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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 something1 about stock specula­
1
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
” provide for increasing and stabilising the price level of com­
To
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 I a study of the operations of the Federal Reserve
n
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,
( i n d Eugene Meyer
Sne)

Governor

The Goldsborough bill reads as followst
"An Act For restoring and maintaining the purchasing power of
t i dollar. Be it enacted by the Senate and House of Representa­
ie
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 a o i the wholesale commodity markets for
»br n
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
.
t l s Act are hereby repealed."
il

.

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 i were to be passed by the Senate, which is extremely
t
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

ST B A IO O C M O IT P IC
A ILIZ T N F O M D Y R ES

ST B A IO O C M O IT P IC
A ILIZ T N F O M D Y R ES

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— period, I called attention of this
22
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

ST B IZ T N O C M O IT PR ES
A IL A IO " F O M D Y IC

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

ST B A IO O C M O IT PR ES
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ST B IZ T N O C M O IT P IC
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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 twT things: To some extent, to speculative building
o
w
rhere 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

ST B A IO O C M O IT PR ES
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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 a e n t making a v r good Republican
r o
ey
h g trf s e c t i m r i g
i h aif p e h h s o n n .

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

ST B A IO O C M O IT P IC
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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 we made.
T
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 ! sound method were available to raise it from the present level.
a
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.




ST B A IO O C M O IT P IC
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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.

ST B A IO O C M O IT P IC S
A ILIZ T N F O M D Y R E

ST B A IO O C M O IT P IC
A ILIZ T N F O M D Y R ES

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 w very helpful in easing the situation and in relaxing
ras
the forced contraction th at was going on—a contraction forced by
T
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 w
rould 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 w
rays 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

>ODHR
KFOAS
5

BUILDING CONTRACTS AWARDED

60
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0

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37£ stemSa e -3 month m v n a e a e a j s e frs a o a vrain
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o i g v r g , d o / d o e s n l aito

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-

V L M O MNF C U I GPOUTO
O U E F AUA T R N RDCIN
D
AILY AVERAGE AGGREGATES IN F. R B AR INDEX. ADJUSTED TOR SEA N LVARIATIO
. O D
SO A
N

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
we have no control.
T
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 w measured in relation to the values of that currency,
ras
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 } and I both think is
rou
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 w have discussed. I regard the reorganization of the bank­
re
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
s3T
stem 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 w
rant 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,
3T may have them withdrawing from the national banking system,
ou
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

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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

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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

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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

D O
EP SITS

M nsod lla s
illio ro r

REPORTING MEMBER BANKS IN NEW YORK CITY

RT O T R OE
AE f U N V R
( TimsP ahh m»
e ffl u

RT O T ROE
AE f UNVR

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 oldenweiser . 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
R T o T NE
A
RV
n
iTcsrerUnumR
im p A O

\

V

12 12- 12 12 12 12 12 13 13 13
93 99 95 96 97 93 99 90 91 92

(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 n
cit¥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

arifdbMOTriS A” Pr°f S O o «onomi«;UnTve‘ ityof MoWgan^
Ptce v
eSr f
r
8
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

3
1

?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 ™ ! ^

‘i
fO

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 s i°„ta ty: Y Ci
$ 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]
.
A A For restoring and maintaining the purchasing powe? of the dollar
N CT
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 N 1103, Seventy-second Congress, first session]
o.
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 w hat you require under this bill?
T
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

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o




PnC6S "* t be i C e S d °r When they a e
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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
i2 «
i
£ 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

reThe first week"in Oetober we had in this country $5,015,000,000 of
C

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 O HON. JEFF BUSBY, A BEPBESENTATIVE IN CONF
GBESS 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 m
oney pow in the hands of a com
er
bination of a few individuals
and they by expanding or contracting the currency m raise or sink prices
av
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 w
diat 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 m ow and others have their index prices, but I am convinced that
y n,
the Bureau of Labor Statistics’ w
holesale com odity index price is the best
m
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 a due largely to the velocity of credit. It was due largely
^s
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
A T R O N S S IO
F E N O ES N

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 O THE PHILA­
F
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 pow in June, 1917. He
der
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 O WALLACE’S FARMER
F
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 G
nvp/m
nruvnt 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:
W
hereas the Federal reserve system has ceased properly to function as an
agency for accom odating com erce and stabilizing prices and has allow
m
m
ed
deposits to decline by $10,000,000,000, thus crippling com erce, disorganizing
m
agriculture, and throw labor out of em
ing
ploym
ent, the C
ongress of the U
nited
States hereby directs the Federal reserve system to raise the price level by the
follow means:
ing
1. R
estore the reserve balances of the m ber banks to the 1927-28 level.
em
To bring this to pass the Federal reserve system shall, w
ithin three m
onths
of the passage of this act, purchase w
hatever volum of G
e
overnm bonds are
ent
necessary to acccom
plish this end.
2. Thereafter reserve balances of the m ber banks shall be held at the
em
1927-28 level as a m um
inim .
3. Furtherm
ore, these reserve balances shall be increased at the sam per­
e
centage rate of grow as the long-term rate of grow in production of
th
th
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 11 n ^
.i i 1 ^1 11 1 /\ 4 /-v n n T7A T7A 11
t
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




$0,0,0,0.
10000000

. 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 .

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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
11
3
124
124
12S
132
127
150
186
193
160
152
149
11
4
114
100
109
104
98
97
103
99
98
102
9
1
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
11
2
113
123
11
4
137
133
119
126
130
128
129
152
184
185
160
155
11
5
137
113
99
108
104
97
98
102
99
97
100
9
1
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
14
1
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
9
1
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
11
2
114
107

123
122
123
145
117
114
122
144
132
130
112
133
129
127
126
157
182
166
11
5
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
11
3
112
132
11
3
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
9
1
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
11
3
112
132
130
124
125
158
179
165
150
154
144
124
106
99
107
103
98
107
99
C
O
94
97
9
1
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
11
2
104
100
106
104
98
106
11
0
96
95
93
9
1
93
92
93
88
1(M
110
113
107
11
1
92
90
8
1
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
11
3
146
116
122
124
138
135
129
113
129
132
126
133
11
6
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
11
5
120
103
107
104
102
99
105
98
96
99
92
92
95
94
96
90
11
0
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
9
1
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
11
2
128
131
122
144
186
193
163
149
146
145
114
100
109
104
100
98
103
98
99
11
0
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
11
5
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
106 102
105
1880
..........
101 100 100 101
99 100 100
1881.......................
ms
108 109 110 111 110
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
8 87 82 82 80 80 85
8
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
68
6 68 71 67 66 71 66
8
1897
........
70
76
71
71
70
1898.
........
76
75
74
74
73
73
71
1899.
........
82
81
84
82
84
1900.
........................................ 84
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.
........................................ 106 107 105 104 104
104
1910
.......
93
92
92
92
95
94
1911
.......
99 102 102 101 101
97
1912-..................
102 101 101 102
102
1913.
........................................ 102
99
98
99
98
99
3 100
.......
1914.
3 100 100 100 101 100 101
1915.
.......
2 115 117 119 121 1 121 122
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
..............
142
a
140
1928
........................................ 139 141 142 141 141
0 139 140 139 138 139
1929
..............
2
130 127 1 3
3
132 1 1
5 134
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

8
6 91
88
90
99
10
0
99
103
107
108
106
11
0
97
96
93
87
88
8
6 85
84
82
82
81
85
87
85
8
6
87
87
81
82
81
82
83
83
79
82
79
76
80
79
78
74
75
69
70
70
71
71
72
6
8
70
70
63
70
70
71
71
70
83
77
82
80
81
82
??
84
83
??
90
89
85
87
85
89
87
89
8
8
89
88
94
90
93
95
92
94
95
92
94
99
104 105
97 • 105
97
95
95
96
0
0 11
103 12
0 12
0
102 11
99
98
99
11
0
105 108
125
142 145
172
179 180
191
199 199
0
2 22
211 | 20
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
0 107
103 10

_____ ______

^-------

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

th e

p r ic e

1921 to

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

1929,

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

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

fr e ig h t

ra tes

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 ?

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

63

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

O f cou rse th ere w as

fr e ig h t ra tes th a t n o w

s u lts .

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

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 .

p re­

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 e c e iv e

r is e

n e a r ly

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.

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, 1920, to

J u n e , 1 9 2 1 , r e ta il p r ic e s

p a id

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

p r ic e s

fe ll 29

per

fix e d

a c tu a lly

fo r

p r ic e s

The

s itu a ­

M r. W arren . It

or

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
ch an ge

very

fo llo w in g

r a is e d

th e

s lo w ly .
p a n ic s

In
of

fa c t

1920

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

been

in s te a d

t h in k , in

see th e

of

d e c id in g

d u r a t io n

of

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 .

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.

an

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
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

has

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

recen t

M r. W arren . Y es.

and

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

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 ?

a d e fla tio n

T h e n , a g a in , in

cen t

O f

and

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

C h a ir m a n . Y e s.

w a g e s c a le

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

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.

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

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

in p r ic e s r e s to r e s th e b a la n c e .

to

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
by

resp on d

liq u id a tio n

m ortg a g 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
on

and

and
stock

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

is

h as to

and

done

over

th e
fo r

th e

jo b

is

th a t

fin d

T h e C h a ir m a n .

th ese

you

p la n s .

w o u ld

and

T h a t is

th e
w hy

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

fo rce s

in t e r fe r e n c e s

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.

w h ic h , i f

B u t w h a t,

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

sp eak

a b o u t th e

m a in ta in

you

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

The

say

b ig

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
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 ?

t h e ir b o n d s , a n d

w hat

80

M r . W a r r e n . V e r y la r g e ly .

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

la b o r.

tr o llin g

W arren. T h ey

th e

n o t h a ve th e

C h a ir m a n . D ir e c t

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

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 .

p e r m itt e d

T h a t seem s q u ite s im p le .

do

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

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

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 ?

e x a c tly

la r g e ly

d evote

p art

real

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

la r g e r

h ere

M r . W a r r e n . C e r ta in ly .
I

th a t th e

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

say

It

p ro p e rty

a b u yer.

to

W it h

tim e .

p h y s ic a l

w a it to

done.

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

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

S e n a to r G o r e . S ta te t h a t a g a in .

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 ,

e ffic ie n c y

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

r e la t io n

lik e

S e n a to r

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

average

p r ic e

of

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

th e

F o r h im , w a g e s o f 13 7 i f h e h a d

a b u y in g

In

fa c t , h e w o u ld h a v e
cen t

above

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.
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.

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
v a lu e o f th e d o lla r .

M r.

W arren. In

if

one

and

w e th row

th e

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

it e m

in ­

h a v e n ’t

be— I

th e

g e t in to w h e n y o u

r a is e th e

m a n u fa c tu r e r

can

H e has to h a ve w ages

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

oth er

e x tre m e , to

th e

lit t le b e s id e s f o o d
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 ?

w o n ’t

yes.

B ut

th e se

get

v a r io u s

w ork m an

a d ju s t m e n t

out o f

and

a g a in

lin e t h e y

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 e n a to r C o u ze n s. W o u ld

you

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

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 ?
tio n

th in k so.

I

t h in k i f w e g o

p ro c e s s , th a t th e c h ild r e n

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
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

th e

liv in g

tim e s ;

average

th in g s

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

esta te g e n e r a lly

th a t

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

in th e n e x t g e n e r a t io n .

begun

So

I m ad e a stu d y o f

is

in d u s tr ia l

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

th a t ite m , w h ic h

m ore th a n

th e

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

th e

is v e r y

C o u zen s. B u t I m ean

la b o r e r — in t o

and

e x a m p le ,

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

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 ­

p rod u cts,

F or

average

w ork ers ?

c o lla r

fa r m

an

o n e ite m

fo r

of

th e

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

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

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 ill g o

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 .
in c r e a s e d

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 .
p r o b a b ly

in d e x

A nd

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

w ith

p re -w a r.

s in c e

It

th e

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

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

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 ,

p ro fe sso rs

M r. W arren . I f

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

w o u ld m e a n

a n d g e t a d ju s t e d

an sw er

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

th a t

p r e -w a r , w a g e s s h o u ld

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.

fa lls

m ake

e n t ir e ly

an

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

th in k
oth er

fin is h e d .

ask ed

th ere
is

The

th is

are

tw o

w ays

liq u id a tio n

liq u id a tio n

h a s n o t r e a lly b e g u n .

of

to

p roceed .

d e b ts , w h ic h

c ity

re a l esta te

Y ou

can

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 .

and

W e h a v e a s ta le m a te .

m u ch ta x es ca n

you

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

One

o f

on

is
not

real

s itu a ­

o f h o te ls ,

a h o te l n o r m a lly ,

c o u ld p a y 2 p e r cen t.

in e v it a b le

r e s u lt

f a c t u r e r ’s p r i c e
cost o f

liv in g

A n d it ta k e s y e a r s to o v e r c o m e it.

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

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

T h i s is a n
The

w ages.

m anu­
The

th e p r o d u c t

w hat

w o u ld

you

say

w as

a

n orm al

ta x ? ”

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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 .

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y o u th a t.

so

fa r
•

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who

A
got

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you

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m an

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to

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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
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
to

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 ?




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

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 .

had

co tto n .

S en a to r G ore. Y es.

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

he

fo r

M r. W arren . P erh ap s

to

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 ---------

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 .

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

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 «

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

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 .

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

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

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 .

dow n

ou t.

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

say

th a t

as to

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

M r. W arren . N o.
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.

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

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

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

we

are to

d e fla te e v e r y t h in g

dow n

to

th e

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
fr o m

I f

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 .

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

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

le a v e t o

w ages
T o

e ffic ie n c y ; t h e y

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 .
dow n.

The

c a p ita liz a tio n

M r. W arren . Y es.

in

b u ild in g s .

w e ca n use.

B u t ta k e th e sh o e in d u s tr y , fo r

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

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

h e d oes n o t w a n t ren ts to g o
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

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
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 .




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
th o se fa c to r ie s c a n

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

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

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 ?

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

g iv e

you

th e

c o n c lu s io n s

very

b r ie fly .
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

we

have

gone

as

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

S e n a to r

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

fo llo w s :

w as

ta l in v e s tm e n t?

of

in s ta b ility

of

m oney

p r im a r ily .

and

A ll

cen t.

p rod u cts

put

A nd

I t g iv e s

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

w hat you

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 ?

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 .
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 .
C o u ze n s. W o u ld

fu r th e r w e ca n

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 ;

s a v in g

and

s a v in g

fo r th e w o r ld ,

M r.
out

a n d n o t c o n s u m in g

W a r r e n . N o th in g

of

lin e

v a lu e

w hat

m oney.

o f

th a n

N ot

to

put

o r b u ild in g

in to

m ore

th row s

we

are

ju s t

th e

enough

p r o d u c tiv e

p o in t

g e ttin g

of

r ig h t

m a n u fa c tu r e r s ,

o f n o n p r o d u c t iv e

v ie w

of

now .
but

p e o p le

The

r is e

m ore
in

in d iv id u a ls .

th e

That

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.
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 ?
M r. W arren. Y e s ;

M r. W arren. Y es.

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

cau gh t

t h in k

you

can

c a l l i t a b u y e r ’s s t r i k e .

I

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

a g a in

w ith o u t

m o n e y .”

S e n a to r

th a t

we

p u t o u r e a r n in g s in to

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;

M r . W a r r e n . N o w , it
p o in t o f v ie w .
w ant

p r o d u c tiv e in d u s tr y ?
W arren. I

th e w o rd .

A nd

som e

of

th em

d o n ’t lik e

w ill n e v e r b e

sa y , “ W it h o u t

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 .

enough

m ust

A ls o b e ­

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

th e ir

we

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.

S om ew h ere

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

p r o d u c tio n .

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

as w e ll, th a t h a v e n o t in c r e a s e d

w ith

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

accord an ce

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

th e r u r a l c itie s
in

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

fa rm s , b u t in
c o n s u m p t io n

M r.

M r. W arren. Y es.

F rom

w onder

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?

m a lly

I

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

u re.

in d u s tr y

p rod u cts o f
over

w ill

in d u s tr y .

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.

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.

a n d p u ttin g y o u r m o n e y b a ck
w h e th e r

p r o d u c tiv e

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.
w h ic h I h a v e h a n d e d t o y o u .

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
in to

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

73

to

n o t th e
m u st

A

spend.

A nd

save

m ost

a

w ith o u t

e le c tr ic

T h ere

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 .
in

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

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 .

S en a tor
t r ia lis ts




C o u zen s. T h e

and

ban k ers

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

am

who

th e

poor

th a t

o ld

con su m e

fu tu r e p r o d u c tio n .

I

th em

so

we

g o in g

a lo n e , b u t th e

w hat

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

fig u r e

are

on

we

earn.

s a v in g

ju s t

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

to

of

a g e n e r a tio n

g e t c a u g h t a g a in .

b a th ,

is g o i n g

of

th is

m any

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

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

a good

w ill ta k e u s

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
S e n a t o r G o r e . D o n ’t y o u
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

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

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.

to in c r e a s e w h ile g o ld

The

to b e in d e b t a g a in .
in

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

have

U n le s s

e x a m p le .

not

can

p r ic e s

not

fo r

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

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

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

H ou se

The

d e ta ils

h e a r in g s .

A

in ­

of

th is

d e s ir in g

in

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

are, as I

s h o w in g

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

th is

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

go

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

key

to

W hy

w ere

to

a n d le a d s t o e n d le s s c o n f u s io n .

The

of

w heat

and

or

s u p p ly

d ecrease

A n

in c r e a s e

fo r

g o ld

m and

in

of

in

A n

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

th e

g o ld
an

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

40

to

A

a ll c o u ld
fe w

50

r e e s ta b lis h
on

ta k en

cen t

to

in c r e a s e

The

in

s u p p ly

w as

fu lly

T h is cra sh

a c c o m p a n ie d
by

a

p r in c ip le

a p p lie s

'

fo r

tid e .

it

w h e a t.

In

The

to

p r ic e s

in t o

th in k in g th a t g o ld

h a s n o th in g

th e U n ite d

p a n ic

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

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
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

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 .
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

to

h e lp in g th e w o r ld

F rom

a fu ll g o ld

w a s d u r in g

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 ?

de­

w h e a t p r ic e s as th e s u p p ly o f

sam e

per

and

e ith e r

sta n d a rd .

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 .

w heat

or

th e

50

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

T h is

o f

in

o f th e

g o ld

a b u s in e s s

th is

40

w a s d u e to th e r e tu r n in g d e m a n d

by

on
to

le v e l

E n g la n d

b a s is .

p re -w a r .

e s ta b lis h e d

a lm o s t d o u b le , w h a t

dem and

g o ld

g o ld

th e

w ere
re tu rn

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 .

out

p r ic e s

th e

of

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

e c o n o m is ts

I t is n o t a q u e s tio n o f c o n fid e n c e .

dem and

r a is e s

of

above

re sto re

p r ic e

th e

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

e c o n o m is ts in

m a jo r it y

th a t

th a t th e y

have

le v e l in

p re -w a r .

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 .
tu a tio n .

o f th e

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
g o ld

above

b a s is , o b s e r v in g

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 .

our

m any

th ey

p r ic e

cen t

th e p r ic e

b a s is , a s s u m e d

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

per

a g o ld

th a t

th e
to

c o u n tr ie s h a d

1915

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

and

50

A m e r ic a n s to o k

a c c o m p a n ie d

is t h e

p r ic e s h ig h ?

by

debt

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

a t th is

c y c le s ;

to

in to

g o ld

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 .

sta n d a rd

th e p u b lic .

h ere.

w ar

to

re tu rn

le v e l o n

lis te n e d

is

th e r a tio o f g o ld

40

1 9 2 1 -1 9 2 9

S ta te s c a lle d a tte n tio n t o th is fo o lis h

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

F rom

ce n t a b o v e p re -w a r .

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.

stood

p r ic e

p h y s ic a l v o lu m e

graph

U n ite d

S ta te s

w as

P r ic e s

th e

A ft e r th e w a r w as
re tu rn ­

b a s is .

g o ld

as fo llo w s :

d iv id e d b y th e w o r ld

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 .

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

we

to

19 14 th e r a tio

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

in g to a g o ld

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

th e

F o r h a lf a g e n e r a tio n

in d e x

th ese

T h e p r ic e s a t th a t tim e w e r e 13 1.

o f g o ld

The

r a p id ly

b y th e 42 g iv e s 136.

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
monetary individ­ tary cir­ Deposits culation
tary gold
coin and circula­ ual de­ culation per dollar and de­
posits 4 per dollar of gold posits per
bulletin > tion !
dollar of
of gold
omitted)
gold
omitted) omitted)

(0,0 (0,0 (0,0
0000 0000 0000
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 01
00
,
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

22
.0
21
.2
20
.1
1.94
2. 03
2. 05
2.31
2.41
2.67
2. 65
2.52
2.51
2.36
2.13
1.98

20
.1
1.96
1.91
1.92
1.92
1.93

18
.8
1.92
1.90
1.92
1.92

18
.6
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

11
.0
11
.0
1.06
1.17

11
.0
10
.0
.97

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. 1696 February,
p. 1696, 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 m
oney 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?

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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.

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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

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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




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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, w would finally find adjustment of all of these things and
re
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

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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 DOLLA
X

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 faflC raised in the city of Chicago by public subscription
we6
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
W must take the consequences, it will mean not only a continuation
P
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 ‘ e d o n e in c r e a s e the price levels, to start say ,m the d.rechon
b
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.

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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

22
0

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




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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

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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.

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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
whole have paid, the more they owe. There has been no liquidation.
T
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.

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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.




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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.

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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 w are on theirs.
re
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




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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

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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 o 7erdone itself that it increased
A
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 A
rery 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 A
7ery 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 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F O L R
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.

SU Y A D D M N
PPL N E A D
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.

B L N E TH S A E
AA C E C L
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.




M IN A IN A E A E PU C A G P WR O D L A 147
A T IN G V R G R H SIN O E F O L R
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.

ID E M N Y D E N C U T
L O E O S ’T O N
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 M IN A IN A E A E P R H SIN P WR O D L A
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PR E L V L M ST B R IS D
IC E E U E A E
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,




M IN A IN A E A E PU C A G P WR O D L A 149
A T IN G V R G R H SIN O E F OL R
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.

O H RIN A IO A YM A R S
T E FL T N R E SU E
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.

ST B IZ B Y G PO E O M N Y
A IL E U IN W R F O E
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 M IN A IN A E A E P R H SIN P WR O D L A
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(<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.

Q E IO S A D A SW R
U ST N N N E S
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




M IN A IN A E A E P R H SIN P WR O D L A 151
A T IN G V R G U C A G O E F OL R
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 M IN A IN A E A E P R H SIN P WR O D L A
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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.




M IN A IN A E A E P R H SIN P WR O D L A 153
A T IN G V R G U C A G O E F OL R
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 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F O L R
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




M IN A IN A E A E P R H SIN P WR O D L A 155
A T IN G V R G U C A G O E F O L R
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

rsre.
eevs

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 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F O L R
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.

SM CMET
O E O MN S
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.”




M IN A IN A E A E P R H SIN P WR O D L A 157
A T IN G V R G U C A G O E F O L R
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.”

A E IC N FA M B R A M N T R R S L T N
M R A R U E U O E A Y E O U IO
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

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M IN A IN A E A E PU C A G P WR O D L A 157
A T IN G V R G R H SIN O E F O L R
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.”

A E IC N FA M B R A M N T R R S L T N
M R A R U E U O E A Y E O U IO
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—2---1
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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.

N T N LGA G R S L T N
A IO A R N E E O U IO
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.

B O S O TH M N Y Q E IO
O K N E O E U ST N
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

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

d e ta ils b u t in

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

are

p a id

by

checks

on

account

of

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

O f

c o n d itio n s

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

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
b u s in e s s .

I

m e n tio n

th is

m e r e ly

becau se

it

b r in g s

out

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

had

record

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

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

b a n k in g

stru c tu re

as

an

im p o r ta n t

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
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

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 ?
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

.

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

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
c u r r e n c y a n d c r e d it.

v a r io u s

a d m in is tr a tiv e

d u tie s—

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

b e fo r e

th e

w h o le

C o m m itte e

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

back

o th e r c o m m itte e s — t h a t, if I

on

B a n k in g

and

C u rren cy,

as

fa r

s t r u c t u r e o f t h e c o u n t r y -----------

have

not

a prep ared

sta te m e n t

to g iv e

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

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

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. 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 .
M r. G

.

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

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
G overnor M
M r. G

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
and

to

a ffe c t
th e

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

in d ic a te

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 .
to

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
in

th e p a st y e a r a n d




th in k ,

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

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

w h a t b ill w a s t h a t ?

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

On

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 ­

b ecau se I

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

I

b an k s.

.

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

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 .

w h o le

in

c r e d it

.

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 ?
.

e y e r

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
m uch

.

e y e r

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
M r. G

.

e y e r

of

o ld sb o r o u g h

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

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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

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I

th in k

p r o p e r ly

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it

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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

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a p p lie s t o
a c c e s s ib le

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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

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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

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r e c o m m e n d a tio n

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a

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m eth o d

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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

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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

th in k

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

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an

reserves.

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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

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in

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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

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

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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

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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

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m e , w h ile

c o n tr o lle d

s u b je c t to

by

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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,

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we

p r o d u c tiv e

e c o n o m ic

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c o n s u m in g

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by

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one co u n try
on e co u n try .

am

w ith

in

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e c o n o m ic

c h a n g in g

la tiv e

m o v e m e n ts.

th is

p e r io d

a

very

im p o r ta n t

fin a n c ia l

d e v e lo p m e 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

occu rred

a c tiv ity p a sse d fr o m

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

sta g e .

T hat

w as

th e

d e v e lo p m e n t

of

a

new

channel

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 .

th e

e sta te

are

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

m any

of

we

a n a ly z e

w as

E veryw h ere

we

have

bonds

fo u n d

had

a

been

w ay

to

know n

la r g e

p r e v io u s ly

a m o u n ts

t h r o u g h th e r e a l-e s ta te b o n d

of

on

th e

a

s m a ll

to

R e a l-

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

fin a n c ia l

a c tiv ity .

In

s a v in g s

T hat

le d

s c a le ,

of

th e

lo c a lly .
co u n try ,

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 ­

is t e d b e fo r e .

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

and

T h ere

c a p a c ity ,

w o r ld .

c o n d itio n s

in te r n a tio n a l,

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

#
to

tw o

tilin g s :

T o

som e

e x te n t,

to

s p e c u la tiv e

b u ild in g

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

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 ­

d o in g it ra th e r

io r o f h u m a n

in c e r t a in lo c a litie s .

b e in g s in la r g e g r o u p s ;

a n d if w e g o

back

to

th e

1921

a c u te

th ro u g h

a

d e p r e ssio n
se r ie s

of

we

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 ,

th e

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

in fla t io n , fir s t

r e a l-e s ta te

need
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 .

to

b e fille d

th e

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 .

have

le d

to

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

b a la n c e s a n d

pened

to

in d iv id u a l d e p o s its a n d in v e s tm e n ts .
w ith

c o m b in e

T hat hap­
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 .

p e r m its

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

as

b u ild in g

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

areas

th ere

in

we

th e

b u ild in g
due

recen t p ast

and

c o n s tr u c tio n

w hen

have

is n o

th e b re a k d o w n

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 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

we

ever

fin d

in ­

th a t

seen

in

we

peace
th e

T h ese

th in g s

I m e n tio n

becau se

I

th in k

th e y

a re s o la r g e in

th e ir

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 ­
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

I had

fo r

a fe e lin g la s t y e a r , w h e n a n

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
som e

p la c e s

in

lo c a litie s

th e re m ig h t

w h ere
be

th e re

m ore

th a t

th e re

m ig h t

g r e a t e r a c t i v i t y in h o u s in g

w as

a

a c tiv ity

need

even

fo r

h o u s in g .

n o w , if m o n e y

In
w ere

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 .
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

an yw h ere

th e re

is

a

s u r p lu s

everyw h ere;

but

h o u s in g

is

nec­

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 ­

to

ease

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

flo w

in to

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

began
to

d w e llin g s — a n d

co u n try .

n eed ; and

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

a t p re se n t.

is g r e a t ly

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

a le g it im a t e

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

m eet

c o n s tr u c tio n

c o n s e q u e n t in ju r y

d u stry

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

and

o v e r -s p e c u la tiv 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

to

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

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
m ost

th a n

I

am

su re

t h a t t h e r e is n o s in g le

su b u rb s.

h ig h w a y s a n d a u to m o ­

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

I

th in k

th a t

th e r e is a lo n g t i m e

tre n d

in

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 .

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

B ut

p u rch ase

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 .

at

good

o f m a te ria l

th a n

w a g e s— g iv e s

it

th e

b u ild in g

b u y in g

in d u s tr y .

p ow er.

It

p u ts

It

e m p lo y s

tr a ffic

on

la b o r

th e

r a il­

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

m a te r ia l th e r e , a n d

e c o n o m ic p o w e r s o f th e

fin d s

v o lu m e

a

w ay

a c tiv ity , I

m ore

th in k

th o r o u g h ly

fro m

m y

in to

th e

o b s e r v a tio n

general

of

o v e r 3 5 y e a rs, th a n

b u s in e s s

a n y o th e r

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
g e n e r a l le v e l o f p r o s p e r ity ,
began

on a sou n d

creased




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 .

a n d h o u s in g a n d

e x is te d .

c r itic a l

A u s tr ia

c lim a x ,

and

p a y m e n ts

on e a c tiv ity .

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,

w ith

th e

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

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

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

s h o r t-tim e o b lig a tio n s
a fte r w a r d s,

th a t

th e

on

to

a n y s h o r t p e r io d o f t im e .

lo n g

fin d

d e p o s its p a y a b le

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

pre­
fo r

c o n tin u e d

w h ic h

has

o th e r

w h ic h

c o u n tr ie s

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 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

C e r ta in ly

in to

o f its

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

w ere

have

had

fro m

p r o c e e d in g

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 .
e y e r

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 .

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

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

to

do

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

B ut

th is

m en

of

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

som eb od y

b ill

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 in g fo r y o u

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 .

th is is th e

n ot change

#
e y e r

and

d id

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

not

G overnor M
tr o n g

.

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

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

you

and

so

w a s 4 5 ,0 0 0 ,0 0 0

till

d rop p ed

to

th e

beef

in

see

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

V L M O M N F C U IN P O U T N
O U E F A U A T R G R D C IO
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 ,

th e

th e m s e lv e s

and

p r o d u c tio n ;

th a t

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

p o p u la tio n

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 wT s r e d u c e d t h r o u g h
a
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,

you

th a t

pass

w as

th ere
very

c o n tr a c tio n

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




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

The

lo a n s

w ere
th a t

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

m em ber

e a sin g

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

w 'a s g o i n g

o th e r th in g s .

1 2 0 2 9 0 —3 2 ----- 1 2

m o d e ra te

p r in c ip a lly

som 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 .

b a n k in g

th e r e v iv a l o f th e W h r F in a n c e

fe a r a n d
in t e r e s t in g fig u r e s .

fe e l, a s I

r e s o lu tio n s

o f a d ju s t m e n t in
of

to

I

sou n d

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

th e

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 ,

m a rk e t,

I

and

in

r e la tio n

it

m ig h t

exchange

lo g ic a l

to

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
by

m o n th s

la te r .

r e fle c t it s e lf

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

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

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

th e

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

th e

w ay

sp eed

F in a n c e

to p u t it .

w ith

M r. G

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
s m a ll

to w n s,

are

an sw er

G overnor M
M r.

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

e y e r

sy m p a th y

C h a ir m a n

th e

I do

h o p e fu l,

in

.

o ld sb o r o u g h

a

.

I

th e

and

th e

w as

m em bers

o f th e

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

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

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

of

c o u n tr ie s .

th e flo o r , I w a s a k s e d t h e

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

m ay

lik e

general

w o u ld n o t p r o fe s s to k n o w .

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 .

I

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

in te r ­

m a rk e t,

rest

w ere
do

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

han­

I a p p r e c ia te th a t .

t h a t is h o w w e f e e l.

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

.

e y e r

o th e r m e m b e rs

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

h e a rty

,. .
,u
th e tim e

to

a

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

on

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

it

o r d in a r ily

a ls o

m a rk e t,

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,

our

to

but

ou r co u n try

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

1 on

w as

a lm o s t e v e r y d is tr ic t.

c o n d itio n s

as b e tw e e n

S o m e tim e s

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

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

E uropean

fo r

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 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F OL R
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

M IN A IN A E A E PU C A G P WR O D L A 179
A T IN G V R G R H SIN O E F OL R

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

.

of

I

w as

d is c u s s in g

e x p o rts,

and

I

e y e r

our

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

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

th e

r e la tio n

in

w ith o u t a n

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

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are

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as

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and

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v a lu e s .

la w

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by

w h a t m e a s u r e it c o u ld

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p o in t.

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is

of

im p o r ta n t

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th e

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per

cent

th a t

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a

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in

fo r

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th e
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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

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to

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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

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It

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in

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th in k

th e

tim in g

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a t th e

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p lu g s c o m i n g in

tim e , y o u

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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 .
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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

know T it

q u a n tity

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

im p o r ta n t, to

th e

of

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you

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th e

tim e

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m o n th s o f S e p te m b e r to

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o u r c r e d it,

of

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is

p o in t

b e s o ld , to th e e x te n t

p rod u cers

v a lu e ,

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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

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 ;

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

w a s rig h t.
to

in

export

o f th e tim in g .

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

o n ly

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our

to

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m ay

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any

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great

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ju s t

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M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F OL R

180

G overnor M
c r itic is m
M r. B
fo r e ig n

new

u s b y

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e y e r

and

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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

w e lc o m e

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

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

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

>

le a r n .

. 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

M IN A IN A E A E P R H SIN P WR O D L A 181
A T IN G V E G U C A G O E F O L R

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

to
if

th in g

be

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per

a lo n g e r p e r io d .

b a le s in

ce n t,

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th e e x p o rts o f c o tto n

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b a le s ,

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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

.

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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

.

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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

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c r e d it

u s b y

.

G overnor M

N

o

e y e r

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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

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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 M IN A IN A E A E PU C A G P WR O D L A
A T IN G V R G R H SIN O E F O L R

M IN A IN A E A E PU C A G P WR O D L A 183
A T IN G V R G R H SIN O E F OL R

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

u s b y

G overnor

e y e r

w re tch e d

.

N

M

o

.

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

; I do n o t.

e y e r

s tr u g g le

B

.

u sb y

I

do

th e ir

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.

not

p e o p le

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 . e y ° u a r e a ? f a m i li a r a s a l m o s t a n y o n e e ls e w it h t h e s u f f e r ­
r

as

o f th e w o r ld — t h e y

m a in ta in

th e ir

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

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

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

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

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

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

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 .

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

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

e x p e r ie n c e in

tre m e n d o u s

try

o th e r.

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

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 .

and

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

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

M IN A IN A E A E PU C A G P WR O D L A 185
A T IN G V R G R H SIN O E F O L R

184 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F O L R
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

on

gu ards

is

under

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

to

v a lu e s b y

d r ie d

up

th e y

p ro p e r b a n k in g sa fe ­

th in k

m any
u se
th e

w h ic h

are

b e in g

e n la r g e s

th e

ask ed

fu n c tio n

a ll o t h e r k in d s o f b a n k s .
u n ifo r m ity

h ere,

Y ou

u n d er su ch

of

s tr ic tly

resou rces,
now ,

and

is r e a l l y

becau se
I

'd o

not

e y e r

to

th e

care

to

p u rsu e

fu r th e r .

..

_

co u n try ,

10

or

n a tio n a l

to

ra te

11

is s u e , a n y

th a t

w h o le

th e

w e a lth

o r s e t-u p

e n tire

U n ite d

y e a r s lo s s e s o f m o r e
u n d o u b te d ly

$ 1 5 0 ,0 0 0 ,0 0 0 ,0 0 0 ;

o f m ore

com pared

. W e ll, y o u
to

and

o f cu rren cy

has

w h ereas
we

u sed ,

in
th e

th a n

w ith

$ 3 ,0 0 0 ,0 0 0 ,0 0 0

1928

and

p la c e

w ith in

th e

m in d

c o m m e r c ia l
and

th e

fr o m

th e

and

su b seq u en t

w h ic h

we

you

not

c r e d its ?

w ay

of

im p r o v in g

m ore

under

fu n c tio n s

to

a v o id

to

th e

due

re a c tio n s

of
I

th e

n a tio n a l

o f b a n k in g

w ill b e g in

s u ffe r in g .

are

a fa c to r

m uch

a

d iffic u lt ie s

is e x c lu s i v e ly

b a n k i n g is c e r t a in ly
rendered

as

b a n k in g

have

m a la d ju s tm e n ts
and

a m o n th ,

do

th e

t e ll y o u ; t h a t is a ll.

p r o p e r lim its , y o u

p r e s e n t, s it u a tio n
and

to

1929,

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

w a s fra n k

you

u s b y

.

d is a s tr o u s
do

re s u lt o f a n y

th a t h as
a c u te -a

c h a rte r
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

to

say

tilin g , b u t

to

th e

w h ic h

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
I

th a t

th e

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

nam e

i t is n o t n a t io n a l.

not

if

I

th o se

M r. B

a s m a ll p a r t o f

e n title d

th e

im p o r ta n t

c r e d it

as

th a n
o n ly

e n tir e

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

Take

s itu a ­

p r o b a b ly

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 .

can n o t m ake

. . .
now

of

of

su ch

tio n

Y ou

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
seem ed

bad

p assed

. W e llj

th a t

at

a w eek,

r e s tr ic te d

th a t

to

th e la s t

sch em e

and

th r e a te n e d

th e

th e

n a tio n a l s u p e r v is io n

ch a rte rs,

th e

in

w here

I

th e n a tio n a l b a n k in g s y s te m ,

in s u r e

and

and

n a tio n a l

sta rte d

1921

$ 1 0 0 ,0 0 0 ,0 0 0 ,0 0 0

a

k in d

th ro u g h

banks

th a t

of

th e

except

in c r e a s e d

fr e q u e n tly

to

s u p e r v is io n

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
le g is la tio n

do

n a tio n a l

fr e q u e n tly

w ill d o w h e n

not

s ta b ility ,

m a y h a v e th e m
th e y

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

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

in

p r ic e , y e s ;

w eek s.

m e a n in p r ic e ?

m ean

t h a t in
a

v a lu e in

to h a v e sta te d

Y o r k sto c k m a rk e t,

I

a n o th e r w a y in

of

p rop er

do

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

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

.
th e

im p o r ta n t

and

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

you ought

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 ? -

G overnor
to

have, I

te m

s h o u ld

sy ste m ,

or

M

e y e r

.

th in k y o u

Y

can

sy ste m

m e

w hat

very m u ch

b e — w h e th e r
a

ask ed

ou

it

s h o u ld

w ith o u t

th in k

is

b e tte r d e te r m in e

be

any

I

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
p la c e , a n d

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

in

G overnor M

a b ility

e y e r

.

I

do

c o n tr a c t th ro u g h
not know

th e se c o n d

M r. B

u s b y

w ith

.

N

o w

w h ic h

sy ste m s— th a t

th ere

, i t is m y o p i n io n
we

th e y

have

w ill

not

been

M r.

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

.

G overnor M
u s b y

e y e r

.

.

w ho
.

be,

w ant
.

its

p rim a r y

th o se

cred ­

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 ,

I t o u g h t to b e .

u s b y

but I have
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

in

b e in g fo llo w e d

e x p e r ie n c in g .

peace
by

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

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

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

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 ?
G overnor M

u se

a n d b a n k in g
our

e x tr a o r d in a r y u se ?

M r. B

M r. B

as w e are n o w

W h a t is y o u r s u g g e s t io n

great

th ro u g h o u t

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

•

e y e r

.

it to

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

G overnor M
u s b y

su ch

I s i t y o u r s u g g e s tio n

..

I t o u g h t to bev
.

Jn o r d e r to tr a n s a c t b u s in e s s .
.

m ay

,

i t s ----------M r. B

sy ste m

to

a ttr ib u te

th in g s th a t w e re n o t

th a t th e c u rr e n c y

a fflic te d

sta n d

w ith o u t g e ttin g o u t o f jo in t a n d

fu n c tio n

w h e th e r I w o u ld

are p r o b a b ly

c r e d it a n d

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 .
s e t-u p

th in k

o u r b a n k in g

r e g io n a l
th e fir s t

I

to

a n y s p e c ific t h in g .

p la c e .

fa ile d

an

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 re v e n ts

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

M IN A IN A E A E P R H SIN T WR O D L A 187
A T IN G V R G U C A G O E F OL R

186 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F O L R
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 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F O L R
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 .




M IN A IN A E A E P R H SIN P WR O D L A 189
A T IN G V R G U C A G O E F O L R
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 M IN A IN A E A E PU C A G P WR O D L A
A T IN G V R G R H SIN O E F O L R

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 ftL 1 7 ° U
c
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 ?n
r‘

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

.

e y e r

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

have

u sb y

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

T 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
m

Y es.

G overnor M

th 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 rdofCii U ^
itt° S

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 & o u ld
w
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 M IN A IN A E A E P R H SIN P WR O D L A
A T IN G V R G U C A G O E F O L R
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

M IN A IN A E A E P R H SIN P WR O D L A 193
A T IN G V R G U C A G O E F OL R

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

to

th e

u se

th e

T hat

b u s i n e s s .”

regard

u sed

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

v o lu m e

of

a fte r

but

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

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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

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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?

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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— 8 level a s a m inim um .
2
“ 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

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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 well that the time element
T
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.

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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