The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
da m w PROPOSALS FOR CONTROLLING THE GENERAL LEVEL OF PRICES E. A, Goldenweiser D i r e c t o r of Research and S t a t i s t i c s Board o f Governors of the Federal Reserve System Presented a t the F o u r t h Annual Conference of D i r e c t o r s o f Research and S t a t i s t i c i a n s Farm C r e d i t A d m i n i s t r a t i o n Washington, D# C. May 19, 1939 Proposals f o r C o n t r o l l i n g the General L e v e l o f P r i c e s I f e e l somewhat l i k e D a n i e l i n the l i o n * s den, p a r t i c u l a r l y "because Chester D a v i s , one of whose important f u n c t i o n s i n the Fede r a l Reserve System i s to tame the l i o n , was not able to come. He wanted me to convey t o you h i s r e g r e t s f o r not b e i n g able to accept your i n v i t a t i o n . Nevertheless, I welcome the o p p o r t u n i t y of speaking t o you f u n d a m e n t a l l y , f o r the reason t h a t from a g r i c u l t u r e comes most of the steam i n back o f movements t o i n s t r u c t the Federal Reserve System, or o t h e r monetary a u t h o r i t i e s , to pursue p o l i c i e s t h a t would r e s u l t i n a reestablishment and maintenance of a p r i c e l e v e l t h a t would not f l u c t u a t e much from the 1926 l e v e l or the 1921-29 l e v e l ( d i f f e r e n t l e v e l s are sometimes mentioned). Most o f t h a t steam comes from the a g r i c u l t u r a l elements i n the p o p u l a t i o n , which have s u f f e r e d most s e v e r e l y from v i o l e n t c o n t o r t i o n s o f p r i c e s of t h e i r p r o d u c t s . There i s , I t h i n k , a f a i r l y widespread f e e l i n g among your c o n s t i t u e n t s t h a t the c r e d i t a u t h o r i t i e s , the monetary a u t h o r i t i e s i n Washington, have been one of the r o o t e v i l s t h a t have brought about much o f the s u f f e r i n g and d i s t r e s s i n the f a r m i n g p o p u l a t i o n . I t was the Federal Reserve, 11 i n 1920 brought about a d r a s t i c d e f l a t i o n o f which by "conspiracy p r i c e s and caused u n t o l d s u f f e r i n g and f a n t a s t i c f i g u r e s of losses t o the a g r i c u l t u r a l p o p u l a t i o n . This statement has been made so o f t e n and loj so many t h a t i t i s almost b e g i n n i n g t o be t r u e i n r e t r o s p e c t . You know, I t h i n k t h a t economic t r u t h s or economic statements have a tendency t o be accepted as t r u e when they have been s a i d enough times over a s u f f i c i e n t l y l o n g p e r i o d of t i m e . And i t i s a l s o the monetary a u t h o r i t i e s t h a t are now, out of the wickedness o f t h e i r h e a r t s , or l a c k o f sympathy w i t h the f a r m i n g p o p u l a t i o n , o r because of t h e i r subs e r v i e n c y t o banking i n t e r e s t s , o r even because t h e y have s o l d out t o the Bank of England, doing n o t h i n g t o help the p r i c e s i t u a t i o n i n the f a r m i n g r e g i o n s , which, once more, i s an acute problem. My statement of these opinions may seem t o you somewhat exaggerated, b u t r a t h e r they are understatements compared w i t h some t h a t one hears and presuma b l y a l s o are understatements of the opinions h e l d by many u n t h i n k i n g p e o p l e . I t h i n k t h a t i n many ways t h a t i s the t h i n k i n g of a l a r g e group of people who have s u f f e r e d s e v e r e l y and who have turned to t h i s p a r t i c u l a r approach t o the problem as being a f e a s i b l e s o l u t i o n and one t h a t would, i f o n l y a d m i n i s t e r e d p r o p e r l y by the proper a u t h o r i t i e s and under proper i n s t r u c t i o n from Congress, do away w i t h a great d e a l of the d i f f i c u l t i e s which farmers have encountered i n t h i s and the l a s t generation and i n the g e n e r a t i o n before t h a t . I f e e l t h a t i t would be u s e f u l and h e l p f u l i f there were a b e t t e r understanding between us. There i s not anywhere a group o f people who are more concerned about the v a r i o u s v i c i s s i t u d e s of farm l i f e than i s t h e Board of Governors, and the Federal Reserve Board before i t . I have been connected w i t h the system f o r 20 years, and I have found t h a t the needs, wishes, and problems o f the farmer have always been v e r y close to the h e a r t o f the system, and, to my personal knowledge, unwise a c t i o n s and i n e f f e c t i v e a c t i o n s have "been taken by the System on several occasions, s o l e l y because those a c t i o n s were expected to do r e l a t i v e l y l i t t l e harm and would g i v e assurance t o the a g r i c u l t u r a l p o p u l a t i o n t h a t t h e i r problems are being taken care o f . I think that the monetary a u t h o r i t y , the Board o f Governors, should never be i n the p o s i t i o n o f having to take a c t i o n s which they themselves recognize as unwise merely as a gesture towards any one group o f the p o p u l a t i o n . I t h i n k t h a t the o n l y way the n e c e s s i t y o r occasion o f such a c t i o n s can be avoided l i e s i n a b e t t e r understanding o f the m a t t e r by a l l . I do not know whether I can c o n t r i b u t e to i t s understanding - I am v e r y d o u b t f u l about t h a t - but I have given i t considerable thought f o r some time, and I w i l l t e l l you the best thought t h a t I am capable o f on the s u b j e c t . I f e e l t h a t you, "being s c a t t e r e d over the c o u n t r y and h a v i n g many c o n t a c t s w i t h farmers and being t r a i n e d i n a g r i c u l t u r a l economics and economics i n g e n e r a l , ought to be i n a p o s i t i o n t o c o n t r i b u t e a good d e a l towards a b e t t e r understanding among farm o r g a n i z a t i o n s and the farmers themselves o f the way the monetary system works, o f the i n f l u ences t h a t are r e f l e c t e d i n i t , of the powers and l i m i t a t i o n s o f the monetary a u t h o r i t i e s , and o t h e r m a t t e r s of t h a t s o r t . I t h i n k i t would be v e r y v e r y h e l p f u l i f the main pressure from the f a r m i n g e l e ments would be d i r e c t e d t o channels where r e s u l t s can be achieved and towards r e s u l t s whose achievement would r e a l l y meet some of t h e i r p r o b lems, r a t h e r than b e i n g d i r e c t e d i n the d i r e c t i o n of the w i l l o f the wisp of a general p r i c e l e v e l , which i s a f i c t i t i o u s concept and one t h a t , p a r t i c u l a r l y from the monetary p o i n t of v i e w , has done u n t o l d m i s c h i e f to our t h i n k i n g . Now, having s t a t e d v e r y b l u n t l y my a t t i t u d e towards the m a t t e r , I would l i k e t o go i n t o a l i t t l e more d e t a i l i n e x p l a i n i n g my p o s i t i o n . I t may be dead wrong, as any p o s i t i o n may be. A l l I can assure you i s t h a t i t i s a p o s i t i o n I have reached w i t h o u t any preconceived i d e a s , w i t h o u t any a l l e g i a n c e to any p a r t i c u l a r group of the p e o p l e . I went to England l a s t year and t o l d the Bank of England I would l i k e to c o l l e c t some of the money they were supposed to have p a i d to buy our conscience, but I d i d not get a n y t h i n g . So I f e e l t h a t , i f we s o l d out t o the Bank o f England, t h a t was a poor b a r g a i n . I brought w i t h me, i n order t o make my own t a l k s h o r t e r - I have t h a t much c o n s i d e r a t i o n f o r your f e e l i n g s - a number o f copies of statements t h a t were prepared by t h e Board of Governors and issued from time t o time on the o b j e c t i v e s o f monetary p o l i c y and monetary measures. There are three statements, issued a t d i f f e r e n t t i m e s , which have now been combined i n t o a r e p r i n t c o v e r i n g much o f the s u b j e c t on which I am going to t a l k . I n t a l k i n g , I wish t o a considerable extent to a v o i d r e p e a t i n g what i s i n t h i s pamphlet f o r the reason t h a t I ~ 3 - t h i n k you can read t h a t a t your l e i s u r e and c o m f o r t ; i t w i l l he more u s e f u l i f I address myself to o t h e r t h i n g s which are more i n d i v i d u a l more my own o p i n i o n - r a t h e r than t o these o f f i c i a l statements which, though I t h i n k they are good, i n e v i t a b l y i n r e p r e s e n t i n g a whole o r g a n i z a t i o n have t o he s t a t e d i n n e g o t i a t e d language w i t h a l l kinds o f care and probably can be made more d i r e c t and vigorous when a p e r son can speak f o r h i m s e l f a l o n e . The f i r s t q u e s t i o n to which I wanted to r e f e r i s , "What i s the p r i c e level? 1 1 We speak o f the p r i c e l e v e l and assume t h a t we know what i t i s , b u t the f a c t i s t h a t we do n o t . I s the p r i c e l e v e l an index compiled o f commodities a t wholesale (213 commodities) by the Bureau o f Labor S t a t i s t i c s ? Or i s the p r i c e l e v e l the cost o f l i v i n g ? Or i s the p r i c e l e v e l the l e v e l o f p r i c e s of c e r t a i n s e n s i t i v e raw m a t e r i a l s t h a t i s compiled by d i f f e r e n t groups? Or do we want to speak o f the general p r i c e l e v e l which C a r l Snyder compiled i n the f e d e r a l Reserve Bank o f New York which includes i n a d d i t i o n t o p r i c e s o f commodities such t h i n g s as s t o c k s , r e a l e s t a t e , and wages? His was an attempt to get a t the t o t a l volume of payments as a measure of changes i n the d o l l a r value o f a l l kinds of t h i n g s t h a t money i s p a i d out f o r , r a t h e r than j u s t commodities. Each o f these indexes has v e r y definite characteristics. I had a l i t t l e rough c h a r t made o f them the o t h e r day, and they do not l o o k a l i k e . Tney f l u c t u a t e q u i t e d i f f e r e n t l y , although o r d i n a r i l y i n the same d i r e c t i o n . I t makes a b i g d i f ference which i s the p r i c e l e v e l , because p o l i c y t h a t i s guided by one might be e n t i r e l y d i f f e r e n t from p o l i c y t h a t i s guided by a n o t h e r . The g e n e r a l p r i c e l e v e l f l u c t u a t e s v e r y much l e s s w i d e l y than the sens i t i v e p r i c e l e v e l . The s e n s i t i v e p r i c e l e v e l may sometimes move i n the opposite d i r e c t i o n . At times, and perhaps a t c r i t i c a l t i m e s , i t may move i n the opposite d i r e c t i o n from the p r i c e l e v e l t h a t includes f i n i s h e d goods. The reason I am b r i n g i n g t h a t o u t , which i s no doubt f a m i l i a r t o you but c o n s t i t u t e s something of a background t o the way I t h i n k about i t , i s t h a t the enthronement o f a concept of p r i c e l e v e l i s u n f o r t u n a t e i n the v e r y f i r s t instance because we have set up a throne and we have p u t a k i n g on i t and we do not know who he i s , fe have n o t y e t been a b l e to determine h i s i d e n t i t y and y e t we want t o be guided by h i s b e h a v i o r . I t h i n k t h a t i n i t s e l f i s a weak spot i n the general p r i c e l e v e l . I have asked Mr # G a r f i e l d o f our s t a f f to g i v e me a l i t t l e d e s c r i p t i o n of these v a r i o u s p r i c e indexes, and as one looks them over one does not have a f e e l i n g o f tremendous c o n f i dence i n those p r i c e f i g u r e s as guides to p o l i c y . I t h i n k t h a t the Bureau of Labor S t a t i s t i c s does an arduous and an e x c e l l e n t j o b i n c o m p i l i n g t h e i r i n d e x , but i t has SI3 commodities, i . e . , 813 s e r i e s i t used t o be much l e s s - and i t gives them i n p r i m a r y markets and i t weights them according t o the amounts marketed i n 1323-^1^ a n & t h a t i s as w e l l as they can do. They change the base and they change the weights whenever circumstances seem to i n d i c a t e the n e c e s s i t y , b u t i t always has been a j o b t o do i t . They cannot do i t v e r y f r e q u e n t l y , and i n e v i t a b l y t h e i r index gets out o f date i n some p a r t i c u l a r s long -1+ ~ b e f o r e they have had ail o p p o r t u n i t y to r e v i s e i t . For example, such t h i n g s as women1 s a p p a r e l , e l e c t r i c a l appliances, and i n d u s t r i a l machinery a r e not i n c l u d e d i n the index a t a l l f o r the reason t h a t i t i s almost impossible to f i n d standard p r i c e s f o r these t h i n g s ; they are too h i g h l y s t y l e d and too many t h i n g s are i n v o l v e d i n them. It does i n c l u d e p r i c e s of shoes, automobiles, and a g r i c u l t u r a l implements, b u t the p r i c e s e r i e s of those are not e n t i r e l y s a t i s f a c t o r y because t h e r e has been a g r e a t change t e c h n o l o g i c a l l y . I n the case of lumber, f o r example, they have had as the p r i n c i p a l i t e m l o n g - l e a f southern p i n e timbers, which used t o be of considerable commercial importance but are no longer i m p o r t a n t . I do not want you t o misunderstand me i n t h i n k i n g I am c r i t i c i z i n g the Department of Labor. I would not h e s i t a t e t o do so i f I had reason t o , but I r e a l l y do n o t . I t i s j u s t t h a t t h e r e i s a constant s h i f t i n g , and i f you want t o consider the p r i c e index they compile as one of a l a r g e group o f economic indexes t o be taken i n t o c o n s i d e r a t i o n i n determining c r e d i t p o l i c i e s and other m a t t e r s , I t h i n k the index i s as good as i t i s p r a c t i c a b l e t o make i t . Every e f f o r t i s made t o b r i n g the index up t o date c u r r e n t l y and i t serves i t s purpose, but i f t h a t one index i s to be the c o n s t i t u t i o n , the economic c o n s t i t u t i o n of the U n i t e d S t a t e s , and the g o a l of a l l endeavor of t h e Government and of a l l monetary a u t h o r i t i e s , I t h i n k i t needs a considerable searching of itself. I t needs a t l e a s t t o be much more c u r r e n t l y a d j u s t a b l e t o changing c o n d i t i o n s , because a c r e d i t p o l i c y which might have enormous consequences might perhaps be based on the f a c t t h a t the index happened not t o have kept up w i t h the times; we might thus engage i n a r e s t r i c t i v e or an i n f l a t i o n a r y v p o l i c y , not because the country was i n a s i t u a t i o n c a l l i n g f o r d e f l a t i o n a r y or i n f l a t i o n a r y measures b u t because the index f a i l e d t o take account of some new commodities t h a t have r e c e n t l y become i m p o r t a n t . I do not want to o v e r s t r e s s t h i s p o i n t . I t i s only the b e g i n n i n g of what I t h i n k on the s u b j e c t , but i t does g i v e you a f e e l i n g of g r e a t h e s i t a n c y i n having t h a t one t h i n g s t a t e d i n the law or expected by the people t o be the g u i d i n g s t a r when i t i s only o f human c o n t r i v a n c e and imperfect t o a degree. More important than t h a t , however, i s t h a t no index t h a t has y e t been compiled can i n c l u d e more than a small p r o p o r t i o n of the t o t a l money payments t h a t are made i n the course of a y e a r . The o r i g i n a l conception of I r v i n g F i s h e r and others i n connection w i t h the p r i c e index was t h a t f l u c t u a t i o n s i n i n d i v i d u a l commodities are l i k e the waves on the s u r f a c e of the sea w h i l e the l e v e l of the ocean i s not a f f e c t e d . That conception i s fundamentally f a l l a c i o u s because i t r e l a t e s to commodity p r i c e s of c e r t a i n kinds - of s e l e c t e d commodities and leaves out of c o n s i d e r a t i o n the f a c t t h a t a v e r y l a r g e amount of what we spend i s spent on insurance p o l i c i e s , on debt r e d u c t i o n s , on savings ( i . e . i s kept as s a v i n g s ) ; any measure of the value of money i n r e l a t i o n to what the people have t o use money f o r cannot be and i s not represented by a wholesale, r e t a i l , or any other k i n d of a commodity - 5 - p r i c e index a l o n e . Why t h a t i s a w f u l l y important i s t h i s : the f u n d amental theory o f the p r i c e l e v e l as a guide to p o l i c y i s t h a t , i n the absence of m o n e t a e changes, a r i s e i n the p r i c e of one group of commodities must he o f f s e t by a decrease i n p r i c e s of another group o f commodities because the t o t a l volume of money has not changed t h e r e f o r e , i f you pay more f o r your shoes, you pay less f o r your h a t ; t h e r e i s no more money to pay w i t h . That conception l i e s back o f the conception t h a t , i f you want to r a i s e the general l e v e l , monetary means w i l l do i t . Increase the amount of money and the g e n e r a l l e v e l w i l l r i s e . You cannot v e r y w e l l guarantee t h a t t h i s o r t h a t o r the o t h e r p r i c e w i l l r i s e , but you can guarantee t h a t the t o t a l amount w i l l r i s e because i n the end i t depends on the q u a n t i t y o f money. Now, t h a t theory i s wrong. I t i s wrong because i t assumes two i n c o r rect things: I t assumes t h a t the q u a n t i t y of money determines the p r i c e l e v e l , and i t does not take i n t o c o n s i d e r a t i o n the f a c t t h a t the same amount of money can do more o r less work as circumstances develop and i t i s wrong because i t ignores the f a c t t h a t a r i s e i n the p r i c e of one group o f commodities, i n s t e a d of being o f f s e t by a d e c l i n e i n another group o f commodities, may be o f f s e t by changes i n items t h a t are not i n c l u d e d i n any index or may r e s u l t i n a change of money v e l o c i t y r a t h e r than i n a d e c l i n e i n p r i c e s and t h e r e f o r e , may not have to be o f f s e t by any item a t a l l . When you t h i n k o f the t h i n g i n these terms, when you remember t h a t the area o f payments t h a t i s covered by the p r i c e index i s a r e l a t i v e l y minor p a r t o f the n a t i o n a l income, and when you remember f u r thermore t h a t the q u a n t i t y o f money i s o n l y one o f two f a c t o r s i n measuring the volume o f payments - * t h e o t h e r f a c t o r being v e l o c i t y , which i s not d i r e c t l y under the c o n t r o l of any monetary a u t h o r i t y you g e t the t h e o r e t i c a l basis f o r r e c o g n i z i n g t h a t the general p r i c e l e v e l approach as a sole or p r i n c i p a l guide t o monetary p o l i c y i s based on f a l s e premises and f a l s e reasoning. I have never s a i d t h i s i n j u s t those terms before p a r t l y f o r the reason t h a t I have always thought I had to speak i n p r a c t i c a l terms, and t h i s business of t r y i n g t o be p r a c t i c a l always has a bad e f f e c t on one ! s m e n t a l i t y . You b e g i n to stop t h i n k i n g because you f e e l f a l l a c i o u s l y t h a t the o t h e r f e l l o w i s not t h i n k i n g . I f e l t when I agreed to speak here today t h a t I ^ o u l d give up the i n h i b i t i o n s and t h a t I would t a l k to you, being t r a i n e d and e x p e r t people i n t h i s f i e l d , t h a t I would h i t s t r a i g h t from the shoulder and speak about t h e o r e t i c a l phases o f the problem as w e l l as the p r a c t i c a l ones. A l l r i g h t . Supposing, however, t h a t the p r i c e l e v e l idea i s wrong i n t h e o r y , but t h a t nevertheless i t works i n p r a c t i c e . In that case, we would not have much basis f o r standing out a g a i n s t the theory except p o s s i b l y as t h e r e may be f u t u r e times when i t w i l l not work, but i f i t worked a t a l l c o n s i s t e n t l y we would f e e l t h a t ray case i n t h e o r y would not be w o r t h making. — 6 L e t us t h e r e f o r e t e s t the t h e o r y i n p r a c t i c e . Chart No. 1 shows the r e l a t i o n s h i p between the volume of money and p r i c e s . I t includes o n l y the amount of d e p o s i t s . I have another t h a t shows c u r r e n c y , but I p a i d you the compliment of not b r i n g i n g i t over because those who b e l i e v e t h a t p r i c e s depend on volume of c u r r e n c y , as some people s t i l l do, a r e so f a r behind i n t h e i r economic education t h a t I d i d not f e e l we need to go i n t o t h a t . Bank deposits are the fundamental money of the countryf n i n e t e e n - t w e n t i e t h s o f the payments are made t h a t way, and i f there were a r e l a t i o n s h i p between the volume of money and p r i c e s i t ought t o show h e r e . The c h a r t shows deposits and p r i c e s w i t h 1926 as the base. I n 1929, money had gone up and p r i c e s had gone down - a p r e t t y f a i r inverse c o r r e l a t i o n b u t the movements were s m a l l , so t h a t you c o u l d not a t t a c h v e r y much s i g n i f i c a n c e to them. But then we went ahead and d i d a g r e a t many t h i n g s t o increase the supply o f money. We have a t t h i s time the l a r g e s t supply o f money i n the h i s t o r y o f the c o u n t r y , p a r t l y because of the Government's s e l l i n g government s e c u r i t i e s to banks, p a r t l y because of s i l v e r purchases, and p a r t l y to a v e r y s u b s t a n t i a l e x t e n t due t o the i n f l o w o f g o l d . We now have deposits h i g h i n r e l a t i o n to 1926 as a base, and p r i c e s ought to be h i g h , but l o o k a t them. P r i c e s are down more than 20 percent from the 1926 l e v e l , w i t h money up about IS p e r c e n t . That does not g i v e you the f e e l i n g t h a t the q u a n t i t y o f money i n p r a c t i c e , l e a v i n g o u t t h e o r e t i c a l cons i d e r a t i o n s , f o l l o w s p r i c e s , or t h a t p r i c e s f o l l o w the amount o f money. They do n o t . They do not over t h i s p e r i o d (and t h i s i s not a s p e c i a l l y s e l e c t e d p e r i o d ) - and do not g e n e r a l l y over any p e r i o d . I w i l l n o t say there were no p e r i o d s when b o t h p r i c e s and money went up. There are such p e r i o d s , b u t whether o r n o t they go up depends on so many o t h e r circumstances t h a t you cannot consider the two t h i n g s as being m u t u a l l y so c l o s e l y r e l a t e d t h a t you could c o n t r o l one by c o n t r o l l i n g the o t h e r . One reason t h a t a g r i c u l t u r a l people are mage more i n t e r e s t e d i n p r i c e c o n t r o l than most o t h e r groups of people i s because they are the g r e a t e s t v i c t i m s of p r i c e f l u c t u a t i o n s , because they are not able to a d j u s t t h e i r p r o d u c t i o n as p r o m p t l y as i n d u s t r i a l people can, and they take t h e i r depressions i n p r i c e d e c l i n e s w i t h o u t a serious r e d u c t i o n i n p r o d u c t i o n . A g r i c u l t u r a l p r i c e s are to some extent the p r i c e s of i n t e r n a t i o n a l commodities; they are measurable from minute to minute on the t i c k e r , and they are moreover l i k e l y to s u f f e r most from a p r i c e d e c l i n e becatise i t does u s u a l l y h i t raw m a t e r i a l s more s e r i o u s l y than i t does o t h e r s . I t i s because of these f a c t s t h a t movements f o r the r e g u l a t i o n of p r i c e s , movements f o r f a n t a s t i c g o l d and s i l v e r p o l i c i e s or f o r f a n t a s t i c currency o r c r e d i t p o l i c i e s , have come to a c o n s i d e r able e x t e n t from a g r i c u l t u r a l elements; t h e i r products are s u b j e c t to the w i d e s t p r i c e f l u c t u a t i o n s . And I t h i n k t h e r e i s the o t h e r f a c t t h a t a g r i c u l t u r a l p e o p l e , e s p e c i a l l y those who produce l a r g e l y one p r i n c i p a l cash c r o p , are l i k e l y t o be more i n t e r e s t e d i n the p r i c e of one commodity than any o t h e r group of people. A manufacturer, w h i l e he i s i n t e r e s t e d i n the p r i c e s of the commodities he produces, i s - 7 - d e f i n i t e l y and c u r r e n t l y conscious of the f a c t t h a t h i s income does not depend s o l e l y on the p r i c e of the commodity he s e l l s hut i s also i n f l u e n c e d hy the p r i c e s he has to pay f o r h i s raw m a t e r i a l s , l a b o r , c r e d i t , and other t h i n g s . He i s t h e r e f o r e conscious of h i s i n t e r e s t being i n the margin between costs and p r i c e s more d e f i n i t e l y than i s a wheat farmer o r a c o t t o n farmer who depends on one commodity, and whose costs ( c o n s i s t i n g i n a l a r g e p a r t of h i s own e f f o r t s ) do n o t change as r a p i d l y . I n o t h e r words, a one-crop farmer i s n a t u r a l l y more i n t e r e s t e d i n the p r i c e of h i s output than almost any o t h e r group of the p o p u l a t i o n , but even among farmers t h a t i s not u n i v e r s a l . They are n o t a l l one-cash-crop f a r m e r s . The d a i r y farmer does not f i n d i t t o h i s advantage when the p r i c e of feed goes up because t h a t i s not always o r a t a l l r e g u l a r l y accompanied by a r i s e i n the p r i c e of m i l k , cheese, or cream, so t h a t he was the f i r s t one i n the a g r i c u l t u r a l group who became conscious of the f a c t t h a t he i s more i n t e r e s t e d i n the r e l a t i o n s h i p between d i f f e r e n t p r i c e s than he i s i n an average of a l l prices. I t i s r a t h e r c u r i o u s , you know, why a person should be i n t e r e s t e d i n the p r i c e l e v e l , because nobody buys i t or s e l l s i t or wears i t or lives in i t . I t has no r e l a t i o n s h i p to everyday l i f e . What they are i n t e r e s t e d i n i s the r e l a t i o n s h i p of the p r i c e s o f what they produce to the amount they can s e l l and the cost of p r o d u c t i o n . Even d e b t s , which are u s u a l l y quoted as b e i n g the one t h i n g which should be r e l a t e d to the p r i c e l e v e l are not p a i d w i t h a p r i c e i n d e x . No one has t r i e d to pay o f f h i s debt w i t h a p r i c e i n d e x . He t r i e s to pay o f f h i s debt w i t h what i s l e f t a f t e r he has produced h i s product and s o l d i t and p a i d h i s l i v i n g expenses. I t i s the margin t h a t pays the d e b t . That margin does not depend on the p r i c e l e v e l . I t does not even depend s o l e l y on the p r i c e o f the i n d i v i d u a l commodity he produces. I t depends on the whole s e t of f a c t s I have mentioned - the p r i c e o f h i s commodity, the volume o f s a l e s , the cost of p r o d u c t i o n - and i s so complex and may be d i f f e r e n t a t d i f f e r e n t times and so d i f f e r e n t i n r e l a t i o n to the p r i c e l e v e l t h a t i t j u s t makes no sense to be p a r t i c u l a r l y concerned about t h a t one t h e o r e t i c a l f i g u r e , Mr # Ford has long since demonstrated t h a t you can make more money by s e l l i n g cars cheap than by h o l d i n g out f o r a h i g h p r i c e , which shows t h a t the p r i c e of the product i s not the d e t e r m i n i n g f a c t o r i n t h a t i n d u s t r y . Now, as I s a i d a w h i l e ago, i n c e r t a i n groups o f a g r i c u l t u r e i t i s more the d e t e r m i n i n g f a c t o r than i t i s i n other i n d u s t r i e s or other phases o f a g r i c u l t u r e , but even t h e r e , to repeat j u s t once more, i t i s not the g e n e r a l p r i c e l e v e l b u t the p r i c e s o f the i n d i v i d u a l commodities concerned t h a t makes the d i f ference. We i n the F e d e r a l Reserve have always recognized the importance o f farm p r i c e s . We have always recognized t h a t what can be done to a s s i s t them should be done by the Federal Reserve. We have always been tempted to g i v e p r e f e r e n t i a l treatment t o a g r i c u l t u r a l commodities a t marketing t i m e . We have done a good many t h i n g s , as I s a i d b e f o r e , ~ g - which, when p r o p e r l y analysed, have not accomplished the purpose and sometimes have done damage to our general p o l i c y , because o f a d e s i r e to l e a n over backwards i n a s s i s t i n g the farm s i t u a t i o n . But t h i s h a s t y a n a l y s i s t h a t I have j u s t made o f the unimportance o f the gene r a l index has as a c o r o l l a r y the statement t h a t monetary means cannot do much i n the d i r e c t i o n of h e l p i n g an i n d i v i d u a l group of people because i f monetary means have any i n f l u e n c e on p r i c e s they have an i n f l u e n c e on p r i c e s as a whole* I have i n d i c a t e d t h a t I do n o t b e l i e v e i n t h a t p a r t i c u l a r t h e o r y o f the p r i c e s as a whole, t h a t i s of t h e i r d i r e c t r e l a t i o n s h i p t o the q u a n t i t y o f money, and i t i s o n l y the q u a n t i t y of money and i t s cost t h a t monetary a u t h o r i t i e s can control. I f there i s no d i r e c t r e l a t i o n s h i p , i t shows t h a t the main approach t o the s o l u t i o n o f the problem o f a g r i c u l t u r e , j u s t as the main approach t o the s o l u t i o n of the problem of c o a l and t o the p r o b lem o f unemployment, l i e s outside of the d i r e c t means through which monetary p o l i c y must make i t s e l f e f f e c t i v e , namely, the q u a n t i t y and the cost of money. Chart No. 2 shows f o r February 193^ p r i c e s o f a s e l e c t e d group of commodities ( s e l e c t e d s i m p l y f o r s i m p l i c i t y ) . We c o u l d not p u t a l l p r i c e s i n ; i t would have been too cumbersome t o have i n c l u d e d the more than BOO l i n e s . The c h a r t shows the general l e v e l of p r i c e s , which i s about 80 p e r c e n t o f the 1926 base. P r i c e s o f c e r t a i n comm o d i t i e s are below the general l e v e l and those of another group are above i t . The , f general l e v e l " i s n o t h i n g more than an average of a l l o f these p r i c e s and some 75^ o t h e r s . There are some p r i c e s , l i k e t h a t o f s i l k , t h a t a r e almost SO percent below the 1926 l e v e l . There are some, w i t h m i r r o r s f o r some reason g r e a t e s t , b u t w i t h p i g i r o n f o l l o w i n g , t h a t are 25 t o 60 percent above. I f t h e r e were a way of r a i s i n g the p r i c e l e v e l , the c h a r t makes i t emphatic t h a t the average c o u l d r i s e i n a v a r i e t y o f ways. I f you had complete c o n t r o l - i f you had a d i c t a t o r s h i p and c o u l d f i x p r i c e s - you c o u l d determine the p r i c e l e v e l by r a i s i n g those p r i c e s which are a l r e a d y above the a v e r age o r by r a i s i n g those which are below the average, or you c o u l d r a i s e the l e v e l by r a i s i n g the whole set o f p r i c e s . Now, the p o i n t i s t h a t monetary a u t h o r i t i e s are never i n a p o s i t i o n to decide which of these things i s g o i n g t o happen. According to the t h e o r y they would be r e q u i r e d to r a i s e the p r i c e l e v e l . I do not know how, but they are supposed to be able t o do t h a t * The question i s how the r i s e i s going to d i s t r i b u t e i t s e l f among i n d i v i d u a l commodities, a process over which monetary a u t h o r i t i e s have no c o n t r o l . I t might mean t h a t e v e r y t h i n g a farmer buys w i l l c o s t him more w h i l e the commodity which he has to s e l l may go down so t h a t he w i l l g e t l e s s f o r what he s e l l s and w i l l have t o pay more f o r what he has t o buy and w i l l have to console hims e l f by knowing t h a t t h e p r i c e l e v e l has been s t e a d y . The Swedes had t h a t experience f o r a w h i l e . Through a group o f more o r l e s s conscious p o l i c i e s t h e i r p r i c e l e v e l was kept c o n s t a n t . Sweden has been quoted t o us and a t us f o r y e a r s . Everybody b u t the Swedes i s saying t h a t they know how t o run the money system. I was over t h e r e l a s t - 9 year and t a l k e d to them, Myrdal i s i n t h i s c o u n t r y now, and you can f i n d out from him. When they had a constant p r i c e l e v e l i t was the r e s u l t of the p r i c e s o f t h e i r import commodities going up w h i l e the p r i c e s o f t h e i r e x p o r t commodities went down. So, Sweden, j u s t l i k e the person I mentioned a w h i l e ago, had the s a t i s f a c t i o n o f paying more f o r what i t bought and g e t t i n g l e s s f o r what i t s o l d and the index was steady. They d i d not seem to he s u f f i c i e n t l y g r a t i f i e d by t h a t r e s u l t t o m a i n t a i n t h a t p o l i c y and proceeded t o adopt o t h e r p o l i c i e s t h a t gave them more f o r t h e i r e f f o r t s and r e s u l t e d i n a r i s e i n the p r i c e index (not a v i o l e n t r i s e , b u t some r i s e ) , and they were a p p a r e n t l y more s a t i s f i e d , a l t h o u g h t h e o r e t i c a l l y i t was not as good a s i t u a t i o n because the p r i c e index was not l e v e l . We know as w e l l as anybody t h a t wide f l u c t u a t i o n s i n the p r i c e l e v e l are accompanied by bad c o n d i t i o n s . A l l I say i s l i m i t e d t o the minor f l u c t u a t i o n s . You can never have a v i o l e n t r i s e i n p r i c e s w i t h out d i s r u p t i n g the economy, and you cannot have a v i o l e n t d e c l i n e i n p r i c e s w i t h o u t d i s r u p t i n g the economy. That we admit and everybody knows, b u t t h a t i s t r u e o f every index we compile. You cannot have a good economy w i t h your p r o d u c t i o n index f l u c t u a t i n g w i d e l y , or w i t h your employment index f l u c t u a t i n g w i d e l y , o r w i t h the c o n s t r u c t i o n index f l u c t u a t i n g w i d e l y , or w i t h the stock market f l u c t u a t i n g w i d e l y , or w i t h the n a t i o n a l income f l u c t u a t i n g w i d e l y . I n o t h e r words, wide f l u c t u a t i o n s i n any o f the indexes we have are i n d i c a t i v e o f unhealthy developments t h a t are u s u a l l y v e r y p a i n f u l f o r some group of the popul a t i o n ; w i t h the repercussions, a l l groups are a f f e c t e d b e f o r e l o n g . We must l e a r n to consider the p r i c e index as being one_of the u s e f u l indexes t h a t have been devised by experts f o r the purpose of meeting the l i m i t a t i o n s of our minds, which are not capable o f t h i n k i n g of 800 or 1,000 or 10,000 t h i n g s a t a t i m e . You have to reduce them to a s m a l l e r number and the p r i c e index as a general i n d i c a t i o n i s f r e q u e n t l y a u s e f u l index i f i t i s k e p t i n i t s proper place among a group o f o t h e r indexes on which p o l i c y has to be based. I f we c o u l d do t h a t and i f we could recognize t h a t a r e s p o n s i b l e a u t h o r i t y has to consider a l l these indexes, and then has t o use judgment and, t h a t there i s no s u b s t i t u t e f o r judgment and t h a t Congress cannot w r i t e i n t o law a subs t i t u t e f o r judgment - i f we would o n l y go over t h i s s m a l l h u r d l e which seems to me one which a t o d d l i n g c h i l d ought to be a b l e t o take I t h i n k we would get away from a tremendous amount of p e r f e c t l y useless and enormously h a r m f u l a g i t a t i o n and o r a t o r y . There i s one o t h e r general f a c t o r I wanted to b r i n g out i n conn e c t i o n w i t h the thought t h a t the person i n business anywhere i s i n t e r ested p r i m a r i l y i n h i s net r e t u r n - a farmer j u s t as much as anybody else - a l t h o u g h sometimes a f a r m e r ' s net income may t e m p o r a r i l y cons i s t to a g r e a t e r e x t e n t of the gross r e c e i p t s f o r h i s p a r t i c u l a r c r o p . The f a r m e r , however, cannot make a s u b s t a n t i a l income f o r any l e n g t h of time when h i s markets are d i s r u p t e d ; h i s markets depend more on the s t a t e o f employment and pay envelopes of i n d u s t r i a l workers than on - 10 any o t h e r one f a c t o r i n t h i s c o u n t r y , f e may t a l k about A r g e n t i n a or A u s t r a l i a and t h e i r economy may depend more on the p r i c e o f wool or wheat i n the w o r l d market because they s e l l abroad, b u t we s e l l so much more a t home than abroad t h a t our farmers 1 p r o s p e r i t y - as has been p o i n t e d out to you, I am s u r e , by many people i n a g r i c u l t u r e and as you who are f a m i l i a r w i t h i t know - depends more on the c o n d i t i o n o f our i n d u s t r i a l p a y r o l l s than on any other one f a c t o r . I have b o r rowed c h a r t No. 3 from the Bureau o f A g r i c u l t u r a l Economics. I t shows the income o f farmers from t h e i r crops and the income o f i n d u s t r i a l workers, and the n a t i o n a l income from a l l sources. I t shows a close relationship. I n o t h e r words, farmers would not b e n e f i t by a r i s e i n t h e i r p r i c e s f o r any l e n g t h o f time i f there were no employment so t h a t the i n d u s t r i a l workers were a b l e t o take the products o f f the m a r k e t . Therefore, i t i s i n p r i c e r e l a t i o n s h i p and i n g e n e r a l economic p r o s p e r i t y t h a t we are i n t e r e s t e d . We have been c r i t i c i z e d f o r these statements as being d e f e a t i s t s ~ o f saying we cannot do a n y t h i n g . I always say, however, t h a t i n the f i r s t place a c r i t i c i s m o f an unsound approach which might lead you to wrong conclusions and a wrong course o f a c t i o n i s u s e f u l whether you have a s u b s t i t u t e o r n o t . Everybody i s n o t b r i l l i a n t enough to be able t o do more than one j o b . I t h i n k t h a t t h i s " d o n H c r i t i c i z e unless you have a b e t t e r s u b s t i t u t e " i s i n i t s e l f a f a l l a c y . If a t h i n ? i s wrong you have to say so and l e t somebody e l s e , i f you do not have a n y t h i n g to suggest, say what should be done. But more than t h a t , I t h i n k t h a t a l l of us here i n Washington and i n the c o u n t r y and i n the w o r l d have found out t h a t t h e r e i s no one answer, t h a t you have to do a tremendous amount o f work on a l o t of f r o n t s b e f o r e you can work out a s t a b l e and prosperous economy. E l i m i n a t i n g the p r i c e l e v e l as the one and o n l y guide c l e a r s the way f o r c l e a r e r t h i n k i n g on problems o f farm management, on problems o f t a x a t i o n , on problems of l a b o r p o l i c y , on problems o f investment. Our economic s t a b i l i t y depends on the complex of a l l of these f a c t o r s , and any attempt to reduce i t to one f o r m u l a i s bound t o do more harm than good, and i t i s of g r e a t importance, i t seems to me, to l e a r n not to t h i n k of i t i n those terms. Some persons take the p r i c e index and then make a c h a r t and get the r e c i p r o c a l value of the d o l l a r . The f a c t t h a t the r e s u l t s must i n e v i t a b l y correspond because they are c a l c u l a t e d one from the o t h e r does not d i m i n i s h i n the l e a s t the t h r i l l t h a t the complete c o r r e l a t i o n i n s p i r e s i n such persons. I t i s an idea which e a r l i e r i n my remarks I i n d i c a t e d i s i n c o r r e c t , among other reasons, because p r i c e s do not comprise the whole f i e l d . The concept o f p r i c e s and the value of money being r e c i p r o c a l e q u i v a l e n t s i s an over s i m p l i f i e d p h i l o s o p h y . I t makes i t a w f u l l y easy to t a l k , and i t i s a r a t h e r d i f f i c u l t t h i n g t o combat because you have to a c e r t a i n extent to combat i t t h e o r e t i c a l l y and most o f the people who t a l k i n these terms have not g o t t e n i n the h a b i t of any k i n d o f t h e o r e t i c a l t h i n k i n g , Many of these people have sought to f i n d support f o r t h e i r p o s i t i o n i n what a l o t - 11 of people who d i e d 150 years ago wrote i n t o the C o n s t i t u t i o n of the United S t a t e s . They have f i g u r e d out t h a t Congress has the a u t h o r i t y to c o i n money and determine the value t h e r e o f . That i s what i s says i n the C o n s t i t u t i o n . They say t h a t means t h a t Congress i s supposed to determine the p r i c e l e v e l and has no a u t h o r i t y t o delegate t h a t d u t y t o any agency; Congress must t e l l the monetary a u t h o r i t y to f i x the average of p r i c e s a t a c e r t a i n l e v e l and keep i t t h e r e , and i f Congress f a i l s to do t h a t i t i s v i o l a t i n g i t s c o n s t i t u t i o n a l o b l i g a tion. I t i s r a t h e r a curious l i n e of t h i n k i n g , "but i t comes d i r e c t l y out of the concept t h a t p r i c e s and the value of money are r e c i p r o c a l s . The f a c t , of course, i s - and we have had a c o n s t i t u t i o n a l lawyer study the q u e s t i o n - t h a t t h e r e was not the remotest conception of t h a t s o r t i n the minds of the f a t h e r s o f the c o n s t i t u t i o n . A l l they had i n mind was the g o l d and s i l v e r contents of the currency and the v a l u e o f f o r e i g n coins c i r c u l a t i n g a t t h a t time i n t h i s c o u n t r y . They had no conception of p r i c e l e v e l . They were not guided "by an e r r o n e ous p h i l o s o p h y t h a t was discovered I50 years a f t e r t h e i r death. I t h i n k the continuance of our economic system and o f our p o l i t i c a l system i s dependent on working out a more s t a b l e and prosperous economy, and t h a t i n v o l v e s the maintenance of a f a i r degree of p r o s p e r i t y f o r farmers and a f a i r degree of constant employment a t reasona b l e wages to the workers. Studies of p r i c e s as a group and p r i c e s i n t h e i r r e l a t i o n t o each other are a p a r t of t h e economic data t h a t we must have a t our command, The monetary a u t h o r i t i e s have a r o l e to p l a y i n t h i s . T h e i r r o l e i s l a r g e l y a matter o f i n f l u e n c i n g the supp l y and cost of money - by i n f l u e n c i n g the supply they can p r o v i d e an adequate amount f o r the needs of the i n d u s t r i e s and a g r i c u l t u r e of t h i s c o u n t r y , and by i n f l u e n c i n g the cost they can to some e x t e n t i n f l u e n c e the speed w i t h w h i c h i t i s being used. There are a g r e a t many times and occasions when those t h i n g s are q u i t e e f f e c t i v e . In 1923 and i n 1929 monetary p o l i c i e s were e f f e c t i v e but there are times when as today the volume of money i s extremely h i g h , the cost o f money extremely low, and the o p p o r t u n i t i e s f o r i t s use inadequate. I t i s a p a r t o f our job to keep a l l these t h i n g s i n our mind and to work i n the d i r e c t i o n o f a proper f l o w of money, but a g r e a t many others w i l l have to do work a l o n g a g r e a t many p a r t s of our economic f r o n t before we w i l l achieve the purpose of a prosperous, w e l l - b a l a n c e d , c o n t i n u ously f u n c t i o n i n g economy. One o f the obstacles (perhaps, b r o a d l y speaking, a minor o b s t a c l e , b u t i t happens to be the one I am t a l k i n g about today) t o the achievement of t h a t o b j e c t i v e i s o v e r s i m p l i f i c a t i o n of the economic p i c t u r e and i t s r e d u c t i o n to some one formula which should guide us and which i f enacted i n t o la?/ would solve a l l our problems. I f e e l t h a t we have to grow out of those conceptions b e f o r e we w i l l be i n a p o s i t i o n to have the r i g h t frame of mind f o r s o l v i n g our r e a l l y v e r y g r e a t d i f f i c u l t i e s . Dr» Johnson: I know D r . Goldenweiser, i n t h i s v e r y i n t e r e s t i n g and v e r y e x c e l l e n t d i s c u s s i o n , has opened up a good many questions i n your minds. We w i l l throw the meeting open f o r a general d i s c u s s i o n . - 12 Mr, Cavert: I would l i k e to ask i f D r . Goldenweiser has any comments on the e f f e c t s o f the change i n reserve requirements i n 1937• D r , Goldenweiser: situation? E f f e c t s o f t h a t on the business and c r e d i t Mr a Cavert? On the business s i t u a t i o n i n g e n e r a l . A f t e r t h a t , the business s i t u a t i o n got worse. I s t h e r e any cause and e f f e c t ? If so, how much? D r , Goldenweiser: I n 193^t w e about 3 b i l l i o n s of excess r e s e r v e s , which meant t h a t the banks could increase a t the then p r e v a i l i n g r a t i o t h e i r loans and investments and t h e i r deposits by a t l e a s t 35 b i l l i o n s o f d o l l a r s on the basis o f the then e x i s t i n g reserves, which would have more than doubled the supply o f money. The Board had been g i v e n by Congress the o b l i g a t i o n to prevent i n j u r i o u s c r e d i t expansion and c o n t r a c t i o n , and i t f e l t t h a t i t would be a good idea to a c t on the reserve requirements a t a time when there was so much reserves t h a t there would be p l e n t y l e f t i f the a c t i o n were taken and a t a time when reserves were so w e l l d i s t r i b u t e d t h a t v e r y few i n d i v i d u a l banks would be a f f e c t e d . They r a i s e d the reserve requirements by a b i l l i o n and a h a l f i n the sumner o f 193^, and there were no e f f e c t s o f any k i n d except t h a t the excess reserves t e m p o r a r i l y d e c l i n e d , o n l y t e m p o r a r i l y because the g o l d i n f l o w continued, and by the end o f the year excess reserves again were about 2 l / H b i l l i o n d o l l a r s . Then a t t h a t time the business s i t u a t i o n was an u n h e a l t h y one because we had a l a r g e number o f d u p l i c a t i n g o r d e r s , we had an accumulation of i n v e n t o r i e s , we had a r i s e i n many costs r e s u l t i n g from war demands and o t h e r t h i n g s , so t h a t we had a combination of a s t i l l v e r y l a r g e volume of reserves and a v e r y u n h e a l t h y , s p o t t y s o r t of a boom. It was not a general boom because we s t i l l had a l a r g e volume of unemployment, b u t we had booms i n various sections and we were impressed once more by the l a c k of l i q u i d i t y and f l u i d i t y i n economy t h a t you can have. We s a i d you cannot have i n f l a t i o n so l o n g as you have i d l e p l a n t s and i d l e men, but you can have i n f l a t i o n i n c e r t a i n spots because n e i t h e r the p l a n t nor the men can move from spot to spot and t r a n s p l a n t themselves i n t o the p a r t i c u l a r a r t i c l e needed a t a p a r t i c u l a r t i m e . So, i n view of l a r g e reserves the Board f e l t t h a t , i f i t l e f t those reserves i n the then e x i s t i n g s i t u a t i o n , an enormous i n f l a t i o n might f o l l o w and t h a t i f t h a t happened and the Board then acted i t would mean a d e f l a t i o n , which we wanted a t a l l odds t o a v o i d . T h e r e f o r e , a p r e l i m i n a r y a c t i o n , a p r e c a u t i o n a r y a c t i o n , i n advance o f t h e use of those funds seemed d e s i r a b l e . I t looked as though i t was much b e t t e r t o d i m i n i s h the base under our c r e d i t system, b e f o r e a s t r u c t u r e had been e r e c t e d on t h a t e x t r a base than t o remove the base l a t e r and make the c r e d i t s t r u c t u r e collapse> So, the Board a c t e d and r a i s e d the requirements to the l i m i t p e r m i t t e d by law. A f t e r they had a c t e d , t h e r e was s t i l l a b i l l i o n d o l l a r s o f excess reserves capable of s u p p o r t i n g 6 b i l l i o n s of a d d i t i o n a l d e p o s i t s . The a c t i o n was taken e a r l y i n the y e a r , - 13 business continued f a i r l y good, the investment market was s t r o n g e r i n the second quarter of 1937 than i t had been a t any time since t h e depression. Money r a t e s continued low. There seems to me no evidence t h a t t h a t a c t i o n had a n y t h i n g to do w i t h the business r e c e s s i o n which was brought about l a r g e l y by maladjustments between v a r i o u s groups of p r i c e s , by the r i s e i n raw m a t e r i a l s and costs w i t h o u t a corresponding r i s e i n f i n i s h e d products which stopped the b u i l d i n g boom and s e v e r a l other l i n e s of a c t i v i t y . I n g e n e r a l , and b r o a d l y speaking, I should say t h e r e was no connection between the two. I should say t h a t there was a s h o r t p e r i o d i n the s p r i n g when w i t h o u t any rhyme o r reason the f a c t t h a t the requirements had been r a i s e d (and nobody understands requirements v e r y w e l l ) r e s u l t e d i n a wave o f dumping of government s e c u r i t i e s , and t h a t wave of dumping o f government s e c u r i t i e s tempor a r i l y had a d i s t u r b i n g e f f e c t on the investment market, which i s i m p o r t a n t . I t h i n k the s l i g h t r e l a t i o n s h i p t h e r e , l a r g e l y on a psychol o g i c a l b a s i s , i s t r a c e a b l e , but i t was a v e r y s h o r t p e r i o d , and the system entered the market and bought government s e c u r i t i e s to the e x t e n t of one hundred m i l l i o n d o l l a r s . That p a r t i c u l a r movement stopped, and a f t e r t h a t there was no i n c l i n a t i o n f o r the investment market to d e c l i n e . I t h i n k i t i s as f a i r an economic statement as any t h a t t h e r e i s no r e a l r e l a t i o n s h i p between the two a c t i o n s . How, you may ask, i f I a n t i c i p a t e the p o s s i b l e next q u e s t i o n , why i n t h a t case d i d we reduce reserve requirements i n the s p r i n g o f 193^? I say we reduced reserve requirements i n the s p r i n g o f 193® w i t h o u t any good reason. We reduced them because business was bad and i t made l i t t l e d i f f e r e n c e whether we reduced i t or n o t . I t was a program worked out here t h a t was intended to impress the c o u n t r y t h a t e v e r y t h i n g was being done along every f r o n t to f a c i l i t a t e r e c o v e r y , and i t seemed t h a t there was no p a r t i c u l a r harm t h a t a d d i t i o n a l excess reserves could do a t t h a t time; and since i t made a c t i o n more complete, as an economic gesture those reserves were reduced by about t h r e e - q u a r t e r s of a b i l l i o n . D r . Stokdyk: When you discussed the r e l a t i o n between farm income and the income of i n d u s t r i a l workers, I i n f e r r e d from your d i s c u s s i o n you might have f e l t t h a t the m o t i v a t i n g f a c t o r was the income of indust r i a l workers. I am wondering whether you have a r e c i p r o c a t i n g r e l a t i o n ship there. D r . G-oldenweiser: A b s o l u t e l y ; I am glad you b r i n g t h a t out because t h a t i s the way I t h i n k o f i t . I would say the same t h i n g t o the i n d u s t r i a l workers about the importance to them o f the farm market. D r . Stokdyk: The reason I b r i n g t h a t out i s I understand somebody i s working on a problem to t r y to prove t h a t a g r i c u l t u r a l income came f i r s t ana i n d u s t r i a l income came l a t e r . D r . Goldenweiser: I would be i n c l i n e d to t h i n k those are r e c i p r o c a l , and which comes f i r s t would be d i f f e r e n t a t d i f f e r e n t times and b o t h are e q u a l l y important to the w e l f a r e of the n a t i o n . Mr» Maughan: I f i t i s n ' t too b i g a s u b j e c t I would v e r y much l i k e t o have you express your o p i n i o n as to the r e l a t i v e importance to business c o n d i t i o n s of the p r i c e l e v e l , I do not want t o suggest the general p r i c e l e v e l , but the average of a l l p r i c e s and, say the monetary base to which you are t i e d - g o l d o r b i m e t a l l i s m . I n your o p i n i o n i s the general average o f p r i c e s a r e f l e c t i o n o f business or the r e l a t i o n s h i p s o f these business f a c t o r s , o r how much i s i t r e l a t e d to your monetary base? D r . Goldenweiser: I w i l l give i t to you i n a few words. Of course, I cannot exhaust the subject on which t h e r e i s a l i b r a r y , but I w i l l give you my o p i n i o n i n a v e r y few words. I do not e l i m i n a t e the monetary base from the v a r i o u s f a c t o r s t h a t e n t e r i n t o the p i c t u r e . I n our economy, as i t works today i n v a r i o u s c o u n t r i e s , the importance of the monetary base i n the short term i s merely i t s e f f e c t on the r e l a t i v e p o s i t i o n of d i f f e r e n t c u r r e n c i e s i n d i f f e r e n t c o u n t r i e s . In o t h e r words, the reason why the g o l d content of the d o l l a r makes a d i f f e r e n c e i s because i t i s a f a c t o r i n d e t e r m i n i n g the amount of d o l l a r s t h a t can be bought f o r a pound s t e r l i n g , o r the number of f r a n c s i t takes t o buy a d o l l a r . When the r e s t of the c o u n t r i e s are on a r i g i d g o l d base, a r e d u c t i o n i n the g o l d content of a p a r t i c u l a r c u r rency has an i n f l u e n c e because i t r e s u l t s i n making the p a r t i c u l a r c u r rency cheaper i n the exchange market and makes i t p o s s i b l e to s e l l goods a t g r e a t e r advantage i n the w o r l d market. T h e o r e t i c a l l y t h a t i s t r u e , but i t does n o t always work out t h a t way because i t may r e s u l t i n a d e c l i n e i n o t h e r c o u n t r i e s r a t h e r than an advance i n the c o u n t r y which takes the a c t i o n , which i s what happened i n England when i t went o f f g o l d i n 1931? "but w i t h the w o r l d i n the p o s i t i o n where i t i s today, w i t h no country on g o l d , the s h o r t - t e r m e f f e c t o f the r e l a t i o n s h i p between the g o l d content i s completely e l i m i n a t e d because any change t h a t we made i n our g o l d content today would be f o l l o w e d by a l l the o t h e r c o u n t r i e s , so t h a t the r e l a t i v e buying and s e l l i n g p o s i t i o n s of the c o u n t r i e s i n the w o r l d market would remain unchanged. The o n l y e f f e c t would be the p r o f i t o f d e v a l u a t i o n t o the t r e a s u r i e s and a f u r t h e r increase i n the encouragement of p r o d u c t i o n o f g o l d , which i s now too b i g f o r c o m f o r t , so t h a t l o n g - t e r m e f f e c t s , such as t h e r e would be, would be i n f l a t i o n a r y i n an u n d e s i r a b l e way and s h o r t - t e r m e f f e c t s would be n i l . 1 do not know whether I have answered your q u e s t i o n . I made i t v e r y much the q u e s t i o n of today because the s u b j e c t i n a l l o f i t s phases i s too b i g t o cover. Did t h a t g i v e you an idea o f my p o s i t i o n ? I used t o argue w i t h Professor Warren about t h a t i n 1933> ^ ^ * asked him whether, i n h i s o p i n i o n , a change i n our g o l d content would have the same e f f e c t on our p r i c e l e v e l i f we were the o n l y c o u n t r y i n the w o r l d or i f a l l the o t h e r c o u n t r i e s acted s i m u l t a n e o u s l y , and he t o l d me yes, i t would, t h a t the exchange r e l a t i o n s h i p i s an i n c i d e n t a l r e l a t i o n s h i p , and t h a t the fundamental r e l a t i o n s h i p i s between the value of the g o l d and the v a l u e of other commodities. That i s the p o i n t a t ~ 15 - which we could not see eye to eye, and I t h i n k t h a t events since then have demonstrated t h a t he was mistaken, hut I do not t h i n k t h a t they convinced him o r h i s successors. DEPOSITS AND PRICES 1926 = 100 PER CENT | PER CENT | DEMAND DEPOSITS-ALL BANKS WHOLESALE COMMODITY PRICES 1926 1929 1938 WHOLESALE PRICES OF 60 REPRESENTATIVE COMMODITIES IN FEB. 1938 PER CENT 160 1926 = 100 PER CENT 160 140 140 120 120 100 C C ill Hi LlJ CD u.Ll. j- m => o W DC O Cash Income from Farm Marketings, National Income, and Income of Industrial Workers PERCENT 100 80 6 0 k- 1924 1926 1928 1930 * U. S. DEPARTMENT OF AGRICULTURE 1932 1934 1936 1938 PRELIMINARY NEG. 31732-B BUREAU OF AGRICULTURAL ECONOMICS
@FedFRASER