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T. A L A N G O L D S B O R O U G H





November 19, 1938

Hon* Marriner S. Eccles
Chairman, Board of Governors
of the Federal Reserve System
Washington, D. C.
Dear Marriner:
I am on my way to Chicago, On next Wednesday,
November 23, if it is convenient to you, I want
to discuss a purely personal matter with you*
I am going to ask you in the meantime to read
the enclosure very carefully*
When I see you next Wednesday, I am not going
to ask you an opinion on the enclosure. I want
you to read it for an entirely different reason.
With kindest regards, I am
Very sincerely yours,

T. Alan Goldsborough





Ob page 4, the stateaent* "t&der the bill retailers take
vouchers f*om their custoaers for the discount allowed,
which Touchers when included with a cash deposit at a bank
by a retailer is credited as part of his deposit and charged
in tto bank's books to its interbank currency account* is
not accurate. The bookkeeping will be between the retailer
and the bask* The custcaer will sifqOy get his goods at a

Monetary Policy of Plenty
Instead of Scarcity


Hon. T. Alan Goldsborough
of Maryland
b e f o r e the

Committee on Banking and Currency of the
House of Representatives

Printed in the Congressional Record of
July 9, 1937



at Government

United States
Government Printing Office

Washington: 1937



M r . G O L D S B O R O U G H . Mr. Speaker, under the leave to
extend my remarks in the RECORD, I include the following
statement I made before the Committee on Banking and
Currency of the House of Representatives, July 8, 1937, on
H. R. 7138, a bill to provide a national monetary policy
which will have a definite relation to the requirements of
domestic industry and trade under the conditions imposed
by our power economy, which will increase production and
consumption to the limit of the country's power to produce,
and for other purposes:
A cursory reading of this bill may give many people the impression that it is Just another measure seeking inflation. On the
other hand, the more closely it is studied the more I believe it
will appear to be based on the known laws that govern the
phenomenon of money.
This memorandum is addressed to the banking fraternity with
the hope that it will throw light upon the rationality of the bill
itself, and also upon some of the more obscure monetary phenomena. It is a truism to say that the working of our monetary system has been filled with surprises and anomalies even to our best
Informed practical bankers. In no other way is it possible to account for the extraordinary experiences we have been through
during the past decade.
As a result, much public antagonism has been aroused against
the banking profession, and many demands have been made that
Its power be curbed. In fact, a great deal of recent legislation has
been aimed at regulating and controlling the issuance of credit
through which the bulk of the circulating medium comes into
existence as demand bank deposits.
I t may, however, be categorically stated that the majority of
bankers have been greatly at sea as to the results of their own
actions in the issuing of credit to the public and have been
caught in the maelstrom of finance without realizing how it had
come about.
The management of a people's money throws terrific responsibility upon those charged with it, and whatever truth there may
be in the claim that a sinister money power exists, it is certain
that few bankers are conscious of it as a concrete force, driving
them whither they would not go, as responsible and publicspirited citizens.
The fact is that discarding from this argument any evaluation
of the money power above mentioned there is sufficient room to
study the circumstances which have been largely responsible for
our recent experiences, and which lie to a very great degree in the
monetary mechanism Ttfhich we have inherited. At the very outset
we are confronted with the fact that gold, which many people
regard as an anchor to windward of any monetary system, is In
Itself so unstable a commodity that it is constantly creating havoc
( 2)

with the "best-laid plans of mice and men" and actually does not
hold any industrial system stable. The phase of the gold problem
which we are at this moment passing through is sufficient proof
of this statement.
What the Nation is concerned with, and what bankers are
periorce equally concerned with, and what H. R. 7188 is concerned with is to bring about a reasonably sane relationship between a credit system that actuates a power economy based on
mass production and an industrial commonwealth of immense
significance to civilization.

The two primary principles upon which the bill is built are:
First. Money is the medium of exchange which has replaced
simple barter and rendered possible the vast complexities involved
in the production and distribution of wealth under modern conditions. T o be effective it must circulate freely. I t cannot circulate freely unless it is available in sufficient quantity to the
buyers and consumers who constitute the open market for goods.
I t is this open market for goods which stimulates production of
wealth and the general advance of civilization.
Second. The mechanism by which circulating money gets into
the channels of trade is not geared to the consumption production
cycle in such a way that an even flow of effective demand for
goods can be maintained. The changes that have been wrought
in industrial life by the introduction of power resulting in mass
produption are not being adequately met by the issue of credit
solely for the production of goods, and a supplementary source of
credit is necessary. The bill is designed to supply this deficiency
through a systematized method of price adjustments based upon
the relation between the natural demand for consumption goods
and the national ability of our technical equipment and resources
to supply those goods.
Both of these statements will be more fully discussed in the
following pages in the relation they bear t o the banking system.
For the present they may be regarded as axiomatic, in the light
of the experience of the past half century and the statistical
history pertaining to it.
The two chief problems that the bill is designed to solve are:
First. The proper adjustment of the real value of the monetary
unit (the dollar) in its relation to the goods offered for sale.
This is something that bankers are greatly concerned with, because the majority of bankers are continually harassed by the
fluctuations of dollar values; in other words, the dollar itself.
Second. The maintenance of the volume and speed of the circulating msdium in relation to its purchasing power and the
volume of goods offered for sale. H i e volume of production
should, of course, approach capacity in order to assure profitable
operation to industrial plant. I t is not a stable money that the
bill seeks to establish, so much as a reasonably stabilized industrial system. But the one is tied so closely t o the other that they
constitute essential components.
Both of these problems have held the center of the national
stage for close to 10 years. They have become household words
amongst us as "The need for increasing purchasing power" and
" T h e revival of production and employment."
In effect the bill seeks to establish a "national monetary policy
having a definite relationship to the requirements of domestic
industry and trade under the conditions Imposed by our power
economy "
A coordinated national monetary policy has been conspicuously
lacking from our national economy both in the banking system
itself and in the Federal administration. But it has been recognized as a need and has been called for time and time again.
This lack may be explained by the fact that there had appeared no

fundamental principle upon which to base one. The machine has
now presented it.
The monetary policy that the bill materializes is that it is a
Federal responsibility under the Constitution to so adjust the
value of money that it conforms to the law of supply and demand.
I t therefore raises the purchasing power of money by reducing the
price of the necessities and comforts of life known as consumers'
Section 2 does this by establishing a general blanket discount on
the price level of goods sold at retail. I t is done through licenses
issued to all retailers to dispense the established discount by, in
effect, selling below cost. I n other words, to sell at a discount
fixed by a credit commission especially equipped to estimate the
current flow of trade. The Secretary of the Treasury is charged
with the carrying out of the provisions of the bill, and the findings
of the Federal credit commission, which the bill sets up, under
rigid statistical restrictions.
The resultant price level of retail goods, which include the
public services such as electricity, hospitalization, transportation,
and so forth, has the effect of increasing the purchasing power in
the hands of the public, arising from whatever source it may,
by the amount of the discount. This price level is known as the
compensated price, because it compensates for the shortage of
buying power as against producible goods.
The retailers who dispense the discount—which means all responsible ones—are reimbursed by the Government through the
banking system by means of an issue of interbank national currency, which is not legal tender to the public, but which is used
by the banks as a backing for credit and is legal tender within th®
Under the bill retailers take vouchers from their customers for
the discount allowed, which vouchers when included with a cash
deposit at a bank by a retailer is credited as part of his deposit
and charged in the bank's books to its interbank currency account. The bank in turn is reimbursed by the Treasury with an
equivalent amount of interbank currency notes. The retailer's
deposit circulates as he draws checks against it, and the interbank currency circulates through the clearinghouses in settlement of interbank balances, offsetting the circulating deposits
arising in the accounts of the retailers as the result of the discount. The general level of deposits in the banking system will
be increased in exact proportion to the issue of interbank currency and will be lowered correspondingly if or when it is
The cost to the banks for rendering this service is covered in the
bill by a provision for fixing the service charge by the Federal
credit commission. As far as the banks are concerned, the handling of the write-ups of the retailer's accounts t o the amount of
the vouchers received is practically the same as if they discounted
a retailer's note, except that instead of charging him interest they
make him a service charge and hold interbank currency as the
The financial technique involved in the application of the discount at retail will be discussed further in later pages. Suffice it
to say here that it should be clearly grasped at the outset that this
issue of credit through an expansion of national interbank currency is so arranged that it only gets into circulation after an
actual sale has been consummated. It represents actual transactions in trade, increasing the turnover of the retailers, wholesalers,
prime producers, and transportation systems by the amount of the
credit issued, and as much of it as continues to circulate.
Section 3 of the bill is confined to definitions of various technical
phrases used in the body of the bill.
Section 4 provides the method for the determination of the rate
of the discount at retail, which initially is fixed at 15 percent. But

thereafter the discount is varied In accordance with the ratio that
goods going into consumption bear to productive capacity. A
special Federal credit commission is charged with this duty. Its
duty is to collect and coordinate the indexes of trade, credit, and
money in circulation, and to report the findings to the Secretary
of the Treasury, who has no leeway to alter their findings. He is
charged with announcing the quarterly rate of discount.
T h e process simply amounts to this: That when wanted goods
cannot be sold the retail discount is increased. If demand catches
up with supply, the discount is cut or discontinued. It is an
automatic way of keeping supply and demand in harmony through
the price level. A margin of safety is provided in paragraph (c)
by prohibiting any discount when the margin between consumption and productive capacity is less than 15 percent.
Sections 5 and 6 provide regulations for the application of the
discount. They are administrative and appear sufficiently clear
to pass without comment.
Section 7: Settlement of discount allowances through banks.
Some explanation of the technique involved in carrying out
the monetary and credit provisions of this bill have already been
given. The text of the bill appears fairly specific in these particulars. Anyone familiar with banking methods should readily
see that the process of issuing this credit is precisely the same as
that of discounting a retail customer's promissory note, except
that instead of the note backing the write-up of his deposit
account, the credit arises from a deposit of interbank currency by
the United States Treasury. This relieves the retail depositor
of an obligation to repay, and the bank is protected by the fact
that its responsibility is that of a fiduciary. The bank is relieved
of the personal responsibility that accompanies the issue of loans
on its own account, but all parties are governed by current
statistical records.


This title deals with the organization of the Federal credit
commission which the bill establishes for the purpose of maintaining a balanced credit system throughout the Nation. Its
duties are circumscribed by the statistics of money and trade,
which it will collect and interpret. Its specific duty is to maintain a balance between production, consumption, and purchasing
I t is protected from extraneous political or other influences. Its
findings are to be based on the conditions of trade and industry,
just as the findings of a court of law are based upon the interpretation of existing statutes.


This title deals with the regulations governing the issuance,
circulation, and recall of the interbank currency. From the standpoint of the banker it is the most important part of the bill,
because it provides the regulations for carrying out the terms of
the bill through the banking system.
Interbank currency represents a recallable issue of credit which
circulates throughout the banking system in support of discounts
on prices of goods and services sold at retail for the purpose of
bringing effective demand into harmony with full production.
I t cannot be included as part of a bank's fractional reserves,
but it constitutes 100 percent reserve against the credit that has
arisen from it. I n other words, if a bank has received from the
Treasury or a clearing house $100,000 of interbank currency and
has $1,100,000 deposits, the notes are 100 percent reserve against
the odd $100,000 deposits. And as such they circulate everywhere
within the system.
As the original credit gets diffused throughout the circulating
deposits of the system the currency becomes equally diffused.
Greater activity in the retail trade would call for greater produc31344—14469

tion for replacements, and expanded private production credits.
With increasing business security prices would tend upward and
the demand for collateral loans would increase.
If a runaway market seemed imminent, the notice of recall of a
percentage of notes outstanding would impose upon the banks the
obligation of calling in sufficient money to cancel an equivalent
amount of credit then outstanding, which would release the notes,
in the same way that private collateral would be released, when
individual loans are called. And the notes would be returned to
the Treasury.
I t is not unlikely that this action would result in a lowering of
speculative prices, and the consequent added reduction of the
loans made for the bank's own account. Normally a movement
of this nature results in a general lowering of trade. But as the
retired currency notes were reissued in the form of new retail discounts, the loss of buying power would be offset and demand for
goods sustained. There would be a sound basis for stability and
sustained confidence.
In effect the system constitutes an alternating current of credit
paralleling the alternating current of electricity, now in use. The
introduction of the alternating current is responsible for the benefits we now enjoy from electricity, although its adoption was
strongly opposed by people who ought to have known better. At
the present time we would be lost without it. An alternating
credit system holds as great a potential for the improvement of
the industrial and banking world as did this innovation in public
I t is provided that the banks act as fiduciary agents of the Government in handling the interbank currency and the credits arising therefrom. For this service a commission is chargeable to
their customers at retail, which should offset the loss of income
now being experienced by them, through the curtailment of trade
credits, which was always considered the most legitimate and reliable source of banking income.
Another provision for the protection of the banks is in regard to
conversion of deposits into currency on depositors' demands. There
is no reason to suppose that the volume of currency in circulation
would be increased. In fact, it would probably be reduced as banking activity and confidence would result. Individual banks, however, can always get into trouble, resulting in hasty withdrawals of
their depositors' money. Banks thus caught can, on application to
the Secretary of the Treasury, convert any interbank currency
notes into national currency for their customers. This proviso augments the deposit-insurance provisions of the 1935 Banking Act in
the degree that interbank currency notes have increased demand
Any bank holding these notes can use them for the liquidation
of its own Federal taxes. But if it does so, it must, of course, have
other surplus resources to support its outstanding credit reserves.
I t is the design of this bill to establish a fund of permanent bank
money that cannot be recalled through a fall in the price level, and
that will circulate continuously in the channels of trade. Some of
it will constantly accrue to inactive bank accounts through profits
and savings. The loss of this money to the blood stream of trade
would be replaced automatically under the bill, and if the accumulations of liquid capital became too great, it could be called in by
any of the means provided or by increased inheritance taxes, which
are probably the most wholesome and least objectionable means of
taxing the rich.
Paragraph ( g ) , section 301, title III, provides several safeguards
against inflationary conditions. It confirms the existing openmarket operations and rediscount rate control and expands the
control of the ratio of fractional reserves by so adjusting the
regulations that this element of inflation prevention is established
on a eliding-scale basis, the same as the rediscount rate.

There are good reasons for feeling that an elastic system of
reserve ratios will be a safeguard against the creation of an excess
of speculative money.
I n this connection it is well t o recall certain elements in the situation that culminated in 1929. I n the 7 years preceding a serious
credit inflation developed, and bank deposits Increased approximately 27 percent, from 43.4 to 55.3 billions of dollars (1924 t o
1929). Loans increased at the same time over 30 percent, or from
31.5 to 42.2 billions (Federal Reserve Bulletin).
Other significant statistics are:
Commodity price index, 1924, 98; 1928, 97; 1929, 95.
Eligible paper in member banks June 1926, 4.9 billions; June
1929, 4.5 billions.
Value of bonds on New York Stock Exchange January 1925,
131/2 billions; January 1929, 17yz billions.
Value of stocks on New York Stock Exchange January 1925,
27 billions; September 1929, 89i/2 billions.
Commercial loans, national banks, 1924, 8.33 billions; 1929, 8.12
Security loans (excluding United States obligations), 1924, 3.64
billions; 1929, 6.67 billions.
These statistics prove that the inflation that occurred was an
inflation of monetized capital values, and that there was not only
no inflation in commodities or the cost of living but that in spite
of the plethora of money in the banks and the security markets
the production of consumer goods was not being fully supported.
At the same time that the production index was rising from 100
to 119, the commodity-price index was falling from 98 to 95, the
eligible commercial paper was falling from 4.9 to 4.5 billions and
commercial loans from 8.33 to 8.12 billions.
In these years also technological unemployment appeared and
increased, whereby hundreds of thousands of highly trained artisans and experts were unable to earn a living, while the production index climbed 20 percent.
I t seems almost superfluous to point out that the apparent
overproduction, which was one factor amongst several others that
started the downward spiral, was nothing but camouflaged underconsumption.
The question therefore of controlling the money of the country
so that the capital values that have been created may be Justified
and inflationary conditions avoided, becomes from the bankers'
standpoint one of restoring the flow of money through the channels of trade.




The idea behind this type of currency is the need for increasing
the flow of commercial credits which have been the backbone of
commercial banks, and out of which the many ramifications of the
modern banking system have developed. The volume of commercial credits flowing continuously is one measure of the spendable
Income of the Nation. I t is the savings conserved out of this
spendable income that give solidity t o all forms of capital credits
and eventually liquidate them.
If capital values and earnings are to be permanently restored, it
can only be through the revival of trade in nondurable goods to a
point where debt charges and amortization can be "saved" out of
the flow of new wealth into consumption.
To attain this the ratio of commercial credits will of necessity
have to be increased, and so far no way has been found to do this
except by Government borrowing and spending and ignoring the
threats that inhere t o an unbalanced series of Budgets.
This statement may be challenged by those who still maintain
that private initiative can achieve the same result, and point for
proof to the 7 years preceding 1930. But the facts of the case
refute any such contention, because reference to statistical records
shows that while the Federal Government did not at that time

borrow and spend beyond its means, the great mass of the active
public, and also the minor units of government, did that very
thing. I t makes no difference whether the Government or industry
follows this route to prosperity, the end is the same—inflation
followed by deflation.
Hence the primary purpose of the issue of interbank currency
provided in this bill is designed to restore the flow of commercial
transactions to a sound ratio with capitalization and capital
charges, by injecting into the arteries of trade the ratio of purchasing power that is lacking. I t enters the commercial credit
stream at such a point and in such a form that every dollar of it
inevitably means an immediate increase in trade of that amount.
T o repeat—this currency is a limited issue and is designed to
circulate throughout the banking system as the backing for the
circulating deposits it has given rise to. I n this respect it becomes
a revolving fund of permanent deposit money for the support of
trade. I t can only be recalled if or when there appears to be an
excess of spendable money over the volume of goods, that would
cause an unwholesome rise in prices. The Government, under
advice of the Credit Commission, would notify banks that they
should reduce their outstanding credits so as to establish surplus
reserves sufficient to permit the return of the required quantity of
notes t o the Treasury. The process would parallel the increase of
reserve requirements or the sale of Government bonds in openmarket operations t o curtail excess credit.
The bill retains the open-market operations in Federal securities
and the control of the rediscount rate as part of a soundly managed credit mechanism to which the interbank note issue is added.
But the notes have another function which is equally important;
that is to maintain public purchasing power and stabilize the
productive income.
I t seems unnecessary in this paper to refer to the other administrative and regulatory features of the bill. My main purpose is
to try to relate the financial features it proposes to the monetary
system as it is and to show how and why it deserves the support
of public-spirited bankers in the interest of profitable banking
and a sound monetary system.


The origin of money was to facilitate the exchange of goods and
services between individuals and groups. The origin of banking
was to conserve, protect, and facilitate the transfer of money. As
transportation facilities increased and the volume and size of shipments of merchandise expanded, bank credits developed in harmony and provided the medium of exchange that monetized goods
in bulk as they passed from hand to hand or place to place.
Without the aid of bankers' credits the growth of centers of
population and group industrialism would have been retarded.
The business of banking became profitable and essential. But
practically the whole of this financial business was built upon the
trade in consumable or semidurable goods. And the credits which
established the medium of exchange in them were virtually selfliquidating. They came into existence as goods were produced and
transferred and went out of existence as the goods disappeared
through consumption, to be reissued for new production.
Metallic tokens of exchange and bullion facilitated these operations on balance, and also as a storage of value. Out of this trade
in consumable goods came monetary savings and the growth of
material wealth. This trade has been the foundation of banking,
finance, and capital as we know it today.
Cooperation between the banking system and the Government
is, of course, just as essential in the carrying out of the technique
of the bill as it is in other fiscal operations. But by the use of
the type of credit expansion provided by the Interbank currency
notes the banks are relieved of the serious consequences that may

follow credit expansion through the discounting of Federal obligations to excess on the basis of an imaginary market.
The only real wholesale market for Government bonds in the
event of a serious credit squeeze is the ability of the Government
to issue billions in currency in the process of buying them back.
That is generally recognized as the inevitable outcome of the
present monetary policies, if continued, and is the essence of disastrous inflation.
On the other hand, the limited currency provided by interbank
currency notes is governed in quantity by transactions in trade
and throws no strain on the resources of the banks. They would
conduct their business as usual, without the danger of forced
liquidation, and with an assurance of a demand for goods that
would put their industrial customers onto a profitable basis. In
other words, the other departments of the business of banking
would become increasingly profitable.
And this truth holds good in our time, and will continue to
hold good under any free economy. The trade in consumption
and semidurable goods, and the circulating credits arising therefrom, have made sound banking possible, and without them in
excess ratio to other forms of finance, such as is involved in the
growth of capital, we cannot progress.
I believe this statement will not be denied by any competent
I t has been asserted time and time again that the
recent bank debacle was due to the shortage of these trade credits
in relation to general financial conditions that forced the banking
system to use its surplus credit for financing long-term obligations. I t is certain that the available records furnish ample
proof of it.
If we restore our national productive income by means of new
long-term credits (which we are now trying to do) and fail at
the same time to restore our national spendable income to a
parity with them, we face the certainty of greater inflation and
greater deflation than we have ever known.
The bill that we are discussing (H. R. 7188, 75th Cong.) proposes a way to do this, based upon monetary principles which
history has proven sound, and which I have tried to outline
above. I n a nutshell, it is to restore the flow of trade by restoring the flow of commercial credits through the banking system
in such a way as to augment the spendable income and bring it
into harmony with our reasonably possible productive income.
Nothing would do so much to give us a sound banking system
and profitable capital investments.



I n the days when banking consisted chiefly of commercial
credits the system of issuing money possessed inherent characteristics that guarded against booms and depressions, except when
forced by deliberate Government mismanagement induced by
wars, or an occasional speculative boom like the South Sea bubble,
and other minor ones, in some of which the colonial concessionaires in London and their companies were involved in the
early days of this continent.
The principle underlying the system still persists and may be
tersely expressed in the bankers' dictum, "Put money out when
prices are rising and pull it in when they fall." In any economy
where production is achieved mainly by hand labor, and where
large mechanical equipment is not the dominating feature of
production, this dictum is "just fine." I t follows the provisions
of nature.
When nature was lavish and peace prevailed, large production
needed more money to distribute it. When crops failed and floods
and pests were rampant and possibly famine threatened, money
must be called in to prevent famine prices aggravating the shortcomings of nature.

But these conditions have ceased to exist The whole system of
production and consumption has changed. Power and the machine
plus the vast monetization of capital equipment has changed it.
The worst thing a banker can do now is to start calling in money
when prices begin t o fall. Carried to excess, as it was in 1929-33,
f e w bankers escaped a serious blow along with the ruin of their
friends and neighbors. They were wise in their generation to protect their depositors. They had no alternative. But any system
that has that story t o tell is obsolete and unsocial under existing
The reason it is obsolete (and destructive to an effective power
economy) is because science and the machine have made the available supply of goods, both agricultural and durable, a relatively
stable item. The volume of merchandise producible is now more
a matter of human will than of Nature's vagaries. But in order
that humanity should gain this control of Nature it has been
necessary to expand the monetary system in the direction of
monetizing capital values and equipment.
The consequence is that unless there is a dependable supply of
money available constantly to the buying public, the demand f o r
the products of industry, which ought also to be a stable factor,
has by force of circumstances become highly unstable. I t has
become unstable because the supply of money available to it is
unstable. The supply of money is unstable because the money
issued is based entirely upon the general price level and must be
recalled when prices begin to fall.
I t was stated above that in the time when the forces of Nature
were the chief governing factor of the volume of production the
issue and recall of trade credits were a necessary stabilizing factor,
because a shortage of goods necessitated a reduction in the money
supply to prevent the kiting of the cost of living. I n those days
the great mass of bank credit was issued against goods in trade,
which always has been the backbone of sound banking. But in
our day the greater part of the credits issued circulate as capital
credits, although their validity is based upon the savings arising
from the trade in usable goods, which savings liquidate them and
provide new capital credits for replacements and improvements.
While bankers still realize the importance of the trade credits
to a stable banking system, force of circumstances has driven them
into dealing in too great a proportion of capital credits, i. e„ credits
issued against and dependent for their validity upon the earnings
of capital. Obviously the earnings of capital are dependent upon
the volume of goods passing to consumption, and thus creating"
replacement demand, continuously and unfailingly. Reliance cannot be placed upon the production of durable goods because it is
so easy to glut the market with them. The demand for durable
goods has a narrow horizon compared with the perpetual, and
necessitous demand for consumable goods.
I t would be difficult to glut the markets with consumable goods
provided that the purchasing power is adjusted to their volume.
I t should be clear to anyone familiar with money and banking
that if the great mass of capital credits now in existence are to be
validated, it must be done through legitimate trade channels; and
that these trade channels cannot be supported by credits for capital account.
Recent experience goes to prove this statement.
The Reconstruction Finance Corporation has revived at least
$5,000,000,000 of what was moribund capital credits, and in addition the Government has pledged its credit for $15,000,000,000
more. The result is an increase of perhaps $25,000,000,000 in national income. From $40,000,000,000 in 1933 to $65,000,000,000 this
We have won, then, through the capital markets an increase of
$25,000,000,000 in national income of doubtful dependability by
perpetuating and increasing long-term debt to the amount of $20,31344—14469

000,000,000. T h i s is not an encouraging result; in fact, there are
f e w bankers w h o do not regard It as a very dangerous result, especially as another twenty billions will be needed t o reach the per
capita Income of 1929.
W e now have about $55,000,000,000 of deposits. By that t i m e
we would have close t o $75,000,000,000. B u t what use would they
be? A n y more than our twelve billions of gold is useful. Both
the deposits and the gold are costly extravagances.
What we need is an adequate flow of trade to validate our capital investments and debts. One-third of the money we have already used t o "prime the p u m p " would have done the trick if i t
had been strictly confined t o trade channels. I n other words, if
we had gone back to fundamental banking principles and injected
the monsy into trade channels. On the basis of trade money revolving three times a year, which is a generally accepted economic
factor, 1 one-third of the money we have already used would have
Inevitably produced the same result. T h a t is $8,000,000,000 revolving three times a year f o r the purchase of new production
would have increased the productive income of the Nation $24,000,000,000, against $25,000,000,000, won by increasing and maintaining l o n g - t e r m debt by three times that amount.
T h e effect on our whole financial fabric of such a revival of
trade would have cured t h e dry rot that now envelops the $55,000,000,000 of deposits, which are molding f r o m stagnation
Furthermore, it is a pretty safe conclusion that if anything like the
$20,000,000,000 of new deposits referred t o above have t o be created
in line w i t h our present fiscal policies, a 100-percent reserve will
be forced upon t h e banking system. On the other hand, if trade
credits are revived, w i t h o u t recourse t o perpetuating the longterm debt as at present, higher reserves than at present may become necessary, b u t the volume of capital credits can be controlled
by open-market operations and the rediscount rate and thus avoid
the difficulty that t h e bankers would be confronted with if t h e
100-percent reserve were suddenly forced upon them.
T h e philosophy of t h e bill we are discussing is t h a t provided
the national industry is maintained upon a balanced production
schedule by maintaining orderly markets through the price of
goods, t h e control of Investment—that is, capital credits—will be
a matter of intelligent management and t h e judicious use of t h e
credit expansion safeguards provided in t h e bill, in the Banking
Act of 1935, and in t h e rules of the S. E. C.
Recent legislation endorsed by responsible bankers and the public has been designed t o control the " g e t rich quick" tendencies
of humanity and should, in conjunction with the provisions of
this bill, provide a monetary system and source of credit for all
purposes in ample volume f o r any Justifiable objective.


Dr. Edward Kemmerer was reported as making the following
statement in an address before the Pennsylvania Bankers Association at Atlantic City on May 26 last:
"Probably t h e outstanding change in American commercial banking during the last half century has been the pronounced s h i f t
in banking portfolios f r o m business paper t o investment securities.
T h i s shift has been particularly pronounced since the World War.
For all of our commercial banks in 1915, f o r example, investments
constituted 23 percent of earning assets and business loans 40
percent. By 1936 the investment percentage had increased t o 60
percent, while the business-loan percentage had declined t o 19."
This statement bears out the contention on which I have based
the main argument of this thesis, namely, t h a t commercial credits
are the lifeblood of the financial system and that the flow of
1 N e t t o be confused w i t h t h e velocity of money, which involves
the transfer of billions of dollars not related directly to production.

money through the channels of trade in sufficient ratio is the only
means of validating credits issued against securities.
One of the old rules of banking, which still holds good to a
greater degree in Europe, is that commercial credits should always
exceed loans on other collateral and investments by 2 to 1. The
enormous capitalization of industry which has developed here is
responsible for this change and is due to the growth of our power
This change must be offset in some way so as to bring the source
of earnings of industry up to an adequate ratio without capitalization. I t is clearly not sufficient for bankers to rely upon the
security markets for validating the capital credits they issue
unless they are assured that the actual earnings accruing to the
capital assets they have monetized are maintained in sufficient
ratio to assure a reasonably stable market for securities they hold
as collateral.
The fact is that there are two types of credit and two separate
uses for money, viz, money for moving goods and money for developing capital assets. The second is dependent for its validity
on the first. For the most part they are independent of each
other, and their velocity of circulation differs widely.
They impinge upon each other at certain points in the industerial cycle, but in the main credits issued on capital account
through security issues lead an independent life from credits that
produce and transfer goods. They impinge upon each other
through the price levels, as when new capacity for production is
undertaken, or when speculation increases or depresses the commodity price level. But the source of real income and real savings that is the warrant for both types is dependent upon the flow
of trade, which is synonymous with trade credits.
Mr. Marriner S. Eccles, at a hearing before the House Committee
on Banking and Currency February 16 last, made the following
remark when discussing the proposal to extend the use of Government obligations for collateral security for Federal Reserve
notes, which is deemed necessary to guard against a "disastrous
deflationary development."
Asked by Representative FORD of California, "Is not this extension
a sort of stand-by measure—a shotgun in the corner—to be used
against a sudden withdrawal of foreign investments?" Mr. Eccles
replied, "Yes; it is available for that purpose, but it is more important for the present position because there is no eligible paper
The fundamental credit base of the Federal Reserve System was
the adequate flow of eligible paper; in other words, paper arising
from trade. According to Dr. Kemmerer, this paper constitutes
only somewhat over 20 percent of the oustanding credit in the
banks, and it is the only type that is self-liquidating. I t must
not only liquidate itself, but it must provide the charges necessary
to liquidate the other 80 percent.
At the present time we are trying to rebuild our financial system on credit issued against long-term debt, although our experience proves that this source of monoy is ineffective in restoring
purchasing power for commodities, except in a minor degree and at
great cost.
I n the Formation of Capital, one of the three volumes of studies
recently published by the Brookings Institution, Dr. Moulton, the
author, says on page 71, "The general conclusion reached in this
and the preceding chapter, that the growth of capital does not
take place, unless expansion of consumption is also occurring,
does not appear upon close analysis to be surprising. The motivating force in all economic activity, under a system of private
initiative, is the wants and demands of people
The base of the
economic pyramid is the production of consumption goods—first,
primary necessities and then comforts and luxuries.
In the

ascending scale of goods that are relatively indispensable we find
new plant and equipment at the top. This is because the demand for plant and equipment is derived from the demand for
consumption goods which such plant and equipment can produce. * • * A slight shrinkage in the base of the pyramid
very nearly eliminates the top."
The conclusion expressed in this quotation bears out the fundamental contention upon which this memorandum is built. Its
intimate relation to a comprehensive monetary system is obvious.
Looked at f r o m the financial standpoint it emphasizes the necessity for a free flow of money in the channels of trade which will
permit the free flow of goods in harmony with actual demand.
Without reasonable stability in the consumer markets capital
credits issued against securities become increasingly dangerous.
As they now constitute the greater part of the business of banks,
and as the growing demand for capital for technological improvements, and improved housing continues, it can only be the part
of wisdom for the banks in their own interest as well as in "the
general welfare to see to it that the base of the pyramid is always
wide enough to support the superstructure of capital credits.
As the formation of liquid capital has now become the dominating element in banking, there appears no escape from the deductions arrived at herein. Dr. Moulton emphasizes this conclusion
when he says on page 157, "The facts show incontrovertibly that
new capital is constructed on an extensive scale when consumption
is expanding rather than when it is contracting." And page 158
idem, "The available evidence also supports the view that the
growth of capital is directly related to the demand for consumption goods."
Surely in a capitalistic country like ours, where each young
citizen is supposed to carry a capitalist's checkbook in his school
bag, it would be well to shape our course in the direction that
the laws of finance indicate.
I n Appendix A of Dr. Moulton's book he reviews the analyses of
our situation by Dr. Benjamin M. Anderson, E. F. M. Durbin, John
A. Hobson, Foster, and Catchings, and others.
On page 181 he summarizes his conclusions as follows:
" T h e analysis which we have made in America's Capacity to
Consume, revealing a demand for consumption goods insufficient
to call forth the full output of our productive establishment, is
not to be regarded as supporting the position of * * * Foster
and Catchings. Our analysis did not show that the aggregate disbursements of national income t o individuals were less than the
prices of goods and services turned out; on the contrary, we contended that they were virtually identical. We were concerned with
the allocation of the national income as between savings for investment and expenditures for consumptive purposes, and we
showed merely that the proportion of the total income received
by individuals which found its way into consumption channels was
inadequate to induce full capacity production."
And, page 184, idem, " T h e maladjustment between savings and
consumptive expenditures did not, as our analysis shows, lead to
a proportional expansion of capital goods, and in due course to
an excessive output of consumer goods which ultimately broke
the commodity markets. On the contrary, the restricted rate of
expansion of consumptive demand held the growth of capital in
check, while the excess savings wrought havoc in the financial
I t is pertinent to this discussion to make one more extract from
this important and judicial work, viz, from chapter X, page 136.
Under the heading " T h e Disproportionate Increase of Investment
Funds" is found the following: " I t was found that in 1929 the
savings of the great mass of the population constituted a negligible proportion of the total savings. For example, 59 percent of

the population, or 16.2 million families, saved in the aggregate
only $250,000,000, while 91 percent of the families comprising all
those with incomes below $5,000 saved only about $4,000,000,000,
or a little over 25 percent of the total. On the other hand, 2.3
percent of the families, those with incomes in excess of $10,000,
contributed over two-thirds of the entire savings."
Taken together these three quotations offer a significant explanation of why our banking system finds it hard to meet the
conditions imposed upon it by the new production technology. If
one eliminates any consideration of the controversial doctrines of
the various economists, and confines one's self to the realities here
presented, it must be clear that the production of new capital
must follow the production for consumption. And that the production for consumption must be met by purchasing power adequate to its abilities.
And as the production of capital is first and last a fundamental
function of banking, it becomes an essential of successful banking
to so order the production for consumption, and the production
of permanent wealth in those ratios which will assure a sound
money system and a permanent balance between these factors.
I t is a recognized truism that 90 percent of the money used
in the conduct of business is borrowed money, created and issued
by the banking system against (supposedly) adequate security,
and when it is paid off it must be promptly reissued t o permit
the industrial system to function.
A fact that we all know is that when any commercial credit Is
canceled it must be promptly replaced with another circulating
credit; otherwise the supply of money would soon fail. Even if we
conceive of a national economy, in which all industry were on a
cash-and-carry basis, the accruals of profits and losses would soon
upset the balance and borrowers would reappear.
An effort was made in the earlier part of this memo to differentiate between cash credits issued for the purposes of trade and
those issued against capitalized values as monetary and economic
factors. I n a smoothly working production-consumption cycle,
trade credits are practically automatic in their functions. But
there are many economic and psychological factors entering into
the creation and repayment of long-term debt. The subject is too
complex to discuss adequately here. I must confine myself to the
repetition of the statement that the amortization of long-term
debt is a function of the volume of credits in trade from which
real profits and savings evolve.
Maintenance of long-term debt within the limits of our earnings
to meet its charges is one of the greatest problems of the banking
system; another being the maintenance of adequate purchasing
power to validate our investments of productive capital.
A comparatively recently recognized monetary phenomenon is
the growth of long-term debt in excess of the increase in production of real wealth, measured in real dollars. Attached to this
memo as appendix A is a copy of the summary of Evans Clarke
and associates sponsored by the Twentieth Century Fund.
I t shows an increase of long-term debt between 1921 and 1932
from $65,000,000,000 to $134,000,000,000. If we add the Increase of
Federal debt, we get for 1936 upward of $154,000,000,000. At the
same time business debts fluctuated between $93,000,000,000 in
1921 to $128,000,000,000 in 1929 and $89,000,000,000 in 1932-33.
I n view of the fact that the economic base of this pyramid,
namely, national productive income, rose between 1921 and 1929
from about $65,000,000,000 to $85,000,000,000 and then fell below
$40,000,000,000 it is easy to see why the forced liquidation of the
early thirties failed to clear up the financial situation and l e f t
the banking system virtually bankrupt. The fact is that the
country has been living off of the fixed capital that it has monetized for several years past. First that monetized by the bank31344—14469

ing system, and later that which the Federal Government in
partnership with the banks has monetized through increasing the
Federal debt.
This persistent increase of long-term indebtedness is an economic phenomenon that is comparatively new I t is inherent in
the growth of the machine age and power production. I t is due
t o the need for vast amounts of new capital, which cannot be
adequately amortized within the life of the values that give it
This memorandum would not be complete without some reference to the pressing problems of balanced budgets and taxation.
When I addressed the House on June 8 last I stated that our
tax rate from all governmental units is the second highest of
those countries whose records are available, Great Britain only
taking precedence of us. But in spite of this our national Budget
is further out of balance. And that the only way to balance our
Budget and pay our taxes is to increase our productive income.
I said then, " T h e income of the people of the United States is
now about $65,000,000,000 a year. That income, by operation of
the legislation I suggest, could be increased as gradually as necessary to $100,000,000,000 in at least 18 months.
What would be
the result of that increase?
The percentage now of taxes in
relation to income Is about 6 > 2 percent, yielding now about four
and one-fourth billion dollars. Without increasing the percentage
of taxation on an income of $100,000,000,000 a year we could raise
six and one-half billion dollars in taxation. By introducing that
other 535,000,000,000 of wealth we would be able t o release from
relief and from governmental support about $2,000,000,000 of laoor
and services. I n other words, the Federal Government would be
relieved of about $2,000,000,000 of pressure that is now brought
upon it, so that by increasing the national income t o $100,000,000,000 you could balance the Budget and begin to pay of nearly
$4,000,000,000 a year of national debt."
I t may be well to point out here that a national income of
$100,000,000,000 a year would be just about equivalent to the percapita income of 1929, allowing for the increase of population.
Also the increase of income of $35,000,000,000, which I referred to
as the introduction of new wealth, means, under the operation of
this bill, real wealth, not inflationary money.
The money provided is limited to $10,000,000,000. The warrant
for it comes f r o m exactly the same source as any other type of
trade credit, namely, the production and distribution of goods.
While it cannot be said how much of this fund would be needed,
there is good ground for the assumption that it would be less than
the full amount provided, because it would bring about trade
activity now dormant and tend to encourage the flow of credit
through the normal channels of banking and commerce.
The point is that it would be an antidote to the otherwise inevitable growth of long-term debt which is now out of all proportion to the fundamental credit base of the economic pyramid.
I n this memorandum I have tried to outline some of the basic
financial problems of today, and to clarify the means by which
this piece of legislation (H. R. 7188) proposes to meet them.
A necessary part of the work of industrial engineers and executives is to study and adjust their so-called production flow sheets
to the advances in techniques.
H. R. 7188 visualizes a financial
flow sheet to meet the needs of the flow sheets of industry and
Every good Industrialist knows that if he can so order his plant
that he can raise wages and at the same time lower prices he is
on the road to success. Every retailer knows that lowering prices
stimulates sales.
The railroads have recently learned the same
thing. No system that does not take into account the relation of

"dollars to goods" at the base of the economic pyramid will succeed, and, as f a r as I have been able to learn, this bill is the only
coordinated attempt to do this thing without disturbing our social
order in one way or another.
I t does not solve all social and labor problems.
But I hope i t
lays a stable foundation for their orderly solution. I t is not a
panacea, it simply attempts t o follow the dictates of technological
advance throughout the world with a heed t o realities.
T h e choice of our times lies between democracy, dictatorship of
t h e proletariat, or dictatorship of the autocrat. A f e w years more
of our present course may land us with one or the other of these
dictatorships, or still more probably, in a maelstrom of both.

Table showing long-term and short-term debts, national wealth and
[Taken f r o m " T h e internal debts of the United States," Twentieth
Century Fund, Inc., pp. 13-301]




Long-term debt
billions of dollars..
Short-term debt:
Business debt
Personal and household.








National wealth
billions of dollars..
National income
Total debt service
Per capita debt
hundreds of dollars..
Percent of national wealth represented by
debts, long term
Percent of national income represented by
debt service

387. 76