committee? Mr. Meyer. No. Senator Couzens. All 12 governors? Mr. Meyer. The 12 governors of the Federal reserve banks con stitute the open market committee. Senator Couzens. And how often do they meet? Mr. Meyer. A s an open market conference? Senator Couzens. Yes. Mr. Meyer. They do not meet at stated intervals. They meet whenever they call a conference or the board calls them into a con ference, and they have an executive committee that acts under the instructions of the full open market committee in the meantime. Senator Couzens. S o the executive committee is called in by the Federal Reserve Board? Mr. Meyer. I t may be, but the full committee is called in, too. Senator Couzens. When did you call in the executive committee of the open market committee last? Mr. Meyer. I do not think we have recently called in the executive committee. We had a conference with the open market committee yesterday. We had one on April 12 also. Senator Couzens. Who was at the conference yesterday ? Mr. Meyer. All the governors of the banks except one whose wife was ill and his deputy came. Senator Couzens. In other words, it was not the executive com mittee then; it was just the----- 21 2 MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR M r . M e y e r ( in t e r p o s in g ) . T h e o p e n m a r k e t c o m m itte e . # T h e C h a i r m a n . W h o a re th e e x e c u t iv e c o m m itt e e ? W i l l y o u g iv e t h e ir n a m e s ? . M r . M e y e r . T h e g o v e r n o r s o f fiv e o f th e r e s e rv e b a n k s , th o se m C le v e la n d , C h ic a g o , A t la n t a , B o s t o n , a n d N e w Y o r k . T h e C h a i r m a n . T h e y h a v e p o w e r to a c t f o r t h e c o m m itte e ? M r . M e y e r . O n a u t h o r it y f r o m th e f u l l c o m m itte e o n ly . S e n a t o r B r o o k h a r t . W h a t a re the e le m e n ts t h e y c o n s id e r a n d a ct o n w h e n t h e y d e c id e t h is p o lic y ? W h a t is i t t h a t d e t e rm in e s t h e ir ju d g m e n t ? . . M r . M e y e r . T h e y a re a c t in g u n d e r th e a u t h o r iz a t io n , w h a t e v e r it m a y be, o f th e f u l l o p e n m a r k e t c o m m itte e . . S e n a t o r B r o o k h a r t . I u n d e r s t a n d t h a t, b u t I m e a n w h a t e c o n o m ic f a c t s o r c o n d it io n s n o w d e t e rm in e s t h e ir ju d g m e n t as to w h e t h e r t h e y w i l l b u y th ese b o n d s o r n o t ? M r . M e y e r . I t d e p e n d s o n th e c ir c u m s t a n c e s a t t h e tim e . T h a t v a r ie s w it h c o n d it io n s . _ S e n a t o r B r o o k h a r t . I a m t r y i n g to g e t a s p e c ific n a m e f o r som e o f th ese c ir c u m s t a n c e s . T h a t do es n o t m e a n a n y t h in g ju s t to s a y “ c ir c u m s t a n c e s .” . . M r . M e y e r . W e ll, c ir c u m s t a n c e s c h a n g e a t v a r io u s tim e s . S e n a t o r B r o o k h a r t . W h a t a re th e c ir c u m s t a n c e s t h a t c h a n g e n o w , t h a t t h e y h a v e t a lk e d a b o u t, t h a t t h e y c o n s id e r ? # M r . M e y e r . T h e m o n e y m a r k e t , c r e d it c o n d it io n s , b u s in e s s c o n d it io n s , a n d so f o r t h . S e n a t o r B r o o k h a r t . P r i c e le v e l? M r . M e y e r . P r i c e le v e l, in t e r n a t io n a l e x c h a n g e — e v e r y t h in g t h a t e n te rs in t o th e f in a n c ia l a n d e c o n o m ic p ic t u r e , I s h o u ld t h in k . S e n a t o r B r o o k h a r t . W e l l n o w , t h e y w i l l a l l co n ce d e , a n d y o u do, t h a t th e p r e s e n t p r ic e le v e l is a b n o r m a lly lo w ? M r. M e y e r . Y e s. S e n a t o r B r o o k h a r t . D o y o u c o n ce d e t h a t th e F e d e r a l r e s e r v e a d m in is t r a t io n h a s h a d a n y t h in g to d o w it h lo w e r in g t h a t p r ic e le v e l ? M r . M e y e r . I n w h a t p e r io d ? S e n a t o r B r o o k h a r t . W e ll, t a k e a n y p e r io d . M r . M e y e r . N o ; I t h in k n o t. I t h i n k th e F e d e r a l r e s e r v e s y s te m h a s b e e n t r y i n g to e x e rc is e a s u p p o r t in g in flu e n c e a n d a s u s t a in in g in flu e n c e in " a r r e s t in g th e d e fla t io n a n d c o n t r a c t io n a n d d e c lin e . S e n a t o r B r o o k h a r t . B u t it h a s been u n s u c c e s s fu l? M r . M e y e r . I t h a s b e e n — I w o u ld n o t s a y t h a t i t h a s been e n t ir e ly u n s u c c e s s fu l, b e c a u se c o n d it io n s w o u ld p r o b a b ly h a v e b een w o rs e i f th e s y s te m h a d n o t m a d e th e e ffo rts t h a t i t d id m a k e . # _ S e n a t o r B r o o k h a r t . W e ll, o f c o u rs e , w e c a n a lw a y s s a y i t m ig h t h a v e b ee n w o rse . M r . M e y e r . W e c a n s o m e tim e s s a y i t t r u t h f u ll y . S e n a t o r B r o o k h a r t . B u t h a s th e F e d e r a l re s e r v e u s e d a l l it s p o w e rs to s t a y t h is a b n o r m a l d e c lin e o f p r ic e s ? M r . M e y e r . I f y o u w a n t m e to s a y t h a t i t h a s b e e n p e r fe c t , I w o u ld n o t s a y i t w a s m o re p e r f e c t t h a n y o u o r I o r th e r e s t o f u s. S e n a t o r B r o o k h a r t . H a v e t h e y b e e n s u b s t a n t ia lly u s in g t h e m ? I d o n o t m e a n a n y t h e o r e t ic a l p e r fe c t io n . MAINTAINING AVERAGE PURCHASING POWER OF DOLLAR 213 M r . M e y e r . I w o u ld h e s ita te to s a y t h a t t h e y c o u ld h a v e d o n e v e r y m u c h b e tte r in t h e l i g h t o f c o n d it io n s w it h w h ic h I a m f a m i l i a r in th e la s t y e a r a n d a h a lf . S e n a t o r B r o o k h a r t . T h e n do es n o t th e la w n e e d to b e a m e n d e d so m e w a y so as to g iv e th e m m o re p o w e r so t h e y c a n m eet th e s it u a t io n b e t t e r? M r . M e y e r . Y o u h a v e a m e n d e d it . S e n a t o r B r o o k h a r t . A r e th o se a m e n d m e n ts s u ffic ie n t? _ S e n a t o r C o u z e n s . D o e s th e b o a r d k e e p a n y m in u t e s o f it s m e e tin g s a n d it s d e c is io n s ? M r. M e y e r . T h e F e d e r a l R e se rv e B o a r d ? S e n a t o r C o u z e n s . Y e s ; a n d th e o p e n m a r k e t co m m itte e . M r . M e y e r . I s u p p o s e th e o p e n m a r k e t c o m m itte e h a s so m e r e c o r d o f it s m e e tin g s , c e r t a in ly . , S e n a t o r C o u z e n s . I s th e re a n y r e c o r d o f th e d is c u s s io n t h a t goes o n to d e t e rm in e th e f a c t o r s t h a t c o m p e l t h e m o r u r g e t h e m to re a c h c o n c lu s io n s ? M r . M e y e r . O f c o u rs e , t h e y h a v e m e e t in g s w h ic h la s t a l l d a y lo n g , a n d t h e y c a n n o t m a k e a c o m p le t e r e c o r d o f th e d is c u s s io n s t h a t go o n f o r s ix o r e ig h t h o u rs . T h e r e a re n o s t e n o g r a p h ic m in u t e s o f th e m . S e n a t o r C o u z e n s . W e w e re i n se s sio n 8 o r 1 0 h o u r s y e s t e r d a y a n d th e re w a s a r e c o r d o f w h a t w e n t o n i n th e S e n a te . M r . M e y e r . I k n o w th e S e n a te is a lw a y s m e t ic u lo u s ly c a r e f u l to ta k e a r e c o r d o f e v e r y t h in g t h a t i s s a id . S e n a t o r C o u z e n s . T h a t w o u ld be in t e r e s t in g , to k n o w w h a t w a s s a id o n th e F e d e r a l R e s e r v e B o a r d a n d a ls o o n th e o p e n m a r k e t c o m m itte e , I t h in k , a t tim e s . . M r . M e y e r . I h a v e n o d o u b t it is . S o m e t im e s th e d is c u s s io n s a re v e r y in t e r e s t in g a n d c o v e r a w id e r a n g e o f s u b je c t s — g e n e r a l c o n d i t io n s , b a n k in g c o n d it io n s , a n d so f o r t h . A t th e sa m e t im e it n e v e r h a s b een th e c u s to m , so f a r as I k n o w , to t a k e s t e n o g r a p h ic m in u te s . S e n a t o r C o u z e n s . W h e n y o u d e c id e to ju m p y o u r p u rc h a s e s , s a y , f r o m t w e n t y -fiv e to a h u n d r e d m i ll i o n a w e e k — I m e a n th e o p e n m a r k e t c o m m itte e — is a r e s o lu t io n in t r o d u c e d ? M r . M e y e r . Y e s ;