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STABILIZATTON
HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OE REPRESENTATIVES
SIXTY-NINTH CONGRESS
FIRST SESSION
ON

H. R. 7895
A BILL TO AMEND PARAGRAPH (d) OF SECTION 14 OF THE
FEDERAL RESERVE ACT, AS AMENDED, TO PROVIDE
FOR THE STABILIZATION OF THE PRICE I^EVEL
FOR COMMODITIES IN GENERAL

MARCH 24, 25, 30, 31, APRIL 1, 6, 8, 9, 12, 13, AND 14, 1926

PART 1

54868




U N I T E D STATES
GOVERNMENT P R I N T I N G O F F I C E
WASHINGTON
1927

COMMITTEE ON BANKING AND CURRENCY
H O U S E OF REPRESENTATIVES
SIXTY-NINTH CONGRESS, FIRST SESSION

LOUIS T. McFADDEN,
EDWARD J. KING, Illinois.
JAMBS G. STRONG, Kansas.
ROBERT LUCE, Massachusetts.
CLARENCE MACGREGOR, New York.
E. HART FENN, Connecticut.
GUY E. CAMPBELL, Pennsylvania.
ELMER O. LEATHERWOOD, Utah.
CARROLL L. BEEDY, Maine.
WILLIAM WILLIAMSON, South Dakota.
JOHN C. ALLEN, Illinois.
JOSEPH L. HOOPER, Michigan.
GODFREY G. GOODWIN, Minnesota.




Pennsylvania, Chairman
OTIS WINGO, Arkansas.
HENRY B. STEAGALL, Alabama.
CHARLES H. BRAND, Georgia.
W. F. STEVENSON, South Carolina.
EUGENE BLACK, Texas.
T. ALAN GOLDSBOROUGH, Maryland.
ANNING S. PRALL, New York.
HARRY C. CANFIELD, Indiana.

P. G. THOMPSON, Clerk

CONTENTS
p
Statement of—
age
George Shibley, Washington, D. C
5,40
Dr. Irving Fisher, Professor of Economics, Yale University
53, 76,104
Norman Lombard, Executive Director of the Stable Money Association, San Francisco, Calif
106
Dr. Frank A. Wolff, Bureau of Standards, Washington, D. C
148,168.
Dr. William T. Foster, Director PoUak Foundation, Newton, Mass__ 181
Prof. James Harvey Rogers, University of Missouri
212
Western Starr, National Committee, Farmer-Labor Party—_,
225,242
William Canfield Lee, Washington, D. C
249
George Seay, Governor Federal Reserve Bank of Richmond, Va
262
Hon. George R. James, Member, Federal Reserve Board
276
Benjamin Strong, Governor Federal Reserve Bank, New York City_ 290,
316, 349, 421 464, 519
George W. Norris, Governor Federal Reserve Bank, Philadelphia
880
Prof. Oliver W. Spragxle, Harvard University
399
Carl Snyder, Federal Reserve Bank, New York City
581, 582, 604
Ethelbert Stewart, United States Commissioner Labor Statistics
605
in




STABILIZATION
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Wednesday, March &4,1926.
The committee met at 11 o'clock a. m.,, Hon. Louis T. McFadden
(chairman) presiding.
The CHAIRMAN. The committee will come to order. This is a
hearing on H. R. 7895, a bill introduced by Mr. Strong of Kansas,
proposing to amend paragraph (d) of section 14 of the Federal
reserve act, as amended, to provide for the stabilization of the price
level for commodities in general. I understand that Mr. Shibley is
here on that subject.
Mr. STRONG. Might I suggest that the bill itself be placed in the
record at this point ?
The CHAIRMAN. Without objection, Mt. Strong's suggestion will
be followed and the bill will be placed in the record.
[H. R. 7895, Sixty-ninth Congress, first session]
A BILL To amend paragraph (d) of section 14 of the Federal reserve act, as amended,
to provide for the stabilization of the- price level for commodities in general

Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembledt That paragraph (d) of section 14 of
the Federal Reserve act, as amended* is amended to rea<i as follows:
"(d) To establish from time to time, subject to review and determination
of the Federal Reserve Board, a minimum rate-of discount'to be charged by
such bank for each class of paper, which shall be made with a view to accommodating commerce and promoting a stable price level for commodities in
general. All of the powers of the Federal reserve system shall be used for
promoting stability in the price level."

The CHAIRMAN. This amendment strikes from the existing law the
words " and business," and adds
and promoting a stable price level for commodities in general. All of the
powers of the Federal Reserve System shall be used for promoting stability
in the price level.

The word " minimum " in the bill, second line, is there by mistake
and is to come out.
Mr. STRONG. That is correct, Mr. Chairman. The word u minimum " is an error and is to come out. However, I anticipate that
as a result of these hearings it may be desirable to change the phraseology of the bill altogether. I hope the purpose will be adhered to.
I do not claim that the idea of this bill is an original one. It is
simply an effort to renew the various attempts that have been
suggested to carry out the direction of the constitution wherein Congress is authorized " to coin money and regulate the value thereof.'*




1

2

STABILIZATION

Congress has directed " the coinage of money" but the only
effort to " regulate the value thereof " was provided in the Federal
reserve act and I feel that the provisions therein set up have been
used rather in the interest of the creditor class instead of for the
purpose of the stabilization of the purchasing power of our money,
which certainly is the great need of all classes of our citizens save
perhaps those who speculate therein.
The purchasing power of our dollar, of course, must be determined by the amount it will purchase of those commodities that
the people generally must exchange for it. The Department of
Labor has been for sometime publishing an index number which
represents the average wholesale price of 404 commodities in general,
and the fluctuations that have occurred since 1914 in such index number demonstrate the fact that the purchasing power of our dollar,
determined by what it will purchase of commodities in general, has
so greatly fluctuated that while it had a purchasing power in 1914
of about 100 cents, in 1919 it was only about 50 cents and now in
the neighborhood of 70 cents.
The language of the bill is a direction from Congress to the Federal reserve system, which is the agent it has set up, to establish
such rate of discount to be charged the banks for each class of paper
with a view to accommodating commerce and promoting a stable
price level for commodities in general with a further instruction
" that all the powers of the Federal reserve system shall be used
for promoting stability in the price level."
The Federal reserve system has the power of increasing or decreasing the volume of money and regulating the rental or cost value
thereof and also powers of publicity that I feel can be used to better
regulate the stability of the price level of commodities in general,
or what is the same thing, the purchasing power of our dollar.
I anticipate that those who have come to believe that the Federal
reserve system, though created by Congress, has become a sacred
thing that Congress should not seek to change or improve upon,
may attempt to prejudice the country by pretending to believe that
the purpose of this bill is to fix prices or perhaps stabilize individual prices like agricultural products. Nothing of the sort is
contemplated, the prices of individual commodities, as they respond to supply and demand, are solely under'the control of such
law. The general price level—that is, the purchasing power of the
dollar—however, changes only with some tundamental variation in
relation of money as a whole to commodities as a whole; and may
have no true economic cause.
I will at this point insert some remarks I made in the House
on February 20 last with reference to this bill. It will be noted
the word " minimum " is not in the bill as I then quoted it and I
think the chart of the price level clearly shows the need for stabilization.
A M E N D M E N T TO T H E FEDERAL RESERVE ACT

[Speech of Hon. James G. Strong, of Kansas, in the House of Representatives, Saturday,
February 20, 1926]
(The House in Committee of the Whole House on the state of the Union
had under consideration the bill (H. R. 9341) making appropriations for the
Executive office and sundry independent Executive bureaus, boards, commis-




STABILIZATION

3

sions, and offices for the fiscal year ending June 30, 1927, and for other
purposes.)
Mr. STBONG of Kansas. Mr. Chairman and gentlemen of the committee, I
wish to call the attention of Members of Congress to House bill 7895, which
I have introduced, proposing a brief amendment to the Federal reserve act, but
an amendment which, if adopted, may have a far-reaching effect, namely, the
stabilization of the price level of commodities in general.
This amendment is to section 14 of the Federal reserve act, paragrph (d).
This section and paragraph provide that—
"Every Federal reserve bank shall have power * * * (d) to establish
from time to time, subject to review and determination of the Federal Reserve
Board, rates of discount to be charged by the Federal reserve bank for each
class of paper, which shall be fixed with a view of accommodating commerce
and business"—
The amendment strikes out the words " and business " and adds—
44
and promoting a stable price level for commodities in general"—
And further adds—
44
All the powers of the Federal reserve system shall be used for promoting
stability in the price level."
The meaning of price level is the average of prices for commodities in general at wholesale. This average of prices is indicated by an index number,
so that as the measurement takes place month after month the changes in
the index number describe the changes in the height of the price level. I
have here a chart showing the price level for this country since 1909. Notice
how this price level went up like a skyrocket during the World War and later
came down even more rapidly, since which time it has been fluctuating up and
down between 140 and 165. At the right-hand side of the chart is shown the
even condition of the price level that would result from the stabilitzation of
the general price level.
This chart is constructed from data supplied by the United State Department
of Labor, which measures the price level for the use of mankind; and so does
Dun's Review, and Bradstreet's Weekly, and Prof. Irving Fisher, of Yale
University.
This chart presents the changes in the price level—the changes in the average
of the prices for commodities in general at wholesale, in this Nation.
Stated in another form, this chart pictures the changes in the purchasing
power of United States money. The Constitution provides that—
44
Congress is empowered * * * to coin money and reguate the value
thereof."
Now the proposal is that Congress shall instruct the members of the Government commission, the Federal Reserve Board, to use the powers of the Federal reserve system for promoting stability in the value of money—stability
in the price level for commodities in general. Our yardstick has a stable
number of inches and our money should be stabilized in its purchasing power.
Stable money is the ideal gold standard.
This price level now stands at about 160, a drop from 251, and my bill instructs the officials in the Federal reserve system to use the powers of the system "for promoting stability in the price level." In other words, in place of
the existing discretionary power in a majority of the eight commissioners on
the Federal Reserve Board to bring on falling prices, they should be obliged
by law to hereafter operate the great Federal reserve system to maintain stability in the index number of general prices—the price level.
I am speaking of the average of prices, the price level. This average of
prices for commodities at wholesale is represented by what is termed an " index number," which accurately shows the height of the price level month after
month and year after year. The chart which I am showing has for its index
number a measurement each month by the Department of Labor in its Bureau
of Statistics, using the wholesale prices of about 300 commodities and striking
an average, which is represented by the index number. £These commodities
fluctuate in price among themselves according to the changes in supply and demand, and at the same time another deflation would again lower the prices of
practically all products at wholesale.
Furthermore, all the countries of the earth would be injuriously affected,
along with the evil effects in this Nation. That is, each nation throughout the
world is endeavoring to maintain a stable par of exchange in its transactions
of business with other peoples, and gold prices are the standard, actually
dominated by the Federal Reserve Board in this country.




PRICE-LEVEL CHABT

2J0
240
230
220
2/0
200
190
W
(70
(60
160
140
130
(20
I tO
I0O
$0
80
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84928—2225


10
60
I

1924 [ <925 ] J926 | |927 1 I93g 1 f93$"

STABILIZATION

5

My bill when adopted will promote stability in the price level. The time has
come, in my judgment, when the Congress of the United States, to whom is
confided the exercise of the power " to coin money " and to " regulate the value
thereof," should declare for stability. Now is the opportune time in the
world's history when the needed stability can be attained. We have nearly
two-thirds of the world's gold and so can safely instruct for stability in the
gold standard of prices.
In 191S the, Federal reserve bill of Senator Owen actually had in it a provision instructing the Federal reserve system to be s,o operated by its officials
as to " promote stability in the price level.'' Furthermore, I am informed that
this was written in the bill after it had been agreed'to by the President'and
his financial advisers, but the World War was about to be fought and the time
had not yet arrived for this great advance in the industrial and business
world; but now the conditions are completely ripe in all directions. In addition to the essential factors for the maintaining of stability in the price level
which I have mentioned are the additional elements:
First. The maintenace of the existing price levels Will be the most nearly
just, as between debtors and creditors, taking into .account the conditions as a
whole.
Second. A further lowering of gold prices in this country will injure every
human being in this world who is not a creditor in considers Die decree: and
even those iarge creditors are where they do not need more wealth, and they
are vitally concerned in making world conditions safe from the revolutionary
radicalism which flares up whenever falling prices set in and unemployment
increases.,
Third. For now the sixth year a crisis has existed for the farming population, and one of the remedies is for Congress tb instruct the Federal reserve
officials to promote stability.
Why should we not seek to stabilize the general price level for the good of all,
business, agriculture, and industry?' Is it not time to take the money question
out of politics or any special class? And at the same time develop the prosperity of all of our citizens and assist the world at large, for our Federal Reserve Board is controlling the gold price.level of the-entire world. Should not
this gold standard of prices be a stable standard, to .result in stable mopey
and no longer be a standard that acts like a jumping jack, as is shown in the
price level.
I ask the serious consideration of Members of the House to this proposition.
I have asked the chairman of my Committee on Banking and Currency for a
hearing on the bill I have introduced, and I .have been assured that such opportunity will be given. If there is any objection to such legislation, I hope
the Members will not hesitate to come to me and present their arguments. I
have been for seven years a member of the Committee on Banking and Currency and have been trying to build up and strengthen our financial systems,
both for agricultural and commercial interests. I do not want to do anything
to weaken or impair them, but if we can. by such an amendment, stabilize the
price level of commodities* in general, why should we not do so? [Applause.]

As I have said, I anticipate that as a result of these hearings it
will be* desirable to change the phraseology of the bill, to better
carry out the purpose intended and to that end I ask the assistance
of the committee and those who shall appear before us on the
proposition.
STATEMENT Ot GEORGE SHIBLEY, DJR^CTOR OF THE RESEARCH
INSTITUTE OF WASHINGTON, D. C.

Mr. SJIIBLEY. Mr. Chairman and gentlemen of the committee,
my full name is George Shibley. In recent years I have shortened
my name by dropping from the middle the initial H. I am director
of the Research Institute of this city. I come before you as an
independent investigator; I am pot employed by any group or
interest.
93869—27—PT 1




2

6

STABILIZATION

Before I take up this bill you are entitled to be told as to my
training and experience in the science of money and prices.
A t an early age I became the head of a family of considerable
size, my father having passed on. At the age of 16 years I began
working my mother's 200-acre farm. The soil was fertile and nature
was bountiful. I raised good crops, but at times the prices were so
low that they sold for less than the cost of production. That was my
introduction to the farmers' problem. I have been through the mill.
That was 1877 to 1883, a period of falling prices the larger part
of the time.
I n 1886 I began the study of law in Chicago at the Union College
of Law. Two years later I was admitted to the Illinois bar, and
later I became a member of the United States Supreme Court bar.
Before I was admitted to practice law I became interested in law
book publishing and quickly laid the foundation of a modest fortune, which accounts for my being an independent investigator of
public questions, free to follow wherever truth should lead.
I n the law book publishing I became the head of the research
corps of law writers. At the age of 29 years I retired from business and began independent researches, which developed into an
exploration of the elements of law; that is, the structure of industry
and of government, and the spirit of the ruling power, and how it
manages to stay in office.
While I was thus engaged I took a course of studies at the University of Chicago. I studied economics, political science, and social
science. I did so as a lawyer trained in weighing evidence and
logic, and as a retired business man.
I discovered, among other things, at that university, that the text
book " Mill on the Principles of Political Economy " had put forth
a tremendous fallacy as to free trade being desirable for a new
country like the United States. And to my amazement I found
that no one had exposed that fallacy. I began to write on the subject and a year quickly passed by.
Then I awoke to the fact that armies of unemployed were marching to our National Capital. That was 1894. I began to investigate as to why there were armies of unemployed, along with large
losses to the business interest and the farmers.
The socialists declared that the cause was private enterprise.
The single .taxers declared that the cause was private ownership in
the land. The creditor class denied the claim of another group that
the cause was deflation; namely, a shrinking volume of money and
credit and falling prices and losses to the business interests and
farmers; and that these discharged hands. The creditor class, however, were seemingly being benefited by an increase in the purchasing power of money.
Which of the four groups of citizens was right? That was 32
years ago. I will tell you, gentlemen, just what took place, as I
found by actual investigation.
I found that in the preceding year, 1893, Congress had repealed
the law that was adding to the volume of money in use. That
increase in the volume of money was needed to maintain stability




STABILIZATION

7

in the price level; but the creditor class secured the repeal of that
law and the price level dropped—prices for commodities dropped
and kept dropping. This resulted in losses to all who were in business, and they in order to lessen their losses discharged some of the
help in the factories and mines; and this loss of wages lessened the
purchasing power of the Nation, so that more hands were discharged,
causing a growing army of unemployed, amid growing bankruptcies
of business men and growing losses for the farmers. The creditor
class thought that they were profiting because of the growing purchasing power of the debts owing to them,
But in the year 1898 the world entered upon a new area. I n
1898 in the contest for the nomination and election of Members
of the National House and Senate in this country, the creditor class
was defeated and big business won; the trust magnates won. They
realized that a rising price level would help to offset the tendency to
unemployment that was resulting from the under consumption, that
was being caused by the relatively high trust prices. I n December,
1899, at the opening of the new Congress, a bill was brought in
which provided for considerable inflation by the printing of paper
money—national bank notes. That bill became law during March,
1900, and it supplied a gradual inflation for a time on top of the
rising flood of gold from the mines.
Mr. STEVENSON. D O you want to be allowed to finish before we
begin asking questions ?
Mr. SHIBLEY. I should prefer that.
From that time, 1900, until the close of the great war, 1918, the
volume of money increased and prices rose most of the time; inflation was taking place; the creditor class was underfoot. From
the close of 1894, for 20 years, the inflation was such as to raise the
price level 50 per cent; that is, a rise in the price level of 2y2 per
cent a year. This rise in the price level of 2y2 per cent a year, meant
that a person who received 5 per cent interest lost half of it from
depreciation in the value of money. That took place for a period of
20 years. The business interests were in power.
Now, in 1926, after 6 years of falling prices for the larger part
of thQ time, with the farmers a submerged group, and with the
bankers and other creditors in the Nation so badly affected that
they have joined with the farmers in a political revolt, except in
the East, and with another deflation now being brought about by
the Government's agent, the Federal Reserve Board, the times are
ripe for this Banking and Currency Committee to report a bill
that will tend to stabilize the price level—end the existing deflation, and do so permanently. This reform will be of tremendous importance, as we will explain presently.
I. I begin by placing before you a chart which pictures to the
eye the history of the changes in the average height of prices for
commodities at wholesale for the past 140 years; that is, since 1782.
Mr. Strong has placed before you a chart for 20 years and I would
like to insert in the record, charts for 140 years.
The CHAIRMAN. Without objection these charts will be inserted
in the record.




8

STABILIZATION

Mr. SHIBLEY. That price level for a period of 140 years shows
t h i s : That whenever there has been a falling price level—falling
prices for commodities, that if these falling, prices have continued
until the business interests have recognized the situation-^recog-

nized the growing depression and have started in to discharge h^nds
to lessen their losses, then there has commenced a period of " hard
times "—hard times for the producing classes, coupled with benefits
to the creditor class because of the increase in the purchasing power




9

STABILIZATION

of debts. That is the principle that is shown in the foregoing chart
of prices for 140 years.
The cause of these periods of hard times for the producing classes
and benefits to the creditor class, alternated by a period of rising
g

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prices iqv commodities and profitableness in business, has been t h e
lack of proper regulation of the quantity of money and bank credit.
An exception is now the seventh year of low incomes for the farming
population, caused principally by the combinations of the business



10

STABILIZATION

interests in the trade associations for raising their selling prices (or
preventing the necessary decline), and forcing down the prices at
which they buy.
The lack of proper regulation of the supply of money and bank
credit has been caused mainly by false education as to the relation
between the quantity of money and the resulting prices for commodities, a false education which has been spread by the creditor
class and their numerous representatives. The need is for proper
regulation of the quantity of money and bank credit. The establishment of the Federal reserve system was a wonderful advance,
which now should be carried a step farther as proposed in the Strong
bill which we are considering, but it is only one of several measures,
the enactment of which is necessary at this time.
Now let us turn again to the chart which shows a zigzag line,
which is the price level for commodities at wholesale and is to be
explained.
I I . A century ago or thereabout there was devised a method for
measuring the average height of the prices for commodities at wholesale. The invention consists—
1. I n listing the prices of commodities at wholesale, for such commodities as there can be found a continuity of wholesale markets for
a stated grade, plus the existence of fairly reliable statistics as to the
quantity of the sales for that commodity within the country.
2. Then for the month there is ascertained the height of the price
for each commodity, day by day, with the average for the month
represented by an index number, with 100 as the base, so that comparison will result. If the average height of the price for a commodity is up, it will show in the index number; and if the price is
down, it will show in the index number. This calculation is made
for each commodity that is listed. I n the Statistical Bureau of the
Department of Labor in this country the number of commodities used
is 404.
3. Next the commodities thus indexed are grouped, each group
being given an index number.
4. Finally all of these groups combined are given an index number—the all-commodity index number or price level. By charting it,
month after month, there is pictured to the eye the comparative
height of this price level. (See Chart 2.)
For 24 years the United States Government has been measuring
this country's price level. The start was made by our Government in
1902 in the Bureau of Labor under the direction of Carroll D.
Wright, who appreciated the citizen's need for accurate knowledge
as to the course of the price level—the changes in the purchasing
power of money—to aid, for example, in the settlement of disputes
as to the proper wage rate. Also the Bureau of Labor began to
measure the height of the cost of living, including retail prices of
food products.
I n this section is explained the system for the measurement of the
height of the average of prices for commodities at wholesale. The
resulting index number from this measurement is the index number
of all-commodity prices, the price level.
I I I . The next step in an understanding of the science of money
and prices is to know that the measurement of the price level for




STABILIZATION

11

commodities at wholesale is the means whereby is measured the purchasing power of a nation's money—the value of money.
For example, in 1920, before the deflation was started, the height
of the price level for commodities was 247. (All-commodity index
number of the Department of Labor, May, 1920.) This meant that
the purchasing power of the money used in the sales of those commodities was only 40 cents as compared with 1913, the year that is
taken as 100, the base year. (This figure, 40 cents, is ascertained by
dividing 100 cents by 247, the index number for May, 1920.)
To-day the basis for calculating the price level should be the past
five years, for the price level should not be lowered, nor should it be
raised to any considerable degree, for adjustments have taken place.
A falling price level is exceedingly harmful, and so is a rising price
level, as compared with the continued use of a practically stable price
level. Also there are other reasons for the immediate stabilization
of the price level, as I will explain presently.
A further fact to be understood in the science of money and prices
is that our price level registers th^ purchasing power of the gold
dollar, which consists of 25.8 grains of gold nine-tenths fine. This
gold dollar has changed in purchasing power in this country, the
same change as in the other forms of money, for all of our money
is kept at a parity.
Thus, the gold standard, which merely means that a certain weight
of gold is placed in the dollar as " the standard unit of value " (act
of Mar. 14, 1900, sec. 1), and that all forms of money shall be maintained at a parity therewith (same section), actually changes in
purchasing power as the price level for commodities rises or falls.
The ideal is to provide for the stabilization of the price level for
commodities and thereby stabilize the purchasing power of the
gold dollar—stabilize the gold standard. For May, 1920 the gold
dollar was a 40-cent dollar as compared with 1913; and for February, 1926, the gold dollar was a 65-cent dollar as compared with
1913. Now, there should be taken a new base, 100, as we have
explained.
I n this section is described the purchasing power of money—
the value of money.
I V . I n 1913 a tremendously important step in advance was
taken in this country by the legislative department in the National
Government. I t framed the Federal reserve system and after
eight months of debate in Congress the bill as amended was enacted
into law. Following is a description of this new Federal reserve
system, preceded by the provisions in the Constitution under which
the Congress and the President acted.
The basis of our National Government is the Constitution which
sets up the legislative department as follows: "All legislative
powers herein granted shall be vested in a Congress of the United
States " subject to a veto power in the President, whose veto may
be overcome by two-thirds vote. The President also recommends
legislative action, and he is the leader of the party in office in the
White House.
One of the groups of subjects for the exercise of this legislative
power in the National Government is as follows:
To coin money and regulate the value thereof, and of foreign coin, and fix
tbe standard of weights and measures.




12

STABILIZATION

The national legislative department of this Government has fixed
the standard of weights and measures and has established the
National Bureau of Standards; has provided that " the money
of account of the United States shall be expressed in dollars or units,
dimes or tenths, cents or hundredths, and mills or thousandths " ;
has provided that gold shall have unrestricted coinage into money at
the rate of $1 for each 25.8 grains of gold nine-tenths fine, and
that " all forms of money issued or coined by the United States
shall be maintained at a parity with this s t a n d a r d " ; and in 1913
the national legislative department established the Federal reserve
system, possessing a monopoly of the right to issue paper money
based on gold and commercial securities, under strict supervision by
the Government, acting through a commission, the Federal Reserve
Board. To this board is delegated the authority and the duty to
regulate the quantity of the Nation's paper money, and the quantity
of the bank credit, the total quantity of the medium of exchange to
be to supply an elastic quantity " with a view of accommodating
commerce and business."
These words " with a view of accommodating commerce and business " are indefinite as to the quantity of money and bank credit
except as a construction is placed upon those words, and the Government commission is construing those words so as to be meaningless, thereby leaving the commission free to apply their own
policy, which is for deflation as fast as it can be brought about without arousing too much opposition. Also this Government commission and the creditor class with whom it is cooperating—the bankers,
are telling the public that this Government commission and the
Federal reserve system is not regulating the quantity of the people's
money and bank credit—a manifest untruth, while at the same time
the Federal Reserve Board for the past six years has been doing
all that has been humanly possible to deflate the quantity of credit
and money—lower the price level for commodities; that is, increase
the purchasing power of money and debts. Had the Federal Reserve'
Board attempted to deflate more rapidly it would have brought on
more violent protests, and there wTere two campaigns and elections
in which the party in power used the board to bring on a temporary
inflation—rising prices and the finding of jobs for the jobless,, as I
will presently describe. Now, early in 1926, one of the issues is the
imperative need for ending the deflation that is taking place in the
quantity of money and credit. The existing power of the moneyed
interests to bring on further deflation must be ended. Fortunately,
for a year the peoples of earth have again been entering into
another era of progress, so that the times are ripe for the needed
legislation along several lines.
The Strong bill that is the basis of this hearing has for its object
the amending of the Federal reserve act of 1913 so as to definitely
instruct the officials in the Federal Reserve Board and thus end
their policy of deflation. The wording that is proposed for the
amendment to the Federal reserve act is that the discount rate at
each of the several Federal reserve banks shall be fixed—
with a view of accommodating commerce and promoting stability in the price
level for commodities in general. All of the powers of the Federal Reserve
System shall he used for promoting stability in the price level.




STABILIZATION

13

The index number of the price level will be publicly known each
week and the law will be obeyed.
I n other words, in place of the existing indefinite instruction by
the legislative department of the National Government to its agent,
the Federal Reserve Board, to regulate the quantity of money and
bank credit " with a view of accommodating commerce and business," which places in the Federal Reserve Board the authority
to deflate the people's money and bank credit, or inflate, as the
majority of the board may decide from time to time, whereas the
proposed amendment to the law is that the Government commission,
the Federal Reserve Board, shall aim at " promoting a stable price
level for commodities in general. All of the powers of the Federal
reserve system shall be used for promoting stability in the price
level."
Such is the special issue, namely, that the legislative department
of the National Government which by the Constitution is charged
with the duty " To coin money " and " regulate the value thereof "
shall declare in unmistakable words its instruction to its agent, the
Federal Reserve Board, as to the quantity of money and bank
credit which it shall supply for the people's use. The need is for
an elastic quantity of money and bank credit to accommodate commerce and business by meeting the seasonal and other requirements,
without deflation or inflation, as evidenced by the index numbers
of prices for commodities at wholesale, the price level.
That is the meaning of the proposed legislation in the Strong bill.
And still more power can be transferred to the Federal Reserve
Board, and details should be incorporated in an enlarged bill by
Congressman Strong.
Also, further plans for stabilization of the price level can be devised and should be inserted in the bill.
There certainly should be placed in an enlarged bill all of the
possible powers for the stabilization of the price level; that is, the
deflation now being engineered must be stopped. That is the pressing need, along with prevention of inflation.
Only the short-sighted members of the creditor class will refuse
to help stop the deflation by instructing for stability. Except in
the Eastern States the condition of the farmers is so very bad
again that some of the bankers and other creditors have joined with
the farmers in a political revolt. For one thing, the existing
deflation is to be stopped !
I n this section there is described the existing mechanism for
regulating the quantity of the people's money and, credit. This
mechanism as it is being used at present is a trick system, in behalf
of the money power, the creditor class. The Strong bill raises the
special issue: Shall Congress and the President place in the law a
definite declaration for stable money? The existing deflation now
being inflicted on mankind must be stopped!
V. I now present very briefly the historical background of this
special issue which I have described.
I n the year 1910 in this country there came the people's peaceful
revolution at the polls. Just previous a similar uprising at the
polls had taken place in nearly all of the other leading countries




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STABILIZATION

of earth. Thus there came into power Progressive Government,
pledged to end the privileges which the former ruling few had taken
to themselves. The pledge was to install equal rights to all, privilege to none.
I n this Kepublic the people's leaders who thus came into office
used their powers of government so wisely that as the time drew near
for the next general election, in 1912, the only real issue was, Which
of the progressive leaders shall be chosen President ?
After the decision as to national leadership in 1912, the incoming
majority in Congress in 1913 consisted of a coalation of t h e progressives in both parties.
Two subjects were taken up promptly at a special session: tariff
revision downwards, and the ending of the money trust in Wall
Street, which had been shown to exist by extensive investigations by
the Pujo Committee in the progressive House.
The outcome from tariff revision and from currency and banking
legislation was an unexpected middle course, beneficial to every
citizen, as follows:
Both parties in the past had been partly right and partly wrong,
and when the people came into power the advance in the form of
legislation was along a sane, middle course, beneficial to the Nation
and to all mankind. I t is the new progressiveism.
The tariff revision recognized the difference in the cost of production at home and abroad; and the currency and banking legislation brought together a new system which joins together private
enterprises and Government supervision, opening up a wholly new
road, a system of Industrial Democracy.
I N D U S T R I A L DEMOCRACY

The general application of this new principle in private enterprise will solve the main problem in industry. This new feature in
private enterprise is self-regulation by majority rule of the citizens
who are most vitally affected, with Government supervision for
unified regulation within the Nation's territorial area, and for the
equal protection of all the groups and individuals.
I t is similar to political home rule, except that home rule is
territorial, while this new system of self-regulation of industry is
along group lines.
Following are the high spots in this new Federal reserve system
of the year 1913:
There are 12 reserve banks each a monopoly in its district, cooperatively owned and managed by the members as a self-governing
corporation. This management is by means of a board of directors
and majority rule, subject to the Government's supervision for unified regulations within the Nation's boundaries, and for equal rights
to all.
Under this system the decision as to technical points in the discount
of negotiable paper to the 12 corporations which create paper money
and withdraw it, is by representatives of the banks, who are entirely
unconnected with the officials in the Government. But the quantity
of the people's money and bank credit is regulated by Government
officials acting under instructions in the law.




STABILIZATION

15

Until the framing of this new system for self-regulation of private
enterprise by majority rule within the group, subject to Government
supervision, there was no provision for Industrial Democracy; that
is, the only way for cooperation in private enterprise was—
First. By voluntary cooperation.
Second. By cooperation in the m a n ^ e m e n t of a privilege in the
midst of private enterprise, such as a railway.
Third. By cooperation by all within a territorial area by Government management; for example, the post office.
I n 1913, which was the year after the people's peaceful revolution at the polls, there opened up a fourth system, as follows:
Fourth. Industrial Democracy; that is, cooperative management
of private enterprise by the citizens who are most vitally affected,
operating by majority vote, and subject to Government supervision
for the unification of the regulations for the entire area, and for
equal rights.
The general application of this new system in private enterprise
will solve the main problem in industry—the ending of the privileges.
I have three bills for presentation in Congress.
The kernel of this new system of Industrial Democracy is that
the individuals within each industry in private enterprise are to
manage it (regulate it) by majority vote, subject to Government
supervision.
GOVERNMENT SUPERVISION

One element in this industrial democracy is Government supervision, as I have said, an all-important xeature. I n the Federal
reserve system it means that the Government has reserved to itself
the sovereign power of regulating the value of the people's money
and bank credit by regulating the quantity. This is achieved by;
providing a Government commission, the Federal Reserve Board,
and instructing it in the administration bill of the year 1913 to
supply an elastic quantity of money and bank credit—
with a view to accommodating the commerce of the country and promoting a
stable price level. (H. R. 6454, sec. 15, par. d.)

Here was a definite instruction against inflation by the printing
press, and protection against deflation. The price level was being
measured by the Government each month.
I n opposition at the time that this administration bill was decided
upon was the money power—the bankers and others of the creditor
class, plus the business interests, most of whom had stood for the
Aldrich plan; namely, that the quantity of the paper money and
bank credit for this Republic should be regulated by representatives
of the bankers. False teaching had been put forth that the masses
aimed at inflation, whereas the truth, as I have found by investigation, is that the times when the masses have insisted on a larger
quantity of money was when they were being robbed by deflation!
(The Money Question, by George ( H ) Shibley, 1896, subtitle Stable
Money.)
I n my researches I found that the invention for the measurement
of the height of the average of prices for commodities at wholesale




16

STABILIZATION

had opened up the way to stable money as soon as the people should
come into power. I n 1900 I was on hand to secure and did secure a
declaration for stable money by the allied reform parties, including
the Democratic P a r t y ; and in 1913 I was on hand to propose it
for the administration bill and again the plan was accepted.
But that stable money pla§ was stricken out in the House Committee on Banking and Currency, without a public hearing. I had
requested to be heard and was refused. (Senate hearings on the
Federal reserve bill, p. 1819.)
Recall that the business interests profit by inflation and that in
1913 the inflation during the preceding 20 years of their dominancy
had been 50 per cent. I n the House in 1913 the quantity of bank
reserve in lawful money for their own vaults was nearly cut in two,
also $200,000,000 of Government funds were to be placed in circulation. (Senate hearings, p. 1778.) And there was stricken from
the administration bill the specific instruction that the index number
of all-commodity prices at wholesale should be kept as stable as
possible. That restriction on inflation was stricken out and then the
only thing which prevented inflation was the Government's agent,
the Federal Reserve Board, which did stand firm for stability until
overwhelmed by the flood of gold from Europe toward the close of
1915. (Chart for years 1910-1926.)
On the other hand, in 1913 the money power, the creditor class,
helped to strike out from the administration bill the instruction in
definite terms for stable money; and in after years—namely, in 1920
to date—that creditor class has been securing an increase in the
purchasing power of money and debts for the larger part of the time,
as we presently will describe.
This section sets forth the historical background, showing that
the business interests have aimed at and secured inflation; and
that the creditor class have aimed at and secured deflation. Both
deflation and inflation have injured the masses, as contrasted with
the effects from stable money, and the masses are again to insist on
stable money.
V I . The outcome of the new Federal reserve system of 1913 is
now to be described.
I n the late months of 1915 there came a flood of gold from Europe
and the business interests secured rising prices. Gold imports continued and prices rose; and in 1917 after this country entered the war
the law was amended to provide for enough paper money and bank
credit to maintain the higher price level.
Beginning May, 1920, there came deflation. Something of a
deflation should have come but not to the extent that was forced by
the bankers after they had started the avalanche.
The duty of the Government's agent, the Federal Reserve Board,
was to regulate the quantity of the people's money and bank credit
" with a view to accomodating commerce and business," which should
have meant the largest possible stability in the value of money after
a reasonable drop in the price level.
The record of the agent of the Government, the Federal Reserve
Board, is indelibly written in the index numbers of the price level.
I ask you, gentlemen, to look at the chart before you (chart 2) and*
note just what has taken place in this country's wholesale markets
since May, 1920. Bear in mind that our Federal Reserve Board




STABILIZATION

17

is the Government's agent for the regulation of the height of the
price level for commodities at wholesale, and in thus regulating the
price level regulates the gold standard of prices, both for this country
. and for all of the other gold standard countries, and jugulates the
gold standard par of exchange with each of the other countries.
Gentlemen of this committee, I ask you to note the following
criticism:
1. This chart of the price level in this country shows that from
May, 1920, to February 1, 1922, a period of 1 year and 9 months,
there was a dreadful era of. falling prices, the price level descended
rapidly from 247 to 138! This was a total drop of 109 points, or 44
per cent, in less than two y e a r s !
I n this connection I direct your attenticm to what the Brussell's
International Financial Conference of 1920 declared:
Deflation, if and when« undertaken, must be carried out gradually and with
great caution, otherwise the disturbance to trade and credit might prove
-disastrous.

Following is the report of the Joint Commission of Agricultural
Inquiry in the United States Congress, in 1921, which reported
October 14:
The commission believes that a policy of lower discount rates [by the Federal
reserve banks] and greater liberality in extending credits could have been
adopted in the latter part of 1920 and the early months of 1921, and that such
a policy would have retarded the process of liqu'dation and thus have spread
the losses incident to the inevitable decline of prices to a lower level over
a longer period, and that the adoption of such a policy at that time would
have been advisable. (Vol. 2, on Credit, p. 13.)

I n language much more denunciatory is the testimony of a former
member of the Federal Reserve Board, Hon. John Skelton Williams,
former Comptroller of the Currency, in his testimony before the
Joint Commission, just named. (Vol. 2 of Hearings, pp. 2-268.)
2. Temporary relief for the producing classes was brought about
by vigorous protests in Congress, beginning May. 31, 1921. Under
the leadership of the Senate there was formed the Joint Commission
of Agricultural Inquiry, which began an investigation and reported
October 14, 1921. But not until the next February, 1922, with party
elections at hand did the officials in the Federal reserve system so
regulate the quantity of money and credit as to result in rising
prices for commodities at wholesale, which meant an increase in
profits to factories and mines and the taking on of additional hands—
the lessening of unemplc-yment. This was just before and during the
congressional and State campaigns of 1922. But the party in power
lost the Congress counting the insurgents as outside of the party.
This reverse was caused in part by the farmer-vote who in large
numbers were dissatisfied with the deflation policy of the Federal
Reserve Board; and were dissatisfied with the deflation policy of
the banks; and were dissastified with the deflation policy of the party
in power. Tw9 of the President's direct representatives, the Secretary of the Treasury and the Comptroller of the Currency, were
members of that Government commission.
To-day, 1926, with a further deflation in progress, the enactment
into law of the Strong bill will stop the deflation, because the public
will receive notice that the aim of the Government commission is to
promote stability, which should mean stability on a par with the




18

STABILIZATION

height of the price level, say of last November, before this last
deflation was started.
I n 1922, as we have said, an election year, the regulation by the
Federal Reserve Board was such as to increase the quantity of
money and bank credit in use and thereby tend to boost the prices
at wholesale except prices fixed in foreign markets. Those rising
prices for manufactured goods in 1922 increased the profits in business and more hands were employed, and this was continued during
the months of the partisan campaign for the control of Congress
and of the State Governments. And again in 1924, two years later,
a similar era of rising prices and stimulated business and the reemployment of the jobless took place during the campaign, beginning
in the month of the national conventions. The President's two representatives, the Secretary of the Treasury, and the Comptroller of
the Currency were on that Government commission which did those
political stunts. The law should declare in more specific terms for
stability, the same as the number of inches in the yardstick are
stable.
I n the words of Doctor Beckhart, writing during the first half of
1924 and evidently referring to 1922:
Politicians assume that the discount rate policies of the Federal reserve
system may be controlled in the interest of party leadership. (The Discount
Policy of the Federal Reserve System, by Benjamin Haggott Beckhart, M. A.,
assistant professor of banking, School of Business, Columbia University,
p. 537.)

3. I n 1923, after the election of 1922 and beginning in May, 1923,
there was then started a deflation which amounted to a 9 per cent
drop in 14 months; that is, the gold standard of prices for commodities at wholesale was put down 9 per cent in 14 months, at a
time when the producing groups of the world were struggling to
get on their feet. Our producers and the peoples abroad were in
great need of stabilization of the price level, but it was forced down,
down! I t was in behalf of the money power—creditor class—oi
this country and of other countries; and the falling prices for commodities were dreadfully harmful to all groups other than the
creditor class.
And here is an additional fact: I t helped to kindle anew the radical
revolutionary sentiment throughout the world. The return of falling prices in this country, with growing unemployment, reflected
abroad, was a demonstration of the continued dominance of reaction
in government and the continuance of the evils from private enterprise. I t resulted in the world-wide spurring up of the Communist
program.
The evils from reaction] sm in 1923-24-25 were described as follows
at the next meeting of the business men of the International Chamber of Commerce, in 1925, in Belgium :
The continued economic disorder in a large part of the world is not only
a dangerous obstacle to the establishment of permanent peace, the elimination of unemployment, and the restoration of normal living conditions to
millions of people, but involves the menace of still further unhappy developments—the Bed peril.
The peoples of the world demand and are entitled to have a just solution
of these problems with the least possible delay.




STABILIZATION

19

This was the utterance of the businessmen's international organization in 1925.
In these United States, apart from the revolutionary radical sentiment, our farming population are now in the seventh year of being a
submerged class, who are practically enslaved by the dominant business and banking interests, as is demonstrated by the index numbers
of prices at wholesale. Details I am about to present to a House or
Senate committee.
For one thing this Banking and Currency Committee should report
favorably the Strong bill for prompt stabilization of the price level.
The economic expert of the New York Federal Keserve Bank in a
statement three years ago, to which I have referred, closes his argument for immediate stabilization as follows:
The idea, in sum, is to keep the amount of currency and credit in balance
with the price level and maintain the latter at as nearly a constant figure as is
practically possible. It is not generally known or realized that in the years
just before the war, and extending even past the first year of the war, this
country at least reached a quite extraordinary degree of economic stability,
beyond that perhaps of any similar period in a century and more. In the seven
years from the end of 1908 to late in 1915, the annual averages, even of commodities at wholesale, varied only four points on the Bureau of Labor index—
from 97 to 101.
Investigations carried on by the writer in the last three years—

And remember that this is the statistical expert of the Federal
Reserve Bank of New York City—
seem to indicate distinctly that this high degree of economic stability could
again be attained, rather quickly, and by the simplest of means, as has here
been sketched (pp. 284-285).

The existing instability is shown by the 9 per cent fall in the
price level in 1923-24, as compared with the 8 per cent fall after the
.panic of 1907.
This section has continued the historical background by describing
just what came from the new Federal reserve system, namely, inflation during the years 1916 to 1920 as the outcome of the domination
of the business interests; and then a necessary deflation was started,
and the money power, the creditor class, succeeded in getting the
upper hand and keeping it. There is a possible middle course of
stable money, as is described by Mr. Carl Snyder, the economist of
the Federal Reserve Bank of New York.
VII. I have been describing the price level, as distinguished from
individual prices. There is a price level, as is shown in the chart,
and there are individual prices of commodities. That is now clear;
that distinction is to be noted.
The price of each individual commodity changes in proportion to
the changes in the relation between its supply and the demand if
there is an open market.
Second. The prices of nearly all of the individual commodities
tend downward in the open market whenever our Federal Reserve
Board causes deflation—undue contraction in the quantity of credit,
or currency, or both.
Third. The prices of nearly all of the individual commodities tend
upward in the open market whenever our Federal Reserve Board
causes inflation—undue expansion in the quantity of credit, or currency, or both.




20

STABILIZATION

The ideal is for the Government commission, the Federal Reserve
Board, in whom is vested the regulation of the 12 banks of issue,
to so regulate the issuance of Federal reserve notes and the quantity
of bank reserves, as to supply to commerce, industry, and agriculture
an elastic quantity of money and credit to meet the seasonal and
other requirements, without deflation or inflation. The gauges are
various whereby the Federal Reserve Board keeps track of the needed
supply of money and credit but the chief gauge, the master gauge,
, should be the index numbers of prices for commodities at wholesale.
The need is to help maintain the utmost possible stability in these
prices—the utmost possible stability in the all-commodity index
number except as unusual conditions prevail for some of the commodities, such as sagging prices for grain, as has been the case
during the past four months, in which' case the all-commodity index
should slightly decline. But, speaking broadly, the need is for stability in the all-commodity index, the price level; also termed " stable
money." Everyone will be benefited.
T H E GOLD STANDARD OF PRICES

A further point is that the achievement of stable money will mean
a stable gold standard of prices. I n other words, gold is the basis
of the vast superstructure of money and bank credit in this country.
Following is one portion of our statutes on the subject:
That the dollar consist ng of twenty-five and eight-tenths of gold nine-tenths
fine, as established by section thirty-five hundred and eleven of the Revised
Statutes of the United States, shall be the standard unit of value, and all
forms of money issued or coined by the United States shall be maintained at
a parity of value with this standard, and it shall be the duty of the Secretary
of the Treasury to maintain such parity. (Act of March 14, 1900, sec. 1.)

The presence of this statute insures that all of the money and
bank credit in use in this country shall be kept at a parity with
gold, and the system as a whole is the gold standard of prices. This
system when stabilized will be1 the stable gold standard of prices.
This term will be synonymous with stable money.
PRICE STABILIZATION

I further point out that this program for stable money and a
stable gold standard of prices can also be described as a program
for price stabilization. To get the meaning, recall that I have pointed
out in this section:
Second. The prices of nearly all of the individual commodities tend downward in the open market whenever our Federal Reserve Bodrd causes deflation—undue contraction of the quantity'of credit, or'currency, or both, or its
policy is by the public understood to be deflation.
Third. The prices .of nearly all,of,the Individual commodities tend,upward
in the open market whenever our Federal Reserve Board causes inflation—
undue expansion in the quantity of money, or credit, or both, or its policy is
by the public understood to be inflation.

The wording is that " whenever our Federal Reserve Board
causes deflation " it lowers the prices of nearly all of the wholesale
prices, of the individual commodities; and "whenever our Federal
Reserve Board causes inflation " it raises the prices of nearly all of




STABILIZATION

21

the wholesale prices. of the individual commodities. The need is
that our Federal Reserve Board shall cease %to deflate and inflate—
principally deflate, in behalf of the money power, the creditor class.
The need is for price stabilization.
) This term " price stabilization " gives one an idea of the mighty
change in the system that is being proposed. There existed price
stabilization during the two years- after the enactment of the Federal reserve law of 1913. (Chart 2.)
I n this section individual prices for commodities are distinguished
from the price level; also we have described how deflation and inflation affect the individual prices.
V I I I . Xext as to the powrer of the Government in this Republic
to prevent deflation or inflation in the quantity of the people's
money and bank credit.
On March 4, 1921, there came back into full power the party
which in 1912 had stood for the Aldrich plan for bankers' control
of the quantity of the people's money and bank credit.
The incoming President was directly represented on the Government commission for the regulation of the quantity of the people's
money and bank credit. The incoming Secretary of the Treasury
and the Comptroller of the Currency took their places on the Federal Reserve Board, possessed of stupendous power in that board of
seven members.
The records show that the policy of the board continued in the
direction of gentle deflation, although the price level for March,
1921, was already down to 155 from 247, a drop of 37 per cent in
less than a year.
On May 31, 1921, the progressives in, the Senate brought about a
majority vote for a proposal for the establishment of a Joint
Commission of Agricultural Inquiry in Congress. The House consented and the taking of testimony as to the causes of the farmers'
distress began in J u l y ; and the report in October condemned the
rapidity with which deflation had been forced by the Federal
reserve system. Then, as late as October, 1921, did the Federal
Reserve Board begin to actively counsel the 12 banks of issue io
provide cheaper money; and then there was no public statement as to
policy, and not until February, 1922, did the business men's confidence in rising prices revive so that buying again commenced in
considerable volume.
The principle to be borne in mind is that during these five years
1921 to date, the power of the Federal Reserve Board has been
such that whenever its underground powers have all been exerted
it has halted an upward trend of prices or stopped a downward
trend of prices: and the speculators, who have been the first to
receive knowledge of the secret change of policy, have been able
to speculate with certainty on the stock exchange.
^Repeatedly inflation has been headed off, even with a billion
dollars of excess in gold flowing in: and the road has been kept open
for deflation, in the interest of the creditor class. The mighty
issue has been and still is, *At what height shall the price level be
permitted to become stabilized ?
Last summer the experts in market conditions in their guesses as
%to what way the secret policy of the Federal Reserve Board predicted




22

STABILIZATION

for and against deflation, and events proved that deflation is their
present-day policy. (Mgirch 24,1926.) (Chart for years 1910-1926.)
I n brief, the Government commission's secret policy for the regulation of the quantity of the people's money and bank credit is
deflation, as rapidly as practicable; and the officials in power in
the legislative department—the Congress and the President, are
those of the party who in 1912 stood for the Aldrich plan of
bankers' control of the price level. These legislative leaders during
the past five years could at any time have stopped the deflation by
threatening to enact a more definite instruction for stability in the
value of money.
I X . To-day the need for the stabilization of prices is very great.
There are at least three fields wherein any further deflation at this
time would be extremely harmful to mankind.
First. The economic system in this Nation—industry, agriculture,
commerce, and so on—is suffering from an ill-balance; that is, an
ill-balance of the incomes of the various groups. The business men,
as everyone knows, are receiving an undue share of the Nation's products, and the lack of purchasing power by the farmer and by the
other consumers is restricting the output from the factories and
mines. Everyone is being injured as compared with the possibilities. At the present time proposed legislation is being considered
by the Agricultural Committees of the two Houses for partial relief
for the farmers, the suggested remedies being to set up an improved
system of cooperative marketing whereby to care for the surpluses.
This should be supplemented by the Strong bill so as to provide for
the necessary supply of money and credit. The soundness of this
logic is indisputable.
#
Second. The peoples of Europe are striving to restore their industries to where international trade shall again become normal. These
peoples are very largely dependent on international trade, especially
with the peoples of the other continents, from whence come their
raw niaterials, in exchange for manufactured goods. The basic
needed in these European countries is to maintain a stable price level,
plus their need that the United States of America, whose Federal
Eeserve Board is controlling the purchasing power of gold for the
entire world, shall aim to stabilize its purchasing power. The creditor-class domination in this country must be terminated.
Third. During the past 26 years the peoples of the leading countries
of this earth have actually entered into a really new age, which
includes universal suffrage. This is to become an effective system
of the people's rule, without doubt, in place of the rule of the feW
who in some of the nations are operating by means of machine rule.
True there is as yet an obscurity as to just how a return to equal
rights in private enterprise is to be brought about, but more is known
than is generally supposed. For more than a year there has been a
growing era of progress, wherein animosities are being laid aside
for a sane, middle course in the direction of the restoration of equal
rights in private enterprise. This is being interfered with by the
deflation policy of the Federal Reserve Board, the Government's
agent. And this reactionary and extremely harmful policy by those
in authority causes the former radicals to hesitate to trust the capitalist regime. The urgent need, therefore, at this time, is for the




STABILIZATION

23

Congress of the United States and the President to work together to
again provide for the stabilization of the price level. That will
help to renew the people's faith that progress is being achieved.
I have described three fields wherein there is urgent need for the
immediate stabilization of prices in so far as is possible by the action
of the Government's agent, the Federal Reserve Board. I n support
of my analysis as to the existence of these great needs for immediate
stabilization I cite the following evidence :
EVIDENCE

First. The existence of the ill-balance between the incomes of the
competing groups in this country is known to everyone. The business interests by means of combinations known as trade associations, one in each line of business, validated by the United States
Supreme Court by a vote of 6 to 3 (Cement Case and Maple Flooring
case, June 1, 1925), have maintained unduly high selling prices and
unduly low buying prices; for example, the low price of corn last
autumn. The need, therefore, is for legislation by Congress and by
the States that shall go ahead with the reconstruction of the economic
system which was interrupted by the outbreak of the World War.
One of the needed laws is the prompt passage of the Strong bill, with
an increased scope, as I am suggesting.
Second and Third. I now will cite evidence to prove that an enlarged Strong bill for the stabilization of the price level should
be enacted to help the other nations recover from the disturbances
in their industries by the four and a third years of World War,
which was succeeded by three years or more of world-wide class
conflict of an acute nature—the contest between constitutionalism
and radicalism. Constitutionalism has won except in Kussia; and
for more than a year there has opened up a return of progress,
as is evidenced by the Locarno treaties in Europe, and other advances, including the widespread recognition in this country that
the farmers are to receive an effective relief. I proceed to cite
evidence to the effect that the economic conditions in Europe, as
well as the subsidence of objections to the continuance of private
enterprise, depend in part on the cessation of the creditor-class
policy by the Government of the United States. I quote declarations by experts in international meetings.
Last year, 1925, at a meeting in Belgium, the International Chamber of Commerce, consisting of leading representatives of the business men from each of the principal countries of earth, including
the United States, declared as follows:
It is not the aim or desire of business men to promote any class interest.
Healthy business conditions depend upon and advance the prosperity of all
classes.

The report of the Committee on Economic Eestoration points
out the need for " stability in prices."
And there is republished the following declaration of the preceding meeting, of 1923, at Rome, which I have quoted and quote
it again:
The International Chamber of Commerce recognizes that the continued
economic disorder in a large part of the world is not only a dangerous




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STABILIZATION

obstacle to the establishment of permanent peace, the elimina,tion of unemployment, and the restoration of normal living conditions to millions of'
people, but involves the menace of still further unhappy developments [the
Red Peril].
The peoples of the world demand and are entitled to frave, a just solution
of these problems with the least possible delay. The fundamental principles
which must obtain in arriving at such a settlement are clear, and with
united action are possible of early application.
We turn now from these statements by the business men's International Chamber of Commerce, to the declarations by the Brussels International Financial Conference, in the autumn of 1920.
This conference consisted of experts representing 39 countries, called
together by the League of Nations " with a view to studying the
financial crisis and looking for the means of remedying and of
mitigating the dangerous consequences of it."
Among the resolutions unanimously adopted was that
Banks, and especially banks of issue, should be freed from political pressure and should be conducted on the lines of sound finance.
Also that 1920 International Financial Conference at Brussels
declared:
Deflation, if and when undertaken, must be carried out gradually and with
great caution, otherwise the disturbance to trade and credit might prove
disastrous.
Preceding that Brussel's International Financial Conference there
was issued for its use various memoranda on the topics to be discussed, one of these statements being " On the world's monetary
problems," which says in p a r t :
X. The problem of deflation: If we only pay some earnest attention to the
serious difficulties we shall have to overcome in order to stabilize a depreciated
monetary standard at about its present value [mark those words, " at about
its present value " in the spring of 1920] we shall immediately realize that
the idea of deflation—the bringing back of that money to its pre-war level—
is altogether Utopian. The popular belief that prices by some mysterious
reason will come down themselves to their old (i normal" level is a result
of the systematical fostering of false conceptions in regard to the causes of
the rise of prices, which has been carried on with such remarkable zeal
during the whole period of deflation.
* * * A prolonged period of falling prices a*id consequent general economic depression will never be accepted as a wise device of deliberate economic
policy * * *. It seems hardly advisable to enter into any deflation scheme
which would involve a reduction of the general level of money wages; for
every such endeavor would without doubt lead to social unrest, and in that
way make harm out of all proportion to the advantages it could bring.
* * * The problem of stabilizing the dollar exchange [with the United
States; that is, stabilizing a depreciated currency with gold] would be aggravated if the United States increased the value of their money by a process of
deflation. A deflation in the United States was actually planned at the middle
of 1919 when a great campaign against high prices was started. But relying
upon popular means, regulation of prices and prosecution of profiteers, the campaign had naturally no success; in March, 1920, the general level of prices
in the United States had risen to 253, against 217 on the average for 1919.
* * * It is now clearly in the interest of all countries endeavoring to
stabilize their dollar-exchange [endeavoring to stabilize their currency with
the gold standard of prices] that the United States should not enter upon any
policy to raise the internal value of the dollar [deflation and falling prices
and hard times for all except the creditor class]. In fact the problem of
stabilising the world's exchange being in its nature an international problem,
it is desirable that one country should take the lead by fixing the internal
value of its money, and it seems natural that this country should be the
United States.




STABILIZATION

25

In the ^ m e manner, it is of great interest for all countries striving to
restore a definite parity with gold, that the value of gold should not be
raised [the price level in the United States be lowered], and that when the
new parities once have been settled, the value of gold should remain as
constant as possible. * * * a prolonged process of deflation would have a
pernicious effect on trade and enterprise and on the financial burdens of the
state (pp. 27, 35, 86, 37).

To*the same effect are the resolutions of two years later at the
Genoa International Economic Conference, April, 1922, at which
there were representatives of Germany, of Eussia, and of each of
the other leading nations except the United States. These Genoa
resolutions include the following:
The essential requisite for the economic reconstruction of Europe is the
achievement by each country of stability in the value of its currency [stability
in its price level for commodities 1.
Credit [further declared the conference] should be regulated not only with
a view to maintaining the currencies, of the countries at par with one another,
but also with a view to preventing undue fluctuations in the purchasing power
of gold [stability in the price level I.

Reviewing these declarations by the international conferences
for promoting the economic restoration of the world, there is an
agreement that the operations of government should be such as to
provide the citizens with stability in the price level—stability in the
value of money.
We have described three fields wherein any further deflation at
this time would be extremely harmful to mankind.
X. That a deflation is actually taking place is evidenced by the
iri4ex number of the all-commodity prices of the Department of
Labor. For the month of March, 1926, this index number is down
to 151.5, from 155 for the preceding month, and 157.7 for the preceding November.
But this deflation has not as yet slackened up buying power as
much as would be expected, judging from the fact that the pay rolls
in factories and mines have stayed up and slightly increased. Wages
have risen slightly, and the budding program now in progress is the
largest on record.
A necessary element for sound economic conditions in the immediate future is to be stability in the price level, and Congress and
the President should at this session cooperate in amending the Federal reserve act, thereby to instruct their agent, the Federal Reserve
Board, to operate in the direction of stabilizing prices as far as
possible.
The special issue that is being raised by the Strong bill is that no
valid reason exists why the legislative department of the Government, that is charged with the duty of regulating the quantity of
money and bank credit for the people's use, should refuse to declare
in unmistakable terms its instruction to its agent, the Federal Reserve Board, to operate in the direction of stability in the value of
money—stability in the price level.
That is the real issue which the Strong bill has placed before the
public* That issue is, Are you for or against stable money?
X I . I n conclusion, I summarize the points in my statement.
The charts which I have presented describe to the eye the history
in the changes in the purchasing power of money for 140 years.




26

STABILIZATION

The problem in connection with money and banking is to provide
a system for the proper regulation of the quantity of money and
bank credit. The chief aim should be to maintain stability in the
value of money—stability in the price level. (Sec. I.)
By means of an invention for measuring the purchasing power of
money there has opened up tfye possibility of proper regulation of
the supply of money and bank credit, to result in stability in the
gold standard of prices internationally. (Sees. I I , I I I . )
The existing mechanism in this country for the regulation of the
quantity of the people's money and bank credit is a trick system.
(Sec. IV.) The Strong bill has raised the issue, Shall Congress and
the President unite in ending this trick system?
I n explanation of how the existing trick system came into being
and how it has been continued, I have set forth some of the high
spots in the history of money and prices, showing that the money
power—mainly the creditor class, have aimed at deflation in the
quantity of the people's money and bank credits; while the business
interests have aimed at inflation—rising prices; and both sets of
interests have at times robbed the people. The self-interest of the
masses are such that they will gladly vote for leaders who pledge for
stable money. (Sec. V.)
Since the enactment of the Federal reserve law in 1913 the pages
of history show that the administration of the system at the start
was such as to result in an almost coinplete stability in the value of
money—stable money. Then came a flood of gold from Europe and
the business interests secured inflation. This included the passage
of a law in 1917 providing for a larger quantity of paper money and
bank credit.
Beginning in May, 1920, deflation was started and the creditor
class, the money power, had its inning. I t controlled the banks and
it struck hard and fast and kept it up. (Report of joint commission
of 1921, vol. 2, on " Credit," p. 13.)
On March 4, 1921, there was a full return to power of the p a r t y
which in 1912 had stood for the Aldrich plan for bankers' control
of the people's volume of money and bank credit; and the price level
for commodities has been forced down as fast as public opinion
would permit. At present another deflation is being engineered.
But stabilization is practicable, as is explained by Mr. Snyder,,
the economist of the New York Reserve Bank. (Sec. VI.)
I have been describing the price level as distinguished from individual prices.
The price of each individual commodity changes in proportion t o
the changes in the relation between its supply and the demand if
there is an open market.
But also bear in mind that the prices of nearly all of the individual
commodities tend downward in the open market whenever our Federal Reserve Board causes deflation, as it is now doing. (Sec. V I I . )
The need is for price stabilization.
And we have exposed some of the half-truths whereby the public
has been fed, for instance, on the declaration that the Federal Reserve
Board has not possessed sufficient economic power to stop the falling
price level. (Sec. V I I I . )
To-day the need for stabilization of the price level is very great.
(Sec. I X . )




STABILIZATION

27

That a deflation is actually taking place is evidenced by the index
numbers of the Department of Labor. A necessary element for
sound economic conditions in the immediate future is to be the
stabilization of the price level. The Strong bill has raised the needed
issue, Are you for or against stable money? (Sec. X.)
Gentlemen, I thank you.
XII. QUESTIONS AND ANSWERS

Mr. STEVENSON. YOU refer to the inflations just before the elections
in 1922 and 1924, which by inference you, of course, state were
brought about for political purposes, for election purposes. Who was
responsible for those inflations?
Mr. SHIBLEY. Gentlemen, the data are before you to this extent:
The index number shows the trend of the price level, and this price
level is controlled by the Federal Reserve Board.
Mr. STEVENSON. Suppose we now go further and fix it so that they
will have absolute carte blanche under the statute to go ahead and
inflate or deflate, to set the price level as they see fit, you would
commit it to the same fellows that inflated and deflated for that very
same purpose.
Mr. SHIBLEY. That is what has come about under the existing
system, and this bill proposes that the Federal reserve law shall
definitely instruct them to maintain stability.
Mr. STEVENSON. I t gives them a direction, but it is for their judgment to say what is a proper action to take for stability; and when
it comes to the political feature of that action, it will be exercised by
a majority of the views of the board.
Mr. SHIBLEY. Let me call your attention to this fact: P a r t of the
mechanism is to use the index number of the Department of Labor,
which will be in plain sight. That is a point which you haven't
thought of.
Mr. STEVENSON. This bill does not say anything about using that.
Mr. SHIBLEY. That is implied. The Department of Labor is
measuring the price level and its index number is being used by the
Federal Reserve Board. The existence of this index number is
generally known. I t is in plain sight. I t is similar to the steam
gauge on a boiler. When you say to a stoker, " Keep it at a hundred,"
anybody can go and see what is being done. And so it will be with
the Federal Reserve Board—the index number of all commodity
prices will be published each week and the board will operate in the
direction of stability; in fact during the past six months the board
has stabilized the price level except that recently a policy of deflation
has been started.
Mr. WILLIAMSON. So far as this particular bill is concerned, it
neither adds to or takes from the power that the Federal Reserve
Board already has. Of course, it gives them a direction.
Mr.

SHIBLEY.

Yes.

Mr. STRONG. And this bill says that they shall exercise that power
to do a specific thing, that is, to bring about stability of the general
price level.
Mr. WILLIAMSON. I t is a direction only. You haven't any means
of enforcing it.




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STABILIZATION

Mr. STEVENSON. I t is left umder their judgment as to what action
they shall take. If they have been formerly influenced by political
considerations, they are liable to be influenced by political considerations again.
Mr. STRONG. Not if they have regard for the general price level,
which they are directed to do.
Mr. WILLIAMSON. Could there not be a specific reference to the
price level as a guide by which they could be controlled ?
Mr. SHIBLEY. I t says, " stability in the price level."
Mr. WILLIAMSON. I t doesn't furnish any gauge.
Mr. STRONG. D O you say, Mr. Shibley, that the price level is
measured and determined by the Department of Labor li
Mr.

SHIBLEY.

Yes.

Mr. STEVENSON. There you are. You are going back into the most
political bunch in the United States—the Department of Labor.
Mr. WILLIAMSON. There is no gauge by which the Federal Reserve
Board is bound.
Mr. STRONG. I t has been said that they are recognizing the index
number of the price level.
Mr. STEVENSON. YOU would not want the Department of Labor
or any other department to do that. There is this suggestion: Two
members of the Cabinet of the President, two direct representatives
of the President, have been on that board which has inflated it at
times when it was politically expedient to do it and which we might
suppose will deflate in the same way. The question is whether we
want to give them more power to inflate or deflate as the political
exigencies arise.
Mr. LEATHERWOOD. This is a debate between members and not between the witnesses and the members.
Mr. SHIBLEY. Mr. Stevenson is entirely in error. A t the present
time the law as it is being construed by the Federal Reserve Board
(as evidenced by their published statements) gives to the board
the power to do anything they choose. They, by their actions, say
that the law says, " We can do as we please; we can deflate or inflate ! " I n 1913 the Congress struck out from the administration
bill a specific instruction to the Federal Reserve Board to operate in
the direction of stability in the price level. I n 1915 there came into
this country a flood of gold from Europe and inflation resulted.
Possibly it was all right in a hard-fought war. But now, for
Heaven's sake, put in a specific instruction for stability in the price
level, and thus place a limit on the existing unlimited power oi the
Federal Reserve Board.
Mr. F E N N . YOU have read this chart? [Chart 2.]
Mr.

SHIBLEY.

Yes.

Mr. F E N N . NOW, let me ask you something. I n looking at the
chart you will see in the lower left-hand part of it that there was a
singularly stable price level from 1908 until 1915.
Mr.

SHIBLEY.

Yes.

Mr. F E N N . What made that price level so accurate ? There was no
reserve board at that time.
Mr. SHIBLEY. The world conditions had become such that the outflow of gold from the mines and the business of the world resulted
in an even exchange.




STABILIZATION

29

Mr. F E N N . That is your statement, but what is to prevent the
country from returning to that price level automatically, if I may
say that. Of course, a great war might come on which no price
level could prevent in any way. But what is to prevent that
return? W h a t is the reason for this new legislation when you
take into consideration the extremely even price level without any
legislation of this kind from 1908 until 1915? W h a t is to prevent
the country from returning to it? I would like to find a reason
for this bill more than a mere supposition.
Mr. SHIBLEY. Let me explain it to you. Here is the point
Mr^ F E N N . Will you tell me why that price level was so very
even for that period of seven years ?
Mr. SHIBLEY. I have told you.
Mr. F E N N . The country was in good shape. We went through the
Roosevelt panic.
Mr. SHIBLEY. After the panic there was a depression.
Mr. F E N N . YOU take this price level. I t is singularly even. You
could not under this law get a more even price level than that.
What is the reason?
Mr. SHIBLEY. I t shows that during 1908 to 1914 the output of
gold and the development of commerce had just about equalized
each other.
Mr. F E N N . But it is tending, as Congressman Leatherwood has
just suggested to me, to become stabilized automatically. What I
would like to know is the reason for this legislation, taking into
consideration the price level which the country seems to have fixed
for itself.
Mr. SHIBLEY. The Federal reserve law was enacted in 1913 and
it placed in the hands of the Federal Reserve Board the direct
control of the price level. How are they discharging their duty
to-day ?
Mr, F E N N . The law of supply and demand makes that.
Mr. SHIBLEY. I t is the Federal Reserve Board that is controlling
the price level by regulating the rediscount rate and the openmarket operations of the 12 central banks, or is consenting to a
tendency to deflation. Thus this board in place of operating in the
direction of stability, as a whole, is working for the creditor class.
The situation is such that Congress should instruct the board to
work for stability, and take it out of politics by regulating neither
for the creditors nor the debtors.
Mr. WILLIAMSON. By what means is the Federal Reserve Board
now changing the price level? Is it done by fixing the discount
rate?
Mr. SHIBLEY. I t is done by fixing the discount rates at the 12
central banks, and it is done by the open-market operations of the
12 central banks, and it is done by other methods. The board haf
described them with considerable fullness in its 1923 report (p. 3),
Mr. WINGO. I t seems to appear from the report to which attention
is called that our changes toward instability have followed the
enactment of the Federal reserve law and the action of the Federal
Reserve Board. We have had more trouble since then than we had
prior to that time, in the absence of that law. Isn't that true ?
Mr. SHIBLEY. Certainly, that is true. That is my point.
93869—27—FT 1




3

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STABILIZATION

Mr. WINGO. If, then, that is true, would it not be better to attempt to restrict the powers of the Federal Reserve Board in so far
as they may be used improperly to affect the price level, and hold
that board and the Federal reserve system within the lines t h a t I
think the Federal reserve act was intended to hold them in—to have
a system of credit responsive automatically to the needs of commerce
and industry and agriculture ?
Mr. SHIBLEY. I wish to correct you as to one of your statements.
You said that the Federal Reserve Board had acted improperly.
That is not so for they now are left free to exercise, their own will.
Mr. WINGO. I don't say that they have acted improperly, and I
don't mean to ask you to say that they have. W h a t I meant to ask
you was, if it is true that the difficulties which you undertake to
remedy—I am not committing myself on that point one way or the
other; you may be right, but I have an idea about it—but is it not
true that the difficulties which you seek to remedy have been accentuated and have occurred more often since the enactment of the
Federal reserve law than was the case before that time ?
Mr. SHIBLEY. Certainly, in recent years.
Mr. WINGO. Tha^t being true, instead of giving further power to
the Federal Reserve Board and specific instructions to meddle with
that very thing in which we have found trouble, would not it be
better to undertake to limit that power and to hold the Federal
reserve system within those lines that make the credit resources
responsive to the normal economic demands of the country without
artificial interference as far as possible?
Mr. SHIBLEY. There is artificial interference. The regulatory
control is in that board.
Mr. WINGO. That is what I am talking about. Would this bill
stop that? Would it cure that evil and eliminate that difficulty, or
does it give them further power or at least a direction to exercise
further the power they already have, out of which have grown the
very difficulties that you talk about?
Mr. SHIBLEY. May I answer that?
Mr. WINGO. I t occurs to me at the point that we have come to
Mr. WILLIAMSON. Let him answer that.
Mr. SHIBLEY. The answer is t h i s : A t the present time the Congress of the United States, to whom is delegated the power and
duty of providing for the regulation of the exchange value of
money, has given the Federal Reserve Board the authority to da
with it as they choose. The board has not acted improperly according to the law as they have construed i t ; the board has acted as it
in its judgment has seen fit. This bill proposes that the Federal
reserve law shall more definitely declare the policy which the Government commission shall apply, so that the commission shall no longer
formulate its own policy. At present it may lawfully inflate or
deflate. If the Congressman can propose a still more definitely
stated policy
Mr. WINGO. That brings us to this inquiry: You would not take
any power from the Federal Reserve Board?
Mr. SHIBLEY. Yes; the power to do as it may choose.




STABILIZATION

31

Mr. WINGO. But you direct them as to the proposition which shall
govern their actions
Mr. SHIBLEY. Isn't that changing their power?
Mr. WINGO. When, under the exercise of that power heretofore,
difficulties have resulted which you say is not due to any improper
purpose on their part. So, I do not see where we need to act.
Mr. SHIBLEY. The question that is before the committee is to
plan to place some limit on their power.
Mr. LUCE. I n order that the statement may appear in the record
somewhere near the matter to which it refers, I want to say at this
point that your imputation of political motives on the part of the
Federal Reserve Board would not be accepted by all the members
of this committee; and that for one I wish to enter a specific and
complete denial of the suggestion that in 1921 and 1922 or 1924
there was any political purpose on the part of the Federal Reserve
Board. With the somewhat intimate knowledge of .their course
which all the members of this committee possess, I think I am
justified in saying that the Democrats on the board acted in practical unanimity with the Republicans and that there was no political
purpose in their course. While I sympathize with much that you
have said and heartily indorse it, I should be very sorry to have the
question confused by the introduction of a suggestion that the
board had ever played politics.
Mr. STRONG. I agree with the statement of Mr. Luce.
Mr. F E N N . I agree with it also.
Mr. SHIBLEY. I simply call atttention to the figures themselves as
shown in the chart that is before you. The price level started
upward in 1922 and kept going up, resulting in the stimulation of
business which absorbed some of the unemployed by putting them to
work during the campaign; and then the same thing commenced
again in 1924 during the convention month.
Mr. STRONG. YOU are taking that coincidence as proof that the
board, which is composed of both Democrats and Republicans
Mr. SHIBLEY. The control was in that board. They did it.
Mr. STRONG. D O you suppose that the Democrats joined with the
Republicans to help the Republicans in the election ?
Mr. SHIBLEY. I don't care how they did it
Mr. F E N N . YOU make that charge and I think that it is entirely
untenable.
Mr. SHIBLEY. I point to the facts.
Mr. F E N N . That is a coincidence.
Mr. STRONG. YOU are simply pointing to a coincidence.
Mr. WINGO. I make a point of order. I believe, as I recall it, that
lawyers are restrained by the court from impeaching their own witness. I think Brother Strong is doing that.
Mr. STRONG. I want to say that there are many statements made
by Mr. Shibley that I would impeach if I were giving testimony.
Mr. WILLIAMSON. Let me make this inquiry here: Calling your
attention to the inflation of prices, beginning with 1922: What
methods did the Federal Reserve Board use in inflating those prices
at that time?




32

STABILIZATION

Mr. SHIBLEY. The committee can inquire from the Federal Keserve
Board and they will find out. I can not say.
Mr. WILLIAMSON. Was it done by decreasing the discount rate ?
Mr.

SHIBLEY. I can not

say.

Mr. STRONG. Why do you make the statement?
Mr. SHIBLEY. Here is the fact
Mr. STRONG. N O , it is not a fact; it is a coincidence.
Mr. SHIBLEY. Then I will say that the prices rose by coincidence
just at the time of the two elections.
Mr. STRONG. By the action of both Democrats and Republicans.
Mr. SHIBLEY. I t was done by the Federal Reserve Board.
Mr. STRONG. I t was the unanimous action of the Federal Reserve
Board.
Mr. SHIBLEY. I t makes no difference; it was done and that is a
fact. The question before this committee is to give instructions for
stability, that there shall be no politics in it, that there shall be stability rather than politics.
Mr. STRONG. YOU have brought politics into it at this hearing.
Mr. WINGO. I would like to ask some questions on the economic
phase of it. Let us get away from politics. I would like to be permitted to ask several questions without interruption, Mr. Chairman.
The CHAIRMAN. Might I just ask him one question before you proceed and while he is on this one point ?
Mr. WINGO. Certainly.
The CHAIRMAN. Mr. Shibley, what effect on the price level do the
open-market transactions of the Federal Reserve Board have ?
Mr. SHIBLEY. The open-market transactions, if they sell, restrict
prices for commodities by taking money out of circulation. If they
buy, it puts money into circulation. Thus the Federal Reserve
Board can put money in and out of circulation by means of the
open-market transactions at one or more of the 12 central banks at
any time.
The CHAIRMAN. Are open-market transactions utilized to affect the
rate of discount?
Mr. SHIBLEY. Yes; the Federal Reserve Board says so in its reports, but of course the board has a purpose in mind when it does so.
The CHAIRMAN. W h a t other facilities do they utilize in stabilizing?
Mr. SHIBLEY. I n the 1923 report of the Federal Reserve Board on
page 3, they state very distinctly and clearly just how they operate.
They have three methods, the rediscount rate, the open-market
operations, and also they may in an emergency instruct the 12
central banks to use moral suasion on the member banks as to how
they shall conduct their operations* Thus they have a very quickacting and thoroughly efficient system of regulating the price level.
The CHAIRMAN. You say " t h e y . " Whom do you mean?
Mr. SHIBLEY. The Federal Reserve Board.
The CHAIRMAN. The Federal Reserve Board does that here in
Washington?
Mr.

SHIBLEY.

Yes.

The CHAIRMAN. And the Federal reserve banks in New York
and Chicago and Washington
Mr. SHIBLEY. The reserve banks act on their own initiative, subject to the supervisory power in the board.



STABILIZATION

33

The CHAIRMAN. YOU interpret the law to the effect that the Federal reserve banks each has the right to fix its own discount rate?
Mr. SHIBLEY. T O start with.
The CHAIRMAN. But not the final one?
Mr. SHIBLEY. Not the final one, for the law says:
Every Federal reserve bank shall have power * * * (d) To establish,
from time to time, subject to review and determination of the Federal Reserve
Board, a rate of discount.

And so forth. There also is a clause in the law stating that the
open-market operations by the 12 reserve banks are under the repudiations to be issued by the Federal Eeserve Board. So, the operations of 12 reserve banks are under the control of the Federal Reserve Board.
Mr. WILLIAMSON. Mr. Shibley, let me ask you just one question
before Mr. Wingo starts his series of questions. You have said
that you think that politics have been involved in the inflation and
deflation of prices. Let me call your attention to this: That at the
time of the severe deflation which occurred in 1920 and partly in
1921, at that time the majority of the Federal Reserve Board was
constituted of Democrats or was Democratic in character. Now,
that tremendous deflation occurred during that period and during
the Democratic administration and you say that it resulted in
defeating the Democratic Congress and resulted in putting in a
Republican Congress. You don't assume that the Democratic board
caused that deflation for the purpose of defeating their own party?
Mr. SHIBLEY. I referred to 1922 and stated that it was the action
of a creditor-class board.
Mr. WINGO. I t would be interesting to know, while we are on the
general question of the deflation of commodity prices, why the subsequent deflation of credit prices, is shown by another chart, which
ought to accompany this chart, as a deflation of commodity prices
and not a deflation of credit,
Mr. SHIBLEY. The credit acts on the commodity prices
Mr. WINGO. I want to ask right there—have you seen the chart
prepared for a Member of the Senate by the Federal Reserve Board
some six years ago, which is a chart showing the volume of credits?
I t was the contention of the board and the point that they made, that
the deflation of credits followed the fall of the price level and not
that the fall in the price level flowed from the deflation of the credits.
Mr. SHIBLEY. That was undoubtedly the case in 1920 after the
avalanche had been precipitated.
Mr. WINGO. I have asked you, is that a fact or not ?
Mr. SHIBLEY. I suppose it is a fact, as you say.
Mr. WINGO. Then, your first statement a while ago was incorrect ?
Mr. SHIBLEY. N O , it was not.
Mr. WINGO. At the proper time

I am going to put that chart in the
record.
Mr. SHIBLEY. May I answer your question ?
Mr. WINGO. Does credit control prices or do prices control the
volume of credit ?
Mr. SHIBLEY. Let me answer that ? please. Historv shows that
whenever the price level drops and business men know that it is going
down, then down go the prices quickly; and next, of course, there




34

STABILIZATION

follows the deflation of credits. I n 1919 the per capita circulation
of money fell 4 per cent in one month, January. Why? Because
the business men said, " There is going to be a depression and we
don't want your money! "
Mr. WINGO. The Federal Reserve Board was criticised at the time
for an increase in the credits, at the time when there was a deflation
of 4 per cent in the per capita circulation.
Mr. SHIBLEY. I n J a n u a r y , 1919?

Mr. WINGO. I don't recall the month. I think you are right—
January. I t was during the time when the commodity price level
was falling down. The Federal Eeserve Board was permitting, as
one Member of the House charged at the time, an inflation of credits.
Mr. SHIBLEY. The point is just simply this: The business men
broke it down. They anticipated that prices were going to fall.
Mr. WINGO. That shows you that you will never reach an agreement on that question. There are two theories. I want to ask
several questions, if I may, without interruption, Mr. Shibley.
Do you claim in your statement of some years ago before this
committee that you got the provision placed in the first bill in 1913,
which carried the language which is in this bill ?
Mr. SHIBLEY. The substance of this language
Mr. WINGO. As a matter of fact, did not the original print in the
first copy of the Federal reserve act, as presented to this committee
by Mr. Glass, carry the identical language, maybe with the words
" with a view to promoting a stable price level ? "
Mr. SHIBLEY. Yes.
Mr. WINGO. YOU claim

that you are responsible for getting that

in there?
Mr. SHIBLEY. Yes.
Mr. WINGO. W h a t was

the fight that caused that to go out? What
were the two contending theories at that time?
Mr. SHIBLEY. Permit me to answer your first question first. As
to my relation with that clause in the bill, it was while the administration was considering it preparatory to its introduction that my
advice was asked by Senator Owen, chairman of the Senate Committee on Banking and Currency.
I pointed to the need for a
definite instruction to the Government commission, the Federal Reserve Board, as to the direction at which its chief aim should be
directed, namely—
with a view to accommodating the commerce of the country and promoting
a stable price level.

The price level was being measured and by instructing to promote
stability in that index number of all-commodity prices the ideal
instruction in the law would be stated. The Senator understood
the situation and he said, " Shibley, I believe that is right," and
he took it to the President and his advisers and they O. K ' d it, and
Congressman Glass, the chairman of the House Committee on Banking and Currency, O. K'd it, and it was placed in the bill, and two
identical bills were introduced in the two houses.
Mr. W I N G O . Didn't that appear in the draft of the bill that was
drawn before President Wilson had ever been inaugurated?
Mr. SHIBLEY. N O .
Mr. WINGO. Are you

sure?

Mr. SHIBLEY. I am certain.



STABILIZATION

35

Mr. WINGO. Well, anyhow that is an immaterial proposition. I n
other words, that was stricken out and the language was made that
they should undertake to influence the rediscount rate with a view
to accommodating business?
Mr. SHIBLEY. Commerce and business.

Mr. WINGO. With a view to accommodating commerce and business. Those are general terms. The general idea was to accommodate business and the credit demands of business in general. You
belong to one school and they said that the Federal reserve banks
should be established and that they should have the power to control
business and fix prices and the price level, and the other school
contended that the Federal reserve system should be set u p for the
purpose of accommodating and serving the credit merchants and
that the law of supply and demand should have free play and that
each individual credit merchant—a member banker—should be permitted to continue as he had done before, to exercise his judgment
in his local credit market. Those were the two contending schools?
Mr. SHIBLEY. N O , you have not stated it quite correctly, in my
judgment. Here is the point: That the control of the price level, the
regulation of the quantity of money and bank credit, is always in
some established institution in every country. I t is not left open.
Mr. WINGO. I beg your pardon. You are begging the question.
I am asking you if at the time that this language was stricken out
of the original bill in 1913, there were not two viewpoints contending for adoption here at this table. One of them—and you belong
to that school—thought that we ought to give them the power to
control the price level, and the other school said, " No. We are not
setting up a controlling board here to parcel out credit and act as a
master of the credit merchants and tell them what they should
do, but we are setting up a system for the benefit and service to
accommodate them and we want to accommodate business so that
there could not be a congestion and artificial control of credits."
That is the thing that we were trying to remedy and eradicate. The
purpose of this system was to accommodate business. W a s not that
the reason?
Mr. STRONG. YOU gave the Federal Eeserve Board the power to
regulate discounts.
Mr. WINGO. Certainly, but for the purpose of accommodating
business. The expressions " accommodating business " and " controlling the price level" are contradictory terms and they were then so
regarded. As the record shows, at that time there were two schools
of economists who fought each other's viewpoint?
Mr. SHIBLEY. May I answer that without interruption? That
question came up for debate in the Senate hearings; the first public
hearings on this Federal reserve bill was in the Senate after it had
passed the House. There came before that committee a delegation
from the bankers' conference of Chicago. The bankers had held a
nation-wide conference and they sent this delegation to appear before
the Senate committee to state their views.
They insisted that one half of the members of the Federal Reserve
Board should be named by the bankers. At that point Senator Shafroth said to one of the bankers:
Is it fair that on that board which is to control the policy as to the interest
rate on money there shall be representatives of the banker? (Vol. 1. p. 41.)



36

STABILIZATION

Then I went out and brought to the Senator an excerpt from a
book printed in England, Bagehot's " Lombard Street," describing
the English system and just what it is, and Senator Shafroth read
it to them (pp. 64, 130, 135 of hearings), and it undoubtedly refuted
them and they had to admit that the British system is t h i s : The
Bank of England controls the discount rate and the board is composed
wholly of big merchants, men who are interested in business. They
do not permit on the board a banker who deals in checks. The
bankers at the Senate hearing had to admit it and then they ceased
pressing their request that the Federal Reserve Board should have
on it three representatives of the bankers.
Mr. WINGO. If you will permit me, that is all very interesting,
but that is subsequent to what I asked you about. That was after
we had wrestled here for months in this room and after the House
had debated for some time and the Federal Reserve Board bill, after
it passed the House, got over to the Senate.
What I am asking you about is whether or not months before the
controversy that you are talking about by Senator Owen and his
group in the Senate were holding these hearings, there was conflict
here in the House committee and didn't those who insisted that instead
of setting up a governmental socialistic control of credits and undertaking to fix the price level of potatoes, corn, cotton, wheat
Mr. SHIBLEY. Which one do you refer to ?
Mr. WINGO. T O the price of commodities generally.
Mr. SHIBLEY. Not the individual prices, but the price level ?
Mr. WINGO. They are the same thing.
Mr.

SHIBLEY. NO ; n o !

Mr. WINGO. We will not quibble about the terms. Those who
opposed the bill finally won out and they struck that out of the bill.
They set the system up for the service of the business of the country.
Mr. STRONG. YOU gave the Federal Reserve Board the right to
regulate discounts?
Mr. WINGO. Certainly. Every bank regulates discounts, but we
gave it to them for the purpose of accommodating and not controlling business.
Mr. SHIBLEY. Permit me to answer that, please. I call your
attention to this fact: how have they controlled it—they have put
the price level down and up.
Mr. WINGO. I am going to get to that.
Mr. SHIBLEY. They have done that in the interest of the creditor
class.
Mr. BEEDY. Will the Doctor answer that question yes or no?
There were two contentions at that hearing?
Mr. SHIBLEY. Yes, two contentions, and I will answer it this way:
When one school of thought stated that the regulation of the quantity of currency and credit (the exchange value of money) should be
in the individual bankers it was an argument to continue the thenexisting system in this country, as distinguished from the proposed
Federal reserve system with its Government supervision, for a
unified control of the quantity of the people's money and bank
credit. The Federal Reserve Board, a Government commission, was
proposed as the unifying agency for the regulation of the monetary
and banking system.




STABILIZATION

37

I n opposition there were those who had stood for the Aldrich
Plan, whereby representatives of the bankers in a central bank
would control the interest rate on money.
Mr. WINGO. Was that the proposition
Mr. SiiiBLET. May I answer your question, please?
Mr. WINGO. My question?

Mr. SHIBLEY. I am answering your question.
Mr. WINGO. I don't believe you Are getting anywhere except to
take up time. You can tell us whether Or not that was the proposition that was considered by this Committee. I Was a Member of
it and I have a very lively recollection and I spent considerable time
reading over my notes and refreshing my recollection.
I have a very interesting article which gays what one group said
about that propositidn, which is the very theory that you are advancing here, that we should not havfc Arbitrary control by a governmental agency; said that they were opposed to it unless they could
have a central control. They said they wanted one bank, one central
bank, to maintain the price level and control business.
Mr. SHIBLEY. Not to control business; to control the price level.
Mr. STRONG. YOU are taking all the time to talk about past
history.
Mr. WINGO. He brought this up.
Mr. STRONG. I am directing my remarks to Mr. Shibley.
Mr. WINGO. YOU said in your previous statement, Mr. Shibley,
that the Federal Reserve Board controls the purchasing power 01
gold and has done so for six years.
Mr.

SHIBLEY.

Yes.

Mr. WINGO. YOU say they have done that. How have they done it?
Mr. SHIBLEY. Through the exercise of this provision of the law
which states that the Federal Eeserve Board shall determine, and
thereby control, the rediscount rate. There is another provision of
law which states that the board shall determine the open-market
operations of the 12 central banks. There is a third way, by bringing influence to bear on th£ bankers.
Mr. W I N G O . But those are the two major ways—through fixing
the rediscount rate and through open-market operations? Has the
purchasing power of gold ever run counter to the theory that it is
dependent upon the rediscount rate? For illustration, how would
they control the rediscount rate if they wanted to decrease the purchasing power of gold?
Mr. SHIBLEY. When conditions are normal the rediscount rate is
operative, but if there is a panic the rediscount rate can not become
operative.
Mr. WINGO. YOU did not get my question. I want to know the
specific action that they would take if they want to decrease the purchasing power of gold. What Would the banks do to the rediscount
rate?
Mr. SHIBLEY. Simply provide such means
Mr. WINGO. Would they raise it or lower it?
Mr. SHIBLEY. They would make such an arrangement as would
bring about a rising price level for commodities, whatever those
conditions might be.
Mr. WINGO. I am talking about fixing the rediscount rate.
93869—27—PT 1




*

38

STABILIZATION

Mr. STEVENSON. T h a t would increase the purchasing power of
gold?
Mr. WINGO. I am perfectly willing to have him make an explanation, but my question was a very specific one. If they wanted to
decrease the purchasing power of gold, would they raise the rate or
lower it?
Mr. SHIBLEY. My dear Congressman, I prefer to word it, that
under normal conditions the Federal Reserve Board raises the discount rate and lowers the price level. At other times the board
lowers the discount rate and raises the price level.
Mr. WINGO. YOU say that under some conditions it will work
one way and at other times that it will work the opposite way ?
Mr. SHIBLEY. Not under normal conditions.
Mr. WINGO. YOU have said that under normal conditions it will.
work sometimes one way and sometimes a different way.
Mr. SHIBLEY. YOU misunderstood me.
Mr. WINGO. I beg your pardon.
Mr. SHIBLEY. I said that in normal times when they wish to lower
the price level for commodities the discount rate must be high enough
to drive it down, and when they wish to raise the price level the discount rate must be low enough to help it up. Conditions must be
such as
Mr. WINGO. I will take it one at a time. If they want to decrease
the purchasing power of gold, do they raise or lower the rediscount
rate in normal times?
Mr. SHIBLEY. If they wish to do what ?
Mr. WINGO. If they want to affect the purchasing power of gold
adversely, to decrease it, do they raise or lower the rediscount rate ?
Mr. SHIBLEY. If they wish to raise the price level ?
. Mr. WINGO. If they wish to decrease the purchasing power of gold.
Mr. SHIBLEY. The purchasing power of gold is registered in the
price level and I reduce it to terms of price—prices for commodities
at wholesale.
Mr. WINGO. YOU have made that statement—I ask you if you
did not make the further statement, that the Federal Reserve Board
has controlled the purchasing power of gold and done it for six
years? I am asking you now to consider the purchasing power of
gold and I am talking about this phase now: We have got down
to this point: If there are three methods that they have—one is the
open market proposition, another is the rediscount rate, and the other
is moral suasion on the banks—I am going to take up each one so
as to have a detailed picture of these methods and then I am going
to ask you what has been done.
Now. it is true that if they want to increase the purchasing power
of gold, then, so far as the rediscount rate is concerned, they raise
it? Is that true? I mean in normal times.
Mr. SHIBLEY. I will transmute that to the term " price level." I
use that method. If they want to force down the price level for commodities they raise the interest rate; and if they want to put the price
level up, they lower the interest rate.
Mr. STEVENSON. If you increase the price of cotton, you decrease
the power of gold, don't you, because it takes more gold to buy a
pound of cotton if you raise the price than if you lower it ?




STABILIZATION

39

Mr. SHIBLEY. I am not speaking about individual prices.
Mr. STEVENSON. I mean all prices. That was just an example.
Mr. WINGO. Whatever way they do it, isn't it true that there have
been times when the purchasing power of gold declined following a
reduction of the rediscount rate and under practically the same general business conditions in America during the last six years the
reverse took place at another time?
Mr. SHIBLEY. The point is right here
Mr. WINGO. That either happened or not. Do you know whether
it did?
Mr. SHIBLEY. The Federal Reserve Board controls it.
Mr. WINGO. Please stick to my question. That is either a fact
or it is not a fact.
Mr. SHIBLEY. I t is not a fact.
Mr. WINGO. Of course, the records will show the statistics of the
board and the Labor Department.
Now, every time that they have used the open-market operation?
there have not been any contradictory results ? I n other words, that
is the major control, the open-market operations?
Mr. SHIBLEY. I believe not, Mr. Wingo.
Mr. WINGO. Can you show one single time where the Federal
reserve banks went into the open market and there was any contradictory action? I n other words, during the past six years has
not the result when they went out and sold bills always been the same
and the result when they went in and bought bills always been the
same?
Mr. SHIBLEY. I suppose so.
Mr. WINGO. I n other words, the only absolutely sure way to automatically and instantaneously affect the purchasing power of gold
during the past six years has been the open-market operations of the
Federal reserve banks ?
Mr. SHIBLEY. I could not say.
Mr. WINGO. Isn't that true?
Mr.

SHIBLEY. NO.

Mr. WINGO. Hasn't that been the only constant result which has
followed their operations during the past six years? The control
of the rediscount rate has had contradictory results. The falling off
of business on the reduction of the rediscount rate did not automatically retire the Federal reserve notes, as it is supposed to do;
but every time that the Federal reserve banks have gone into the
open market they instantaneously got the result? Didn't they get
the result within one day's time when they went into the market with
their fifty-five millions to cover fifty millions that had been withdrawn that day on call loans to meet withdrawals by banks out in
the country? Didn't the result come within one day?
Mr. SHIBLEY. YOU admit that the Federal reserve banks do control the interest rate on money.
Mr. WINGO. I am not talking about whether it is right or wrong.
I am asking you whether that actually took place. Have not the
results of experience in the last six years been constant enough so
that we can deduce from them a rule that will operate permanently ?
The CHAIRMAN. Might I suggest that it is nearly 12.30?
Mr. BEEDY. Doctor, will you please answer that question?




40

STABILIZATION

Mr. SHIBLEY. I will say that when they put their $55,000,000 of
money in the market for the purchase of securities they got immediate results.
Mr. CHAIRMAN. I suggest that we recess now until 2.30.
(Thereupon, at 12.30 o'clock p. m., the committee took a recess
until 2.30 p. m.)
AFTER RECESS

The committee resumed its session at 2.30 o'clock p. m., at the expiration of the recess.
The CHAIRMAN. The committee will come to order. We will resume the hearings on H . R. 7895.
STATEMENT OF GEORGE SHIBLEY—Continued
Mr. WINGO. Mr. Shibley, my attention has been directed to the
fact that possibly one of my questions this morning was reversed,
and in order to straighten it out I will repeat the question.
I n theory, now, assuming that all of the other factors remain
constant, if you want to decrease the purchasing power of gold you
will decrease the discount rate. That is the theory, is it ?
Mr. SHIBLEY. I n order to think of that in a direct manner I translate it into terms of price.
Mr. WINGO. All right. If you want to increase the price of
commodities, you decrease the discount rate?
Mr. SHIBLEY. If I wish to increase the price level.
Mr. WINGO. I mean the price level.
Mr.

Mr.

SHIBLEY. Yes,
WINGO. That

sir.

is the abstract theory?

Mr. SHIBLEY. YOU are correct.

Mr. WINGO. Some one said this morning that I got it reversed.
Now let us get back to where we were. I think we can agree that
the most important factor of those three is the open-market operation; that experience has shown that the most instant and direct
effect of any of these operations has flowed with more certainty, and
with constant repetition, from a change in the open-market operations, than it has either from the discount rate or the " moral suasion " upon the bank.
Mr. SHIBLEY. I presume so.
Mr. WINGO. NOW, you speak about a stable price level. J u s t what
do you mean by a stable price level ?
Mr. SHIBLEY. The all-commodity index number as measured by the
Department of Labor in its statistical bureau consists of 404 articles,
and for the base they take the year 1913, which is 100. Then each
month they measure again, and then, as it stands, they give it a number to show whether it is up or down from the preceding month.
Mr. WINGO. I n other words, you mean the average of the price of
these 404 commodities?
Mr. SHIBLEY. Yes; properly weighted.
Mr. WINGO. Suppose there was an abnormal production of wheat
in one year, and a surplus of wheat, and at the same time there was an
abnormal underproduction of cotton, or a shortage of cotton, and
t h a t the effect upon the law of supply and demand was negligible




STABILIZATION

41

because the shortage of o ^ was counterbalanced by the surplus of
the other; then under your theory, the Federal Reserve Board would
not have to do anything, because the average level would remain the
same?
Mr. SHIBLEY. That is correct.
Mr. WINGO. {So there would be no action by the Federal Reserve
Board, either antagonistic or favorable, that would help the
depressed commodity or check the advantage of an increased price of
the short commodity ?
Mr. SHIPLEY. That is my understanding.
Mr. WINGO. Now, if you had then a stable price level, as you contemplate, that would not mean a relatively uniform price for the
various commodities ?
Mr. SHIBLEY. NO ; it would not.
Mr. WINGO. For illustration, all commodities might be 200, as
measured by the 1913 level; all commodities except wheat might be
200, and wheat would be down to 65. You would have a stable price
level there, would you not, but it would not be a uniform level ?
Mr. SHIBLEY. T h a t is correct.
Mr. WINGO. The wheat grower would still be distressed, even
though he had a stable price level. So is it not more important, and
are not most of the economic distresses and displacements of industry
produced by lack of a relatively uniform level than one of stability ?
Mr. SHIBLEY. If the price of wheat drops to 65, it is because of
supply and demand.
Mr. WINGO. All right. Now, suppose that the price of wheat and
the prices of all of the 404 commodities gradually and automatically
march side by side, with a sudden rise of 60 points all the way along;
the effect on the country would be nil, would it not, according to your
theory in relation to industrial prosperity?
Mr. SHIBLEY. Oh, no indeed.
Mr. WINGO. YOU deny that. Now, why would it not be? Let
us see.
Mr. SHIBLEY. A rising price level has various effects. I t stimulates business; it overstimulates, usually. The business man is not
able to forcast, to make contracts.
Mr. WINGO. Now, why did not that rule work at one time in
1923, and also in 1924?
Mr. SHIBLEY. I wish you would explain your meaning.
Mr. WINGO. YOU say that a rising price level produces what?
Mr. SHIBLEY. A rising price level stimulates business.
Mr. WINGO. Now, it is not a fact that with a rising price level in
1923 there was a sudden depression in business for about two months,
and the same thing happened in 1924?
Mr. SHIBLEY. I am glad you asked that question.
Mr. WINGO. NOW, what was the reason for that exception to the
rule? There are always exceptions to every rule, they say. What
was the occasion for the exception in that year ?
Mr. SHIBLEY. I am glad you asked that question. The rising
price level of 1922 did stimulate business, but the farmers' prices
at that time dropped to such an extent that they lost one-sixth of the
average price of farm commodities as compared with the business
men's prices which were shoved up. The farmers could not shove




42

STABILIZATION

up their prices—their prices actually fell; and the differences between the two groups was such that the farmers lost one-sixth of
the whole average price of their commodities in a few months in
1922.
Mr. WINGO. Due to the decrease in purchasing power?
Mr. SHIBLEY. Yes, sir, decrease in relative purchasing power, as
compared with the business men's prices.
Mr. WINGO. So that, as a matter of fact, you did have a situation
where the price level was stable
Mr. SHIBLEY (interposing). Oh, the price level went up.
Mr. WINGO. Weil, it went u p ; and yet you had one great commodity that was out of line, that was not uniform with the level;
you decreased the purchasing power of that group of consumers, as
well as of producers, and yet you say the effect was not bad?
Mr. SHIBLEY. I say the effect was bad on the farmers; but it was
due to action by the organized business interests.
Mr. WINGO. NOW, will your proposal here, this stump speech
of directions to the Federal Reserve Board—I am not speaking
disrespectfully; I am just using a blunt expression—do you think
it will check these business interests?
Mr. SHIBLEY. Certainly not.

Mr. WINGO. If you write these words into the law, will not those
same business interests act with the same inherent selfishness with
which all of us would act if the same set of circumstances should
arise again?
Mr. SHIBLEY. I have stated that the idea is that this bill of Mr.
Strong when enacted into law will result in the stabilization of the
price level. I also am going before a House or Senate committee
with a bill to provite for self-regulation by the business interests,
subject to Government supervision; and a similar bill for cooperative
marketing by the farmers.
Mr. WINGO. H O W do you propose to regulate them? I n other
words, you admit that this proposal would be ineffective of itself,
and that you have got to have supplementary legislation of another
kind in order to maintain a stable price level; that the board could
not maintain a stable price level with this authorization, but that
you have got to have something from the Agricultural Committee
to join with it. Now, just what would be its general terms?
Mr. SHIBLEY. Excuse me. Congressman; I think you are mistaken
in saying that a stable price level can not be maintained. I say,
maintain a stable price level, and then, with a stable average of
prices for commodities you can begin to handle the other remedies
concerning prices and get results. But if you attempt to remedy
the other matters as to price, and leave the price level so that it
goes up or down, you can not get any real relief for the farmers, in
my judgment.
Mr. WINGO. What do you understand the word " level" means ?
W h a t is the legal as well as the dictionary definition of the word
"level?"
Mr. SHIBLEY. That it continues at about whatever the index number may be; if it is 100, it will continue at about 100.
Mr. WINGO. " L e v e l " means along on an even line, does it not,
to use a homely expression? I t means running along on the same
space, in an even line, does it not?



43

STABILIZATION
Mr.

SHIBLEY. Yes.
WINGO. And " stable " means what—fixed ?
Mr. SHIBLEY. N O .
Mr. WINGO. W h a t does " s t a b l e " mean?
Mr. SHIBLEY. We say, promote stability.
Mr. WINGO. I am talking about " stable " now.

Mr.

" Stable " means
fixed, does it not; without much fluctuation or change?
Mr. SHIBLEY. I t means on a practically constant level.
Mr. WINGO. I t means constancy?
Mr.

Mr.

SHIBLEY. Yes.
WINGO. Without

change; without violent

fluctuation?

Mr. SHIBLEY. YOU are correct.

Mr. W I N G O . Then, if you want to have a stable price level, you
will have one that runs along on an even line, without much fluctuation, but with constancy?
Mr.

SHIBLEY.

Yes.

Mr. WINGO. NOW, who is going to say where you shall place that
line; the board ? Or are you going to have an agricultural bill that
will designate a group of farmers to fix the level ?
Mr. SHIBLEY. A S stated in the bill, it directs them to begin
wherever they may be at that time.
Mr. WINGO. I n other words, you propose to place the level at the
average price of commodities at the time the act goes into effect?
Mr. SHIBLEY. Yes. My preference is 162.
Mr. WINGO. NOW, even though you did not call it that, that would
have the effect of pegging prices at what they were on the day your
bill went into effect?
Mr. SHIBLEY. Will you explain what you mean by " pegging
prices " ?
Mr. WINGO. I t means to fix them right there; keep them there.
Mr. SHIBLEY. YOU mean individual prices ?
Mr. WINGO. The average price.
Mr. SHIBLEY. That is what I am getting at. Yes; certainly, the
average height of prices.
Mr. WINGO. So you would not prevent fluctuations within the
404?
Mr.

SHIBLEY. N O .

Mr. WINGO. There might be distress among the wheat growers
and affluence among the cotton growers, or just the reverse, but as
long as it all averaged up—the distress of one and the extravagant
expenditures and the extraordinarily prosperous conditions of the
others, which would lead them to extravagance—that would not
affect the public welfare at all? You would just let that run on?
Mr. SHIBLEY. I do not say that. What I say is this: That there
would be kept a stable average, and then if one commodity goes
down it is due to supply and demand or some combination. That
has to be handled by itself.
Mr. WINGO. Certainly; and is not that the thing you are getting at—telling the board to do it? Now, how are you going to
have the board do it?
Mr. SHIBLEY. T O do what?
Mr. WINGO. T O do just what you have been proposing.
Mr. SHIBLEY. I am simply recommending that this bill should be
enacted into law.



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STABILIZATION

Mr. WINGO. All right. After this bill is enacted into law, how
is the board going to carry out the direction ? W h a t are the minute
details of the practical operation and the machinery that they would
employ?
Mr. SHIBLEY. The index number which they have been using right
along, of the Department of Labor's statistical bureau, will be before
them, and the law would instruct them to keep that index number
of all-commodity prices at a practically stable figure. I t will be
similar to where directions are given to a man who is stoking a
furnace; you tell him to keep his steam at 100, and anybody can
come in and look at the steam gauge and see what it registers. And
a similar situation will exist as to the index number of all-commodity
prices, for it will be known by the public at all times, and if the
law is enacted it will be obeyed.
Mr. WINGO. You think that if the steam is kept at 100 that would
be consolation and salvation to the man that might be washed overboard by a storm that struck the decks, or if the hull was rammed?
If the steam were kept normal on the ship—that is, if the steam register were at an average level, just so it was stable, the welfare of the
ship and its cargo would be all right ?
Mr. SHIBLEY. That simile is not in line.
Mr. GOLDSBOROTJGH. You are not undertaking to cure all economic
ills by this legislation ? That is your answer, is it not ?
Air. SHIBLEY. Thank you, Mr. Goldsborough. That states it correctly. I t is not intended as a panacea.
Mr. WINGO. I beg your pardon. I thought you said that the
trouble with the country, economically, was that we had a fluctuating price level, that the purchasing power of gold fluctuated violently and disturbed people, and I thought that was one thing that
we had told the farmer was the trouble; that we had violent fluctuations; that here are these manufacturers—and I am not making a
partisan argument—our Republican friends from the Wheat Belt
say, " Your manufacturer can cut down his production when he sees
that the demand has decreased, but the poor farmer has put his
crop in the ground and he can not curtail it." Then another t h i n g :
There may be an extraordinary season which may give him a surplus
production, and the hail, the storms, the droughts and the floods
may come, and he will have a shortage. H e can not control t h a t ;
and I thought the object was to remove this economic distress that
comes from a lack of balance, and I thought the sacred magic and
panacea for all that was to have a stable price level by Government
ukase. I want to know who are going to be the mechanics to bring
about this great salvation.
Mr. SHIBLEY. I am glad you have the correct idea about the price
level.
Mr. WINGO. What is going to be the operation of the Federal Reserve Board in carrying out these directions?
The CHAIRMAN. Mr. Shibley, in connection with your answer to
t h a t question, are you familiar with the plan of operation by the
Federal Reserve Board in handling the discount rate?
Mr. SHIBLEY. I went to their offices and was told by the statistician that each week he goes before the board and reports to them the
situation in production and the various matters that interest them.




STABILIZATION

45

The CHAIRMAN. And makes a definite recommendation ?
Mr. SHIBLEY. N O ; he states the facts.
Mr. WINGO. I was coming to that, Mr. Chairman. After he had
answered my question, I was going to ask him to point out one
single thing that he suggested that the board was not already doing.
But, go ahead.
The CHAIRMAN. I beg your pardon for interrupting you.
Mr. W I N G O , That is what I was going to do. I n other words, I
was going to ask him to define what it is that this statute is going
to do. If they are already doing the very things that we expect them
to do, what good is this bill going to do ?
Mr. SHIBLEY. Permit me to correct that statement, when you say
they are doing all we expect them to do.
Mr. WINGO. All right. Tell me some of the things that this bill,
if enacted, would cause them to do that they are not now doing. Tell
me some of the things that the impelling force of this authority
would cause them to do that they are not doing now.
Mr. SHIBLEY. The statistician of the Federal Eeserve Board
goes before the board and describes to them various things that are
taking place throughout the country, but the determining of a
policy in fixing the rediscount rate and other operations is for the
board in executive session. Now, when the Board comes to determine a policy, as the law stands at present they have absolute
*
power to do as they will. The present direction in the statute says,
" t o accommodate commerce and business." I t is so general that
history shows that for the past six years, at least, the Government
commission has put the price level up or down as it might decide
should be proper.
The CHAIRMAN. Mr. Shibley, right there, is that the sole controlling argument on which they base their decision, or are there other
controlling influences that enter into the conference that you speak
of, after they have had the statistician's report ? W h a t other influence, in other words, is given to them which tends to make a
decision on the question of rates ?
Mr. SHIBLEY. Well, the board members themselves have their attitude of mind as to what should be the general policy of the Federal
Eeserve Board, but this bill gives them an instruction to work
toward stability and not toward fluctuation, up or down.
The CHAIRMAN. I S the question of the amount of Federal reserve
notes outstanding, or the amount of rediscounts of the reserve bajiks,
or the amount of reserves, one of the controlling features that enter
into that final decision by the Federal Reserve Board?
Mr. SHIBLEY. Not a controlling feature at present, for this reason:
This country has such a large quantity of gold that the Federal
Eeserve Board is free to do as it chooses—to put up or down the
quantity of currency and credits; because the board is not limited
by a solid wall beyond which it can not go in the expansion of
credit. The board has a free field up ancj. down. And so, as is
stated in a book by Doctor Beckhart published in 1924 on " The
Credit Policy of the Federal reserve system," the existing gold
supply in this country is so large that the only available gauge for
the Federal Eeserve Board to use is the index number of the price




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STABILIZATION

level, which should be kept stable. And this morning in my statement I placed before this committee a quotation by the economist
of the New York Federal Reserve Bank in advocacy of stability in
the price level.
The CHAIRMAN. Mr. Shibley, in that connection, does the price
of stocks have anything to do in the minds of the members of the
Federal Reserve Board, in your judgment, in determining the discount rate ? I n other words, would a speculative condition, evidencing large concentration of loans for stock exchange purposes, influence them in determining the discount rate ?
Mr. SHIBLEY. Oh, that is a separate matter. I t might, yes; most
assuredly.
The CHAIRMAN. Then there are a good many influences that may
get into the minds of the various members of the board that would
affect the discount rate?
Mr. SHIBLEY. Exactly; and this bill proposes that the Federal
reserve law shall instruct the Government commission, the Federal
Reserve Board, to take as their chief aim stability in the price level,
which means stability in the value of money. As I have stated, the
Federal Reserve Board in recent years has put the price level up
15 per cent in 1922-23 and then down 9 per cent. [Chart 2.]
Mr. STEVENSON. I want to ask you a question right here, and it
is fundamental with me. Would not this amendment to the act be
equivalent to striking out the word " accommodating " where it says
" which shall be made with a view to accommodating commerce and
business " and inserting the word " controlling " ? Is not that what
it would amount to? I n other words, the Federal Reserve Board
now has the power and the direction of Congress to accommodate
the seasonal business needs of the banks and of the business of the
country for discounts, for credit, and they are to accommodate them.
Now you propose instead of that to require them to control?
Mr. SHIBLEY. N O , indeed.
Mr. STEVENSON. I S not that what will happen?
Mr. SHIBLEY. N O , indeed. When it says that the price level for
commodities shall be kept stable, it means that the Federal reserve
system shall supply all the credit and cash that is necessary to
maintain this stability.
Mr. STEVENSON. Yes; but if the price level begins to hop away
up they are required to prevent the price level from going exceedingly high as well as from going exceedingly low, and they would
have to control by contracting credits in order to do that. I t is a
direction to them to control business, it seems to me.
Mr. SHIBLEY. Because I did not have an opportunity to put forth
my objection to the decision stated by Mr. Stevenson nor have an
opportunity to complete answer to the main question I wish to state
as follows:
The wording in the Strong bill to which Mr. Stevenson refers is
that the discount rate at the Federal reserve banks—
shall be made with a view to accommodating commerce and promoting a
stable price level for commodities in general. All of the powers of the Federal reserve system shall be used for promoting stability in the price level.

The meaning of these words is that the quantity of currency and
bank credit shall thenceforth be elastic, with a view to accommo


STABILIZATION

47

dating commerce and business, without deflation or inflation, as evidenced by the index number of the price level.
This fuller statement or something like it should be placed in an
enlarged bill by Mr. Strong to avoid misunderstanding.
Mr. STEVENSON. NOW let me ask you this
Mr. W I N G O (interposing). Before you get away from that, let me
ask this question: Do you not know that if we had a bumper wheat
crop and a bumper cotton crop, and at the same time there was an
extraordinary revival of consumptive demand, so that both the
wheat growers and the cotton growers sold that bumper crop at a
big price, that that would, judged by past experience, increase the
purchasing power of those two great groups, the wheat growers and
the cotton growers, and they would come in and enhance the great
demand for manufactured goods; and do you not know that that
enhanced demand for manufactured goods, with the dealers' shelves
cleaned out, would force the price up automatically? Would you
want to check that rising tide of prosperity by saying, " No; you are
going to disturb the price level; we have got to hold this price down;
we must hold down the manufactured goods; we must not permit
them to go up by reason of the operation of this law of supply and
demand; we must check the operation of the law of supply and
demand, and we must maintain this price level." Do you not know
that if you did that you would check the very prosperity that you
ought to foster, and which the original purpose was to accommodate and foster?
Mr. SHIBLEY. Congressman, you are mistaken.
Mr. WINGO. I hope I am.
Mr. SHIBLEY. F o r this reason: The manufactured products can be
multiplied indefinitely; and the point is that the prices of manufactured products should be maintained at a fairly stable rate and be
multiplied at that rate, and not that their prices should be put up and
down.
Mr. WINGO. I n other words, you think that the unfilled orders of
the steel mills are not a correct barometer of business? You think
that the steel mills of the country are foolish whenever they reduce
their prices to encourage business when their unfilled orders decline?
Mr. SHIBLEY. We have nothing to say about t h a t ; we are speaking about the price level.
Mr. WINGO. D O you not know that if their unfilled orders increase,
following the law of supply and demand, the natural, enlightened,
justified selfishness of people is such that where they think they can
sell a greater volume at a greater price they both produce the
greater volume and put up the price; and you think that ought to
be checked? You think it is a part of the function of the Government, through a Government board, to check that and to put the
business and industry of this country in a strait-jacket so as to hold
it on an even keel?
Mr. SHIBLEY. I n every country it is done.
Mr. WINGO. W h a t other country that is worth living in, outside
of this one ?
Mr. SHIBLEY. The Bank of England
Mr. F E N N . Oh, the Bank of England.




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STABILIZATION

Mr. SHIBLEY. The Bank of England controls the rediscount rate
and the price level.
Mr. F E N N . That is not here.
Mr. SHIBLEY. And France
Mr. F E N N (interposing). France is bankrupt; you know that.
Mr. SHIPLEY. I am saying that every country
Mr. F E N N (interposing). Tell us something that has some sense
in it.
Mr. STEVENSON (interposing). I want to come to a concrete illustration of the proposition here. Suppose everything except wheat
is on a rising price; that it rises during the current year; that there
is an extraordinary crop of wheat, and that there is an extraordinary
one in Canada and Argentina and Australia and in all the o t t ^ r
great wheat-producing countries, and it goes down to 65, but the
rise in the other commodities maintains the price level at 162, notwithstanding wheat is down to 65. Now, this bill would provide
tha^t they have got to stand in their tracks and maintain it just that
way, although the one great commodity that is suffering, that is
faced with bankruptcy, needs special provision made for it. Now,
you absolutely tie the hands of the Federal Eeserve Board from
making special provision for the one suffering industry that is
threatened with bankruptcy, because the level is 162 and they must
maintain it on account of the rise in prices of everything else.
That may be an extreme illustration, but it illustrates the principle upon which you are going. Is not that so ?
Mr. SHIBLEY. Let me separate what you have stated into two
propositions.
Mr. STEVENSON. All right; as many as you please, but let me have
the answer.
Mr. SHIBLEY. The Federal Reserve Board has almost unlimited
power to help an industry if it can do so and still maintain the
stable price level.
Mr. STEVENSON. H O W will it do it? If the price level is 162, with
wheat at 65, then if they are going to fix it so as to raise the price
of wheat from 65 to normal, they have got to put something else
down, have they not ?
Mr. SHIBLEY. They are not going to do it. That is not their
function.
Mr. STEVENSON. W h a t is the use of your bill?
Mr. WINGO. Then, Mr. Strong has been misled. H e thought it
would bring wheat up.
Mr. SHJBLEY. I beg to differ with you. Mr. Strong understands
this bill accurately and states it accurately.
Mr. WINGO. H e thought that this would relieve the farmer; that
this is one of the farm relief bills.
Mr. SHIBLEY. I t is one of the farm relief bills by providing for
stability in the price level.
Mr. BEEDY. I wish, Mr. Chairman, that a couple of minutes could
be given the gentleman to answer Mr. Stevenson's question.
Mr. STEVENSON. Yes. H e was about to separate it into its constituent elements.
Mr. BEEDY. I have been trying to follow this thing, and I can not
see that we are getting anywhere. I do not think the doctor has a




STABILIZATION

49

chance to answer our questions. We argue with him without allowing him to answer.
Mr. STEVENSON. I want to give him the opportunity to answer.
Go ahead, Doctor.
Mr. SHIBLEY. A S I was stating, with the establishment of a stable
price level, then if the price of wheat is low it is caused by something
about the supply or the demand of wheat, and you have to work at
that direct, not through the interest rate on money, to put the price
level up or down. That has nothing to do with it. The price level
should be kept stable; and then go at your other problems for relieving the farmers. If it is wheat, find out what the trouble is. If too
much is being raised, get him to cut down the acreage. If he can not
find a market for his surplus, try to correct it. But do keep your
price level stable. How can a cooperative marketing association of
to-day conduct its business when it does not know what the Federal
Eeserve Board is going to do with the general price level? As I
have shown, in 14 months during 1923-24 the price level went down
9 per cent. How can the cooperative marketing association succeed
under such a system as that?
The CHAIRMAN. That was due entirely to the action of the Federal
Eeserve Board, do you contend?
Mr. SHIBLEY. I do.
The CHAIRMAN. H O W did they reduce it?
Mr. SHIBLEY. The Federal Reserve Board

has absolute control as
to certain factors which can be made to dominate the price level
under normal conditions.
The CHAIRMAN. What factors entered into that reduction you have
just referred to?
Mr. SHIBLEY. I would have to examine into that reduction and
ascertain what the factors were.
The CHAIRMAN. I n other words, just what definite action did
they take to bring that about?
Mr. SHIBLEY. I can not say as to that except by an examination.
I do point to the fact that the price level went down when the
action of the Federal Reserve Board should have been such as to
have kept the price level stable.
The CHAIRMAN. H O W do you know, then, that the Federal Reserve
Board did that?
Mr. SHIBLEY. Because t that board, a Government commission, had
been placed in control of the price level by regulating the quantity of currency and bank credit and its duty should have been
to maintain stability, but under the law as it is being construed
the board is free to do as it may choose and it chose to deflate.
That board can start the price level up or down in 24 hours.
Mr. GOODWIN. Have they exercised that power in that way ?
Mr. SHIBLEY. Yes. They have done it time and again; and, as
they are operating at present, whoever is on the inside to know
what their policy is, can play the stock market, as has been done
time and again; because the board does not publicly declare its
policy in words that mean anything. The words " to accommodate
commerce and busiiiess " are meaningless.
Mr. WINGO. That is a pretty serious charge; that they can play
the stock market, aiid have done it. Have you any proof of that,




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STABILIZATION

Doctor? If you have, I would like to have it. If you have any
proof that anybody on the inside of the Federal Reserve Board
is playing the stock market and taking advantage of what they
are going to do, I think you ought to give names and facts.
Mr. SHIBLEY. My statement is that whoever knew the policy
was in a position to do it.
Mr. F E N N . Well, that is the board itself.
Mr. SHIBLEY. I say, whoever among the speculators on the outside knew it.
Mr. F E N N . D O you intimate that the Federal Reserve Board is
giving information outside for the sake of speculating?
Mr. SHIBLEY. I do nothing of the kind; no, sir. But I do say
that there should be a declaration by law, declaring for stability,
and not leaving it up in the air for speculators.
Mr. BEEDY. Doctor, let me see if I understand what you have
been driving at here. You do not claim that this bill would prevent the rise and fall of prices, owing to the law of supply and
demand in specific products and industries?
Mr. SHIBLEY. YOU are correct.

Mr. BEEDY. B u t you do say that before we can begin intelligently
to take legislative action to minimize crisis, we must have at least
one yardstick maintained which we may use at all times ?
Mr. SHIBLEY. That is my position.
Mr. BEEDY. That is all of your contention?
Mr. SHIBLEY. That is all. I t is well said; splendidly!
Mr. BEEDY. Well, I think you are right.
Mr. WINGO. That brings up another question. I thought you were
talking about a stable price level, not a yardstick. I thought you had
been talking about credits and not about the gold dollar, the standard
dollar. There is quite a distinction between the money and the basis
of your money and the credit machinery.
Mr. BEEDY. What I understand him to say is that having once
gotten the level of prices—that is, the yardstick—that he would
always keep it. Now, then, that yardstick will not prevent fluctuation in the individual prices of individual products due to the
inevitable working of the law of supply and demand. Those you
have got to deal with specifically.
Mr. WINGO. That is what I understand.
Mr. BEEDY. But under the present regime you have no stable
standard. H e wants Congress to fix a standard.
Mr. WINGO. I am hoping, though, that he will show us what the
virtue of that is. I t it does not relieve the distress of the farmer,
if it does not relieve the distress of the steel mills when their orders
are falling off, I am wondering what the virtue is of maintaining
this little line that is nonfluctuating.
Mr. BEEDY. All I understand is that you have got to get a start
somewhere. That is his contention.
Mr. SHIBLEY. YOU are correct.

Mr. STEVENSON. If you will permit me, that simply involves what
I undertook to state a while ago; that you have got a general price
level made up of the average of all the prices. Here are some commodities way below the level of the cost of production. They have
got to be gotten up, or the folks will have to quit. Whenever you
elevate them, you necessarily have got to lower the others or disturb




STABILIZATION

51

your price level, and it authorizes the board to step in and control
the business of this country by saying that when wheat goes up steel
must come down in order to keep the price level stable; and if you
give them the power to do that> you are going to have trouble in
this country.
Mr. SHIBLEY. Congressman, they have the power; they are doing
it now. (See also the more complete answer, above.)
Mr. STEVENSON. Well, we have not given it to them. That is a
very different proposition. I am not responsible for it, if they are
doing i t ; and I am not going to be, either.
Mr. SHIBLEY. Are ther§ any more questions ?
Mr. ALLEN. I would like to ask a question, Doctor. I am thinking
now of the agricultural interests—of the farmers. Let us take the
farming interests out in Iowa, we will say. You know about the
condition of the farmer, as represented to us. Now, if you could put
this into operation, what picture could you draw of the farmer in
Iowa a year hence, and what would this do to bring about a better
condition out there ? I ask that as a question.
Mr. SHIBLEY. That is a splendid question. As Congressman Beedy
stated a moment ago, to stablize the price level would supply a
basis, so that the specific problems in connection with the price for
individual commodities can be dealt with intelligently. The Agricultural Committee is trying to ascertain what it should recommend
to correct the prices of individual commodities—corn, cotton, tobacco.
You of this Banking and Currency Committee are considering an
entirely different proposition—the general price level, that is being
regulated as to its height by a Government commission which
regulates the quantity of the people's money and bank credit. That
Government commission, the Federal Reserve Board, should operate
in the direction of stability in the value of money—stability in the
price level for commodities. And the Strong bill proposes that
the law shall instruct for stability in that price level definitely, and
then with a practically stable price level the prices of individual commodities can be dealt with intelligently.
Mr. STEVENSON. Mr. Shibley, there are one or two statements that
you made this morning I want to get back to, in the interest of
accuracy in history. This is a hearing that may be perpetuated.
You stated this morning that the era of falling prices came about
from the contraction resultant on the repeal of the silver purchase
act in 1893.
Mr. SHIBLEY. Yes; that is correct. The era of falling prices in
1894 came about from the repeal of the silver purchase act in 1893.
Mr. STEVENSON. NOW, do you not remember that that era of falling prices began as far back as 1888, and that the result was a reversal in this country; Mr. Cleveland was defeated and Mr. Harrison
was elected because of the contraction that was going on then?
The prices were down to below cost of production. They were shipping horses and selling them by the qarload in my country at $10
a head. That went on until the election of 1892, and it still got
worse and worse, until in 1892 the whole country turned over, and
Mr. Cleveland got nearly all of the electoral votes, because of the
contraction in prices and the tremendous panic that was pervading
the farming interests of this country, and the commercial interests,




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STABILIZATION

too. So that did not begin with the repeal of the silver purchase
act. While I was opposed to the repeal of that act, that did not
begin then.
Mr. SHIBLEY. YOU admit that the silver purchase act was increasing the volume of money?
Mr. STEVENSON. Yes; it was increasing the volume of money; how
much? $2,000,000 a month.
Mr. SHIBLEY. YOU will admit t h a t when that silver purchase law
was repeated it decreased the volume of money?
Mr. STEVENSON. NO ; it did not decrease the volume of money.
Mr. SHIBLEY. I t stopped the increase.
Mr. STEVENSON. I t stopped the increase to that extent; yes—
$2,000,000 a month.
Mr. SHIBLEY. And prices fell, and that was the trouble.
Mr. STEVENSON. Well, but prices had been falling until we had
had two revolutions in politics here in five years, and when Mr.
Cleveland came in on the 4th of Match, 1893, it had gone on until
our gold reserve was so depleted that he had to sell bonds within
30 days after he came in to get gold to keep his gold reserve up.
So that was one of those world-wide things that started with the
• failure of Baring Bros, in London about 1885 and played havoc
for 10 years. So do not let us lay it onto the fact that we cut out
$2,000,000 a month increase. I just do not want that to go unchallenged in this record.
Mr. ALLEN. YOU touched just lightly on Baring Bros. Was it
not generally thought that that was the one that started it ?
Mr. STEVENSON. That was the one that started i t ; the failure of
Baring Bros, in London, with their branches all over the world. I t
was the beginning of a contraction that was very disastrous for a
whole decade.
Now, there is one other matter. You spoke of the increase in
circulating medium and the act of 1900 increasing the national-bank
circulation. T h a t increase only amounted to allowing the national
banks to issue circulation up to a 100 per cent of the bonds which
they had filed that were at par, when they were only issuing 95 per
cent before; was not that it?
Mr. SHIBLEY. And the result was it increased it $700,000,000.
Mr. STEVENSON. Well, that may have been, but I question the
figures. I question very seriously whether 5 per cent of the amount
of the national-bank circulation that was in existence at that time
was $700,000,000; but it may; have been.
Mr. WINGO. Can you furnish the figures to support your statement?
Mr. SHIBLEY. I will bring in the exact figures to you.
Mr. WINGO. I think you are in error either in your percentage or
your amount. How much did you say—$700,000,000?
Mr. SHIBLEY. $700,000,000.
Mr. WINGO. T h a t would be 5 per cent. Ten per cent would be
one and one-half billion; and 100 per cent would be how much ?
Mr. STEVENSON. From the report of the Comptroller of the Currency for 1900 you will see how much national-bank circulation was
outstanding. Do you know positively that it was that much ?
Mr. SHIBLEY. I will bring in the figures.




STABILIZATION

53

The CHAIRMAN. The total amount outstanding at the present time
is something over $700,000,000.
Mr. STEVENSON. Yes; that is all.
The CHAIRMAN. And that is the largest amount that has ever been
outstanding.
Mr. SHIBLEY. W i t h your permission, I will bring in the exact
figures.
The CHAIRMAN. We shall be very glad to have you do it.
Mr. STEVENSON. Mr. Shibley, you are confusing the total nationalbank circulation with the increase of 5 cents on 95 per cent—really
about 6 per cent—which was made by the act of 1900. That is all
that was done by that act. I do not want a whole lot of history to go
in here that is not accurate.
The CHAIRMAN. Thank you very much, Mr. Shibley.
We will now hear Professor Fisher.
STATEMENT OF PROF. IRVING FISHER, PROFESSOR OF ECONOMICS,
YALE UNIVERSITY
The CHAIRMAN. Professor Fisher, do you want to make your
statement without interruption?
Professor FISHER. I would rather do so; but just as you say.
The CHAIRMAN. I would suggest that Professor Fisher proceed
with his statement to the committee without interruption until he
has completed it, and then we will question him in regard to any
angles of it that we may want to know about.
DISAGREEMENTS WITH MR. SHIBLEY

Prosfessor FISHER. I appear here in favor of this bill, but I would
like to begin by saying that I do not agree altogether with the preceding speaker, and particularly in regard to what he said that
impugned the motives of the Federal Eeserve Board. I know those
men—some of them, I think, extremely well—and I want to indorse
what Congressman Luce said in regard to that matter.
I also do not agree altogether in regard to the extent of the power
of the Federal Reserve Board to stabilize the price level. I think
it is ver^ definitely limited, and ultimately will be much more lim^
ited by circumstances than it is to-day.
THREE PROPOSED CHANGES I N THE BILL

I n other words, in the main, I agree with what Mr. Shibley has
said, and favor the bill with three modifications.
I n the first place, I see no reason for that word " minimum " being put in the bill. I think that should be stricken out.
I n the second place, I prefer the wording t h a t Mr. Goldsborbugh
suggested to this committee originally, on December 19, 1922, at the
hearings on the Goldsborough bill for stabilizing the dollar. A t that
time, on page 47 of the hearings, he asked me the following question:
What would be your idea of amending that section—

the section of the Federal reserve act here referred to in the present
bill, subsection (d) of section 14 of the Federal reserve act—
What would be your idea of amending that section to read: "To establish
from time to time, subject to review and determination of the Federal Reserve



54

STABILIZATION

Board, rates of discount to be charged by the Federal reserve banks for each
class of paper, which shall be fixed with a view of accommodating and
stabilizing agriculture, commerce, and business, and preventing deflation and
inflation"?

I think it would be a stronger and at the same time a more elastic
statement if it were put that way; that the object of this bill is to
prevent deflation and inflation.
I n the third place, while I think this bill is a step in the right
direction, I do not think that it will succeed in fully solving the
problem until there is coupled with this credit control, as provided
ior in this bill, also a gold control. As I said in former hearings,
you must have gold control and credit control together, as two legs
to walk with. I will come back to that later.
RESUME OF PREVIOUS TESTIMONY

I will endeavor not to repeat unduly what I have already said,
which some of you have heard, and the rest of you can easily read
if you care to, in the previous hearings (on H. E. 11788, 67th Cong.,
and H . K. 494, 68th Cong.). As a background I will merely recall
to vour minds that I made five points.
fn the first place, we are all subject to a money illusion. If it
were not for that, we would not need this bill to-day. Stabilization
would be taken as a matter of course. I found in 1921, when I
visited Europe, that even with the depreciated and depreciating currencies of Europe scarcely anyone realized that their own money was
changing. Even in Germany, where money had lost 95 per cent of
its value, there was by actual count and examination by me and another economist there, among those that we spoke with, not more
than 1 person in 24 who realized that anything had happened to the
mark. They measured the dollar in terms of the mark, and thought
the dollar had gone up, just as we measured the mark in terms of the
dollar and thought the mark had gone down. Of course, both should
be measured in terms of ordinary commodities purchasing power.
Every country has a money illusion in regard to its own money,
because it is living in that money atmosphere and is unconscious of
it, just as we are unconscious of the pressure of the atmosphere in
which we live and breathe. That is the basis of the whole problem—•
this money illusion—the idea that we have got a dollar that is stable
already. We have not.
I n the second place, I went over the facts as to the instability of
the dollar; that is to say, the instability of the price level. I showed
that prices had changed from 1860 to the present, the price level
jumping from 100 in 1860 to 250 in 1865, down to 67 in 1896, up to
250 again in 1920, down to 138 in January, 1922. and then up and
down somewhat less until now—last week, according to my own index number, it is at 153. Or, putting it the other way around, the
purchasing power of the dollar had shifted in the opposite way, because, of course, it means the same thing to say—relatively speaking,
at any rate—that when prices have doubled a dollar will buy half as
much. The purchasing power of money is cut in two when the price
level is doubled, or when the price level is cut in two the purchasing
power of money is doubled. So, in terms of our pre-war dollar,
either 1860 or 1913—because the dollar is in those two years hap-




STABILIZATION

55

have the
purchasing power
Eened tothat I have same described would be substantially—that same
istory
just
described as follows: In

1860 we had a 100-cent dollar, because you take that arbitrarily as
the starting point. I n 1865 it was a 40-cent dollar; in 1867 it Was a
150-cent dollar. I n 1920, in May, it was again down to 40 cents. It
got up in January, 1922, to 72 cents, and has fluctuated since then,
and last week it was about 65 cents. That is to say, the dollar to-day
will buy as much as 65 pre-war cents bought.
Mr. STEVENSON. By "pre-war," do you mean pre-World W a r or
pre-Civil W a r ?
Professor FISHER. Either one; because the two years, 1860 and
1913, happened, just by accident, to have much the same price level;
within a few per cent.
So the facts are that we have unstable money all over the world.
Of course, we all know that Europe has it. Each country knows less
about the instability of its own money than any other.
I n the third place, I spoke about the causes of this, and showed
that the chief cause of rising prices—that is, of falling money,
falling purchasing power of the dollar—is inflation, and that the
chief cause of falling prices—that is, a rise in the purchasing power
of the. dollar—is deflation; and by inflation and deflation I mean an
increase or decrease of the circulating medium, which may be gold
inflation, paper-money inflation, or credit inflation. Any kind of inflation of the circulating medium will tend—it may be conteracted
by other causes—but it will tend to depreciate our money. I think
there is no reputable economist to-day who does not agree that this
is the great cause. We may disagree among ourselves a little as to
the relative magnitude of other causes. Personally I believe that
this explains at least 90 per cent of all the economic history on the
subject of price levels that we have available in index numbers.
If you want to go into this matter for yourselves—and that is
more my object in coming here than anything else; I take it that
you men are looking for the t r u t h ; you are not here to hector me
or here for fun; you are interested in this as a serious problem—I
.suggest you read the book by Bordes on the Austrian crown. I t is
the finest piece of work in any country of Europe—the monograph
on the history of the Austrian crown—that I have seen. I am in
hopes that other monographs will appear on other currencies of the
world and on that of the United States, but at present I do not
know of anything that goes into the matter historically any better
than this book by Bordes on the Austrian crown. So my third point
is that inflation and deflation are the master keys that give the
explanation of these price movements. Such fluctuations are not primarily a matter of supply of and demand for goods, but currency.
They are monetary matters primarily. Mr. Wmgo is correct that
there are other things that affect the price level. But we must make
a distinction between the price level and individual prices, and we
will make much progress when we get that distinction. The price
level can be affected by deflation and inflation. I do not say that
inflation and deflation are 100 per cent the Cause, but I do say that
in my opinion they are 90 per cent and always have been, and that
the rise in prices during the war was not due to war scarcity of commodities; it was due to inflation; it was due to the increase of credit
and gold in this country. Likewise, in Germany it was not the




56

STABILIZATION

blockade that was the main factor. I t was a factor; but the main
factor was the tremendous volume of paper money printed by the
printing presses of the country and put out through the Reichsbank.
The fourth point I made is that out of this instability of money
grow tremendous evils. Some of you may remember that Dr. Willford I. King, secretary of the American Statistical Association and
one of the investigators of the National Bureau of Economic Research—one of the most able statisticians this country has—stated
before your committee that he believed within the last few years
there has been a loss to some people, offset by gains to others—but an
unjust robbery—through the unstable dollar of at least forty billions of dollars, and I believe he is correct, and the only reason we
do not recognize that is this money illusion.
If you face the fact that the dollar does vary—and it robs us all
the worse because we do not see it take our money—you will get
further along than otherwise. Out of this primary evil of the loss
or unjust transfer of $40,000,000,000 come secondary evils, just because we do not understand them, and one of those very evils, without meaning any offense to Mr. Shibley—but he exemplifies it—is
the ill feeling that comes from misunderstanding and fault finding
and accusations. Whenever there is inflation you will find socialism
thrives, because the socialist, with his suspicious mind, believes that
the great corporations are grabbing, and thus you have the word
" profiteer " and other nicknames applied to people into whose laps
fall the profits which inflation takes away from others; and, on the
other hand, you will find when there is deflation the farmers and
others blaming Rockefeller and Morgan and others personifying
Wall Street as the cause of their troubles when as a matter of fact the
cause is an impersonal one. Out of those unjust accusations that the
creditor class controls the price level, or the debtor class, you have the
evils of distrust and suspicion and *ill feeling and class warfare and
sometimes bloodshed.
Lord D'Abemon, one of the few men in England who has gone
into this matter thoroughly, said in the House of Lords that he
believed 90 per cent of the Bolshevism of Europe was due to unstable money. I believe that is too extreme. I would guess, however, that the larger part of this class warfare that we are so much
afraid of comes out of this instability of money.
This is not a radical measure, therefore, that is proposed here; it
is a way to fight radicalism. I t is one of the most conservative
measures you have had. I t is not a hair-brained dreamer's idea; it
is something that will prevent the kind of upset that they had in
Russia.
I n the fifth place I took up the remedies. At that time we were
discussing the Goldsborough bill, which aimed at the fundamental
remedy, the control of the gold base. This present bill is a much
simpler one and not so ambitious, but it makes a first step in the
direction of real stabilization.
THE RECENT STABILIZATION MOVEMENT

Supplementing the foregoing five points I want to add to what
I told you, the last time I was here, a few remarks concerning the
movement toward stabilization.




STABILIZATION

57

In the first place I should like to emphasize again what has
already been referred to by Mr. Shibley, the Genoa Economic Conference, in 1922. Thirty-one nations there unanimously passed resolutions, which Mr. Shibley read to you, two of which related to the
subject of stabilization and recommended the very thing that is
being proposed in this bill, and almost exactly the same method of
attaining that object. They said that in order really to have stable
money in Europe it was recognized that you should have not only
a stable exchange—not only that the mark and pound sterling be in
a standard ratio to each other again, but that they should be stable
in relation to commodities—that the "internal" purchasing power
of moneys should be stabilized. Another resolution stated that this
should be done through the central banks controlling their gold reserves and exercising their credit control so as to prevent undue inflation or deflation.
I regard the action taken at the Genoa conference as the most
outstanding of the many events which, if there were time, I could
go over with you, working in the direction of stabilization of prices,
and I have crossing my desk almost every day some new evidence that
in Europe and in this country people are waking up to the evils
of unstable money, and to the fact that it must be stabilized.
I believe ultimately we will have a genuine stable money level,
because to stabilize the dollar is the same thing as to stabilize the
price level; to stabilize the price level is the same thing as to prevent deflation and inflation. Those are simply different ways of
saying the same thing. I have not the slightest doubt but that we
shall have that all over the world, and we can not avoid it because
people are waking up.
Mr. WINGO. Professor Fisher, will you repeat what you just said ?
I did not quite catch it.
Professor FISHER. TO stabilize the dollar is the same thing as to
stabilize the price level, and to stabilize the price level is the same
thing as to prevent deflation and inflation.
The evils of the farmers to-day are the left overs of the deflation
of 1919 and 1920, more than any other factor; at least I think 50
per cent of the evils of the farmer come from that. The farmer was
one of the most sensitive to that deflation and one of the slowest to
get over it. However, I do not regard this as class legislation. I
am against all class legislation. I should not like to help the farmer
at the expense of other people. This is general legislation for the
welfare of everybody. It just happens that to-day the farmer is
suffering more than the others, but I should not like to have the
price level fixed in the interest of the farmer altogether. I t should
be fixed in the interest of everybody.
A second step in the progress of stabilization is a little one. You
may have noticed the Philadelphia Rapid Transit Co. has recently
tried to stabilize the wages they pay, and they are getting up a
special index number of the cost of living in Philadelphia for
people with incomes such as their employees have; and hereafter
the Eapid Transit Co. of Philadelphia will have all their employees
paid according to that index number. This is a method of correcting
the stability, and not preventing it. After the instability is shown
this index number is used to make an adjustment. Of course you




58

STABILIZATION

know that was done by the W a r Labor Board during the war and
in Europe, especially, affecting some millions of employees in England alone. This is the first time since we have gotten adjusted
after the war that any great company, as far as I know, has taken
this up, and they have gone into it from a scientific standpoint.
A third step worth mentioning is the use of a " stabilized bond."
This is a copy of a stabilized bond issued by the Kand-Kardex Co.
I was concerned in this, although it was not at my own suggestion
that the bond was gotten up in this form. I t was the suggestion of
Mr. James H . Kand, jr., who is president of the Rand-Kardex Bureau, which now includes the Library Bureau, the Globe-Wernicke
Co., the Safe Cabinet Co., and some others, including my own former
company, the Index Visible. The Index Visible is a company I
started myself which merged with these others, and Mr. Rand suggested that the stabilized bond should be exchanged for the preferred stock of the Index Visible. He asked me if I would t r y to
work out such a bond, and here it is. I worked it out with the aid
of a lawyer, Mr. Franchot, of Buffalo. Some of you may be interested in it, and I will pass it around.
I have been asked to explain it before law schools and others,
because it is different from other instruments of this sort, and lawyers scarcely know what to make of it. I t is a scheme whereby the
man owning the bond, instead of getting $50 per year, of uncertain purchasing power, will get enough money to buy what $50
would buy to-day, and so, if the price level went up twofold he
would get $100, and if the price level was cut in two, he would get
$25. The United States Department of Labor index number is used.
As you doubtless know, and as I shall show later, bondholders
have been particularly hard hit, and in Europe particularly. Professor Harmack, of Germany, the great theologian, is now penniless
because his fortune was invested in bonds, supposed to be the safest
thing possible. That does not mean that there were defaults in the
bonds, but the purchasing power of the mark dropped 99 per cent
and more. This man had several hundred thousand marks invested
in bonds, but they are practically worthless for the purchase of
bread and butter to-day.
The CHAIRMAN. Without objection, we will put this bond into the
record.
(The bond referred to is as follows:)
UNITED STATES OF AMEBICA,
STATE OF DELAWARE

No. M.

$1,000
RAND KARDEX CO. (INC.)

7 per cent 30-year stabilized debenture bonds
[Registered and safeguarded as to purchasing power of both principal and interest]
Band K&rdex Oo. (Inc.), a Delaware corporation, hereinafter termed the
" company," for value received, hereby promises to pay to the registered holder
hereof on the 1st day of July, 1955, at the principal office of the Buffalo Trust
Co., in the city of Buffalo, State of New York, such sum of money as shall
possess the present purchasing power of $1,000, with interest thereon at the rate
of 7 per cent per annum, payable quarterly on January 1, April 1, July 1, and




STABILIZATION

59

October 1, in such sums as shall at the respective times of payment equal in
purchasing power of 1.75 per cent of said purchasing power of $1,000, all to be
based upon an index number of the prices of commodities defined and fixed
in accordance with the amplified statement below.
The company declares that it is its intention, by this obligation, to afford
the holder hereof a steadier income in terms of real purchasing power than
that obtainable from any other form of obligation, by providing herein for the
increase or decrease of the sums of money payable hereunder when the purchasing power of the dollar falls or rises, in the sense that the index number
of the prices of commodities rises or falls.
This bond is one of a duly authorized issue of bonds of the company known
as its 7 per cent 30-year stabilized debenture bonds (hereinafter referred to
as the "bonds") limited to the aggregate principal amount of $500,000 in
present purchasing power, issued and to be issued under a trust indenture
dated July 1, 1925 (hereinafter called the "indenture"), duly executed by the
company to the Buffalo Trust Co., of Buffalo, N. Y., as trustee (hereinafter
called "trustee"), to which indenture and indentures, if any, supplemental
thereto, reference is hereby made for a statement of the rights and remedies
of the holder hereof.
Subject to the provisions for registration hereof this bond is intended to
have, to the extent permitted by law, all the characteristics of a negotiable
instrument, and the principal and interest will be paid without regard to any
equities between the company and the original or any intermediate registered
holder or holders hereof.
At the option of the company all of said bonds, or any part thereof, may
be redeemed on any quarterly interest payment day prior to maturity, upon
at least 60 days' notice in writing to the registered holder hereof, as provided
in said indenture, at the principal amount and accrued interest, together with
a premium of 3 per cent of the principal amount if redeemed on or before
July 1, 1935; or with a premium of 2 per cent of the principal amount if
redeemed after July 1, 1935, and on or before July 1, 1945; or with a premium
of 1 per cent of the principal amount if redeemed after July 1, 1945, and on
or before April 1, 1955. The amount to be paid upon any such redemption,
both as to principal and interest, shall be determined in accordance with the
provisions hereof in respect to the fixing of the payments to be made in
accordance with the purchasing power of the dollar at the time of payment.
If less than the total number of bonds issued and outstanding under said
indenture are to be redeemed as aforesaid, the particular bond or bonds so to
be redeemed may be determined by the board of directors of the company.
In case of certain defaults specified in said indenture, this bond and all
other bonds of this issue may be declared and may become due and payable in
the manner and with the effect provided in said indenture.
This bond is transferable only by the registered owner in person or by his
duly authorized attorney, upon the books of the company, maintained and kept
for that purpose at the principal office of the trustee in the city of Buffalo,
N. Y.
No recourse shall be had for the payment of the principal of, or interest on,
this bond, or for any claim based thereon, or otherwise in respect thereof, or of
said indenture against any incorporator, stockholder, officer, or director, past,
present, or future, of the company, or of any successor corporation, whether by
virtue of any constitution, statute, or rule of law or equity, or by the enforcement of any assessment or penalty or otherwise, such liability being by the
acceptance hereof, and as part of the consideration of the issue hereof, expressly released.
This bond shall not become obligatory until it shall have been authenticated
by the execution by the trustee of the certificate hereon indorsed.
The United States internal revenue documentary stamps required by act of
Congress approved November 23, 1921, have been affixed to said indenture.
AMPLIFIED STATEMENT OF METHOD OF F I X I N G A M O U N T S TO BE PAID A S PRINCIPAL
A N D INTEREST HEREUNDER

The index number of the prices of commodities employed hereunder shall
be the well-known index number of wholesale prices of the United States
Bureau of Labor Statistics as published each month, subject to such modifications and amplifications and changes of method in making and computing the
same as shall or may be made by said bureau from time to time.




60

STABILIZATION

If as of any due date the index number of the prices of commodities shall
remain at approximately the present level—that is to say, if it does not rise
or fall as much as one-tenth part of the level fixed as of July 1, 1925, i. e.,
157.5—then the amount to be paid as principal shall be $1,000, and the amount
to be paid as interest on any quarterly interest date shall be $17.50.
In case the index number as of any due date shall be found to be more or
less than that fixed for July 1, 1925, by as much as one-tenth part of said
index number of July 1, 1925, then for every full one-tenth rise or fall of
said index number there shall be added of subtracted, respectively, one-tenth
of the payment then due, said one-tenth being $1.75 for any quarterly payment of interest and $100 for the principal sum.
The index number measuring the present price level as of July 1, 1925,
shall be the average of said index numbers for the three calendar months
preceding July 1, 1925, which have been published on or before July 1, 1925,
namely, the index numbers for March, April, and May of 1925, which average
is 157.5 on the basis of 100 as representing the 1913 price level.
The index number measuring the price level as of July 1 of any other year
hereunder shall be the average of the said index numbers for March, April, and
May of such other year, and the index number as of October 1 in any year
shall be in like manner the average of the said index numbers for the preceding
June, July, and August, and the index number as of January 1 in any year
shall be in like manner the average of the said index numbers for the preceding September, October, and November, and the index number as of April 1 in
any year shall be in like manner the average of the said,index numbers for
the preceding December, January, and February.
Since one-tenth of the normal quarterly payment, i. e., $17.50, is $1.75, and
since one-tenth of 157.5, i. e., the index number as of July 1, 1925, is 15.75,
the application of the foregoing principles may be illustrated by the following
tabulation:
(a) The quarterly payment at any due date shall be $17.50 if the index
number as of said date shall lie between 141.75 and 173.25.
(&) The quarterly payment at any due date shall be—
$19.25, if index is as large as 173.25, but not as large as 189.00
21.00, if index is as large as 189.00, but not as large as 204.75
22.75, if index is as large as 204.75, but not as large as 220.50
24.50, if index is as large as 220.50, but not as large as 236.25
26.25, if index is as large as 236.25, but not as large as 252.00
28.00, if index is as large as 252.00, but not as large as 267.75
And so forth for still higher price levels.
(c) The quarterly payment at any due date shall be—
$15.75, if index is as small as 141.75, but not as small as 126.00
14.00, if index is as small as 126.00, but not as small as 110.25
12.25, if index is as small as 110.25, but not as small as 94.50
10.50, if index is as small as 94.50, but not as small as 78.75
8.75, if index is as small as 78.75, but not as small as 63.00
7.00, if index is as small as 63.00, but not as small as 47.25
And so forth for still lower price levels.
(d) Likewise the principal sum at maturity shall be $1,000 if the index
number as of such date of maturity shall lie between 141.75 and 173.25; it
shall be $1,100 if the index number as of such date is as large as 173.25 but
not as large as 189.00, etc., for still higher price levels; it shall be $900 if
the index number is as small as 141.75, but not as small as 126.00, etc., for
still lower price levels. The same results would apply on redemption dates,
if any, with the addition of the premiums above specified.
In case the United States Bureau of Labor statistics should discontinue
the computation and publication of its said monthly index number of wholesale prices, or the publication thereof should be delayed so as to precent its
use hereunder, there shall be substituted therefor by the trustee, as specified
more fully in said indenture, such other index number or method of ascertaining changes in the price level as resembles, in the opinion of the trustee,
most closely the index number and method of arriving thereat of said bureau.
Unless otherwise directed in writing by the registered holder hereof, the
company will mail checks to the registered holder hereof covering the quarterly interest payments addressed in accordance with the registered holder's
post-office address, as it appears on the books of the company.
Certain of the provisions of the said indenture may be amended by the written consent of the company and of the holders of 80 per cent of the principal




61

STABILIZATIOK

amount of the bonds of this issue then outstanding, given in writing or at
a meeting of said holders as provided in said indenture.
In witness whereof the company has caused this bond to be signed by its
president, or by a vice president, and its corporate seal to be hereunto affixed
and attested by its secretary, or assistant secretary, as of the 1st day of
July, 1925.
[ SEAL. ]

By

BAND KARDEX CO.
,

(INC.),

President.
Attest:
— —
— —

,
Secretary.

No. M

$1,000

BAND KARDEX CO. (INC.) 7 PER CENT 30-YEAR STABILIZED DEBENTURE BOND

Principal due July 1, 1955; interest payable January 1, April 1, July 1, and
October 1.
Principal and interest payable at Buffalo Trust Co., Buffalo, N. Y.
TRUSTEE'S CERTIFICATE

This bond is one of the issue of bonds described in the within mentioned
indenture.
BUFFALO TRUST CO., AS TRUSTEE,

By
By

,
Vice President.
,
Assistant Secretary.

[No writing hereon except by an officer or agent of the company]
Date of registry

In whose name registered

Registrar

M r . STEVENSON. I f those G e r m a n b o n d s h a d been m a d e p a y a b l e
i n m a r k s , consisting of gold of a c e r t a i n w e i g h t , fineness, etc., t h a t
w o u l d n o t h a v e o c c u r r e d , w o u l d it ?
P r o f e s s o r F I S H E R . T h e y w o u l d h a v e lost t h e n a b o u t 30 o r 35 p e r
cent, i n s t e a d of 99 p e r cent o r m o r e .
I n t h e f o u r t h place I w a n t t o m e n t i o n t h e w o r k t h a t h a s been
d o n e recently by several business m e n i n r e g a r d t o t h i s m a t t e r of
b o n d s a n d stocks a n d p a r t i c u l a r l y to t h e w o r k of M r . E d g a r S m i t h ,
a l e a d i n g b r o k e r a n d a business m a n of N e w Y o r k C i t y , w h o w r o t e
a book recently called " C o m m o n Stocks as L o n g T e r m I n v e s t m e n t s , "
i n w h i c h h e w e n t i n t o t h e t h i n g c a r e f u l l y a n d statistically, a n d
showed t h a t b e t w e e n 1916 a n d 1920 b o n d h o l d e r s lost m o r e i n dep r e c i a t i o n of t h e d o l l a r t h a n t h e y g a i n e d i n interest. T h e y lost
t w o - t h i r d s of t h e i r p r i n c i p a l , w h i c h m o r e t h a n offset all t h e interest
t h e y received. I f a n y o n e h a d t r i e d t o g e t r i c h like H e t t y Green,
b y l e n d i n g m o n e y , d u r i n g t h i s p e r i o d h e w o u l d h a v e lost m o n e y ;
a n d w h a t t h e b o n d h o l d e r h a s lost t h e stockholder h a s gained.
W e call those people profiteers w h o t o o k i n t h e profits t h a t t h e
b o n d h o l d e r lost t h r o u g h t h i s d r o p i n t h e p u r c h a s i n g p o w e r of t h e
dollar.
93869—27—PT 1




5

62

STABILIZATION

Kenneth Van Strum, a writer in Barron's Magazine, went over
the same matter in much the same way and came to the same conclusion. I have gone over the works of Smith and Van Strum
and put their findings in a way I like better. I called by article
" When are gilt-edge bonds safe ? "
I also call your attention to another article of mine, " Stocks
versus bonds," on the same subject, that appeared in the American
Review of Reviews.
A fifth event of importance, showing how people are waking up
.to this subject, is the appointment of a committee on stabilizing the
dollar by the Investment Bankers' Association. The chairman of
that committee is Lawrence Chamberlain, one of the leading investment bankers of the country, and he has a very strong committee of
five, which is quite in earnest in trying to see what is the best
method of stabilizing the dollar. They will doubtless want to appear some day before your committee, and you men want to be
ready to find out whether this bill of Mr. Strong or the one of Mr.
Goldsborough is the best solution of the matter. The problem has
got to be solved. The investment bankers are not pleased with the
idea of selling " gold bricks " to the public, but that is what they
have been doing, without any responsibility for it.
I n the sixth place I would like to call your attention to an
investigation of my own which applies to some of the points and
questions of Mr. Wingo. This article is the last of a series I wrote
for the American Statistical Journal. I t is called " Our Unstable
Dollar and the So-Called Business Cycle." On page 188 of the
Journal I have shown the relation between rising and falling prices
and the volume of trade. I have shown that there is a very high
degree of correspondence between those two things, that when
prices are rising business will be good a few months afterwards, and
when prices are falling business will be poor a few months afterwards. Of these two curves [exhibiting] one gives the volume of
business as it actually was, according to the committee on economic
statistics of Harvard, and the other gives the figures as they would
be if the influence of the instable dollar were the only influence.
The figures are shown there, and the slight differences in the two
curves are due to other influences than that of instability. If you
will glance at the two curves you will see the strong correspondence
between them.
I have recently published, or am about to publish, for the International Labor Office, in Geneva, a study of the relation of price
changes—that is, appreciation and depreciation and unemployment—and I find the same thing is true. You have unemployment
following deflation quite regularly. Of course, you remember the
unemployment following the deflation in this country of 1920 and
1921, and the same thing has happened in England and in Norway
and in Czechoslovakia. Wherever we have index numbers to show
the changes in price levels and statistics of unemployment, we find
this relationship between instability of money and unemployment.
The seventh point I would like to mention in this discussion is
the growing number of resolutions in favor of stabilization, calling
upon Congress, or the Federal Eeserve Board to stabilize. One of




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63

these recently—only the other day—was by the Chamber of Commerce of Paterson, N. J . Another was by the Farmers' Institute, of
Illinois, at the institute meeting at Quincy, 111., about a month ago.
T H E H I S T O R I C A L BACKGROUND OF T H E FEDERAL RESERVE ACT

Before discussing this bill more definitely, I want to get its historical background before you, in reference to the Federal reserve
act, and establish how it was enacted and how it is operated. I want
to say, in the first place, just as a plain matter of fact, what J . Maynard Keynes says in the introduction to his book on Monetary Reform, which is one of the books on stabilization in England, that
bankers in general do not know their own subject of banking in its
public aspects. A banker may be an extremely successful banker
and know on which side his bread is buttered, and he may know
where to extend credit and he may be a good judge of men and have
a good organization, etc., and yet fail completely to understand the
public implications of his actions and particularly the effect of his
extensions or restrictions of credit on price levels.
If that were not so, we would not have that $40,000,000,000 loss
that Mr. King spoke of before this committee. One reason for that
is that in this country we have had individual banks, without any
responsibility to the country as a whole. Thousands and thousands
of banks have been operating, and you could not expect any concerted action between them to maintain a stable price level. I n England, where they have had the Bank of England for centuries, they
have come to consciousness of public policy, and so the Bank of
England has accepted a sort of mandate of public opinion to look
out for the general interests of England without looking merely to
the private interests of the shareholders, and, among others, they
have accepted the responsibility of influencing the price level, of
making the price level in England harmonize with the price level
outside of England. You will find that definitely stated in the Cunliffe reports, and it has been the practice of England for a long
time.
When the Federal reserve system was established, there was this
tradition of individually operated banks, with thousands and thousands of them, and no central bank. Back in the days of Andrew
Jackson we had a central bank which was abolished almost before
it was established and before there was any knowledge of price
levels or index numbers or anything of that sort. I t is quite likely
that very few then understood the necessity of stable price levels
and their connection with banking policy. So I am not at all surprised, when a provision was put in the original Federal reserve
bill by Senator Owen, for stabilizing the price level, similar to what
is now being proposed by this strong bill, that it was stricken out.
I t is exactly what one would expect, with the lack of understanding
of the situation which existed at that time.
Governor Harding said—partly because he realized how the general public regarded these things and partly b?cause the Federal
reserve act lacked just what this bill would put back into it—when
people were beginning to talk deflation to him and asking him to




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deflate or not to deflate and criticising him for the inflation of
1920—that the Federal reserve system had nothing to do with prices
but only had to do with sound banking. By this he meant that the
bank statements as to liabilities and resources, etc., should be kept
in order. But sound banking, to my mind, includes a policy that
will avoid those tremendous evils of inflation and deflation which
have cost this country, or some of it, that $40,000,000,000.
TWO MISTAKES OF THE FEDERAL RESERVE SYSTEM

Two tremendous mistakes were made because of the lack of this
provision in the Federal reserve act. (1) The postwar inflation
and (2) the deflation that followed. Whatever I might say in regard
to inflation during the war—and much can be said to excuse it as it
was more important to win the war than to maintain a stable
dollar—certainly we can not justify that postwar inflation that
started soon after the armistice. I was a terrible, terrible mistake.
W h y did it happen ? I have not read this book of Governor H a r d ing's fully, but judging from what I have seen of it and heard and
read of it in reviews, it virtually places at least a part of the responsibility for that inflation on the Federal Beserve Board in
that they refused to raise the rediscount rate, the excuse being the
pressure brought to bear by the Secretary of the Treasury.
The CHAIRMAN. What is that book?
Professor FISHER. The " Formative Period of the Federal Keserve
System," by W. P . G. Harding. The excuse given for the deflation
of 1920 and 1921 is the pressure brought upon the Federal Reserve
Board by public opinion and by the McCormack resolution in the
Senate for deflation and by the bankers. Please understand I am
not one of those that intend to malign anyone for that. I think
the trouble was that these men did not realize the tremendous evils
that would come from allowing either deflation or inflation.
As to the inflation, there was the Overman Act^ which gave the
President power to take out of the control of any board or bureau
any particular task and put it in some other hands; and judging
from what this book says, it was the fear that that might be applied
giving to the Secretary of the Treasury the whole power to run
the Federal reserve system, that the Federal Beserve Board permitted itself to yield to the pressure of the Secretary of the Treasury.
I believe it was a mistake.
Mr. STEVENSON. Why was that pressure brought to bear ?
Professor FISHER. I n order that the Victory Loan might be sold
at a low rate of interest. Of course that is a good object and illustrates what I mean. These men who have been in charge of the
big affairs of the country often do not realize the economic results of
their actions. The Secretary of the Treasury undoubtedly had the
best intentions.
Mr. STEVENSON. That was done by Secretary Glass, who was then
in charge and who was insistent that they should not begin to contract. Leffingwell was the man who ran it.
The CHAIRMAN. Doctor Fisher, in that connection, my view has
been—and the opinion I had at that time was—that there was an
undue amount of fear as regards the flotation of that last Victory




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65

loan. That was one of the controlling elements that entered into
treasury domination. My own view of that is that they were in
error as to the state of public sentiment. Patriotism was at a high
point then and had the situation been known the public would have
responded and purchased those bonds no matter what rate of interest was paid.
Mr. BEEDY. I make a point of order that the chairman has violated the very rule he asks us to observe—not to interrupt the
speaker.
The CHAIRMAN. The point of order is sustained.
Mr. STEVENSON. Here is a question I should like to ask about this
bond: How do you meet the usury laws of the United States ? Here
is a fellow who has borrowed $1,000 and the index rises and he has
to pay $1,200 when he comes to pay it, and some of the rises exceed
the amount of interest which the law permits him to establish.
The CHAIRMAN. The question arises also as to how you are going
to correctly state an obligation of that kind in your statement of
assets and liabilities.
Professor FISHER. YOU might be interested in my general description of that, as published in The Annalist of New York, which
answers one of your questions.
A WELCOME CHANGE IN POLICY OF THE FEDERAL RESERVE SYSTEM

I had gotten to the point of saying that I think the Federal reserve
act was passed without due understanding, on the part of those who
passed it and of those who operated it, as to the tremendous importance of preventing inflation and deflation. The Federal Reserve
Board learned, by bitter experience, the consequence of this inflation
of 1919 and 1920 and this deflation of 1921. Also, I hope they have
learned that you can not cure deflation by inflation, or inflation by
deflation. Reginald McKenna stated that, and you know who he
is—former Chancellor of the Exchequer of Great Britain and chairman of the London Joint-City and Midland Bank—he has emphasized it—that both are evils and the only cure for both is stabilization. Therefore, with these lessons before them, the Federal Reserve Board has been doing, without any specific authority beyond
the phrase in the Federal reserve act, " accommodate commerce and
business," practically what is being proposed in this bill, and you
will find an article on this, in such terms, in the Harvard Business
Review of April, 1924, by Waddill Catchings and W. T. Foster, two
men who have collaborated in producing several important works
lately on this general subject.
I am here not to criticize the Federal Reserve Board; on the contrary, I think we owe them a debt of gratitude that can scarcely
be measured. I do not blame them for the mistakes they have made,
partly because of the excuses Mr. Harding has given and partly
because it was a new machine and they did not understand the general theory of running it. Having learned their lesson they are
anxious that we should never again go through such a period of inflation and deflation and, while they have not been specifically stabilizing the dollar, they have not been disobeying the law. On the
contrary, they have been carrying out the spirit of the law to prevent




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STABILIZATION

the occurrence of deflation and inflation. I say, more strength to
their elbow. I say we should recognize the tremendous debt of
gratitude we all owe to them for giving the dollar a more or less
fixed purchasing power of 64 prewar cents for the last four years;
not that they have done it altogether, but they have really tried
to prevent any great deviation in the purchasing power of the dollar,
and if they had not done that, but had adopted the old individualistic banker's position, " W e are here to make money," you men know
what would have happened. We would have had a price level 75
per cent above what it is, and a repetition of 1919 and it might have
culminated in the same way.
Something has been said in regard to the present situation being
favorable to the stock market. I want to say in that regard that,
while the price level of stocks is high, it is not as high as it seems,
by 30 or 35 per cent, because of this very factor of unstable money.
I n order to compare the present level of the stock market with the
prewar level, you have to take account of the fact that we have a
63-cent dollar to-day compared with a 100-eent dollar in 1913.
Mr. Rand, whom I have quoted and who instigated this bond, has
written two articles on that subject, and Secretary Mellon, you may
have noticed, also stated in an article recently that the stock market
is not as high as it seems, on account of the fact that the purchasing
power of the dollar is low compared with what it was. I publish a
weekly index number of stock-market prices, as well as one of commodity prices, and the index two or three weeks ago, when the peak
was reached, was just about the same as two pre-war peaks, when
you translate and correct for this change in the purchasing power of
the dollar. A great many people who are afraid of disaster to-day,
and think there is an unsound position in Wall Street, would not be
afraid if they realized that.
Then the situation is this: The Federal Reserve Board is already
doing, in a certain diffident sort of way, what this bill proposes.
They would not admit they are stabilizing the price level or stabilizing the dollar, and they have not any index they will stick to, and I
do not think that any index should be imposed upon them, but they
are, to a certain extent, doing this very thing, preventing inflation or
deflation. This bill, if passed with the amendments proposed by Mr.
Goldsborough and which I have read, would authorize and direct
the Federal Reserve Board to do what they are doing and commend
them for doing what they have been doing, and prevent them from
being tempted by any interests in this co'untry from doing otherwise. They could then say, " The law says we shall not have deflation or inflation."
RESERVE BOARD POWERS ARE LIMITED

But you must not think that you can go as far as you like in forcing them to stabilize because they can not deliver the goods absolutely. They have not the power Mr. Shibley seems to imagine.
They can only do it to a certain extent, and I do not think you
should give them too much of a task, unless you give them, at the
same time, more power than they now have. While I think some
restrictions should be put on—and I regard this as a restriction. I t




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67

is certainly not giving them any more power, but is specifying how
their present powers shall be used. I think that during this experimental period particularly they should not be tied too hard.
If you now merely say, as this act says, " We do not want any great
inflation or deflation," people will say, "Amen. We have had those
calamities and we remember them; we want no more of them." But
I think a few years from now you will have to go further and pass a
real stabilization act. By that time we shall have completed the postwar adjustments and we won't have the quarrels there are now, and
you may be able to say, " Let us completely stabilize conditions." If
you had tried four years ago to do this, at the price level as it was
then, 138, you would have had one of the biggest fights politically
and economically you ever had in this country. If you should precipitate it now, you would have less disagreement, and in a few years
there will be no disagreement at all.
The proposed act would leave a great deal of discretion with the
reserve authorities, but not as much as they now have. They have
too much now. I think it is a dangerous situation, as much as I trust
these men.
There is a magazine in New York that has criticized the Federal
Reserve Board for doing this thing, saying they have no authority to
prevent inflation, that they should lend out all the money they have
got. If they should do that, you would have a repetition of 1919 and
1920.
Now, Mr. Chairman, I do not know whether I am spinning this out
too thin. I have a lot more to say.
Mr. WINGO. I think you had better take your full time. Mr.
Chairman, I think we should give him every opportunity to elaborate in his statement. Personally I think this is a very important
matter and his statement is very interesting. He knows his subject
and I think he ought to be allowed to proceed at length.
The CHAIRMAN. I think so, Professor.
STABILIZATION IS NOT PRICE FIXING

Professor FISHER. Very well; I shall take up the point, Mr.
Wingo, that you have been talking about, as to whether this is price
fixing. I t is not price fixing in the objectionable sense that you have
in mind. I t is no more price fixing than what we already have. We
do now fix the price of gold. I t is $20.67 an ounce, which is another
way of saying our gold dollar consists of 23.22 grains of pure gold.
Now, the changes in the supply of gold since 1837, when the weight
of the dollar was fixed, have changed the value of gold. Sometimes
up and sometimes down, yet the price remains the same. So we
do already have a certain price fixing—gold price fixing—and you
can not get away from it, if you have a fixed gold standard. People
say, " Of course the law fixed the price at $20.67 because there are
23.22 grains in the dollar, and how else can you have a gold standa r d ? " The Goldsborough bill shows how. But that is not before
you now. Even that bill is not any more price fixing than you have
got now. I am prejudiced against price fixing just as much as
anybody is. I was won over to giving assent to it during the war,
but I am not sure now that I ought to have assented even then.




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Certainly in peace time I am very much against it, and I dislike
these farm relief measures which involve the matter of price fixing,
much as I sympathize with the farmer. That is my personal attitude
and I want to emphasize it. This bill is not price fixing; it is a
step toward stabilization of the general level of all prices—which is
a very different thing. The price of gold fixes the standard to-day.
I t fixes it by tying the dollar to the weight of gold. W h a t the
Goldsborough bill would do would be to tie it to the purchasing
power of gold. The present bill, introduced by Mr. Strong, by an
attempt to control credit, is an attempt to fix the general price level,
but not to fix specific prices. I t does not fix the price of wheat or
of beef or of any other commodity. I t merely fixes the general
average price level, and I would like to emphasize the fact that it will
leave the law of supply and demand just as free as it is to-day as
regards individual commodities; in fact, freer.
Anything that now affects the supply of and demand for hogs will
affect the price of hogs either under this bill or under the Goldsborough bill, but with stabilization in effect this price will not be
mixed up with inflation or deflation, and the two things ought to be
entirely distinct. I n other words, in every particular price there are
two factors, the factor of supply of and demand for that particular
commodity and the factor of inflation or deflation. The only place
that I know of where that has been brought out explicitly in popular
understanding is in Germany. When I was there, in 1921,1 got into
a taxicab and when I got through I looked at the meter and it read
" 2 marks," I think it was. I thought that was the cheapest ride
1 had ever had, but I supposed it was right and I offered the driver
2 marks. " But," he said, " you must multiply that by 25." I n other
words, that was a corrector, due to inflation. He was not getting 25
times the fare he was getting before the war; he was getting the same
price in real value, but in order to get it, he had to get 2 marks
multiplied by this factor, 25. Later on I found the same thing was
done in the restaurants, so as not to require the reprinting of the
menus every day. They would say a dinner is 8 marks or a breakfast
is so much, and when you came to pay for it, you were handed a little
slip which showed the day's " multiplicator." I t would indicate the
number by which you should multiply the price on the menu, and
that " multiplicator " was changed every day. Everybody recognized
that this varying " multiplicator " represented a great evil and that
it ought to be fixed, but to fix it would not be fixing the price of the
dinner. I maintain, Mr. Wingo, that the real price of food and
lodging there consisted of two factors, the " multiplicator " and the
supply and demand factor. The " multiplicator" was the money
factor, and whether you have it as explicitly as it was there, so that
you can readily see it or not, nevertheless, it is always there, so long
as you have instability of money or deflation or inflation.
A n index is not an average price; it is an average price ratio or
" relative." You do not take the average price of cotton, wheat, etc.,
but you take the average percentages of change in those prices. I t
is an abstract number; not so many dollars per unit, but an abstract number. And so the price level is a different kind of thing
from prices. I t is a wholly different kind of thing, it is a " multiplicator." I t is a pure, or abstract, number, separate and apart from
the supply and demand factor. This bill is not trying to fix prices;



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69

ft is not a price-fixing scheme at all. I t is an attempt to fix a price
level, or scale, an index number, a " multiplicator." I like that word
" scale " better than " level." You know if you have a drawing you
may have it on different scales. You may look through a magnifying glass and it looks bigger or a reducing glass and it looks smaller.
So we are not proposing to change the price of hogs, wheat, or cotton relatively to other prices, but this scale of prices is to be prevented from changing. When you have inflation or deflation you
change the scale of prices. I n Germany, as you know, this scale
went up a hundredfold, a thousandfold, a millionfold, and up to
three trillionfold. Inflation did not change the real prices—the
drawing—but it did change the price level—the scale. I wish we
could get rid of the phrase " price level." I t is not a price, but it is
a scale. I am just as much a believer in supply and demand as any
one can be and I want it as free as possible, untrammeled by the
Government or any other agency, but I do believe we must have the
general purchasing power of the dollar—the scale of prices—the
level of prices, fixed.
To stabilize the price level, or price scale, is simply to fix the
" multiplicator," so to speak, not to fix the price of a dinner. The
hotel keeper is free to fix that as he finds expedient but the " multiplicator " should be fixed for him.
The two are separate and distinct—the individual prices on the
menu and the price scale, or multiplicator, which applies to all alike.
And the forces which determine the individual prices on the menu
are distinct from the forces which determine the price scale. Supply of and demand for food and rooms determine the individual
prices while inflation and deflation of money and credit determine
the scale of prices applicable to all alike. This distinction applies
in America as well as in Germany. I am against price-fixing which
would interfere with the supply and demand for individual commodities, but in favor of fixing a stable level or scale of prices or,
in short, of stabilizing the general purchasing power of the dollar.
THE LIMITATIONS OF THE FEDERAL RESERVE

Now, I want next to take up the limitations in the powers that
the Federal reserve authorities have. But first let us look at the
present situation.
I n the first place, we have a superabundance of gold. We have 75
per cent reserve of gold when we need only 35 or 40 per cent under
the reserve act. There are various other conditions that combine
with that to make the present situation peculiar and to give the opportunity to the Federal reserve system, to-day, to affect or partially control the price level or price scale, which ordinarily they
would not have. If that gold should cease to be superabundant,
then that legal limitation of 35 or 40 per cent would come into play
and you could not stabilize without disobeying the law or changing
the law or suspending the reserve provisions. I think that must be
obvious. Suppose the reserve supply of gold was down to 35 or 40
per cent and you decide to prevent a fall of prices by lowering the
discount rate. That would mean that there would be extensions of
credits by banks, and rediscounting by these banks with the reserve
93869—27—PT 1




6

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STABILIZATION

banks, but the reserve banks would not have enough gold to allow
them to extend these credits without breaking below the 35 and 40
per cent figure. They might have to come down to only 25 per cent
reserve to keep the price levels from dropping, and bankers might
then become alarmed and would object.
Thus, even if you pass this bill, you have not fully solved the
problem. I t might work for 10 years, or 20 years, or longer, but at
some time it may bump against that limitation, where the gold fund
will not be sufficient to furnish the base for the credit required.
Then you will have to go to the Goldsborough bill for a solution.
Mr. GOLDSBOROUGH. What is that again, Professor?
Professor FISHER. The Federal reserve banks have about two
times the gold they need to keep on a 35 or 40 per cent basis, and
so the Federal reserve system must and should, as they do, more or
less ignore the usual reserve ratio rule. If they should try to extend
credit sufficient to utilize all their present reserves on a 35 and 40 per
cent basis, they would make a great inflation, and prices would skyrocket. They ought not to do that. So that under present conditions they can stabilize the price level without disobeying the law, or
the rule as to that gold reserve, because they have so much gold.
But suppose 10 years from now they should not have that gold; suppose the reserve gets down to 35 per cent or so; and suppose we must
have more credit or currency in order to maintain the price level.
The bankers would then ask for credit from the reserve banks, and
they would have to say they could not give it because the reserves
were at their low limit. So the system would be jammed and deadlocked, and they could not extend the credit, and prices would fall.
This bill would not meet that. You would have to do something
more. The Goldsborough bill would meet the situation then.
Now, don't misunderstand me. This bill will not do any harm.
Remember, I am in favor of it, but you can not expect too much of it.
I t may run against a limit in that direction.
PARENTHESIS ON CHANGING THE WEIGHT OF THE DOLLAR

Mr. BEEDY. I wish you would show us how the control of gold
under the Goldsborough bill will meet this.
Professor FISHER. I think I would be out of order if I discussed
that.
Mr. BEEDY. I should like to have your explanation.
The CHAIRMAN. The Chair will have to sustain the point of order
by the gentleman.
Professor FISHER. Briefly, I would say there are two ways of
avoiding that embarrassment; one is the Goldsborough bill method
and the other is the method of Professor Lehfeldt, of South Africa.
The Goldsborough method would meet this hypothetical situation
by lowering the weight of gold behind the dollar; or in other words,
by raising the price of gold, in terms of dollars. . This would not be
interfering with the supply of and demand for gold, but merely recognizing its increased value. Gold would then be scarce and ought
to be dear. That is what it would amount to. You would then be
experiencing a scarcity of gold, but under the Goldsborough bill its
price would be raised to recognize or express this scarcity.




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71

If the amount of gold behind the dollar were reduced in weight,
say, 10 per cent, that would mean that a certain lump of gold, say,
the size of this room, in the Treasury, instead of having, say, .a
billion dollars in it, would have a billion one hundred million—10 per
cent more—in it, because each dollar would have 10 per cent less gold
behind it. A t present your yellow backs are out against that gold
on the basis of 23.22 grains of gold per dollar of certificates; and if
you issued more yellow backs, which you would be allowed to under
the Goldsborough plan, up to 10 per cent, you would then have more
dollars outstanding. You see, it would not be a dilution, because
the gold would have increased in value. The value behind every
dollar would be the same as before. So your lump of gold would
have a higher value because gold had become scarce, and you could
issue a larger number, of dollars against that lump, and then there
would be a larger number of certificates outstanding to be used by
the banks as reserve, and there you get back to your 40 per cent
reserve again. You have stabilized.
P A R E N T H E S I S ON CONTROLLING GOLD PRODUCTION

The other method I do not like as well. Professor Lehfeldt, of
South Africa, proposes doing the same thing—controlling the value
of the dollar by controlling the gold mines. Thus, if the United
States and Great Britain, which have most of the gold mines of
the world, should come to an agreement on this matter to stabilize
the price levels, they could take over the gold mines or make business
arrangements with the present owners in such a way that they would
subsidize the gold mines when they needed more gold and shut them
down when they did not need it. I n that way you could get your
40 per cent back by digging gold out of the ground, regardless of
expense.
I n the second place, it is quite possible to go to the other limit
of too much gold, and that is what I am afraid of to-day rather
that too little. If we get too much gold, what is to prevent individual bankers building up and pyramiding credit on that? The
Federal reserve has no power over nonmember banks. I t could not
control these thousands of banks that have a great deal of individual freedom and power. The price level might very well get
away from them from that cause, and that is what I am afraid of
now. Under the Goldsborough plan that situation would be met
by increasing the weight of gold behind each dollar, thus decreasing
the number of yellowbacks issued against that lump in the Treasury
and holding down the reserves. Let me just throw out this thought:
Suppose Europe should send us 500,000,000 or 1,000,000,000 of gold;
what could we do to prevent inflation?
T H E FOUR POWERS OF T H E FEDERAL RESERVE TO STABILIZE

Let us see what the methods are by which the Federal reserve
system can now stabilize, through the control of credit. What are
their present limits of power? They can stabilize, as I see it, in
four ways: I n the first place, by changing the rediscount rate. That
has been emphasized this afternoon. That is, when you think there




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is inflation impending, raise the discount rate and that will check
it. You remember the other day in the stock market how immediately there was a quietus put upon it or, at any rate, the ardor of
the market was dampened, when Boston, 250 miles away, increased
its discount rate one-half of 1 per cent. That shows the respect
which Wall Street has for this power.
Secondly, there are the open-market transactions—I quite agree
with Mr. Wingo, these are most immediate and important propositions. I n the exercise of its open-market operations the system acts
as a unit in buying and selling capital securities. If they have
securities in their possession they sell them and that withdraws
that much purchasing power (credit or cash) from circulation.
The money or credit they get from the sale of the securities is withdrawn from circulation, and they lock it up. On the other hand, if
they buy securities they a're putting money or credit into circulation,
and they regulate the price levels in that way.
I n the third place, they can substitute gold certificates for Federal
reserve notes, or vice versa. The Federal reserve notes only require
40 per cent reserve, while gold certificates represent 100 per cent
reserve. If they substitute gold certificates for Federal reserve notes
they are virtually putting their reserves into circulation and taking
it out of their vaults, and that is being done. You will notice there
are more yellowbacks to-day than usually.
The CHAIRMAN. May I interrupt? Will you explain to the committee the difference between a Federal reserve note exchanged for
gold and a gold certificate, and is inflation possible in that kind
of transaction, or not ?
Professor FISHER. Well, I am not sure that I understand your
question.
The CHAIRMAN. I S there any difference between a Federal reserve
note which has been issued in exchange for gold and a gold certificate ?
Professor FISHER. Yes; because if gold is deposited and a Federal
reserve note is obtained in exchange, the bank can then issue 150
per cent more of the Federal reserve notes against that same gold,
because they only need to have in reserve two-fifths of the outstanding Federal reserve, instead of 100 per cent, when they issue the
yellow backs. Of course, this device is slow and indirect, but it
is being used.
The CHAIRMAN. Would that tend to inflation?
Professor FISHER. N O . I t would tend to deflation but it takes
time. I t does not work as immediately as the other
The CHAIRMAN. Would inflation be possible under the open market
policy of the Federal reserve—that is, they can now go into the
market and buy paper and Government securities, and use free gold
which they might hold and cause the issue of Federal reserve notes,
which might not be issued in response to demand for commerce or
business but in aid of speculation ?
Professor FISHER. Yes.

The fourth method has been known as moral suasion, and that,
I think, is a tremendously powerful thing, if they can get the cooperation of the independent bankers. That is one reason why I
think you should pass this bill. There are thousands of independent




STABILIZATION

73

bankers, and they are told by the Federal reserve bank, with which
they rediscount, that the situation is such that inflation should be
checked and they ought to call in loans and not extend others.
Or they may be told, possibly, that hard times are coming and that
they should extend their loans and encourage customers to get in
debt with them. So, by passing the word around through the
Federal reserve system to the thousands of banks, they get the
cooperation of those banks in restricting or loosening up on credit.
As it is to-day, any banker can say, " I have got your advice, and
I will put it on file, but will not follow it," and the only thing that
can be said in reply is, " You will find it hard to do business with
us in future." But if you give the specific authorization, by this
bill, that the Federal reserve system is expected to maintain stable
price levels and prevent inflation and deflation, then the bankers
would say, " T h a t is the lawr of the land and we will do our part
in cooperating," and the public would say, " T h e y are doing their
duty and we will conform."
THE LIMITATIONS

I want to speak about the limitations on the use of these four
devices.
First, so far as the discount rate is concerned, you can not, by
lowering the discount rate, have very much effect. The raising of
the discount rate has a more immediate effect than lowering it.
You can raise the discount rate and check inflation with considerable success, but when you try to lower it, and thus encourage
borrowing, if the public is discouraged and there is not much business doing, merely a reduction in the discount rate will not lead to
good business. I t does not work as well in one direction as the
other. Even in raising it, you can not do it indefinitely. You do
not want to raise it as Germany did to 12 per cent per month, and
even if you did, you may not be able to stop the inflation. I t may
go on up under the influence of an abundant gold supply or other
cause. That was the situation in J a p a n wliere their banking system
lent itself to that result.
Secondly, as to the open market operations, there is a limit to that
device, too. If you are trying to contract through the use of open
market transactions you can only contract so far as you have got
securities in your own portfolio to sell. As soon as they are gone,
you are out of ammunition and that is the situation to-day pretty
nearly and that is one reason I am afraid inflation may come in a
year or so, unless the authorities use great wisdom and discretion.
There is a limit, therefore, to open market control and likewise
to the control exercized by circulating gold certificates.
Thirdly, there is a limit to the use you can put gold certificates
to as a basis of reserve for Federal reserve notes or vice versa. There
is a limit both ways.
The CHAIRMAN. I want to ask you another question there to get it
in the record at this point: Is there inflation in your judgment in the
system to-day, and, if so, to what extent?
Professor FISHER. I would not say Mr. Chairman that there is
very much evidence of inflation to-day relatively to the last few




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STABILIZATION"

years. The price level according to my index number has been going
down rather than up during the last month and as I said the stock
market is not as high as it seems. The only evidence of inflation I
can see is the stock market which is not as much as it seems and the
Florida boom.
But I am afraid of inflation when the open market committee gets
out of ammunition and this gold that is flowing into the country
all the time from Europe gets into circulation. If trouble comes in
Europe and our investors stop buying foreign bonds or if Europe
adopts a policy of dumping gold on us to run up our price level, then
we must have inflation unless additional power is given to the reserve
system to stop it.
Fourthly, as to moral suasion, the banks will not follow indefinitely the advice of the Federal reserve banks and board. There is
another thing about gold that I meant to have said: The Federal
reserve system, by not using gold, loses the interest on i t ; they have
a dead asset instead of a profit-making asset; and they keep it unused
for the good of the public. But they can not be expected to do that
indefinitely and the member banks will scarcely do it at all. So
when you get this country choked up wTith gold beyond a certain
point some banker who has not very much public spirit is going to try
to make all there is in it out of it "while the going is good." As
soon as he does that somebody else will do the same thing and before
you know it you have got inflation and you can not stop it. I have
been afraid of that for several years. I t has not come yet and I hope
it won't. But I feel as if we are in a very dangerous situation and
this bill would help very materially to guard against it by strengthening the hands of the reserve authorities.
I will just summarize to emphasize the fact that I regard this bill
as a step in the right direction but only a step. After you have
passed such a bill which to my mind is merely validating what the
Federal reserve system is already doing by saying " We believe this
is the way to accommodate business. We want you to prevent inflation and deflation with all the powers you possess," the time will
doubtless come in the course of years when you will want to specify
more definitely what the price level should be you will want to follow
this up by a bill of particulars, etc., which I think would be
unwise just now. I t might be thought that you were holding too
tight a rein over the Federal reserve board and were hampering
rather than helping them; but when you run against some of these
limits if not before you have got to go further than merely to control
credit because controlling credit is only controlling one part of the
circulating medium it is the major part undoubtedly but the basic
p a r t is gold just the same.
I n the old days credit was the minor factor, gold still being the
basic factor. But to-day the " t a i l is wagging the dog;" to-day
credit is much more important than gold in magnitude, to-day it is
the volume of credit that determines the purchasing power of the
dollar—the price level—more than the volume of gold; but both
are important factors. I n the long run gold is the more fundamental of the two because the credit is merely a pyramid standing
in the gold base.




STABILIZATION

75

So you can not indefinitely escape this gold problem. You have
got to have your gold control as well as your credit control, if you
are going to prevent the terrible evils of inflation and deflation I n
the future.
You could pass this bill with proposed amendments, and stop
there and let it stay there a hundred years and do no harm, but the
good you would do might be limited to five years. After that you
run against one of these limits, and then the bill becomes practically inoperative. Whereas if you couple it with the Goldsborough
measure it will work well for a thousand years; or if you substitute
the Lehfeldt idea of controlling the gold mines you can accomplish
the same thing.
THE GOLDSBOROUGH PLAN

I want to say just one thing more. Professor Hastings, now at
Yale (but at the time I am going to refer to, not at Yale, but the
researcher of the Pollock Foundation for Economic Researcn), was
deputed by that foundation to study stabilization plans. I do not
suppose any one has compared different plans as much as he has.
And he took the Lehfeldt plan—I call it that—just for convenience—Lehfeldt is not the only one who has suggested it—and what
we call the " Goldsborough plan," and various other plans, and he
has shown their limitations and the good and bad features of each.
He has commented on the Goldsborough plan, and all the rest, but
he concluded that what we call the Goldsborough plan is the only
one of the 11 plans that will work under all circumstances, and
without throwing on the United States alone the financial burden
of stabilizing prices for all the world; and that is the reason I am
for that plan. I t is not because I am the author of the book
" Stabilizing the Dollar " wherein that plan is explained, for I was
anticipated by many other people. Simon Neweomb, the economist
and astronomer, was one of the first, in 1879. Prof. Alfred Marshall, the dean of English economists, who died a short time ago at
Cambridge, suggested it back in 1887; the names of a number of
other anticipators are given in the introduction to my book, where
I have given them all full credit. I t is not pride of authorship; I
do not care how you stabilize the dollar, providing only that you
stabilize it. To my mind, it is the most important economic problem
that we have in the world to-day.
NOT A PANACEA

I t will not be a panacea. There are plenty of other economic
problems I am deeply interested in, just as you are, Mr. Wingo,
including the plight of the farmers. While I do not regard this as
farm relief legislation, it will help the farmers just as it will help
others. There are lots of economic problems; there are lots of problems I can show you which stabilization will not solve, any more than
stabilizing the bushel basket will solve all the problems. Thus, it
will not solve the weather problems; but it will stabilize the unit
in which all business is transacted and that is why we want to
stabilize the dollar.
I think that is all I have.




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STABILIZATION

Mr. STEVENSON. Before we adjourn, I want to put in here this
statement, because Mr. Shibley and I had a difference about the
increase of bank notes under the act of March 14, 1900. I have the
figures here from the comptroller's report.
The CHAIRMAN. I suggest they be placed in the record.
Mr. STEVENSON. I will just put it in the record. This shows capital stock $632,000,000; with possible increase 10. per cent—it was 90
per cent. So there was a possible increase of $63,000,000 from that
act, and there was an actual increase up to 1905, October 30, of
$270,000,000, because the national banks had increased their capital
over $200,000,000. The increased amount that they could issue was
about $75,000,000. Anyway, the figures are accurately given here,
and I put that in. We ought not to have a difference on figures
that are available, and I take it Mr. Shibley wants that to go in as
accurate.
Mr. SHIBLEY. Giving circulation of bank notes ?
Mr. STEVENSON. I have given it for March 14, 1900, and October
31, 1900, and October 31, 1905; and also the capital stock.
(The statement submitted by Mr. Stevenson is as follows:)
National banks had a capital stock March 14, 1900, of $632,502,395; possible
issue of notes, 90 per cent, $569,252,156, 10 per cent, making $63,250,239
increase under act of March 14, 1900, could be added.
But circulation then outstanding was only $253,993,881. This was increased
to $331,613,268 by October 1, 1900, making an increase of $77,619,447.
By act October 31, 1905, the capital of banks had increased to $812,026,075
and the circulation to $524,508,249 leaving possible—yet $288,517,826 not issued
and being an increase of $270,514,368 in national bank notes instead of $700,000,000, as asserted by Mr. Shibley.

The CHAIRMAN. The committee will now adjourn until 10.30
o'clock to-morrow morning.
(Thereupon, at 5 o'clock p. m., the committee adjourned to meet
to-morrow, Thursday, March 25, 1926, at 10.30 o'clock a. m.)
HOUSE OF REPRESENTATIVES, '
COMMITTEE ON B A N K I N G AND CURRENCY,

Thursday, March 25, 1926.
The committee met at 10.30 o'clock a. m., pursuant to adjournment, Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will please come to order. Doctor Fisher, will you take the stand?
STATEMENT OF PROF. IRVING FISHER—Continued
The CHAIRMAN. I want to call the attention of the committee to
a memorandum which I received this morning from Dr. Jeremiah
W. Jenks, of New York University, regarding H . R. 7895. This
memorandum was prepared by W. F . Hickernell, evidently at the
request of Dr. Jeremiah W. Jenks, and is as follows:
MARCH 23,

1926.

To: Dr. J. W. Jenks.
From: W. F. Hickernell, regarding H. R. 7895, "A bill to amend paragraph (d)
of section 14 of the Federal reserve act, as amended, to provide for the
stabilization of the price level for commodities in general."
Gold prices are influenced but not actually determined by Federal reserve
banks. The Federal reserve banks can prevent extreme fluctuations, but can



STABILIZATION

77

not prevent the index number from drifting to a more or less permanent new
level, up or down. Excess gold can cause a general rise which the Federal
Reserve Board can not prevent. New inventions and improved methods of
production can lower prices of individual commodities and cause the index
number to recede, theoretically. Declines in prices due to inventions, etc.,
benefit mankind and are desirable. However, it is desirable to prevent extreme fluctuations and the Federal Reserve Board can do a great deal in
this direction. It can " promote stability." It can not prevent the oscillations which occur during the so-called business cycle. It can not entirely
checkmate the inflating influence of excess gold production on the one hand
or the deflating influence of complete resumption of the gold standard in
Europe, expansion in world output of goods, etc. Thus, while the Federal
reserve bank can measurably check extreme fluctuations, we should not raise
false hopes that they can maintain an index number at a fixed level.
W . F . HlCKERNELL.

Doctor Fisher, you have listened to the reading of that statement ?
Professor FISHER. Yes.

The CHAIRMAN. Are you in accord with the views expressed
therein ?
Professor FISHER. Yes; absolutely.
Mr. STEVENSON. That is a very conservative statement, it seems
to me. There is a good deal of sense in it.
ENGLISH BANKING

The CHAIRMAN. Referring, Doctor Fisher, to your statement yesterday as to the influence exerted by the Bank of England on England's situation, you stated that the Bank of England voiced the
sentiment of the public pretty thoroughly as regards these economic
subjects, particularly the rate of interest, etc., and on stabilization
matters. Was that correct?
Professor FISHER. I said that the Bank of England took the public viewpoint as distinct from the private viewpoint to a large
extent; that instead of doing a banking business merely for the
profit of the shareholders of the Bank of England, they were primarily doing it patriotically, for the country, for the good of the
public.
The CHAIRMAN. And I understood you to say that that was
largely possible because of the fact that the directorate of the Bank
of England was composed of the leading merchants of England
and not bankers.
Professor FISHER. N O ; that is wliat Mr. Shibley said.
The CHAIRMAN. Oh, Mr. Shibley said that?
Professor FISHER. Mr. Shibley said t h a t ; yes, sir.
The CHAIRMAN. D O you agree with him in that respect ?
Professor FISHER. T O a certain extent, except that in England
the word " m e r c h a n t " is used differently from what it is in this
country. The merchant in this country is rather exclusive of bankers, whereas a merchant in London includes the private banker. So
these merchants, so-called, are very often what we would call
bankers, although not what they call bankers there.
The CHAIRMAN. NOW, having the Federal reserve system here, do
you think that it is possible for the Federal reserve system to voice
the public sentiment as definitely as does the Bank of England?




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STABILIZATION

Professor FISHER. Perhaps not quite, but very nearly. I n England they have a long tradition behind them of the leadership of the
Bank of England and relatively few banks with a great many
branches, whereas here we have thousands of independent banks.
The CHAIRMAN. D O you think it is desirable that the Federal
reserve banks should assume such a position in the United States as
does the Bank of England to England in that respect?
Professor FISHER. Before answering that broad question, I would
like to give it a good deal of study; but from the standpoint of producing stability in the price level I do, because I think stability in
the price level should be the first consideration in business. You
have got to have a yardstick of fixed length; the very dollar also
has to be fixed in purchasing power. We really have not got true
civilization until we establish a stable dollar, and I do not see any
way more promising of doing it in this country than by utilizing the
powers that the Federal Keserve Board and banks have.
The CHAIRMAN. The reason I ask you that question is that there
has been indicated from time to time, and quite recently, a disposition on the part of the administrators of the Federal reserve system
to make the Federal reserve banks to the United States apparently
what the Bank of England is to England. I wondered, in that connection, whether or not it woi^ld be possible for the Federal reserve
system, constituted as it is, to voice the sentiment in regard to these
economic matters that the Bank of England does.
THE $ 4 0 , 0 0 0 , 0 0 0 , 0 0 0 ROBBERY

Yesterday you referred to a loss, because of no stabilization, of
$40,000,000,000. The question comes to my mind just how that loss
is made up. Was that a loss in natural resources, was it a loss of
book profits, or just how was that loss arrived at ?
Mr. W I N G O . Or a shift of values?
The CHAIRMAN. Or a shift of values ? And, if there was a shifting of values there, might not that loss be recovered at a later date;
and was there also taken into consideration, in fixing that loss, the
natural increase in values throughout the country?
Professor FISHER. I think I did, as I remember it, at one stage
say "loss," but I ought not to have used that word. I should have
said " robbery," which I know I did say in certain other passages. I
remember being conscious, as I used the word " l o s s " that it was
misleading. I t is a loss to some people, but it is partly a gain by
others, just as when a man robs your house it does not destroy that
much wealth, but he has got it instead of you.
The CHAIRMAN. That is the point I wanted to raise. The question
came to my mind as to whether or not it was a loss on the whole or
whether it was a loss by certain classes and a gain by other classes.
Professor FISHER. I would say the latter, except that where there
is such an injustice perpetrated on one set of people for the benefit
of others there goes with it, as a consequence, just as it goes with
gambling, a net loss to society, which, of course, is a small fraction of
the forty billions. I do not know how much it would be; it might be
five billions.
The CHAIRMAN. I am interested to know whether that loss was to
the people of the United States entirely, and if the gain was to the
people of the United States, or whether the loss was by the people



STABILIZATION

79

of the United States and the gain by people outside of the United
States.
Professor FISHER. Within the United States for the most part. I t
is a sliifting. When prices are rising, the stockholder gains and the
bondholder losses, and when the prices are falling the opposite is
true. If you want to take time to go into that, Mr. Chairman, I
would be glad to illustrate it by an imaginary example to show
exactly what I mean—that kind of injustice that I had reference to
when I quoted Professor King, who made that statement before your
committee at a previous hearing, concerning this 40,000,000,000 injustice.
ILLUSTRATION OF SHIFTS BETWEEN STOCKHOLDERS AND BONDHOLDERS

The CHAIRMAN. I would like to have that, if you can briefly
state it.
Professor FISHER. I t will take about five minutes. If you suppose
a company which before the war was doing a business with a capital
of $100,000,000, evidenced by stock certificates, and $100,000,000 in
bonds, and that company was earning 5 per cent on each, then the
stockholder and the bondholder would be getting, respectively, $5,000,000 apiece. Now, suppose that the war comes and doubles prices.
Then that company, if it is a typical company, will be able to get for
its products double the,prices it formerly did. I t will also have
to pay double the expenses for raw materials, wages, etc. If the
receipts, therefore, are doubled, and the expenses are doubled, their
profits are doubled; so that instead of making $10,000,000, as they
did before, to be distributed to the stockholders and bondholders, they
will be making $20,000,000, but this $20,000,000 will only have the
same value in purchasing power as the original $10,000,000. They
are not really making any more. They are merely making more
measured in a depreciated dollar. They are selling the same physical
volume of products, and the general price level is doubled, so that,
measured in terms of commodities, the $20,000,000 is the exact equivalent of the previous $10,000,000. And if it were not for that disturbance of the price level, the disturbance in the dollar, there
would have continued to be this 50-50 division between the stockholders and the bondholders.
But in view of this change you can see at once that the bondholders will not get their half. They are tied down by contract to
5 per cent. Consequently they will get $5,000,000, which nominally
is the same amount they got before, but really is half as much in purchasing power. If they get $5,000,000 out of the $20,000,000, there
will be $15,000,000 left for the stockholders. The stockholders therefore are getting nominally three times what they got before; and that
is the way thiijgs looked in 1919. You remember the enormous dividends that were being distributed. But that is partly an illusion,
because prices are doubled, so that they really are not getting three
times as much, but one and one-half times as much, when you take
into account the cutting in two of the dollar.
Therefore, you see, the stockholders have gained 50 per cent over
what they used to get. They got $5,000,000 before. Now they get
$15,000,000, which has the value that seven and one-half million used
to have. So they have increased their real income in bread and
butter, the comforts of life, by 50 per cent; and the bondholders have



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STABILIZATION

decreased theirs by 50 per cent. The unstable dollar has picked the
pockets of the bondholders and taken half of what they had there
in real value, and put it into the pockets of the stockholders.
T h a t is one illustration.
Now take the opposite. Suppose we start with a given price level,
and then, because of deflation, it is cut in two. Suppose, as before,
that at the start there were $100,000,000 of stocks and $100,000,000
of bonds, each yielding 5 per cent. There will be the $10,000,000
with which you started before, evenly divided between stockholders
and bondholders. But after the price level has dropped to half of
what it was—in other words, after the dollar has doubled in purchasing power—see what will happen. Instead of sharing 50-50, the
bondholders will now take the whole thing, because they are entitled,
under the legal terms of the contract, to get 5 per cent, and there is
only $5,000,000 now earned. F o r if the price level is dropped, the
receipts and expenses have been cut in two, and the profits cut in two.
Instead of $10,000,000 profits, there will be only $5,000,000 profits,
and the bondholders will get it all. There will be no net profits
left for the stockholders, who will get nothing.
That is exactly what happens when you have deflation. You always have this help to the bondholder and hurt to the stockholder,
and very often bankruptcies, closing up shop and unemployment.
Mr. STEVENSON. Doctor, you said a while ago that the shifting of
values usually retained the profit that was made as a result of it in
this country.
Professor FISHER. Yes.

Mr. STEVENSON. NOW, take the matter of exportable surplus. Take
the matter of cotton. I n 1920 it fell $100 a bale on an average, and
there were 7,000,000 bales of it shipped abroad. Now, that was to
the benefit of the manufacturer in England and elsewhere. H e made
$700,000,000, in round numbers, on that. So that $700,000,000 just
faded out of this country. Whenever it is a product that is exportable
and has to be exported, where there is an exportable surplus, a depreciation in its price works directly to the benefit of the outsider,
and the United States loses it absolutely; is not that true ?
Professor FISHER. Yes; it may well be, for foreign trade, that
there is a gain here and a loss abroad, or a loss here and a gain
abroad, but this may be partly or entirely offset by a change in the
price of foreign exchange. The foreigner finds, under deflation,
that he has to pay more for his dollar exchange. The seller of foreign exchange reaps the profit. I think I said—I meant to have
said—that the gain and loss are mostly between individuals in the
United States. I said that because most of our commerce is internal
commerce. Our foreign commerce is a small fraction of our total.
Also still more is it true that most of our indebtedness is internal
and not external. We may say, also, that the cotton grower is in the
position of the stockholder, Mr. Stevenson, while the foreign-exchange dealer is in the position of the bondholder. Under deflation
the stockholder loses while the bondholder gains. The consideration
that Mr. Stevenson brings up would apply particularly to international debts. If we were in debt abroad in dollars and prices rose,
we would gain as the debtor gains, when prices rise, and the foreign
creditor would lose, and vice versa. If they were in debt to us in
dollars, the opposite would be true in both instances. A t present,



STABILIZATION

81

for instance, with Europe in debt to us in dollars, it is to the interest of Europe to see American prices inflated. Then they could pay
their debts with a lower value, with less commodities.
Mr. STEVENSON. B u t it used to be the other way ?
Professor FISHER. Yes.

Mr. STEVENSON. And hence, during the long period from the
early eighties until about 1910 the cry that Lombard Street was
depressing the prices of our commodities and robbing us by manipulation of the gold standard, and one thing and another, was the
natural result of the fact that we were debtors and we were having
to pay over there in a depressed commodity ?
Professor FISHER. Yes; exactly.

Mr. STEVENSON. I heard a very interesting speech once by a
candidate for Congress, who was elected on a Farmers' Alliance
ticket. H e beat a very able man from my district, who preceded
me. They had had a lot about Lombard Street in the papers, but
he was giving Wall Street hail Columbia, and an old fellow who
had been reading these papers stepped up and said, "Jeff, hold
o n ; ain't that the wrong fellow you're a-cussing? Lombard Street
is the damn rascal that has been robbing us, ain't he? "
CAN ENGLAND MAKE US INFLATE

The CHAIRMAN. I n that connection, Doctor Fisher, I am reminded
of the thought expressed during recent months, that because of the
very necessity that you have just stated here, and which has been
referred to by Mr. Stevenson, English influences were brought to
bear in this country, through the Federal reserve, to influence prices,
as you suggested, particularly advocated by those people who believe in cancellation of the debts which are owed by foreign nations to the United States. I n other words, the statement is made
that that was another method by which a reduction in the amount
that the other countries owed us could be effected, rather than by
an entire cancellation. From your observation, have you seen any
thing to indicate that such an influence was being exerted to that
end?
Professor FISHER. N O ; I have not; and I would be very loath to
believe that our Federal reserve people would lend themselves to
any such plan, if it were suggested. I think they would feel insulted
and resent it.
I do think, however, that 'a great many private citizens of Great
Britain are hoping for inflation in this country. I t has been expressed in their newspapers, and, in fact, when I was over there in
1921 I found economists telling me that they hoped that that could
be done; that the way to #serve America right was to send her a lot
of gold so that it would inflate prices here. They thought that would
be inevitably the result if they sent the gold over here. I t would
have been, I believe, if the Federal Reserve Board had not stopped it.
" EARMARKED " GOLD

The CHAIRMAN. I n regard to this subject I notice in the Washington Post an editorial this morning headed " A creditor or debtor
Nation," which is in part as follows:
It is claimed by many good authorities that most of the gold in the United
States now is here only temporarily, much of it only loaned; that large sums




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STABILIZATION

of foreign money have been invested recently in American securities, and that
if our commodity commerce in the near future is against us rather than in our
favor as a country, the United States may soon be, if it is not already, a debtor
Nation instead of a creditor Nation.
If there is solid foundation for this position it has an important bearing on
the economic attitude and course of Congress and the Executive. It may be
that, while we have been placing our national biUs receivably up in the billions, the fact is that our national bills payable are larger than is commonly
known or admitted.

I n connection with that statement I would like to ask you whether,
in your judgment, the gold which was referred to yesterday as held
in this country, principally by Federal reserve banks, and otherwise,
is held in trust or is " earmarked," or is the property of others, which
may be withdrawn at an early date; and in that connection I think
it would be interesting for you to state to the committee just how
gold gets into the Federal reserve system.
Mr. WINGO. And how it gets out.
The CHAIRMAN. And how it gets out.
Professor FISHER. Which question do you want me to answer first?
The CHAIRMAN. I have given it to you, and you may answer it in
your own way.
Professor FISHER. I remember Mr. Hoover said some years ago
that the excess gold in this country should not be utilized to build
a credit structure on but should be " earmarked " for ultimate return
to Europe when Europe got on a gold basis. I think it was one of
the cleverest suggestions that has ever been made for helping the
popular mind to reconcile itself to keeping gold apparently idle.
The first impression of the average man, who has not studied the
effect on the price level, is that we ought to keep everything at work
just as we keep a machine at work; that if we have all of this gold it
ought to be used as a basis for credit. That is the opinion of a great
many to-day, and it is a very dangerous opinion and may lead us to
inflation. The other idea, that we ought not to use it but to earmark it and keep it for Europe, is a very good one to instill into
popular psychology. Whether there is any actual earmarking in
any literal sense or not, because foreigners have deposited gold here
and earmarked it, with the approval of the banks, I do not know.
I doubt it very much. I think that is a metaphor more than anything else. But I think it is a very good idea.
The CHAIRMAN. H O W can that be definitely ascertained, Doctor
Fisher?
Professor FISHER. I should suppose by inquiring of the bankers.
The CHAIRMAN. Which bankers?
HOW GOLD COMES I N AND GOES OUT

Professor FISHER. The Federal reserve, the Federal reserve banks,
and the larger banks of New York City.
As to the other question, as to how gold gets into this country
Mr. BEEDY (interposing). Into the Federal reserve system; is not
that the question ?
The CHAIRMAN. That is the primary question; I think it would
be interesting to have in this hearing a statement as to just how gold
gets into and out of the Federal reserve system.




STABILIZATION

83

Professor FISHER. I suppose you intend to include how it gets
into play as affecting the price level. That is partly in the system
and partly otherwise.
There are two sources from which gold comes in. One is from
the mines and the other is from imports. The mines of the Klondike or Cripple Creek or California or the mines of other countries
can pour their product in, and in that case the miner theoretically
coins that gold under our system of free coinage. But he does not
think of it as coining. H e thinks of it as selling; and, as a matter
of fact, that is literally what is done. I t almost never happens that
he takes the gold to the mint says, "Please turn this bullion into
gold coin and hand it back to me," which was the original theory.
What he does is to exchange it for money that he does want—paper
money—which normally will be gold certificates. I t may be warrants that he gets at the assay office, which afterwards are so converted. But you may take that as the normal thing, that the gold
is exchanged for gold certificates, or that the gold is deposited in
the bank and from the bank finds its way to the Federal reserve
bank, and from there to the subtreasury of the United States.
The CHAIRMAN. Before you go into that, the gold received either
from the sale of goods or from the mines passes through the assay
office, does it not ?
Professor FISHER. Yes; or, if it is already in coined form, it may
be directly deposited in a bank, usually in New York, when it comes
from abroad; and when it is so deposited it is actually exchanged
or sold for whatever the depositor wishes. H e may get gold certificates; he may get bank notes; he may get Federal reserve notes;
he may get just a deposit book credit. But he carries off whatever
he gets for it in those four forms, and the bank then possesses the
gold. I t no longer belongs to the man who put it there, nor is it
" earmarked " as from him. H e ha£ no further connection with it.
I t belongs to the bank.
The bank then can use it in any way it sees fit. I t can sell it in
the market; it can sell it to the jeweler. Normally, however, it is
used either as a part of its own reserve or more frequently it is
redeposited in the subtreasury of the United States in return for
gold certificates, which are more convenient for reserve, or it is
deposited in the Federal reserve bank in that district and used to
get a credit with the Federal reserve bank. The Federal reserve
bank, in turn, may give it to the subtreasury of the United States
and get gold,certificates for it. At each stage there is an actual
exchange of that gold for something else; but it ultimately forms the
basis for a reserve—a bank reserve, ordinarily.
The CHAIRMAN. May I interrupt you right there ? Are you familiar with the practice pursued by the Federal reserve banks now in
regard to their gold reserve ? Do they hold the gold, or is that held
by the Government as security for the certificates which are issued
in the form of gold certificates ?
Professor FISHER. I think the latter is the more usual procedure.
The CHAIRMAN. That is to say, the gold is held by the Government ?
Professor FISHER. Yes.




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STABILIZATION

The CHAIRMAN. And the Federal reserve bank holds the gold
certificates instead of actual gold as their legal gold reserve?
Professor FISHER. Yes.

Mr. STEVENSON. If you will permit an interruption, it is the Federal reserve agent; it is turned over to him.
Professor FISHER. Yes.

Mr. STEVENSON. When they ask for a million dollars of certificates, they have got to turn the gold over to the Federal reserve
agent.
The CHAIRMAN. Yes; I understand that. The point I was raising
was whether the actual gold was turned over, or whether i t was
turned over in the form of certificates.
Mr.

STEVENSON. Yes;

I

see.

The CHAIRMAN. I understand your answer, then, to be that the
Government holds the gold and it is the practice of the Federal
reserve to hold the certificates and treat them as gold ?
Professor FISHER. Yes; that is my understanding.
The CHAIRMAN. I interrupted you. You had not completed your
statement as to how gold gets into the Federal reserve system and
gets out of the Federal reserve system.
Professor FISHER. I think I have completed the statement so far
as its getting in is concerned. As to its getting out, it is very much
the reverse. The gold can get out either by being exported abroad
or by being used by the jeweler. There are two kinds of gold that
come in, one of import and the other by gold mining. There are two
kinds of gold that go out; one by export
The CHAIRMAN (interposing). If you will pardon me I would like
to get this in the record. I do not think you have discussed, at least
not as fully as I would like to have you the exchange of gold for
Federal reserve notes, which is another method by which gold gets
into the Federal reserve system.
Professor FISHER. Yes.

The CHAIRMAN. I would like to have you state also, if you will,
just what is done with that gold when it is received by the Federal
reserve bank in exchange for Federal reserve notes; that is, what
the Federal reserve bank does with that gold.
Professor FISHER. My understanding is, as I said, that it usually
turns that gold over to the vaults of the United States Government
in return for gold certificates, and keeps the gold certificates as its
own reserve. But, of course, it can do both or either.
The CHAIRMAN. I f it exchanges for certificates, what does the
Federal reserve bank do with those certificates which represent gold
that they have already issued Federal reserve notes for?
Professor FISHER. They can make two exchanges. They can accept the gold and give Federal reserve notes for the gold; then the
gold belongs to them; and they can substitute gold certificates for
that gold by asking the Treasury to give them the gold certificates.
GOLD AS BASIS FOR PAPER INFLATION

Mr.

WINGO.

May I interrupt you right there ?

Professor FISHER. Yes.

Mr. W I N G O . Can they, and do they, ever use that same gold as a
gold reserve against Federal reserve notes issued on rediscount opera-




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85

tions? I am talking about gold that they have bought with Federal
reserve notes. That is their gold, you say. I t is there in their
vaults. Now, can they, and do they, use that same gold as a p a r t of
the reserve against Federal reserve notes issued subsequently in a
rediscount operation?
Professor FISHER. Yes; because when they get the gold in exchange for the notes, they have got it dollar for dollar; not on the
40 per cent basis.
Mr. W I N G O . Your contention is, an expressed by what you said
a while ago, that they have bought the gold and have paid for it,
and it is theirs ?
Professor FISHER. Yes. Now, they have got a 100 per cent reserve
against the Federal reserve notes, so far as that particular transaction is concerned. But the gold goes into general pot as reserve
for all the issue, and not for that particular batch. Consequently >
if they have more than a 40 per cent reserve, they can issue more
Federal reserve notes on the basis of rediscount, backed up by collateral, etc.
Mr. WINGO. That is the next question I am going to ask you.
Can they do that ? When their reserves have gotten down low ?
Professor FISHER. N O ; not when their reserves are too low.
Mr. W I N G O . I n other words, they can only do what looks like a
duplication of the use of the gold as long as they have got an
abnormal volume of gold on hand; and the word " abnormal " covers
the margin between what they have and the legal requirement for a
gold reserve against all outstanding Federal reserve notes ?
Professor FISHER. Yes. But if at the start they had just a 40
per cent reserve, and then somebody comes in with a million dollars
of new gold, and they issue Federal reserve notes to the extent of a
million dollars in exchange for that, which is all they can do, they
will now have a little higher per cent of reserve than before; because
for that particular batch they have 100 per cent of gold behind the
notes and they had 40 per cent behind all the rest, and this goes into
the general pot, and it increases their gold reserve by that amount.
Mr. W I N G O . Let us follow that up for a moment. I t may be
very simple to you, Doctor, but I get a little confused on it. Assume
that they have a 40 per cent reserve against what is outstanding
and you sell them another million dollars of gold and they give you
Federal reserve notes for it. Now, they have 40 per cent against
all of the notes outstanding before that transaction, and then they
have 100 per cent reserve against that one million. Now, that is a
surplus of reserve. Then they can take that surplus, you contend—
and they do it—and use that as a reserve against a further issue
without procuring any more gold ?
Professor FISHER. Yes; but, of course, they do not do it just as a
fiat issue. They do it in return for other assets in the re-discount
process. They can not run a paper mill and do it.
Mr. WINGO. Let us carry it a little bit further. You have sold a
million dollars of gold to them, and they have given you a million
dollars in Federal reserve notes. I am a member bank. I come in
and make a rediscount operation, putting up the necessary collateral,
and I get a million dollars in Federal reserve notes. Now, they
use some of the same gold—because, as you contend, there is a 100




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STABILIZATION

per cent reserve back of that—they use some of that same gold,
which would be 40 per cent, or $400,000 of that gold, as a reserve
back of this $1,000,000 of Federal reserve notes which they gave me?
Professor FISHER. They have got $600,000 of free gold.
The CHAIRMAN. I n connection with that, Doctor Fisher, you have
stated that one of the methods of retirement of gold in the Federal
reserve system is through just such *a transaction as Mr. Wingo
has just recited?
Professor FISHER. Yes.
ELASTIC CURRENCY

The CHAIRMAN. NOW, that kind of a transaction evidently is from
a demand of commerce and business for funds which causes that
rediscount by the Federal reserve bank?
Professor FISHER. Yes.

The CHAIRMAN. That is one of the real purposes of the creation
of the legal reserve fund in the Federal reserve banks ?
Professor FISHER. Yes.

The CHAIRMAN. T O provide elasticity to meet the demands of
legitimate business throughout the country.
Now, there is another source by which that gold can be absorbed
through the open-market transactions, is there not, which is under
the control of the open-markets committee? A t any time when, in
their judgment, they deem it advisable, for one purpose or another,
can they not go into the open market and buy paper and place it
with the Federal reserve agent with a certain amount of this free
gold, and thus cause the issuance of Federal reserve notes by the
Federal reserve system?
Professor FISHER. Yes; provided they keep within the legal
reserves.
The CHAIRMAN. Yes; of course. But that is another method by
which Federal reserve notes, which are payable in gold, can be put
into circulation ?
Professor FISHER. Yes.

The CHAIRMAN. D O you consider that method—the issuance of
Federal-reserve notes in exchange for open-market paper and gold—
to defeat to any extent the real purposes of the Federal reserve system, which was to create an elastic currency ? I n other words, what
I am driving at is, is it not possible to secure inflation in the Federal reserve system by resort Jo open-market transaction which
result in the issuing of Federal-reserve notes instead of the rediscount by member banks of what is known as commercial-business
paper, which is responsive to the demands of industry and commerce throughout the country? Is not such a note issue apt to aid
speculation to a greater extent than the other method in which
your Federal-reserve notes are issued through a rediscount by the
member banks of eligible paper in response to actual trade needs ?
Professor FISHER. I think it is quite possible that there should be
such abuse. I mean, with the set-up as it is now, it would be quite
possible for the open-market committee to misuse their powers in
such a way and to produce inflation. I should not suppose it would
make any material difference to speculation, because funds once in




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87

the market are fluid and can be used as the public sees fit, in speculation or in commerce or in business, the difference only being according to the profits which offer in both and the discount rates that
the member banks have on loans, or the rates for the call loans.
The CHAIRMAN. I desire here to call attention to the fact by this
method of issuing Federal-reserve notes based upon open-market
paper, supported by free gold which happens to be in the possession
of the Federal reserve banks, permits the Federal reserve banks to
control the amount of Federal-reserve ndtes outstanding, at least
to the extent that these issues are based upon open-market paper,
and also permits the use of gold as security of such notes which
may have been received by the Federal reserve banks by the exchange of Federal-reserve notes for gold, that inflation is possible.
Where gold is exchanged for Federal-reserve notes by the system,
why should not the Federal-reserve banks hold the gold thus acquired in the same manner as does the United States Treasury when
it exchanges gold certificates for gold, as a trust fund, and the gold
certificates as a warehouse certificate ?
Mr. WINGO. Before you leave that proposition, I happened to be
present, at a conversation the other day where the same statement
was made that you just made, and it was challenged that it could
not be used in speculation, but this was the contention, and I want
to see if it is sound, that if the Federal reserve bank, we will say, in
New York, put out $50,000,000 under an open-market operation
and paid $50,000,000 of paper from one of the banks that was loaning
funds on call
Professor FISHER. I do not understand that.
Mr. WINGO. Say that the Federal reserve bank started to increase
its purchases under the open-market operations, $50,000,000; it goes
to one of the banks that has eligible paper which they can buy under
the open-market operations, and it buys $50,000,000 of these securities
under the open-market operations from this bank; that bank then has
$50,000,000 additional available to lend on call on the street, and that
transaction has actually happened. Is that accurate ?
Professor FISHER. I do not see why it is not. If the bank receives
Federal reserve notes in place of some of its own assets, in the form
of investments, it can more readily lend them out than it could in
the other form, but, as I said before—and I should like to emphasize
that—I do not think the net effect in encouraging or discouraging
speculation in the stock market, as distinct from transactions in
commerce and business, would be very great, if any, because money
used in that bank might not go into the stock market. I t might go
to the West if the West would bid more for it than the stock market.
If the profits to be obtained from its use in commerce and business
offered more than the speculative profits expected in using the money
in the stock market, naturally it would go into commerce and business. I t seems to me it is merely a question of two forces affecting
the flow of funds to the stock market or to other uses; namely, the
force of expected profits on the one hand, and the deterrent force of
the rate of interest on the other hand plus safety and availability.
That is a matter for the particular bank to take up rather than the
Federal reserve system.
Mr. WINGO. Aside from the profits ?
Professor FISHER. Yes.




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STABILIZATION

The CHAIRMAN. The public generally understands that the Federal
reserve system is responsive to the demands of agriculture, industry,
and commerce, and that its credit goes up and down as the demands
go up and down, through the rediscount of their eligible paper with
the Federal reserve system. The general public must also understand, in that connection, should they not, that there is another
method which can be pursued, which is entirely in the control of the
Federal reserve banks, through this committee on open-market
transactions. I n that connection it might be perfectly legitimate and
perfectly right that they have the opportunity to go into the open
market to buy paper that is known as being dealt in in the open
market. I t may or may not be the same class of paper rediscounted
by the member banks, but I think it should be understood that the
Federal reserve member banks have the right, through this system,
to cause the issue of Federal reserve notes; and might it not also
occur, in as much as the transactions in the open market are principally handled in New York City, where there is also a stock exchange
with a centralization of speculation probably which does not appear
anywhere else in the United States, that an undue amount of Federal
reserve notes might be used to take care of speculative market
situations?
Professor FISHER. I think it is possible. I do not think, however,
in the constitution of the Federal reserve system, there is very much
possibility of any such discrimination.
The CHAIRMAN. I n that connection, pertinent to that very situation, is the recent call by the Federal Reserve Board for a list of the
borrowings from banks in New York for speculative purposes.
Professor FISHER. Yes.

The CHAIRMAN. A recent statement of one of the financial papers
indicated there was a concentration of available cost and credit of
65 per cent being used in speculative loans. Do you think that is a
fair average, and would you think there was an undue concentration of loans for stock-exchange purposes that might be detrimental
to the business interests of the country ?
Professor FISHER. I do not know whether 65 per cent is right or
not. I know nothing about that, but I do not think there is very
much in the idea that this process is detrimental to the United
States in any sense in which you can remedy it. If it is a disease—
if it is something that should be deplored, it is something more or less
separate and apart from the operation of the Federal reserve system—I mean because of this fluidity of the money market; if you
dam it in one place, it will flow around the dam in some other way.
The CHAIRMAN. I n that connection you realize, as many of us do
at this time, that there are large profits made in underwriting large
domestic issues, both domestic and foreign, and naturally that chance
of profit creates a demand for funds that does not-exist probably
in any other part of the country while that distribution is taking
place. The point I think of as bearing on this whole situation of
the concentration of funds—the point I was getting at—was whether
or not that might be influencing a slowing up of industry.
Professor FISHER. I think it is because industry has not taken u p
the funds available for industry that we have the surplus. The
most you can say is that we have so much gold and so much expan-




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89

sibility in our Federal reserve system that it is quite natural that it
should go into speculation, especially with the mergers going on,
the economies of which have increased the speculative profits, and
this boosted the stock market. That is one of three or four things
behind the recent rise of stock prices.
The CHAIRMAN. H O W do you know we have too much gold,
Doctor?
Professor FISHER. We have got about twice what is necessary for
the legal reserves and I believe it is a very great menace to the price
level or the purchasing power of the dollar.
The CHAIRMAN* Don't you think we need more gold now than we
needed in 1914?
Professor FISHER. Yes; but we have more than we need, and
abroad they are not using it very much, even when they go on the
gold standard, and it will be a long time before France and Italy
get on the gold standard and before there is a universal gold standard abroad.
The CHAIRMAN. H O W much gold is there, and where is it, in this
country? You say there is too much gold. I think a supporting
statement and analysis of that situation would be most interesting
to the committee.
Professor FISHER. I have no figures in my mind.
The CHAIRMAN. Are you arriving at it in an arbitrary way?
Professor FISHER. No; I am simply watching that one figure in
the newspapers as to the gold reserve—that is, the gold that is func r
tioning for the support of currency or credit.
The CHAIRMAN. I n arriving at that decision, you should also, I
should think, have to know whether or not any of this gold is held
in trust. If it is held in trust, of course it belongs to outsiders.
Professor FISHER. But in that case it must be held idle and the
interest otherwise to be earned on it by utilizing it for loans is lost to
the owner.
THE CREDIT OF $200,000,000 TO THE BANK OF ENGLAND

The CHAIRMAN. H O W does, in your judgment, this $200,000,000
credit established for the Bank of England, to go back on the gold
basis, affect our gold situation?
Professor FISHER. I have not considered that question, Mr. Chairman. I should like to give it some thought before trying to
answer it.
The CHAIRMAN. Members of the Federal Reserve Board appeared
before the committee, and one member of the Federal Reserve
Board stated they established a credit available for the bank of
England. Would that take gold out of this country, in your judgment, or tend to leave it here ?
Professor FISHER. A S this credit has, I believe, been hitherto
unused and as it did not encroach on domestic credit, there being
enough and to spare for all, there has been no tendency apparent
in either direction. As soon as the credit is used the situation will
be different.
The CHAIRMAN. Would that affect the price level?
Professor FISHER. I t would tend to.
The CHAIRMAN. Lower or raise it?




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STABILIZATION

Professor FISHER. I t would tend to raise it as soon as the credit
was used for purchasing goods in this country. But it would have
other reflex effects. For instance, it would tend temporarily to reduce by $200,000,000 the gold or goods to be exported from England
in payment of her debt to us and this would neutralize the priceraising effect in this country and substitute a price-raising effect
in England (or what amounts to the same thing would deter any
tendency of prices to fall there). I t s main object is to make it
possible to keep gold in England, or ultimately, perhaps, to buy
gold here and ship it there.
The dominant thought in England has been to get back on the
gold standard. This idea of boosting the price level in the United
States is merely an idea of a group. The dominant idea—the
one they put across—was to get back on the pre-war gold basis.
They have made a tremendous sacrifice in unemployment to do that.
The CHAIRMAN. D O you think we should aid to get them back on
a gold basis as quickly as possible and should lend assistance by the
shipment of gold to them ?
Professor FISHER. I am not enthusiastic about it, but in as much
as what I should like is out of the question for the immediate
future—that is, universal stabilization for the whole world—I do
not see any other second-best thing than to encourage them to get on
the gold standard and help them get there. Of course, that means
deflation of prices in England or inflation in America.
• The CHAIRMAN. D O you think there is any danger on our part in
holding such a large amount of the world's gold, because other
countries might declare gold a commodity and it might thus lose
its value in international trade ?
Professor FISHER. YOU mean if they do not go on the gold standard?
The

CHAIRMAN.

Yes.

Professor FISHER. I do not think it would change the situation
as it now stands.
The CHAIRMAN. YOU do not think it would affect the value of
gold?
Professor FISHER. A mere declaration ?
The

CHAIRMAN.

Yes.

Professor FISHER. I do not think so.
The CHAIRMAN. Could they accomplish that by a mere declaration?
ELASTICITY AGAIN

Professor FISHER. I do not think so. Of course, gold is a commodity in the paper-money standard countries of the world to-day,
just as it was in our country during the Civil War.
You asked me in regard to the elasticity, Mr. Chairman.
The

CHAIRMAN.

Yes.

Professor FISHER. When the Federal reserve act was passed it was
largely in response to that slogan of an elastic currency, the idea
being that the money or credit put in circulation should be matched
up always wxith some business transaction so that the flow of money
should be parallel to the flow of commerce. That is merely a crude
formula to cover very much the same ground as that which I tried




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91

to cover when I spoke of stable money and stable price levels. I t
means that money should not be in excess of the demands of commerce. I n the equation of exchange you have money multiplied
by its velocity equui to the price level multiplied by the volume of
trade.
If the volume of trade is kept proportionate to the money, then
the price level will remain fairly constant. So it amounts to very
much the same thing as saying we want an elastic currency that
expands when business expands and contracts when business contracts; that is to say, we want money to be such as not to disturb
materially the price level. So, in that way, I think the Federal
Reserve Board was quite within the law and carrying out the spirit
of the law when they " accommodated commerce and business " by
preventing inflation or deflation. This was, by implication, the
fundamental idea of elastic currency and the fundamental idea of
the Federal reserve act.
The CHAIRMAN. I n that connection, Doctor, under the present
practice of the Federal reserve system, the Federal reserve notes are
becoming more extensively in circulation than other forms of money.
Now there is $1,650,000,000 of Federal reserve notes outstanding—
somewhere between one and a half and three-quarter billions at this
time. I s this due to the fact that the Federal reserve system is
using the Federal reserve notes to a greater extent than originally
intended that these notes are outstanding and is an undue amount of
Federal reserve notes outstanding, or has there been taken from
circulation an amount of money of other classes so that to take care
of the needs that Federal reserve notes must be out in increasing
amounts?
Professor FISHER. I could not answer such a question specifically
without going into the records, and you are evidently much more
familiar with them than I am; but I should say that the expansion
of our circulating medium, including that of Federal reserve notes,
has been in response to a great increase in business activity since
the war and also in response to this large amount of gold that we
had sent to us from Europe.
The CHAIRMAN. YOU think it is incumbent upon the Federal
reserve system to furnish circulating medium in the form of Federal reserve notes rather than the old forms of circulating medium
sucli as prevailed before the Federal reserve system was created,
which are now becoming secondary ?
Professor FISHER. Yes; to a large extent, because it is more
elastic.
The CHAIRMAN. Is it not possible that, from these operations, we
may affect prices and the price level ?
Professor FISHER. If too much circulating medium goes into the
channels of circulation, it tends to raise the prices; and if too little,
it tends to restrain them.
The CHAIRMAN. H O W can that be controlled ?
CREDIT VERSUS POCKET MONEY

Professor FISHER. By the process we were speaking of yesterday,
by the Federal reserve system substituting gold certificates for Federal reserves, or vice versa. However, I do not think the actual




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STABILIZATION

pocket money in circulation is the chief determining factor. I t is
the checkbook deposits that are ten times as important.
The CHAIRMAN. I judge from what you say then that it does not
matter whether there are five billions of circulating medium out or
ten billions of circulating medium out. Do I understand you correctly there? I t would have no effect on the price level whether
there was five billion of notes or ten billion.
Professor FISHER. Of notes ?
The CHAIRMAN. Money, I mean—actual currency—pocket money.
Professor FISHER. I t would make a difference, but not as much
difference as 50 years ago, because now we have such a large volume
of credit in circulation and it is the deposits subject to check which
have the upper hand rather than the pocket money, and that is one
reason for the paradox often mentioned by people who do not thoroughly understand the quantity theory of money and want to diecredit it, that very often the quantity of money in circulation follows
the price level rather than precedes it.
The CHAIRMAN. I n your judgment it does not make any difference
who furnishes the money so long as it is available, whether issued in
the form of silver certificates or Federal reserve bank notes or gold
certificates ?
Professor FISHER. I t is dollar for dollar. Of course, greenbacks
will always be $346,000,000. They will not fluctuate, that is the
law, and the Federal reserve notes will fluctuate. The Federal
reserve notes are elastic and meet the fluctuations of business better
than the other forms we previously had. The important thing is
to have true elasticity in the deposits subject to check. If you can
get them to correspond to the demands of business and be neither too
much nor too little, the pocket money will take care of itself.
Mr. STEVENSON. I S not that governed by the extension of credit by
all banks?
Professor FISHER. Yes.

The CHAIRMAN. There is really no definite control, through the
Federal reserve operations, of the amount of credit than can be
granted ?
Professor FISHER. I will answer that by referring to the letter you
read written by Professor Jenks. There are thousands of nonmember banks, none of which the reserve board can control, but they
can influence them by moral suasion. They can influence them by
their rediscount policy. You can check the expansion when there is a
tendency of the member banks to put out too much credit and the
price level is rising. The Federal reserve system can put a quietus
on it.
The CHAIRMAN. Should the rediscount rate be above or below the
rate for money ?
Professor FISHER. I do not think it is essential "that it should be
uniformly in one direction or the other. I think the Federal reserve
system should be given wide discretion in regard to that.
LOSSES TO CREDITOR CLASSES SINCE 1913

Mr. LUCE. I should like to recur to that phase of the subject with
which the discussion began this morning. Ten years ago, as a
result of foregoing the enjoyment of certain luxuries during 30




STABILIZATION

93

years, I had laid aside a certain amount of purchasing power against
the needs of sickness and old age. I had become a member of the
creditor class, which is, I fear, sometimes referred to with an
invidious suggestion. I had put this purchasing power partly in
savings banks and cooperative banks and a little in bonds and I had
a life insurance policy. Four years later I found that one-half of
the fruits of my sacrifices and denials had disappeared.
Professor FISHER. You mean in purchasing power %
Mr. LUCE. Yes. About that time the bulk of the economists in
the country expressed the hope that we would never get it back.
They desired to have that price level stabilized and predicted that
it would be stabilized at something over 200, and unless my memory deceives me, you were one of those who brought grief to me
by predicting that the price level would not fall and intimated that
it should not fall. To my great satisfaction, in the six years that
have passed since that prediction was made, I have got back part
of it and now I am only 33i£ per cent out. I have now one-third
less of that purchasing power than I had 10 years ago.
Professor FISHER. Yes.

Mr. LUCE. Yesterday's discussions brought out the belief apparently by Mr. Shibley and yourself that I ought to abandon all hope
of getting back the third I lost, which again, to my very selfish
impulses, is a very disagreeable outlook. I should like to know what
there is ethically unsound in my desire to get it back.
Let me, before you answTer the question, point out I am not wholly
selfish in this matter. I come from a city of 30,000 persons, an
industrial city. There are about 20,000 adults there and I imagine
that about 18,000 of the 20,000 are in this obnoxious creditor class.
The wage earners arc almost universally in the creditor class. We
have savings banks that have deposits of about $15,000,000, of which
ten or twelve million dollars is the property of the reprehensible
creditor class that toils in the woolen factories, and other factories
in that town. Of these 20,000 adults, I surmise that more than
15,000 have life-insurance policies and that most of them or very
many of them held those policies 10 years ago. I happen to be a
director of one of the smaller mutual life insurance companies and
so it was brought home to me at every directors' meeting I attended
that the great bulk of the funds which have been put into our hands
to be held in trust for this creditor class, which works in the mills
and factories, is invested in bonds, and those bonds have, in the last
10 years, lost a third of their value. I am one of the board of
trustees, therefore, for a great many thousands of wage earners,
because this life-insurance company deals chiefly with the industrial
class and the great bulk of our policyholders are wage earners who
very often have taken out a policy in order that there might be
enough money to bury them and pay the cost of the last illness.
Am I wrong, unjust, or unfair or inequitable in holding that the
purchasing power which has been taken away from these thousands
and thousands of working people shall be returned to them? I
talk about it with a sort of earnestness because the money is held
by us as trustees. Will you explain why it is wrong for me to desire to get my own purchasing power back or for these thousands of
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7

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STABILIZATION

depositors to desire to get their purchasing power back? Whyshould we not, in other words, return to the scale of 1916 and deflate and get back the money which you say has been robbed from
us?
Professor F I S H E R . Mr. Chairman, that is just the sort of thing
that is wringing my heart, and I say that literally, and I have sympathy not only wTith our friend who has spoken for himself personally, but for the thousands that he represents, and I also have
sympathy
The CHAIRMAN. The situation he depicts is a typical one throughout the country.
Mr. LUCE. Let me also point out that I have a very keen sympathy with the educational institution that gave me my education
and I have seen one-third of its endowment disappear. I am interested in a hospital and in a church and various bodies that are supported for philanthropic purposes by their endowments and I have
seen a third of that go and that adds to my anxiety.
Professor F I S H E R . Not only do I have sympathy
Mr. STEAGALL. Before you proceed, I want to express some gratification that wells up in my heart as to the statements here that
the money of this country had drifted into the hands of laboring
people. I am unselfish enough to rejoice with those sections of the
country to which it applies. I n the section of the country in which
I live the laboring people have nothing but their labor and some
of them just a little of its products.
MUST

COMPROMISE

BETWEEN

JUSTICE
DEBTOR

TO CREDITOR

AND J U S T I C E

TO

Professor FISHER. I was going to say, Mr. Chairman, that from
the standpoint of sympathy and justice we must take into account
not only the men who are in the position Mr. Luce has described,
but those who are in the opposite position. The farmer, for instance,
who mortgaged his farm in 1920 at the peak of prices—thousands
and thousands of them have done it—is in that position. I notice
in my notes I wanted to speak about your reference to my personal
prediction and desire back in 1919. At that time, I think, I was the
the only one who came out and predicted there would be a rise in
the price level. (There was a general expectation there would be
a fall.) Such a rise did occur. And I coupled with that prediction
an opinion that in about a .year's time there would be some recession
and that recession did come, and it came with a vengeance, a great
deal more than I expected. So that my prediction was partially
fulfilled and partially not. But the time when I may have stated,
as you seemed to have remembered that I did, that the price level
should r o t fall, I think wTas after that first fall. I may be mistaken.
The principle on which we should decide what is just should take
account of all concerned, debtor and creditor, and the different dates
of the debts and credits. What you say is true, undoubtedly, and
your loss is part of the $40,000,000,000 that I have been talking
about. I spoke yesterday of how the same thing had happened in
Europe to a large extent. I mentioned the fact that the leading
professor of Germany, perhaps, had lost his entire fortune. I might




STABILIZATION

95

mention the fact called to your attention by Professor Rogers when
he was studying, after the war, these various conditions, that he went
to Budapest and visited a poorhouse which was philanthropically
run by a lady for the benefit of the " new poor," as they are called,
in Europe, the middle class who had saved a medium amount of
money and invested it in bonds and savings banks, etc., and expected
to live on it in their old age, and she pointed out a little hall bedroom where two ex-justices of the supreme court lived, men who had
come to her poorhouse to live because their savings had been swept
away. I know there are millions of people in the United States
suffering to-day because they made investments at the pre-war level
of 1913, and now, at the level at which I would propose to stabilize,
they are going to lose permanently a third of their investments. I f
there were some way of individualizing this and scaling these debts
so that you, Mr. Luce, should have an addition to your bonds, and
that should come out of others who had invested in stocks and who
got what you lost, that would be ideal justice. But that would not
be practicable and would not correspond with your contract. The
answer is, " Well, Mr. Luce, you made the investment and you should
know there was no guaranty that the dollar would be stable. You
took your chance and you must toe the mark and play the game and
take your loss." That is the answer.
From the standpoint of the individual that is a sufficient answer,
but it still goes against the grain if more people lose that way than
otherwise, and so the question of justice to the people must be considered on its merits, and so, because you can not individualize and say
how much should be restored, the only thing you can do is take the
course that will do the greatest good to the largest number and the
least harm to the smallest number. That means you should take
into account the creditor and debtor and the dates of the debts; you
should take into account those who went into debt in 1920, like the
farmer, and those who made investments in bonds in 1913; like yourself, and those have to be balanced against each other and a sort
of center of gravity taken. If everybody had done as you have
done—and there are doubtless millions of them—if all debts had
been contracted in 1913, I would say the only thing to do in the
United States to-day, in justice to everybody, would be to get back
to the 1913 level. If, on the other hand, all the debts that exist had
been contracted in 1920, I would say that the farmer was right and
we should go back to the 1920 price level.
I had on my desk at one time two letters that came to me, one
representing the farmer class and another representing the Government employee, one saying that " t h e only justice I can see is to go
back to the 1920 price level," and the other saying, " T h e only justice
1 can see is to go back to the 1913 price level."
What is the average ? I tried at one time to calculate that, and I
found as nearly as I could estimate it or guess at it, on the basis of
such statistics as I could get hold of as to the duration of loans,that
the average loan was one year old.
Mr. LUCE. I wonder if you took into account the average life of
life-insurance policies and savings-banks deposits and the endowments of educational institutions?




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STABILIZATION

Professor FISHER. I did endowments, in the sense of including
bonds. I did not with respect to life insurance. As to savings banks,
it is different. There is a constant flowing in and out.
Mr. LITCE. I interpolated that because I was surprised you discovered it was a year or less.
Professor FISHER. I may be wrong, and I think to-day it may be
more than that, because of the Liberty loans. Billions of Liberty
bonds are out now. The ideal method would be to get to-day the
bonds you own and the savings-banks deposits, which range according to the time they have been carried, and the farmers' loans, and
take their debts and see those that now exist. You can not do anything with those that have been liquidated, but for the bonds and
debts and mortgages now outstanding, what is the average date when
they began ? My impression is that they would be two or three years,
on account of the Liberty bonds carrying them back. Then there
would be three groups, the group you represent, the farmers' group,
and the group of Liberty bond holders, and perhaps a fourth group,
scattering. The Liberty bond price level was, if I remember correctly, not much above the price level we are at now. I would have
to see the figures to state just exactly what it was. The price level
is now 153.6, according to my index number last week. What it was
then I will find for you in a moment. The price level at which you
contracted was 100. The price level at which the farmer contracted
in many cases was about 200 or 220,1 suppose. I have never recently
tried to work this out.
My guess would be that almost all the indebtedness which now exists was created during the last four years, except for the Liberty
bonds, which run into billions. Of course, that means there are still
billions that go back to 1913, but with all the new issues that came
out in the last four years, which deserve consideration, the average
would be very close to our present average, and, rather than enter
into a long discussion, if I were to stabilize or had the power to
stabilize and people would accept my dictum or decision as to what
it should be, it would be the average of the last four years.
Mr. LUCE. After the Civil War, when the thing was left alone,
the creditor class got back,its money.
Professor F I S H E R . Yes; but it was not the same individuals that
got it back. That was the idea in 1920 to some extent, that justice
required getting rid of the high cost of living. That was one cry,
and it was on the theory that people would be better off anil better
pleased to get back to the pre-war level, and you immediately bankrupted other people; in other words, the water is over the d a m ; so
we should let bygones be bygones and try to prevent a repetition of
the evils you describe.
The CHAIRMAN. Suppose Mr. Luce, representing the creditor
class, was an investor in farm-mortgage bonds which you refer to,
issued at a price level of 220; that would not change the situation at
all so far as his situation was concerned, would it?
Professor FISHER. Yes; he has made money on that. The man
who bought the farmers' mortgages in 1920 is the man that the farmers lost to. He has gained, while the farmer lost, during the deflation. The investor in farm mortgages from the period of May, 1920,
to the present, has been the gainer.




STABILIZATION

97

The CHAIRMAN. I n other words, if Mr. Luce's investment was represented in loans placed in 1920, he would not have suffered that loss
of 3 3 ^ per cent.
Professor FISHER. N O ; he would have had a gain instead.
The CHAIRMAN. Then it has been profitable for the creditor class
that invested in farm loans when the price level was at that high
point ?
Professor FISHER. Yes; and the farmer is therefore angry at those
people---the money lenders—because he now has to pay back that
which he then borrowed with a 60-cent purchasing power dollar.
Mr. LUCE. I might say that the insurance company of which I
spoke puts a material amount of the money entrusted to it into farm
mortgages, but I can not recall at any time in the last six years any
difference in the rate of investment. I t has always been on the same
basis.
Professor FISHER. Yes; but when prices are falling at the rate of
5 per cent the money has gained 11 per cent in purchasing power.
If you invest $100 to-day and the next year get back $106, and the
gain in purchasing power is 5 per cent, you have gotten back next
year the equivalent of $111 this year.
Mr. W I N G O . Doctor, the contemplation of Mr. Luce on one end of
the seesaw, with the others who were compelled to go into debt and
give their promise to pay in 1919 on the other end of the seesaw, furnishes an argument in favor of your attempt to prevent instability
and prevent further violent fluctuations ?
Professor FISHER. Yes, sir.

Mr. WINGO. The men, including the insurance companies, who
were so fortunate as to buy telephone stock and other forms of investment, when they were down to 9Sy2 in 1920 and could sell them
to-day at 14Q and something, on an average—there has been about a
43 per cent rise in the standard groups—they have recouped some,
but those people who went into debt
Mr. LUCE. I might say that the insurance company with which
I am connected buys no stocks.
Mr. W I N G O . But there has been a class, to which Mr. Luce belongs, that has recouped somewhat by the rise in prices. But take
the other gentlemen on the other end of the see-saw comparable to
Mr. Luce. I have in mind a gentleman very similar to Mr. Luce.
He contemplated laying aside funds to take care of his minor children and forewent luxuries in order that he might be able to give
to his three children a university training, something that was
denied to him. When the time came for him to put two of them
into the university he found that the cost of clothing and all the
other expense incidental to educating the children had more than
doubled and his meager savings, under the old price level, were
wiped out and were not sufficient, as he figured they would be and
expected that they would be, and he had to mortgage his home
at a time when the level was about 200. Now, as the seesaw works
up again and the time comes to pay the mortgage, he is going to
have to pay it in a 100-cent dollar, whereas he borrowed a 50-cent
dollar.
Professor FISHER. Stung twice.




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STABILIZATION

Mr. WINGO. And he is going to lose as Mr. Luce lost. I n other
words, Mr. Luce's seesaw goes back up and the other man is cut,
and your conclusion is that there is not any practicable way by
which we can wipe out the inequities that have occurred in the past
for everybody, and theoretically we must assume that they are just
about evened up, because individuals flow into the mass and flow
out, but the only thing left in a practical way that the bankers
who control credit, or Congressmen who can legislate to aid in
this matter, is to prevent the same injustices recurring by the future
operations of the credit machinery.
STABILIZATION I S FOR P R E V E N T I O N R A T H E R T H A N R E L I E F

Professor FISHER. That is my idea, and that is the reason we do
not make very much progress, because the immediate problems before Congress are problems looking toward relief—what you can
do to help the farmer and help these particular men in this particular
predicament instead of attempting to legislate against a recurrence.
Prevention is worth many times cure, because prevention may last
for a million years.
The CHAIRMAN. H e who borrows should know whether he is in a
rising price level or a lowering price level.
Professor FISHER. Absolutely.
Mr. BEEDY. Of course, he can not know that.
Mr. WINGO. I n other words, we have been focusing our attention
on emergency matters and have lost sight of these preventive
measures ?
Professor FISHER. Yes.

Mr. WINGO. I am constrained to recall at this point a statement
made by an Englishman, that English statesmen never sacrificed
the security and stability of the future of the British Empire to
present interests and temporary benefits, whereas the American can
not see beyond the present emergency and frequently sacrifices the
stability of the future in order to appease desires created by temporary distress.
Mr. BEEDY. His charges that the standards of statesmanship, so
called, and the standards of legislation have declined in the past 50
years are that we have been administering legislation in the form of
anesthetics rather than in the form of sound fundamental remedies.
Mr. WINGO. I must dissent as to the gentleman's use of the word
" anesthetics." You have been attempting to use an artificial stimulant in industry under the name of a protective tariff.
O P E N - M A R K E T OPERATIONS

Mr. BEEDY. Getting back to the query of the chairman and the
line of discussion he had as to the open-market operations, aside
from the profit that is accruing to the Federal reserve banks by openmarket operations, and assuming that there is a surplus of funds,
as there has been for several months—practically 24 months—the
member banks not needing any increase by reason of rediscount
operations, assuming that to be true, aside from the profit that flows
to the Federal reserve banks, what benefit is there in a Federal




STABILIZATION

99

reserve bank engaging in open-market operations, what public
benefit?
Professor FISHER. I t is a device they can use for stabilizing the
price level. That is the benefit, and they have been using it for that.
They have not advertised it, but it is, as you were saying the other
day, the most powerful weapon they have.
The CHAIRMAN. Might it not be possible that the influence that
caused them to do that might be a desire to make earnings to pay
the operating expenses of the Federal reserve system? Would they
be justified in going into the open market for that purpose, with no
other thought as to the effect upon the credit situation?
Professor FISHER. I think they would be if it did not interfere
with the public purposes for which the system was created.
The CHAIRMAN. If they did not have earning power to cover current expenses, and went into the open-market operations to get
those earnings, might they not do something that w^ould have a very
bad effect?
Professor FISHER. Yes, sir; it is possible, especially if people
criticize the Federal Reserve Board, as they do—and, I think, unjustly to some extent—egg them on and say, " Why should we lose
money for nothing? " whereas if you could validate what they are
doing and say, " This is done under authority of law and in order
to prevent deflation and inflation; that is one of our great public
utilities and we are expected to prevent any great deflation or inflation "—in that case they would be encouraged to go on and €o this.
The CHAIRMAN. Take a situation, though, where the 12 banks in
the Federal reserve system are having difficulty in earning an income
sufficient to cover expenses; for instance, last year they returned to
the Government a surplus which was a very small amount. Some of
the 12 Federal reserve banks did not earn their operating expenses.
Mr. WTNGO. Take the instance referred to by the chairman, that
of making expenses. The Federal reserve bank is a trustee for the
member banks, and when they go into the open market under conditions that prevail, because they say that the banks are so prosperous and have such a surplus of funds, they do not rediscount
with the banks to the extent that would enable them to pay expenses
out of the rediscount revenues—if that is true and banks have the
surplus and they are looking for investments with which to pay their
own running expenses, then when the Federal reserve bank goes into
the open market in competition with them, every time they make a
dollar to cover expenses, do they not take that same dollar out of
the member banks themselves? Is it not taking it out of one bank
and putting it in another ?
The CHAIRMAN. Don't they keep up the rediscount rate by that
and tend to prevent deflation ?
Professor FISHER. Yes. I think the member banks should be told
this: " Sometimes we compete with you and to that extent we do you
damage, but that is nothing compared with having your yardstick
of commerce stabilized and avoiding these evils that Mr. Luce refers to."
Mr. WINGO. That might be true, but when they say not that commerce needs it to save fluctuations, but merely to malie profits to pay
salaries, they would not be justified, would they?
Professor FISHER. I agree with you.



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STABILIZATION

Mr. WINGO. Because if they have a right to protect this situation
you refer to by giving an indirect benefit to all classes, especially
the credit banks, they have no right to disturb that stability simply
for the purpose of making money to pay expenses, because it is taking money out of one bank and putting it in another.
The CHAIRMAN. Don't they go to the market for another purpose ?
Don't they go into the open market for the purpose of influencing
the money market ?
Mr. WINGO. That is the point I am talking about. If they go in
for the benefit of—assuming that they have the legal and moral right
to try to control the money market for the purpose of maintaining
the stability of prices, then if you assume they have that right, both
morally and legally, then it is not wise for them to go in there and
disturb that purely to make profits.
The CHAIRMAN. Doctor Fisher has stated that is one of the most
powerful weapons in their hands. I t has been argued by some gentlemen who claim to know, that the Federal Reserve Board or this
committee on open-market transactions, watching the trend of prices,
gauge their operations in the open market as to what they think
the market should be. For instance, if the market is going up or
general prices turning up and the general prices of the stock exchange are too high, they go into the market for the purpose of controlling that situation. Is not that about what you stated? The
effect of what you said would be abo^t that ?
Professor FISHER. Something like t h a t ; yes.
Mr. WINGO. I am not criticizing that, but suppose that the price
level is on an even keel; the point I am making is that it violates the
very purpose for which they are to function by disturbing that even
keel, because if it does have any effect it would undoubtedly depress
the credit market by throwing surplus credit on the market and raising prices.
Professor FISHER. May I go back to the point Mr. Luce made
•
The CHAIRMAN. Does not the fact that the Federal reserve banks
engage so extensively in open market transactions affect the stock
market and is not that a function that should be more properly carried on by banks outside of the Federal reserve system ?
Professor FISHER. I am not sure whether you are speaking from
the standpoint that is in my mind all the time, of stable price levels,
or speaking of it on the hypothesis that the price level is all right
and does not need such regulation. If you are talking from the
standpoint of stable price levels, I think that is the paramount issue
of the time and the disturbance caused by the going in or the going
out of the market is, in other ways, too small to be compared with
the other extremely important thing of maintaining the dollar at
a fairly stable purchasing power. If you are going into the market
on the other theory, that is a banking proposition entirely which
will have to be considered by the individual member bank as to its
duty to the stockholder.
FOREIGN TRADE VERSUS DOMESTIC TRADE

Mr. WINGO. Before you go on the other matter, I do not recall
your exact language, but somehow, in discussing the foreign trade,
you gave expression to the thought that you agree with those who
treat as of very small importance the volume of our foreign trade*



STABILIZATION

101

because, as you frequently stated, compared with the great volume
of domestic trade, it is infinitesimal. I thought possibly those who
took that view overlook this fact: I will take a concrete illustration,
because sometimes that is very helpful in explaining a point. Take
the very illustration Mr. Stevenson used when there was a slump t>f
$700,000,000 in the cotton industry.
Mr. STEVENSON. $700,000,000 in that which was exported.
Mr. WINGO. And, of course, it meant something like five or six
hundred million dollars additional on the whole crop; in other
words, I think we can safely assume there was a billion lost on the
whole crop that was affected by the breakdown of prices. But even
taking the $700,000,000 in the foreign market, that decreased the
purchasing power of those farmers to the extent of $700,000,000, and
you are more familiar than I am with the ratio of what that represented, with the compounding of the purchasing power. If they
could have spent that $700,000,000 in the purchase of automobiles,
hats, shoes, and necessities of life, and the manufacturers could have
spent that money in the employment of additional labor, is not that
the real crux of our domestic trade—the purchasing power of the
people ?
The CHAIRMAN. That $700,000,000 is part of the $40,000,000,000
referred to by Professor Fisher as " robbed " in this country because of the fluctuation of the price level, is it not?
Mr. WINGO. But here is the question
The CHAIRMAN. I wanted to know if this $700,000,000 lost was
not part of the $40,000,000,000 loss he spoke of.
Professor FISHER. I think so.
The CHAIRMAN. I t is a loss in values.
Professor FISHER. Yes; but not a loss as between debtor-creditor;
it is a loss by producers benefiting traders.
Mr. WINGO. I S not the foreign trade of a great deal more importance than the mere statistical percentage as compared with the domestic trade ? As a matter of fact, was it not a frequent statement in
the financial papers and trade papers some months ago that the revival in business that came from the last slight depression was
brought about by the increase in the purchasing power of the farmer,
and do they not all recognize that the purchasing power of the
farmer has a very decided stabilizing or depressing effect on the
commerce of the country?
Professor FISHER. I think that is unquestionable, and the few
statistical computations made, taking into effect all the foreign trade
you refer to, do not generally amount to over 10 per cent of the total
domestic trade of the country, and the highest percentage, as I recollect, was 18 per cent. However, I dislike to quote figures from
memory, and I find I am in error in one figure already.
Mr. WINGO. Does not a percentage of 5 per cent represent the
difference between depression and boom figures?
Professor FISHER. Yes.

Mr. WINGO. I n other words, take a favorite illustration that I
use: That where there are 11 men seeking for 10 jobs as compared
with 10 men seeking for 11 jobs, there is only a small difference of
two, yet it represents the difference between prosperity and depression in the labor world.
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STABILIZATION
T H E P R I C E LEVEL W H E N

L I B E R T Y BONDS W E R E

ISSUED

Professor FISHER. I see your point.
If I may go back now, Mr. Chairman, to the questions Mr. Luce
raised and the answer I made, in special reference to Liberty bonds,
here in my book, Stabilizing the Dollar, at page 157, in a footnote
I have indicated that computation. The first Liberty loan had the
average date of June, 1917, and was issued on a price level of 184.
The second Liberty loan was dated as of November, 1917, and the
index number was 182; the next Liberty loan was 191; the next, 204;
and the last, 200. Taking into account the relative amounts of these
and averaging the price levels for the whole, they average 195. So
the influence of that disturbing factor on the whole average, if it
was possible to get the statistics and find the ideal justice, probably
it would work against your side of the case. I t would tend to raise
the price level, but it would be just to all concerned.
UNEMPLOYMENT AND DEFLATION

One other matter in connection with what Mr. Luce said as to the
working people: You would injure the working people much more
than you would help them by trying to come back to the price level
of 1913, because unemployment is an absolutely necessary sequel of
deflation. I speak with absolute confidence on that, because of the
experience of this and other countries. Unless we took many years
to get back to the 1913 price level, in which case it would not do
any good, deflating would ruin these men in whose behalf Mr. Luce
was speaking, by throwing them out of jobs. They would derive a
very small benefit in augmenting the purchasing power of their
savings as compared with the disastrous effect of unemployment.
Mr. LUCE. H O W do you meet the suggestion, if that be the basis
of our procedure, that every time there is an abnormal rise in the
price level, as after all great wars, it ought to be pegged at the new
top reached ?
Professor FISHER. I have never taken that ground myself.
Mr. LUCE. I S not that the logical conclusion from what you say?
You say all periods of deflation are objectionable because of unemployment. I do not question tho validity of the statement, but it
arouses the question whether, if we should reach the heights, we
should invite these periods of unemployment by deflation.
Professor FISHER. I t is hard to treat of situations theoretically
when you have a practical situation to deal with. I have tried to
show theoretically what should be done. I believe that you reach
pretty close to where you are to-day—163 or perhaps 170—by taking
the average of all the price levels at which debts now outstanding
were contracted, including those Liberty bonds. Then you have to
take the industrial effects into account and weigh one against the
other. As far as the industrial effects are concerned, unemployment,
that is true, and from the standpoint of the prosperity of general
business the price level ought to stay just where it is. So far as that
consideration goes, if you are away up in the sky, keep there; or if
you are away down, keep there. You have to keep account of both
considerations, debts and unemployment, and it is difficult for me




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103

to solve and come before you with a definite recommendation. That
is the reason I do not think we should say, " Stick to 162," as Mr.
Shibley would. W h a t we should say to the Federal reserve system
is, " D o not have any great deflation or inflation. Let the price
level stay near where it is for a few years, and then we will have a
long period of years upon which to average it."
The CHAIRMAN. YOU stated very clearly- that when the price was
rising labor is more regularly employed and wages increase.
Professor FISHER. Not in purchasing power.
The CHAIRMAN. But in actual money wages rise.
Professor FISHER. But the high cost of living offsets that.
The CHAIRMAN. And conversely, in a declining price level, labor
is unemployed to a greater extent ?
Professor FISHER. Yes.

The CHAIRMAN. That is one of the troublesome things, that the
wage level remains high, while the price level is going down. I s
there any other way to reduce wages in a proper ratio other than
through unemployment ?
Professor FISHER. Well, I do not know whether you are assuming
that the wages are too high. I doubt if they are too high to-day.
The CHAIRMAN. Might they not be too high in relation to other
prices. I am not assuming they are, but when labor is unemployed
there comes deflation in wages, and when labor is employed the old
wages stick ?
Professor FISHER. Yes.

The CHAIRMAN. I was questioning whether there was any other
way than unemployment to reduce wages, when cost of living is
going down.
Professor FISHER. Yes; by the process of supply and demand, as
Mr. Wingo suggested—11 men seeking 10 men's jobs.
THRIFT MADE A MOCKERY

Mr. LUCE. I S there anything to indicate that your average that
you refer to would result in a benefit to the greatest number of
people? Have you got figures to show that more than half of the
people showed a willingness to forego luxuries and be thrifty during
the period you refer to or otherwise ?
Professor FISHER. Just at the present time ?
Mr. LUCE. Yes. Would not the net gain accrue more largely to
the less thrifty people? Would not the injustice be greater if you
took an exact average ?
Professor FISHER. I do not know. I t is staggering to think of
the number of complications you might introduce. But you must
remember the number of people who were thrifty when prices were
falling, and they have got more than they ought to get, just as you
have gotten less, because they invested in 1920 and you invested in
1913. I t would be hard for me to answer that question. But I
have absolute sympathy with what you say. When prices are rising
there is no reward for thrift. Thrift is then mockery. You are
cheating the servant girls and laboring men who yield to the educational propaganda of thrift campaigns, and it is a fraud on those
people. I think when we know prices are going to rise there is a
personal responsibility there. During the campaign for the Liberty




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STABILIZATION

loans I believed that prices were going to rise (and they did rise),
and when I was speaking for Liberty loans I always refused, in
spite of those who urged me to say what I did not want to say, that
Liberty loans would prove a good investment. I said, " D o not
invest merely as a matter of investment. This is a matter of patriotism." because I believed they were going to lose in purchasing power.
They did for a time, but later there was that deflation which benefited those who held on.
The CHAIRMAN. During the period of high-price levels the Federal farm-loan bonds were put out or sold, represtnting loans to
farmers, and a great many rich people bought them because of the
tax-exemption feature. Those people who bought those bonds during the high-price levels have been extremely fortunate. They not
only received a tax-exempt security but a security that did not depreciate in value 331/^ per cent, as Mr. Luce stated.
Mr. W I N G O . T h a t is true of all securities which were sold for a
diluted dollar.
The CHAIRMAN. I t is a quarter to 1. What is the pleasure of the
committee ?
Mr. WINGO. I suggest we get back at 2 o'clock.
The CHAIRMAK. Are there any other questions of Professor
Fisher?
Mr. BEEDY. I have a question.
Professor FISHER. I will be back this afternoon, if you want me
longer.
The CHAIRMAN. Very well; we will adjourn now until 2 o'clock.
(Whereupon, at 12.45 o'clock p . m., the committee took a recess
until 2 o'clock p. m.)
AFTER

RECESS

The committee resumed its session at 2 o'clock p. m., at the expiration of the recess.
STATEMENT OF PEOF. IRVING FISHER—Continued
The CHAIRMAN. With the exception of a question that Mr. Beedy
wanted to ask Doctor Fisher, I think we had finished. If, on the
contrary, there are further questions, Doctor Fisher will be glad
to answer them, I think.
PROPOSED

AMENDMENT

DELETING

WORD

" MINIMUM,"

ETC.

Mr. CANFIELD. I would like to ask the doctor a question. I
notice you referred yesterday to the word " minimum " and said
that you thought the bill would be better without it. I s that correct ?
Professor FISHER. Yes; I see no reason for that word.
Mr. STRONG. That " minimum " was a mistake, gentlemen, as I
have stated. I will ask to have that taken out.
Mr. CANFIELD. And as to the word " level," you said you thought
that that word should be changed to " scale."
Professor FISHER. I suggested that you go back to the wording
which was first suggested^ to this committee by Mr. Goldsborough,
which I have before m e :
To establish from time to time, subject to review and determination of the
Federal Reserve Board, rates of discount to be charged by the Federal re


STABILIZATION

105

serve banks for each class of paper, which shall be fixed with a view of
accommodating—

That far, I think, it is identical with the act as it now stands—
accommodating and stabilizing agriculture, commerce, and business, and preventing, deflation and inflation.
I suggest th&t this wording take the place of part of the wording
of this bill, but that you include the last paragraph of Mr. Strong's
bill, which is to the effect that all the powers of the Federal reserve
system shall be used to this end. As it stands otherwise, without
that addendum, it would merely authorize them to use the discount
power; but with that last paragraph included they can use the openmarket power and the other powers. I t seems to me that these ought
to be added. Otherwise, my suggestion is merely that this original
statement of Mr. Goldsborough be substituted for the statement in
the Strong bill.
Mr. STRONG. YOU think the language directing them to use all
their powers should be kept ?
Professor* FISHER. Yes.
Mr. STRONG. The purpose of that, of course, was with regard to
the open-market operations.
Professor FISHER. Yes. That last paragraph in your bill, I think,
should be kept.
Then I also said, if you will recall, that in order to have a complete bill, that would not only operate under present conditions, as
I think this bill would, but indefinitely, you should add the whole
of the Goldsborough bill.
Those are the three changes that I suggested: That you eliminate
the word " minimum "
Mr. STRONG (interposing). That was a mistake, as I have explained. Mr. Goldsborough, have you introduced your bill this year ?
Mr. GOLDSBOROUGH. Yes.
Mr. W I N G O . D O you mean it
Mr. STRONG. I suppose so.

was a mistake of the stenographer ?
I did not catch it until my attention
was called to it after the bill was printed.
Mr. W I N G O . That is a wholly different bill, Doctor, if you will
permit the suggestion. That would be a different proposition and
would apply, in a different light, to a good many of us.
Professor FISHER. I t would seem a good deal different to the
public.
Mr. W I N G O . I t would be a different philosophy entirely.
Mr. STRONG. NO ; it would not be a different philosophy at all.
Mr. W I N G O . For the purposes of the record, I wish to suggest this,
and I think it is material: The gentleman brings in a bill here under
which he wants to authorize the Federal Reserve Board to assume
control of credits and fix the minimum rate which the credit merchant might charge. The sky would be the limit. He could charge
all the traffic would bear and use that for the purpose of maintaining a stable price level. Now, the Doctor suggests that, from time
to time, they fix the rate of discount—one rate—for the purpose of
stabilizing agriculture, industry, and business and preventing inflation and deflation. That is a wholly different proposition.
Mr. STRONG. Let me say, for the benefit of the record, that the
gentleman's statement, of course, is facetious. I t was just stated to
him that the word " minimum " crept in there in some way unknown




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STABILIZATION

to myself. I just now understand from Doctor Shibley that it was a
mistake of the drafting board of the House, and I have already said
that I will ask to have it eliminated.
Mr. WINGO. Well, it is not facetious. You admit my impeachment of it.
Mr. STRONG. I do not do anything of the kind. I just say that
after having explained to you that it was unintentional and that
it is to come out, you then try to make a speech on it.
Mr, WINGO. Oh, no. I t is a wholly different proposition. You
admit that it is a different proposition. You will not defend the
original proposition.
Mr. STRONG. YOU are trying to " play horse."
Mr. WINGO. N o , I'm not. I am just calling attention to the fact
that your stenographer is very careless.
Mr. STRONG. N O ; you are trying to " play horse." I t has already
been explained to you that it was an accident, and that it will be
eliminated from the bill.
Mr. WINGO. However it got in there, you admit that it is an accident and that it is unsound, and you ought to back off of it. Whether
it is an accident or not, it is a wholly different proposition. You can
not defend that proposition.
Mr. STRONG. I do not want to. As I told you, I have asked to
have it taken out.
Mr. WINGO. I am glad you have seen your error.
Mr. STRONG. YOU were advised that it was an error before it was
discussed here at all.
Mr. WINGO. No, sir; this is the first time I have ever heard that
it was an error. I thought it was intentional.
The CHAIRMAN. Mr. Lombard, the committee will hear you now.
STATEMENT OF NORMAN LOMBARD, EXECUTIVE DIRECTOR OF
THE STABLE MONEY ASSOCIATION, SAN FRANCISCO, CALIF.
The CHAIRMAN. Mr. Lombard, will you state your name and occupation foi* the record ?
•Mr* LOMBARD. My name is Norman Lombard. I am the executive
director of the Stable Money Association.
The CHAIRMAN. And your residence ?
Mr. LOMBARD. San Francisco.
The CHAIRMAN. What is the Stable Money Association?
Mr. LOMBARD. The Stable Money Association was organized in
1925—
to ascertain the most effective method of preventing the vast, though subtle,
evils arising from unsound and unstable money, and to promote a better understanding thereof, in the expectation that crystallized public opinion will result
in constructive congressional action. ,

The CHAIRMAN. Who is the organization?
Mr. LOMBARD. If I may, I will read a few of the names, for the
information of the gentlemen here, and ask to have this complete list
inserted in the record.
The president is Dr. H . Parker Willis, the editor of the Journal
of Commerce, of NeW York, and formerly secretary of the Federal
Reserve Board.
Mr. KxtfG. May I ask what his connection with Wall Street is?




STABILIZATION

107

Mr. LOMBARD. H e is editor of the Journal of Commerce. That is
at 32 Broadway, just around the corner from Wall Street.
Mr. K I N G . I do not care anything about the street. I am asking
with relation to the residents and occupants of the street and their
particular business. What connection has he with them?
Mr. LOMBARD. YOU are referring to psychological rather than geographical location?
Mr. KING. Financial connections.
Mr. LOMBARD. I do not know. I am not personally acquainted
with his financial affairs.
The active vice presidents of the association are Mr. W. F . Gephart, vice president of the First National Bank in St. Louis, and
Mr. Henry A. Wallace, editor of Wallace's Farmer, Des Moines,
Iowa.
The executive committee consists of these gentlemen and Mr. Frederick W. Roman, professor of economics at New York University;
Doctor Fisher, who just preceded me, professor of economics at Yale
University and chairman of the Kardex Institute of Business Management; Hudson B. Hastings, professor of industrial engineering
at Yale University; Dr. Willford I. King, secretary of the National
Statistical Association; Dr. H a r r y W. Laidler, director of the league
for Industrial Democracy in New York; Mr. George Soule, director
of the Labor Bureau, New York City; and Col. Henry M. Waite,
treasurer of the Ross Demurrage Bureau of New York.
We have a list of vice presidents consisting of a number of bank
officials, including Mr. Lawrence Chamberlain, chairman of the
investment economics committee of the Investment Bankers' Association
The CHAIRMAN (interposing). Mr. Lombard, so that we may get
this matter clearly, this is the " window dressing " of your organization ?
Mr. LOMBARD. Exactly.

The CHAIRMAN. And they are not always active in the detail work
of your organization, are they ? They are sustaining members, so to
speak?
Mr. LOMBARD. These honorary vice presidents are not active. The
executive committee are very active. But these honorary vice
presidents have loaned their names as evidence of their belief in the
validity of our purposes.
The CHAIRMAN. But the aqtive management of this organization
is in the hands of gentlemen like you, who are experts in their particular line, in analyzing these various economic problems; is that
correct ?
Mr. LOMBARD. Yes, sir; the executive committee is the directing
head of the organization.
The CHAIRMAN. NOW, will you tell us—I do not want to interrupt
you, but for the benefit of the committee, because I think they would
like to be informed—what college are you from ?
Mr. LOMBARD. I was going to ask you, after I put in this list,
whether you wanted me to go into my personal experience.
The CHAIRMAN. We like to know something about the men who
are addressing us.




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STABILIZATION

Mr. LOMBARD. May I continue with this "window dressing," as
you term it?
The

CHAIRMAN.

Yes.

Mr. LOMBARD. We have a large advisory council—I had better
not read the names—of some 30 or 40 professors of economics of
colleges all the way from the Pacific to the Atlantic, who by the
acceptance of positions on our advisory council indicate their approval of our aims.
I would like to submit this list as a part of the record in lieu of
what I have been saying.
The CHAIRMAN. Without objection, it will be inserted into the
record at this point.
(The list submitted by Mr. Lombard is as follows:)
THE STABLE MONEY ASSOCIATION

Organized to ascertain the most effective method of preventing the vast,
though subtle, evils arising from unsound and unstable money, and to promote a better understanding thereof, in the expectation that crystallized public
opinion will result in constructive congressional action.
Executive director, Norman Lombard, room 1909, 104 Fifth Avenue, New
York City, tel. Chelsea 5489.
Officers (members of executive committee, ex officio) : President, H. Parker
Willis, editor and vice president Journal of Commerce, New York, formerly
secretary Federal Reserve Board; vice presidents, W. F. Gephart, vice president
First National Bank in St. Louis; Henry A. Wallace, editor Wallace's Farmer,
Des Moines; Secretary, Frederick W. Roman, professor of economics and education, New York University; treasurer, Edward B. Swinney, 104 Fifth Avenue,
New York City.
Honorary vice presidents: Sydney Anderson, president Millers' National Federation, Washington, D. C.; Lewis C. Babcock, vice president Midland National
Bank, Billings, Mont.; Lawrence Chamberlain, chairman investment economics
committee, Investment Bankers Association of America; Thornton Cooke, president Columbia National Bank, Kansas City, Mo.; T. Alan Goldsborough, Congressman from Maryland; M. K. Graham, Graham, Tex.; Arthur T. Hadley,
president emeritus, Yale University, New Haven, Conn.; Hamilton Holt, president Rollins College, Winter Park, Fla.; William Kent, former United States
tariff commissioner, Kentfield, Calif.; Harold A. Ley, president Fred T. Ley &
Co., New York City; Robert Luce, Congressman from Massachusetts; George
Foster Peabody, director Federal reserve bank, New York City; EJ. W. Wilson,
president Pacific National Bank, president Foreign Trade Club, San Francisco,
Calif.
Executive committee: Irving Fisher, professor of economics, Yale University; Hudson B. Hastings, professor of industrial engineering, Yale University ; Willford I. King, economist National Bureau of Economic Research, New
York City; Harry W. Laidler, executive director League for Industrial Democracy, New York City; George Soule, director Labor Bureau (Inc.), New York
City; Col. Henry H. Waite, treasurer Ross Demurrage Bureau, New York City.
The advisory council of the Stable Money Association: Darien Austin Straw,
department of logic and rhetoric, Wheaton College; John B. Andrews, secretary, American Association for Labor Legislation; Charles A. Bell, statistician,
United States Bureau of Labor Statistics; Harry Gunnison Brown, professor
of economics, University of Missouri; T. N. Carver, professor of political
economy, Harvard University; John M. Clark, professor of political economy„
Harvard University; John M. Clark professor of political economy. University
of Chicago; H. J. Davenport, professor of economics, Cornell University; D. R.
Dewey, professor of economics and statistics, Massachusetts Institute of Technology, managing editor American Economic Review; Henry W. Farnam, professor emeritus of economics, Yale University; Frank A. Fetter, professor of
political economy, chairman department of economics and social institutions,
Princeton University; W. T. Foster, president Pollak Foundation for Economic
Research; Harry G. Guthmann, University of Chicago; G. X>. Hancock, dean,
School of Commerce and Administration, Washington and Lee University;




STABILIZATION

109

Jacob H. Hollander, department of political economy, the Johns Hopkins
University; E. W. Kemmerer, professor of economics and finance, Princeton
University; Edwin A. Kopf, assistant statistician, Metropolitan Life Insurance
Co., New York City; Samuel McCune Lindsay, president the Academy of Political Science in the city of New York; Wesley Clair Mitchell, professor of economics, Columbia University, director of research, National Bureau of Economic Research, New York City; Henry R. Seager, professor of political economy, Columbia University; Edwin R. A. Seligman, McVickar professor of
political economy and finance, Columbia University; O. M. W. Sprague, Converse professor of banking and finance, Harvard University; Carl Strover,
counsellor at law, Chicago, 111.; C. M. Walsh, Bellport, Long Island, N. Y.;
G. F. Warren, professor of agricultural economics and farm management,
Cornell University; Holbrook Working, professor of economics, Leland Stanford Junior University.
A FEW EXPRESSIONS

" We the people of the United States, in order to * * * establish justice
* * * promote the general welfare * * * do ordain and establish
* * *
SEC. 8. The Congress shall have power:
*
*
*
*
*
*
*
5. To coin money, regulate the value thereof."—Constitution of the United
States.
" What we all want from this economic system is greater stability, that men
may be secure in their employment and their business."—Herbert Hoover, Secretary of Commerce, in Review of Reviews for January, 1926.
" Next to the economic havoc of war itself, there is probably no more devasting agent at work than the rudderless and ballastless unit of value which has
resulted in the price anarchy of the past generation."—David J. Lewis, United
States Tariff Commission, in a private letter.
" It is the self-evident duty of the Federal Reserve Board to administer the
Federal reserve act in such a manner as will safeguard the Nation from inflation and deflation in the future, and we heartily approve all sincere efforts
being made to find and apply the best legislative method for safeguarding the
purchasing power of money."—Iowa Bankers' Association in convention at
Ames, 1923.
"Although many believe that only with rising prices can prosperity be
secured, true prosperity is dependent on stability."—James S. Alexander, chairman National Bank of Commerce, New York, in annual address to shareholders,
January 8, 1924.
" I firmly believe that the purchasing power of money can be stabilized. I
believe that the solution, when we have it, will be found to be simple; and I
trust that that solution will soon be embodied in legislation."—Hon. T. Alan
Goldsborough, in the House of Representatives, May 23, 1922.
"The truth is, of course, that both (inflation and deflation) are bad. What
is needed is stability, the point from which both alike proceed in opposite directions. When we have stability of prices we have a. basis upon which trade
can be carried on with #confidence."—Reginald McKenna, chairman Joint City
& Midland Bank, at the annual meeting, January, 1922.
" It may be that the stabilization of the purchasing power of the dollar along
the lines advanced by economists will some time help to remove some of the
problems of the counterfeit wage. A solution is highly desirable."—Edward A.
Filene, in New York World,'May 21, 1922.
"The primary monetary need, then, is a stable unit of value, and this does
not come chance. Even if we had no other evidence, the records of the past
five years in the United States should convince us that the country is not safeguarded against inflation by reserve ratios or merely because bank credit is
expended ' in response to the legitimate demands of business/ or ' in the ordinary course of financing production.' There are at least four compelling reasons for taking measures now to make a dependable dollar for the deliberate
aim of conscious policy."—W. T. Foster, president Pollock Foundation, ana
Waddill Catchings, of the Goldman, Sachs & Co., in Harvard Business Review,
April, 1924.
" The explanation is simple enough—' radicalism' is always found where
there is suffering, injustice, and failure."—New York World, March 10, 1926.




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STABILIZATION

Mr. LOMBARD. Since this was printed, and since I have been in
Washington, we have acceptances of honorary vice presidencies from
William C. Redfield and Louis F . Post. We have also acceptances
on the advisory council from Vernon Kellogg, the permanent secretary of the National Research Council; Mr. J. Edward Meeker, the
economist of the New York Stock Exchange; Mr. Robert E . Chaddock, of Columbia University; Mr. A. W. Loseby, president of the
Equitable Trust Co., of New York; Mr. Ray B. Westerfield, of the
department of economics of Yale University; Mr. Royal Meeker, of
the department of economics at Carlton College, Northfield, Minn.,
and formerly director of the Bureau of Labor Statistics in Washton; and Mr. Frank D. Graham, of Princeton University.
I might read Mr. Graham's little note. He says:
I have pleasure in accepting your nomination to membership on the advisory
council of the Stable Money Association. It is trite, I suppose, to name anything as the most important of social reforms, but I do feel that this matter of
stable money is something to which too much time and attention can scarcely
be devoted.

As to my own experience, my memory runs back to the panic of
1893, when my father was president of the First National Bank, of
Kansas City, which he founded, and he was also the vice president
and western manager of the Lombard Investment Co., the largest
privately owned farm mortgage company in the country. That company failed in 1893 with something like $50,000,000 of guaranteed
mortgages outstanding and $4,000,000 of capital, and the effect upon
my father's mind and health is a very vivid memory.
The CHAIRMAN. Those were very pretty bonds. They were very
beautiful.
Mr. LOMBARD. There was lots of criticism of the management, as
there always is, because nothing succeeds like success, and nothing
fails like failure. But I am thoroughly convinced that the failure
was due to the unstable dollar.
During the period from the seventies down to 1893 the influx of
population in the West, due to the building of the railroad system,
just about counterbalanced the depreciation in the dollar value of
the farms, so that there was a constantly rising farm value.
Do I make my point clear? The increase of population in the
West a little bit more than overcame the depreciation in the purchasing power of the dollar, so that farm-land values were rising^
and it was a very profitable period for the farm-mortgage men.
T,hey received large commissions, and they had constantly rising
collateral. But, as always happens when you have a long period of
declining prices, a social reaction set in. The East lost confidence
in the West, and refused to buy western securities, and about that
time the free silver agitation set in, and, as Mr. Stevenson was saying awhile ago, the repeal of the Sherman Silver Purchase Act
occurred, and there was a general conflict between the East and the
West, which resulted in the failure of numerous farm-mortgage
companies and the wrecking of numerous banks, and a general.condition of social and political upheaval in this country, which is
possibly more vivid to most of you than it is to me, because I am
probably the youngest man in the room.




STABILIZATION

111

I was educated at Massachusetts Institute of Technology as an
engineer. After finishing at Boston Tech I studied law at the
Kansas City School of Law, while working in a bank which had a
mortgage department. After three years I removed to California
and entered the farm-mortgage business actively in the office of the
financial correspondent of the Union Central Life Insurance Co.
I rose to become general manager of their operations in California.
I n 1913 I organized my own mortgage company, which continued
until the farm-loan system was .inaugurated, which made it inadvisable for me to continue in that operation, because it is neither
profitable nor patriotic to compete with the Government. I then
engaged in other activities, rather actively, exporting and importing,
financing time sales of tractors, and doing an investment banking
business, lately acting as a professional business counsellor.
About 1917, I think, I saw a little squib in the paper saying that
Dr. Irving Fisher, of Yale University, had been publishing something about the unstable dollar. I had worried a great deal about
the loans I was making on farm lands. Many of the treasurers
of these eastern life insuraiice companies would ask me, " W h a t is
the value of this farm?" I did not know much about the subject at
that time, but I had to reply t h a t " the value now is thus and such; I
can not tell what it will be in the future, but the income from the farm
is thus and such." There was subconsciously a feeling that there
was something wrong. After I had studied the unstable dollar I
realized that the securities I was selling were not desirable securities for the reason explained here a while ago—that the real rate
of interest on them was nil. The dollar was depreciating faster
than the interest return. I also had my whole system of thought so
upset by this relaization that the universal yardstick of commerce,
the dollar, was not fixed in value, and that there was no science and
no exactitude in business whatsoever by reason of that fact that I
decided to devote a great deal of my time to this question of stabilizing the dollar. So I proceeded to make lectures, and so on, and
cultivated my acquaintance with Doctor Fisher, who, by the way,
came out to California and delivered a series of lectures at the university during this period, which got me even more interested. Now,
I have come back to the East to accept this position of executive
director, with the idea of doing as much as I can to promote this
idea of stabilization of price levels, to discourage inflation and deflation, and to promote stability.
Does that cover the situation, Mr. Chairman ?
The CHAIRMAN. I think so.
Mr. LOMBARD. I think that the desirability and the necessity of
stabilizing the general level of prices is becoming more and more
evident. Business men, bankers, farmers, labor organization men,
are seeing these effects, as the fluctuations have been great, and they
are coming to allow for these fluctuations in arranging their various
affairs. For instance, the fixing of the wages of the employees of
the Philadelphia Eapid Transit Co. in terms of an indext figure is a
concession of the fact that the dollar in which these wages have been
paid has not meant anything. Advances in wages for laboring men
which are immediately counteracted by a decrease in the purchasing
power of the dollars in which those wages are stated is an empty




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STABILIZATION

victory. If we are going to have any permanent sense of satisfaction between employer and employee, this dollar in which their
relations meet has got to be stabilized so that it means something.
Mr. STRONG. The same thing would apply to the farmer, would
it not ?
Mr. LOMBARD. Yes, sir; and to every line of business. This, gentlemen, is the most fundamental problem, I believe, that has ever
come before this committee. I t has more far-reaching social and
economic consquences, and its wise and complete decision is very,
very much to be desired.
This Kardex bond that Doctor Fisher explained to you is another
evidence. This was a bond issued by the Kardex Co. While on its face
it is for $1,000 and draws 5 per cent interest, there is a schedule inside
that states that if prices go down the amount of dollars paid shall be
adjusted accordingly, and that if prices go up the number of dollars
paid shall be adjusted accordingly, so that the investor at the maturity of the bond will receive back the identical purchasing power
that was represented when the bond was issued, regardless of the
value of the dollar at that date; and the .same way with the quarterly
payments of interest; they represent the present purchasing power
at the time the bond was issued.
Now, I am very glad, gentlemen, that Doctor Fisher has stepped
out of the room while I am mentioning this bond—and this can go in
the record or not, just as you see fit. But I want you gentlemen to
know something about Doctor Fisher. I think that you are entitled
to it.
I know that the ordinary concept of a college professor is a man
who puts salt in his coffee and sugar on his eggs, and so on—an
absent-minded dreamer, a theorist who gets nowhere. But Doctor
Fisher is a' different sort of man. I might say that at the time these
bonds were issued he contributed to the combination of the RandKardex Co., a little business which he had established based on an
invention of his own and which he built up, and he received in compensation for that $1,600,000 in market value. There was quite an
editorial in the Wall Street Journal about this college professor that
had done a great deal more in a business way than most business
men have done. I n the meantime he was conducting classes in economics at Yale, was chairman of the hygienic reference board of the
Life Extension Institute, which he founded, and very active in numerous directions, and a large contributor to the various movements
and various charities in which he was interested.
I want you to know something about Doctor Fisher because I
think you will give more weight, probably, to what he has had to
say before this committee with this knowledge before you of just
what type of man he is.
Now, economists have long felt the need for some stabilization
because they have seen many sincere attempts to correct undesirable
social conditions or to further social progress of some sort thwarted
because of the instability of the dollar. I think that subject was
touched on here yesterday. Legislators and the public generally
have been confused by the instability of the dollar in studying
various subjects, and they have attempted to apply palliatives; to
treat the symptoms instead of going to the source of the trouble.




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113

This has applied in studies of taxation,* unemployment, minimum
wage, credit, exchange, banking, production, marketing, distribution, transportation, tariff, and everything where the dollar enters.
I have here a publication, a Senate committee print, a copy of
which each of you has received, I am told, on the increase of judicial
salaries; considerable study having been given to this question of
increasing the salaries of judges. All of this work would have been
totally unnecessary if we had had a stable dollar in which those
salaries, when originally granted, could be stated.
I t is interesting to see the comments of some of these judges. T
have not had a chance to read this document through thoroughly,
but I have marked a few extracts. I think it is better not to mention
the names, because I imagine that these letters were submitted more
or less in confidence.
Mr. LUCE. I t is a public document, Mr. Lombard.
Mr. LOMBARD. Well, not exactly, Congressman.
Mr. LUCE. Oh, yes, it is; absolutely.
Mr. F E N N . Yes.

Mr. LOMBARD. D O you think I had better read it ?
Mr. LUCE. I think you had better read it.
Mr. LOMBARD. This one is from Mr. Justice Sutherland. H e says
t h a t a deterioration in the quality of the judiciary will eventually
result unless something is done to fix this situation.
Here is Mr. Justice Stone, who says:
In considering the amount of salary to be paid it should be remembered
that the present salaries were established at a time when the purchasing
power of the dollar was double what it is to-day.

Mr. STEVENSON. That was done in 1918.
Mr. LOMBARD. I would hesitate to criticize the word of a Supreme
Court Justice.
Mr. STEVENSON. Yes; but I would not. That was done in 1918,
and the purchasing power of the dollar was not any greater then
it is now. We passed the act to raise all judicial salaries in 1918,
according to my recollection.
Mr. LOMBARD. I am only pointing out, that there is a fluctuation. That is a detail, Mr. Stevenson.
The CHAIRMAN. YOU are not referring to these for the purpose of
advocating this raise in pay of the judges, but rather to illustrate
a point, I assume ?
Mr. LOMBARD. Illustrating the harmful effects of the fluctuating
price level.
Mr. STEVENSON. I understand.

Mr.

LOMBARD.

Judge Anderson of the first circuit says:

I suppose the present purchasing power of judicial salaries is the lowest
in our history.

These men are not economists, of course. Judge Meadows of New
York says:
There has been a very heavy increase in the cost of living since the time
the present salaries were established.

Judge Rodgers of New York City says:
At the time the present salaries were fixed the purchasing power of the
dollar was much greater than it is now.




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STABILIZATION

And so on through this whole business, 140 pages of letters from
Federal judges taking very much the same position.
Unfortunately, this fact of fluctuation has been taken advantage
of by agitators who have made appeals to prejudice and class hatred.
I want to say this is not a matter of class against class it is not a
matter of party against party it is not a matter of nation against
nation, it is not even a matter of race against race. I will tell you
how I conceive this situation. I t is a factor in the great contest of
man against nature. All of the advance of man has been due overcoming the natural effects of nature. We take what nature has given
us and capitalize it to our own ends. We build houses to protect us
from the weather, and fires to protect us from cold and wear clothes
for the same purpose and so on. Man's continual efforts are to
overcome natural conditions.
This stabilization proposed is just equipping man with a desirable
weapon against fluctuation which is primarily a fundamentally at the
root of this whole problem. Just as Doctor Fisher said the Federal
reserve board has the power to a limited extent to stabilize, to prevent inflation and deflation. All that is a temporary matter, but
for a final cure we have got to adopt one of two or three of a very
limited number of plans: Either the Lehfeldt plan or the compensated dollar plan, or the plan proposed by Carl Snyder of the Federal Reserve Bank of New York. I believe there are some others.
I do not pretend to be an expert on the theory of this matter. 1 am
surrounded by advisers that I can never hope to equal in the knowledge of the subject.
Mr. LUCE. Can you explain the Snyder plan?
Mr. LOMBARD. I am not competent to explain it, but I can refer
you to where it is given. I t is in the American Economic Review.
The CHAIRMAN. Page 277 of the American Economic Review of
June, 1923. That is the article referred to.
Mr. LOMBARD. There are numerous other plans varying in their
minor details, but all having for their object the stabilization of
the price level. I might say that our association is not advocating
any plan. We are advocating a policy, a policy of stabilization.
I want to run over some of the effects of falling and rising prices
that have appeared to me as a business man. When prices are falling merchants do not buy as freely as they do when prices are
rising. They buy from hand to mouth. The result is that factories
are shut down and we have unemployment, we have soup kitchens,
and all of the phenomena that go along with that situation. That
leads to misery and suffering and distress, because these people
usually live pretty close to the poverty line and when their pay
checks stop they frequently have nothing whatever to act as a buffer
between them and want. Stockholders lose during these periods of
falling prices. The factories and industries fall into the hands of
bondholders, who are usually not competent to run them. The result
is inefficient management.
Under those conditions we blame men in business for not having
made a success under impossible conditions. Mortgagees become owners, owners become tenants, and tenants become Bolsheviks. Reorganization is the order of the day. Lessened production follows, resuiting in disorganization and general demoralization of business;
new development is stifled.



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115

On each of these things a volume could be written. I have briefly
run over some of the results that follow falling prices. The result
of a long and severe fall, such as from the close of the Civil W a r
down to 1893, as shown by the chart on the wall, is a political uprising, such as greenbackism, free silverism, and other inflationary
appeals, demagogic as a rule, but not always. I db not mean to
say the people who advocate a high price level have not been sincere.
I think some of them have not had a complete understanding of the
evils that would follow from the very thing they proposed as a
remedy for the condition they are trying to meet.
When prices are rising the situation is reversed, and we have entirely different kinds of evils. Merchants buy beyond their needs,
borrow and stretch their credit in order to buy more goods; factories boom; stockholders propsper inordinately; extravagance is
rampant; the Great White Way is very active during such a period.
On the other hand, bondholders and trust funds, such as belong to
colleges and hospitals, life-insurance beneficiaries, all suffer through
Ihe inadequacy of their fixed incomes to meet their constantly mounting expense, constantly mounting because of the decreasing purchasing power of the dollar.
People with fixed incomes measured in dollars (such as schoolteachers), public servants of all kinds (such as your experts in the
various departments at Washington), judges (such as I have mentioned here), if I may say so, Congressmen, salaried clerks, widows,
orphans, pensioners, all of these suffer because of the decreased purchasing power of their dollars, and they are frequently pinched
beyond endurance.
These are times when labor strikes. You would think that wages
would increase as rapidly as the cost of living does, but they do not.
The cost of living is always a little ahead. Prices rise, and they
have to have a committee to take it up with the superintendent or the
boss, and the boss is not always ready to yield the advantage he has,
and the result is a strike. I am satisfied that 90 per cent of the
strikes would be avoided if we had a stabilized price level.
During these periods we have sabotage; labor is dissatisfied due
to the fact that they are not getting as much as they should get, and
the boss is riding around in a fancy automobile; soldiering on the
job; all these fallacies run riot. Those are the periods when demagogues thrive and class hatred rules. This should be an economic
question, not a class question, not a political question. All these
phenomena America has experienced time and again in the brief
period of my short life. I have experienced them myself.
Now, America has the gold standard. We hear so much of the
gold standard that I want to emphasize this feature. Say the general price level in America was 100 in 1860. This is more for the
benefit of the Congressmen who have not been here during the last
couple of days. From a level of 100 in 1860 it went up to 200 in
1865. I t dropped to less than 66 in 1896 and rose again to over 240
in May, 1920; fell to less than 140 in January, 1922; and is now
hovering around 155 to 160.
Europe, with her gold reserves depleted, has frequently suffered
from the same phenomena of rising and falling prices. Millions
were reduced to abject poverty by the recent post-war inflations.




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STABILIZATION

Supreme judges slept in charity beds. Musicians sold their priceless
violins for a meal. Professors picked up coal from the gutters.
Probably a million people died from the resulting disease, hunger,
and starvation. And all of this for the want of a sound policy of
stabilization and public understanding of the problem.
You may want to know how you will know when you have inflation or deflation. I will tell you what I think. I am not an expert, and I may be wrong. I think a falling price level is unfailing
evidence that there is an inadequacy of available bank credit or
money in circulation to support the volume of business being done;
in other words, falling prices show deflation.
Now, a rising price level, on the other hand, is unfailing evidence
of a superabundance of bank credit or money in circulation; otherwise, rising prices show inflation. Deflation is not a cure for the
ills of inflation, and inflation is not a cure for the ills of deflation.
Each has its own inevitable and dire consequences of far-reaching
social and political importance.
The remedy for the ills of both inflation and deflation is stabilization.
As I said, our association is interested in stabilization as a policy
and not primarily in any particular plan or bill. I t is immaterial
whether stabilization comes by one or another method or device or
organization or individual. We feel that as a first step in the right
direction the efforts and methods of the Federal reserve authorities
during the last four years have been admirable.
I want to point out just here that these were patriotic efforts and
done at the expense of the banks. As you know, the Federal reserve
banks are privately owned institutions. They are owned by the
member banks. When they keep a surplus gold reserve in the Treasury in order to prevent inflation, they are sacrificing the interest
they might receive if they loaned out the Federal reserve notes,
which they might base upon that gold reserve, two and one-half
times the amount of the gold reserve. They are patriotic in sacrificing that income, in order that you Congressmen, if you please, may
exist on your present scale of living with your present fixed salaries
in order that inflation may not come upon us with its attendant evils.
Mr. STEVENSON. Of course, you understand that no matter how
much they make, the owners can only get 6 per cent. The balance
must go to the United States Treasury. And they always manage
to get the 6 per cent.
Mr. LOMBAED. I have noticed in that connection that in the annual
reports of these banks there seems to be much emphasis placed on
high profits and high dividends and high earnings.
The CHAIRMAN. Much reference is also made to high operating
expenses.
Mr. STEVENSON. I just wanted to lodge my protest against the
assumption that because they refuse to make loans of money that
these banks are suffering. These banks can only get 6 per cent, and
the always get that. They are not suffering at all.
Mr. LOMBARD. Of course, if the member banks discounted their
bills at the reserve banks and took that money and loaned it at a
higher rate they would make the difference.
Mr. STEVENSON. The member bank would.




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117

Mr. LOMBARD. Of course, the reserve banks are just agents of the
member banks in that connection.
Mr.

STEVENSON.

Yes.

Mr. LOMBARD. I think we can allow them credit for foregoing some
profit they might otherwise make in the interest of maintaining a
stable level and preventing inflation under present conditions. I
believe that is sound.
We are hoping to see the activities of the reserve board in the
direction of preventing inflation and deflation extended, refined,
perfected, legalized, and made mandatory on future boards, and
made to operate ministerially and not left to discretion, and in
so far as we can we shall be glad to aid in that process.
You gentlemen here are at the spearhead of the conflict between
two economic theories. One is that money volume has nothing to
do with price levels, which theory is advocated by some economists
of some standing. I think they are a little less active now than they
were before the war, because the ocular demonstration of the effect
of inflation upon prices has been almost compelling in its cogency
Then there is another theory that the use to which the money is
put makes a difference, the goint in the "circuit flow" at which
the money enters makes a difference. The theory is that if the
money is given to manufacturers or producers it does not inflate,
because the production brought about by the use of the money
makes a level situation, whereas if it is loaned to a consumer the
automatic effect is to increase the price level. You gentlemen are
faced by that economic theory. You have supporters on both sides.
Mr. STEVENSON. What about land speculation? That also raises
the price level, does it not?
Mr. LOMBARD. As I say, I am not a theorist. Just at what point
in the actual flow the money has to enter in order to affect the price
level, I do not know, but I can state as my positive belief that there
is a casual connection there. I think I can say that without having
any economist differ with me, that there is a casual connection between money volume and prices.
Mr. KING. Can you answer the question asked by the gentleman
from South Carolina, in respect to the money lenders and speculators ?
Mr. STEVENSON. We will say, for instance, here is a man who has
a tract of land to sell. We will say there are half a dozen fellows
who see where they can make some money developing it. If all of
them have the money, or if they can get the money, there will be
competition that will put the price of that land up when it goes on
the market. But if only one has the money, he will buy it as cheaply
as possible. I t also applies to speculators in stocks and securities.
You put a lot of cheap money into the hands of men who are speculating on the exchange and they are going to spend it, and they are
going to make the prices of securities and prices of stocks go up.
The CHAIRMAN. I S not that exactly what occurred recently in
Florida?
Mr. STEVENSON. That is what happened in Florida.
Mr. LOMBARD. I think as you increase the currency volume you
increase prices, but you can not tell where it is going to break out.
Mr. STEVENSON. Or increase the trading volume.




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STABILIZATION

Mr. LOMBARD. Yes, sir. I tried to make that plain in my first
formal statement. That is even more effective than increasing currency. I t is something like when you squeeze a handful of putty.
You can not tell where in your hand the putty is going to break
out, whether between the first and second fingers in Florida, or
between the second and third fingers on the stock exchange. The
situation is there, and it is going to break out some day. Does that
answer the question?
Mr. K I N G . That will do.
Mr. LOMBARD. I want to read you something from the report of a
general conference of 35 nations of the world gathered in Genoa.
The CHAIRMAN. Will you dwell a little more fully on that p a r t of
the subject you just touched upon—the amount of actual money in
circulation in contrast with the extension of credit? Say there are
$100,000,000,000 of cash and securities and credit. Say five billions
are in cash and ninety-five billions in credit. Suppose the credit
amount is extended twenty-five billions and the cash remains the
same. What is the result in the price level ?
Mr. LOMBARD. That is a very complicated question, Mr. Chairman,
and I would have to go somewhat into theory to answer it. If you
are willing to stand for the theory, I will give you as complete an
answer as I can.
Mr. STEVENSON. We will listen to anything. We do not say we
will stand for it.
Mr. LOMBARD. This chart is an algebraic statement of the equation
of exchange. I will explain what that means. Take this half dollar
and transfer it to some one for some commodity; then the commodity
has transferred in commerce. Take every piece of money in the
world, and it has its own velocity of circulation, and every commodity has its own price. I think it is a self-evident truth that the two
will balance. The money, multiplied by the velocity with which it
circulates, must equal the prices of all the commodities in the world,
multiplied by the total volume.
Mr. GOLDSBOROUGH. Do you mean after a period of inflation when
there has been a vast volume of bank credits ?
Mr. LOMBARD. I see what you are getting at. If you will let me
finish my explanation, I think it will be answered.
Mr. GOLDSBOROUGH. Very well.
Mr. LOMBARD. This letter M represents each piece of money, and
the letter V represents the velocity of the money of the world. The
total of those multiplied together must equal the price level multiplied by the volume of trade. That is obvious. I do not believe anybody will controvert that fact. That is a self-evident proposition.
Now, take a summation of both sides of the question and it would
be expressed a little differently. We then have the total volume of
money multiplied by the velocity, plus the total volume of substitutes, such as credits, checks, and what not, multiplied by the velocity of circulation equals the price level multiplied by the volume of
trade.
Bringing that equation down you have ^ ~ - equals P . That is,
there are four factors in the equation of exchange—the money in
circulation, its velocity, the volume of trade, and the price level. If




STABILIZATION

119

you want to stabilize the price level P , you must stabilize the other
.,
,.,
.. MV P
-side of the equation -*-—
Obviously, the velocity of M circulation (V) is something that is
not under Government control. The volume of trade (T) is something you do not want to control. You do not want to depress or
increase it. I n order to keep the price level constant therefore, you
must manipulate M, and by manipulating M one way or the other
you can keep a constant price level.
The CHAIRMAN. By manipulating the money in circulation?
Mr. LOMBARD. By manipulating the money in circulation, or the
substitutes for money.
Mr. GOLDSBOROUGH. If your M and T remained constant and your
credit became solid—that is, V became smaller—the price level would
fall?
Mr. LOMBARD. I t would fall, but you can prevent its falling by
putting more money into circulation.
The CHAIRMAN. I S not that exactly what occurred when the Federal reserve notes were put into the market ?
Mr. LOMBARD. Yes. When you go to the bank and borrow a thousand dollars, that is what occurs. There are a large number of transactions going on which somewhat tend to neutralize each other.
The CHAIRMAN. I S there any difference between issuing and putting in circulation Federal reserve notes and the credit established
by loans at the bank ?
Mr. LOMBARD. I t is very difficult to say which is the most effective.
I t is very difficult to trace to determine whether V represents a
greater velocity than V . V represents the velocity of circulation .of
real money, and V represents the velocity of circulation of substitutes for money, such as bank credits. If you borrow a lot of money
at the bank and leave it there it will not affect the price level; but if
you immediately draw your checks upon it, it does affect it.
The CHAIRMAN. And the use to which that money is put?
Mr. LOMBARD. There are some theories to the effect that the point
at which that money enters into business affects the situation differently from what it otherwise would be.
The CHAIRMAN. If that $1,000 credit is spent by the borrower for
waste or extravagance, or for investment in useful production, does
not that have something to do with it ?
Mr. LOMBARD. What is useful production, and what is waste? That
is the question that we must answer. The use of an automobile by
a doctor may be useful production. So may silk hosiery for the
ladies. I t is a question of which is a luxury and which is necessary.
The doctor might walk to see his patients. On the other hand, a
woman may get real gratification from wearing silk hosiery, more
real gratification than she would from a square meal. I t is not for
us to say which is waste and which is actual production or a necessity.
We are dealing with a great fundamental, economic question. I say
it is up to the individual to squander his own money in his own way.
If he wants to spend his money for Florida real estate or on the New
York Stock Exchange or for automobiles, that is his privilege. We
are dealing with a fundamental, economic problem.




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STABILIZATION

Mr. K I N O . D O you suppose we could include that chart in the
record at this point?
The CHAIRMAN. Can you give the reporter a copy of the chart for
that purpose ?
Mr. LOMBARD. Yes.
The CHAIRMAN. The

explanation you have made will be more
understandable. Without objection, that will be inserted at this
point.
(The chart referred to is on file with the committee.)
Mr. LOMBARD. I feel as though this explanation is very inadequate.
I t is so extemporaneous.
The CHAIRMAN. If you want to enlarge or elucidate, you will
have that opportunity.
Mr. LOMBARD. I will now read this Genoa conference reports.
Mr. K I N G . W h a t Genoa conference?
Mr. LOMBARD. The conference of 35 nations in Genoa in 1922.
I t was an economic conference, for the economic reconstruction of
the world.
The CHAIRMAN. Was it held under the auspices of the League of
Nations?
Mr. LOMBARD. N O . I do not think the league had anything to do
with it. Did it, Doctor Fisher?
Doctor FISHER. I do not think so.
Mr. LOMBARD. I t was an economic conference held for the purpose
of suggesting methods for getting the world back to a normal condition.
Mr. K I N G . Through what influence was the representatives appointed ?
'Mr. LOMBARD. I think Lloyd George instigated it.
Mr. STRONG. Was this Nation represented?
Mr. LOMBARD. I think not. Frank Vanderlip was there reporting
it for the New York World. He was not an official representative.
Resolution No. 1. The essential requisite for the economic reconstruction
of Europe is the achievement by each country of stability in the value of its
currency.

I want you to get that, because that is very important. That is
35 nations of the world putting that into an official document. They
say:
The essential requisite for the reconstruction of Europe is the achievement
by each country of stability in the value of its currency.

The CHAIRMAN. When you say it was a conference of 35 countries
of the world, you mean it was a conference of economists from
these 35 countries, do you not ?
Mr. LOMBARD. Yes. I mean the men assembled in that conference
put that out as the cure for the situation.
Resolution 9. The purpose- of the convention would be to centralize and
coordinate the demand for gold, and so to avoid those wide fluctuations in the
purchasing power of gold, which might otherwise result from the simultaneous
and competitive efforts of a number of countries to secure metallic reserves.
Resolution No. 11. It is desirable that the following proposals to form
the basis of the international convention contemplated in Resolution 9 be
submitted for the consideration of the meeting of central banks suggested in
Resolution 3.




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STABILIZATION

Then they give six clauses, and I will quote the seventh:
Credit will be regulated, not only with a view to maintaining the currencies at par with one another, but also with a view to preventing undue
fluctuations in the purchasing power of gold. It is not contemplated, however,
that the discretion of the central banks should be fettered by any definite rules
framed for this purpose, but that their collaboration will have been assured
in matters outside the province of the participating countries.

You will see these countries practically stated that the central
banks control the reserves of credit.
Mr. FISHER. Might I interject a word here?
The

CHAIRMAN.

Yes.

Mr. F ISHER. YOU raised the question of economic experts. This
was not a gathering of economic experts as such, but an official conference of those 35 nations, trying to solve the economic proposition.
The conference failed in its purpose, because France took the position that that problem should not be considered. Therefore, it only
has a moral value, but it was an official conference, not an unofficial conference.
Mr. LOMBARD. There is a frank admission of the control of reserves or credit by the central banks. That is what I am getting at.
The CHAIRMAN. Does that apply to the Federal reserve system
in the United States ?
Mr. LOMBARD. Absolutely. I t must, if that equation of exchange
is correct.
Mr, % KING. I t is all leading to the gold standard, after all?
Mr. LOMBARD. Of course, the old gold standard is pretty firmly
fixed in their minds.
I think, Mr. Chairman, it might be well if I further answered
your question as to who composed the conference.
The CHAIRMAN.

Yes.

Mr. LOMBARD. These 35 nations were officially represented, and
their representatives were accompanied by their economic advisers.
The CHAIRMAN. They were appointed or designated by the government which sent them ?
Mr. LOMBARD. Yes. They were official representatives -of these
governments.
Now, per contra, Hon. George W. Norris, governor of the Federal Reserve Bank of Philadelphia, is quoted by George E . Roberts,
vice president of the National City Bank oi New York in the
Economic World for December 15, 1925. Here is what Roberts
quotes Norris as having said:
It is not one of the functions of the Federal reserve bank to determine
whether prices of stocks or commodities are too high or too low, or to make
any effort to raise or lower such prices. It was never the intention of Congress to give any such power to the system. It is a very dangerous power
to put in the Tiands of any man or group of men, no matter how wise or
altruistic.they might be.

Mr.
Mr.

K I N G . They did exercise that power
LOMBARD. Mr. Roberts goes on:

in 1920.

It is a power which the American people will never be willing to entrust
to any board or commission, and it is fair to say it is a power the Federal
reserve bank has never attempted to exercise.

Then he quotes Dr. A. C. Miller, a member of the Federal Reserve
Board:




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The CHAIRMAN. Was that a speech delivered in Boston just prior
to the change in the discount rate by the Federal Reserve Bank of
Boston ?
Mr. LOMBARD. Mr. Roberts does not say just where Doctor Miller
made that statement.
Then Mr. Roberts says in his own right:
It is not clear that a rediscount rate of itself can be rfelied upon to give the
desired degree of control.

He also says further:
The CHAIRMAN. W h a t book are you reading from ?
Mr. LOMBARD. The Economic World for December 15, 1925, an
article by G. E. Roberts.
The CHAIRMAN. I gained the impression that Governor Norris's
statement is in conflict with your views.
Mr. LOMBARD. I am not putting forward my own views. I am
pointing out that you are the spearhead of conflict of two economic
theories. One says the central bank can control, and the other
says they can not.
Mr. STEVENSON. A S I understood Norris, he says it should. H e
does not say it can.
Mr. GOLDSBOROUGH. Mr. Roberts is vice president of the National
City Bank?
Mr. LOMBARD. Yes; and one of the foremost economists and
bankers of the United States.
I am going to mention a speech he made in Kansas a few'years
ago. This is his closing sentence in this article:
The reserve banks constitute a great reserve of credit which should be
used, as Doctor Miller has said, to give steadiness, stability, and strength,
and equalize business conditions.

Mr. Roberts stated in his address before the Kansas Bankers*
Association in 1922 that the control of credit exercised by the reserve
banks reflects itself in the level of prices. I am quoting him from
memory, and that may not be his exact words, but that is the
substance of his thought.
Mr. BEEDY. YOU do not mean reflecting itself in the control of
prices ?
Mr. LOMBARD. I n the price levels.
The CHAIRMAN. I can say, Mr. Lombard, that probably one of the
greatest students of the reserve system stated in this room that the
open-market transactions of the Federal reserve system would control the money rate, and when carried to its fullest extent would affect prices of commodities and prices on the stock exchange of
stocks and securities.
Mr. GOLDSBOROUGH. That was Mr. Warburg, was it not?
The CHAIRMAN. Yes; Mr. Paul Warburg.
Mr. LOMBARD. I want to read some quotations from the report of
the Cunliffe Commission of England, of which Lord Cunliffe was
chairman, and which reported in the latter part of 1918.
Mr. STRONG. What was that commission ?
Mr. LOMBARD. I t was formed with the idea of studying what steps
should be taken following the World War.
Mr. STRONG. Who formed it?




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123

Mr. LOMBARD. I t was formed by the Government in power at that
time. I think David Lloyd-George was premier at that time. I am
'ust going to refer to some portions of it. I can not give you the
t>.uitext without burdening you gentlemen unduly. I would like to
have you read this report. I t can be found in this book. I have two
copies, one in the J o u r n a l of the Canadian Bankers' Association for
January,, 1926, and a copy from the Congressional Library.
I want to point out to you how, by repeated references to the fact,
they maintain that the central bank does exercise control over the
price level.
PAR. 5. But the raising of the bank's discount rate and the steps taken to
make it effective in the market necessarily led to a general rise of interest
rates and a restriction of credit. * * * The result was a decline in general
prices in the home market.
PAR. 6. Domestic prices were automatically regulated so as to prevent excessive imports.
PAR. 18. They tended to check expenditure and so to lower prices in this
country.
PAR. 19. For the low home rate, by fostering large loans and so keeping up
prices which continue to encourage imports and discourage exports.
PAR. 20. The issue of extra notes stimulates the conditions which tend to
produce an advance of prices.
PAR. 21. No doubt it would be possible for the Bank of England, with the
help of the joint-stock banks, without any legal restriction on the note issue,
to keep the rate of discount sufficiently high to check loans, keep down prices,
and stop the demand for further notes.
The CHAIRMAN. I would suggest that at this point there be inserted in the record the summary of the conclusions reached by this
commission. Lord Cunliffe in 1918 was governor of the Bank of
England and chairman of that commission. I t seems to cover the
situation fairly well, and I think it should go in the record at this
point.
Mr. LOMBARD. I would be glad to see the whole report in the
record. I think it is a masterly document.
(The document referred to is as follows:)
S U M M A R Y OF C O N C L U S I O N S

47. Our main conclusions may be briefly summarized as follows:
Before the war the country possessed a complete and effective gold standard.
The provisions of the bank act, 1844, operated automatically to correct unfavorable exchange and to check undue expansions of credit. (Pars. 2 to 7.)
During the war the conditions necessary to the maintenance of that standard
have ceased to exist. The main cause has been the growth of credit due to
government borrowing from the Bank of England and other banks of war
needs. The unlimited issue of currency notes has been both an inevitable
consequence and a necessary condition of this growth of credit. (Pars. 8
to 14.)
In our opinion it is imperative that after the war the conditions necessary
to the maintenance of an effective gold standard should be restored without
delay. Unless the machinery which long experience has shown to be the only
effective remedy for an adverse balance of trade and an undue growth of credit
is once more brought into play, there will be grave danger of a progressive
credit expansion which will result in a foreign drain of gold menacing the
convertibility of our note issue and so jeopardizing the international trade
position of the country. (Par. 15.)
The prerequisites for the restoration of an effective gold standard are :
(a) The cessation of government borrowing as soon as possible after the
war. We recommend that at the earliest possible moment an adequate sinking
fund should be provided out of revenue, so that there may be a regular annual




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STABILIZATION

reduction of capital liabilities, more especially thoise which constitute the
floating debt. (Pars. 16 and 17.)
(b) The recognized machinery, namely, the raising and making effective of
the Bank of England discount rate, which before the war operated to check a
foreign drain of gold and the speculative expansion of credit in this country,
must be kept in working order. This necessity can not, and should not, be
evaded by any attempt to continue differential rates for home and foreign
money after the war. (Pars. 18 and 19.)
(c) The issue of fiduciary notes should, as soon as practicable, once more be
limited by law, and the present arrangements under which deposits at the
Bank of England may be exchanged for legal tender currency without affecting
the reserve of the banking department should be terminated at the earliest
possible moment. Subject to transitional arrangements as regards currency
notes and to any special arrangements in regard to Scotland and Ireland which
we may have to propose when we come to deal with the questions affecting
those parts of the United Kingdom, we recommend that the note issue (except
as regards existing private issues) should be entirely in the hands of the Bank
of England. The notes should be payable in London only and should be legal
tender throughout the United Kingdom. (Pars. 20 and 21.)
As regards the control of the note issue, we make the following observations:
(1) While the obligation to pay both Bank of England notes and currency
notes in gold on demand should be maintained, it is not necessary or desirable
that there should be any early resumption of the international circulation of
gold coin. (Par. 23.)
(2) While the import of gold should be free from all restrictions, it is
convenient that the Bank of England should have cognizance of all gold exports and we recommend that the export of gold coin or bullion should be subject to the condition that such coin and bullion has been obtained from the
bank for the purpose. The bank should be under obligation to supply gold
for export in exchange for its notes. (Par. 24.)
(3) In view of the withdrawal of gold from circulation we recommend
that the gold reserves of the country should be held by one central institution and that all banks should transfer any gold now held by them to the Bank
of England. (Par. 25.)
Having carefully considered the various proposals which have been placed
before us as regards the basis of the fiduciary note issue (pars. 26 to 31), we
recommend that the principle of the bank charter act, 1844, should be main^
tained, namely, that there should be a fixed fiduciary issue beyond which
notes should only be issued in exchange for gold. The separation of the
issue and banking departments of the Bank of England should be maintained,
and the weekly return should continue to be published in its present form.
(Par. 32.)
We recommend, however, that provision for an emergency be made by the
continuance in force, subject to the stringent safeguards recommended in the
body of the report, of section 3 of the currency and bank notes act, 1914, under
which the Bank of England may, with the consent of the Treasury, temporarily
issue notes in excess of the legal limit. (Par. 33.)
We advocate the publication by the banks of a monthly statement in a
prescribed form. (Par. 34.)
We have come to the conclusion that it is not practicable to fix any precise
figure for the fiduciary note issue immediately after the war. (Pars. 35 to
39.)
We think it desirable, therefore, to fix the amount which should be aimed
at as the central gold reserve, leaving the fiduciary issue to be settled ultimately at such amount as can be kept in circulation without causing the central
gold reserve to fall below the amount as fixed. We recommend that the normal minimum of the central gold reserve to be aimed at should be, in the
first instance, £150,000,000. Until this amount has been reached and maintained concurrently with a satisfactory foreign exchange position for at least
a year, the policy of cautiously reducing the uncovered note issue should be
followed. When reductions have been effected, the actual maximum fiduciary
circulation in any year should become the legal maximum for the following
year, subject only to the emergency arrangements previously recommended.
When tile exchanges are working normally on the basis of a minimum reserve
of £150,000,000, the position should again be reviewed in the light of the
dimensions of the fiduciary issue as it then exists. (Pars. 40 to 42.)
We do not recommend the transfer of the existing currency note issue to
the Bank of England until the future dimensions of the fiduciary issue have



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125

been ascertained. During the transitional period the issue should remain a
Government issue, but new notes should be issued, not against Government
securities but against Bank of England notes, and, furthermore, when opportunity arises for providing cover for existing uncovered notes, &mk of
Engl&nd notes should be used for this purpose also. Demands for new currency would then fall in the normal way on the banking department of the
Bank of England. (Pars. 43 and 44.)
When the fiduciary portion of the issue, has been reduced to an amount
which experience shows to be consistent with the maintenance of a central
gold reserve of £150,000,000 the outstanding currency notes should be retirecl
and replaced by Bank of England notes of low denomiriation in accordance
with the detailed procedure which we describe. (Pars. 45 and 46.)
Mr. LOMBARD. I will now read a paragraph from a statepient by
former Gov. W. P . G. Harding. H6 is now governor of the Federal Reserve Bank of Boston. He was formerly governor of the
Federal Reserve Board.
The CHAIRMAN. He made several appearances before this committee during that period.
Mr. LOMBARD. This is the first time I have had the honor of appearing before this committee, and I had no knowledge of that fact.
I take it that you gentlemen are familiar with the Overman Act,
which placed supreme power in the hands of the President to transfer the functions of one bureau or department to another.
The CHAIRMAN. A very powerful act.
Mr. LOMBARD. The reason for making that statement will appear
as I read:
As a matter of fact all legitimate steps were taken by the Federal Reserve
Board to restrict expansion, inflation, speculation, and extravagance during
the year 1919, except one—a sharp advance in the discount rate. And it is
not at all certain that even that would have been effective at a time when
the public seemed to care little for expense. At all events the necessities
of the Treasury during that period should not be overlooked, and the board
felt that it was its duty to cooperate with the Treasury authorities. Failure
to cooperate would have been tantamount to an undertaking by the board
to dictate the policies of the Treasury, and in such a case I think the board
would have heard something of the Overman Act. Under that act, which
at that time was still in effect, the President could by Executive order have
transferred any of the functions of the Federal Reserve Board to the Secretary of the Treasury or any other officer of the government.
The CHAIRMAN. That is a very guarded statement, but it indicates to me that the action of the board was in response to a demand
from the Secretary of the Treasury.
Mr. LOMBARD. I think that was clearly brought out in the hearings
of the agricultural inquiry before the joint commission of the Sixtyseventh Congress, in which it was clearly demonstrated that the
Treasury had exercised tremendous influence upon the board as to
its rediscount policy, with the result that rates of interest were kept
low, making it possible to float the Victory loan at a low rate of
interest and booming prices.
T would like to quote a few expressions on this subject, then I
will take up a few of the points mentioned by some of the members
of the committee earlier in the hearing, after which I will be glad
to answer any questions that members of the committee may desire
to ask.
Mr. Herbert Hoover, Secretary of Commerce, in the Review of
Reviews for January, 1926, says :
What we all want from this economic system is greater stability, that men
may be secure in their employment and their business.
93869—27—PT 1—9



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STABILIZATION

Mr. James Alexandei, chairman, National Bank of Commerce,
New York City, in his annual address to the shareholders on Janua r y 8, 1924, said :
Although many believe that only with rising prices can prosperity be secured,
true prosperity is dependent on stability.
Although Congressman Fenn is not favorable to expressions from
foreigners, I would like to quote from Dr. Alfred Zimmermann,
commissioner general of the League of Nations at Vienna, in an
interview reported in the press of October 29, 1923.
Mr. F E N N . I have no objection, but I like them to be from strong
financial countries.
Mr. LOMBARD. Doctor Zimmermann has made a very strong
country out of Austria.
Faith will return as the policy of inflation finally falls before a sound
financial administration and stable money.

W. T. Foster, president of Pollok Foundation, and Waddill Catchings, of Goldman, Sachs & Co., in Harvard Business Review, April,
1924:
The primary monetary need, then, is a stable unit of value, and this does
not come by chance. Even if we had no other evidence, the records of the
past five years in the United States should convince us that the country is
not safeguarded against inflation by reserve ratios or merely because bank
credit is expended "in response to the legitimate demands of business " or " in
the ordinary course of financing production." There are at least four compelling reasons for taking measures now to make a dependable dollar the
deliberate aim of conscious policy.

The Iowa Bankers' Association, in convention in 1923, adopted
the following resolution:
It is the self-evident duty of the Federal reserve bank to administer the
Federal -reserve act in such a manner as will safeguard the Nation from
inflation and deflation in the future, and we heartily approve all sincere efforts
being made to find and apply the best legislative method for safeguarding the
purchasing power of money.

That is practically the reading of this bill with the amendment
Doctor Fisher pointed out as desirable.
The CHAIRMAN. Was Doctor Fisher present at that time?
Mr. LOMBARD. He is here. He can speak for himself.
Mr. FISHER. I was. I was not the sole author.
The CHAIRMAN. I t was evidently pleasing to you ?
Mr. FISHER. Not at all displeasing.
Mr. LOMBARD. Reginald McKenna, chairman, Joint City & Midland Bank, at the annual meetings January, 1922:
The truth is, of course, that both (inflation and deflation) are bad. What
is needed is stability, the point from which both alike proceed in opposite
directions. When we have stability of prices we have a basis upon which
trade can be carried on with confidence.

Dr. Frank A. Wolff, Bureau of Standards, Washington, D. C ,
before the Committee on Banking and Currency of the House of
Representatives, February 26, }924:
One of the greatest difficulties with which the Bureau of the Budget has
to contend and over which it has no control is the evil of an unstable price
level.

The CHAIRMAN. I S there a difference in the instability in England
and in this country? I s there instability of price levels in England,
and, if so, how does it compare with the United States 2



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127

Mr. LOMBARD. Yes. This low line on this chart illustrates t h e
fluctuations in the price level in England, and the upper line illustrates the fluctuations in the price level in the United States, running
back over 100 years.
The CHAIRMAN. They are quite similar.
Mr. LOMBARD. They are both gold standard countries. I have a
chart here which illustrates the fluctuations of price levels in the
United States, Canada, Great Britain, France and Germany.
Mr. LOMBARD. These are all gold standard countries. There is
one common cause for it. Her,e is a chart which is also exceedinglyinteresting on the subject of stabilizing the dollar.
The CHAIRMAN. Have you small copies of these charts that you,
could give the reporter?
Mr. LOMBARD. 1 think some of them are in the previous hearings.
These two lines illustrate the fluctuations in the price levels in India
and England. They are very interesting. During the period shown
on the chart from 1860 to 1912, different conditions obtained between those two countries. From 1860 to 1873 both countries were
on a bi-metallic basis, and while the fluctuations in price levels
varied in degree, both go up and down at the same time, illustrating
that the same fundamental cause was at work.
Between 1874 and 1893 there was no tie between the two countries.
There you will notice that frequently the price level in India goes
up when in England it goes down, and similarly it goes up in
England sometimes and goes down in India. From 1894 to 1921
India was on a gold exchange standard, and again you will notice
the similarity in the movement that occurred, illustrating that the
metallic basis is a fundamental controlling factor in the fluctuations of the price levels. If I may now read some more of these
expressions:
Hon. T. Alan Goldsborough, Member of Congress, in the House
of Representatives in May, 1922:
I firmly believe that the purchasing power of money can be stabilized. I
believe that the solution, when we have it, will be found to be simple; and I
trust that that solution will soon be embodied in legislation.

The Constitution of the United States, section 8 provides t h a t :
" The Congress shall have power to coin money, regulate the value
thereof."
Dr. F r a n k Crane in McClure Newspaper Syndicate, February,
1926:
It is well known that gold fluctuates. Sometimes there is more and sometimes less of it, and its value decreases or increases accordingly. * * *
Some method ought to be devised to base the value of a dollar upon a balance
of human necessities; that is, for instance, upon corn, meat, hide, wool, cotton,
and gold, instead of upon gold alone.

Prof. Gustav Cassel, of Sweden, in a report to the League of
Nations :
The downward movement of prices has not, as is sometimes assumed, been
merely a spontaneous result of forces beyond our control. It is essentially the
result of a policy deliberately framed with a view to bringing down prices and
giving a higher value to the monetary unit.

Edward A. Filene, in New York World, May 21, 1922:
It may be that the stabilization of the purchasing power of the dollar along
the lines advanced by economists will sometime help to remove some of the



128
problems of the counterfeit
sirable * * *.

STABILIZATION
wage. A scientific

solution

is highly

de-

Carl Snyder, economist, Federal Reserve Bank, New York, in
American Economic Review, June, 1925:
With the general level of prices established upon a level keel, the prices of
individual commodities and wages and salaries and interest rates would fluctuate widely among themselves, just as they do now under the varying pressure
of demand and supply, but in a greatly lessened degree. * * * We should
no longer have an appalling and endless number of strikes and wage disputes
and tie-ups and traffic blockades; for almost every strike and wage dispute
grows out of a changing level of the purchasing power of money, and if this
level of purchasing power can be made fairly stable, a large part of our
troubles, so-called, will disappear. And with this would come a corresponding
opening to all the talents of our inventors and discoverers and engineers and
efficiency and production experts, giving them a wide open opportunity to get
at ways to enhance the man product per hour, to distribute the product more
equably, to diversify and lighten human toil.

David J. Lewis, United States Tariff Commission, in a private
letter:
Next to the economic havoc of war itself there is probably no more devastating agent at work than the rudderless and ballastless unit of value which
has resulted in the price anarchy of the past generation.

Howard S. Mott, vice president, Irving National Bank, New York,
May, 1920:
All violent, long-continued, or extensive changes in the general level of prices
probably create more human misery than all other things put together.

A. C. Miller, member, Federal Reserve Board, October, 1921:
We should seek just as earnestly to avoid deflation as we should to avoid
inflation. By inflation I mean an expansion of credit that eventuates in a rise
of general prices. By deflation I mean a restraint of credit that eventuates in a
fall of prices. Good economic and credit policy will endeavor to steer a middle
course between these two dangerous shoals.

Lawrence Chamberlain in the Principles of Bond Investments,
1911:
For loans of long duration there is involved in this matter of fixity of interest a more profound question than mere certainty and regularity of payments—
and that is the future purchasing power of the money in which interest is
usually payable. If dealing in long loans it is well to know that the certificate of indebtedness given by the borrower calls for payment of interest and
principal " in gold coin of the United States of the present standard of weight
and fineness" rather than in mere " lawful money of the United States."
however synonymous those two terms may now seem; but it would be better if
the lender by any possible system of accounting could exact interest of so much
per cent " in present purchasing power of the necessities of life."

Investors' Digest, December, 1925:
A report comes via London that gold in immense quantities has been located
in the Rand, South Africa. Any great increase in gold production leads inevitably to inflation in the prices of all commodities.

New York World, March, 1926:
The explanation is simple enough—" radicalism" is always found where
there is suffering, injustice, and failure.

Secretary Mellon, in a speech yesterday in Philadelphia, reported
in the Washington Herald this morning, said:
Every one of us here in America has a material interest in seeing that stabilization is promptly effected.




STABILIZATION

129

Going back to the question of the power of the central banks to
influence credit, I would like to quote Mr. W. F . Gephart, vice
president of the First National Bank of St. Louis, a very important
institution, in his speech before the reserve city bankers at French
Lick Springs, Ind., June, 1923:
Price inflation could easily take place should we permit our gold accumulations to be converted into effective purchasing power through credit expansion.
This responsibility is shared not only by the reserve banks but by the independent commercial banks as well. They, in .the last analysis, can probably
do more to prevent the evU by comprehending the dangers involved than the
reserve banks can by attempting to control the situation through warnings.

Mr. STEVENSON. YOU spoke of the price level in 1865. W a s that
determined by the currency in circulation, or was it figured on the
gold basis?
Mr. LOMBARD. I n 1865 I referred to paper prices. The solid black
line is the paper price and the dotted line is the gold price.
Mr. STEVENSON. Silver was running about 2.16 or better for a
dollar in gold. The gold price was pretty near level.
Mr. LOMBARD. YOU can see that by referring to the chart.
Mr. STEVENSON. That shows the gold price.
Mr. LOMBARD. That solid line shows the gold price in England.
The solid line shows the idiosyncrasies introduced into the economic
system by the fluctuations in gold.
Mr. STEVENSON. I understood you to say that it was the falling
price level for the next few years that caused the greenback controversy. Was not that rather caused by the contention of a very powerful group that United States bonds, having been paid for in greenbacks, which were worth 52 and were bought from 65 to 70, ought
to be paid in greenbacks. Was not that the basis of the greenback row, and not the question of falling prices? I t started before
the prices fell very much, did it not ?
Mr. LOMBARD. That question of whether debts should be paid in
the purchasing power in which they were contracted has entered into
economic discussion for many hundreds of years. A decision handed
down by Grotius, the great international lawyer, held that a pound
is a pound, and a debt had to be paid in the currency in which it was
contracted, regardless of varying purchasing power. George Washington, in the early history of this country, rebelled against receiving
payment in inflated currency for money which he had loaned out
when- the dollar had a higher purchasing power. We are getting
constantly, through an organization to which we subscribe, reports
of similar conflicts going on in Germany, where there is a tremendous amount of litigation over whether or not debts should be paid
in depreciated marks or whether there should be some scaling down
of prices. You will remember that the Hamburg-American line
paid their bonded indebtedness at the cost of about $1,100 in gold,
which has given rise to more litigation.
Mr. STEVENSON. I am not interested in that particular development. I do not want to get a false premise in this record about what
caused that greenback row. If you will read the debate between
Benjamin F . Butler, from Massachusetts, and James G. Blaine, of
Maine, in which that question was settled, you will see that there was
made perfectly clear one of the most wonderful speeches ever delivered on the floor of the House, by Benjamin F . Butler, for whom I




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STABILIZATION

have absolutely no respect in the world, in which he absolutely demolished Mr. Blaine and Mr. Garfield on that issue, not whether
they should be paid on the same price level they were bought on but
whether they should be paid in the same kind of money they bought
the bonds with. That was the issue.
The bonds provided that the interest should be paid in gold, but
did not make any provision as to the principal, and the announced
purpose was to pay them in gold when the banks had bought them
with paper worth 52 cents on the dollar. The greenback movement
grew out of the assertion of a lot of people in this country that they
ought to be paid in the same kind of money they were bought with,
and not paid in gold which was worth $2 or better.
Mr. LOMBARD. Congressman Stevenson, you will concede that there
were two fundamental thoughts in the minds of those two men. One
was inflation, high prices; the other was deflation, low prices.
Mr. STEVENSON. That was not the issue there at all. I t was a question of what form of currency the Government could honestly pay
its obligations in. I t was claimed that there was a currency that was
worth 50 cents on the dollar in gold, but it was the currency which
the Government got for the bonds, and therefore the bondholders
should take the same kind of money at par, when they were getting
100 cents on the dollar when they only paid 70 cents. I was not a
greenbacker, but I heard all about it.
Mr. BEEDY. I understood your original statement to be that was
one of the incidents of an era of falling prices, that greenbackism
was one of the incidents of that era. Was that it ?
Mr. LOMBARD. Yes, sir. That was the product of that long period
of falling prices, where suffering and a general feeling of unrest
arose. I t culminated in greenbackism. That is my opinion. I may
be wrong, because my age is not sufficient to carry me back that far.
Mr. STEVENSON. The general mass of the people contended that
the Government by its greenback statutes required them to take
greenbacks. I t was legal tender. I t is legal tender now. The
Government required them to take it in discharge of every debt they
had, and yet the Government said, " We will not require these bondholders to take it." That was the proposition, and it caused all that
row that almost smashed the national banking system. The national
banks bought those bonds. They got them at 70 cents, and when they
fell due they got 100 cents on the dollar in gold. These people said,
" We have to take a 50-cent dollar for our debts, and these fellows,
who are making an unlawful profit out of the Government, are going
to get 200 cents on the dollar." That is what made the trouble, and
there was $ good deal of reason for it.
Mr. LOMBARD. All of which would have been avoided if we had
h a d a stable dollar.
Mr. STEVENSON. The greenbackers undertook to fight that, and
you will find the statute on the subject of resuming specie payments.
They decreed by act of Congress that the amount of greenbacks
should never be reduced, and it never has been. There have been
$$46,000,000 outstanding, still outstanding to-day. If you will look
in the Treasury daily balances, you will find it.
The CHAIRMAN. And gold reserves of $150,000,000 against it.
Mr. STEVENSON. Yes. We had no gold reserve behind it until the
second administratiou ^f Cleveland, when they repealed the Sherman




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131

Act and put up $150,000,000 of gold to back it, and that is outstanding.
Mr. LOMBARD. All of which would have been avoided if we had
been on a stable price level.
Mr.

STEVENSON.

Yes.

The CHAIRMAN. Eeference has been made tq the fact that at the
close of the Civil W a r gold was at a premium. The price of gold
is fixed by the act, is it not?
Mr. LOMBARD. Yes; just like the number of eggs per dozen is fixed.
The CHAIRMAN. Then how could it vary during that period?
Mr. LOMBARD. The price of paper was depreciated by overissue.
The CHAIRMAN. W h a t effect does the existence of the large amount
of gold that we have at the present time, with gold at a premium,
have in this country?
Mr. LOMBARD. None, so long as you can take the paper to the
Treasury and get gold.
Mr. STEVENSON. That is different. There was no gold reserve behind paper then.
The CHAIRMAN. H O W much paper money, payable in gold, is in
circulation now.
Mr. LOMBARD. A good deal more than the gold fund, if that is
what you are aiming at. There is a good deal more outstanding currency than there is gold to redeem it, but it is never all presented at
one time.
The CHAIRMAN. T h a t brings up the statement of Doctor Fisher
that there is too much gold in the country. Do you consider there
is too much gold in the country ?
Mr. LOMBARD. The minimum reserve contemplated by the act was
40 per cent. I t is now something like 75, indicating that there is a
good deal more gold than is necessary to act as a reserve for the
volume of currency outstanding.
The CHAIRMAN. Suppose an emergency should arise, as there did
five or six years ago, when large ^discounting is necessary, might
we not find ourselves in the position of not being able to expand and
extend credit to the business needs of this country, if we permit
the gold to go out of this country that we now deem excessive?
Mr. LOMBARD. N O ; I think not, Mr. Chairman. I think business
will accommodate itself to whatever volume of money you give it.
My only test for inflation and deflation, or sufficiency of circulat-'
ing medium, is the price level.
The CHAIRMAN. I recall, during that period of about 1920, when
the Federal reserve system was considerably concerned about the
outstanding Federal reserve notes and rediscounts being almost at
the breaking point. There was considerable discussion in regard
to reducing the legal reserve requirement of gold, because of t h a t
condition. Might not that condition occur again, because business
is expanding beyond what it was during that period ?
Mr. LOMBARD. I t might, if the excess of imports over exports be
too great and we loan too much money in Europe. However, that
situation would automatically correct itself through the operation
of exchange—the fluctuations in exchange—it would not long be
profitable to lend to Europe, and loans wotild stop.
The CHAIRMAN. D O J O U consider that we have inflation at the,
present time, either through rediscount of paper in member banks or



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STABILIZATION

through the issue of Federal reserve notes, or through the plan of
exchanging Federal reserve notes for gold?
Mr. LOMBARD. Or through too.much gold?
The CHAIRMAN. Or through too much gold.
Mr. LOMBARD. Inflation and deflation are relative terms. We have
inflation with rising price levels, and deflation with falling price
levels. If you are asking me whether we have inflation relative t o
1865,1 say no, we have deflation.
The CHAIRMAN. A S compared with 1913.
Mr. LOMBARD. A S compared with 1913, we have inflation.
The CHAIRMAN. T O what extent ?
Mr. LOMBARD. T O the extent of about 30 per cent. I think the
purchasing power of the dollar is about 62 cents to-day.
The CHAIRMAN. How was that inflation brought about?
Mr. LOMBARD. Principally through the gold in this country, the
result of large exports.
The CHAIRMAN. Could not that be controlled by the Federal
Reserve Board?
Mr. LOMBARD. I t has been controlled by the Federal Reserve
Board, which has kept the level down much lower than it might
have gone without the system. If we now had the old national
banking system we would have a price level two or three times as
high as it now is.
The CHAIRMAN. You do not consider that we have an excessive
amount of inflation?
Mr. LOMBARD. We have had practical stability for the last four
years.
The CHAIRMAN. Suppose the price level were reduced to that of
1913, and money and credit remained where they are, what would
be the result ?
Mr. LOMBARD. I do not believe you could do it. I do not think
you could reduce the price level and keep money and credit wThere
they are. I think you would have to reduce them.
Mr. STEVENSON. Contract them both?
Mr. LOMBARD. One or both.
Mr. STEVENSON. And some of the contraction would have to be a.
considerable amount, would it not?
^Mr- LOMBARD. The only way to put prices down is to bring about
deflation.
The CHAIRMAN. The statement has been made before the committee that the power vested in the Federal Reserve Board is being
exercise to the extent of fixing prices, not only in this country, but,
throughout the world. Do you agree with that statement?
Mr. LOMBARD. That was a statement quoted in the United States
Daily this morning. I think it is a mistake, except our reserve
bank authorities can not control prices abroad so far as the Federal Reserve Board may send its gold abroad or lend its credit or
buy or sell exchange.
The CHAIRMAN. D O you agree with Doctor Fisher that the open
market transactions of the Federal reserve system are the most
potent device they have for the purpose of stabilization ?
Mr. LOMBARD. I hesitate to differ with Doctor Fisher, because
he is the world's greatest authority on this question of stabilization,
but I think maybe he overlooked the tremendous power of moral




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133

suasion, and the power of publicity which the Federal Reserve Board
has, bearing in mind that large numbers of our banks are not
members of the system and are out at the end of a string, as it
were", running wild to suit their own notions. I think the power
of the Federal Reserve Board, through warning and suggestion
and publicity, is greater in this country than the open-market
operations.
Mr. STRONG. We heard this morning from the governor of the
Federal reserve bank, who stated that the banks are getting in*
formation from various business men ais to business conditions;
that the reports show that while they had a prosperous January,
February was rather reactionary, and that the consensus of opinion
seemed to be that was caused by conditions on the stock exchange,
being a psychological condition of mind t h a t if stock prices are
going down trouble will come and we would better be careful.
The CHAIRMAN. I S that not somewhat similar to fye plan pursued
by the Bank of England in regard to the statement of that kind
of conditions and warnings in regard to the use and misuse of
credit ?
Mr. LOMBARD. They do not function in that way.
The CHAIRMAN. I t would have the same effect?
Mr. LOMBARD. They are very much more frank and open with
their public than our financial authorities are. They seem to impute
to the public a larger degree of intelligence than is imputed to our
people. Of course, one of the controlling policies of the Bank of
England has always been to maintain the gold fund at the proper
level. They have been more interested, because of their large foreign business, in maintaining stable foreign exchange tham they
have in maintaining stable local prices. You have to make up
your mind which you are going to stabilize—discount rates, foreign exchange, or prices. Few people are interested in stable foreign exchange. People who are borrowing and lending money are
interested in interest rates, but everybody is interested in the price
level. Every dollar he has got or every investment he has got,
every commodity he owns, is affected by the price level. So I con«
sider the stabilization of the price level is the fundamental economic necessity of the world to-day.
Mr. K I N G . May I ask a question?
Mr.

LOMBARD. Yes,

sir.

Mr. K I N G . What are the various elements that enter into the
fixing of the price level ?
Mr. LOMBARD. First is the gold supply, because our dollar is a
unit of weight; it is a fixed weight of gold. Then, of course, the
power of the Federal Reserve Board, exercised through their four
devices: (1) Rediscount rate, (2) open market operation, (3) circulating gold, (4) moral suasion.
Mr. K I N G . D O you take into consideration the law of supply and
demand ?
Mr. LOMBARD. The law of supply and demand is very much misquoted. I would like to quote a remark I heard made by a college
professor who said you could teach a parrot what the average business man knows about economics by teaching him to say " Demand!
and supply, demand and supply." I asked him if it were not true,
93869—27—PT 1




10

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STABILIZATION

if a man knew demand and supply in all of its ramifications, he
knew economics. H e said yes*
Demand and supply has four factors. There is the demand and
supply of the article which I sell, and the demand and supply of
the article which you sell. You are selling gold, and I am selling
wheat. The demand and supply of gold is just as important as the
demand and supply of wheat. But the trouble is the weight of our
dollar has been fixed in gold; the law of demand and supply has
been suspended in the case of gold. We want to see it stabilized,
so it will have a fixed purchasing power in terms of commodities
we all buy and sell and wear and eat.
Mr. K I N G . Then these employees in Philadelphia ought to be
paid on the same basis. W h a t various commodities would enter
into their pay? W h a t would they get for their work?
Mr. LOMBARD. I do not recall now, but I think the index figure is
based upon thq things that men in their station of life consume
and use.
Mr. K I N G . The higher the prices, the higher their pay?
Mr.

LOMBARD. Yes,

sir.

Mr. K I N G . W h a t effect would there be if certain industries would
proceed along the line of taking a flyer in food ? You gentlemen are
familiar with that. A number of men a few years ago cornered
all of the condensed milk. They borrowed money oil it and gave
notes, which came out as Federal reserve notes. They had back
6f it the notes; and had the condensed milk. They sold it for whatever price they saw fit to take. That is one of the things we
experienced during the war and just after the war. W h a t effect
would that have, on the price level.
Mr. LOMBARD. That opens up a subject which will require considerable time to explore. I am very willing to do it, if the committee wants to take the time, and will answer your question specifically. The index figure is made up of a large number of commodities. Any fluctuation in any one has very little effect on the
general price level. When the price of, one commodity increases
automatically there tends to be a decrease in the price of others.
Mr. K I N G . Then you must of necessity be guided or controlled
by the same system we have now, when the price level gets very
high.
Mr. LOMBARD. YOU can stabilize it at any point you want in terms
of gold.
Mr. KING. Not in corners of food.
Mr. LOMBARD. There are no corners of food at all times.
Mr. K I N G . They operate pretty well on that line. Take clothing
to-day, it is controlled by that system; sugar has been controlled;
condensed milk has been controlled; meats have been controlled.
Mr. LOMBARD. I think this chart will explain my, position. If you
put the price of one thing too high, t h e public will immediately
buy the substitute.
Mr. K I N G . And if they can not get butter, they buy oleomargarine ?
Mr. LOMBARD. If they can not get linen collars, they buy cotton
collars.
Mr. K I N G . Will that not make Bolsheviks, as you suggested?




STABILIZATION

135

Mr. LOMBARD. Here is a chart which illustrates the similarity of
the price levels as calculated by using different numbers of commodities. You will hear some objectors to this plan ask, " W h a t
price index are you going to take, or what commodities are you going
to use ? " I t is said to be a matter which will be manipulated by
schemers, and so on.
Here [illustrating] is one line based on 25 commodities; here is
another one based on 50 commodities; and here is another one based
on from 242 to 261 commodities—various numbers at different times.
You will notice the similarity with which those curves move. Of
course, they are not identical. This system that we are proposing,
this system of stabilization, is not a perfect system. There is nothing perfect under the sun, but it is so much closer an approximation to perfection than the present system that there is no comparison. Under a system of stabilization you would have neither the
deflation nor the inflation indicated by the rising line here [indicating] and the falling line here [indicating].
The CHAIRMAN. Mr. Lombard, speaking of price levels, which of
the price levels, outside of the Fisher price level, do you consider
the nearest correct ?
Mr. LOMBARD. YOU mean the index figure of prices?
The

CHAIRMAN.

Yes.

Mr. LOMBARD. I think the figure of the United States Bureau of
Labor Statistics is a very reliable and satisfactory figure. There
is some objection to it because it is calculated by the Department of
Labor of the Government, and the suggestion has been made that
therefore it might be influenced by considerations other than those
purely economic ?
The CHAIRMAN. Which of the other indexes would you say would
come next?
Mr. LOMBARD. I am really not an expert along t h a t line. I do
not think my answer to that question would be worth anything..
Mr. K I N G . YOU do not say that this price level can be manipulated, do you?
Mr. LOMBARD. I t can be manipulated, you say?
Mr. KING. Yes, sir; either up or down.
Mr. LOMBARD. If you had too few commodities, the effect of
manipulation would be greater than if you had a large number of
commodities. T h a t is obvious.
Mr. STRONG. If you had 200 or 300, it would be better ?
Mr. LOMBARD. If you had two or three hundred, it would be better.
I t is impossible to suppose that there is going to be a combination
of controlling elements in 400 commodities.
Mr. K I N G . This laborer in Philadelphia will be permitted to take
whatever commodity he thinks he needs, will he ?
Mr. LOMBARD. N O ; there is an arbitration committee that determines which commodities enter into the calculation.
The CHAIRMAN. Certain commodities enter this year that were
used last year ?
Mr. LOMBARD. Not necessarily. The arbitration committee decides
that. If they want to include silk shirts, they can do t h a t ; and the
following year they can include canned milk.
Going back into history, it is interesting to see the standards that
were suggested as better than gold. Wheat has often been sug


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STABILIZATION

gested, rye was used in Germany recently, and it was once suggested in England that velvet be used.
Mr. K I N O (interposing). And Doctor Wiley suggested calories.
Mr. LOMBARD. Yes; and kilowatt hours have been suggested; but
that is largely theoretical. One of the most stable commodities determined by Doctor Fisher is eggs.
Mr. K I N G . Cold-storage eggs or fresh eggs?
Mr. LOMBARD. The average level of eggs, eliminating seasonal
changes, fluctuates more uniformly with the average of all commodities.
Mr. STRONG. Personally, I am in favor of butter and eggs and
those agricultural products being fairly high.
Mr. WILLIAMSON. YOU are speaking of it not being manipulated,
but it is conceivable that some great combination of capital could
control 50 per cent of these things.
Mr. LOMBARD. N O , sir; that is not conceivable—that the controlling
elements, if there were such a thing, in a sufficiently large number of
these commodities would ever be able to get together in such a way
as to work one way, because there would inevitably be leaks which
would prevent it.
Furthermore, I want to answer some questions raised yesterday.
Even great world conditions never result in such a way that we have
a n overproduction of corn and an overproduction of wheat and an
overproduction of barley and of rye, etc., all over the world at one
time.
Mr. WILLIAMSON. N o ; but sometimes you have a whale of a cataclysm of overproduction of wheat in the world.
Mr. LOMBARD. Yes; some one commodity; but when it is only one
it does not affect the whole list to any extent.
Mr. WILLIAMSON. But if wheat drops to 65 and the level is still
maintained by other things, you fix it so that the board can not do
anything specific to raise the price of wheat because it would elevate the general price level. You are putting a strait-jacket on the
Federal Reserve Board that they have to maintain a certain level.
Mr. LOMBARD. This is our difficulty, that we have been looking
upon gold as being stable and other commodities as fluctuating. J u s t
so, a man in an elevator in an office building might say, " My, but
this building jumps up and down a lot." I t is the gold that goes up
a n d down. I t is gold and the substitutes for gold that have to be
stabilized. We do not propose to stabilize wheat or cotton, but gold
and money.
Now, then, you fellows can have your rows among each other as
t o which is going to have high prices—wheat or corn or cotton or
butter—but those commodities will fluctuate between themselves
just as much under a stabilized dollar as they do now, but the fundamental measure—the dollar itself—will be stabilized.
I n that connection I want to read what Carl Snyder, the economist of the Federal Reserve Bank of New York, says. H e is an
eminent economist and he knows what he is talking about. H e has
made a careful study of these matters.
As I said, he is economist of the Federal Reserve Bank of New
York, a responsible position. He says:
The general level of prices established upon a level keel, the prices of individual commodities and wages and salaries and interest rates would fluctuate



STABILIZATION

137

widely among themselves just as they do now under the varying influence of
demand and supply, but in a greatly lessened degree. We should no longer
have an appalling and endless number of strikes, wage disputes, tie-ups, and
traffic blockades, for almost every strike and wage dispute grows out of a
changing level of the purchasing power of money, and if this level can be more
fairly stable a large part of our labor troubles will disappear, and with this
would come the corresponding opening to all these talents of our inventors
and engineers and efficiency and production experts, giving them a wide-open,
opportunity to get easier ways to increasing a man's production per hour, to
distribute the product more equitably, and to diversify and enlighten human
toil.

Mr. BEEDY. There is a good deal of confusion here in the use of
terms. Doctor Fisher in his testimony said he would like to get
away from the use of the phrase "price levels"; that the proper
term was "price scale." A moment ago the chairman referred to
" price level" when he meant " index figure." I would like to enlighten myself. There is no such thing as a price level, to be accurate, is there, in all this discussion ?
Mr. LOMBARD. N O .
Mr. BEEDY. There

is a scale of prices, which scale varies and from
which we take an average and arrive at an index figure.
Mr. LOMBARD. That is right; it is a mental concept.
Mr. BEEDY. We have had a good deal of confusion on that.
Mr. STEVENSON. I t reminds me of an Italian who brought a suit
in which the Supreme Court decided that the Constitution did not
follow the flag. He brought suit about some lemons that he undertook to bring in, and they imposed a tariff on him, and when the
court came in and decided that the Constitution did not follow the
flag the dago bobbed up and said, " What has become of my lemons ? "
The court said, " To hell with your lemons; we are deciding a constitutional question."
If you are going to decide a constitutional question, what is going
to become of folks when they have too much wheat ?
Mr. STRONG. Just what becomes of them now. Whatever they sell
their wheat for, they will have a stable dollar to buy their other
products with.
Mr. LOMBARD. D O you want me to give you my idea of what is
wrong with the wheat growers ?
Mr. ALLEN. Yes; and the corn growers, too.
Mr. STEVENSON. The cotton growers are not fussing now.
Mr. STRONG. The wheat growers are not satisfied with the prices
now.
Tell us what is the matter with corn.
Mr, LOMBARD. I t is typical of what I referred to in the early p a r t
of my address, the confusion which is wrought in our minds by the
fluctuating dollar and the efforts that we make to treat the symptoms*
rather than the ultimate caus£, the fundamental cause.
Some years ago we put into effect a farm-loan system, and in manjr
States we had State land settlement boards, and we had various*
devices and schemes to aid the farmer to get greater production.
Mr. STEVENSON. T O ^et in debt.
Mr. LOMBARD. Yes; for implements, for irrigating ditches, and f o r
everything contributing toward greater production. Every time you
monkey with the economic machine the chickens come home to roost
some time and in some way, and we can hear them cackle now.




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STABILIZATION

Mr. STEVENSON. I n other words, you think that by furnishing
greater credit for the farmer you have enabled him to overproduce
himself ?
Mr. LOMBARD. Yes, sir.
The CHAIRMAN. That has been

the claim that has resulted in legislation here in Congress for State aid. I have in mind particularly
the aid that is furnished under the Smith-Lever bill, in which we
created a system of county agents to teach the farmers how to farm
und to make two blades of grass grow where one grew previously.
You are speaking now of the results of the accomplishment of that
kind of legislation and also the opportunity to borrow money through
the Federal farm loan system as two of the causes which enter into
this overproduction at this time ?
Mr. LOMBARD. Yes, sir. You did not treat the fundamental cause
of the trouble. You did not go after the real trouble at that time;
you went after one of the symptoms. The farmer was suffering, and
he hollered loud, and he got aid, and now he is suffering from that
aid.
Mr. STRONG. D O you not believe that if we had not formed the
farm-loan system to let the farmer have a little cheaper money than
he was having and to let him pay back a small amount each year, he
would have borrowed from the mortgage loan companies just the
same and had to pay a higher rate of interest?
Mr. LOMBARD. N O ; and I will tell you why, Congressman Strong.
Mr. K I N G . H e would not have gotten it.
Mr. STRONG. B u t he did get

it.

Mr. LOMBARD. What is the term, Doctor Fisher, for marginal farms
right on that line?
Doctor FISHER. The recardian acre.
Mr. LOMBARD. This was the effect under all of that spoon feeding
of the farmer; that encouraged a lot of bank clerks and street-car
conductors and others to drop their usual occupations and go on the
farm and produce. We did that more in California I suppose than
in any other place. We even went so far as to have a land settlement board out there that bought land and sold it to the farmers.
The CHAIRMAN. I S that under the El wood Mead plan ?
Mr. LOMBARD. Yes; and on that question he and I stumped the
State in opposition to each other. I think that California had no
more business to go into* the real estate business than into the grocery or the jewelry business. I do not think the farmer is entitled
to be spoon fed any more than the groceryman, for the fatalities in
the grocery business are greater than the fatalities on the farms.
The CHAIRMAN. A n d the fallacy of that plan in California has
been fully demonstrated.
Mr. LOMBARD. Am I stepping on anybody's toes?
Mr. CHAIRMAN. Not in the least.
Mr. LOMBARD. If there is any party question involved here I will
quit because I do not want to say anything to interfere with the
movement for stabilization.
Mr. A L L E N . YOU were referring back to 1903, I believe, when you
said the Lombard Co.
Mr. LOMBARD (interposing). 1893.




STABILIZATION

139

Mr. ALLEN. When that money was loaned out in Kansas and
Nebraska and Iowa. Then followed the depression and the clean-up
but do you not picture from that time to this a great development
in that section of the country?
Mr. LOMBARD. The Lombard Co. had loans of $10 an acre on land
worth $200 an acre, but unless the farmer can pay his interest when
it comes due he loses his farm. One economist says that 1,000,000
farmers were forced to surrender their farms by reason of the deflation in 1920.
The CHAIRMAN. W h a t effect in your judgment did the operations
of the Federal farm loan system, in granting these more favorable
loans to farmers than they had theretofore been able to get, coupled
up with the additional assistance given them through Federal aid.
have on the prices of land in the Central West? I am speaking of
Iowa, southern Illinois, Nebraska, and Kansas.
Mr. LOMBARD. Of course it gave an artificial stimulus to production. I t rendered the farm business more profitable, and that was
immediately capitalized in land values.
The CHAIRMAN. And rampant speculation was the ultimate result
of that?
Mr. LOMBARD. Partly that and partly the depreciating value of the
dollar, but we would have had an increased price of land even with
the stabilized dollar under those conditions. If you spoon feed any
one business you are going to increase the capital value of that business.
Mr. BEEDY. A good many of those farmers in the Middle West
now crying for relief are those who bought lands at those high
prices on account of that inflation and now they claim that they
can not make any money to pay the overhead.
Mr. LOMBARD. That is true to a certain extent, but let me try to
take into consideration all the factors involved. What I am speaking of is one element. One of the big elements is certainly the
decreasing purchasing ability of Europe since the war. Europe has
not bought since the war what she did before. That has affected,us
particularly in California. Germany previously consumed tremendous amounts of dried apricots and prunes and so on but she has not
been consuming them so largely since.
Mr. STRONG. I want to say that there has not been any inflation
of land values in Kansas in the last 10 years, and there has not
been much borrowing of money to buy lands. Neither have there
been any conductors encouraged to go out there and buy land and
borrow money. Our farmers are practically the farmers that we had
10 years ago, and they are conducting their affairs just about as they
did 10 years ago, but they are not making any money. I think that
perhaps the fact that the dollar is only worth 63 cents in purchasing
power was largely responsible for it.
Mr. BEEDY. D O I understand that your State has not grown any
in the last 10 years?
Mr. STRONG. I t has grown; yes.
Mr. BEEDY. YOU have had some new influx of farmers there, have
you not?
Mr. STRONG. There are probably some, but I am talking about the
mass of the people.




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STABILIZATION

Mr. BEEDY. YOU said you had the same farmers that you had 10
years ago.
Mr. STRONG. Practically the same. The great majority who were
farmers 10 years ago are farming to-day.
Mr. BEEDY. What did they borrow this money for ?
Mr. STRONG. Principally to pay their old mortgages, which were
at higher rates of interest.
Mr. CANFIELD. I S it not a fact that you have fewer farmers out
there than you had 10 years ago? There were farmers making a
living then that can not make a living now, and they had to go off
the farm.
Mr. STRONG. I t is true all over the country that the cities are
growing at the expense of the farm districts, principally because
agriculture is no longer a profitable industry.
Mr. KING. And the farmer has nothing to say about the price of
his stuff.
Mr. STRONG. That is it.
The CHAIRMAN. If I understood your statement correctly, it was
to the effect that, owing to the demands from the agrarian group,
much legislation was passed which had the effect of overproduction.
Now, there is still that demand existing here for additional aid.
I t seems to me, if I understand vou correctly, that the present demand is largely the outgrowth oi unwise legislation which has previously passed and which has stimulated overproduction. Is that
correct ?
Mr. LOMBARD. Yes; I think that is correct.
Mr. STRONG. Would it not be fair or fairer, to say that the requests and demands made upon agriculture during the war to increase their production and feed the boys in France and feed the
nations of the world had more to do with stimulating the production of agriculture than anything else ?
Mr. LOMBARD. N O , Congressmen; I think the farmer did not get
a square deal during the war. The prices of his product would have
gone higher if they had not been pegged.
Mr. STRONG. I admit that.
Mr. STEVENSON. We want to find out what we are going to do tomorrow.
The CHAIRMAN. What is the pleasure of the committee in that
respect ?
Mr. STRONG. Is there anybody else to be heard ?
The CHAIRMAN. This is what I was going to suggest to the committee. I think that we should have the statistician of the Department of Labor who handles this index matter for the Department of
Labor here. He has evidenced interest in this as well as a desire to
appear.
I think also that it would be well for us to have the same man
from the Federal Reserve Board and the same statistician from the
Federal Reserve Bank of New York here.
If that is the pleasure of the committee, I will see that those men,
if they have not already been invited, will be invited to appear.
Mr. STRONG. I would like to state that it was my hope that the
Federal Reserve Board would have a representative here to hear
this discussion and reply to it.




STABILIZATION

141

Mr. GOLDSBOROUGH. Mr. Piatt was at the door just a few minutes ago.
The CHAIRMAN. I will say to you, Mr. Strong, that a communication which I received from Governor Crissinger indicated a willingness on the part of the board to appear, and stated that they would
like to know what was developing here so that they might be able
to make a more definite statement or answer to any questions that
were raised. Inasmuch as it was a subject which was not being
urged by the Federal Reserve Board, I thought, out of deference to
them, that that was probably a practical disposition.
Mr. STRONG. I was hoping they would be here so as to know what
questions were raised.
Mr. STEVENSON. The question I want to know is, W h a t are we
going to do to-morrow ?
The CHAIRMAN. S O far as the Chair knows, there is no one outside
of the gentlemen present here to be heard to-morrow. Doctor
Wolff desires to make a statement, I believe; and Mr. Starr told me
he wanted to make a statement.
Mr. K I N G . I would like to ask the chairman a question. Would it
not be possible to call in some representatives of farm organizations ?
They have experts, and good ones, on subjects of this kind, and they
are certainly interested in legislation of this kind.
The CHAIRMAN. Mr. Strong has had that in mind, and I think he
has gotten in touch with a good many.
Mr. STRONG. I will state that when it was decided to have this
heard by a subcommittee, and I was made chairman of the subcommittee, I did invite the farm organizations, and several of them
have written me; but when we decided, because of the importance
of this matter, to have the hearing before the whole committee, of
course, I deferred to the chairman and to the rest of the committee as to who should appear here; but in setting a date to which
we should adjourn I would like to present this thought: I would
have liked to have had the Federal Reserve Board hear this testimony and be able to present any objections that they may have.
As they have not been here, when they do make their statements, it
seeing to me it would be well if we could then adjourn to a time,
within a day or two afterwards, when the gentlemen who have appeared here and made statements could have an opportunity to reply
to any arguments that might be presented.
Mr. STEVENSON. All of which is not reaching the question I have
in mind, and that is whether we are going to be here to-morrow.
Mr. LOMBARD. I n accordance with your suggestion, Mr. Chairman,
that I file a supplementary statement, I submit the following:
The equation of exchange: - m - = PThis is an algebraic statement and proof of what I like to call
" the demand and supply theory of money." I do not like the term
"quantity theory of money," because that is frequently misunderstood. The quantity theory of money is that " other things being
equal, the purchasing power of money fluctuates inversely in proportion to its quantity," but the trouble is that " other things " are never




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STABILIZATION

equal. Money fluctuates in purchasing power in accordance with
the law of demand and supply the same as does any commodity or
service. This equation shows us that prices vary directly with the
quantity of money in circulation multiplied by its velocity of circulation, and inversely as the total volume of trade.
We start the demonstration by taking, as an example, any piece of
money. When a purchase is made this piece of money changes
hands for a given thing at a given price. If we take every transaction into which money enters and give each piece of money its own
designation as m, m', m " , etc., and if the velocity at which each of
these pieces of money circulates is designated by v, v', v " , etc., it is
obvious that their product must be equal to the total of all the things
purchased multipled by the price of all those things. If each of these
things we designate by t, t " , t " , etc., and the prices of these things
we designate by p, p ' , p " , etc., it must be obvious that these two
must be equal. That is, m v + m V - f m " v " , etc. = p t + p ' t ' + p " t " ,
etc. Taking a summation of the two sides of the equation and redesignating the sum of all the money (and credit) involved by the
large letter M, the average velocity of circulation by a large V, the
total volume of trade by large T, and the general price level by
large P , we have the next step in our equation, viz, M V = P T .
Dividing both sides of the equation by T, we secure the algebraic
MV
statement of the demand and supply theory of money, -rp- = P ,
which means that the total money and credit in circulation multiplied
by the average velocity of circulation and divided by the total volume
of trade equals the general price level.
Now, assuming that we desire to keep P (the general price level)
constant, and that V is not subject to our control—being a matter of
individual determination—and that we do not want to exercise any
direct control over T (the volume of trade) such as by limiting
production or artificially stimulating the same, then the only factor
remaining subject to our control is M, the volume of money and
credit.
Under our disjointed banking system, with many thousands of
banks not even members of the Federal reserve system and operating under the ^supervision of State authorities and thinking only
of their own profits and security rather than of the common good,
the measure of control exercised by the Federal reserve authorities
must be even more drastic than would be the case if we had one
central institution, such as exists in England, for example.
Also, since it is traditional in banking that gold reserves must
have a certain fixed percentage relation to outstanding liabilities,
it follows that inflation in the amount of gold in bank reserves or
deflation in such reserves will reflect itself in the outstanding bank
credit and that the Federal reserve authorities can control this outstanding bank credit only as to their own member banks and this
control must be far more drastic and severe than would be the case
if all banks in the country were members of the system.
Diagram E : As to the measurement of the factor P in the above
equation—the price level—and the influence upon the calculation
or excluding certain commodities, I call your attention to diagram
E on which are charted price levels from 1890 to 1912 as determined




STABILIZATION

143

by using 25, 50, and over 200 commodities, respectively. The close
similarity of the three different curves illustrates that it is of
comparatively minor importance how many and even what commodities enter into the calculation of the general price level.
Diagram F : Eeferring to diagram F , upon which are charted the
results of calculating the index level by using weighted and unweighted figures, it will be seen that it is of comparatively little
importance which of the two methods is followed. By a weighted
figure we mean one where the weight given to each commodity in
the statistical calculation is dependent upon its importance in commerce and is directly proportionate thereto, whereas in an unweighted calculation each article is given the same weight in the
calculation, regardless of its importance in commerce.
Diagram G : Referring to diagram G, whereon have been plotted
two series of index figures, one based on retail prices and the other
on wholesale prices, we observe that the two closely resemble each
other, the fluctations in the wholesale line being greater than in the
retail line, evidencing that an index figure based upon wholesale
prices is more sensitive, and therefore, perhaps, a better guide in
connection with any plan for stabilization than would be an index
figure based upon retail prices.
Diagram A : As to the influence of gold upon inflation and deflation, I call your attention to diagram A, whereupon have been
charted the index of price levels in the United States and England
from 1790 down to 1915. The dotted line on this chart indicates
the gold price 'level, where it was different from the paper level.
Since it is paper prices that people have to pay, when inflation goes
to such an extent that paper is depreciated in terms of gold, it is
the black line which we should more closely observe in considering
the affects of paper inflation. I t will be noticed that these two lines
are strikingly similar—when one goes up the other goes up, and
when one goes down the other goes down, illustrating that the same
fundamental cause is at work. I t is also interesting to note the inflationary periods in England and in the United States during the
Napoleonic wars, the American Civil War, and the recent World
War.
I t is also interesting to note that the price level reached a low
ebb and started to climb again about the time of the discovery of
gold in California and Australia. After the Civil W a r the price
level declined in both countries until it was at its low point about
1896, at which period we had the characteristic political phenomenon
of an " Inflationist P a r t y " almost successful at the polls. At
about this time the cyanide process for extracting gold from the
theretofore worthless gold dumps of the world was discovered, and
also about this time gold was discovered in the Rand. Then the
price level began to mount gradually under the natural stimulus of
this increase in production of gold until the outbreak of the World
War, when M and V, in our equation, were energetically stimulated
and T not so much so (because of the fact that the producers were
at the front killing each other) so P rose to great heights.
Diagram C : on diagram C are shown the fluctuations in the price
levels of Germany, France, Great Britain, Canada, and the United
States from 1890 to 1914. During this period all of these countries




144

STABILIZATION

were on a gold standard and operating on a more or less fixed gold
reserve ratio, so that we have here graphically deplicted the effects
on all of the price levels of one fundamental cause, viz, fluctuations
in the demand for and the supply of gold itself.
Diagram D : This controlling influence of the metallic base upon
the price level is even more strikingly demonstrated on diagram D ,
where we see charted the price levels in India and in England from
1860 to 1912. During this time there were three briefer periods
during which relationships between the countries changed. Thus
from 1860 to 1873 both countries were on a bimetallic basis and during this period when the price level in one country rose, it rose in
the other country, and vice versa. From 1874 to 1893 there was no
tie between the two countries and during this period there was no
synchronism between the two lines. Sometimes they rose and fell
together, and sometimes when one rose the other fell. From 1894
to 1912, however, India was on a gold exchange standard and during
this period again, when the price level rose in one country it rose in
the other and when it fell in one country it fell in the other.
Nothing could be more cogent to prove the absolute necessity for
some thoroughgoing law yhich will cause gold in the future to
serve, rather than to master, man.
Diagram I : Diagram I illustrates some of the evil consequences
of fluctuating price levels. On this chart the crosshatched portions
indicate the relative changes in price levels from year to year. The
crosshatched portions above the median line indicate increases in
the price level and those below the median line indicate decreases in
the price level, each as against that of the previous year. I n some
cases, where the increase or decrease was so great that it could not
be shown on the diagram, it has been indicated by figures on the
margin.
The heavy black line indicates fire losses. Fifty-three per cent of
the total premium income being considered normal, any increase in
this normal ratio is shown by projecting the solid black line below
the median line, whereas any decrease in the normal fire-loss ratio
is shown by projecting the solid black line above the median line.
I t will be noted that, with the exception of one or two years, fires
increased when the price level dropped and they decreased when the
price level rose. The frequency with which this is shown removes
any question as to its being entirely a matter of coincidence.
Even more interesting and sentient from the point of view of our
study is the relationship shown between fluctuations in the price
level and the percentage of business failures. Thus, on Diagram I ,
when business failures increase the dotted line goes down and when
they decrease the dotted line goes up. I t will be noticed that with
absolute fidelity when the price level drops business failures increase,
when the price level rises they decrease, thus indicating the fact that
business men, more than they realize, are subject as regards their
success or failure to the idiosyncrasies in the price level which they
have absolutely no way of prophesying or estimating. Thus they are
subject to the activities of miners and inventors on the one hand, t o
the users of gold in the arts on the other; to the whims and the
judgment of our Federal reserve authorities in their policies as regards rediscount rates and operations in the open market, and to the
activities of a large number of banks operating under the laws of a







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146

STABILIZATION
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STABILIZATION

147

half a hundred jurisdictions, guided only by the natural instincts
of the business man and so trying to make as much money as possible
for themselves and their stockholders.
This is a general condition which will be immeasurably improved,
in my opinion, by the passage of the legislation under consideration,
particularly if the bill be amended as has been in these hearingssuggested; but the problem is so large that further legislation will
in time be needed, and it is hoped that the passage of this bill will
be merely preliminary to a study of the much larger problems
involved in controlling the fluctuations in the price level which are
due to the changing demand for and supply of gold itself.

hD£XF/GUfiES
As CALCULATED BY
W&GHTED& UNWEIGHTED METHODS

Mr. F E N N . I move that we adjourn until Tuesday morning at
10.30.
The CHAIRMAN. Mr. Fenn moves that we adjourn until Tuesday
morning at 10.30.
(The question was put and the motion was adopted.)
The CHAIRMAN. We will now adjourn until Tuesday morning at
10.30.
(Whereupon, at 4.35 o'clock p. m., the committee adjourned until
Tuesday morning March 30, 1926, at 10.30 o'clock a. m.)
HOUSE or REPRESENTATIVES,
COMMITTEE ON B A N K I N G AND CURRENCY,

Tuesday, March SO, 1926.
The committee met at 10.30 o'clock a. m., pursuant to adjournment,.
Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order.
I would like to place in the record at the opening this morning a
letter from the governor of the Federal Reserve Board, under date
of March 22, as follows:
MY DEAR ME. MOFADDBN : Confirming our conversation over the telephone
this afternoon and answering the letter x>f March 19 addressed to the secre


148

STABILIZATION

tary of the board by the elerk of your committee, inviting Doctor Miler and
other members of the board to attend the hearing to be held March 24 to
consider H. R. 7895 amending paragraph (d) of section 14 of the Federal
reserve act to provide for the stabilization of the price level for commodities
in general, which bill was introduced by Mr. Strong, of Kansas, January 18,
1926, I would state that Doctor Miller and possibly other members of the
.board will be glad to appear before the committee before the hearings on the
bill terminate.
In accordance with our conversation over the telephone this afternoon, 1
understand that there will be a number of economists and others who will
appear before the committee upon this bill. In pursuance of my talk with
you, I hope it will be satisfactory to you to let us have a report, so far as
possible, of the remarks made by these various economists and others appearing in advance of our appearance so that the members of the board may have
at hand all the information from which they can determine what points require answer on the part of the board when tmey appear. After we have this
information it will be perfectly agreeable for Mr. Miller to appear before
your committee and furnish such information as is available here on the
subject.
Very truly yours,
D. R. CBISSINGER, Governor.
Hon. Louis T. MCFADDEN,

Chairman House Committee on Bankmg and Currency,
Washington, D. C.

I n that connection I would say that the stenographic notes which
we have received to date of these hearings have been furnished to
the Federal Reserve Board, and it is the purpose of the chairman
to keep them supplied with these hearings as they develop from
time to time.
We will now hear Doctor Wolff.
STATEMENT OF DE. FRANK A. WOLFF, CHIEF TELEPHONE SECTION, BUREAU OF STANDARDS, WASHINGTON, D. C.
The CHAIRMAN. Doctor Wolff, would you like to proceed without
interruption?
Doctor W O L F F . Yes; I think so.
The CHAIRMAN. The Chair will suggest that Doctor Wolff be air
lowed to complete his statement without interruption, after which
he will be opto to answer any questions that come to the minds of
members of the committee.
Doctor WOLFF. I have appeared before this committee on two previous occasions; first, in connection with the hearing on the Goldsborough bill, H . E . 11788, held December 20, 1922, and again at the
hearing on the same measure, reintroduced as H . R. 494, on February 26, 1924. I am here to-day on invitation of your chairman
and also of Representative Strong, who has submitted the amendment to the Federal reserve act now before the committee.
As I stated on the previous occasions, I am here as a self-appointed spokesman for one group of victims of inflation. I appear,
therefore, in my capacity as an individual and not in my official
capacity. Since 1896, with a few minor intermissions, there has
been a decrease in the purchasing power of the dollar. Expressed
in terms of the 1901 dollar, the present-day dollar, as measured by
its purchasing power, is worth 40 cents.
I am connected with the Bureau of Standards, which deals with
weights and measures in the broadest sense. I can not avoid the
conclusion that the use of our dollar as a unit of value might be
compared with the use of yards and quarts and bushels made of



STABILIZATION

149

India rabbet or some other elastic material. The American public
would not put up with the use of India-rubber yardsticks or bushels
or quarts or pints for a minute. They insist on accuracy and permanency—permanency with time—so that the units of measure are
the same year in aftd year out. With regard to the unit of value,
they do not understand the question, or they would not put up with
a variable unit of value any more than they would put up with a
variable unit of measure.
I n the case of the shifting value of the dollar the question has
been too subtle for them,. As Professor Fisher stated in his testimony the other day, we live in an atmosphere of money. We, therefore, are not conscious of changes going on, and it is for that reason
that people jare not wise to the fact that one of the most important
things that this country ought to do is to stabilize, if possible—and I
do regard it as possible—the purchasing power of the dollar, so that
it will become a real unit of value.
A t one of the previous hearings I introduced a memorandum on
the legalization of the standards of weight and measure by this country. I found that the principal actions of Congress with regard to
weights and measures were as follows:
I n 1828 a certain troy pound was adopted as a standard for
coinage.
I n 1836, by joint resolution, Congress directed the Secretary of the
Treasury to deliver to the governor of each State—
a complete set of weights and measures adopted as standards and now either
made or in process of manufacture for the use of the several customhouses.

I n 1866 the metric system was legalized for permissive use throughout the United States.
I n 1911 Congress provided that the standard troy pound of the
Bureau of Standards should be the standard troy pound for the
regulation of coinage, thus repealing the previous act of 1828.
I n 1915 a mandatory standard barrel was adopted for the sale of
dry commodities, whether in intrastate or interstate commerce.
A standard lime barrel and standard baskets have also been legalized for use in interstate commerce.
I n addition to that, in 1894 Congress legalized standards for electrical measurement suggested by the International Electrical Congress held at Chicago in 1893. These, I am frank to state, we disregard at the Bureau of Standards, because that action has been
superseded by the decisions of subsequent Congresses.
The Constitution provides, among other things, that the Congress
shall have among its powers the right—
to coin money, regulate the value thereof, and of foreign coin, and fix the
standard of weights and measures.

Now, in a sense, the second part of that clause has been ignored,
except in so far as there has been the direct legislation just outlined.
I n effect the regulation or fixing of standard weights and measures
has been informally delegated to the Bureau of Standards. The
standards in customary use are actually those which have been
adopted by the Bureau of Standards. They pass by general sanction without any strict legalization.
I n the same way Congress has not lived up to the first part of this
provision of the Constitution—to regulate the value of money. I t




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STABILIZATION

has passed certain legislation fixing the amount of gold or other
metal in the adopted coinage; it has passed banking legislation; it
has passed the Federal reserve act; but it has given no attention to
regulating the value of the dollar. And yet the real value of the
unit of money-—currency—is of the very highest importance. Nearly
every business transaction involves the units of weight or measure
on the one side and the unit in terms of which payment is to be
made—the dollar—on the other. I t is just as important to fix the
second as it is to fix the first.
The results of inflation and deflation have been referred to in the
previous hearings and also in these hearings. Among other evidence presented, reference was made by Willford I . King, the economist of the National Bureau of Economic Research, (that during
the period of inflation from 1914 to 1920 $40,000,000,000 of value
were transferred from one set of pockets to other sets of pockets.
During the following period of deflation, which only went half as
far, about one-half of that sum was again transferred from one set
of pockets to other sets of pockets—not the same sets of pockets, as
Professor Fisher pointed out.
At a previous hearing 1 raised the question whether, in either
case—during the periods of inflation or deflation—this was in conformity with the preamble to the Constitution, which breathes
its spirit—the preamble to the instrument which you have all sworn
to uphold and defend.
The preamble reads:
We, the people of the United States, in order to form a more perfect Union,
establish justice, insure domestic tranquility, provide for the common defense,
promote the general welfare, and secure the blessings of liberty to ourselves
and our posterity, do ordain and establish this Constitution for the United
States of America.
I also r a i s e d t h e f u r t h e r q u e s t i o n s :
To form a more perfect Union, or to endanger its disruption?
To establish justice, or to enthrone injustice?
To provide for the common defense, or to foment an internal clash of
divergent interests?
To insure domestic tranquility, or to engender unrest?
To promote the general welfare, or to reduce our standards of living?
To secure the blessings of liberty to ourselves and to our posterity, or to
strengthen the economic bonds which fetter us in our normal development?
And this situation has been brouught about largely through a lack of understanding of the * basic economic laws of money and credit, as has be^n so ably
presented to you by Professor Fisher.

I read that again because I want to bring home to you that under
the preamble, and also under the specific provision of the Constitution, it seems to me that this committee and Congress should give
earnest attention at the earliest possible moment to this question of
stabilization.
I n nearly all of the discussion on the money question the terms
" inflation " and " deflation " are used, but most often they are used
without any clean-cut understanding of what they mean. I n any
physical science we do not consider that we know anything about
the science until we are able to express relations in numerical
measure.
I would therefore like to put this question: W h a t is the measure
of inflation or deflation?




STABILIZATION

151

During the war and the period immediately following the war
we had a vast increase^ of the price level. We were then told that
this is not inflation. But what is the measure of inflation or deflation?
I t is, the change in the index number, which represents
the average price level of commodities. With this definition we can
apply the acid test to determine whether or not we are having
inflation or whether we are having deflation or stability. I n the
case of inflation there is an increase in the index number, and in
the case of deflation a lowering of the index number.
Inflation and deflation are to be contrasted with the purported
object of the passage of the Federal reserve act. At the time it was
under consideration by Congress, it was stated that the purpose of
that act was to provide for elasticity of the currency and of credits,
in order to provide for the variations in the need by business arid
commerce for currency and credit; that in order to provide that
elasticity required to meet the varying needs of business and commerce it is necessary to expand the currency and expand credits
when more currency and more credits are legitimately needed. But
if the expansion is carried beyond the limits which are required to
meet these varying legitimate needs of business and commerce, it is
reflected by an increase of the index number of prices, and then we
have inflation. If it is not carried far enough, we have deflation.
That distinction must be made; and once you get it, the purpose
and importance of this bill is easily understood.
I believe that control of money and credit must be vested in the
Federal Government; in Congress or in some agency created by
Congress; and I believe that the proposed amendment to the Federal reserve act would result in effectual stabilization.
I approve of the objects of the bill. I prefer the wording that Mr.
Goldsborough suggested to the wording in the Strong bill.
Mr. STRONG. That is the use of the words " Inflation and deflation."
Doctor WOLFF. Yes, sir. However, we may have to come to the
Goldsborough plan or some other plan at some later time, if the
world stays on a gold basis, and if for any reason our gold reserve
is depleted. I believe that if we adopt the plan of stabilizing the
dollar it would result in a clarification of many other problems in
which this is an underlying difficulty. Stabilization, of course, as
Professor Fisher has pointed out, is not a panacea for all the economic ills that we are subject to.
I believe the influence of publicity has been underestimated. I
believe it would have a very far-reaching effect if the Federal
Reserve Board would publish the index number from time to time,
in cases where the index number had gone up, to publish the fact
that it had gone up, and that it was the purpose of the Federal
Reserve Board to bring it back to normal. I believe that that
would have a greater effect than any of the other means that the
Federal Reserve Board has at its disposal.
As to the bearing which the stabilization question has on other
problems, take the question of Government expenditures.
Back in 1920 the then Director oT the Bureau of Standards,
Doctor Stratton, appeared before a subcommittee of the House
Committee on Appropriations to defend the 1921 estimates which
he had presented. These called for necessary increases all along the
line, to expand the work of the bureau and correct grave injustices.



152

STABILIZATION

When the chairman of the subcommittee saw these estimates he
" went up in the air," to use a colloquial expression, and said, " My
God, this would bankrupt the Government!" Later the bill was
reported to the House, and in so doing the chairman of the subcommittee paid a very high tribute to the Bureau of Standards and to
its director—he has always been a friend of the bureau—but repeated
the quoted remark in other words. That led Dr. E. B. Rosa, then the
chief physicist of the bureau, to inquire whether there was any real
danger of bankrupting the Government by providing the increases
for which the director's estimates called. Doctor Rosa first undertook an analysis of the appropriations for that year, the fiscal year
1920, and found that out of a total of five and one-half billion dollars carried by all the appropriation acts of that year only 1 per
cent was provided for all the research, educational, and development
work; 3 per cent was for public works; 3 per cent was for the ordinary civil functions of the Government; leaving the balance, 93 per
cent, to take care of the obligations arising out of the World W a r
and for current naval and military expenditures.
Mr. GOLDSBOROUGH. That included pensions, did it not ?
Doctor W O L F F . That included pensions.
Not satisfied with that, Doctor Rosa undertook a functional analysis of actual expenditures and receipts of the Government from
1910 to 1920, inclusive, a period of 11 full years. The receipts and
expenditures were divided into nine major groups, with altogether
110 subgroups. The results of that study are given in volume 94 of
the Annals of the American Academy of Political and Social Science.
I t is the first and the best analysis of expenditures and receipts t h a t
has ever been made for the United States. By the time Doctor
Rosa completed this study the little group of us in the bureau that
were working with him knew more about Government expenditures
and receipts than anyone on Capitol Hill, anyone in the Treasury,,
or anyone anywhere else, and this is not intended as a boast or a
criticism.
I n connection with that study I undertook a further analysis of
the civil expenditures, using the figures developed by Doctor Rosa,
by applying thereto the economic yardstick. I found, for example,
that, taking 1914 as the basis, or 100, the net civil expenditures in
1920 had apparently risen to lGO1/^, but when they were equated on
the basis of the decreased purchasing power of the dollar the expenditures for civil purposes in 1920 had actually fallen to 81 per cent,
for the dollar of 1920 was worth only 50 cents in terms of the 1914
dollar. I n other words, instead of an increase, there was an actual
net decrease for 1920 as measured in terms of the same yardstick.
Mr. WILLIAMSON. By the yardstick you mean the index number?
Doctor WOLFF. Yes; the index number.
The aggregate decrease for the years 1915 to 1920, expressed in
1914 dollars, figured out nearly $194,000,000, notwithstanding that
there was an enormous increase in the number of Government employees. That is the most remarkable thing. So, therefore, it can
be said that since the Government had to go out in the open market
and buy goods, supplies, etc., this decrease was really due to the fact
that the Government employees were not paid in proportion to what
they had received in 1914. The amount by which they were Aim-




STABILIZATION

153

flammed—and I use that word intentionally—was nearly $194,000,000; and those are 1914 dollars. Multiplying by 1.6 to reduce
them to the present-day dollars, that would mean over $300,000,000.
And that is greatly underestimated, because I could not take into
account the large increase in the number of employees.
So you see the application of the index number throws an important light on title question of real Government expenditures and
wages.
Mr. WINGO. May I interrupt you to ask you this before I forget it?
Doctor WOLFF. Yes, sir.

Mr. W I N G O . I was looking this morning for a tabulation along
the same line. I do not recall who got it out, and I do not know
whether it was the same group that prepared these papers on Government expenditures. I t wras a translation into terms of index
numbers and relative purchasing power of dollars. There was just
such a calculation on the question of wages in the different basic
industries of the country. Do you recall that tabulation and who
got it up?
Doctor WOLFF. NO ; I do not.

Mr. W I N G O . I t was rather interesting, I know. I t was a partisan
argument with reference to a wage dispute in one of the big groups
of employees of the country. They undertook to show, in the different industries, that notwithstanding certain nominal increases that
they had had in the standard measure of their daily wages, that by
the operation of the inflation of prices, and measured by the purchasing power, their wages were still lower.
The CHAIRMAN. I f the gentleman from Arkansas will pardon me,
I think I will put into the record at this point a statement issued
by the Department of Labor, which was printed in the United States
Daily for Saturday, March 27,1926, showing statistics relative to the
purchasing power of the dollar for the past 12 years.
Mr. W I N G O . Yes; I think that ought to go in. Does the chairman
recall the pamphlet that I referred to? I have not been able to
find it in my files. I thought I put it in the railroad file, but I can
not find it.
The CHAIRMAN. I recall such a statement being made, but I can
not refer you to it.
Mr. WINGO. I was under the impression that the Bureau of Labor,
or some one connected with it, had prepared these statistics, and
I thought, in view of the study that had been made by the Bureau
of Standards, that they possibly r a n across the same thing.
The CHAIRMAN. That will be inserted in the record at this point.
(The statement referred to is as follows:)
[From the United Statos Daily for Saturday, March 27, 1926]
PURCHASING POWER OF DOLLAR S H R I N K S 40 PER CENT SINCE 1913, THE DEPARTMENT OF LABOR REPORTS—STATISTICS COMPILED GAUGE PRICE C H A N G E S —
VALUE OF MONEY I N FARM PRODUCTS I N EXCESS OF AVERAGE FOR ALL COMMODITIES—PERIOD OF 12 YEARS TABULARLY SURVEYED—MOVEMENT OF CURRENCY
I N TERMS OF VARIOUS PRODUCTS FIGURED AT STATED PERIODS

[Clothing manufactures—Building materials—Metal products—Chemicals—Drugs]
The purchasing power of the dollar, as measured by wholesale prices, has
dropped almost 40 per cent since 1923, according to compilations made by the
Bureau of Labor Statistics, Department of Labor.



154

STABILIZATION

The decrease in the value of money is shown to have been greatest in cloths
and clothing, the prices of which have increased almost 50 per cent over the prewar figure. The value of the dollar on farm products is slightly above the
average of all commodities.
The bureau gave the following survey in the changes in the purchasing
power of the dollar:
" That the purchasing power of money has greatly diminished since 1913, the
year preceding the World War, is well known to the most casual observer.
To the average person, however, the extent of such decrease is more or less
conjectural, owing to the wide diversity of price fluctuations of individual
commodities and the difficulty of reducing them to a common standard for
gauging changes in the price level.
" The index numbers of wholesale prices constructed each month by the
Bureau of Labor Statistics furnish a reliable barometer of the composite
price movements. In the present article the figures have been brought together and monthly changes in the buying power of the dollar, for various
groups of commodities, are shown for January and July from 1913 to 1925.
The dollar's average buying power in 1913 forms the basis of the comparisons,
Or 100 cents.
" It will be seen from the foregoing table (see table giving ' changes in buying
power of the dollar in specified groups of commodities, 1913 to 1925') that the
purchasing power of the 1913 dollar, as applied to farm products, sank below
50 cents in the closing months of 1917 and continued downward until January,
1920, when it equaled only 40.5 cents. Declining prices of farm products, however, brought the dollar's buying power up to 88 cents in June, 1921, the highest
point since 1916. In the latter part of 1921 the purchasing power declined
again to a point ranging from 80.5 cents to 84 cents. From January, 1924, to
the end of 1925 the value of the dollar in the purchase of farm products has
fluctuated between 61.2 cents and 74.6 cents. In foodstuffs the low point of
40.3 cents was reached in May, 1920, with rising buying power thereafter, fluctuating between 41.1 cents and 76.6 cents, the latter high point being reached
in January, 1922. During 1925 the figures ranged from 65.3 cents in May down
to 62.4 cents in September and November.
"As regards cloths and clothing, the dollar would purchase more than a dollar's worth in 1914 and most of 1915, but sank to 28.9 cents in February, 1920,
since which time the figures have ranged between 29.1 cents and 58.6.
" In the three groups of fuel and lighting, metals and metal products and
building materials, the buying power of the dollar rose above its buying power
in other groups in 1914 and the first part of 1915. Advancing prices of metals
for wrar purposes after 1914 brought the dollar's purchasing power rapidly
downward.
Changes in buying power of agricultural

and nonagricultural

commodities

[1913=$1.0001
Year and month
1913—January
July....
1914—January
July.—
1915—January
July....
1916—January
July....
1917—January
July....
1918—January
July....
1919—January
July....

Agricul- I Nonagritural I cultural
$1,025
.992
.984
.982
.952
.951
.922
.859
.541
.502
.482
.460
.437

$0.975
1.009
1.049
1.085
1.094
1.046
.852
.769
.616
.525
.591
.543
.557
.513

Year and month
1920—January..
July
1921—January..
July
1922—January..
July
1923—January..
July
1924—January..
July
1925—January..
July
December

Agricul- Nonagritural
cultural
I
$0. 416 I
415
658
768
801
710
704
719
.705
.618
.618
.651

$0,444
.417
.533
.659
.660
.592
.592
.619
.639
.660
.636
.637
.633

And this was followed by similar declines in the other groups. By the middle
of 1917 the dollar of 1913 had shrunk to 34.2 cents in the purchase of metals
and their products, but expanded quickly as prices again declined.
" In 1920, the year of highest prices, the dollar of 1913 reached a low point,
equivalent in its purchasinug power to 49.3 cents in the case of metals and
metal products, 35.6 cents in the case of fuel and lighting, and 33.4 cents in the



STABILIZATION

155

case of building materials. After the dates of these low prices the buying
power of, the dollar rose again, going to 61.7 cents in October, 1924, }n the case
of fuel and lighting; to 91.7 in March, 1922, for metals and mejtal products;
and to 64.7 in the same month for building materials. During 192& the, purchasing power of the dollar, in so far as it relates to fuel and lighting, ranged
from 59.6 cents in January to 56.3 cents in the following month.
" Measured by its buying power in the purchase of chemicals and drugs in
1913 the dollar was equal to less than 50 cents during the latter half of 1917
and most of 1918 and 1920. Since 1920 the figures have ranged from 65.2 cents
in January, 1921, to 82.6 cents in July, 1922. In the case of house-furnishing
goods the dollar of 1913 had a value less than 40 cents in the second half of
1920, since which time it has ranged from 46 cents in January, 1921, to 60.3
cents in December, 1925.
" F o r all commodities combined the dollar of 1913 was equal in purchasing
power to more than a dollar in most of 1914 and 1915, but dropped steadily
thereafter until May, 1920, when it equaled only 40.5 cents. With a declining
general price level it advanced above 70 cents in the second half of 1921, and
the first half of 1922, but receded to 64 cents thereafter. From 1923 to 1925 it
fluctuated between 62.1 cents and 69.2 cents.
" In view of the importance of building materials the table which follows (see
table giving ' Changes in buying power of the dollar in the purchase of specified
classes of building materials, 1913 to 1925') affords a comparison of the dollar's
purchasing power since 1913 for several classes of such materials. As in the
preceding table, the comparison is with the average for the year 1913.
"The figures for lumber in the above table (see table giving 'Changes in
buying power of the dollar in the purchase of specified classes of building
material, 1913 to 1927') are based on wholesale prices of Doublas fir, gum, hemlock, maple, white oak, white pine, southern yellow pine, poplar, spruce, yellow-pine lath, cypress shingles, and red-cedar shingles, each material having
an importance equal to its production in 1919. The figures for brick represent
an average for the United States computed from prices in various localities,
while the figures for structural steel are for Pittsburgh. Included in * other
building materials' are Portland cement, crushed stone, gravel, hollow tile,
lime, sand, slate, plate and window glass, linseed oil, putty, rosin, turpentine,
white lead, zinc oxide, cast-iron pipe, copper wire, sheet copper, lead pipe,
nails, reinforcing bars, roofing tin, and sheet zinc.
" The table shows that the dollar's purchasing power has fluctuated more
widely in the case of structural steel than of other materials. In January,
1914, and again in 1915 the 1913 dollar had a buying power of $1.37, while in
June, 1917, it had dwindled to 30.2 cents. With the inauguration of price control later in 1917, as a war measure, the dollar's buying power increased to
50.4 cents and, except for a short period in 1920, has fluctuated above that
figure since.
" Early in 1922 it rose above the 1913 level of 100 cents, but soon dropped
going as low as 57.5 cents in May, 1923. During the past year it has ranged
from 71.9 cents to 78.4 cents. Lumber, also, shows wide fluctuations since 1913
in the dollar's purchasing power. Averaging $1.14 in the first half of 1915,
it fell to 26.8 cents early in 1920. From this low point it began to rise again,
and since 1920 has fluctuated between 43.6 cents and 66.1 cents. Brick, while
relatively more stable than other materials, has shown a range in the purchasing power of the dollar extending from $1,042 in 1915 to 33.9 cents in 1920,
advancing to 49 cents in 1925.
" The table which follows (see table giving * Changes in buying powers of the
dollar in purchase of agricultural and nonagricultural commodities, 1913 to
1925') furnishes a comparison of the pre-war dollar's purchasing power since
1913 for agricultural and nonagricultural commodities. The figures for agricultural commodities in this table are based on the wholesale prices of all products of American farms included in. the bureau's regular series of weighted
index numbers, while those for nonagricultural commodities are based on the
prices of all other articles so included.
" In the first half of 1920, the year of high prices, there was little difference
in the buying power of the pre-war dollar as between agricultural and nonagricultural commodities, the average being around 42 cents. After the middle
of that year, with the slump in prices of farm products, the purchasing power
of the 1913 dollar in terms of agricultural commodities rose rapidly, reaching
80.1 cents in January of 1922. At this time the pre-war dollar was equal to
only 66 cents in the purchase of nonagricultural commodities.




156

STABILIZATION

"In 1923 and 1924 relatively more agricultural than nonagricultural commodities continued to be purchasable by the dollar of 1913, but in 1925, except
for the last three months, these conditions were reversed, showing that agricultural products had again slightly exceeded the price level of other commodities."
Changes m buying power of building materials
[1913 e q u a l s $1 000]

Year and m o n t h

Lumber

1913—January..
July
1914—January..
July
1915—January..
July::.—
1916—January..
July
1917—January..
July
1918—January..
July
1919—January..
July
1920—January..
July
1921—January..
July......
1922—January..
July
1923—January..
July
1924—January..
July.'
1925—January..
July
December

979
010
067
085
144
153
995
007
.884
.699
.676
.622
. 630
. 452
.299
.323 |
.517
.649
.602
.535
.472
.486
.521
.578
. 525
.561
.528

Brick,
common

$0,994
1.003
1.011
1.013
1.025
.992
.989
.858
.800
.749
.670
.534
.496
.484
.408 '
.342 |
.368 i
.447 ,
.490 .
.497 I
.489
.462 .
.465 I
.471 ;
.481 '
.487 '
.489 ,

Structural
steel

Other
All
building building
materials m a t e r i a l s

$0,990
1.007
1.374
1.314
1.374
1.208
.839
.575
.465
.336
.504
.504
.504
.617
.617
.487
.617
.719
1 007
.915
.755
.604
.604
.686
.719
.755
.775

$1,003
1.008
1 042
1.049
1.095
.944
.827
.728
.637
.559
.583
.512
.516
.499
.468
.451
.525
.600
.654
.646
.613
.610
.590
.612
.600

$0,989
1 009
1 074
1.083
1.136
1.064
.912
.835
.726
.595
.622
.564
.568
.479
.365
.372
.520
.625
.635
.590
.533
.527
. 552
.592
.557
.588
.565

Changes in buying power of various commodities
[1913 e q u a l s $1,000]

Cloths
and
clothing

1913—January
'
July
1914—January
July
1.
1915—January...July
1916—January
July
1917—January
July
1918—January
July
1.
1919—January
July
1920—January
*
July
1921—January
July
1.
1922—January
July
1923—January
July
1924—January
July
1925—January
July
December..

$1.024
1.006
.973
.973
.961
.964
.911
.854
.657
.511
.475
.461
.446
.415
.405
.840
.821
.739
.702
.740
.693
.710
.612
.618
.657




$1,011
.944
.991
1.010
.942
.962
.917
.854
.715
.590
.548
.541
.492
.477
.433
.420
.616
.711
.766
.705
712
.708
.698
.721
.626
.636
.637

and
lighting

Metals
Houseand
B u i l d - j 0 * ^ furnishmetal ingma-1 J * g
ing
prodterials
' dmgs
goods
ucts

Miscellaneous

$1.007
1.002
1.008
1.007
1.065
1.037
.906
.802
.635
. 553
.497
.421
.454
.382
.295
.333
.510
.583
567
.554
.510
.518
.500
.533
.523
.530
.534

$0 997
1.011
1.009
1.098
1.145
1.229
.889
.826
.583
.570
.608
.572
.561
.552
.514
.385
.405 1
.538 1
512
.393
. 458
.546
. 592
.577
. 596
.581
. 572

$0.934 $0,989 I $0,998
1.016
1.009 ! 1.001
1.134
1.074 | 1.017
1.209
1.083
1.050
1.218
1.136
.928 '
.956
1.064 '
.767 I
.749
.544 I
.912 !
.631 J .835
.571 I
.505 I
.579 I
.726 i
.342 !
.487 ,
.595 j
.546 I
.448
.622 I
. 529 i
.479 .
.561 ,
.571 |
.553 ,
.568 I
.625
.599
.479 i
. 5 7 1 J .365 I .528 I
495 '
.473
.372 ,
.653 '
.652
.520 '
.775 '
.625
.805
.891
.635
.828
.590
.750
.533
.764
.688
.527
778 j
.705
.759
.552
.767
.791 |
.592
.734
.740 '
.558
.791
. 750 !
588
.772
.743 •
.565

$0,943
1.004
1.058
1,070
1.010
1.067
.907
.833
.673
.654
.690
.628
.604
.564
.516
.493
647
.816
.857
.875
.806
.829
.858
.890
787
.697
.724

Fuel

$1.002
1.002
1.000
.998
1.012
.999
.973
.935
.844
.773
.728
.630
.597
.546
.418
.364
.460
.556
.563
. 578
.543
536
.569
.585
.579
.591
.603

All
commodities

$0,999
1.000
1.015
1.031
1.017
.996
.887
.812
.654
.533
.543
.510
.503
.472
.429
.415
.589
.709
.723
.646
.642
.664
.661
.680
.625
.625
.640

STABILIZATION

157

Doctor WOLFF. We discontinued the analysis of Government
expenditures after Doctor Rosa's death, which occurred shortly
after his monograph had been published. He dropped dead at his
desk. He was an indefatigable worker, and one of the most valuable
men in the Government service.
I would also like to state that after Doctor Rosa's death all the
material bearing on Government expenditures and receipts was
turned over to the Bureau of Efficiency, and the Bureau of Efficiency
has since then, at least for a number of years—I do not know whether
it has been carried to date—continued the analysis, using the same
classification.
With regard to congressional salaries, there seemed to be a hesitancy about increasing the salaries of Members of Congress to
$10,000. However, $10,000 that you receive to-day, expressed in
1901 dollars, is equivalent to $4,000. The salary in 1901 was $5,000.
So you have not made up by 25 per cent the equivalent of the 1901
salary.
The same question is up now with regard to the adjustment of
salaries of the judiciary.
I am mentioning this to influence you in any decision you may be
called upon to make. 1 am merely pointing out that everything is
muddled unless you express salaries, income, or whatever it may be,
in terms of the same yardstick.
Mr. MACGREGOR. If you raise it all along the line, all over the
county, we will be in the same situation again.
Doctor WOLFF. YOU would get another inflation; yes. But the
fact is that in certain lines they do carry out that inflation right
straight along. Take, for example, the public utilities. The capital invested in public utilities is estimated at some $40,000,000,000.
Every one of them is seeking to have its property revalued on the
basis of cost of reproduction as of to-day, less depreciation, involving
increases in value of from 25 to 50 per cent. And the commissions,
on the basis of court decisions, consider themselves bound thereby
so to do.
Now, apply 25 or 50 per cent to forty billions and you get ten or
twenty billions, amounts which are respectively equal to one-half or
the whole of the present war debt. I n other words, we are lessening
the war debt by paying it off, at the rate of a billion or less per
annum, and at the same time there is being added to the base on
which a fair and reasonable return is reckoned for utilities, an
amount to from one-half to the whole of the present war debt. You
see that goes irfto staggering figures.
The money question also enters into the retirement legislation
which is now under your consideration. I believe the retirement
act was passed in 1920, and fixed a maximum of $720 for the
annuity. If you reduce that 16 per cent to allow you to obtain the
purchasing power of the $720 in those days, or about $605.
Mr. STRONG. What is it now ?
Doctor W O L F F . NOW, it is $720. The money question also enters
into the settlement of foreign debts. At the time the British debt
settlement was under consideration in the House, I proposed to Mr.
Goldsborough, just to get the stabilization question before the
public, to suggest an amendment specifying that the payments should
93869—27—PT 1




11

158

STABILIZATION

be made in dollars as of that time. During the year in which the
settlement was made there was an increase in the wholesale price
level of 13 per cent, and 13 per cent applied to $4,600,000,000, the
amount involved, means $600,000,000 in round figures.
Mr. MACGREGOR. Suppose it was the same as the franc and all
the money of Europe?
Doctor WOLFF. D O you know that during the period of inflation
following the armistice it was even argued that we ought to bring
our dollar to a purchasing power in correspondence with that of
the money of foreign countries, so they would be more easily able
to pay their debts? That was one of the arguments then advanced
for further inflation, and I think by administration spokesmen.
Mr. MACGREGOR. There would not be that much money.
Doctor WOLFF. I would like to refer to the statement which I had
incorporated in the record of a previous hearing, made back in
1834 by John C. Calhoun, who at that time, I believe, was chairman
of this very committee. H e said:
Place the money power in the hands of a combination of a few individuals,
and they, by expanding or contracting the currency, may raise or sink prices
at pleasure, and by purchasing when at the greatest depression and selling
when at the greatest elevation, may command the whole property and industry of the community and control its fiscal operation. The banking system
concentrates and places this power in the hands of those who control it.
Never was an engine invented better calculated to place the destines of the
many in the hands of the few, or less favorable to that equality which lies
at the bottom of our free institutions.

That is true to-day.
Mr. STEVENSON. Was that in relation to the contest about the
United States bank?
Doctor WOLFF. I think it was. I t is not merely a question of controlling money and credit in this country. The gravest question
which is raised by the accumulation of gold in the United States is
control of the world's credit and American world domination based
thereon. Some time ago we saw on the front page of our newspapers a whole lot about world-rubber control in British hands,
world-coffee control in Brazilian hands, etc. But, without any
question, there is a world-credit control largely in American hands,
and that, exercised as it is being exercised, is threatening to combine the countries of the world against the United States. That,
I regret to state, is the conclusion forced upon us.
I n closing, I desire to express my gratification at the increasing
interest which this committee is manifesting in the question of stabilization. There is more interest in each of the successive hearings.
I thank you.
Mr. STEVENSON. YOU referred to the period of inflation, which
everybody recognizes began at the beginning of the World W a r and
ran up to the deflation in 1920. Did not the law of supply and
demand have quite a lot to do with raising the price level? When
the war came on was there not an increasing demand for everything
that we manufacture in this country that could possibly be used to
maintain war, and was not a good deal of the increase in prices
attributable to the enormous demand for goods of every kind?




STABILIZATION

159

Doctor W O L F F . I t runs back earlier than that, Mr. Stevenson.
F r o m 1901 to 1914 there was an increase in the general price level
of 50 per cent.
Mr. STEVENSON. Yes. T h a t came about
Doctor W O L F F . We are not discussing how it came about. There
was that increase.
Mr.

STEVENSON.

Yes.

Doctor W O L F F . I think that represented an inflation. Anything
that increases the general price index represents an inflation. I n
my estimation, that increase in the price level is largely attributable
to improved banking methods, making credit more fluid, etc.
Now, from April, 1917, to the close of the war there was inflation
which was brought about by war requirements, I do not believe it
necessarily had to be carried so far, but as judged by those in power
it was decided to conduct the war largely by credit inflation.
The inflation after the armistice I regard as unconscionable. Following the inflation there had to be a deflation, because what goes
up must eventually come down.
Mr. STEVENSON. Between 1900 and 1913 you will remember there
was a good deal of increase in prices. Things came back to the
point where business became profitable. Do you not remember
that about the latter nineties the discovery of gold in the Klondike
and the application of the cyanide process, which was just then invented, to the South African gold mines, increased the output of
gold, which was the basis of money all over the world, very largely ?
Was that not true?
Doctor WOLFF. I t was.

Mr. STEVENSON. Of course, the issuance of national-bank notes
was encouraged to the extent of something like $300,000,000 in the
United States. Did not those things, the loosening up of capital
and the consequent increase of credit, have a good deal to do with
that raise in the price level ?
Doctor W O L F F . I t unquestionably did, but I think it was unwise
to expand the credit—and that is really the determining factor—
faster than the requirements of business. If that had been kept in
control we would have had a uniform price level throughout that
period.
Mr. STEVENSON. Are you prepared to say there was an unwise
increase in the price level from 1900 to 1913?
Doctor W O L F F . Previous to that period there had been a decrease,
and those who had suffered from that decrease naturally wanted t o
see the price level go up again, but whenever the price level moves
either upward or downward it has the effect of taking value out
of one set of pockets and transferring it to another set of pockets.
There is injustice either way you look at it.
Mr. STEVENSON. Yes; but the debtor class had from about 1881
to 1900, about 20 years, of very hard sledding. Everything they
owed was increased by the decrease in the purchasing power of t h e
dollar, and it just simply swung back towards normal until the w a r
began. Was not that pretty well the case ?




160

STABILIZATION

Doctor W O L F F . During a period of inflation there is manifested
what is usually called prosperity. However, such prosperity is based
on value taken out of one group and transferred to other groups.
You can not escape that.
Mr. W I N G O . You contend that was just psychological prosperity,
and not one in fact ?
Doctor W O L F F . I t was one in fact, but it was stimulation of business, etc., by such transfers which were being made—and the measure of prosperity in the minds of business men is profits—and these
were derived by taking value from one set of pockets and transferring it to another set.
Mr. WINGO. Somebody had to pay it.

Doctor WOLFF. Somebody always has to pay. Following inflation there is always deflation, with its attending distress and suffering.
Mr. WINGO. That is not theoretical but actual.
Doctor W O L F F . N O ; take the New York stock market. I think
the prices there have been boosted beyond all measure, and then
they go down again.
Mr. W I N G O . With the gradual increase in value of real estate in
New York, is there liable to be inflation?
Doctor W O L F F . I doubt that, if it is not speculative.
Mr. W I N G O . D O not overlook the very distinction you directed
attention to a while ago between legitimate expansion and inflation.
A n increase in volume of cash or of credit is just like an increase in
the value of property. Whenever that increase goes beyond the
actual legitimate use of real estate, instead of being an expansion
it became an inflation.
Doctor WOLFF. Exactly.
Mr. WINGO. I use as an illustration New York City real estate.
T h a t has not been an inflation as a general proposition, but the
increased use and the increased population, the measure of the old
basic law of a great demand upon a fixed supply, has naturally
brought about an expansion of value, not an inflation of value, and
as long as property has the value that represents its useful legitimate return base it is said to be an increase or expansion and not an
inflation.
Doctor W O L F F . I agree with you there.
Mr. WINGO. I S there any difference between credit and commodities, measured by the law of supply and demand ?
Doctor WOLFF. Yes.

Mr. W I N G O . What is the difference?
Doctor W O L F F . W i t h regard to the law of supply and demand,
in the past, when things were largely uncontrolled, we might have
talked about a natural law of supply and demand. I n the same way
we might have said that the birth rate was more o r less without
control. B u t just as soon as birth control was introduced, things
were changed entirely. Now, with regard to the law of supply and
demand, just as soon as control is exercised on the supply, then you
can no longer speak of the law of supply and demand.
Mr. W I N G O . Assuming that all of the other factors are constant,
an increased supply will decrease the price.
Doctor W O L F F . I t will.




STABILIZATION

161

Mr. W I N G O . And the reverse is true, that a decrease in supply,
even with a fixed content of demand and all other factors, has just
the opposite effect.
Doctor W O L F F . Precisely.
Mr. W I N G O . The increase in the volume of the gold of the world,
brought about by the new discoveries in the period to which you
have referred, even in spite of other interferences in the operation
of the law of supply and demand, the increase in the birth rate
and every other thing, every other factor had an equal relation to
the increase in the supply of gold, the basis of money, currency, t h a t
caused the rise in the prices of commodities.
Doctor W O L F F . I t did, but it was not a necessary consequence.
Mr. WINGO. I am not talking about a necessary consequence, but
it did?
Doctor W O L F F . That is exactly what happened. I t was assumed
that, because there was more gold, you should build u p an increased
currency and credit corresponding thereto. Professor Fisher the
other day said he most feared excess supply of gold we have on hand,
excess with respect to meeting the reserve requirements. H e fears
that this excess may be made the basis of credit expansion which
would carry with it inflation.
Mr. WINGO. That is simply an illustration of the application of
the age old factor of the operation of the law of supply and demand.
The gold in itself does not amount to anything. I t is the use to
which it is put. To use an old familiar illustration, had all this surplus gold been put in the hands of the Eskimo around the Arctic
Circle, it would have practically no real value.
Doctor WOLFF. N O .

Mr. WINGO. I t is the use to which it is put that gives it the value,
and the operation of the law of supply and demand encompasses all
of the different factors, one of which is the use of the commodity.
Doctor WOLFF. F o r the last few years the Federal Reserve Board
has intentionally put part of this gold reserve out of use.
Mr. WINGO. Yes.
Doctor WOLFF. That
Mr. WINGO. I n other

could have been done in the past.
words, it was the use to which it was put.
There was no evil per se in the gold, but it was the possible use to
which it was put.
Doctor WOLFF. Yes.

Mr. W I N G O . And they tried to prevent the evil by preventing that
use.
Doctor W O L F F . The main purpose of money is to provide legitimate exchange. That is also the purpose of substitutes for money.
If they are provided in excess of the requirements, it means inflation*
Mr. WINGO. If it became practical to double the volume of credit
that could be created on the same fixed basis of gold, what .would
be the effect on prices ?
Doctor W O L F F . With production the same, it would double prices.
Mr. W I N G O . I mean all other factors remaining constant.
Doctor W O L F F . I t would double the prices.
Mr. W I N G O . Certainly. With improved banking facilities—that
is, with an increase in creative volume of credit—the banker is both
the credit merchant and credit producer.




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STABILIZATION

Doctor WOLFF, ^c es.

Mr. WINGO. F o r all practical purposes.
Doctor WOLFF. Yes.

Mr. WINGO. Whenever you increase the banking facilities of the
nation or of the community, you increase the volume of the credit
of that nation or community. I s not that the theory and justification
of banks ?
Doctor WOLFF. T h a t is what happens. Take, for instance, China.
When the foreigners took over the banking system there they worked
t h a t scheme of expanding credits, and the result was a general rise
in the prices. I do not think that was to the benefit of China at all.
Mr. WINGO. I am not talking about benefit; I am not talking
about merit or demerit; I am talking about formulas upon which
we can agree. I t is true that an increase in the volume of credit, all
other factors remaining constant, decreases the purchasing power
of that credit just like an increase in the value of gold, all other
factors remaining constant, decreases the purchasing power of that
gold?
Doctor W O L F F . A n increase in the volume of credit will do it.
Mr. WINGO. I am not talking about these other incidental effects;
I am talking about the basic effect. A n increase in the volume of
credit, all other factors remaining constant, enhances prices and
decreases the purchasing power of that credit ?
Doctor WOLFF. Precisely.
Mr. WINGO. I am now speaking of the use of credit in place of
actual gold or currency.
Doctor WOLFF. Yes, sir.

Mr. WINGO. I n other words, the same law applies to credit that
applies to gold?
Doctor WOLFF. I t does.
Mr. WINGO. And the same effect of increasing or decreasing of
volume affects prices of commodities and the purchasing power of
credit the same as it does of gold ?
Doctor WOLFF. I t does.
Mr. WINGO. What is the average volume of credit in the Nation
to-day? You have a fixed amount of gold. W h a t is the average
volume of credit?
Doctor WOLFF. I would estimate it to be around forty or fifty
billion dollars.
Mr. WINGO. I s it not more than that?
Doctor WOLFF. A t least that.
Mr. WINGO. Are you not figuring on banking credits alone?
Doctor WOLFF. I was multiplying the value of currency by 10, not
allowing for any difference in the velocity of circulation.
Mr. WINGO. YOU think there are forty or fifty billions of credit?
Doctor WOLFF. Yes, sir.

Mr. WINGO. That is what you might call the volume, just like
you measure the volume of gold in so many dollars or pounds.
Doctor WOLFF. Yes, sir.

Mr. WINGO. If you were to decrease the volume of that credit,
what would be the effect on the commodity price level ?
Doctor WOLFF. I t would decrease.




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163

Mr. WINGO. I n other words, if you decrease the volume of credit,
you decrease the price level ?
Doctor WOLFF. Yes, sir.

Mr. W I N G O . D O you know of anything, outside of a radical
change in either the supply or demand, that would affect commodity
prices more than the decrease or increase in the fixed volume of
credit in existence.
Doctor W O L F F . Prices as a whole are largely controlled, as P r o fessor Fisher said, by the volume and the rate of circulation of the
bank credit.
Mr. W I N G O . I s it not true that by practical observation and experience we have discovered that more prices are affected by the
volume of credit than by even the volume of demand and supply?
Doctor WOLFF. Yes, sir.

Mr.

WINGO.

That is an accepted theory, is it not?

Doctor WOLFF. Yes, sir.

The CHAIRMAN. I n that connection may I ask you a question in
regard to this volume of credit? I t flows, of course, to and from
the demand?
Doctor WOLFF. Yes, sir.

The CHAIRMAN. If there is a demand in one locality for that credit
and the interest rates are attractive, that demand, of course, has a
tendency to attract the flow into that locality ?
Doctor WOLFF. Yes, sir.

Mr. WINGO. I was just coming to that. I want to follow that
up. As long as the volume of credit flows in that way, then you
have neither deflation nor inflation. When you have credit controlling commodities instead of commodities controlling the volume
of credit, then is when you have either inflation or deflation ?
Doctor WOLFF. There is a demand for credit facilities on the part
of the speculators.
Mr. WINGO. I was going to come to that a little bit later. I want
to first take commodities.
Doctor WOLFF. Yes, sir.

Mr. WINGO. A S a matter of fact, there is always the temptation
to manipulate the credit agency so that the volume of credit will
automatically contract or expand to meet the ebb and flow of the
demands of business. There is a constant interest in reversing the
process and manipulation of credit to affect either the demand or
increasing the commodity price level.
Doctor WOLFF. There is a temptation.
Mr. WINGO. I S it not a great temptation?
Doctor WOLFF. I t is very great.
Mr. W I N G O . I S not that the speculative spirit that is in men?
I am not talking about it being immoral. Do you not recognize
that, with our sensitive credit changes, and our sensitive operation <*f
prices, our investments as represented by the stock exchange quotations, those prices are affected by the volume of credit used day by
day for speculative purposes on the stock market?
Doctor WOLFF. I believe so.
Mr. WINGO. One of the papers yesterday afternoon said the drop
on the market was precipitated by the calling of $10,000,000 of loans.
This morning's paper says about $20,000,000 were called. Notwithstanding the fact that everybody pointed out that the business of



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STABILIZATION

the country was all right, that there was no change in the volume
of production or credit, by the dimunition of the volume of credit
available on that particular market it had a depressing effect upon
the market prices of property represented by the certificates.'
The CHAIRMAN. May I make this observation in connection with
the statement this gentleman just made and with reference to t h e
statement he made a moment ago, that one of the powerful factors
in stabilization is publicity by the Federal Reserve Board. I n this
particular instance it is applicable, because about a month ago the
Federal Reserve Board called for a list of stock exchange loans, a
list of loans that were supposed to be speculative. That statement
was filed and brought to the attention of the public. The statement
showed that some three and one-half billion dollars of those particular loans had been made in New York by a certain class of banks.
The public began to scrutinize those figures and came to the rather
definition conclusion that if a correct statement had been made of all
loans involved in speculation it would then have been in the neighborhood of five and one-half billion dollars. The publication of those
facts aroused the attention of the bankers throughout the country
who had bank balances in New York that a speculative situation
existed, and it is my observation that large withdrawals of reserves
in New York City took place, which has caused this stringency and
drop in prices of stocks, which took place. That demonstrates to me
the power of publicity.
Doctor WOLFF. Exactly.
Mr. WINGO. You anticipated what I was coming to in respect
to that.
Doctor W O L F F . I would like to make one remark.
Mr. WINGO. Very well.
Doctor WOLFF. I think the inferred policy of the Federal Reserve
Board and publicity had the greatest effect through this period of
about 30 days. However, the Street is very sensitive to rumors and
statements made by public officials. The Washington Herald thi&
morning attributed the drop yesterday, in p a r t at least, t o statements which Senator Smoot made that money advanced on foreign
bonds would not likely be repaid.
Mr. WINGO. I believe if you had been there yesterday you would
have found the thing that put the fear of God in the hearts of the
speculators was the belief that the ten-million-dollar withdrawal was
but the forerunner of a large volume of withdrawals from New York
City by the outlying banks of money that had been on the call
money market there.
T h a t brings me down to another question. We reached the agreement that the increase in the volume of this credit and the constancy
of surplus credit, surplus money, does have a tendency to put fictitious values upon the segregated evidences of property invested in
the credit.
Doctor WOLFF. Yes, sir.

Mr. WINGO. If you destroy these little independent country banks
scattered over the country—and I include everybody outside of the
three major cities.
Mr. STEVENSON. Better name them.
Mr. W I N G O . I would say outside of Chicago, New York, Boston,,
and possibly a few more. I mean by " country banks," banks outside



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165

of New York and a few other large financial centers. I am not attempting to criticize them one way or another for their business. I
am trying to get at the actual facts. If you were to destroy these
country banks and their control of the credit, and concentrate that
control in the very same gentlemen who met in New York City
Sunday and said these theories and rumors were unfounded and they
<jould go on paying just the same, and were going to mobilize bank
credits for the purpose of maintaining the price level of the stock
market, you would probably not have this slump in the market. I n
other words, if these banks did not withdraw their surplus funds, if
this volume of credit and money were controlled centrally, would it
not have the same effect as if you had cornered all of the wheat or
cotton in the country? Could not this man or this group of men
have a very important influence and controlling influence in fixing
prices of this commodity?
Doctor WOLFF. I do not consider it is one of the purposes
Mr. W I N G O . I am not talking about purposes.
Doctor W O L F F . Or one of the results of the operation of this plan
to increase the power in the hands of the big banks.
Mr. W I N G O . I am not talking about that.
Doctor W O L F F . I t would put them all on the same basis, and I
think it would strengthen the little fellows.
Mr. W I N G O . I n other words, if you had concentrated control in
the hands of men of superior wisdom and high patriotism they
would have been able to overcome these theories of people who were
very much disturbed by violent fluctuations in the volume of credit
outstanding.
I have heard it argued for 14 years that it is possible to have Government agencies so wise that they can buy all the cotton and market
it to the advantage of the producer, and buy all the wheat and market
it to the advantage of the producer, and now we have a proposition
t h a t the only way to prevent deflation and suffering by the producers of all these basic commodities is to place all the credit control
in the hands of one group and let them automatically maintain that
control, and bring on that blissful heaven of the socialist where
there would be no change.
Doctor W O L F F . I t would have to be done by the Government, not
by a certain group.
Mr. W I N G O . The argument of the socialist has been that if you
concentrate all power in the hands of the Government, and take
away the selfish spirit and natural stupidity of men, you would free
all the people from all the ills that flow from the exercise of that
selfish spirit, and would have a pure Government. Of course, they
overlook the basic fact that it is easier to control 10 men than 50.
I t is easier to control one centralized banking system than to control
30,000 independent banks in the Nation, each one having the power
t o withdraw their surplus funds from New York, and the power to
say when they will send it back.
Doctor W O L F F . The effect of this bill would be to put the control
where it belongs. I can not conceive of the money control—the
control over the purchasing power of money—being legitimately
lodged anywhere else than in the Government.
Mr. WINGO. The Government can only act as an agency.
93869--27—PT 1




12

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STABILIZATION

Doctor W O L F F . Yes. This measure provides for the very simplest
kind of machinery on the part of the Federal Eeserve Board,
namely, the exercise of its powers to maintain the average price
level constant. If average prices were maintained constant and
those policies were carried out,_ then there would not be the wide
fluctuations to which Mr. Wingo has been referring. I think t h a t
answers most of his objections.
The CHAIRMAN. I t is my observation that in a situation like we
have been discussing here there are other elements that enter into
this, perhaps, that are not controllable by either a group of banks
in New York or by groups interested in control of prices of commodities. If I remember correctly, one of the main purposes for
the creation of the Federal reserve system was the demobilization of
bank reserves.
Mr. WINGO. I agree with you.
The CHAIRMAN. And stop pyramiding of bank balances.
Mr. WINGO. I do recall that.
The CHAIRMAN. The gentleman from Arkansas was on the committee at that time. I am sure he will recall that as one of the
features. I want to point out to the committee, and particularly
the gentleman from Arkansas, how that has not been accomplished
by the Federal reserve system, but that this pyramiding of reserves
of idle funds or bank balances make possible the inflation of stockmarket prices and the demobilization and withdrawal of those reserves concentrated in New York and is responsible for the very
slump in stocks that took place.
By way of illustration, we will take the bank in Blue Kapids^
Kans. We will say they have idle funds which they deposit with a
bank at Wichita. The Wichita bank pays them interest. They, the
Witchita bank, deposit the same funds in Kansas City, the Kansas
City bank redeposits them in Chicago, and the Chicago bank deposits
them in New York. That is the usual trend of idle money going
through banks and centralizing in New York to-day. To my mind
t h a t is the cause and the basis of much of the speculation which has.
occurred.
Notice which the Federal Eeserve Board gave to the country*
when they called for information in regard to speculative loans>
which loans were made through the stock exchange fear, was the
very thing that caused the withdrawal of these funds or loans.
This control or centralization of idle credit, flowing to the point
where the greatest demand is, is responsible for that, and it is my
judgment that we are never going to have stabilization until other
methods are found for employment of idle funds by banks than,
pyramiding of balances in big cities. I do not know whether I mak$
myself clear or not.
Mr. WINGO. I n other words, we have sat around this table and
thought we had perfected a scheme by which we were going to have
a Government agency that would rid the country of all these ills
with which it was afllicted, and once more we have had a failure of
the idea that we thought we were going to accomplish; once more
we have seen a dam put up against the tide or the flow, and we have
seen that same currency lind other channels. We have seen those




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167

things. I realize that, and have given expression to the impression
left on me during recent years, and have done so before.
So that brings home to us sometimes a sense of futility to those of
us who are trying by legislative action to so restrain and regulate
the activities of the people of this Nation as to protect them against
evils. And that brings me to the thought that after all there are
certain influences that are more powerful than either the wisdom or
stupidity of Congress.
Mr. STEVENSON. I want to get back to something the witness said
about what should be done. You said that the publicity by the
Federal Keserve Board would be one of the most powerful things;
that when we have an undue elevation in the price level, if the board
would give notice that there was such an elevation and they proposed
to bring it down, that would have a very powerful effect.
Doctor W O L F F . I t would stop inflation.
Mr. STEVENSON. Yes. J u s t how would they bring it down?
There is no use in their going out and saying they are going to bring
it down without they have some weapon to do it with.
Doctor W O L F F . By the discount rate and by open-market operations.
Mr. STEVENSON. The same thing would arise at the other end of
the line. A thing that works up ought to work down.
Doctor WOLFF. I t does.
Mr. STEVENSON. I have not yet heard anybody in this whole discussion say anything about when the price level drops too low what
they are going to do to put it up, or whether they ought to put it up
or not.
Doctor W O L F F . If, in one case, they buy on the open market, in
the other case they would sell on the open market, they would increase the discount rate on the one hand and decrease it on the other.
Mr. STEVENSON. Your idea is they ought to do it either way?
Doctor W O L F F . They should. That is the only way to stabilize
the average price level.
Mr. STEVENSON. One more question and I am through. The illustration made by the gentleman from Arkansas was that if production
were stable, all the commodities were stable, and the volume of credit
were doubled, it would very largely elevate the price level.
Doctor W O L F F . I t would double the average of prices.
Mr. STEVENSON. That temporarily would be true, but would not
the production of all those things immediately so stimulate that as
to tend to a certain extent to modify it?
Doctor W O L F F . Yes; it would modify it, but we would still have a
big inflation.
Mr. STEVENSON. I n other words, that is not a simple problem in
algebra, that where a equals b and b equals c, therefore a equals c.
When you do something to elevate the price level it does not necesr
sarily return where it was?
Doctor W O L F F . YOU asked me the question on a certain assumption—that production remained the same.
Mr. STEVENSON. Yes; if production remained the same. You say
production would not remain the same if you increased the price
level?




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STABILIZATION

Doctor WOLFF. If you increase the price level you stimulate production.
Mr. STEVENSON. Would not that hold it down ?
Doctor W O L F F . I t would tend to hold it down to some extent. If
you continue such a policy, the prices would be going up and up and
up, till the smash came.
Mr. STEVENSON. That is all I wanted to know.
The CHAIRMAN. I suggest that the committee recess until 10.30
to-morrow morning.
(Whereupon, at 12.15 p. m., the committee recessed until to-morrow, Wednesday, March 31, 1926, at 10.30 a. m.)

HOUSE OF REPRESENTATIVES,
COMMITTEE ON B A N K I N G AND CURRENCY,

Wednesday, March SI, 1926,
The committee met at 10.30 o'clock a. m., pursuant to adjournment,
Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order.
Doctor Wolff, you were in the midst of your discussion yesterday
when we recessed, and we shall be very glad to have you complete
your statement this morning.
STATEMENT OF DB. FRANK A. WOLFF—Continued
Doctor W O L F F . Mr. Chairman, if it be proper, I would like to
submit a statement (summarizing my replies) in reply to the various
questions which were put to me by Mr. Wingo. I am very sorry Mr.
Wingo is not here.
Since adjournment yesterday I have been trying to analyze Mr.
Wingo's seeming objections to stabilization. They seem to reduce
to the following:
First, opposition to Federal control.
The need of a limited control was conceded by the supporters of
the Federal reserve act in providing therein for an elastic currency
and credit system; the Federal Eeserve Board, a governmental
board, was created to carry out this plan.
The guiding clause, " a n d promoting stability price level," contained in the Owen bill, was stricken out. I am told it was stricken
out by the House committee. Its retention would have prevented
many of the economic ills which we have encountered since.
T o adopt the Strong bill, or its equivalent, would furnish a specific
automatic guiding principle now lacking.
The CHAIRMAN. Doctor Wolff, you are speaking now of the consideration that was given at the time of the passage of the Federal
reserve act?
Doctor W O L F F . A t the time of the passage of the Federal reserve
act.
The CHAIRMAN. Was that stricken out in committee or on the floor
of the House?
Doctor W O L F F . I was told it was stricken out by this committee,
and that the action of this committee was supported by the House.
The CHAIRMAN. On whose motion; do you recall?



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169

Mr. GOLDSBOROUGH. I think it was stricken out in conference. The
Senate adopted it, and the House struck it out, and it remained out in
conference, as I understand it. Who made the motion, I do not
know.
Mr. SHIBLEY. The Senate did not adopt it.
The CHAIRMAN. Well, it is immaterial to me. I was simply interested to know just how it occurred.
Doctor W O L F F . I would like to say a few words about stabilization,
looked at from the standpoint of physics. I like the word " stabilization." We speak of an equilibrium being unstable in physics when
any departure from that state tends automatically to make t h e
departure greater and greater. This pencil [indicating] balanced on
its tip, represents the condition of unstable equilibrium. Displaced
from that position of unstable equilibrium it falls over, and t h e
motion continues away from the position of equilibrium.
I n the case of a sphere resting on a level table, we have the condition of neutral equilibrium. I t is in that condition in any position,
on the table.
The condition of stable equilibrium is illustrated by this ash tray
[indicating]. If I displace it from its position of equilibrium by
tilting it, it tends automatically to restore itself.
The principle contained in the Strong bill is of that sort. W e
have to concede that the price level will at best change slightly u p
and down. The specific direction to the Federal Reserve Board to
conduct its actions in such a way as to bring it back to the norm,
if carried out, would illustrate the application of this principle of
stability.
The next point with regard to Mr. Wingo's view is that he does not
seem to believe in restrictions on the use of theoretically available
credits. At present we have an anomalous situation resulting from
the huge gold supply in the United States. To make this available
to the limit of the reserve ratio would spell disaster to the country,
and to the banks as well, as deflation would surely follow the resulting inflation.
The third point which Mr. Wingo seemed to make was that the
small banker would be placed at a disadvantage with respect to the
large banks. I believe he is now at a disadvantage. I believe, however, that with this guiding principle adopted all the banks, large
and small, would be on the same basis.
Further, in his questioning Mr. Wingo assumed t h a t conditions
such as have existed in the past—that is, violent changes in the price
level—would exist after stabilization were applied. That would not
be the case, except possibly in the event qi a war.
I would like to call the attention of members of the committee to
House bill 3895, introduced by Mr. McSwain and referred to t h e
Committee on Military Affairs. That has for its purpose the carrying out of a stabilization plan in the event of a future war. I n view
of the fact that it has to deal with money and credits, it would seem
to me that this committee, as well as the Military Affairs Committee,,
should give consideration to it.
I f there is no objection, I would suggest that this bill be incorporated in. the record, as illustrating a plan worked out by the
administration for preventing inflation in the event of a future war.




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STABILIZATION

Mr. STEVENSON. That is a plan providing for the drafting of all
resources ?
Doctor WOLFF. Yes, sir.

Mr. STEVENSON. Every form of man power?
Doctor W O L F F . Man power and resources, including capital.
Mr. MACGREGOR. Who prepared it ? W a s it prepared by the W a r

Department ?
Doctor WOLFF. Yes, sir.

The CHAIRMAN. I t is a bill to provide for the national defense,
introduced on December 7, 1925.
Without objection, the bill will be inserted in the record at this
point.
(The bill referred to is as follows:)
[H. R. 3895, Sixty -ninth Congress., first session]
A BILL Further to provide for the national defense

Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled, That when Congress shall declare
war, the President shall have power to draft into the military and naval
services and any auxiliary branches thereof all citizens of the United States
between the ages of twenty-one years and forty-five years, with the exception
of such classes as shall appear to the President to be in the public interest
so as to cause the least possible dislocation of then existing conditions, and
to draft for the use of said service in carrying on war all such material
resources of supplies, manufactories, transportation, finance, and all other
property, as the President shall deem necessary to prosecute successfully
such war.
SEC. 2. The President shall pay as compensation for all such private property
as shall be drafted into the service of the United States to aid in conducting
such war only the average and ordinary peace-time price of the material
resources above mentioned, and to prevent profiteering the President shall have
power to fix by proclamation from time to time the prices at which any or
all commodities shall be sold either to the Government or to the civilian
population, and if any person shall feel aggrieved at the prices proclaimed
by the President, and offered to be paid by him for such property, or for the
use thereof, then in such case such person shall have the right to resort to
the courts of compensation hereinafter authorized, after due notice in writing
to the President and according to the rules to be established and publicly
proclaimed by the President.
SEC. 3. In compliance with the Constitution and in order to provide for the
payment of just compensation for such property as shall be taken, requisitioned, or commandeered by the Government or any department, committee,
board, agency, officer, or employee thereof in time of war, under the powers and
provisions of this act, the President is hereby authorized to appoint members
of inferior courts of the United States, each to be known and designated as a
"court of compensation"; and the personnel of such courts shall be either
members of the Military Establishment or civilians, either male or female,
and may be partly military and partly civilian, and partly male and partly
female; and said court shall have the power and it shall be the duty of said
courts to establish rules of procedure and to bear and determine according
to said rules of procedure all such questions as shall be brought before said
courts by any person, citizen, or subject of the United States or of any other
country, whose property shall have been taken, requisitioned, or commandeered in time of war for the uses of the Government; and the measure of
such just compensation to be ordered and determined by said courts in any
case before them shall be the reasonable and fair market value of the property
so taken by and for the Government in time of war, without respect to any
inflation of prices in time of war and without including any unreasonable
and extraordinary profits to the owner thereof; and the decision of all such
courts of compensation upon the question of the amount of compensation for
any property so taken shall be final and conclusive upon both the Government




STABILJZATION

171

and the citizen whose property shall have been taken, except that the same
may be reviewed by a court to be known and designated as the " national
court of reviews of compensation cases," to be appointed by the President
and to exercise the power of appeal and review according to such rules and
regulations as shall be prescribed by the President fixing the procedure and
jurisdiction of said court; and the decision of said " national court of reviews
of compensation cases" shall be final and conclusive upon all matters both
of law and of fact upon both the Government and the citizen, person, or
subject whose property shall have been taken by the Government, except by
a writ of certiorari issued by the Supreme Court of the United States for the
review only of questions of law in any such case.
SEC. 4. No contract for supplies, services, or construction or repair work
for the War Department or the Military Establishment of the United States
shall be made (a) which provides for payment on the basis of the cost of such
supplies, services, or construction or repair work plus a percentage thereof
for profit, and (b) which is not made in pursuance of lump-sum or unit bids
based upon detailed specifications of the supplies, services, or construction
or repair work required, except that when, in the opinion of the President,
the public exigency requires the immediate performance of such service
.or undertaking of such construction or repair work before such bids
can be procured, the President may by order direct that the particular
services shall be performed or construction or repair work undertaken by
the Corps of Engineers of the United States Army, either entirely or until
jsuch time as the remainder of such services can be performed or construction
or repair work undertaken in accordance with a contract made in pursuance
of such lump-sum or unit bids. Any contract made in violation of this section
is void.
SEC. 5. Section 3709 of the Revised Statutes as amended is amended to read
„as follows:
" SEC. 3709. No purchase or contract in any amount in excess of $500 of
supplies, services other than personal services, or construction or repair work
(1) for any department or other Government establishment in the executive
branch of the Government, whether or not located in the District of Columbia,
or (2) for the District of Columbia, shall be made unless competitive bids
have been procured by advertisement therefor, except that when, in the opinion
•of the President, the public exigency requires the immediate furnishing of the
supplies, performance of the services, or undertaking of the construction or
repair work before bids can be so procured, the President may by order direct
:that the particular purchase or contract may be made in pursuance of competitive bids which have been procured in a manner other than by advertisement."
SEC. 6. During the existence of a state of war between the United States
and any government or persons—
(a) No sum, other than pay, if any, due as an officer in the military forces
.of the United States, shall be paid by the United States, either directly or
indirectly, as a fee or other monetary compensation for service in supervising
or directing construcetion or repair work, the production or furnishing of
•supplies, or the furnishing of facilities for the War Department or the Military
Establishment >of the United States, to any person rendering such service or
to any individual, partnership, corporation, or association of which such person
;is a member, officer, employee, or agent; and
(b) Any person rendering any such service may, in the discretion of the
President, Jbe commissioned as an officer in the military forces of the United
;States, regardless of any limitations in existing law, for the period of such
service and with such grade as the President may determine.
Whenever any contractor, whether person, firm, or corporation, for any
material or supplies necessary for the Government in the carrying on of war,
shall fraudulently furnish defective supplies or materials or shall render an
account anql seek to collect for a larger quantity of supplies or material than
lie shall have actually furnished, or shall conspire with any other person, or
employ any device, method, or system whereby there shall be sought to be
obtained, or actually obtained, from the Treasury of the United States, a
larger sum of money than was actually and honestly due to be paid for supplies and material actually received by thte Government, then every such
person, firm, or corporation, and every officer, agent, or employee of any such
iperson, firm, or corporation tfrat shall participate in said fraud or such con-




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STABILIZATION

spiracy, as the case may be, shall be liable to indictment and trial, and upon
conviction shall be fined not exceeding $1,000,000, or imprisoned not exceeding
20 years, or both, at the discretion of the court.
SEO. 7. Every person who shall have been in the employ of the Government
in time of war, whether as an officer of the Army or Navy, or as an enlisted
man in the Army or Navy, or as a civilian officer, agent, or employee, and
who shall have used the opportunities, knowledge, and facilities of any such
employment or official connection, whether during the period of such service
or after the termination thereof, for the purpose of obtaining any advantage
and financial benefit by reason of the furnishing, sale, or providing any material or spplies for the Government for the carrying on of war or any financial
benefit or advantage in the purchase, acquiring, and disposition of surplus
material and supplies of war, shall upon trial and conviction be liable to a
fine not exceeding $1,000,000, or to imprisonment not exceeding, 20 years, or
both, at the discretion of the cou^rt.
SEC. 8. It shall be unlawful for any person, firm, or corporation or for any
officer, agent, or employee of any person, firm, or corporation, to violate any
of the provisions of this act, and every such person, firm, or corporation so
violating any of the provisions of this act shall be liable to indictment and
trial and shall upon conviction be liable to a fine not exceeding $1,000,000 or
to imprisonment not exceeding 20 years, or both, at the discretion of the*
court.
SEC. 9. If any provision of this act, or the application of such provision to
certain circumstances, is held unconstitutional, the remainder of the act, and
its application of such provision to circumstances other than those as to
which it is held unconstitutional, shall not be affected thereby.
SEC. 10. All acts and parts of acts inconsistent with this act be, and the
same are hereby, repealed.

Mr. MACGREGOR. D O you know who specifically drew that bill?
Doctor W O L F F . I believe a board drafted it.
Mr. MACGREGOR. Designated by the Secretary of W a r ?
Doctor W O L F F . Under the Secretary of W a r ; it resulted from a
speech made by President Harding, advocating some such scheme as
this.
The CHAIRMAN. President Harding?
Doctor WOLFF. President H a r d i n g .

Mr. MACGREGOR. Well, that was advocated by a great many people
besides President Harding.
Doctor WOLFF. That made it an administration program. I t also
has been advocated by President Coolidge.
The CHAIRMAN. Mr. McSwain is a member of the Military Affairs
Committee, I think; is he not ?
Mr.

STEVENSON.

Yes.

Doctor W O L F F . Another thing I would like to refer to is a matter
that is now up before Congress, and that is this retirement
legislation.
The cost to the Government of the proposed retirement legislation
seems to be one of the obstacles to its consideration at this time.
I would like to submit that the full cost of retirement legislation
for 30 years has already been indirectly paid by Government employees through the fact that the shrunken dollars in which they
were paid between the years 1914 and 1920 and since have compelled contributions on their part which have more than made up
the total amount required for 30 years. Further, reclassification
did not- begin to make up for the deficiencies in the purchasing power
of the dollar, because Congress took the view that the price level
would go down again. I n other words, they made only a partial
adjustment for the change in the purchasing power of the dollar.




STABILIZATION

173

With regard to the present situation in France, there has recently
been a further drop in the French exchange. I t was quoted down
as low as 3.4 cents to the franc. That means that its present value
is only 17.6 per cent of its pre-war value. By way oi illustration,
I might take the case of a holder of French Government bonds
amounting at their face value to a million francs. On the basis
of this depreciation since 1914, these have shrunk in purchasing
power, as measured in terms of gold, to 17,600 francs. On top of
that there has been the depreciation of gold, in terms of conmodities, of 40 per cent. So that would leave a present purchasing
power of 10,560 francs. I n other words, this 1,000,000 francs
francs existing as an investment in 1914 has shrunk in purchasing
power to 10,560 francs—a depreciation of almost 90 per cent.
The CHAIRMAN. Doctor Wolff, the question that comes to my mind
there is t h i s : This French situation is the result of the war, and of
the waste and other situations that have naturally developed from
that war.
Doctor W O L F F . I t has been a result of inflation.
The CHAIRMAN. I am wondering whether it would be possible,
under those conditions, to have stabilization through any effort such
as your suggestion here; whether that would be possible by reason
of war conditions and conditions created by the war.
Doctor W O L F F . Personally I do not believe that a war can. be
conducted without some inflation. The question as to the extent
of that inflation is another matter. France has undertaken to
finance itself largely through inflation—especially postwar inflation.
The result of the depreciation in the currency in France has, of
course, been general unrest. While I was over in Europe last
summer even the employees of the banks throughout France were
on a strike for a salary increase. When bank employees strike, it
indicates a rather serious condition.
Further, a few days ago two communists were elected to the
Chamber of Deputies from Paris districts. That resulted in riots
on the p a r t of certain groups of the right. However, one can say
that such results are to be largely explained by the depreciation of
the franc.
The CHAIRMAN. W h a t knowledge have you with regard to the inflation in France now? Is it proceeding? Are they continuing
the issuance of fiat money?
Doctor W O L ^ F . I t was proceeding a very short time ago, and, in
fact, there was almost a scandal about it, the Government having
issued paper money in excess of what the law provided. Such increases have to be authorized by the French Chamber of Deputies
and the Senate, and the Government exceeded the limit fixed by those
authorizations.
The CHAIRMAN. The suggestion was made to me the other day,
by one who should know, that it was the deliberate policy which
was being pursued by the French now, that they were going through
practically the same inflation that Germany did, and that it was
only a question of time before the franc would be as worthless as
is the mark; that that was their plan for repudiation. Have you
any knowledge on that subject?




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STABILIZATION

Doctor WOLFF. I have no knowledge. I imagine that is the viewpoint of some—those representing the extreme left. On the other
hand, I can not conceive that it is the viewpoint of the nation; certainly not when it must have knowledge of the experience that
Germany and the other countries of Europe went through.
Mr. STEVEN sox. Did you see a very interesting statement made
by the Bank of France the other day—it was published in something
I read the other night—in which they were complaining that the
French Government had continued to raise the maximum amount
of advances that the banks should make to the country, and therefore requiring additional issues ,of bank notes until the thing was
becoming top-heavy?
Doctor W O L F F . That has been going on right along.
Mr. STEVENSON. They passed a resolution that they were not going
to yield to it any more; but they intimate in this statement that the
Government may be able to make them yield anyhow. I t looks as
if the Government has made up its mind to inflate the bank notes
of that institution to such an extent that they will be worthless.
This was a report to the stockholders. I t was published, possibly, in
this United States Daily. I know that I read it within the last
few days.
Doctor W O L F F . Of course, France is up against a very difficult
political situation. If taxes are materially increased, the cabinet
will fall and those who advocated sucK increase in taxation would
be defeated at the election which would have to be called.
Mr. STEVENSON. Well, they are up against the proposition that
they have either got to tax themselves or issue money that is daily
becoming more and more worthless, and they have steadily refused
to tax themselves adequately to balance their budget.
Doctor W O L F F . Yes; thus far.
Mr. STEVENSON. I t looks to me as though they are heading for the
rocks financially, or at least their creditors are.
Doctor WOLFF. I n conclusion, I would like to ask permission to
insert in the record a table, with explanatory text, explaining the
basis of my statement that U. S. Government employees during a
certain period lost, through the depreciated dollars in which they
were paid, at least 193,000,000 1914 dollars, or over 300,000,000
present-day dollars and also an address that I made on the subject
of the budget.
Mr. STEVENSON. I t might be helpful if you would put in your
table showing how -much the Members of Congress lost also.
LLaughter.]
Doctor WOLFF. I will be glad to include a statement to that effect
also.
Mr. STEVENSON. YOU made a statement covering that matter yesterday.
The CHAIRMAN. ^Without objection, the matter referred to by
Doctor Wolff will be inserted in the record.
Mr. GOODWIN. Including the speech to which he referred?
The

CHAIRMAN.

Yes.

(The.matter.referred-to is as follows:)




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STABILIZATION

Quoting from pages 85-87 of the 1922-23 Hearings on the Goldsborough bill:
This is clearly shown if we take as our basis the civil expenses as determined by the late Dr. E. B. Rosa, as given in the table on page 397 of Professor Fisher's testimony at the joint hearing before the House and Senate
Committees on Civil Service, May 27, 1921. While the dollar cost which remained practically stationary until 1920, notwithstanding the great decrease
in the purchasing power of the dollar, there was a considerable rise in 1920
which was, however, largely explainable by increased civil activity, as for
example, the 1920 census, the expansion of the internal revenue, of the State
Department, a large postal deficit (resulting from increased pay to the railroads), etc., as fully discussed in Doctor Rosa's monograph.
Expressing the expenditures for each of the years given in commodity dollars, we find that even the expenditures in 1920 on any basis of comparison,
whether it be wholesale commodity dollars, retail food dollars, or cost of
living dollars, are actually less with the exception of one year than in 1914,
taken as a basis of reference, as shown in the following table:
Net civil expenditures 1910-1920 on basis of 1913-14 purchasing power of the
dollar
Bureau of Labor Statistics
index numbers

Net United States civil expenditures
Fiscal year ending June
30—
Amount

1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920

1.

$207,125,688
196,640,988
202,511,853
210,039,082
210,162,388
231,288,542
201,427,156
199,860,650
222,458,285
231,858,252
366,550.410

Per cent

98.6
93.6
96.4
99.9
100.0
110.0
95.8
95.1
105.8
110.3
174.4

Per
capita
$2.24
2.10
2.13
2.18
2.15
2.33
2.00
1.96
2.15
2.'21
3.45

Per cent

Wholesale
commodities

104.2
97.7
99.1
101.4
100.0
108.4
93.0
91.2
100.0
102.8
160.5

98.2
97.2
97.9
100.5
100.0
100.3
108.5
150.4
186.3
203.8
243.1

Retail
foods
90.0
91.6
93.9
97.9
100.0
101.5
104.0
128.3
153.7
177.1
197.1

Cost of
living

100.0
101.8
104.3
118.9
142.8
169.5
196.9

Equivalent net civil expenditures
Fiscal
year
ending
June 30—

1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920

On basis of wholesale
commodity index
Amount

Per Per Per
cent capita, cent

On basis of retail food index

Amount

Per Per Per
cent capita cent

On basis of cost of living index

Amount

Per Per Per
cent capita cent

$210,922,000 100.4 $2.28 106.0 $230,140,000 109.5 $2.49 115.8
202,306,000 96.3 2.16 100.5 214,674,000 102.1 2.29 106.5
206,856,000 98.4 2.18 101.4 215,668,000 102.6 2.27 105.6
208,994,000 99.4 2.17 100.9 214,545,000 102.1 2.23 103.7
210,162,000 100.0 2.15 100.0 210,162,000 100.0 2.15 100.0 $210,162,000 166.6 $2.15 100.0
230,597,000 109.7 2.32 107.9 227,870,000 108.4 2.30 107.0 227,199,000 108.1 2.29 106.5
185,647,000 88.3 1.84 85.6 193,680,000 92.2 1.92 89.3 193,123,000 91.9 1.92 89.3
132,886,000 63.2 1.30 60.5 155,776,000 74.1 1.53 71.2 168,091,000 80.0 1.65 76.7
119,409,000 56.8 1.15 53.5 144,735,000 68.9 1.40 65.1 155,783,000 74.1 1.51 70.2
113,768,000 54.1 1.08 50.2 130,919,000 62.2 1.25 58.1 136,790,000 65.1 1.30 60.5
150,782,000 71.7 1.42 66.0 185,972,000 88.5 1.75 81.4 186,161,000 88.6 1.75 81.4

The loudest objections to the "rising" Government expenditures have been
voiced by the business interests who directly pay the largest bulk of the taxes.
The money for payment of these taxes was derived by them from profits on the
manufacture or sale of commodities, and it is interesting to note that as com-




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STABILIZATION

pared with 1914, in 1919 a contribution of only 50 to 60 per cent of tne volume
of the same commodities would have sufficed for the payment of that part of
Government cost chargeable to all civil activities.
Since the cost of the civil government is made up of the cost of cpmmodities and the cost of the services expressed in salaries and wages, and since
the commodities purchased by the Government were bought on annual contracts
or upon open bids at prevailing market prices, the conclusion is inescapable that
the " savings " demonstrated by the tables and curves were made at the expense
of employees.
The amounts involved are staggering in the aggregate. No exact calculations
can be made on account of the impossibility of segregating expenditures for
goods and services without a complete reexamination of every voucher. The
following table, however, gives a measure of the injustice wrought by the deceptive dollar, the amount for each year since 1914 being given:
"Net decrease in United States civil expenditures adjusted on the ~basis of depreciated purchasing power of the dollar (1914 taken as normal)
On basis of
wholesale
commodity
index
1915
1916
1917
1918
1919
1920

_.
_

Total —

On basis of
retail food
index

i $20,435,000
24, 515,000
77, 276,000
90, 753,000
96,394,000
59,380,000

i $17, 708,000
16,482,000
54,386,000
65,427, 000
79,243, 000
24,190,000

i $17,037,000
17,039,000
42,071,000
54, 379, 000
73, 372,000
24,001,000

327,883,000

222,02,0000

193, 825,000

On basis of
cost of livin
index

* Increase.
The total of nearly $200,000,000 in the last column represents the most conservative estimate of the loss of the employees in the civil groups up to July
1, 1920. It must, however, be noted that the sum is expressed in terms of
1914 dollars, now worth 1.6 times as much as our present-day dollars. Hence,
the total up to July 1, 1920, would amount to at least $300,000,000—1922 dollars. Nor has any allowance been made for the fact that the Government paid
for goods at the higher prevailing market or contract prices and that finally the
above sum is far too low, as no allowance has been made for the great increase
in the number of Federal employees in the civil groups between 1914 and 1920.
Nevertheless, the reclassification bills before Congress still hang fire and
Government pay still remains on the same basis as decades before the war.
As a specific illustration I might take the case of the retiring director of the
Bureau of Standards who has held that position ever since its establishment
in 1901. His initial salary was $5,000 per annum. His present salary is
$6,000 per annum, but that $6,000 is equivalent to only $2,400—1901 dollars.
Thus he has been flimflammed out of 50 per cent of the purchasing power of
his initial salary, while at the same time the bureau has grown enormously.

Quoting again from the 1922-23 hearings:
It might interest you to know to what extent you have flimflammed yourselves through permitting the value of money, the purchasing power of the
dollar, to slip out of your control. Congressmen and Senators get a salary
of $7,500. For convenience the cost of living may be taken as 100 per cent
in the fiscal year ending June 30, 1914. You have been getting that since
1914 at least, I believe.
Mr. STEVENSON. Since 1902, I think it is.
Doctor WOLFF. AS I say, for convenience, the cost of living may be taken
as 100 per cent in the fiscal year ending June 30, 1914. In the next year the
cost of living rose. This is the best index number—from the standpoint of your
salaries, not wholesale prices or retail prices of food. The cost of living in general as shown by retail prices of food, clothing, rent, fuel, etc., went up IS




STABILIZATION

177

per cent above the fiscal year 1913-14. The next year it went up 4.3 per cent
above the same starting point, the next year 18.9 per cent, the next year 42.6
per cent, and the next year 69.5 per cent. In 1920 it went up 96.9 per cent.
The dollar shrunk in inverse ratio. Now, if you would go around to the subtreasury and draw out gold, you would get as much now as ever. But I
imagine that no Congressman uses his salary in that way. He uses it not for
gold, for which he has no use, but for bread and clothing and other necessities. He could not buy as much, but only a little less than half as much, in
1920 as he could in 1913 with his salary. If Uncle Sam would make good to
you the loss in the purchasing power of your salaries, he would have had to
pay you in 1914-15, the first year, after a slight depression of 1.8 per cent
in the purchasing power of the dollar, the sum of $135. The next year he
would have paid you, in order to make up your loss, $423.50; the next year it
would be $1,417.50 in addition to your regular salary; the next year, 1917-18,
$3,210; the next year, $5,212.50; and for 1919-20 he would have had to pay you
$7,267.50; making a total supplementary payment that you ought to have had
to make good the losses in the purchasing power of your salary of $17,565.
Bringing this record up to date, there are to be added $7,050 and $5,340,
respectively, for the fiscal years 1921 and 1922, thus making the total to July
1 of this year $29,955, or an average of approximately $3,750 per year for
the past eight years; that is, 50 per cent of your salaries. Moreover, this sum
is increasing at the present time at the rate of $4,500 per annum. Expressed
in other words, your loss in eight years has been $4 for every dollar in your
annual rate of pay. This was because you did not take it upon yourselves
to regulate the purchasing power of money under the provision of the Constitution and along the lines set forth in the preamble to the Constitution.

Quoting from pages 74 to 78 of the 1924 hearings on the Goldsborough bill:
After my testimony of last year [1923] in discussing the question of the
stabilization of the dollar with the Chief Coordinator of the Bureau of the
Budget, I pointed out to him that not only was it basic to a lot of our big
national problems but to his own work as well. I prepared a memorandum
for him, and then subsequently he had me arrange for an informal conference, which was held on July 19 of last year, to discuss " Fluctuations of
values as an impediment to stabilizing the Government's business." I arranged the program, and some 30 Government officials were invited, and at
that meeting I brought this out. I would like to introduce this statement
into the record, and to save time I will only read the conclusions which I
drew. It happens that the supplies and materials purchased by the Government amount to some $250,000,000 a year, according to General Lord's estimate. Besides that, the other outlays are for salaries; and then for interest on the war debt, and such things.
Discussing the whole subject, I arrived at two conclusions which I called
self-obvious conclusions. [Reading:]
" During a period of rapidly changing price levels, and therefore of rapidly
changing purchasing power of the dollar—
" 1. It is impossible to correctly estimate governmental costs, even though
the quantity of goods and the size and character of the personnel are correctly estimated.
" 2 . It is impossible to correctly estimate revenues, since incomes, profits,
and other sources of revenue are subject to wide variations throughout the
various stages of the business cycle."
This material was prepared early last year [1923], and a little while
before that it had been indicated that we would have a deficit of some
$700,000,000. We wound up the year with a surplus of over $300,000,000, a
difference of $1,000,000,000, largely due to this change in the purchasing power
of the dollar, as influencing the volume of business and the aggregate profits
and incomes subject to taxation.
The statement to which reference is made follows:
THE UNITED STATES GOVERNMENT AS A PUBLIC UTILITY

A public utility may be defined as a business organization established for
rendering to the public any service declared by law to be peculiarly affected




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STABILIZATION

with the public interest and which the individual or individual community
can not render for himself or itself a t all or only at a cost incommensurate
with the value of the service. The services most commonly included under this
general description are the furnishing of light, heat, and power, transportation
and communication, water, gas, and numerous other services. The same corporation may, of course, furnish more than one kind of service, as, for example,
gas and electric service.
On the basis of the foregoing definition the United States Government may
be considered as a superutility corporation engaged in the business of furnishing to the public a vast variety of services without which it could not get along
at all, or which it could not afford to buy on account of prohibitive cost.
Broadly speaking, these include the legislative service, the judicial service, and
the executive service.
The executive service comprises the largest bulk of the Government's activities; Foreign Service (Diplomatic, Consular, and commercial), interior or
domestic service, Postal Service, commerce and industry service, labor service,
defense service (military and naval), veterans' service, fiscal service, public
debt service, research service, educational service, development service, public
works service.
Just as in the case of a public utility, the Government's field of activity is
controlled by a charter. It is directed by a President and executive committee
(the Cabinet) and (with a distinct departure) by two coordinate boards of
directors, the House of Representatives and the Senate, responsive in the end
to the stockholders, composed of the eligible native and naturalized citizens who
have attained the age of 21 and who each have one vote.
Just as does a public utility, the Government needs a business organization
designed to carry out its functions in the most effective businesslike manner,
which calls for an articulated functional organizational plan.
Just like a public utility, the Government must provide its service without
discrimination, and in addition the service must be reasonably adequate in
quantity and quality to meet the public requirements. However, the aggregate
cost as well as unit costs for each service must be brought down to a minimum
dictated by the intelligent selection of the best business methods and the intelligent application of the principles of economy and efficiency in every branch of
work.
Just like a public utility, the United States Government must have a physical
plant consisting of land, buildings, equipment, furniture, etc.
THE NEED OF A BALANCE-SHEET STATEMENT

One of the many functions exercised by the Federal Government is the regulation of privately owned utilities doing an interstate business. For such a
utility a rigorous accounting system is prescribed, so that the actual state of
its business, its assets, its liabilities, its surplus or deficit, as well as its rate of
return on the capital invested, can be ascertained at any time, and so that all
the elements entering into the cost of rendering the service and the revenues
received therefor can be found and checked, if necessary.
Curiously enough, the greatest utility of them all, the United States Government, which imposes such requirements on the lesser utilities it regulates, has
not yet developed an equally satisfactory accounting system for its own business.
Among the advantages offered by such an accounting system which might be
cited is the setting up of a fixed capital or property account, consisting of the.
investment in fixed property devoted to the public use; the setting forth of the
amount of investments in loans, such as those made to the railroads or under
various congressional acts, or to the foreign governments as a result of the
World War, and also miscellaneous investments. Such a balance sheet would
show, besides the amount of working assets, including cash and deposits on
hand, marketable securities, bills receivable, interest and dividends receivable,,
and materials and supplies on hand. Among the assets would also be included
accrued income not due at the date of the balance-sheet statement.
Similarly all the liabilities would be classified and tabulated, making it possible at any time to strike a balance and find the amount of the surplus or
deficit at that time.




STABILIZATION

179"

In addition, operating accounts properly kept would make it possible to
ascertain the aggregate cost as well as unit costs of providing any one of the
many services, including in such costs all charges properly assignable to such
services. This would furnish a reliable basis for judging whether or not the
expenditures for any service meet the test of justification on economic grounds..
T H E INSTABILITY OF P U R C H A S I N G POWER A S A N I M P E D I M E N T TO BUDGET

MAKING

The cost of running the Federal Government still exceeds three and one-half
billion dollars per annum, and it is estimated that the aggregate cost of Federal, State, and local government approximates $10,000,000,000 per annum.
It is further estimated that the amounts spent for materials and supplies in
the two cases are approximately two hundred and fifty million and one billionr
dollars, respectively.
It is slowly but surely being recognized that neglect to take into account
the seemingly fortuitous changes in the general price level has given a distorted perspective to the comparison of present-day and pre-war Government
expenditures, as well as introducing confusion into our most important national
problems pressing for solution, such as .the relief of agricultural distress, the
development of better relations between labor and capital, the transportation
and fuel problems, and public taxation.
One of the greatest difiiculties with which the Bureau of the Budget has
to contend and over which it has no control is the evil of an unstable price
level.
It was therefore the purpose of Colonel Smither in calling this preliminary
conference to consider the manner in which, and extent to which, changes in
the general price level influence governmental costs, and how such changes
in price levels directly affect incomes and profits, and the taxes based thereon,
and indirectly affect our imports, and therefore the aggregate customs duties
collected. It is the plan of Colonel Smither to direct particular attention at
this time to the subject of procurement of supplies, materials, and equipment,
and all services generally classified as " other than personal," and to take the
first step in an attempt to formulate a businesslike basis for such future policies regarding procurement as would result in the maximum savings in the
$250,000,000 or more now annually expended for this purpose and without detriment to the Government service.
Before proceeding to a detailed consideration of this subject, it appears
desirable to present a bird's-eye view of the problem from the particular angle
of those engaged in budgetary worjf,
T H E PREPARATION OF BUDGET ESTIMATES

Soon after the beginning of a new fiscal year work is begun on the preparation of estimates for the next fiscal year. This is necessary since the Budget
laW prescribes that the esitmates of the departments and establishments must
be in the hands of the Bureau of the Budget by September 15. That allows
only two and a half months for the preliminary work, including the preparation of the estimates by the smallest organization units, the consideration and
consolidation of the estimates of each group of units by the ofiicial directing
the work, the consideration and consolidation of such major estimates by the
bureau chief, and finally the preparation and consolidation of the departmental
estimates with revision at each stage.
The Budget law requires that the Budget be transmitted to Congressman
the first day of the regular December session, and this allows but scant time
for the bureau to consider, revise, and make final adjustments.
The estimates submitted by the departments and establishments and by
Congress and the Supreme Court are based on the anticipated cost of carrying
out the various lines of work prescribed by the organic law or by appropriation acts, or by special acts. These costs are largely made up of the cost of
things and the cost of services for the items coming under fixed charges,
such as interest, pensions, as well as public debt transactions, payments representing obligations assumed, investments and working capital (for the post
office and other branches) may be separately considered.
In the first place, while it is possible to make estimates with fair accuracy
as to the quantities of materials and supplies and the size and character of




180

STABILIZATION

the personnel required to carry out a given line of work, the variable purchasing power of the dollar can not adequately be taken into account.
Estimates are presented in terms of dollars, but it must be recognized that
the dollar, while defined as equal in value to 25.8 grams of gold 0.9 fine, fluctuates widely in real value in terms of the quantities of the different kinds
of commodities it will buy or the services it will command.
It follows therefore that the estimated cost of goods is low or high according to whether the dollar has depreciated or appreciated in purchasing power.
In the former case a larger sum is required to buy the estimated quantities
of goods, the difference being made up by spending less for personnel service,
or less goods is obtainable for the same number of dollars. In either case the
estimate is evidently low or high as compared with the assumed requirements
on which it was based.
It therefore follows that the tendency on the part of those responsible for
making up the estimates and of defending them will be to submit estimates
actually in excess of the amounts required so as to " play safe," especially in
view of anticipated pruning in the appropriation bills, and in view of absence
of provision for handling situations demanding increased funds which could
not possibly have been foreseen.
The magnitude of these differences can be realized when it is found that
the wholesale price level increased during the calendar year 1922 by over 13
per cent, though the retail price index and cost of living index lagged behind,
as is the usual case.
In the District of Columbia the Government buys its supplies on contract
negotiated through the general supply committee, usually for a complete fiscal
year, the bids being opened and the contracts awarded several months in
advance of July 1. The quantities are not specified, but merely indicated.
Deliveries may be required throughout the whole fiscal year, even in amounts
far exceeding the estimated requirements, or none at all may be ordered.
I t provides that supplies may be ordered in small lots by any of the bureaus
or minor subdivisions for delivery anywhere.
In the face of such handicaps alone it is no wonder that the bidding has been
far from satisfactory, but when it is considered that the prices quoted generally hold for a complete fiscal year, during which price levels may themselves fluctuate by more than 10 per cent, it reduces bidding on Government contracts to a pure gamble, in which the more reliable bidders often
decline to participate.
GOVERNMENTAL R E V E N U E S

The principal income of the Government is derived from the following
sources: Internal revenue; income and excess profits; cigars and tobacco;
transportation and other utilities; autos, candy, furs, jewelry, etc.; beverages;
special taxes on capital stock, etc.; estates inheritance; stamps on legal
papers, etc.; admissions to amusements, etc.; insurance and miscellaneous;
customs.
One of the provisions of the Budget law is to limit the expenditures so as
to not exceed the estimated receipts, but it is obvious that no accurate advance
estimates of receipts is possible when wide fluctuations are likely to occur in
business activity for the amount of income and profits, customs collections,
etc., will depend upon what part of the business cycle the period covered by
the estimate includes. In a boom period incomes and profits are high, there is
littlg unemployment, and tax collections are correspondingly high, while in
the period of depression sure to follow (" what goes up must come down " ) ,
incomes and profits decrease, business failures multiply, unemployment becomes acute, all of which is reflected in the amount of the taxes collected
CONCLUSIONS

From the foregoing the following two almost self-obvious conclusions may
be drawn:
During a period of rapidly changing price levels, and therefore of rapidly
changing purchasing power of the dollar—
1. It is impossible to correctly estimate governmental costs even though
the quantity of goods and the size and character of the personnel are correctly
estimated.




STABILIZATION

181

2, It is impossible to correctly estimate revenues, since incomes, profits, and
other sources of revenue are subject to wide variations throughout the various
stages of the business cycle.
Until these handicaps are removed, and the only cure seems to be through
the stabilization of the purchasing power of the dollar, the necessities of the
case often impose upon the Bureau of the Budget the employment of more or
less arbitrary methods of revision of the estimate so as to make reasonably
sure that their aggregate will not exceed the estimated revenues which may
themselves be uncertain to the extent of some hundred millions of dollars.
When the dollar is once stabilized, the greatest factor in determining the
fluctuation in business will have been removed and the most important step
will have been taken in stabilizing the Nation's business—the business of the
United States Government.

Mr. CANFIELD. Doctor, I have one question that I would like to
ask you. I believe that you said that since 1896 the value of the
dollar has gradually gone down. I s that correct ?
Doctor W O L F F . I t continued to go down until 1920, when it began
to rise.
Mr. CANFIELD. I misunderstood you, then. I thought you said the
value of the dollar had gradually gone down from 1896.
Doctor W O L F F . F r o m 1896 to 1920.
Mr. CANFIELD. The 1920 was the part I did not get. I t has gradually increased since 1920?
Doctor W O L F F . I t increased the purchasing power after the break,
but it has decreased since.
STATEMENT OF DR. WILLIAM T. FOSTER, DIRECTOR POLLAK
FOUNDATION FOR ECONOMIC RESEARCH, NEWTON, MASS.
The CHAIRMAN. Doctor Foster, the committee will hear you now.
Will you state for the record your name and address and your connection ?
Doctor FOSTER. William T. Foster, Newton, Mass. I am connected with the Pollak Foundation for Economic Eesearch.
Mr. GOLDSBOROTJGH. You are director, are you not, Doctor?

Doctor FOSTER. Yes, sir.
Mr. LUCE. Mr. Chairman, before Doctor Foster begins I would like
the privilege of saying a few words, not only because he is a constituent and neighbor of mine, but also, and chiefly, because perhaps I have
been more familiar with his work than some of the rest of you.
Doctor Foster and Mr. Catchings, his associate in writing, have
won the respect of the whole economic world by their recent publications. H i s work, " Money," is, in my judgment, the simplest, clearest, and best statement of the money problem, and I commend him to
all men who are interested in the general subject.
Doctor Foster's writings, I think, will attest that he is peculiarly
worthy of the attention of the committee.
Doctor FOSTER. I came to this hearing, Mr. Chairman, in response
to an invitation, being in Washington on other business; and I
brought with me a statement which Mr. Waddill Catchings and I
wrote some time ago on the specific question now before this committee, namely, whether the Federal Keserve Board should use its
powers for the purpose of attempting to curb fluctuations in the
general price level.




182

STABILIZATION

This statement contains a good deal of statistical material which
you probably would not care to hear, at least at this time; but I will
tell you what it is about. It is a study of the movements of the price
level in relation to the production of goods, money rates, openmarket operations of the Federal reserve system, etc., since the deflation period of 1920-21, with a detailed study of what happened when
we had a marked movement toward inflation in the spring of 1923, and
precisely what the Federal reserve banks did then in the matter of
discount rates and open-market operations, with an account of the
results and with graphs which set forth the statistics in question.
(The statement referred to was later directed to be inserted in
the record at this point, and is as follows:)
BUSINESS CONDITIONS AND CURRENCY CONTROL BY WILLIAM TRUFANT FOSTER
AND WADDILL CATCHINGS
[Reprinted, in 4>art, from the Harvard Business Review, April, 1924]

What is the likelihood that the next upward swing of business will develop
Into a major movement and culminate in another depression? What is the
likelihood, on the other hand, that sufficient forces will be brought to bear as
in the spring of 1923, to stop the next upward movement, prevent a general
recession and keep business on a fairly even keel? These questions are of
dominant interest to business men. We can not answer them; and we shall
not hazard guesses. We shall venture no further than to point out some of
the •experiences of the past that we ought to take into account in considering
the prospects of the future.
I
In order to present these recent experiences in bold relief, we must first
sketch in, as a background, the previous significant swings of business. Chart
I pictures the movement of wholesale commodity prices in the United States
and in England from 1800 to 1922. The chart shows that from 1914 to May,
1920, wholesale commodity prices in the United States rose from 100 to 253.
During the next 12 months, prices dropped abruptly to 148.1 For anyone
who understands the disastrous effects—economic, social moral—of inflation
and deflation, these few statistical items or the lines in chart I are enough to
tell the whole story in broad outlines.
We may next observe that, following the collapse of 1920 and the sharp
descent into depression, we had a year of economic stability—extraordinary
stability, as a glance at the various charts will show. From April, 1921, to
March, 1922, it appears that prices, production, trade, and employment fluctuated less than in any 12 months since the outbreak of the World War.
(See Charts I I I and IV.) During this period, the Harvard price index moved
within the comparatively narrow range of 49.8 and 55.9.a The Harvard index
l o r business (line B in Chart V) fluctuated much less than in any other 12
months from 1919 to date; wholesale commodity prices did not move above
148 or below 138. Indeed, from June, 1921, to March, 1922, in only one month
was there a variation of as much as 1 per cent from 141. Employment, both in
the first month of this period and in the last, stood at 81, having been no
Mgher than 85 in any month. These facts are pictured in Chart III. The
volume of domestic trade, as indicated by bank clearings outside New York
City, was 13.37 billion in April and 14.04 the following March, having in the
meantime reached no higher than 14.37 (Chart IV). The volume of manufacture, it is true, ranged from 72 to 92, indicating the possible approach of
trouble; but, on the whole, though at a low level throughout the year from
April, 1921, to March, 1922, business was remarkably steady.
According to the index of the United States Bureau of Labor Statistics, a weighted
average of wholesale prices of over 40O raw and manufactured articles. This is the price
index used throughout this paper unless otherwise stated. It is the. basis of the commodity price lines in Charts III and V. Both have been computed on a 1919 basis.
a
The source of statistics in this paper, unless otherwise stated, is the Review* of
Economic Statistics. See, especially, Supplement 1, June, 1923, and the " Review of the
year 1923." Chart III is based upon a subsequent revision of unemployment statistics.




183

STABILIZATION
II

During the next 12 months it was not. All the principal indexes of business
conditions exhibited marked upward tendencies which early in 1923 went so
far that business appeared to be in the first stage of a major boom. The
Harvard price index of business cycles, starting at 54.3 in April, 1922, rose to
78.9 in February, a range of 24.6, compared with a range of 6.1 for the previous 12 months. Wholesale prices rose from 143 to 159. Employment moved
up rapidly from 78 to 96. More important still, volume of manufactures rose
in one month (February to March) from 109 to 117, and thus reached the
highest point in three years. The volume of manufacture of consumption
goods, which continued above normal through 1922, rose sharply from 101 in
January to 115 in March. Production of pig iron, which had mounted from
33 in the summer of 1921 to normal in November, 1922, went abruptly up to
116 the following March. The monthly production of automobiles jumped
from 207,300 cars in December to 344,400 cars in April. At the same time
volume of building permits reached a high peak. Thus production as a whole
was rapidly moving toward the point where the selling of increased stocks to
consumers at the higher price level might become impossible. At the same

1800

1810

1820

1830

1840

1850

1860

1870

1880

1890

1900

1910

1920 1930

time, however, the volume of domestic trade, which had hovered around 14
during the previous 12 months, increased rapidly. In March, 1923, it rose to
17.58.
This abrupt upward movement of the early months of 1923 is shown in the
charts. They depict heights of industrial activity. They mark the rapid
progress of business toward conditions in which increased volume of currency
and bank credit, under prevailing methods of financing industry, would still
be accompanied by higher prices but no longer by increased production. A
glance at these charts suggests that if the advance had continued at this rate
for another 12 months, we should have had hectic " prosperity," with another
period of severe depression just ahead. We should have suffered again the
inevitable evils of monetary inflation.
Ill
But the rise of prices of the early months of 1923 did not continue. Neither
was there a general slump in business. There was, indeed, an unfortunate
recession—a more than seasonal decline—in the middle of the year; but it was
a decline from a high level to a level that was still high, and it did not lead to
a depression. The net result of the forces that, somehow or other, were brought
to bear at this time was a year of sound economic conditions. The physical
volume of trade, all branches included, was 9 per cent above normal; and
freight-car loadings, the most comprehensive of indexes, broke all records. Employment, wages, trade, and profits were sustained, in general, on a high level.




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STABILIZATION

185

striking.
IV
How was this unusual stability achieved? How did it happen that the rise
of prices, once well under way early in 1923, did not, like the similar movement
a few years before, <carry us forward to a boom, a collapse, and a depression?
One thing, at least, is d e a r . The restraining influence was not the reserve
ratio. We had enough gold to form the basis of a larger volume of currency
and bank credit than we had ever used before. Within the reserve requirements of the Federal reserve system the price level could have been carried
about twice as high as the highest point of 1923. (See Chart VIII.) It is
equally clear, from the statistics now available, that the curbing of the inflationary movement was not due chiefly tQ conditions in Europe, or to foreign
trade, or to the automatic operations of business financing, or to a consumers'
strike against high prices.




186

STABILIZATION

In seeking to explain what happened early in 1923 we must take
account of the state of mind of bankers and business men. Their
painful memories of the inflation and deflation of a few years before
were still vivid. In this early stage of what appeared to be a boom,
caution was urged from many influential quarters. The United
States Department of Commerce wisely advocated the postponement
of construction wherever feasible. Some forecasting agencies and
some trade associations advised caution. Various banks, in their
monthly letters gave reminders of the disasters of 1920.
At the same time many economists expressed concern over the
marked trend toward inflation. On March 1, 1923, the National
Monetary Association prepared a statement, significant because it
expresses the views which were held at that time by nearly all economists, and which, no doubt, had some influence on the general busi-

Index of General Business Conditions

G
R IBank debits for 140 cities outside NY. l I I I I I I I I | I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I
° iCommodity prices
I
f
/Rateon 4-6 months commercial paper
i
l
l
^ [Rate on 60-90 day commercial paper| j 1 | M | | M M | | 1 M 1 i t 11 1 I I I I M I M 11 I 1 I I M
r

I 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 2 3 4 5 6 7 8 9 1 0 H 12 I 2 3 4 5 6 7 8 9 1 0 1 ! 12! 2 3 4 5 6 7 8 9 101112 I 2 3 4 5 6 7 8 9 1 0 1 1 1 2
1919
1920
192J
1922
1923

ness s i t u a t i o n on t h e g e n e r a l business s i t u a t i o n w h e r e v e r t h e views of
economists were h e a r d . T h e s t a t e m e n t r e a d s :3
We are in an era of sharp price advances, and the National Monetary Association believes that the rapid rise in the price level wUl continue for some time
unless definite steps are taken to keep such a movement in check. Productive activity, according to reliable indexes of production, is rapidly approaching a level as high as the peak attained during the last boom period; and no
further advance in prices can be justified on the ground that it is needed to
stimulate production. With the experiences of 1919, 1920, and 1921, still fresh
in mind, the country is well aware of the vast losses and injustices which arise
out of such periods of inflation and deflation. * * *
The association holds that in so far as further advances of the price level
are moderated, this accomplishment will tend to (1) mitigate the severity of
the next major reaction in business; (2) decrease the length of the ensuing
period of depression; (3) lessen industrial unrest and the losses which arise
therefrom; and (4) lessen injustice to the great mass of the American people,
since their wages and income from savings do not increase as rapidly as prices.
All these facts go to show that the country has a much clearer idea than
ever before of the monetary requirements of sustained prosperity. Though
3
This statement was approved by the research council of the National Monetary Association. The members of the council were: William T. Foster, Daiid Friday,, Hudson B.
Hastings, E. W. Kemmerer, Wesley C. Mitchell, W. M. Persons, John B. Rovensky, Carl
Snyder, and Allyn A: Young.




187

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188

STABILIZATION

there are still many who insist that, regardless of the state of business, the
Government can promote the general welfare by printing more money, or the
banks by expanding loans, regardless of how the additional currence or credit
gets into circulation, their influence was not sufficient in 1923 to induce this
country to emulate the excesses of Central Europe. Our chances of avoiding
such excesses are much better than they used to be, partly because of the
unhappy results in Central Europe and the effective public education conducted
in recent years by banks, Federal agencies, trade associations, and statisticians
and economists generally.
V
Still more cautious became the business world when the rediscount rates
were raised. In February and March, 1923, the reserve banks of New York,
Boston, and San, Francisco raised their rates. (See Chart VII.) Interest
rates of commercial banks rose in February and again in March. Rates on
call loans, on 60 to 90 days paper and on 4 to 6 month paper, were all higher in
March than in any month of the previous year. Chart III shows that the
raising of money rates was followed promptly by a curbing of the upward
movement of prices and production.
I Chart V I I
C a l l M o n e y Rates and F e d e r a l R e s e r v e B a n k D i s c o u n t R a t e s a t N e w Y o r k
Percentage
(Monthly Averages)

5
131211-

A

1

II °
76-

Discount
Rates
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1915

Financial Statistics Division

1916

1917

1918

1919

1920

1921

1922

1923

Federal Reserve Bank of Boston

I

The nice adjustment of money rates was previously shown during the 12
months of conspicuous business stability which we have described above (April,
1921, to March, 1922), when the average rates charged on bills discounted by
Federal reserve banks fell steadily from 6.32 to 4.70. That the changing
ratios were important factors, though by no means the only factors, in maintaining the stability of the period is beyond question.
Not so generally understood is the fact that the open-market operations oi
the Federal reserve banks in the first half of 1923 tended to curb the inflationary movement; and, in the second half of the year, tended to sustain business
on its new level. Early in January the Federal reserve banks held open-market
acceptances and United States securities to the value of $734,000,000. These
they reduced steadily, throughout the period of incipient business boom. By
July the total holdings were less than $300,000,000. Between October 17 and
the end of the year, however, the holdings increased from about $300,000,000
to $473,000,000. Thus the open-market operations took money out of general
circulation at a time when, according to all our indexes, money in circulation
was increasing faster than the volume of trade; and, later in the year, when
these same guides pointed in the other direction, the open-market operations
^ut more money into circulation.




STABILIZATION

189

How well these open-market sales and purchases were adjusted in time and
volume to the other factors that affected the general price level and the general
business situation is shown by the graphic accounts of the year 1923 to which
we have called attention. The open-market policy of the board was an effective adjunct to other forces in maintaining the stability of prices, though the
policy was adopted, according to the official statement, with primary regard
to the accommodation of business and the general credit situation. 4 Apparently,
the effect would have been better still had the policy been carried out sooner.
The action of the banks seem to lag several months behind the signals for
such action. (See Charts III, IV, V.)
We conclude, then, that the discount rate and open-market policies of the
reserve banks had their part in preventing the sharp upward movement of
early 1923 from going forward to a boom and a collapse. This conclusion, it
would seem, might be admitted by anyone, no matter what theories he may
hold concerning the causes of business cycles.
VI
With these experiences in mind we may now return to the question with
which we started: What are the chances that another marked movement toward inflation, once under way, will be curbed before it has resulted in " overproduction " that leads to deep depression?
Chart VIII

Federal Reserve Ratio (Monthly Averages for the System)
Percentage

The chances are nil, let us note at once, if we rely on the " gold standard,"
so called, or on a legal minimum reserve ratio, like the one in the present law,
that is arbitrarily fixed without reference to movements of the price level. The
gold basis, it is true, prevents such fiascos as the printing-press performances
of Russia and Germany, but there never was a time when the gold basis stabilized the purchasing power of money. From 1914 to 1920 the price level in the
United States on a gold basis mounted from 100 to 253; then, in less than one
year it fell, still on a gold basis, to 150. The disastrous results do* not need
recounting here. Under the existing law and with the present stock of monetary gold in the United States the fluctuations in the value of the dollar could
hecome still more spasmodic and more disastrous. (See Charts II and VIII.)
Even the approximation to a stable level (shown in Chart I ) , that at times
has been achieved both in England and in the United States by means of gold
reserve requirements and the old machinery of currency control, is not likely
to be achieved again in either country, under the new conditions, unless a
stable price level becomes the avowed object of conscious policy.5 It is not
*The policy of the Federal Reserve Board during 1923 found expression mainly in
these open-market operations. That policy was in accord with the following principle,
adopted by the board in April, 1923 : " That the time, manner, character, and volume of
•open-market investments purchased by the Federal reserve banks be governed with primary regard to the accommodation, of commerce and business and to the effect of such
purchases or sales on the general credit situation.,"—Federal Reserve Bulletin, January,
1924.
5
The reasons for this statement, as it applies to Great Britain, are set forth by the
Hight Hon. R. McKemna in his annual address as chairman of the Midland Bank (Ltd.),
January 25, 1924.

93869—27—PT 1-




-13

190

STABILIZATION

now the avowed object in this country. The present Federal reserve law is not
aimed to prevent sustained departures from the general price level. On
the contrary, a provision directing the board to use its powers for this
purpose was thrown out before the law was passed. The board and the banks
were doing all that the law required during the injurious inflation of 19181920 and the even more injurious deflation that followed. Again, in the early
months of 1923, they would have been just as true to the law if, instead of
putting their rates up, they had put them down.
Then, as at all times, the board was under pressure from the " foes of the
money monopoly"—from those whose cure-all for economic ills is always
easy money. Then, as now, those who wanted easy money could maintain,
with strict adherence to the truth, that neither the reserve ratio nor bank
profits justified the banks in keeping up their rates; and that, in pursuing
a discount rate and open-market policy that tended to stabilize prices and
thus " to put brakes on reviving prosperity," the banks were acting arbitrarily
and without the warrant of congressional mandate. That the board and the
banks succeeded, under these circumstances, in resisting political pressure and
doing their part to safeguard the year 1923 from further inflation and from
extreme deflation is highly to their credit.
VII
In view o f this measure of success it is easy to understand why some men
oppose any change in our official monetary policy. Why not let well enough
alone? What could be gained now by congressional action directing the board
to use its powers toward preventing sustained departures from the prevailing
price level?
There are a number of pertinent answers to this question. First of all, the
best time to take action toward preventing violent movements of the price
level is when the price level is fairly stable. At such a time the immediate
effects of the proposed action are slight and no criticism of existing authorities
is implied. At such a time, moreover, the question of the level near which
general prices should be stabilized is not a burning public issue. Thus the
measure can be considered on its merits, comparatively free from sectional
economic and partisan political complications; and the measure can go into
effect without disturbance to business.
In the second place, no matter how high our record may be for the present
Secretary of the Treasury and the present members of the Federal Reserve
Board, we, have no guarantees concerning the qualifications of future members.
That uncertainty is inherent in our political system.
We can not make sure that future members will understand the relation of movements of the price level to human welfare or the relation of their
own policies to either, or that they will resist the pressure to act in what
appears to be the special interests of a class or of a political party. But we
can make sure that no doubt exists concerning the desirability of a stable
price level. We can direct the board to use rediscount rates and open-market
purchases and sales for the specific purpose of safeguarding the purchasingpower of the dollar. And then, by means of an official index number of prices,
published weekly and improved as a result of further statistical research, we
can measure with a high degree of accuracy the progress of the country in
achieving this purpose.
There is abundant evidence that the present board has promoted the
welfare of the country as a whole. But it has pursued no avowed policy
that the public can understand; and partly for this reason it has been subjected to much undeserved criticism and to some political pressure that might
have been avoided. Its avowed policy of acting " witk primary regard to the
accommodation of commerce and business " is unobjectionable; but it is too
vague. At all times there are many men who are convinced that their business
would be greatly " accommodated" by easy money, and they see no reason
except a " money monopoly " why the Government should not give them what
they want. Their program seems to have been vigorously supported by
organized propaganda. These more-money enthusiasts have had their way in
Central Europe. They may at any time gain the upper hand in the United
States. Before that time comes the country ought to be committed to the
principle of preventing by means of currency and bank-credit control such
fluctuations as are avoidable—note that we say, such fluctuations as are
avoidable.




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191

In estimating the future need for such an avowed policy, we must take
account of the fact that in 1923 the board and the banks were aided by a
spirit of caution that, as we have shown, ruled the business world. When the
next marked movement toward inflation sets in—and it is sure to come sooner
or later—the people are not likely to regard it so suspiciously as they did the
movement of 1923. This is a third reason for taking definite action now. In
1923 men were cautious because prices were still high compared with 1913,
and some thought that there would be a return to pre-war levels. Furthermore, men were cautious because they had not recovered from the disaster of
1920; liquidation in some lines was still under way; a number of the most
important industries were still accumulating deficits instead of profits. But
every year the memories of the sufferings of 1920 and 1921 become less vivid.
The memories of business men are traditionally short. Many men denounced
the Federal reserve banks for raising rates in 1923. Instead of giving thanks
because these restraining influences had their part in saving us from excesses
and consequent reverses, these critics point to the year's record as evidence
that such caution was unnecessary. What a pity, they say, that the alarmists
set up the bogey of inflation; for there was no inflation! They could as
reasonably condemn the flood-prevention measures taken by the people of
Dayton on the ground that there has since been no flood at Dayton.
Under present conditions, our vast gold reserves are a menace. There is
one way, however, in which they can be made to serve the interests, not only
of the United States but of the world; for they are large enough to make a
policy of curbing fluctuations immediately practicable, without endangering
the gold standard or changing the weight of gold behind the dollar. And that
is a fourth reason for acting now. It seems probable that the present reserves
would be sufficient to maintain approximately the present purchasing power
of the dollar for at least a generation to come. Perhaps by that time the
whole country would be convinced that a stable money is a sound money.
The country would then be less dependent on gold reserves as safeguards
against inflation, and in a better position to adopt additional methods, if necessary—perhaps new legal reserve ratios—for controlling long-time price movements and exchange rates.
Meantime, the world would have at least one dependable uint to tie to.
Consequently, any country that was prepared to take the necessary measures
could attain the approximate stability of its own currency by means of a gold
exchange standard without maintaining huge gold reserves at home. Various
writers—J. M. Keynes, for example—have ridiculed the United States for impounding this mass of " useless " gold. As a *matter of fact, this gold could do
nothing so useful to the world as to play its part in protecting the purchasing power of the dollar from avoidable fluctuations.
The primary monetary need, then, is a stable unit of value; and this does
not come by chance. Even if we had no other evidence, the records of the
past seven years in the United States should convince us that the country is
not safeguarded against inflation by reserve ratios, or merely because bank
credit is expanded " in response to the legitimate demands of business," or " in
the ordinary course of financing production." We have spoken of the relative stability ofHhe price level since 1921, the uncertainty concerning the future
personnel of the Federal Reserve Board, the nearness to the collapse of 1920
and the present large stock of monetary gold. There are, at least, these four
compelling reasons for taking measures now to make a dependable dollar the
deliberate aim of conscious policy. Returning finally to the question with
which we started, we may say with assurance that such measures will do
much toward preventing the next upward swing of prices fro&a developing mte>
a major-movement and a resultant depression.
Still, it must always be borne in mind that the utmost the Federal Reserve
Board could do might be of little effect unless important influences beyond their
control worked toward the same end. There are occasions when nothing the
board could do would have far-reaching effect. On the other hand, there are
times, such as the spring of 1923, when their action might afford the needed
leadership or, in view of the attendant circumstances, might be a sufiicient
contributing cause to accomplish the purpose.
VIII
Is a stable medium of exchange, then, our only monetary need? It woold
seem so from various current discussions. So calamitous have been the depre-




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STABILIZATION

ciating currencies in Central Europe that it seems to many people as though
the monetary needs of the world could be summed up in the word " stability."
That, indeed, is the first necessity; but that is not all. It is possible to have
a stable price level and a declining standard of living; a stable price level and
an inequitable distribution of the products of industry; a stable price level
and meager incentives to industrial efficiency; a stable price level and stocks
of goods that can not be sold. It is just as possible to have a stable price
level in China as in the United States. The price level can be maintained, as
we have seen, with the volume of money and production and the standard of
living of the year 1922. It can be maintained just as well with a larger volume
of money, a larger volume of production, and a higher standard of living.
In short, we must seek something more than stability in the general price level
if we are to discover all the monetary means of promoting welfare. But the
discussion of these means is beyond the scope of this paper.
A policy which takes account only of the gross volume of money in circulation and the general price level is crude. That is one reason why the " quantity theory of money," as usually stated, does not seem very useful to business
men. If we are to understand the monetary means of lifting business
activity to higher levels and keeping it there, we must consider where money
enters the circuit flow, whether it is first used to produce goods or to buy
finished goods, and how the various price levels, of which any general price
level must be a composite, are affected. In considering crop prospects we take
into account not merely total rainfall but also its intensity, its time relation
to crop maturities, and how much is used at once in plant growth. Similarly,
in considering business prospects, we must take into account not only increases
in the total volume of money but also its velocity, its time relation to production maturities, and how much is used at once in producing goods.
To raise the general standard of living substantially requires, among other
things, increased per capita production; but it requires also a flow of money
to consumers sufficient to enable them to buy this increased output at current
prices. As soon as there is much doubt of their ability to do so, production is
curtailed. They can do so only if the volume of money in circulation is
increased at a sufficient rate; but it is not enough that the total volume be
increased. The new money must go into circulation in such a way that the
flow into consumers' hands is enough, in addition to individual savings, to
enable consumers to buy the additional products of industry. Only in that
Way can the new money long sustain economic prosperity.
But, in a period of expanding production, industry does not disburse to
consumers enough money to eriable them to take away the output of industry, without a fall in the price level. And consumers have no other
source of income. Moreover, since consumers must save, they can not spend
even as much money as they receive. There is not an even flow of money
from producer to consumer, and from consumer back to producer. The expansion of the volume of money does not fully make up the deficit, for money
is expended mainly to facilitate the production of goods, and the goods must
be sold to consumers for more money than the expansion has provided.
Furthermore, the savings of corporations and individuals are not used to
purchase the goods already in the markets, but to bring about the production
of more goods. Under the established system, therefore, we make progress
only while we are filling the shelves with goods which must either remain
on the shelves as stock in trade or be sold at a loss, and while we are
building more industrial equipment than we can use. Inadequacy of consumer income is, therefore, the main reason why we do not long continue to
produce the wealth which natural resources, capital facilities, improvements in
the arts, and the self-interest of employers and employes would otherwise
enable us to produce. Chiefly because of shortage of consumer demand, both
capital and labor restrict output, and nations engage in those struggles for
outside markets and spheres of commercial influence which are the chief
causes of war.
In short, the financial requirements of prosperity can not be wholly satisfied
by attempts to regulate the general price level merely through changes in the
total volume of the circulating medium, regardless of the effects of such
changes on the relation between consumers' income and the production of
consumers' goods. However desirable it may be to prevent marked movements of the general price level upward or downward, and to use national
financial policies as one means toward that end, there are other fundamental




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STABILIZATION

monetary aspects of the problem of promoting
welfare.6

and

sustaining

economic

The CHAIRMAN. I take it, Doctor, that it is your view that the
Federal Reserve Board has the power to affect prices ?
Doctor FOSTER. Undoubtedly it has the power to affect the general price level, and it has used that power.
The CHAIRMAN. W h a t are those powers, particularly and principally ?
Mr. GOLDSBOROUGH. Mr. Chairman, might I suggest that Doctor
Foster be allowed, if he prefers, to make his statement and then be
questioned afterwards?
Doctor FOSTER. I t is immaterial to me, Mr. Chairman. You know
what you have done so far and what you want and* what I might
possibly do for you. I will do anything you please.
The CHAIRMAN. Suppose you follow Mr. Goldsborough's suggestion and proceed ?
Doctor FOSTER. The conclusions that we arrive at in our paper on
"Business conditions and currency control" are that the board
actually has used its powers for helping to stabilize the price level;
that in 1923 its open-market operations and its changes in rediscount
rates actually did help to curb the inflationary movement and help
to bring about a period of relative stability of the price level.
The next point we make is that the powers of the board, although
sufficient to help matters, are nevertheless insufficient to control the
situation. I n other words, the Federal Keserve Board at the present
time has not the power to bring about stability of the price level
unless the contributing causes are sufficient, as they have been at
times in the past few years.
The final statement in our paper is that it is impossible to bring
about stability of the price level merely by controlling the gross
volume of money in circulation, regardless of how that money is
used.
We conclude, therefore, first, that it is highly desirable that the
Government should have stability of the price level as an avowed
aim; second, that it is highly desirable that the Federal Eeserve
Board should have that as an avowed aim; but, third, that it would
be unfortunate for business in general and for the future of the
Federal reserve system, if the idea became widespread that because
such a bill as this was passed, therefore the board actually did have
the power, under all conditions, to bring about stability in the price
level; because the time is sure to come when the board with its
present powers could not achieve the end; and if it were then
blamed, it would be unjustly blamed, and the result would be
unfortunate.
Mr. STRONG. D O you feel that any legislation in addition to this
could be enacted that would bring about a condition in which the
Federal Reserve Board could maintain the stability of prices? I
might say that it has been suggested by men wTho have come before
the committee that with the passage of the Goldsborough bill the
Federal Keserve Board could bring about a stability of prices.
6
These aspects of the problem are discussed in money and in profits, two books in the
Pollak Series, issued by the Pollak Foundation for Economic Research, Newton v>8, Mass.




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STABILIZATION

That is, they say that this bill might do it temporarily, but that
eventually there would have to be a bill passed, such as Mr. Goldsborough's bill, in order to enable the Federal Reserve Board to
maintain the stability in the general price level or to prevent inflation or deflation of prices in general.
The CHAIRMAN. Doctor Foster, you are familiar with the Goldsborough bill; that is, the Fisher plan of stabilization ?
Doctor FOSTER. I am. My answer to that question is that, regardless of what you do in the future, it is highly desirable to have the
Government committed now to stability in the price level as a
definite policy; second, that it is impossible for the Federal Reserve
Board to achieve that aim permanently with its present powers;
third, that therefore some time in the future something more has got
to be done.
The CHAIRMAN. When you speak of the Government just which
department do you refer to ?
Doctor FOSTER. I am referring to no department. Under the present Government the Federal Reserve Board is one agency through
which it would seem natural to try to carry out the purpose.
The CHAIRMAN. What influences on the Federal Reserve Board
effect that? What governmental influences are brought to bear on
the Federal Reserve Board to bring about the carrying out of their
suggestion? I n other words, who instigates, on the part of the
Government, these instructions to the Federal Reserve Board ?
Doctor FOSTER. Who actually does that at the present time ?
The

CHAIRMAN. Yes.
FOSTER. And has for the last few
The CHAIRMAN. Yes.
Doctor FOSTER. I am unable to answer

Doctor

years ?

that question. I do not
even know what the aims of the board are. All I can do is to
observe what the board does and what follows. I know the precise
volume of the open-market operations of the banks in each period;
I know precisely when each bank has changed its rediscount rate;
and I can correlate these acts of the banks with the movements of
the general price level. But I do not know why they acted as they
did. They do not say why, except in the vague phrase, to accommodate commerce and business.
The CHAIRMAN. I understood you to say that the Federal Reserve Board is the agent of the Government through which these
activities proceed. Do they act, in your judgment, on their own
initiative as representatives of the Government or is there a suggeston directly from the Government?
Doctor FOSTER. I know nothing about it.
Mr. MACGREGOR. Well, who is the Government? Whom do you
refer to when you use the word " Government " ?
The CHAIRMAN. That is what I was trying to develop; whether
you considered the Federal Reserve Board as the Government or
whether there was a higher power that influenced the Federal Reserve Board. Is it the ex-omeio members of the board who are
officials of the Government? There are those who feel that the
Federal reserve system is an independent banking system. Now, if
governmental influences control the actions of the board I think
that is rather an important thing to understand.




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195

Doctor FOSTER. I n the statement I made I meant simply that this
country, officially, through whatever agency it may use should endeavor to bring about the stability of the price level.
The CHAIRMAN. D O I understand correctly, then, that the Federal
Reserve Board is engaged in this procedure ?
Doctor FOSTER. I say again that I have no means of knowing what
their motives are. I judge merely by results which are matters of
public record, but which the public does not pay much attention to.
Mr. STRONG. Have you in your statement set out what those results
have been?
Doctor FOSTER. We have set them out in some detail for the year
1923, which was a conspicuous case—the most conspicuous case
since the deflation of 1920-21, because the price level shot upward
at a rapid rate in the early spring of 1923, and the upward movement
was brought to a sudden stop. At the same time the operations of
the Federal reserve banks were such as to help to curb the inflation.
Mr. STRONG. Did it shoot up more rapidly than it did at the
beginning of the war ?
Doctor FOSTER. For a short period it went up at just about as
rapid a rate. But the movement did not continue. Had it continued at that rate, and had we used the gold basis which was
available at the time for a continuance of the increase of the volume
of money in circulation, we should have had just as serious an
inflation as during the war, and, in my judgment, just as serious
a deflation following.
The CHAIRMAN. Following up the suggestion that I made a moment ago as td who gives the directions to the Federal Reserve
Board, it has been stated to the committee that in 1919 the situation
was such that the Secretary of the Treasury influenced the Federal
Reserve Board in regard to what they had decided upon as a proper
course, namely, to call a halt on the inflation; that that matter was
deferred at the suggestion of the Secretary of the Treasury because
of what he considered to be the necessities of the Government in
the flotation of the Victory loans. If the necessities of the Government are such from time to time that, through their proper representative, the Secretary of the Treasury, who happens to be ex-officio
chairman of the Federal Reserve Board, such influence can be
exerted, I think it is very pertinent to know whether that influence
extends as a continuing thing over the operations of the Federal
Reserve Board in regard to the question of stabilization of prices.
Doctor FOSTER. My judgment is that the Secretary of the Treasury at that time, through what I regard as a mistaken policy, insisted upon the Federal Reserve Board and banks acting in such
a way that he could float Government bonds at an artificially low
rate of interest; that he could not carry out that policy without
preventing the Federal reserve banks from using their powers in
the interest of a stable price level; and that at any time, if the
Treasury Department. is to interfere in this way with the Federal
reserve bank policies, it necessarily interferes with any efforts that
the Federal reserve banks might make toward stabilizing the price
level.
Does that cover your question?




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STABILIZATION

The CHAIRMAN. Yes. Then it is a fact that the governmental
situation might be such as to defeat, if it were exercised through
the proper channels, the very intention of the Federal Reserve
Board; and is not that greatly aided through the control of the
issuance of temporary certificates of indebtedness to the extent that
they are outstanding?
Doctor FOSTER. I t seems to me that it may be possible at any time,
under present conditions. That is one reason why I believe that
there should be an official declaration on the part of Congress in
favor of an attempt to stabilize the price level. At the time that
the Treasury Department acted as it did act in 1919, there had been
no such declaration on the part of Congress; the Federal Reserve
Board was not directed to use its powers for that purpose.
The CHAIRMAN. If I recall the situation at that rime, correctly,
there was much discussion on that subject, and members of the
Federal Reserve Board appeared before this committee. If I am
wrong in that, I hope gentlemen will correct me; but, as I recall,
they assumed the position at that time that they were not responsible, and that they did not put in motion the machinery which
caused deflation.
Mr. WINGO. What time was that, did you say ?
The

CHAIRMAN. I n

1919

or

1920.

Doctor FOSTER. I n my judgment, they were powerless in 1920 to
prevent deflation.
Mr. GOLDSBOROTTGH. That is very interesting, Doctor. Will you
develop that a little ? Just why do you think so ?
Doctor FOSTER. The volume of money in circulation over which
they had control, through open-market operations, was too small
for that purpose. Moreover, they could not, by lowering bank rates,
force anybody to borrow money and put it into circulation, even if
there was plenty of available money.
By buying securities in the open market at the proper time and
by selling them at the proper time, the banks can influence the price
level, but only to the extent of the volume of those transactions,
and that is definitely limited.
Mr. WILLIAMSON. Doctor, how is the price level affected by this
process? The Federal reserve banks shot up their discount rates
to 6, 7, and at one time nearly 8 per cent. T h a t resulted in their
calling in their loans from their correspondents, and they in turn
called in their loans from the smaller banks, and that whole pituation developed all over the country, with the result that there
was a great contraction of currency—not of currency itself, but a
great contraction of credits. That is what brought on the deflation
to a very great extent. I t was a pyramiding of the calling in of
loans and credits which to a very great degree brought it on.
Mr. WINGO. I t was also contended, was it not, that there was a
refusal to make rediscounts for certain types of banks?
Mr. WILLIAMSON. Yes, sir; I think that is true.
Mr. W I N G O . On the other hand, it was also contended—and I
would like to have Doctor Foster's viewpoint on both contentions—
it was also contended, on the other hand, just as he has intimated,
that the board was powerless; that the deflation in commodity
prices had already set in, and that brought with it the resultant




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197

deflation of credits. I would like to have your viewpoint on both
contentions, as to which you think is the correct theory.
Mr. GOLDSBOROUGH. And, Doctor, while you are discussing that,
did not that same condition also cause what is known as a freezing
of credits?
Doctor FOSTER. May I be permitted to say this, as a basis for my
answer to your question: I n a period of a rising price level, such
as we had from 1914 to the middle of 1920, prices inevitably get to
the point sooner or later where the buyers of goods have not enough
income, and under the present financial system can not possib]y
get enough to buy the goods which are produced and thus to sustain
the price level. Therefore the price level of 1919 had to go down,
regardless of the operations of the Federal reserve banks.
The CHAIRMAN. T h a t period is what might be termed, and has
been termed, a " buyers' strike " ?
Doctor FOSTER. I object to the term "buyers' strike," at least as
applied to consumers, because I think that consumers buy as long
as they have the income with which to buy; and all the statistics
that I know anything about, as well as my knowledge of my own
habits and those of my neighbors, bear me out in saying that in
1920-21 there was no buyers' strike. The reason consumers did not
buy was that they did not have the money. People who refuse to
buy because they have no money should be compared with the unemployed rather than with strikers. [Laughter.]
Mr. CANFIELD. Doctor, do you not think the agitation that was put
out in the newspapers at that time caused the buying public to quit
buying ?
Doctor FOSTER. I think we should distinguish rather sharply between the consumer-buying public and the wholesale trade. Are you
thinking of consumers ?
Mr. CANFIELD. When the consuming-buying public stops buying,
then the other fellow has got to stop. The consuming public was
told to quit buying, and it did quit.
Doctor FOSTER. I t is the consumer you are speaking about, then ?
Mr.

CANFIELD.

Yes.

Doctor FOSTER. Well, that is precisely what I am speaking about.
My judgment is that consumers do not stop buying because prices
are high or because they are urged to stop buying, but because their
income is insufficient.
This subject, I may add, is discussed at length in chapter 17 of
the book on " Money," to which Congressman Luce referred.
The statistics bear out the conclusion that people curtail their
buying because they do not have sufficient income.
Mr. MACGREGOR. YOU did not answer the question. I s it your
view that the raising of the discount rate by the Federal reserve
system had nothing at all to do with the deflation ?
Doctor FOSTER. The Federal reserve system can at any time bring
some influence to bear on the situation by changes in rates. The
point I made was that deflation would have come anyway.
Mr. MACGREGOR. T O the extent that it did ?
Doctor FOSTER. Approximately.
The CHAIRMAN. Mr. Lombard wishes to ask you a question.
93869—27—PT 1




14

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STABILIZATION

Mr. LOMBARD. I want Doctor Foster to develop, by one or two
questions, a little further of his thought on the power of the Federal
reserve authorities to prevent deflation, particularly the deflation
which followed May, 1920. I believe statistics will show there was
already a slight drop in the price level, when there was a meeting
of the Federal Eeserve Board with the members of the advisory
council, held in May, 1920, finally published at the request, I believe,
of Senator Glass, at which they made the decision to raise the rate
to 7 per cent, largely, I believe, at the request of Mr. James S.
Alexander, of the National Bank of Commerce of New York. Even
at that time prices had started to fall. The country was excited.
You will remember in the report of that meeting that they were
given telegrams from various people in the West urging t h a t no
action be taken to further decrease prices. With foundation, in your
mind, I want to ask you this question:
If they had not increased tb<* rate at that time to 7 per cent, if on
the other hand they had gone into the market and bought United
States Government bonds freely, thus putting the amount of their
purchase into circulation in the form of bank credit and currency,
would not that have had the effect of maintaining the high price
level then existing? I t is merely a theoretical question, but I wondered if you did not want to take into consideration the possibility
of buying capital securities on the open market, in answering the
question of the committee as to whether, as a purely academic matter,
they could not have prevented deflation in 1920.
Doctor FOSTER. Mr. Chairman, I have already taken that into
consideration when I said the Federal reserve banks could at any
time affect the situation by their open market operations, to the
extent that they used available funds for the purchase of securities
on the open market, thus helping to put money into circulation,
and thereby helping to sustain the price level.
The CHAIRMAN. By " purchase of securities " do you refer to shortterm Government securities, Governments bonds, open-market paper,
bank acceptances?
Doctor FOSTER. Paper that they actually do buy. However, the
point is that the volume of such purchases is limited by the available funds, and the time came in 1920, as the time is sure to come
again, when the possible volume of such operations is not sufficient
to prevent a drop in the price level.
Mr. LOMBARD. D O you mean the gold reserve ?
Doctor FOSTER. I am not talking about that. I am talking about
the funds available for the purchase of these securities.
Mr. LOMBARD. Could they not have bought five hundred million
of Government bonds in 1920 ?
Doctor FOSTER. If they had the money available, they could have
brought them, and to that extent they could have helped the situation; but that would not have been enough in 1920 to prevent a
slump.
Furthermore, we had approached so closely to the legal reserve
ratio that it was impossible for the volume of money in circulation
to continue to expand on a gold basis at a sufficient rate to sustain
the price level. We had made the mistake of inflating the currency
and had to pay the penalty. There was no way out of it. The




STABILIZATION

199

board might have modified the course of events in 1920, but they
had no power to prevent a slump in the price level.
Mr. LOMBARD. D O you happen to recall what the reserve ratio was
in the middle of 1920?
Doctor FOSTER. I t is shown in this document. The point is that
it was very close to 40 per cent, close to the legal limit.
Mr. GOLDSBOROUGH. Let us assume they had not been restricted in
any way, but that there was plenty of leeway for it. You would say
the prices should have been kept up in general, but that the reaction
had to come, no matter how much gold there was ?
Doctor FOSTER. I n that particular slump the gold reserve ratio
was pretty nearly a controlling factor. Now, your question is,
Would it be possible for the Federal Reserve Board, with its present
power, to prevent a slump, even though there were plenty of gold?
Is that the question ?
Mr. GOLDSBOROUGH. Yes. That was not exactly the question; but
if you will answer that, you will practically answer my question.
Doctor FOSTER. I n my judgment, the time is sure to come, even
with plenty of gold, when the Federal Reserve Board can not, with
its present power, prevent a recession in the price level.
Mr. GOLDSBOROUGH. Let us assume that they had all the power that
could be given them, and that the gold reserve is not limited. Under
those conditions is it humanly possible to continue a period of rising
prices ? Does not the slump have to come after a period of inflation
and continued increased production.
Doctor FOSTER. Yes, sir.
Mr. GOLDSBOROUGH. Does not the slump have to come ?
Doctor FOSTER. The slump has to come, regardless of the gold
reserve available.
Mr. STRONG. Could the Federal Reserve Board be given power that
would prevent a rapid increase ?
Mr. GOLDSBOROUGH. Let me follow up my question for a moment.
Mr. STRONG. I beg your pardon. I thought you were through.
Mr. GOLDSBOROUGH. Let us assume this condition: T h a t there is a
period of rising prices, and it becomes apparent that we are going to
have a period of inflation; that the Federal Reserve Board has power
to control the price level; that is, to control the credit by openmarket operations and by the discount rate. Do you think it is possible to give the Federal Reserve Board, by this bill or by any other
legislation, sufficient power to check an apparent oncoming period
of inflation to such a point as would measurably control production,
and therefore measurably prevent a period of succeeding deflation?
That is an important consideration, whether the board can contiol
unhealthy periods of inflation which are bound to be followed bjT a
slump or deflation.
Doctor FOSTER. There are times when nothing the Federal Reserve
Board can do, with its present power, will prevent, though it may
curb, the kind of inflation of which you speak, because there are
times when the member banks, in expanding the volume of money
used by business, are not dependent on the Federal reserve banks,
and at such times the Federal Reserve Board can do little more than
advise.




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STABILIZATION

The CHAIRMAN. I n that connection I would like to ask you a little
about the distinction between bank credit and money. W h a t I mean
by bank credit is the use to which it is put in paying by checks.
You have stated that the-Federal Reserve Board could not maintain
any control because of the limited amount of money in circulation.
I n that connection there is a vast amount of credit over which the
Federal Reserve Board has practically no control, that outside the
Federal reserve system.
Doctor FOSTER. I should have said in the first place that I always
used the word " money " to cover both currency and bank credit,
because all the factors that we are considering are affected quite
as much by bank credit in circulation as by currency; that is to
say, Federal reserve notes, United States notes, etc.
The CHAIRMAN. What part of bank credit does the Federal Reserve Board have control of?
Doctor FOSTER. When the member banks are not dependent upon
the Federal reserve banks, the increase in loans can take place before the Federal Reserve Board is advised of the faces. The
board gets the information after the expansion of bank credit has
happened.
Xhe CHAIRMAN. YOU are speaking now of the member banks.
There are a number of banks that are not members of the system
that are more or less a factor ?
Doctor FOSTER. SO far as they are not dependent upon the Federal reserve banks for the expansion of credit, the Federal Reserve
Board has no direct control over the situation.
Mr. STRONG. YOU said you thought the board could not prevent
inflation or deflation, with the power it now has. Are there any
powers that can be given by Congress to the Federal Reserve Board
that will enable them to maintain the general price level and prevent inflation or deflation?
Doctor FOSTER. I will say first in answer to that question that
there is no possibility of attaining an absolutely stable price level.
I suppose everybody agrees to that. There must be some fluctuation. The question is, whether any power could be given the Federal Reserve Board to enable it to prevent excessive inflation or
deflation.
Mr. STRONG. That is what I mean.
Doctor FOSTER. There is no way in which the price level can possibly be stabilized permanently simply by controlling the gross
volume of money in circulation, regardless of the way in which it
gets into circulation. Now, if I am really going to answer your
question, according to my view, it will take an analysis which, I
dare say, goes beyond anything you have heard at these hearings;
because I take issue with all the proponents of stabilization who believe it is possible to stabilize the price level by simply controlling
the gross volume of money in circulation. I t can not be done, because the time is sure to come in any period of expanding production when the flow of money to consumers is not sufficient to take
away the consumers' goods that are ready for market. When that
time comes we must either continue to accumulate unsold and unsalable stocks of consumers' goods, or else have a recession in prices.




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201

Under present conditions, the time is sure to come when a fall in
the general price level is the only means of distributing the surplus
stocks and enabling producers to go ahead producing. You can not
control the situation simply by controlling the gross volume of
money in circulation, regardless of the way in which the money
enters the flow from producer to consumer and consumer back to
producer, regardless of the amount of newly created credit which
is first used on the production side. The difficulty comes from the
fact that our financial system is largely a system of financing production rather than a system of financing consumption.
The CHAIRMAN. YOU think that has not developed to the extent
it should have been, in order to relieve that situation?
Doctor FOSTER. When we expand Ave expand it on the producer's
side. Very little of the expansion is for the purpose of financing
consumption. Considerable more has been done for that purpose in
the last few years than ever before, because of the unprecedented
increase in the sales of goods on instalments, which sales have been
financed largely by financing corporations. But this method of
expanding sales by expanding consumers' debts is leading to a day
of reckoning.
The CHAIRMAN. I n that connection, may I just recall to your
mind the new development of financing through capital issue rather
than through the method to which you refer ? Is not that a factor
in the situation also? What I mean is that many of the large
corporations have segregated large amounts on their own treasuries
for the purpose of handling these accounts. I s not that a factor in
that control of the money situation, and does not that take away
from the producer the amount of money that otherwise would be
available? I s it a fact that there is an undue amount of moneytied up unnecessarily to-day for capital purposes ?
Doctor FOSTER. I think it is always true that our investment in
capital facilities is in excess of that which is warranted by the flow
of money to consumers. I n other words, we are always far ahead
in productive capacity of the power of consumers to buy the potential products. But, in the very process of enlarging capital facilities, we have helped the consumers to buy the goods already produced. I t is partly because the past 50 years has been a period of
expansion of capital facilities unprecedented in history that we
have been able to go on as well as we have; because whenever we
are rapidly expanding capital facilities and expanding the volume
of money in circulation, we are paying money to* consumers as wages
in the process of producing these capital goods in advance of the
goods which are to be produced by these new facilities and which
consumers will eventually be asked to pay for. This e x p a n s i o n
however, must go on at an accelerated rate, or else we have a slumps
My own judgment is that one reason why business is in such a b a d
condition in England, compared with the United States, is t h a t
England is further along in this period of development and t h a t
the time is coming in this country when we shall feel the effect of a
declining rate in the production of new capital facilities and consequently a declining flow of money to consumers and increasing
difficulty in selling the goods which we produce.




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STABILIZATION

Since business operates at a profit, and corporations save part
of their profits, and individuals save part of their incomes, there is
a constant tendency toward a deficit of consumer purchasing power.
That is offset, in part, by the increase of capital facilities.
H a d it not been for the development of the automobile industry
in the last 10 years, and the capital facilities created in connection
with that industry, the prosperity of this period would have been
impossible. The automobile has done for us lately what the railroad once did for us, in inducing a flow of money to consumers in
advance of the goods which consumers are asked to pay for.
Mr. WINGO. You used the word " expansion." Does not that also
mean inflation ?
Doctor FOSTER. That word " inflation " is used in so many different
senses that we get into trouble unless we define it carefully. I
always use it to mean an increase in the volume of money which is
accompanied by a rise in the general price level.
Mr. WINGO. The distinction I have heard heretofore between expansion and inflation is that expansion is that increased volume
which keeps pace with actual business and necessities, whereas inflation is an excessive increase in volume.
Doctor FOSTER. The trouble with that definition, sir, from my
standpoint, is that the term " necessities " is of necessity an undefined
term.
Mr. WINGO. Is not that true of all definitions ?
Doctor FOSTER. I t is not true in my definition. Its terms are
capable of measurement.
Mr. WINGO. I S it not a matter of language, after all ?
Doctor FOSTER. By inflation, I mean an increase in the volume of
money in circulation which is accompanied by a rise in the price
level, and both those factors are ver^ definitely measurable.
Mr. WINGO. D O you think all inflation is harmful ?
Doctor FOSTER. All excessive fluctuations are harmful. Nobody
objects to an increase in volume of money in circulation, accompanied by an increase in volume of business on a given price
level. I t is only when that increase leads to a rapidly rising price
level that the trouble begins.
The CHAIRMAN. Are we in a period of inflation now ?
Doctor FOSTER. N O .
Mr. STRONG. Are we in a period of deflation?
Doctor FOSTER. Apparently, we are beginning a period of deflation.
Mr. WINGO. YOU spoke about capital investments, and you referred
to excessive capital investments. I saw in some publication some
time ago that the productive capacity of our country was practically
80 per cent of the theoretical capacity; that if our production
represented 80 per cent of the theoretical capacity, we would have
$15,000,000,000 worth of surplus products. W h a t do you think of
that statement? Is that an excessive estimate of our productive
capacity ?
Doctor FOSTER. I do not understand the " fifteen billion " part of
the question; but in answering the first part of it I should say that
it is a conservative estimate. Nobody knows what our productive
capacity is, but virtually every industry is now unable to operate at




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203

capacity. I should say that we could produce, with our present capital facilities, 50 per cent more than we are producing at the present
time, if we had th3 market.
Mr. WINGO. I am not talking about the market. I am talking
about the capacity to produce. No doubt this man took into consideration the fact that he could take a given mill. He knows what
the capacity of steel mills are; he knows the capacity of certain
acreage of land in wheat, taken over a long terms of years. The
same is true of cotton, the same is true of wool, the same is true of
woolen goods, and other industries which were running to practical
capacity. H e possibly had that in mind. That was 15,000,000,000
more than the consumers demand.
Doctor FOSTER. There is no question about the fact that because of
a lack of consumer purchasing power we are unable to use our capital
facilities at any approach to capacity. For example, there are 100
or more producers of tires, six of whom could produce enough tires
to satisfy the entire demand.
Mr. WINGO. What is going to be the effect of that overinvestment
in capital requirements which you have referred to? Is it not like
having an excessive inventory and high-priced goods on the shelf
beyond the wants of the consumer, producing a slump sooner or
later?
Doctor FOSTER. It has a tendency to bring about overproduction,
because of the natural eagerness of each industry to use its equipment to capacity. As a matter of fact, the country periodically
produces goods in excess of the capacity of consumers to buy the
goods.
Mr. LUCE. One of the axioms of a well-known economist was that
there could be no such thing as general overproduction.
Doctor FOSTER. If he means production beyond the capacity of
consumers to buy the goods, he is wrong. If he means production
beyond the desire of consumers to consume, he is right.
Mr. LUCE. One man's demand was another man's supply.
Doctor FOSTER. Exactly. One of the traditional economic theories
holds that since supply and demand are different aspects of the same
thing, supply must equal demand. Therefore, general overproduction is impossible. That theory is fallacious, because it ignores
money.
The CHAIRMAN. YOU raised the question of the rubber industry
and said that six concerns could supply the demand for tires in the
United States.
Doctor FOSTER. Yes.
The CHAIRMAN. Does not that indicate that there is an undu«
amount of capital tied up in that particular industry, and is not that
an economic waste of capital ? For instance, there is pending before
Congress a demand from the agrarian group of producers for financial assistance and credit assistance for orderly marketing on the
theory that men who desire to market the product of the farms have
no facilities nor capital to market them. If that extra capital employed in the rubber industry were diverted to the use of orderly
marketing facilities for the farmers would not that be a relief to that
situation ?




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STABILIZATION

Doctor FOSTER. There is no dearth of capital at the present time.
On the contrary, commercial banks are going into the open market
and buying securities because their customers are not borrowing
enough money.
,
The CHAIRMAN. These groups are contending now before Congress
that credits or capital are not available to them for the creation of
facilities for orderly marketing of their products, and they are
demanding governmental assistance in the supplying of that capital.
DOCTOR FOSTER. I am not an expert in that field, but I believe that
plenty of money is available for anything which, appears to the banks
to be a sound business proposition. All they ask is security of principal and interest.
The CHAIRMAN. I S there an undue amount of money tied up in
capital in the rubber industry in the United States to-day ?
Doctor FOSTER. There is more money invested in capital facilities
in the rubber industr}^ and in nearly all others, than consumer
demand warrants. But that does not mean there is no money available for expansion. There is plenty of money for productive purposes and has been for the past four years. The contention has been
made that high taxes have caused a dearth of capital, but statistics
do not bear out the contention.
Mr. W I N G O . Statistics show that in the last five years there has
been a greater volume of money flowing into productive capital
investment than ever before in the history of the world.
Doctor FOSTER. That is true. During two of the years of our
highest taxes, the volume of money invested in new enterprises and
in new issues of old enterprises was larger than in four years of the
preceding period of low taxes. There is no basis for the contention
that high taxes caused a dearth of capital facilities.
Mr. WILLIAMSON. What is the effect of the excessive use of capital
in the rubber industry upon the price of the product ?
Doctor FOSTER. Very slight.
Mr. WILLIAMSON. I n other words, are those products just as cheap
as if they were being maufactured by the six concerns that could
manufacture them ?
Doctor FOSTER. Excessive development of productive facilities in
any industry, for instance, in New England textiles, does not necessarily raise the price of the product at all. Producers sell their
goods for what they can get, and consumers do not care how much
has been invested in capital facilities.
Mr. WILLIAMSON. Does not the effort to earn dividends upon extra
capital to a certain extent influence the prices at which goods are
sold?
Doctor FOSTER. I t influences the prices at which producers would
like to sell goods, but they sell them at whatever price then can get,
and the buyer is the sole maker of the actual selling price.
Mr. WINGO. I wish you would answer the question that was
asked a while ago. You may have answered it, but if you did I
did not observe it. If you would do away with the excessive concerns and leave it in the hands of six of them to produce the present
consumer demand, would not that cheapen production and the cost
to the consumer? Did you answer that?




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205

Doctor FOSTER. I t would make possible a lower unit cost.
Mr. WINGO. I was thinking that was the theory.
Doctor FOSTER. I t would unquestionably make possible a lower
unit cost.
Mr. WINGO. Those in control of the industry might become dictatorial and sell at an undue profit.
Doctor FOSTER. That has been true in some industries in the past.
Mr. WILLIAMSON. I S it not true that the goods are sold by producers at the point where they will produce the maximum profit
upon the capital invested in production ?
Doctor FOSTER. A S a rule, goods are sold at the maximum price
consumers will pay for a given output, regardless of the capital
investment.
Mr. WILLIAMSON. That does not quite answer my question. Take
Henry Ford as an illustration. Whenever his automobiles do not
move readily upon the market and he is beginning to pile up a big
supply, he cuts the price in order that there may be more rapid sales.
He attempts to set a price at that point where they will produce the
maximum profit to his factory.
Doctor FOSTER. He does not reduce the price because his investment in capital facilities has been what it has been. Apparently, he
reduces the price because he can not sell his output at that price,
and for no other reason. Although he is heralded as a great benefactor, and although he is in some ways, he appears to be like most
producers in this respect: Judging from results he sells at the
highest price consumers will pay for his output, regardless of costs.
Mr. STRONG. I S it your position that the consumer sets the price?
Doctor FOSTER. The consumer sets the price of Ford cars.
Mr. STRONG. Suppose he would attempt to buy at a price where
there would be no profit, would he get any cars?
Doctor FOSTER. Consumers are competing with each other for a
definite supply of cars. Thus far, in the process of competing, they
have made prices that have yielded large profits to Mr. Ford. On
every road in the United States somebod}^ is driving a Ford car,
who has had something to do with the price at which Mr. Ford can
sell his output. If consumers decided that they would not pay
enough for Ford cars to yield Mr. Ford a profit, he would seel his
surplus at a loss and he would make no more cars. There are scores
of producers of automobiles who are no longer making cars, because consumers would not pay enough to yield these producers a
profit.
Mr. STRONG. Of course, if the consumers would go on a buyer's
strike and conduct it successfully they might set the price, but in
our present system of conducting business that is not done, and the
producer does set the price the consumer pays. He says, " H e r e is
this automobile at $1,000. Take it or leave it."
Doctor FOSTER. He may say that to-day, but to-morrow he reduces
the price, if that is the only way to sell the cars.
Mr. STRONG. He reduces it only because his development has
reached the point where he can supply it cheaper. H e does not
sell it for less than cost.




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STABILIZATION

Doctor FOSTER. He does if he has to. The buyer tells him whether
he can sell at a profit or must sell at a loss.
Mr. WINGO. W h y are not bankers moved by the same consideration?
Doctor FOSTER. I n their interest rates?
Mr. W I N G O . Yes.
Doctor FOSTER. They are.
Mr. WINGO. Let us see. I

know bankers that have surplus funds
out at 4 per cent, and they will not lend me or anybody else for less
than 10 per cent. I was wondering about that. I wondered if they
gave me the real reason. They are now letting out funds outside
of the State for less than half of the lowest rate they would charge
anybody in that community, however gilt-edged the security might
be. W h y does not that theory apply to them like it does to Henry
Ford?
Doctor FOSTER. I am not familiar with the bank in question. I
have no doubt that in general the banks are governed by the same
principle as other sellers. They get as much as they can get for
good risks.
Mr. WINGO. I have been accepting that theory on their statement
that after all credit is like anything else, if they are short of capital
they will .charge a higher rate. Now, when I find th£y have an excessive funds and still keep the rate at' 10 per cent, I am wondering
if my theory should not be revised.
Mr. STRONG. I t is said in Iowa, where they are having a good deal
of trouble over financial matters, that the banks have been sending
their surplus funds to New York to be loaned to the banks there for
3 per cent, because they are afraid they can not get good security in
Iowa; which has affected the stock market, and the withdrawal of
that money by the country banks is what is now bringing about a
reduction in the price of stocks.
Mr. WILLIAMSON. I would like to make another inquiry somewhat
along the line that I did before. There has been a process going on
throughout the country in the way of increasing capital investment
of our street-car companies, railways, and other facilities of that
character, apparently with the view of increasing rates for transportation, freight, and the like. As a matter of fact, does not that
affect the situation, very materially affect the price the public must
pay for what they get ?
Doctor FOSTER. When I say that buyers fix the prices at which
goods are actually sold, I naturally have to except prices which are
fixed by law. I n the case of public service corporations, when the
price is fixed, the consumer decides how much he will take at that
price. When the price of gas, for example, is established by law
buyers do not fix it except through their representatives. They do
decide, however, how much gas they will take at the established
price, and how much money they will spend for substitutes for
gas; and in this way they influence the price of gas.
Mr. WILLIAMSON. I S it not true that in industries like the transportation industry, which is a natural monopoly, as a matter of
fact, they control to a great extent the price they charge the public
upon the question of supply and demand? I n other words, there
is the fixed demand which people can not afford to be without and,




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207

consequently, any kind of corporation or institution which supplies
t h a t service does not have competition, and it can fix the price.
Doctor FOSTER. Theoretically, in some instances, that is t r u e ;
but it is not true of street-car companies. If these are any concerns
which have suffered under competition in the last 20 years it is
street-car companies.
Mr. STRONG. I started-to find out a while ago whether or not you
thought the power should be given to the Federal Reserve Bo#rd
that would tend to stabilize prices and prevent inflation and deflation. I take it from your answer that you do not think it should
always do it. Do you think it advisable, or do you think that any
power could be given them that would be desirable to cause them
to attempt to stabilize the price level and prevent inflation and
deflation?
Doctor FOSTER. Your question is the most far-reaching one we
have had to-day, and if I were going to enter into that discussion
it would take a long time.
Mr. STRONG. What I am trying to get at is this: I am frank to
admit that all I want is to get some information that will enable
us to decide whether or not it is desirable to attempt to regulate
the price level through power we might give the Federal Reserve
Board that could be used by them in that direction. Do you think
anything could be done by way of legislation that would tend toward
stabilizing a general price level and preventing inflation and
deflation?
Doctor FOSTER. I think, first, that they already have power to help
prevent excessive fluctuations in the price level, which power, let me
add, they have been using, in my judgment, very intelligently and
effectively in the past few years; but they did not use it before that
time as effectively as it should have been used.
Second, I think that they should not only do that but that they
should do it under the definite direction of Congress to use that
power in the interest of stabilization of the price level. I n other
words, that it should be a conscious and avowed policy, understood
by everybody.
The next question is whether it would be possible to devise additional powers, which may be more effective for the purpose. I think
so, but it would take a longer time than we have now to expound my
ideas on that subject.
Mr. STRONG. Would you have any objection to sending the chairman of the committee your views on that subject, so that they may
be incorporated in the record ?
Doctor FOSTER. N O .
Mr. STRONG. I want to say the purpose of this hearing, as far as
I am concerned, is to ascertain information to enable us to take such
proper action as may be advisable to take. The bill as presented
here simply directs the Federal Reserve Board to use its efforts.
We are not giving them any new power. I t is rather restrictive.
I t says they shall use the power they have for the purpose of
stabilizing the price level. Do you think it advisable to pass a bill
ofthatkirid?
Doctor FOSTER. I do. We said so in this article published two
years ago.




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STABILIZATION

Mr. WINGO. I understand the Doctor takes the position that the
Federal Reserve Board already has the power to do the things contemplated by this bill, but the value of this bill would be to have
the Government, Jhrough Congress, announce a positive policy.
Doctor FOSTER, I es, sir. I have explained at some length that I
think there would be an advantage in having an avowed policy,
understood by all.
Mr. WINGO. You think that would be of economic value ?
Doctor FOSTER. I do; but I want this one point repeated for emphasis : We should always bear in mind that the utmost the Federal
Reserve Board could do with its present power might be of little
effect unless important influences beyond their control worked t o ward the same end. There are occasions when nothing the board
could do would have far-reaching effect. On the other hand, there
are times, such as the spring of 1923, when their actions might afford
the needed leadership or, in view of the attendant circumstances,,
might be a sufficient contributing cause to accomplish the purpose.
Mr. STRONG. A good doctor might be employed to bring relief
to an overcrowded stomach, but if you were foolish enough to do
those things which again overcrowd that stomach the time would
come when the doctor could not serve you.
Doctor FOSTER. Yes; that is true, only I should leave out the
word " foolish," because under our present method of financing production and distribution, the overcrowding of the markets will inevitably come again.
Mr. STRONG. Lots of times rather foolish things are done in speculation, such as the application of capital to industry that would not
warrant it.
Doctor FOSTER. From the statement which you have decired to
incorporate in the records, you will see that I am not disposed to
find fault with the Federal Reserve Board. The industrial system
in which we live and move and have our being is such that in the
ordinary course of increasing production, we come to the point
where the income of the consumer is not enough to buy the output,,
at the prevailing price level. Then the price level drops. The Federal Reserve Board has no power to provide consumers with enough
money to prevent that drop.
Mr. BEEDY. I would like to ask a question, Mr. Chairman, if I
may.
Doctor FOSTER. I am now about to be catechized by my former
student.
Mr. BEEDY. I may say that what little I know on this subject I
learned under Professor Foster.
Your remarks here are perhaps to be summarized by saying that
capital is and for a long time has been over financed, and that under
the present economic system funds are freely available for capital,
but that economic crises and incidental social disturbances are the
result of a lack of purchasing power lodged with the consumers,
the masses.
Doctor FOSTER. Yes.
Mr. BEEDY. S O that we may say there is an economic foundation
which justifies the argument of the so-called discontented masses.




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209

and is evidencing itself in the tremendous growth of Socialism, Communism, and the revolutionary movement in the Old World ?
Doctor FOSTER. I think Mr. Beedy, that it is true that our present,
organization of industry and finance is such that we are constantly
making production facilities in excess of that which is warrantee!
by available consumer purchasing power; that if to our extremely
efficient system for financing production we could somehow add an
equally efficient system for financing consumption, we could make
marked and rapid progress toward increased production and consequently toward higher real wages and higher standards of living;
that the people generally are pretty well aware of the fact that it is
possible to produce more than we do, and that there is some reason
which they can not understand why in spite of our vast equipment
t h e marvelous advance in technical knowledge and invention, the discovery of new resources, the reduction of wastes, reduction of unit
costs, in spite of all that which apparently ought to result in a
rapid increase in real wages and general well-being the people do not
find that they can buy very much more with their present income
than they used to be able to buy. Consequently, in my judgment
there is a real reason for not being entirely satisfied with things as
they are and therefore a responsibility upon those members of society
who think to see that a remedy is devised which will be sound and
•constructive which will retain all that is good in our present organization of society and enable us to utilize decade after decade more
t h a n we now utilize of the available resources of labor and capital.
Mr. BEEDY. A S I do not wish my position to be misunderstood at
:any future time I want to go on record as saying that I believe the
major part of our present policy of economic system is sound and
wise, and that the remedy is not to be had through any kind of radical movement which we have seen manifesting itself in recent years.
I want to ask you if in your opinion the relief proposed by the
Goldsborough bill is more fundamental and far-reaching than that
proposed by the Strong bill?
Doctor FOSTER. May I say Mr. Beedy, that the answer to that
question is implied in the statement which I have been asked to give
to the chairman of the committee.
Mr. STRONG. D O you think both would be of advantage?
Doctor FOSTER. I can not answer that question except in an
•extended statement.
The CHAIRMAN. Without objection the statement of Doctor Foster
on this and the other matters which he may want to present to the
committee will be incorporated in the record.
The CHAIRMAN. I n connection with the leadership which you
intimated could be exercised by the Federal Reserve Board in the
matter of stabilization, what is the most effective way in which that
can be done, by publication of their action, calling attention to what
they propose to do in the way of changes in rules and regulations, or
any decisions they may make in regard to the price level and the
money situation ? Should it be done by way of public utterances ?
Doctor FOSTER. From what I have observed of the actions of the
Federal Reserve Board and their published reports in the last few
years, I am inclined to think they are very much wiser than I am in
that regard. I would not attempt to advise them.




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The CHAIRMAN. Their notices to the public are not confined ta
their annual or monthly reports. For instance, I have, in mind an
interview the governor of the Federal Reserve Board gave out yesterday in regard to the business situation; no doubt prompted by the
slump in the stock market. I t was intended, no doubt, to stimulate
confidence in the general business and banking situation of the country. What I had in mind particularly was, can they be made more
effective by the issuing of periodical statements like, that ? I am just
asking for your opinion.
Doctor FOSTER. I do not think I am competent to discuss t h a t
question.
The CHAIRMAN. I t is very pertinent to this whole situation, as to
how the views of the board are to be made known.
Mr. BEEDY. May I interject a suggestion? You mean would it be
helpfully effective, or effective in the right direction?
The

CHAIRMAN.

Yes.

Doctor FOSTER. Let me show you why I hesitate to answer. I am
aware of the fact, as you all are, that there is great confusion in the
public mind between the effort to stabilize the general price level
and the effort to stabilize individual prices. That is where the
trouble comes. I dare say more than half the people of the United
States, the moment a statement appears about the effort of the board
to stabilize the price level, will at once have in mind fixing the price
of wheat, fixing the price of cotton, and what not.
Mr. SALISBURY. That is one of the greatest difficulties that will be
encountered.
Doctor FOSTER. I believe that one of the main reasons why the Federal Eeserve Board has always been so careful to say that it has
nothing to do with stabilizing the price level is that it feared it
would be understood by the public as attempting to fix individual
prices, which, of course, it ought not to do, and no government ought
ever to attempt to do.
The CHAIRMAN. The effect of your statement has been fully demonstrated here quite recently. I have in mind what was suggested in
the hearings yesterday, that the possible effect on the stock market
of the inquiry which the board made in regard to brokers loans was
very far-reaching. No doubt any statement by the board would be
misconstrued by these same gentlemen who are watching market
prices so closely. For instance, the change in the discount rate has
been used as a football in so-called Wall Street. When the change
was made by the Boston bank, y<5u recall the attitude of mind of the
browers engaged in marketing securities?
Doctor FOSTER. Yes.
The CHAIRMAN. Whether the power of the board ought to be
utilized in that way is a problem the committee is very much interested in. I t naturally arises in connection with any direction proposed to be made to the board.
Doctor FOSTER. Let me add at this point that one of the chief reasons why the entire business world is so easily upset by any step
which the Federal Keserve Board takes is that it never knows
whether that step may lead to inflation or deflation. We do know
what has happened in the past, and we do know that the board has
never indicated an avowed purpose to prevent such things in the
future.




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211

The CHAIRMAN. The price level being maintained regularly,
should there not be some notice from the Federal Reserve Board?
Should the price level go up or down; should not a notice of the
board be issued, calling the attention of the public to the fact that
they are proposing to take such steps as are within their power
to regulate the holding of a normal price level. Might it not be rea
sonably assumed that that would be the plan that would follow ?
Doctor FOSTER. That sounds logical and healthful to me. The
very fact that the country was officially committed to a stable price
level as an ideal, would in itself discourage some of those activities
which have most to do with causing excessive fluctuations of the price
level.
Mr. STRONG. If the policy is adopted by the Government to direct
the board to maintain a general price level, you have just stated that
you think publicity would be healthful, if they would announce to
the public that they are going to do so and so. You think it would
be healthful and not harmful ?
Doctor FOSTER. All publicity of that sort would be of value.
The CHAIRMAN. An overproduction or underproduction would not
be affected ? Prices might go up or down as a result of overproduction or underproduction?
Mr. STRONG. Individual prices?
The CHAIRMAN. Individual prices. If there should be a shortage
of the wheat crop and a demand for wheat throughout the world,
that would otherwise put prices up, but the general price level might
not be affected seriously by that unless all the commodities that enter
into the consideration of that price level were affected ?
Doctor FOSTER. Under the proposed plan nothing is suggested
that would have any more effect on the price of one commodity than
on the price of another commodity. Each individual commodity is
left to find its way. The aim is to give each producer as much
assurance as possible; that if there is a slump in the price of his
product it will not be due to any change in the value of monetary
unit.
Mr. WILLIAMSON. I believe you stated this would very largely
tend to stabilize prices. Would it also result in stabilizing wages and
salaries of that class who receive an income of that sort which would
reasonably provide for American conditions of living ?
Doctor FOSTER. I t would tend to increase the real wages of labor
over a period of years, and it would tend toward stabilization of all
incomes, and profits, too.
Mr. CANFIELD. Did you say it would decrease or increase wages?
Mr. F E N N . YOU mean the purchasing power of wages, do you not ?
Doctor FOSTER. I mean real wages, the things that wages will buy.
Mr. STRONG. I understand your position is that if all interests
knew the Federal Reserve Board would direct its power toward
stabilization of prices, and that would prevent inflation and deflation, the very fact that that policy is adopted would of itself help all
interests to unite and bring about the same end ?
Doctor FOSTER. The very fact of the declaration would help to
achieve the aim.
Mr. STRONG. Then a bill of this kind could not possibly do any
harm?




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STABILIZATION

Doctor FOSTER. I do not see how it could do any Harm. The only
qualification I would make is the one I made awhile ago. I t would
be unfortunate if the idea got abroad that the board always had
sufficient power to stabilize the price level, so that if the situation
got out of their hands it might be said, " The Federal Eeserve Board
has been directed to stabilize prices, and they have not done it. We
will turn them out."
Mr. STRONG. Anybody who believes that legislation can bring
about the millennium has to suffer from that kind of belief.
The CHAIRMAN. Have you any further statements you desire to
make?
Doctor FOSTER. NO, sir. I had no idea when I came of taking even
10 minutes of your time.
The CHAIRMAN. We appreciate your attendance very much.
(Whereupon the committee adjourned until to-morrow, Thursday,
April 1, 1926, at 10.30 a. m.)

HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Thursday, April i , 1926.
A quorum of the committee not being present, a further adjournment was taken until 2 o'clock p. m. of this day.
The committee met at 2 o'clock p. m., Hon. James G. Strong presiding.
Mr. STRONG. The committee will come to order, and we will let
Professor Rogers, of the University of Missouri, put his statement
in the record.
Professor Rogers, I suggest that you go ahead in your own way
and put in your statement, and when you have finished some of the
members of the committee may want to ask you some questions; that
is, if you prefer it that way, or will it interfere with your line of
argument to be interrupted ?
Professor ROGERS. Not at all. I am very glad to be interrupted
at any time.
Mr. STRONG. Very well.
STATEMENT OF PROF. JAMES HARVEY ROGERS, PROFESSOR OF
ECONOMICS, UNIVERSITY OF MISSOURI, COLUMBIA, MO.
Professor ROGERS. Mr. Chairman and gentlemen, since the years
1920 and 1921 have passed so short a time ago the evils of instability
should not need much emphasis at this time. I wish to call attention,
however, to two of three evils with which I am sure that you are all
familiar, but which should be emphasized, I think, on every occasion.
The first is the great redistribution of incomes and of wealth that
necessarily, comes about with any period of rising or falling prices.
As you well know, all persons with fixed incomes, such as income
from bonds, lose very greatly in a period of rising prices; and when
you consider who those people are the injustice appears the larger.
All people dependent on insurance left to them by ones already dead,
such as the widows and the orphans that we know so much about,




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213

lose to the extent, of course, that the value of the dollar shrinks; or,
to say it in other terms, they lose to the extent that the prices rise.
And the question is, To whom do they lose? They lose largely, of
course, in the case of corporation bonds, to the stockholders of the
same corporations, made up of a class of people much more wealthy
and in many cases speculators.
We find in addition that the labor class suffers to the extent t h a t
their wages fail to rise an equal amount with the cost of living.
Mr. STRONG. That applies to all salaried people ?
Professor ROGERS. All salaried people and all wage earners. The
salaried classes, of course, find that their salaries do not rise to anything like the extent that the cost of living does. Taking even the
wage earners, the people working for the corporations that make
larger incomes during a period of rising prices than at other times, in
general their wages do not rise as fast as the cost of living. I t is
much more exaggerated with the salaried classes, as I was saying.
Then, in, a period of falling prices—I am speaking now of the
wage earner—he is very apt to lose his job. I n other words, in a
period of rising prices we run over him once, and then, as if to make
the thing right for him, we turn around and run over him again by
having a system that causes him to lose his job when once depression
sets in.
Mr. LEATHERWOOD. I S it your contention that wages have not gone
up in proportion to the cost of living ?
Professor ROGERS. That is, I think, statistically true. Of course,
3^ou have exceptions to it. The wages of certain laborers have gone
up in certain periods of rising prices more than in proportion to the
rise in prices; but the wage earners in general have not received
enough more to give them the same real wage that they had prior to
the beginning of the period of rising prices.
That has been the subject of very careful investigation. I believe
the Bureau of Labor Statistics has made one investigation. I t has
been investigated likewise by the National Bureau of Economic Research, and both have come to the same conclusion.
We find, then, that this very great redistribution of income occurs
with every period of rising prices. I think that I might mention
one case which occurs to me now. I happened to be in the city of
Buda-Pesth in the summer of 1921, and I was going over the city
with a wealthy lady who had established a sort of endowed poorhouse to take care of the poor people that could not take care of themselves any longer. She was showing me the various rooms in which
they lived. We came to a small room where the only furniture
was an iron bed, with one mattress on it, and a dry-goods box for
a washstand, with a tin washpan and a pail of water—a galvanized
pail—sitting beside the pan. She said:
In
take
day.
tion,

this room are two judges. Before the war they had an ample income to
care of all the necessities of life, and, of course, plenty laid by for a rainy
The inflation process has reduced them practically to the verge of starvaand they have applied to me for shelter.

That, of course, is an extreme case, and we have never had anything of that sort in this country.
Mr. LEATHERWOOD. That was a direct result of the World W a r
condition ?




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STABILIZATION

Professor ROGERS. A direct result of the inflation of the currency
and the consequent rise in prices that came after the war; not during
the war. P a r t of it came during the war in Hungary, but it was
a direct result of the great rise in prices, which is the same thing as
saying a direct result of the instability of the currency.
Mr. CANFIELD. Did you say these were judges or ex-judges?
Professor ROGERS. These were ex-judges. They had retired about
the time the war broke out.
Mr. LEATHERWOOD. I S it your belief, Professor, that there could
be any system of stabilization that would overcome the violent
fluctuations that are brought about by war conditions such as we
experienced during the World War?
Professor ROGERS. Yes, sir; I think it is possible. There is no
system that has ever been operated that has done it. But I am
quite sure that it is possible. I think, however, that should a war
begin under such a system we might, on account of the difficulties of
financing the war, with a stable price level abolish whatever provisions had been made for it. The scheme advocated by Mr. Goldsborough in his bill—introduced, I believe, twice before Congress—
would prevent prices rising substantially even under war conditions.
I will go ahead to point out what happens to business in a period
of rising prices and again in a period of falling prices.
Of course, business is usually prosperous under a period of rising
prices, but we find that business develops very unequally. Many
branches of business are overstimulated in comparison with other
branches, so that we find in these overstimulated businesses an increase, largely on account of the building of new plants.
Take, for example, an industry like the rubber tire industry, or
the steel industry, during certain periods of rising prices that we
have had. They nave increased their output by building large plants
and then in the period of depression which followed they have found
themselves idle or largely overstocked with goods which were extremely difficult to dispose of. This led to a halting of production
like the halting that we found in the years of 1920 and 1921, and to
unemployment, with all the resulting evils.
We find, in addition, that the farmers are almost invariably overstimulated; and I call attention to the position of the farmers prevailing in the years 1920, 1921, and 1922, and even into 1923. The
high prices which came about partly during the war but largely
after the war in this country led the farmers to expand their production, not only by employing new workers and buying additional machinery, but in many cases by buying additional land at the inflated
prices that prevailed at that time. I n many cases they spent their
accumulated savings to make the first payment on the land. I n addition, they frequently mortgaged the farms which they already held
as well as the farms that they were buying as security for the payment of the balance. You all know what happened in the period of
falling prices which came in 1920 and 1921.
Mr. STRONG. May I interrupt you right there? Were they not
•encouraged to that expansion through governmental agencies that
said, " T h e boys in the field must be fed, and the world must be
fed, and we depend upon you farmers to do i t " ?




STABILIZATION

215

Professor ROGERS. That was true during the war, and, of course,
t h e Government lived up to its promises. That continued after the
war for about a year, I believe. Yes; that was quite true. But it
did not cease with the war.
Mr. STRONG. NO. Then the bottom fell out of the demand for
the products, and they were practically ruined.
Professor ROGERS. Yes; but the top of prices in cotton, you will
remember, Mr. Strong, came in 1920.
Mr.

STRONG.

Yes.

Professor ROGERS. Early in 1920. The prices of wheat—I believe
I am correct—likewise continued to rise for some period after the
w a r ended. I believe that is true.
Mr. STRONG. Yes.
Professor ROGERS.

And I maintain that the rise in prices of cotton—and of wheat to the extent that w^heat rose—was likewise largely
due to the general rise in the price level itself.
Mr. STRONG. The peak of the price level came in about the middle •
of 1920.
Professor ROGERS. About the middle of 1920. The price level continued to rise until May, 1920, to be exact.
I n the inevitable reaction which follows each of these periods
of rising prices, we know what happens to the farmer. Having
been largely overestimated during this period of rising prices, it is
impossible for him, so to speak, to liquidate immediately. Take the
case of a manufacturing industry. When their officials find that they
have overproduced and can not sell their product any longer at a
profit, what they do is to close down if necessary, or at least cut their
production. But take the case of the farmer. Finding that he has a
big debt for land which he has purchased, and finding that the prices
of his product have gone down, the only possible way out for him is
to produce all he can, and he sets to work to produce harder than
<ever before. H e borrows money to increase his production. We
have had before Congress many measures to give him additional
credit. I have maintained all along that such relief was just exactly
what he did not need, because it has tended to prolong his difficulties,
rather than to improve him.
Mr. LEATHERWOOD. At that point would you mind giving us your
view of what caused the violent and sudden decline of prices
beginning early in 1920?
Professor ROGERS. That is a very, very long story, and I do not
think anyone can tell you clearly all the causes that operated to
make prices begin to fall. We do know this: Whenever we have a
period of rising prices it has ended finally with a period of falling
prices; that is, unless we adopt policies similar to those adopted
in Germany during the inflation period, where nothing was done
to keep prices from rising, and where everything was done to allow
them to continue to rise.
I think, personally, that the credit factor is an extremely import a n t one. I n this country the Federal Reserve Board announced that
they were raising discount rates, and that they were going to continue
to raise discount rates, and that the price level was not to be allowed
to continue to rise.




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STABILIZATION

Mr. LEATHERWOOD. D O you not think that the action of the Fed
eral Reserve Board had a good deal to do with it?
Professor ROGERS. I think immediately it h a d ; but the only alternative action, I maintain, was to allow us to continue in a period
of rising prices and go on to the ultimate limit which was found in
the German inflation. I do not think there is any other way to
stop it.
Mr. STRONG. The cause of our disaster came from inflation.
Professor ROGERS. The cause came from inflation, to begin with.
Mr. LEATHERWOOD. Should not deflation, then, have been uniform?
If we are going to deflate one class, why not deflate all of them?
Mr.

STRONG. YOU can

not

do

it.

Professor ROGERS. I t can not be done, so far as I understand your
question. Will you enlarge your question, please?
Mr. LEATHERWOOD. I have in mind this: To refuse to extend credit
to certain classes and certain lines of business, and induce other
lines to increase.
Professor ROGERS. I personally think that this discrimination as
between industries was very unfortunate.
Mr. LEATHERWOOD. D O I make my point clear?
Professor ROGERS. Yes; you do. I think that this discrimination
was very unfortunate, and I have the opinion that it was so discovered by the Federal Reserve Board itself, and was soon stopped.
I think it was very unfortunate, and that all businesses should have
been treated alike.
Mr. STRONG. I s it not practically true that whenever we have a
period of inflation at a time of war, the deflation must come; t h a t
you can not maintain the inflated value?
Professor ROGERS. There is only one case in which the deflation
did not come; possibly two. The one that I have in mind is the
German case, where the mark, as you know, was allowed to depreciate to practically nothing—four trillions to the dollar.
There is another case which is a possible illustration of this.
That is the case of Austria. The crown was allowed to depreciate
to the figure of 83,000 to the dollar. That was the lowest, I believe,
that it ever reached. I t then rebounded to 70,000 to the dollar,
thus becoming more valuable. They stabilized it at 70,000 to the
dollar, and it is still stabilized at that figure. Nevertheless, after the
stabilization came, there came what appeared very much like a
period of deflation in that country. I t was a period of a considerable
number of failures.
.Mr. STRONG. What was the crown normally? W h a t was the
ratio ?
Professor ROGERS. The crown used to be 20 cents.
Mr. STRONG. Five to the dollar?
Professor ROGERS. I t was 20.6; approximately five to the dollar.
And it is now, of course, 70,000 to the dollar, where it was stabilized
at the end of their inflation period.
They had a depression, which did not last very many months, but
a^ depression it was. Six months later they began to recover considerably, and they have run on practically as stable a price level as
we have since that time. I t is still stabilized at 70,000 to the dollar.




STABILIZATION

217

Mr. STRONG. Instead of depreciating the price level, they depreciated their yardstick in money?
Professor ROGERS. Yes, sir.

Mr. STRONG. They depreciated their dollar?
Professor ROGERS. Yes, sir; the crown.
Mr. STRONG. I t has been suggested that I ask you whether that
could have been accomplished without external help.
Professor ROGERS. I do not think so. Of course, it was accomplished by securing, through the assistance of t h e League of Nations,
a loan, and the proceeds of this loan were used for the purpose of
stabilizing the crown at that figure; that is, this loan was used in
certain foreign-exchange centers to buy up the crown whenever it
tended to depreciate beyond that figure.
Mr. STRONG. Then, as I understand you, the only way we could
have stabilized in this country at current prices after the war would
have depreciated our dollar?
Professor ROGERS. Yes; it would have depreciated the dollar.
T h a t is the only known way.
Mr. LEATHERWOOD. I S deflation to be desired through governmental
instrumentalities rather than economic law, working in the ordinary
channels?
Professor ROGERS. I t depends on what you mean by governmental
interference. The bill, as I understand it, provides that we give
the Federal reserve banks and the Federal Reserve Board a mandate to use their powers to stabilize the price level. I should say
that that was hardly a governmental interference.
Mr. LEATHERWOOD. W h a t I had in mind was this: I may not have
made my point clear. You were discussing a moment ago means by
which deflation was brought about, beginning in 1920, and I think
we will agree that the action of the Federal Reserve Board brought
about a very violent deflation in certain lines of industry.
Professor ROGERS. Yes, sir.

Mr.

LEATHERWOOD.

And in others it did not operate so violently?

Professor ROGERS. Yes, sir.

Mr. LEATHERWOOD. My question, though—I may have been -unfortunate in selecting my language—was whether or not such a deflation as that is to be desired.
Professor ROGERS. I think the deflation should be uniform. I
have expressed my opinion that that type of deflation is improper.
I t is the wrong way to get at the problem or to stop inflation, at any
rate.
Mr. STRONG. But the real solution of the problem is to prevent
inflation ?
Professor ROGERS. Yes; the real solution of the problem is to prevent the inflation, and then you have no problem of deflation at all.
Mr. LEATHERWOOD. But this is what happened in the community
in which I happen to live: They wiped the stock industry out of
existence, and at the same time encouraged the banks to make loans
upon warehouse receipts for automobiles.
Professor ROGERS. I did not know of that at all. I am very much
surprised to hear that that was the case in any town in this country.
Mr. LEATHERWOOD. I am stating to you the exact facts.




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STABILIZATION

Mr. STRONG. I want to say, for the benefit of my Federal reserve
bank, that they did put a stopper on loaning on automobile paper.
They did do that.
Go on, Professor.
Professor KOGERS. Having said a few words with regard to the
evils of instability, I think we might look for a moment at the advantages that we could expect from stability in the price level; and
I think, since we have had practically a stable price level since 1923,
under the regime which has operated since 1923, our discussion of this
point need not be altogether theoretical. If you will look at the
statistics of business beginning about March or April, 1923, you
will find that our volume of production has not only been larger
than we have ever had it before but in the years 1924 and 1925 it
has surpassed all estimates of what it should normally have been,
expected to be. We are running at the present time, I believe, about
8 per cent above what was expected if we had continued the same
normal rate of increase that had prevailed for the last 30 or 35 years.
We have found not only that the production has been great, but t h a t
the efficiency of our production probably was never higher than it
has been during the last year and the beginning of this year. A n d
not only has the efficiency been very high, but the number of improvements that have been put in in many of our industries has in few
years ever been exceeded.
Take, for example, the automobile industry. I think anyone who
has been accustomed to driving automobiles for the past five yeare
will recognize the extraordinary improvements that have come in
the last three years. Other industries—perhaps to a lesser extent in
most of them—have introduced also extremely numerous and important improvements.
Throughout this period, likewise, labor has in general been well
employed. The unemployment figures have not been large. Furthermore, the farmers have during this period gradually gotten over
their difficulties. They probably will not admit that they have
quite gotten over them, but at any rate their condition has improved
greatly, and it has improved by the gradual abandonment of some
land in certain sections and, of course, by the growth in the needs
of the country, with labor well employed and with business generally
prosperous. The needs for their products have gradually increased,
and we have now grown up to the production of the country, and
the farmers are getting along reasonably well again.
I think it is not worth while to talk more about the evils of instability or the benefits of stability; and I raise the question, then,
as to whether this bill will provide the stability which we seek.
I n my opinion it will, in large measure, provide such stability.
I say " in large measure," however. I think there are certain situations under which it would not provide stability. Certainly if a
great war similar to the last one broke out, we should not expect a
provision of this sort to take care of the rise in prices.
Mr. STRONG. Pardon me. Do you not think that if in the next
war instead of drafting just the man power of the country we should
draft all the resources of the country—money, railroads, and all
industries—we would come out of the war without the damaging
results that follow inflation ?




STABILIZATION

219

Professor ROGERS. Theoretically that seems very hopeful. I have
never yet seen a plan, though, for drafting all industry that appealed
to me as being a practical, workable plan, Mr. Strong.
Mr. STEONG. Well, it would be fairer to draft the material part of
it, it seems to me, or just as fair, as it would to draft human life.
Professor ROGERS. Yes; certainly just as fair; but I am not quite
sure that it is just as practicable.
Mr. STRONG. I n my first term in Congress I made that statement
on the floor of the House and got rather prolonged applause. I see
that it has been reiterated recently, and I think there is a good deal
of justice and merit to it.
Mr. LEATHERWOOD. I t would never be possible to test your theory,
Mr. STRONG. I hope not.
Mr. LEATHERWOOD. We never would get in.
Mr. STRONG. That is true. There would never be any war, as you
suggest, if we drafted all industry. I think you are right about that.
Excuse me, Professor. I promise I will not interrupt you again.
Professor ROGERS. I t is conceivable, likewise, that we might have a
period of an extremely reduced cost of getting gold out of the mines.
If we had, for example, a continued increase in the production of
gold over a long period, so that it was relatively a much cheaper
metal than it is at the present time, I do not think that a plan of this
sort could keep prices from rising indefinitely. I am quite sure of it.
Nevertheless, I do think this: That practically all of the so-called
cyclical movements in business which we have had periodically in
the past would be almost entirely eliminated by the passage of this
bill. I feel quite sure qf that.
Mr. STRONG. Professor, I promised that I would not interrupt
again, but I think it is fair to you, who have not been here during
all the hearings, to state that most of the political economists and
financial economists that have come before us have taken the position
that while this bill would under ordinary circumstances bring the
results that were intended, something added to the plan, such as the
Goldsborough bill, would help to do the things you have suggested,
and that it would also stabilize the production of gold, or stabilize it
in its use as money.
Professor ROGERS. Yes. As to cyclical fluctuations, I am of
opinion that we would get practical stability from the passage of
your bill; I mean for the periodic fluctuations that have come to us
every few years in this country; and it is only for the long-time movements of the price level that we would need to introduce the Goldsborough bill.
I therefore advocate most strongly the immediate passage of this
bill of yours, because it is the cyclical fluctuations that bother us
most frequently. If wTe need something else, I should say by all
means pass something else in addition; something similar to the
Goldsborough bill. But this bill consists of a simple provision which
I think can be made with little opposition from anyone, and will
nevertheless bring us pretty nearly the stability we need in ordinary
times.
I might say that the stability that has come since 1923, I can not
help but believe, has been brought about largely by the Federal
reserve banks, with the cooperation of the Federal Reserve Board >




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STABILIZATION

bringing it about deliberately, and in this way: They were naturally of the opinion that business should not be allowed to go off into
a period of inflation again, and they have therefore raised the discount rates much earlier than they did previously, and I believe they
did so with very widespread popular support; and now, until the
events of 1920 and 1921 have receded a little bit further into the past,
I believe the country would like to guard against this type of
happening in the immediate future.
That is all I have to say, Mr. Chairman.
Mr. STRONG. I would like to ask you this question for the record.
One thing that I have claimed for this bill, and in which the chairman has supported me, is that the very fact that a governmental
authority would direct the Federal Reserve Board to use all of its
powers—and by all of its powers I mean not only the powers of
rediscount but the open-market purchases and operations—if they
would use all the powers that they have for stabilization of the
price level, and the whole country at large, including all manner
of business, would know that that was the direction of the Government, would not that very thought, published throughout the land,
tend of itself to assist in stabilization ?
Professor ROGERS. I think that is very important, indeed. I think
that that would assist very greatly in the stability. There would no
longer be the incentive to speculate on prices rising.
Mr. STRONG. I have read in several of our dailies in the last day
or two where great credit was given for the reaction that so promptly
came after the violent fall in the stock market, to the Federal Reserve
Board for its announced policy. They give the Federal Reserve
Board credit for helping the reaction that came after the violent
fall in the stock market. Now, if everyone knew that the Federal
Reserve Board was going to be permanently directed to take that
action—not that they would take it at any specific time, but that that
was the direction of the Government—it seems to me it would tend
very strongly to emphasize to all business the fact that stability
was to be maintained, and that the psychology of that knowledge
on the part of the people would bring about stabilization more
readily. I may not put it in just the words that you would employ,
but that is my thought.
Professor ROGERS. Yes. I think at least many people attribute
some of the recent fall in the stock market to the anticipation of a
falling price level in the near future. I am not sure how widespread
that opinion is; but if there were no great rises and no great falls in
the price level to be anticipated, I believe that we should likewise get
rid of much of the rise and fall in the stock market itself.
Mr. LOMBARD. Mr. Chairman, might I ask Professor Rogers a
question ?
Mr. STRONG. If the professor does not object.
Professor ROGERS. Not at all.

Mr. LOMBARD. YOU come from an agricultural section. I would
like to ask what the effect of this bill would be on the farmers, and
in that connection I would like to direct to you the question whether
inflation and deflation do not, both—each alternately—have bad
effects upon farmers, peculiar to the nature of their business; in




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221

other words, whether instability does not work more definitely to
the injury of the farmer than almost any other class?
Professor ROGERS. I think that the injury is very great, but largely
because the period of readjustment is necessarily longer. During
the depreciation period in Europe I took occasion to visit practically
every country of inflated currency in which the prices had risen
so rapidly and for so long a period; that is, all of the countries of
eastern and central Europe, with the one exception of Rumania.
I n every single case the farmer prospered under inflation—in every
single case—and I think it is natural.
Mr. STARR. They paid off their debts ?
Mr. LOMBARD. The farmer prospered as much as any other class?
Professor ROGERS. He prospers not quite so much as 'most of the
business classes, but nevertheless he prospers.
Mr. STRONG. B u t then he loses all of the deflation ?
Professor ROGERS. I n the period of inflation he is overstimulated
in every case that I know anything about. Prices of land invariably
go up, and the enterprising farmer, the man that we like most to
encourage, is the man who is apt to buy land in larger quantities
than anyone else, and he is absolutely sure to get caught in a period
of deflation. He will be caught with high-priced land on his hands
which it is almost impossible to pay for.
Mr. STRONG. High-priced stock or high-priced implements?
Professor ROGERS. Yes; high-priced stock and high-priced implements.
Mr. STRONG. And high-priced help?
Professor ROGERS. Well, high-priced help is liquidated easier than
anything else.
Mr. STRONG. I know; but he has it on his hands ?
Professor ROGERS. He has it on his hands temporarily.
Mr. STRONG. And he can very seldom reduce the price upon it?
Professor ROGERS. Yes, sir.

Mr. LOMBARD. Directing your attention, Professor Rogers, to the
to the charts, with which you are undoubtedly familiar, showing the
situations in different groups of commodities, and taking the fluctuations in farm products as related to the fluctuations in the general
commodity scale, is it a fact that the farm products seem to drop
further and quicker, and to go back more slowly, under inflation
and deflation respectively?
Professor ROGERS. There is no doubt at all of that.
Mr. LOMBARD.- SO that the farmer is always at a disadvantage
under inflation and deflation with respect to the other producers of
commodities ?
Professor ROGERS. I n general. I t is not true with certain specific
types of producers, but the prices of farm products do tend to go
down faster. They are raw materials, and raw materials have a
habit of going down first and faster; and the farm products, because they are farm products, stay down longer than do others
because the farmer can not shut off production like the industrialists.
He can not, like them, close down and quit producing for a while.
He continues to produce, and, as I have said before, in larger volume
than ever.
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STABILIZATION

Mr. LOMBARD. Then, directing your attention to the agitation for
farm relief legislation now under consideration by Congress, would
you not say that the policy of stabilization would be, if not the
soundest, a very sound and very effective form of farm relief?
Professor ROGERS. I should go further and say it was the soundest
plan of relief for the farmer.
Mr. LEATHERWOOD. YOU mean stabilization?
Professor ROGERS. Stabilization; yes, sir.
Mr. STRONG. I wish the farmers of my district and all other
farming districts could hear jon say that, Professor; because I am
inclined to believe it myself.
Mr. LEATHERWOOD. 1 wish, Professor, you would give us your
view with reference to whether or not cooperation among the farmers
would have any tendency to overcome this inability on their part to
recover rapidly.
Professor ROGERS. I personally think that cooperation among the
farmers is very much to be desired. I think the cooperative marketing organizations for farm products, for example, promise to do
something to help the farmer. I think that they sink into insignificance in importance, however, compared with the gains that he
would get from stability in price le^ el.
Mr. LEATHERWOOD. But both of 'iiese methods would operate to
his benefit?
Professor ROGERS. Yes, sir.

Mr. LEATHERWOOD. The stabiliza' ^ n of prices and the perfection
of cooperative organizations?
Professor ROGERS. Yes, sir. I n 7\y opinion, they are very important in comparison with the incn isod credit schemes that occupied
the attention of Congress for so lo ^.
Mr. CANFIELD. I n your opinion, are we beginning a period of
inflation or deflation?
Professor ROGERS. I t is extremely difficult to say. The indications would lead one rather to expect deflation than inflation, though
we have had very little inflation, as you doubtless know. The price
level (Bureau of Labor index of wholesale prices) has been between
145 and 160 ever since 1923. I think that the low limit would be 145.
Mr. STARR. What is it now?
Professor ROGERS. I t is about 155 now.
Mr. CANFIELD. YOU think, then, that if this was the law, or if
the Federal Reserve Board follows out the suggestions of this law,
that any deflation that might be started at this time might be
stopped?
Professor ROGERS. Yes, sir. I think we might get a fall of a few
points, but if there was a concerted effort on the part of the Federal
reserve banks and Federal Reserve Board I believe that they could
relieve any tendency in that direction, especially if they announced
it immediately.
Mr. STRONG. Gentlemen of the committee, I stated at the beginning of these hearings that I wanted them to be very full and complete, in order that all objections that could possibly offer to the
bill might be presented to the committee. I have here a letter from
Mr. Paul Warburg, formerly a member of the Federal Reserve
Board, of 52 Cedar Street, New York City. I have presented it to




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STABILIZATION

the chairman, and he agrees with me that it should go into the
record. I t reads as follows:
N E W YORK, March

22,

1926.

M Y DEAR MR. STRONG : I t h a n k you for your letter of March 19 inclosing a
copy of H. R. 7895, introduced by yourself, and a copy of the Congressional
Record bearing upon t h a t bill.
While, of course, I s h a r e your view t h a t price stability is a thing devoutly
to be wished for, I regret to say t h a t I a m not in sympathy a t all with the
amendment t h a t you propose. No banking system, to my mind a t least, can
u n d e r t a k e to provide a stability of prices, and I believe it would be dangerous
to place the Federal reserve system in a position where the responsibility for
extreme fluctuations in price levels could be laid a t its door. N a t u r a l l y t h o s e
in charge of the F e d e r a l reserve system should always watch most carefully
fluctuations
in the price level and fashion the policy of the system as far a&
it is practicable so as to combat excesses of inflation or deflation; but t h e
powers of the central banking system in this regard a r e distinctly limited.
I n t e r e s t r a t e s may be a contributing factor in affecting price levels, but to
my mind they a r e only one of the m a n y factors of all t h e world-wide economic
forces a t play which in t h e end determine price levels.*
I hope t h a t you will pardon the frankness with which I have expressed m y
views as above, and with assurances of high esteem, I am,
Very sincerely yours,
P A U L M.
Hon.

WARBURG.

J A M E S G. STRONG,

House of
Representatives,
Committee on Banking and Currency,

Washington,

D. C.

Professor Rogers, would you like to make any comment on that
letter?
Professor ROGERS. Yes, sir. I agree with Mr. Warburg to this
extent: Of course, there are many factors determining the changes
in the price levels. For example, you can not say that the interest
factor is entirely responsible for changes in the price level. But I
do not think that that means that we can not correct through interest
rates many of the changes in prices that are due to other causes.
For example, suppose that prices were rising for any reason whatever. We have had them start rising from time to time, although
the rise may have had nothing to do with what the interest rates
were at that particular time. If, however, interest rates were raised
considerably, it would make it extremely difficult and more expensive
for business to expand, and therefore for the boom period to get
under way, and consequently I should say that raising of the discount rates by the Federal reserve banks, and the issuance of a statement that that was to be their policy, with the idea of cutting off this
rise in prices, would do very much toward cutting off the rise after
a very short time.
I think that Mr. Warburg has overemphasized the fact that the
other causes are real causes for the rise, and therefore that we can not
correct it with a change in the interest rates. I do not accept his
conclusion. I think we can correct it very frequently when the
causes are different from the means we use for correction. I am
very sure that this is true, for example, as to the provisions of the
Goldsborough bill. I am sure that in spite of any rise in prices,
from any cause whatever, you can correct it if you adopt as drastic
provisions as those of the Goldsborough bill; and I maintain t h a t
in all ordinary cases the provisions of this bill will do it. You may
find a case once in a while when it does not correct it completely,
but in all ordinary cases this will do it for the cyclical fluctuations
which bother us so much.



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STABILIZATION

Mr. LOMBARD. You mean that this bill will do it %
Professor ROGERS. This bill will do it.
Mr. STRONG. I n other words, business will not speculate?
Professor ROGERS. That is true.
Mr. STRONG. If they can not get money, or if the rate at which
they get money is almost prohibitive?
Professor ROGERS. Yes.

Mr. STRONG. Another thing I would like to point out. A good
many critics of the bill seem to take into consideration the proposition of the regulation of the discount rates, but do not seem to grasp
the last two lines of my amendment, which read:
All of the powers of the Federal reserve system shall be used for promoting
stability in the price level.

By which I mean to include their open-market purchasing powers
and all other powers that they may have, of advice, extending credit,
publicity, and so on: that they will not permit the iise of the Federal
reserve system for the purpose of assisting inflation.
Professor ROGERS. Yes; I think it is very important that these
last two lines be left as they are, because I am sure that both publicity and open-market operations of the banks are very important.
Mr. LOMBARD. Professor Rogers, it has been suggested that those
two lines be amended to read:
All of the powers of the Federal reserve system shall be used for promoting
stability in the price level, so far as may be, by preventing inflation and
deflation.

Would you consider the addition of the extra words desirable?
Professor ROGERS. Well, as making the mandate a little bit more
specific, perhaps.
Mr. STRONG. And as being a little plainer to the public in general.
Mr. LOMBARD. And by expressing the further purpose to which
you have adverted by inserting the words " so far as may be."
Mr. STRONG. I am not claiming any originality of authorship in
this matter. I only became very much interested in directing the
Federal Reserve Board to use all its powers to maintain stability
of prices (or the stability of the purchasing power of our dollar,
which is the same thing), according to the language in the bill, in
order to go before the country with the very best thing possible,
and I am willing to accept all amendments that will work to that
end.
Professor ROGERS. If you can get it through Congress, you will
have contributed the greatest part of the work.
Mr. STRONG. I appreciate that. I t is a little like the proposition
in Kansas relative to the prohibition question. We gave the people
prohibition, and the next thing is to make them like it. I have introduced this bill, but whether I can persuade this committee and
the Congress to vote for it I do not know.
Mr. LEATHER WOOD. With respect to prohibition, we really have not
tried it in the United States, have we %
Mr. STRONG. Well, that may be so. On behalf of the committee,
I desire to thank you, Professor.




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225

STATEMENT OF WESTERN STARR, REPRESENTING THE NATIONAL
COMMITTEE OF THE FARMER-LABOR PARTY
Mr. STARR. I reside in the District of Columbia. I am a retired
farmer, and I represent the national committee of the FarmerLabor P a r t y here to-day.
The subject is big, and it is round, and it is a little difficult to
tell just where to take hold of it. But I want to start in by saying
that I regard it as a great advantage that I had an opportunity to
hear Doctor Foster yesterday. That is one of the compensations
that I have for coming in at the tail end of the procession. I was
tremendously impressed by two points that he made, and one was
that it is within the power of Congress to correct and remedy the
situation which periodically oppresses the country by reactions from
inflation, and the other thing was that nothing that Congress could
do would be a placebo for the situation under the present system
of Government finance.
If you had taken Doctor Foster and put a scarecrow suit of
clothes on him and let his beard grow for a week and put him on
a soap box and station him on the corner of Halsted and Madison
Streets in Chicago and let him say what he said here yesterday in
a dialect that would be understood in that section of Chicago, he
would have been arrested as a Bolshevik. There was never a more
revolutionary or dynamic statement than he made here in answer
to a question of Mr. Beedy, of Maine. Mr. Beedy sought to draw
out the social implications involved in the consideration of this
question, and Doctor Foster stated that it was entirely within the
power of Congress to remedy the conditions out of which the social
discontent was appearing periodically to the people and making
trouble all over the country, growing out of the fact we had stimulated and pyramided our productive power at the expense of our
consumptive power; that the people did not have money with which
to buy until the prices got at a point where they were able to buy.
He also stated that the country had been proceeding—I think he
said it and if not I have seen it recently in a reliable publication—
that the country had been living from hand to mouth, and that this
process of living from hand to mouth had been going on for years,
owing to the uncertainty of the future. Nobody can tell what is
going to happen.
Right here I want to ask permission to see the reply wThich may
be made to the statements before this committee, by representatives
of the Federal Reserve Board when they come in. I was impressed
with the letter in which they reserved the right to withhold their
statement until after every one else had gotten through; that is, the
economists and others who might appear before the committee, and
I should like very much to have an opportunity to answer, in case
there is anything worthy of answer, that appears in the statements
of the representatives of the Federal Reserve Board.
Mr. STRONG. I want to say, in the interest of getting all the facts
on this question before this committee, that I have requested the
chairman that, after the opponents of the bill had been heard, those
who believed in it should have an opportunity to make a reply and
he has assured me that that opportunity would be given.




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STABILIZATION

Mr. STARR. NOW, on the bill itself, I wish to say that, as a declaration of policy, I and the people whom I represent, most cordially
approve of such a declaration of policy, but we feel that the measure
as presented here and as now under discussion, is so lamentably
short—falls so far short of possible accomplishment, that we insist
upon amendments to the bill or abandonment of the bill in favor of
an entirely different proposition.
Mr. LEATHERWOOD. I did not understand what farm organizations
you represented.
Mr. STARR. The Farmer-Labor Party.
The bill is a matter of advice—a declaration of policy. I t offers
nothing. I t offers nothing that was not promised to us before the
Federal reserve bank bill became a law. I n the first place, with
respect to the Federal reserve act, we were told this was something
that would save us from the economic domination that we are confronted with all the time; that it would prevent panics and lockouts and stabilize currency and give us a flexible currency that
would meet all the demands of commerce; that it was the one thing
that the world had been looking for and we must have it, and they
even got William Jennings Bryan, who had been fighting the principle involved in the Federal reserve bank bill all of his life, to go
personally and dragoon Members of Congress and the Senate of the
United States in his party to support the bill; and if it had not
been done it could not have been passed; and he said, before he died,
it was the one thing he had done in his public life that he regretted
having done.
Mr. LOMBARD. Can you quote us the passage where that can be
found?
Mr.

STARR. I can not

say

now.

Mr. STRONG. Will you find that and place it in the record at this
point ?
Mr. STARR.

Yes.

(The matter referred to is as follows:)
[ E x c e r p t from, " M y Forecast on Next Year's Election, by William J e n n i n g s
Hearst's I n t e r n a t i o n a l Magazine, November, 1923, page 23]

Bryan,"

The Federal reserve bank that should have been the farmer's greatest
protection has become his greatest foe. The deflation of the farmer was a
crime deliberately committed not out of enmity to the farmer but out of
indifference to h.in. Inflation of prices had encouraged him to buy, and then
deflatiaon delivered him into the hands of the money lender. The Federal
bank can be a blessing or a curse according to its management. If the Wall
Street speculators are in control of it they can drain the agricultural districts
and keep up a fictitious prosperity among the members of the plunderbund.
While the Federal reserve bank law is the greatest economic reform
achieved in the last half-century, if not in our national history, it would be
better to repeal it, go back to old conditions, and take our chances with individual financiers than to turn the Federal reserve bank over to Wall Street
and allow its tremendous power to be used for the carrying out of the plans
of the Money Trust.
As to Mr. Bryan's influence in securing the enactment of the Federal reserve bank bill, see the statement of George Creel in Harpers' Weekly of
June 26, 1015.
[Article by George Creel.

Page 605, H a r p e r ' s Weekly, J u n e 26, 1915.
" Commoner " ]

On t h e

Go to any of the Washington correspondents, regardless of the paper he
represents, and ask as to the services of Bryan. There is not one who will




STABILIZATION

227

refuse to give him full credit for the legislative achievements chat go to make
up the administration record. As far as the party was concerned, Woodrow
Wilson was without influence, save for the patronage he possessed.
It was Bryan who whipped Congress into line on the tariff bill, on the
Panama Canal tolls repeal, and on the currency bill.
The statement by Mr. D. F. Houston appearing in the World's Work of
April, 1926, under the title " Girding the Nation for war," to the effect that
the Federal reserve bank system was necessary in order to assume control of
credit, is in point as to the motives for enactment of the law.

I do not know whether it would be worth while for this committee
to get a picture of what is in the minds of the men who are members of the Farmer-Labor P a r t y as to what the Federal Reserve
Board is; just what its place is in the scheme of things in this country, but it will take but a minute and I think I had better do it.
They knew of the panic of 1907 and know what made it. They
know that out of that hand-picked and hand-made panic, engineered
by the House of Morgan for the purpose of giving the United States
Steel Co. an absolute monopoly of the production and price of steel
in this country, the Pujo committee came into existence. There had
been so much noise about the Money Trust, and Woodrow Wilson
had received political preference on the scheme of a " new freedom "
which would enfranchise America, at least from the domination of
the Money Trust, that the Pujo committee was appointed and its
express mandate was to investigate whether this country was dominated by a money trust or not.
Mr. STRONG. Will you state at this point who the Pujo committee
was appointed by and its composition ?
Mr. STARR. I will have that inserted at this point and will cover
both the committee and its functions.
(Read from report of the committee.)
That committee sat and deliberated for many months and finally
made a report, and it reported that there was an unlawful money
trust in operation in the United States. But it did not stop there.
I t went on and named the men who constituted the Money Trust
and said it was J. Pierpont Morgan & Co. for one; the National City
Bank for another; Lee Higginson & Co., of Boston and New York,
for another; Kidder, Peabody & Co.; and Kuhn, Loeb & Co.
Well, now, as it looks to us, here was a denunciation of criminals,
men who had been conducting criminal operations in the fiscal
markets of this country for years, and they were denounced as criminals, and that was notice to every district attorney in the United
States that they were liable to indictment and punishment.
Mr. STRONG. What year was that report ?
Mr. STARR. 1913. The record will show it. I will have it i o r you.
Then, to go back a little, these men had to quit their criminal
operations or else find a sanction in a legislative act that would
legalize their unlawful operations. Naturally, they did not want
to quit. They had a great deal of money invested in that kind of
business and wanted to keep going on with it and wanted to continue
to control the power to regulate rates of interest and say who should
have credit and who should not have credit and on what terms.
Just one illustration of their power: When Carnegie had gotten
tired of running the steel business and wanted to devote his time
to philanthropic enterprises, he made up his "mind to sell out, and
there was another man engaged in the same enterprise who could




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STABILIZATION

use his plant, Mr. Frick. Mr. Frick offered Mr. Carnegie $1,000,000
for an option and Carnegie offered to accept $100,000,000 for his
property, and Mr. Frick put up a million dollars as earnest money
for a year's option on that proposition.
Well, Mr. Frick felt very large about it and immediately hopped
a train and went to New York to see Morgan. He said, " I have a
world beater here; come in and put in some money to finance it, and
v e will divide the world between us." I can not repeat the repartee
that crossed the board between them, but this is the substance of just
what happened: Morgan said, " Oh, no; you are wild; you are foolish. There is not enough money in it to finance it on a basis of
$100,000,000. Talk about $40,000,000, perhaps, but not $100,000,000."
Well, he had agreed to pay $100,000,000, and he did not want to
lose out, so he went across to England and talked to the Barings
about it and talked to the Bleichrhodens in Berlin and the Eothschilds
in Amsterdam and Paris, but nothing doing. At the end of the year
the earnest money of $1,000,000 was forfeited. And, by the way,
from that day on Mr. Carnegie and Mr. Frick never spoke to one
another. I presume they are on speaking terms now.
Mr. STRONG. Let us hope so.
Mr. LEATHERWOOD. That is on the basis they reside in the same
place.
Mr. CANFIELD. D O you not think the Federal reserve act has stabilized the banking in this country
Mr. STARR. N O .
Mr. CANFIELD. I

judge from your remarks that you figure that the
bankers wanted this Federal reserve system.
Mr. STARR. The banks are for it ?
Mr. CANFIELD. The men you refer to—the financial interests.
Mr. STARR. Yes, sir.
Mr. CANFIELD. Well, then,
Mr. STARR. They did not

why did they fight it so hard?
fight it. Paul Warburg was the man
who originated the scheme and brought it here from H a m b u r g for
the purpose of putting it over on the American people.
Mr. LOMBARD. Mr. Starr, did not the great majority of the commercial bankers of the United States oppose this act in its inception?
Mr. STARR. Most of them until they had a party—they started it
with the Aldrich-Vreeland bill five years before it passed. I t took
five years of moral suasion to put it across. I was asked by my little
/
banker on the Eastern Shore what I thought about it.
Mr. CANFIELD. The bill they wanted was a different bill from what
passed.
Mr. STARR. Paul Warburg said it differed only in one particular;
and while it did not contain all they wanted, that could be corrected by " administrative processes."
But to get back to the steel matter. Frick found out he could not
finance it for $100,000,000, and only a few weeks after the option was
forfeited the commercial world was startled or surprised by the
organization of the Steel Trust at $1,100,000,000, and they put in a
lot of old shotguns and broken-down buggies and recapitalized it at
$1,400,000,000, and they sold the stock. At our time it sold ai 10
cents on the dollar, and now it is $120 a share. Those Farmer-Labor
people out in Kansas, Nebraska, and Illinois who had to stand an




STABILIZATION

229

increase in price from a dollar a keg for nails to $5 saw that, and
those who had to buy barbed wire for fences saw those things.
Now, the Federal reserve act was passed, and they put one of the
men that had been denounced as a criminal in charge of it. Paul
Warburg, a member of the firm of Kuhn, Loeb & Co., was put on the
board to run it. That is what the farmers of this country saw and
now think about your Federal Reserve Board. They may be away
off; they may be very much mistaken. These men may be as patriotic as the Angel Gabriel and all right, but the farmers of this country do not think so, and the labor men of this country who do not
stand in and get a slice do not think so. That is the situation with
respect to the Federal Eeserve Board.
Now, as to the question of raising and lowering of discount rates,
I want to make my illustration as clear as I can. Assuming that
there is a definite amount of physical commodities in the worJd—
and call that revenue; that which is created from day to day—there
is a constant stream of it flowing from production to consumption,
matched, or supposed to be balanced by a normal volume of purchasing medium.
Now, if, for any reason, some one has power to injeci into the
current of purchasing medium a volume just as great as there was
before, it means that the purchasing medium is cheapened by onehalf. I t takes twice as much of it to buy the physical commodities
which we consume. We have given the Federal Reserve Board the
•power to put just as much of the circulating medium into the current as they desire or as their self-interest dictates; and they do it
at will and do it all the time unless^ for their own purposes, they
take it out.
Mr. LEATHERWOOD. What power would the bill, which we have
under consideration, confer upon the Federal Reserve Board that it
does not have at present?
Mr. STARR. Absolutely none. That is what I am coming to now.
These men may be just as patriotic after the passage of the bill,
just as public-spirited and honorable after the passage of this bill
as they are before, but we can not expect them to be any more so—
certainly not from anything which is contained in the bill. There
are no mandatory propositions here. I t is merely an advisory
proposition.
Mr. STRONG. There is this mandatory proposition, that the power
of the Federal reserve system shall be used for promoting stability
in the price levels.
Mr. STARR. That is what they are supposed to be doing now.
Mr. STRONG. But they have not been directed by that mandatory
provision.
Mr. STARR. Of course not, because in so far as they have used
their power to prevent inflation they have done it because they know
one more example like 1920 will throw them out into the world. I t
is a case of enlightened self interest going as far as you dare and not
getting caught. I do not think there is any question about it.
I want to see this bill modified in such a way that any boy who
has gone far enough in school to use quadradic equations or a sliding
rule can tell every day in the year just exactly what the course of
prices is or ought to be.
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16

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STABILIZATION

Mr. LOMBARD. Would Mr. Starr be willing to insert in the record
something in the nature of a bill that will accomplish that purpose ?
Mr. STARR. I have not drawn it, but I was going to outline it, and
if the chairman desired, to put it in form.
Professor Fisher is entitled to an immense amount of praise for
the way in which he has modernized the index number. There is
nothing new about the index number and I think Professor Fisher
has so stated in some of his public works; but he is applying it to
a new and different use. You can take the average price level of
to-day, if you want to, and the country will very soon adjust itself
to it; but there is another angle that I want to go into a little later
on. If you take an average of two or three or four hundred commodities which are standard commodities, most largely dealt in, and
cover a period of a week, a month, or a year, or 10 years—and you
can take any 10-year period you want—and take the average price
level for the 400 commodities for 10 years and establish that as a
unit of value—not a unit of weight but a unit of value, as determined after centuries of experience—you will have a fixed fact, as
absolute and unchangeable as Gibraltar. I t will have all the gravity
of natural phenomena.
Mr. STRONG. Suppose during the 10 years we had a period of inflation and deflation.
Mr. STARR. Suppose we had both; suppose we tried to treat every
one alike and not get an edge on the fixed-income man and not take
it out of the speculative man; let it stand. I t will stand, as Professor
Rogers stated, it is about 155 now.
Suppose we make whatever £he index shows, par—110 or 96. That
is our standard. I t will be like the meridian of Greenwich that all
the world measures from on the question of longitude.
Now, here is this boy with his sliding rule. The market reports
are published every day, and it may be in some one given market.
Take New York or Chicago—I do not care which you take, as one is
just as good as another, providing it covers a range of commodities
sufficient to give a fair example of what the price level actually is.
Any school boy with a slate and pencil can tell whether the price
is going up or below the fixed standard, and he knows what i£ going
to happen.
Suppose we fix the standard at par, 100, and the price level goes
1 per cent u p ; that means one of two things and only one of two
things. I t means that there is a general scarcity of commodities
being felt, or it means that there is too much circulating medium
in existence, and when I say circulating medium, I mean credit as
well as actual coin or paper bills, just as Professor Foster made an
inclusive use of the term money or currency. But Professor Foster
did not go to the point that 0,8 per cent of all commercial transactions now in the world, and the United States particularly, are done
,m credit and not with money at all. I n 1917, 1918, 1919, and 192C
in the New York City clearing house, for every thousand dollars
of clearings that passed in those four years, only $1.87 cash was
used.
Now, with 98 per cent liquidated by the use of credit instruments
the credit factor is the important factor.




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231

The credit factor is the lash on the dog whip. The money is the
handle of the whip, and the credit is the lash. Why, it seems to
me perfectly simple that where a man calls himself a banker and
accepts $100,000 deposits to safeguard and keep and protect, from
his patrons, and he has discovered that this depositor is not going
to come in and get all that money in any one day and he can lend
five times the amount of his deposits and be safe—and that is the
banker's whole business, selling credit, and credit does not rest on
money; it rests on goods. Professor Laughlin, who, it will be admitted before this committee, at least, is a competent expert on
finance, has stated that credit rests on goods and not on money; a
banker is a glorified pawnbroker, and you will not get any credit
from the banker unless you put up stuff to cover it.
Emory Stores was a great wit and after-dinner speaker. He had
some habits that interfered somewhat with his highest success in the
world. But he attended a banquet. Lyman J. Gage was there. Mr.
Gage was the president of the First National Bank of Chicago, the
Standard Oil Bank in that central part of the country, and while
president of that bank, represented Eockefeller, and while Secretary
of the Treasury, he sold the subtreasury in New York City to Rockefeller. That is only by the way.
This man Stores was at the banquet and made a speech, and
Lyman J. Gage made a speech, patting the country on the back,
stating that the country was prosperous and money was easy and
interest rates were low and anybody could get money. So Stores
went into the bank the next morning and happened to see Mr.
Gage, and he said:
" Well, do you still think that times are good and money is easy
and anybody can get money ? " " Oh, yes," he replied. " Would
vou lend me some money? " " Yes; certainly." " W e l l , let me have
$10,000." " Yes; $10,000? What do you propose to put up as collateral ? " " Collateral ? Why I have not said anything about collateral," said Stores. " Oh, it is not money that is scarce; it is collateral that is scarce."
That is the way it is with every banker in this country; unless
you have the collateral you can not get the cash.
Now, the injection of credit into the flowing tides of business in
1916, 1917, and 1918 was deliberate and intentional. I t was a war
measure. I t was intended to stimulate production and speed up the
wheels of industry and set everybody in a good humor and make
everybody believe they were going to cash in, and they succeeded to
the extent that little tanneries up in New Jersey bought shiploads
of hides to tan on credit. They were doing a guaranteed, cost-plus
business. They got them going so hard they could not stop. They
could not stop when the war ended and ran on until 1919, and in
1920 there began to be a question of how far they should go. In
1919 and 1920 things got—well, a little jumpy, and here are the
minutes of a conference with the Federal Reserve Board of the Federal advisory council and the directors of class A banks of this
country, held in Washington, D. C . on May 18. 1920, in which,
over the protests of some of their own members, secretly and under
orders of secrecy, they decider I to deflate. There were reasons.




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STABILIZATION

Some of the great employers of labor felt that they were paying
too large a share of their income in the form of wages. They had to
reduce wages the first thing.
Now, in order to reduce wages they had to cut the cost of living.
They could not reduce wages until they cut the cost of living. T h a t
meant they had to hit the farmer first. Tha^ was the first step, and
God knows they hit him.
One of the directors of the advisory board of the Minneapolis
bank told this meeting here:
Our bank is making $10,000 a day, net velvet, and we can not offer these
people this rule; we can not knock them in this way and bring ruin and starvation and death to the people who are dependent on us.
But that was only one voice crying in the wilderness.
Mr. LOMBARD. H e was a farmer, too ?
Mr. STARR. Yes, sir. Here is a member from Texas. H e said:
It is reported that we are making i00 per cent per annum on our capital
investment, and I can not recommend that we act too savagly here. We ought
to proceed more gradually and give people time to settle down gradually.
This is monstrous.
I will read you what he said here. I think I can put my finger
on i t :
We should be careful, however, not to overdo this matter of liquidation,
because too drastic a policy of deflation, which might result in crowding to
the wall and throwing into bankruptcy legitimate enterprises, however unessential their operations may be, would have a tremendously bad effect and
would defeat the purpose of the very policy which we are trying to have established. There must always be a wise and discriminating judgment used.
I will give you the name of the man in a minute. I do not know
that it is important, but it is here and I presume you have all seen it.
They know perfectly well, as Professor Foster said, they must not
allow it to come again.
This is Mr. McDowell, of North Dakota, who says, on page 29 of
this report:
It seems to me that now is a poor time to penalize the little fellow, and I
am afraid we are just going to create a little more unrest out in the Northwest, where socialism has got such a strong foothold now, if we do not look
at this thing not from any other standpoint except that of safety. The Federal Reserve Bank of Minneapolis is making $10,000 a day. Is that profiteering when they have been using our money without any interest ever since it
started? Is the Federal Reserve Board going to be put in the same class as
the sugar profiteers and the manufacturer who has been making big money?
T h a t is the time when they had sidetracks in Kansas loaded down
with sugar they did not dare to bring out on the market for fear it
would bring down the price of 24 cents per pound.
Then there is this man from Texas, whose statement I want to
read here. This is Mr. Scott, of the Federal Reserve Bank of Dallas,
district No. 11, quoted on page 35 of this report:
We can not hope to correct this situation in a day or a month or six months;
we have got to go at it in a sensible way to bring it about in a gradual way,
rather than to attempt to correct it within a short period of time. The Federal
reserve banks have been charged with profiteering by reason of the rates they
are now charging. We are making in the neighborhood of 100 per cent on our
capital. We know that any increase in the rates is passed on to the consumer
and has a great deal to do with adding to the burdens of the high cost of
living, so that I say a great deal more good can be accomplished by educating
the business man and the people than by simply putting in higher rates.




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233

These are Federal reserve bank officials who make this statement
in protest, overridden by the statements, philosophy, and arguments
of W. P . G. Harding.
Mr. LEATHERWOOD. D O you think that decision of that famous
meeting held in Washington, in which they decided to issue this
order, had anything to do with the gathering in, soon thereafter, of
millions and hundreds of millions of securities of the little holders?
Mr. STARR. My dear sir, it is only another illustration of the practice that has prevailed for more than 2,000 years. I t has been the
practice of what you might describe as the moneyed class for more
than 2,000 years to create alternate periods of high and low prices,,
buying when things are low and creating artificially stimulated high
prices on which they sell out, only to create another period of deflation on which they buy in. That has been the practice. We have
had 16 different periods of that kind in our own history as a Nation
of less than 150 years.
Mr. LEATHERWOOD. Could it be possible that the method of
financing the war took that into consideration—the method of selling
securities in small amounts ?
Mr. STARR. W h a t was the bait and stake ? I have it stated here in
a statement I made before this committee on the 29th day of J a n uary, 1923, and I can quote it more quickly and readily than I could
describe it. I said, at page 133 of part 2 of the hearings before the
Committee on Banking and Currency of the House of Representatives, Sixty-seventh Congress, fourth session, on the bill (H. R.
11788) to stabilize the purchasing power of money
Mr. STRONG. The Goldsborough bill ?
Mr. STARR. Yes, sir. This is what I said on that occasion:
There is a purpose running through all this. I do not see how a reasonable
man can escape the conclusion that the very basis of all responsibility in individual or in social life is the legal and moral principle that a man is supposed
to intend the natural consequences of his conduct. There was this to be done:
The law of supply and demand had been utterly abolished until the time came
to spring the trap and the word was passed. The prize was a 15 to 20 per
cent scalp on $26,000,000,000 of Government bonds—the equities in $80,000,000,000 of mortgaged homes and farms, the stocks and bonds of $50,000,000,000
corporate industrial and public utility plants, the daily wages of 40,000,000
industrial workers, and the produce of more than 6,500,000 farms and ranches.
It was a matter purely of credit control.

I can remember the financial panic of 1857 and I remember what
happened to the people in the town in which I lived out on the Mississippi River. I t was a steamboat town, a lumber and saw mill
town. The town was, at that time, of perhaps 5,000 or 6,000 people,
and the whole town went broke. Every mill shut down and the
steamboats quit running. There was absolutely nothing they could
do to earn a living. They were down and out.
That was only one of them. But I remember every one since, and
I remember that every last one of them has been caused by precisely
the sam'e cause, brought about by precisely the same cause—restriction of credit and the 'cutting down of the ability to utilize opportunities that lie all around us.
I t seems to me it is an insane kind of civilization which has developed this phenomena—the scientific capacity to produce, as Professor Foster has said, 50 per cent more than we are now producing;




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STABILIZATION

things that administer to human desires and needs and add to the
comforts of life and that everybody wants, but nobody can get, except the favored few—all because there is a power in the land that
says:
This mill shall run for this period of time; all mills shall run for so long
and then they must stop.

Mr. LEATHERWOOD. Are not the people of all classes in the United
States at the present time pretty well fed and clothed ?
Mr STARR. Pretty well fed and clothed, did you say ?
Mr. LEATHERWOOD. Yes; and housed.

Mr. STARR. I want to answer that by saying yes and no. Most of
the clothing that you see is bought on the installment plan right
here in Washington. All the automobiles and all of the homes are
bought and furnished on partial payments; and the people have
mortgaged their future to live in the present.
Even opium would not enable a men to invent a system of that
kind.
Now, I have here a statement by a man by the name of Soddy.
Mr. LEATHERWOOD. I take it that what you think we need is to
curtail the powers of the Federal Reserve Board rather than expand
them?
Mr. STARR. I want to take it out of the discretionary power of
anyone. I do not think it is a safe thing for anyone to have discretionary power that he can use to his own advantage at the expense
of the general public. We are like a community that has established
a settlement in some beautiful and fertile valley, and instead of each
family digging their own well we have decided to dig a community
well and put in a town pump. Then we have turned the town pump
over to a bully who squats on the spout of the pump and says,
" Nobody can get any water out of here until I get all I want and
can use—I and my friends." We have turned over to private individuals the power to operate the most important function of t h e ,
Government, outside of the power to make war. We have deliberately handed over t o these mei^ the power to tax the people and
impose that tax at their own discretion.
I t was the Federal reserve system that discriminated between sections and classes and industries and that brought ruin on the whole
Northwest. And people do not need to think because the Northwest
suffered and they did not happen to feel it for the moment, that they
are immune, because you can not take a gallon of water out of a tub
and leave a hole there. The water will be distributed levelly all
over—not only America, but the whole world. The great losses and
destruction of the World W a r are gradually being leveled out over
the whole economic world.
That brings me to what I want to say about the possible effects
of this bill. The United States, since the armistice, has loaned and
advanced to England, Belgium, Germany, France, and Italy,
money—hundreds and thousands of millions of dollars. The private
loans now outstanding, of which American financiers are the creditors and the European nations the debtors, amount to about $11,000,000,000, and that is over and above the Government loans which
amount of $12,000,000,000 more.
The Dawes plan—they will not say it in those words, but it is a
fact and they recognize it now—is a program under which credit




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235

control can be exercised by a combination of English and American
bankers over the entire industries of the civilized world—of Europe.
I t means that if you will be good, if you will come in and join the
system and stand for the gold standard and play the game according
to the rules we set down, we will take care of you; you shall have
advarices and loans, but if you do not
Mr. LEATHERWOOD. I noticed quite recently a distinguished United
States Senator announced that these private loans will never be paid.
Mr. STARR. I understood that—except at the cost of a great war in
which America would be the loser. I do not hesitate to say this,
because I believe it is absolutely true. The nations for whom we have
made sacrifices despise us and hate us and abhor us; you can not
go to a music hall or read a comic magazine published in any one
of those countries in which they do not hold us up as a Shylock and
robber. I t is because our foreign policy is dictated, not by the people
of this country but by the bankers, by the credit monopolists of this
country, and if we are ever going to get away from that feeling of
detestation and hatred which they feel against us and which, if it is
allowed, will grow into a war, compared with which the last war
was a Fourth of J u l y picnic, we have got to take our domestic
affairs and foreign affairs out of the hands of these old men of the
sea
Mr. LEATHERWOOD. D O you think they are the men who are urging
Congress to forgive the foreign debts ?
Mr. STARR. Yes, sir; to forgive the first mortgage so that their
second mortgage will then become a first mortgage.
Mr. LEATHERWOOD. But they have not got very far with that,
have they ?
Mr. STARR. I hope they will not get very far. They seem to have
unlimited power, however, and I do not know what they will be
able to do.
We have $346,000,000 of Uncle Sam's money, but it is not drawing
interest from anyone. Every Federal reserve note you have in your
pocket draws interest for some one.
This is from the New York Times of January 5, 1925:
The old " greenbacks" which came out shortly after the Civil War should
be retired in advance of the natonal bank notes, according to the American
Banker, which states that the $340,681,016 of " greenbacks " now in existence
are nothing but pure fiat currency.
As they pass from hand to hand they serve as a constant reminder to
economic cranks—

I suppose I am one of those—
and so-called political progressives that the State can manufacture its money
on the printing press, according to the publication.

That is a horrible and ghastly idea that society can print its own
money, and they want to get it out of sight and maybe the people
will forget it after a while.
At the feast of sound currency they are a perpetual death's head. If the
purging of our currency should begin anywhere it should begin right here.

Now, here is another interesting paragraph:
The grisly phantom of bimetallism likewise stalks the land in the form of
silver dollar and the silver certificate. Here, again, is another germ of
ancient disease of the currency. The chance to get rid of silver once and
all has come and gone. The Treasury sold most of its silver to Britain




the
an
for
for

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STABILIZATION

use in India at a splendid price. The Senators from the silver-mining States,
however, were permitted to gain their pound of flesh; the Treasury has been
compelled to acquire its archaic store of silver at prices above the market
rate. Some day this anomalous situation must be rectified unless the gold
standard is to be abandoned.

Mr. LEATHERWOOD. That must be the source of opposition to the
Pittman Act.
Mr. STARR. Probably; the American Bankers Association, the
currency manufacturers and credit makers. Surely they do not
want anything in the shape of money around unless they get a
whack out of it.
I n speaking about our relations with foreign countries, the world
to-day is an economic unit, made so by the fact of credit. I n the
earliest stages of society, the earlier States were little city States
where you could walk to the center carrying produce with which a
man paid his taxes, and get back home the same day. T h a t was
way back in the old barter period. A little later, when the earliest
money was copper and bronze, that extended the realm, because of
the facility or ease of making payments. When they got silver,
they developed to the point where they could create a kingdom and
when they got gold, great values could be conducted in a narrow
bulk and they established empires. We have established credit as
a means of payment which can be handled by wifeless and is handled by wireless and made the whole world one economic unit and
my judgment would be—I know this man who writes this pamphlet
stands in the scientific world in England exactly where Professor
Foster stands in the scientific and economic world here. H e is a
teacher and lecturer in Oxford University, and he has discussed this
subject from the purely scientific point of view.
I should like to see a group of men selected, not for a disarmament
conference but for a sound, rational credit-control conference, by the
leading scientists of Europe, in cooperation with our scientists, and
then I should like to see a policy adopted, under which an international standard of value would be established to be maintained
in the markets of the world from a central source of information.
This will some day come.
Mr. LEATHERWOOD. Will the features of # the proposed act that
you intend to submit to the committee, reflect these features?
Mr. STARR. I t will reflect my views. I question whether it will
be possible, under present conditions, to get the men who have the
power to do it, to unite in the enactment of any such provision. 1
question whether it would be possible to get such a bill through.
Congress can enact legislation that will automatically regulate this
situation. I t will take out of the discretionary control of any individual, or group of individuals, the power to regulate credit.
Mr. LEATHERWOOD. That is the thing that appeals to me as very
interesting. I would like to have you, when you come to revise
your manuscript, insert the plan by which Congress can do this.
Mr. STARR. I will be very glad^to present my ideas on that. But
I want to say to you that you can not do it under the present system
of national finance. That is what Foster said, and I am in accord
with his opinion on that. I t will involve a complete reorganization
of our financial program.




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237

Mr. LEATHERWOOD. Are you advocating a doctrine which you think
is impossible?
Mr. STAKE. N O , sir; a doctrine we advocated during the Civil W a r
when we made our own money.
Mr. LEATHERWOOD. YOU said a moment ago Congress could remedy
the situation.
Mr. STARR. Yes, sir; by taking over the Government function of
coining and issuing money and determining credit control. I t will
not be necessary for the Government to buy all the banks in the
country. If the Government opens just one bank, if it does business in accordance with the laws I laid down, every bank in the
country will have to follow suit. The Government is not in the
business to make money; the Government does not run the post
office to make money, or the Bureau of Standards to make money
or run the Astronomical Observatory to make money, or run the
Weather Bureau for profit, but it does it for a public service; and
here is a public service that is infinitely more important than all the
other business that we run, because every man who derives an income from investments and derives an income from his work is
dependent on the group of men whose only interest is to manipulate the system in their own interest as they please. When we
undertake to change nature's laws we run into trouble.
For instance, we have sheep. Oh, we dehorn sheep and cattle,
and take good care of them, and feed them, and get them fat, and
kill them, and eat them. We make better mutton, perhaps, but we
make poorer sheep, and that is the way it is with our citizens in this
country.
Mr. LEATHERWOOD. H O W do you reach that reasoning? I do not
believe I quite follow you. What is your idea ?
Mr. STARR. W h a t is the analogy?
Mr. LEATHERWOOD. By producing better mutton we produced
poorer sheep?
Mr. STARR. The sheep is not naturally a mutton animal, but a
wild animal. We have domesticated and fed him regularly three
times a day, and given him plenty of water and sleep. We get our
money out of him by shearing the wool from his back, and then we
mutton him.
Mr. LOMBARD. YOU are approaching this matter from the view
of the sociologist rather than that of the financier or economist ?
Mr. STARR. The sociological matter is the background. I am approaching it not so much from the financier's standpoint as that of
the industrialist's standpoint, the human being standpoint.
Mr. LOMBARD. Your idea is the proposed bill would tend toward
the remedying of an undesirable social condition ?
Mr. STARR. I believe it would.
Mr. STRONG. Under the present system we have in this country,
would the enactment of this bill be helpful ?
Mr. STARR. I t would be helpful simply as a declaration of policy.
I t would be merely doing just what they did when they enacted the
common law or declared the common law to be the law of the State.
When this Federal reserve law was passed, it was on the understanding that the Government was a partner in this game and every-




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STABILIZATION

thing above 6 per cent was to be divided between the Governmenc
and the bankers. The first thing they did was to set apart $50,000,000 to build bank buildings, and when Congress questioned their
power to do this—why, they said, " T a k e a walk around the block,
this is our property, not yours."
Mr. LEATHERWOOD. Have you investigated the salary raises \
Mr. STARR. When they raised salaries from $10,000 to $50,000, I
wondered what wonderful additional capacity they had.
Mr. LEATHERWOOD. Would it benefit the people to have that money
get into the Treasury of the United States?
Mr. STARR. I know people who pay taxes who have to borrow
money to do it.
This is revolutionary, but it is not as revolutionary as what Foster
told you. Foster told you what every Bolshevik in the United
States has been trying to tell you for years. He tells you this is
not fair dealing; that we have not gotten our fair share of the products of labor and something must be done about it, and yet they
lock them up for saying so.
Mr. STRONG. There seem to be two thoughts here that have come
before this committee as to the policy of the Federal Reserve Board.
One was they deliberately used their powers for deflation at one time
which was a great injury to the Nation.
Mr. STARR. Nobody could read that [exhibiting a pamphlet] without knowing it.
Mr. STRONG. If that be true, others have come and said recently
they are using those same powers in a rightful way. Without discussing that, Brother Starr, my idea was that if this bill would
direct them to use it as they say they are now using it, rightfully,
for stabilization, would they bring a little more confidence in the
country and increase stabilization?
Mr. STARR. That is what Foster said, and along the line of what
Rogers said—it might lead to false hopes.
Mr. STRONG. Don't you think that if they were directed by the
Government of the United States to use all their powers toward
stabilization of price levels and prevent inflation and deflation, that
they would use those powers ?
Mr. STARR. A S it suits them—just as they have in connection with
the interstate commerce law or antitrust law—and when it does not
suit them, kick it out.
Mr. LOMBARD. Under this bill they could be mandamused, could
they not?
Mr. STARR. YOU can not mandamus a discretionary officer.
Mr. STRONG. If you give him positive orders, do you mean to
say
Mr. STARR. He has discretion under this bill.
Mr. STRONG. YOU mean the Government of the United States can
not order him
Mr. STARR. Not by this bill. Suppose somebody mandamused
you to introduce a bill? What would you say?
Mr. LEATHERWOOD. A good answer would be to call attention to
the Pittman act. Congress ordered certain things down and they
defied Congress.




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239

Mr. STARR. I n the winter of 1924, Sir Montague Cottel Norman
came over to New York City and had a little private conversation
with Mr. Ben Strong, governor of the Federal Reserve Bank of the
city of New York, and those two men made a gentlemen's agreement to the effect that the interest rates in New York were to be
kept below the gold import rate.
Mr. LOMBARD. Was that reduced to writing?
Mr. STARR. N O ; they do not reduce gentlemen's agreements to
writing.
Mr. STRONG. What evidence have you of that?
Mr. STARR. The market shows that.
Mr. STRONG. Then, it is your supposition.
Sir. STARR. YOU may call it what you will, but at any rate the
interest rate has been kept below the gold import point, and the
inflation that began in the spring of 1924 has been going on ever
since. Only last week a prominent business man went to Boston
and circulated around in the financial district.
Mr. LOMBARD. D O you want to give his name ?
Mr. STARR. N O ; he would object to it. I can verify it, but I do
not care to put his name in the record. The bankers of Boston
said, " What in the name of heaven is the matter with the administration, preaching flowers that bloom in the spring, preaching good
times and prosperity, when, as a matter of fact, we are on the edge
of a volcano," and that was after the smash of the 3d of March,
but before the smash that came on the 30th. The whole country is
right in that hysterical jumpy condition to-day; it has been brought
about by the policy of the Federal Eeserve Board so to adjust discount rates as to permit gold to stay in England in order to rehabilitate the pound sterling in the world's markets.
Mr. LOMBARD. Would this bill help to alleviate the affairs of the
country in that regard?
Mr. STARR. This bill would have absolutely no consideration of
the English interests at all or the claims of American bankers on
British mortgages.
Mr. STRONG. Then your remarks are not directed at all to this
bill but to your idea of what should be the financial system adopted
for this country?
Mr. STARR. I said in the beginning I favored the principle of the
bill and thought it was a good thing to have a declaration of policy.
Mr. LOMBARD. Particularly if it would be obeyed.
Mr. STARR. But I do not think it would be obeyed.
Mr. LOMBARD. D O you not think it would be to the advantage of
the world and to the United States, as a part of the world, to have
England restored to the gold standard?
Mr. STARR. N O , sir; I do not believe in the gold standard. I do
not believe in a standard that will fluctuate 45 per cent in three
months, as I understand it has done. I do not believe in a standard
that comes to the Congress of the United States and asks for the
passage of a bill that will penalize the use of gold in mechanical
arts, in order to pile it up as a basis of credits.
I think I have given you the bulk of what I wanted to say, I
know, however, there are many other things I should like to cover,




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but the big thing is that there should be absolutely no discretionary
power vested anywhere to control the flow of credit.
Mr. STRONG. My idea was that this bill was an attempt to give
mandatory directions.
Mr. STARR. YOU can not do it. You will realize that when you
realize the whole purpose of the bill. The ostensible purpose of the
bill when it was passed was to do the very thing you are trying to do
here.
Mr. STRONG. Was not the purpose of the bill
Mr. STARR. That was the intention of the bill, but you have seen
Paul Walburg's letter about it, addressed to you.
Mr. LOMBARD. YOU say Paul Walburg had that stricken out ?
Mr. STARR. Yes, sir; he was in constant consultation with members
of committees of both houses for five years.
Mr. LOMBARD. I understood one of the members of the committee
feared it put too much power in the Federal Reserve Board and had
it stricken out.
Mr. STRONG. Mr. Wingo, I think, had it stricken out.
Mr. STARR. I know Mr. Wingo pretty well and I would hesitate
to believe he would act as an agent for any outside interests.
Mr. STRONG. I am sure he did not.
Mr. LOMBARD. If he was acting in that direction, you think it was
a mistake ?
Mr. STARR. Yes, sir; a great blunder, but I should like to see a
price level index fixed that would be as permanent as the meridian
of Greenwich.
Mr. LOMBARD. Have not the financial powers attempted to move
the meridian of Greenwich ?
Mr. STARR. If anyone attempted to calculate his latitude or longitude by ignoring the meridian of Greenwich he would get pretty
thoroughly paid for it before he got through.
Mr. STRONG. The clerk has handed me a letter addressed to Hon.
Charles E. Fuller, House of Representatives, Washington, D. C>
that I understand has been placed in the basket of the House and
referred to this committee, signed by Mr. Lombard, executive director, reading as follows:
MY DEAR CONGRESSMAN FULLER :

I call your attention to the following resolution unanimously adopted by the
convention of the Illinois Farmers' Institute at Quincy, 111., last month:
" We favor the standardization of the dollar in purchasing power and urge
our legislative members in Congress to consider what means may best be
adopted to bring about such stabilization."
In this connection, I beg to refer you to the hearing now being held on the
bill, H. R. 7895, introduced by Congressman James C. Strong, of Kansas.
This organization, as a policy, does not advocate the passage of any specific
legislation, but I am sure you will be interested in attending the hearings,
which are directly in line with the above resolution.

If there are no other remarks, the committee will adjourn in
accordance with the previous action taken by the committee, until
Tuesday morning at 10.30.
(Whereupon, at 4.20 o'clock p . m., the committee adjourned until
Tuesday, April 6, 1926, at 10.30 o'clock a. m.)




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STABILIZATION
HOUSE OF REPRESENTATIVES,
COMMITTEE ON B A N K I N G AND CURRENCY,

Tuesday, April £, 1926.
The committee, met at 10.30 o'clock a. m., pursuant to adjournment,
Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order.
I desire to make a statement at this time in regard to the program.
Hon. Benjamin Strong, governor of the Federal Reserve Bank
of New York, will appear before the committee on Thursday, April
8, at 10.30 a. m.
Hon. George W. Norris, governor of the Federal Reserve Bank of
Philadelphia, will speak before the committee on April 9, at 2 p . m.
Mr. Carl Snyder, the economist of the Federal Bank of New York,
will appear on Tuesday, April 13, at 10.30 a. m.
Dr. Ethelbert Stewart, of the Department of Labor, who has
charge of making up the index numbers there, will appear on
Wednesday, April 14, at 10.30 a. m.
I desire also to place in the record a letter from Governor Norris.
of the Federal Reserve Bank of Philadelphia; a letter from Governor
Strong, of the Federal Reserve Bank of New York; one from Carl
Snyder, of the Federal Reserve Bank of New York; and a letter
from the Secretary of Labor in regard to the appearance of Doctor
Stewart before the committee.
(The correspondence referred to is as follows:)
FEDERAL RESERVE B A N K OF P H I L A D E L P H I A ,

April 8, 1926.
M Y DEAR CONGRESSMAN : I have this morning your favor of March 31, inviting me to a p p e a r before the B a n k i n g and Currency Committee of t h e House
in connection with hearings on H. R. 7895.
I do not feel t h a t I can contribute a n y t h i n g of value to the discussion of
t h i s bill, and would therefore be very glad to be excused from participation in
t h e discussion.
If, however, t h e committee desires my attendance, I will, of course, comply
with the request. F r i d a y next, the 9th instant, would be the day most convenient to me, a s I a l r e a d y have engagements for Tuesday, Wednesday, and
T h u r s d a y . I should also like to be excused from a t t e n d a n c e a t a n y hour
earlier t h a n 11.30, a s t h e most convenient morning t r a i n for me is one due
in Washington a t 11.05.
W i t h best wishes, I am,
Very t r u l y yours,
GEORGE W.

NORRIS,

Governor.

Hon. L o u i s T. MCFADDEN,

House

of Representatives,

Washington,

D. G.

FEDERAL RESERVE B A N K OF N E W YORK,

April 2, 1926.
M Y DEAR CONGRESSMAN : Your favor of March 31, inviting me to appear
before the Committee on B a n k i n g and Currency in connection with the hearings now in progress on H. R. 7895, h a s j u s t been received, and I shall be
very glad to do so a t t h e committee's convenience.
Apparently, the questions which will likely be asked me will co^er a very
wide field of discussion, and in order to be helpful, a s I most desire to be,
I should have time for necessary preparation. So I t a k e t h e liberty of suggesting t h a t the l a t t e r p a r t of next week, t h a t is to say, t h e 8th, 9th, or 10th
of April, or t h e first p a r t of t h e following week, would suit my convenience
a little better.




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STABILIZATION

Aside from those m a t t e r s mentioned in your letter and, of course, questions
having generally to do with t h e a d m i n i s t r a t i v e features of t h e system, could
you indicate to m e a little more definitely a n y p a r t i c u l a r m a t t e r s which a r e
likely to be inquired into, so t h a t I might assemble a n y d a t a which would be
useful in t h a t connection?
Assuring you of m y desire to be of a n y service possible, I beg to remain,
Ver^y truly yours,
BENJ.
H o n . L O U I S T.

House

STRONG,

Governor.

MCFADDEN,

of Representatives,

Washington,

D. C.

N E W Y0RK,'Apr£Z 2, 1926.
M Y DEAR MR. MCFADDEN : T h a n k you very much for t h e invitation to a p p e a r
before your committee. I t is a question of deep interest, b u t I do n o t know
t h a t there is much I Gould a d d to w h a t you have a l r e a d y had, a n d w h a t would
be given you with much more a u t h o r i t y by Governor Strong.
Despite t h e fact t h a t I have been quoted in favor of stabilization, I a m n o t
in sympathy with t h e spirit of t h e present proposal. I t seems to me t h a t it
would meet with insuperable difficulties a n d be inadequate in t h e end.
I a m a t your service if you desire, almost a n y day, b u t if I came I should
prefer to discuss t h e economic a n d technical problems involved r a t h e r t h a n
questions of F e d e r a l reserve policy. And if I came it might be somewhat
better if I did n o t appear on t h e same d a y or directly after Governor Strong.
Please accept m y appreciation of your courtesy.
Very sincerely yours,
CARL SNYDER.

Hon.

L o u i s T. MCFADDEN,

Committee
House

on Banking and
of Representatives,

Currency,
Washington,

D. C.
DEPARTMENT OF LABOR,

Washington,

April 3, 1926.

H o n . L. T. MCFADDEN,

Chairman

Committee on Banking and Currency,
House of Representatives,
Washington, D. C.
DEAR M R . MCFADDEN : I have your letter of March 31, concerning t h e Commissioner of Labor Statistics, Bthelbert Stewart, appearing before your committee in regard to H . R. 7895.
Commissioner S t e w a r t will be out of t h e city during t h e week of April 5.
I t is h i s suggestion t h a t since your committee is scheduled t o meet on Wednesdays h e would be glad to discuss t h e construction of t h e wholesale price
index with you Wednesday, April 14. Please l e t me know if t h a t will b e
agreeable to you, or you m a y communicate directly with Commissioner S t e w a r t .
His telephone number i s Main 8474, Branch 59.
Sincerely yours,
JAMES J. DAVIS,

Secretary.

The CHAIRMAN. I understood that Mr. Western Starr, who made
a statement the other day, desires to have a few minutes to complete
his statement this morning. We will hear Mr. Starr at this time.
STATEMENT OF WESTERN STARR—Continued
Mr. STARR. Mr. Chairman, during the course of the statement
which I was making the other day I was requested by different members of the committee and others to offer certain authorities for
certain statements which I made.
I referred to the Pujo committee and its work as being the basis
on which the Federal reserve bank act was afterwards put through,
and I was asked to give the names of the people referred to in the
report and some of the facts which they had set out in their report.




STABILIZATION

243

I had supposed that every member of the committee was possessed
of a copy of the Pujo report.
I have here the statement of the committee with reference to the
agents of concentration, and the names of the men. Section 4 of
the report, page 56, says:
It is a fair deduction from the testimony that the most active agents in forwarding and bringing about the concentration of control of money and credit
through one or another of the processes above described have been and are
J. P. Morgan & Co.; First National Bank, of New York; National City Bank,
of New York; Lee, Higgingson & Co., of Boston and New York; Kidder,
Peabody & Co., of Boston and New York; Kuhn, Loeb & Co.
Then, on page 130, they define what they call the " money trust,"
as follows:
If, therefore, by a " money trust" is meant "An established and well-defined
identity and community of interest between a few leaders of finance which has
been created and is held together through stock holdings, interlocking directorates, and other forms of domination over banks, trust companies, railroads,
public-service and industrial corporations, and which has resulted in a vast
and growing concentration of control of money and credit in the hands of
a comparatively few men," your committee, as before stated, has no hesitation in asserting as the result of its investigation up to this time that the
condition thus described exists in this country to-day.
Another matter that I was asked to' verify was the statement that
I made that it became necessary, in order to put through the Federal
reserve bank act, to call upon Mr. William Jennings Bryan, who had
been fighting the principle of credit control which is embedded in the
Federal reserve bank act all his life. I was asked to verify that
statement, and I do so by an excerpt from a stat ment which he
made, published in Hearst's International Magazine for November,
1923, page 23. H e said:
The Federal reserve bank that should have been the farmer's greatest protection has become his greatest foe. The deflation of the farmer was a crime
deliberately committed, not out of enmity to the farmer but out of indifference
to him. Inflation of prices had encouraged him to buy, and then deflation
delivered him into the hands of the money lender. The Federal bank can be
a blessing or a curse, according to its management. If the Wall Street speculators are in control of it they can drain the agricultural districts and keep
up a fictitious prosperity among the members of the Plunderbund.
While the Federal reserve bank law is the greatest economic reform achieved
in the last half century, if not in our national history, it would be better to
repeal it, go back to old conditions, and take our chances with individual financiers than to turn the Federal reserve bank over to Wall Street and allow its
tremendous power to be used for the carrying out of the plans of the Money
Trust.
As to the influence of Mr. Bryan in that matter, I want to quote
an article by George Creel on page 605 of Harper's Weekly of J u n e
26, 1915, on " The Commoner." He says:
Go to any of the Washington correspondents, regardless of the paper he
represents, and ask as to the services of Bryan. There is not one who will
refuse to give him full credit for the legislative achievements that go to make
up the administration record. As far as the party was concerned, Woodrow
Wilson was without influence, save for the patronage he possessed.
it was Bryan who whipped Congress into line on the tariff bill, on the
Panama Canal tolls repeal, and on the currency bill.
Mr. WINGO. Do you agree with Mr. Creel, or do you agree with
the other school of thought that says that Mr. Bryan wTas wrong at
that time and did not get what he wanted? You are familiar with
letters that say that Mr. Bryan was turned down by the President.




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STABILIZATION

Of course you can appreciate that that is of interest to me, because
I happened to be on the committee and in touch with Mr. Bryan,
and know what the urgings were both ways.
Mr. STARR. Yes.
Mr. WINGO. I am

interested as a matter of the psychological study
of public history, and the myths that grow out of fights here in Congress ; and I am interested to know which one you believe is correct,
the Creel contention or the other.
Mr. STARR. My opinion personally would have comparatively little weight. But I want to give a statement made by Mr. Bryan to
a man whom I can not name—a man who was for eight years a
member of his own State senate, who was for many years the chaii man of his owrn State committee, and who was perhaps as close personally to Mr. Bryan as any man outside of his own family.
Mr. F E N N . D O you mean by " State committee " a legislative committee or a political committee ?
Mr. STARR. A State political committee.
Mr. F E N N , Excuse me for interrupting you.

Mr. STARR. That is all right.
On one of Mr. Bryan's later visits to Washington he met this
gentleman, and they got to talking about the Federal reserve situation
and the condition of the farmers. Understand, I am not going to
give you the name of this man, who refuses to be quoted, but you
can take it from me. Mr. Bryan said to him, in substance:
That is the one thing in my public career that I regret—my work to secure
the enactment of the Federal reserve bank law.

Mr. WINGO. Do you know that Mr. Bryan, on one of his last visits
to Washington—as a matter of fact, the night of his last birthday—
stated to more than one friend in the lobby of the Lafayette Hotel in
the city of Washington that such a statement was not authorized ?
Mr. STARR. I do not know that Mr. Bryan ever said that. I am
quite sure
Mr. WINGO (interposing). You are familiar with the fact that
Mr. Bryan has been quoted pro and con—contrarily by his supposed
enemies—just like every other public man in the history of America;
and must you not, after all, judge the man by his works and not by
what may be said by the hangers-on, who seek to get reflected glory
by quoting every public man that they happen to meet casually?
Is it not better to leave their reputation undisturbed and judge
them by their works and by their own utterances, and not by what
other men say that they said ?
Mr. STARR. If you would like my opinion on a question of ethics
of that kind, I would say that no man could do Mr. Bryan a greater
service than to show him exactly as he was, and as he stated himself to be. I do not care to discuss the ethic^ of a proposition of
that kind.
Mr. WINGO. I will ask you this: Do you think Mr. Bryan was a
man who was capable of double-dealing with the members of this
committee that was then framing this act? Do you think Mr.
Bryan, even for political purposes, would mislead me, for instance,
a member of the committee, who talked to him about the matter?
Mr. STARR. Certainly not. But I do believe that Mr. Bryan could
change his mind when he saw the way the thing worked. I do




STABILIZATION

245

believe that Mr. Bryan was honest enough and courageous enough
to say that he had been misled and that he had made a mistake.
Mr. WINGO. Did Mr. Bryan have a peculiar habit of throwing
political expediency to the wind and saying just what he thought
publicly, and not running around under cover, whispering to his
friends, " I made a mistake here," or " My friend over here made
a mistake? " Was he not brutally frank and candid, even about
his own mistakes?
Mr. STARR. I campaigned the United States two different times
under the auspices of the national committee for Mr. Bryan. I want
to say that at the high point of my regard for Mr. Bryan there
were some things which he stood for that I could not stand for,
and which I did not stand for. I accepted him as a candidate as
the least of evils, and I did all that I could sincerely to aid him.
Mr. WINGO. Do not misunderstand me. I am not imputing any
bad motives to Mr. Bryan.
Mr. STARR. YOU are imputing motives to Mr. Bryan that I would
not submit to.
Mr. WINGO. N o ; I am not imputing motives to him. I am asking
you whether it is wise to leave a public record here that would look
as though a bad motive were imputed to him. I know that is not
your idea about it. I n framing my question my meaning was that
I had no doubt that Mr. Bryan was always candid, and that he did
not deal in these subterranean switchings, telling one man one
thing and another man another.
Mr. STARR. With all the things I have found that I could not agree
with in Mr. Bryan, there never was a moment in all my personal
intercourse with him, and all that I ever saw or read of him, in
which I did not give him credit for the highest integrity, the purest
motives and the strongest honesty. H e was so honest that he was
bigger than most men; but this proposition is infinitely bigger
than Mr. Bryan or Mr. Bryan's party.
Mr. WIXGO. On this particular question, what difference does
it make now, Mr. Starr, whether Mr. Bryan regretted or did not
regret the influence that he may have used 13 years ago? W h a t
effect does that have upon the merit and whether or not this committee at this time should enact legislation of the character that
is proposed by this bill? How will that help us to arrive at a just
conclusion? I ask you that in all kindness, Mr. Starr, and not in a
critical spirit.
Mr. STARR. That is all right.
Mr. WINGO. What is your object ?
Mr. STARR. I was requested to bring this in for the purppse of
verifying the statement which I made to the effect that Mr. Bryan
regretted having had anything to do with putting the Federal reserve bank act into force. I was asked to verify it, and I have done
so in this way.
Then, I was asked to do something else. During the course of
the colloquy Mr. Leatherwood asked me if I had any concrete suggestions and any formal idea to present. I had stated, in answer
to Mr. Strong and others, that I could not see any harm in the
enactment of this bill, but that I could not see any good in it, except
as a declaration of policy. I t is like telling a little boy, " Now,
Johnny, you go and be good." The first thing he does is to knock




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STABILIZATION

the cat's eye out and tie a can on the dog's tail, and he thinks he is
being very good. I was asked if I had a concrete suggestion to
make, and I have done so in this form.
I want this committee, if it recommends any bill in connection
with this idea, to recommend a bill which will have teeth in i t ;
which will compel and force certain things automatically, just exactly as the world has come to accept the meridian of Greenwich
as a standard. They derive t h a t standard from some source. I t is
only an imaginary line.
Mr. WINGO. If you were the legislative dentist sitting here, what
would be the first tooth you would put in the jaw of this Federal
reserve system ?
Mr. STARR. This is going to be just as revolutionary as the t h i n g
that Mr. Foster said here the other day. I t is going to be just as
dynamic. I t will probably be just as difficult to get into action. I
think that no one could surpass me in respect for the cold, precise,
scientific way in which Mr. Foster told certain vital truths here, when
he told you t h a t Congress had the power to help the situation, but
that it had not helped the situation by anything that had heretofore
been done, and that this bill would not help i t ; and he further said
that there was no way of helping it under the present financial
system.
This is what I am going to suggest. I t is crude, boyish, perhaps,
and utterly futile, but this is what I want to offer:
A BILL To establish a Federal board for the stabilization of the national currency and
the control of credit

Be it enacted by the Senate and House of Representatives of the United
States in Congress assembled, That there is hereby established a Federal
board, hereinafter referred to as the board, for the purpose of stabilizing the
monetary value of the national currency, maintain the uniform general price
level of market commodities and control the general level of interest rates
and discounts that may be charged by the Federal reserve banks and other
banks that are members of the Federal reserve bank system for the use of
credit in commercial transactions.
SEC. 2. The board hereby established shall consist of five members to be
appointed by the President by and with the advice and consent of the Senate,
no more than three of which shall be at any time members of the same political party, and who shall hold their offices for a term of ten years, unless removed by physical or other disability in accordance with law, provided, that
the President may direct or designate that the terms of certain members of
the board shall terminate at the end of two, four, six, and eight years from
the date of the original appointment of members at the inauguration of the
board. The members shall be eligible to reappointment on the expiration of
their terms.
The compensation of the members shall be at the rate of $10,000 per annum,
payable monthly, and they shall be entitled to reinbursement for all costs
and expenditures necessarily incurred in the performance of the duties and
services herein specified.
The board shall be provided with quarters for the necessary offices, together with such physical and mechanical equipment as the services the
board is hereby required to perform may make necessary; together with such
clerical and office help as may be required for the full performance of the
duties of the board.
The compensation of the office assistants employed by the board shall be
at the same rates as is paid for the performance of similar services in the
other offices and departments of the Government.
Here are the powers and duties:
It shall be the duty of the board to ascertain at the earliest possible date
the average index of the market buying power of the dollar, as sfiown by an




STABILIZATION

247

index taken from the market records for a period of not less than five nor
more than 10 consecutive years subsequent to the year 1910, in the wholesale markets of the United States; and embracing not less than 300, nor
more than 400 staple commodities; due weight being given to quantities
and qualities of all such commodities. The general price index so^ determined
shall be the permanent standard unit of value of the American dollar. It shall
be the duty of the board to make daily computations of the market fluctuations
in the prices of all the commodities from which the index price level has been
derived and publish daily the movements of all prices, if any, and of the
general price level so found.
In case at any time the daily report of the general price level as shown
by the index number indicates a general rise or fall in commodity prices of
exceeding 1 per cent, it shall be the duty of the board to publish notices thereof,
and of the amount and direction of such variation through the daily press,
and also to notify the Secretary of the Treasury thereof.
Upon receipt of such notice from the board it shall be the immediate duty
of the Secretary of the Treasury to inaugurate open market operations, by
the sale or purchase of obligations of the Government to the extent necessary
to restore the index number to the level established by the board as par. All
sales of Government obligations or purchase thereof by the Secretary of the
Treasury for the purposes indicated in this act shall be for actual currency,
without delay, deflation or sets off; nor shall there be any exchange of
Government obligations or securities except for actual currency or coin issued
by the Government, in the execution of operations designed to maintain the
stability of the price level.

The CHAIRMAN. YOU have made an interesting suggestion about
authorizing the Secretary of the Treasury to sell Government securities for the purpose of stabilizing prices. Is it your contention that
the sale of Government bonds or short-time notes by the Secretary
of the Treasury has the same effect that open-market transactions
do on stabilization of prices and money rates ?
Mr. STARR. They do. Undoubtedly they do; that is to say, if
they are actual sales for currency.
Now, let me make this statement: If I go to my friend, or to the
bank, and borrow $100, or $500, or $5,000, or $1,000,000, and take it
in cash, there has been no reduction or change in the volume of the
purchasing power of the country.
Mr. WINGO. You are proposing practically the same thing that
you have now, are you not? You propose to let the Secretary of
the Treasury take the place of the open-market committee?
Mr. STARR. I do not. Well, I do not know about your openmarket committee. You may have an open-market committee that
says when bonds shall be bought and when bonds shall be sold. The
object of buying and selling in these times and in this way is for
the purpose of withdrawing currency from the open market or of
injecting currency into the open market.
The CHAIRMAN. There is a provision in the Federal reserve law
that permits the loaning of funds on Government securities. Might
that also imply an issuance of Federal reserve notes?
Mr. STARR. Yes, sir. That would have an effect on the price
level.
The CHAIRMAN. That might be in the control of the Secretary
of the Treasury or it might be controlled by banks that hold Government securities?
Mr. STARR. The point that I make is that where there is a daily
publication of the drift and movement of price levels, every school
boy knows, if he thinks about it, just exactly what the influence is
going to be on prices, and any country school teacher who can do




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STABILIZATION

quadratics in algebra, or who can handle the slide rule, can figure
the price index for himself, having command of the market quotations.
Mr. WINGO. Even though he could not make out his own incometax return?
Mr. STARR. Very probably.
Mr. WINGO. From your viewpoint, it looks to me as if you are
proposing to trade off the devil for the witch; that instead of the
devil we ought to substitute a witch.
Mr. STARR. All right. As the thing stands to-day, the banker
can not create a stock of gold; he can not go out and create a mass
of commodities; but with a stroke of the pen he can throw a million
dollars into the circulating medium in the form of a bank credit,
and they do it whenever they want to do it. The CHAIRMAN. Who

can do it ?

Mr. STARR. A banker. Some can not command that much money,
but a banker that can does.
Mr. WINGO. NOW, just assuming that that is true, what power has
Congress got, either to do it directly or to get a board that would
take that posibility away from a banker or from a merchant or from
an individual ? You can create credit yourself, can you not ?
Mr. STARR. N O , sir.
Mr. WINGO. YOU can not ?
Mr. STARR. N O : I can not create

credit. I can take $10,000 worth
of securities over to the bank and borrow money on them. Sometimes I can not. I once tried to do it, in May, 1920, and they told
me to take them back and hide them.
Mr. WINGO. When you go to a bank, do you not simply put in
your credit and get the bank to let you have its own, because it will
get commodities more quickly than your credit? I always had the
delusion that the bank's credit was better than mine, and that is
the reason why I substituted it and paid for the privilege. I
traded my horse for theirs, and got a better one, and paid something to boot.
Mr. STARR. All I do is to go to my bank and get my chicken feed
every week so as to pay my bills.
Mr. WINGO. Assume that we put your plan in operation. Would
not all the influences that produce the evils of which you now coinplain, and which flow from selfishness—not necessarily criminal
selfishness, but the natural selfishness of men—would not those same
influences operate under your plan as they do under the present
system ?
Mr. STARR. I have not a practicle of idea that we can change
human nature by the establishment of a stabilization board; but we
can make the thing automatic. The Government of the United
States, in establishing the Naval Observatory over here, does not
tell the scientists there what they are to discover or what they are
to do.
Mr. WINGO. YOU mean to make it automatic just as a government issuing fiat money makes its value automatic?
Mr. STARR. There was never a particle of money on earth that was
not fiat money.
Mr. WINGO. I say, is it your thought that a government board
can automatically fix values, regardless of the value that exists ?




STABILIZATION

249

Mr. STARR. No; you are mistaken about that. I do not want to
have the Government make money. I want to have the Government regulate the value of credit, which determines the value of
commodities in the open market, and which prevents selfish men
from influencing the price level to their own advantage and at their
own discretion. I want to make it so automatic that no banker or
group of bankers can bring upon the world again such a thing as
they did in May, 1920.
The whole story, to a man that can read between the lines, is told
here in this report.
The next thing that I am going to speak of is this, and this will
make a great deal more disturbance than anything else.
For the purpose of facilitating the operations which I have
described, I go on to say:
SEC. 3. The Secretary of the Treasury is hereby authorized and directed to
establish, equip and operate a bank to be known as the Bank of the United
States, for the service of all operations conducted by him under the authority
of, and which are designed to carry out the purposes of this act; and the
Secretary of the Treasury shall have power in the operation of such bank to
do and perform all the services lawfully rendered by National Banks under
authority of the laws of the United States; to issue Government notes, loan
money and discount bills, buy and sell foreign exchange and the obligations of
the Government of the United States, to the end of stabilizing Currency of the
United States and maintaining the general price level in the markets of the
United States.

Here is another thought which I was asked by Mr. Leatherwood
to elaborate upon:
SEC. 4. And the Secretary of the Treasury is hereby authorized and directed
to open negotiations with the financial secretaries or representatives of the
treasuries of foreign governments for the purpose of bringing about an international conference of the important commercial and industrial nations of
the world, with a view to establishing a general standard of price levels
adapted to the stabilizing of a monetary standard to serve the purposes of
international trade and commerce of the world.

Those are the suggestions.
I think this committee has got hold of the biggest bear by the
tail that ever was caught, and it is up to this committee to make
the recommendations. I do not want to disparage my own efforts in
this matter, but I have a very strong feeling that the world perhaps
is not yet ripe to put into concrete form and concrete fact the suggestions that have been made here. But some day it will be. Some
day it will have sense enough to know that it is unwise to turn over
the administration of the most important functions of government
to private individuals to use their own discretion in the operation
of those functions.
The CHAIRMAN. # You are speaking now of the Federal reserve
system?
Mr. STARR. I am speaking now of the Federal reserve bank act.
I thank the committee for its courtesy and for the opportunity of
appearing.
The CHAIRMAN. We will now hear Mr. Lee.
STATEMENT OF WILLIAM CANFIELD LEE, WASHINGTON, D. C.
The CHAIRMAN. What is your connection, Mr. Lee?
Mr. L E E . I am a member of two societies that are deeply interested in this subject, b u t I am not officially delegated to speak for



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STABILIZATION

them, so I am speaking simply as a citizen and a representative of
class.
The CHAIRMAN. What are these two societies that you refer to?
Mr. L E E . The National Monetary Association; and the Federation
of Federal Employees.
I am speaking as a citizen and as a member of a large class who are
deeply interested in this subject. I am not a banker nor a manufacturer nor a merchant, but I belong to that very large class who
earn salaries and wages, and who, as such, feel deeply the effect of
variation in the value of money.
I do not have statistical facts to present, such as the various experts have given, but I would like to call attention to certain aspects
of the situation that might not be brought out by others, and one of
these is the importance of this bill as compared with various others
coming before Congress. This bill, in its subject matter, is the most
important, probably, that has been or will be handled by the present
Congress—at least in relation to domestic affairs.
I t is far more important than tax reduction. For what do taxes
amount to ? A few dollars on the average from each family, and for all
we pay in taxes we get our money's worth. We get more for our money
that we pay out as taxes than for what we pay out for anything else.
The saving from reduction of taxes will for most people be but slight;
and if it were not saved, it would not be lost. But everybody loses
by the depreciation of money, and this is wholly loss. Even if it
went to enrich someone else at the loser's expense, that would not be
right; but it is largely destruction; it is like what is washed away in a
flood.
Suppose that high water carries away one man's farm and deposits
the soil on the other side of the river, as sometimes happens. Then
some other man gains, perhaps; but more often the flood simply
washes away and destroys land, or spoils it. I knew a man in
Kansas, a friend of mine, who had half his farm washed away, or
rather it was covered over by gravel and rendered uncultivatable.
Thus he lost his property. That is, he lost its value. What good did
it do him that his land remained, if it no longer was a farm ? Now,
this happened through the activity of nature, and man could not
prevent it. If, however, it were a result of human activity, as is
money fluctuation, it could be prevented; and to prevent destruction
of property rights through human activity is one of the first functions,
and duties of government.
Of what government, it may be asked ? I t is the duty of the States
to protect against thieves; and it is just as much the duty of th&
United States Government to protect citizens against unintentional
robbery by unknown persons, through the impairment of our money,
as it is the duty of the States to protect against deliberate criminal
robbery by thieves.
I t is the duty of all government, of course, to preserve property
rights. We hear sometimes a comparison of the value of personal
rights and property rights. I t may be that property rights are less
important than personal rights; yet it is universally admitted t h a t
they are very important, and their preservation is one of the very
first duties of government.
Mr. W I N G O . Do you make no distinction between protection and
preservation? You said it was the duty of government to preserve-




STABILIZATION

251

property rights. I was under the impression that it was only the
duty of government to protect a man in the exercise of his property
rights and the maintenance of them.
Mr. L E E . Well, protection involves prevention of destruction
or impairment that can be prevented.
Mr. W I N G O . And that is what you mean by preservation?
Mr. L E E . Yes, sir.
Mr. WINGO. All right.

Mr. L E E . A man is not protected in the exercise of his rights to
the property called money if through government action, or through
anything which government could prevent, that property which we
call money is made to lose its value. His right to his property is not
maintained under those conditions. Neither are his rights in other
property maintained, if money is allowed to appreciate so that his
other property loses its effectiveness for service and he is compelled
to part with it to satisfy debts which he never agreed to. By t h a t
I mean, if he agreed to pay 1,000 one-hundred cent dollars, and is
obliged to part with his other property in order to pay his $1,000
debt in two-hundred cent dollars.
Property does not have to be taken away in order to be spoiled,
as in the case of that Kansas man's farm. Or, suppose a horse is
hamstrung. The criminal may leave the horse in the pasture, b u t
the owner loses the value of it.
Mr. W I N G O . In other words, the real value of the commodity is
its usable value, is it not? Not its intrinsic value?
Mr. L E E . That is it; and since there is no form of property t h a t
is more widely distributed, and in which more people are interested,
than money, certainly they ought to be protected in the use of that.
Protection of property rights, therefore, in the case of money, necessitates preservation of its value. If this could not be done by government, it would not be a duty of the Government; but it can be
done by the Government, hence it is a duty.
I t is pointed out that this bill lays on the Federal Reserve Board
the duty of maintaining stable values of money. I t has been said
that the Federal Reserve Board can do this now; and we may say
further that it is right now the moral duty of the board to do so.
Yet since it is obvious that not every one appreciates the importance
of this principle of keeping the price level stationary, and since many
influences may distract the attention of the board from this aspect
of its work, it would be in the highest degree helpful to lay this upon
them as a definite duty under the law. Lest they may not think of
it as their duty, tell tnem. Make it their bounden duty to use all
the powers of the Federal reserve system, which we know are great,
for this purpose.
The CHAIEMAN. Mr. Lee, you believe in legislation such as is
proposed here, do you ?
Mr. L E E . I do.
The CHAIRMAN. Supposing that we had had in operation such a
Ian during the period from 1914 to 1921, do you think that it would
ave remedied the situation that did occur in the absence of that law?
Mr. L E E . I should think it would. I think so, decidedly.
The CHAIRMAN. In other words, do you think that the needs of
the Government, as shown during that period, would have been
surmounted by the operation of such a law as this?
Mr. L E E . Yes, sir.

i




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STABILIZATION
UNEQUAL CONTRIBUTIONS TOWARD THE WAR

The CHAIRMAN. I t has been stated that the needs of the Government were so great that the Government acquiesced in or permitted
inflation in order to take care of the demands for money and credit
incident to carrying on the war and the sale of its own securities.
Do you think that such a law as this would have prevented any such
inflation and increase in the price level as occurred during t h a t period ?
Mr. L E E . I t would seem so. I think so. The Government had
to get material things to use in military operations; and it could have
gotten those with money raised by taxation, without inflating the
money supply of the country. As it was, the inflation of money was
simply a form of taxation which was borne unequally by different
classes. For instance, the Federal employees paid toward the
expenses of the war far more than their proportion, because all their
pay was reduced.
The CHAIRMAN. I t was reduced because of the smaller purchasing
power of the dollar?
Mr. L E E . Yes, sir. People talk sometimes as though the Government employees were always wanting more. In fact, they do
not have what they had before the war. I do not see how that can
be questioned. Congress has raised the pay of Federal employees
repeatedly, but this has been only a nominal raise, because it has
been merely an increase in the number of dollars paid by the Government to its employees, while at the same time the Government
was reducing the value of those dollars by conducting or permitting
the policy 01 inflation.
The difference in the real value received by the Government
employees before and after the war was their forced and heavy contribution toward the expenses of the war. I t amounted to millions
of dollars. And they still continue to pay, in that manner; though
the war is now in the past.
Yet people talk as though Government employees were unreasonable in asking for enhanced pay. They are only asking for what
they had before; and if it is given to them in the future, they will
not be recouped for the loss they have sustained year by year in
the meantime. How would Members of Congress like to be made
personally to pay one-third of their salaries as a contribution toward
the war, in addition to what they pay in the regular methods of
taxation ? They would not like it. And they did not like it. Members of Congress did suffer this excessive and unjust levy during the
war, along with other Government employees; but they did not
like it at all; hence Congress raised the pay of its Members from the
$5,000 which they used to receive to the $10,000 which they are
>aid now. As a matter of justice, the same thing ought to be done
or all Government employees.
Instead, however, the way is open, and unless this bill is passed it
will still be left open, for further stripping of public employees, not
only Federal, but State, county, and city employees, througn further
inflation, if conditions happen to favor inflation in future.
The CHAIRMAN. YOU suggest, then, that the alternative might
have been to raise more money by taxation?
M r . L $ E . That is it.

f




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253

The CHAIRMAN. YOU do not think that would have been confiscation, because of the very great demands of the Government?
Mr. L E E . Why, no; certainly not. Taxation by legal process
is not confiscation, whereas you might say that inflation is. Inflation has resulted in the confiscation of a portion of the property of
everybody who had to use money; and especially of all those who
were depending upon money to be received, such as bond holders,
savings-bank depositors, and insurance beneficiaries.
The CHAIEMAN. In other words, it was a deferring of the demand
on the public for the necessary money to carry on the war? Instead
of taking the money all at once, they let the public come along and
pay it over a period of time?
Mr. L E E . Yes, sir. That is, they fixed it so that a fraction of the
Nation would have to keep on paying forever. But it was not a
deferring of the payment. All that the Government gained bv inflation it took out of the public at once; but the people witti fixed
incomes have to keep paying it over and over, year after year, in the
reduced worth of their earnings and interest receipts. I t is a very
different thing from paying off bonds.
Mr. W I N G O . The favorite method seems to be the financial style,
the passing style, of installment payments—a dollar down and a
dollar a week for the rest of your life. That is what the chairman
refers to. That is the present method of the Government.
Mr. L E E . Well, the objection to this inflation method is t h a t it
took a terrifically large assessment, 40 per cent of their entire property, from all who had fixed incomes—not only from Government
employees, but from all sorts of people who had fixed incomes, including bond investors. If the policy of the Government had been to
raise war funds by taxation, and the purchasing power of money
had remained stable, every one would have contributed according to
his ability, in accordance with whatever method of assessment the
Government would have deemed equitable and expressed in tax laws.
But the policy of inflation simply stripped those whose resources,
whether invested wealth or current earnings, were in the form of
fixed sums of money.
Part of the Government's war revenue was obtained by borrowing
on bonds. This was a legitimate form of deferred payments. At
least it was if the contract of borrowing is fulfilled by the Government paying back as much value as it borrowed. Those who lent
money to the Government expected to get it back, but they will not
get it back if they are paid in money that is inflated.
Our Government is not the only one that has raised money by this
method. The German Government has paid off its war debt completely within a few years by excessive inflation—and ruined millions
of its citizens.
Mr. W I N G O . Will you answer me this? As I understand, you are
in favor of this bill. You say that the Federal Reserve Board now
has the power to centralize and control the volume of credit. Is t h a t
your position?
Mr. L E E . Yes, sir.
Mr. W I N G O . D O you think the command to serve is synonymous
with the command to control?
93869—27—PT 1




17

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STABILIZATION

Mr. .LEE. The command to serve is vague. They can serve in
whatever way they see fit. They can serve whatever interests they
see fit. I t is left purely to their discretion. But this proposed command is to serve in such a way that the value of this property—
money—will remain stable.
Mr. W I N G O . For example, I have someone who is under m y
control, and I say to him, "Here, you accommodate Mr. Lee."
Does that mean that he is to control your actions ?
Mr. L E E . I t depends on what the nature of the accommodation
is. I t may amount to that.
Mr. W I N G O . We will get down to a concrete proposition and say
t h a t this control will be through the centralization and control of
the supply of credit. Is that your idea?
Mr. L E E . Yes.
Mr. W I N G O . In other words, if they think things are running
away with the prices—there is a rapid rise in prices—your theory
would be to call in credits ?
Mr. L E E . Yes, sir.
Mr. W I N G O . And the reverse would be true; if there was a depression of prices, the idea would be to put in circulation additional
credits?
Mr. L E E . Yes, sir.
Mr. W I N G O . And you think that would be very effective?
Mr. L E E . I do.
Mr. W I N G O . NOW, let us see. They have the power now, and it
is just a question of whether they will do their duty—the power is
there, and we will take the present situation—what is the possible
volume of additional credits that the Federal Keserve Board would
create at the present time ? Have you figured on that ?
Mr. L E E . N O ; I have not. I can not quote the figures.
Mr. W I N G O . NOW, we will take this situation, and we will get at
the same point. I want to get at the relative powers. What power
has the board got now to prevent a bank of which I might be, but am
not, the president—take a hypothetical bank—what power has the
board got over me, even though I am a member bank, either to
compel me to make loans to these gentlemen in this room who are
m y customers, or compel me to refuse to make loans to them?
Mr. L E E . The banks will be unable to make loans except to the
extent of the funds that they have at their disposal.
Mr. W I N G O . YOU do not understand me. Of course that is understood, that the funds at their disposal are the limit of their power,
just as the funds at the disposal of the reserve banks are the limit of
their power, but I am talking about relative powers now. Is the
volume of money that individual banks control and the volume of
credits that they might create, on the basis of the reserves that they
may hold in their own vaults—is that greater or smaller than the
actual volume that the Federal reserve banks hold and can control ?
Mr. L E E . The funds which they can loan out would depend on the
reserves they have to start with. I t depends on what they can get
from the reserve banks
Mr. W I N G O . YOU do not mean that. I know banks that never
have called on the Federal reserve banks for funds. They claim and
complain that they have to keep reserves up there and do not borrow
from them at all. Yet those banks are powerful. They can create,




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255

and do set in circulation, great volumes of credit. They can contract
t h a t credit by recalling those loans. Here is my point: Take this
question of controlling the speculative stock market in New York,
whether it be true or not—and I am not going into that, nor going to
attempt to prove anything that is or is not going on, and I am not
arguing the merits of it, but I am talking about the actual operations
and powers of the Federal reserve member banks of the Federal
Reserve Bank of New York—their loans that they put out on stock
market collateral are very small compared with what the outlying
banks have put out on stock market loans in New York City. Now
suppose that overnight the outlying banks should do the unexpected and all of them withdraw all the funds amounting to something
less than $2,000,000,000
Mr. L E E . Withdraw from what?
Mr. W I N G O . These loans that I am discussing; these stockmarket loans in New York City. I think it is something like
$1,400,000,000, judging from the last statement. Suppose, overnight, they should say, " W e will withdraw those funds, and they
do do it. T h a t means a number of loans called. What power is in
the Federal Reserve Board or in the Federal reserve bank to substitute $1,400,000,000 of additional credits for those that have just
been taken out?
Mr. L E E . Those men who could not get the money from those
banks would go to other banks.
Mr. W I N G O . Suppose that all the banks—the Federal reserve
banks and the great national banks disagree and say, " W e will
not let you control us." That may be far-fetched, but suppose
they say, " W e will not lend the funds out," and suppose an appreciable number of them will say, " W e will withdraw everything we
have on deposit with the Federal reserve bank except the cold-blooded,
naked legal reserve we are required to keep there.
Where would the
Federal Reserve Board and tne Federal reserve bank be then ?
Mr. L E E . That is far-fetched.
Mr. W I N G O . D O you think they could control prices?
Mr. L E E . That is far-fetched. That assumes that the banks will
work together, where the tendency is, as is well known, they will
make loans if they have the funds.
How do they happen to have the reserves ? I t is because we have
a large volume of currency. I t is not all gold or gold certificates.
I t is due to the gradual development of a large volume of bank credit
throughout the country, which has resulted irom the operation of the
Federal reserve system. The volume of bank credit has become
unduly large, when it might have been restricted.
Mr. W I N G O . I am not talking about how it is; I am talking about
the use of things you say are already in existence. In other words,
the only way you can do what you suggest is to centralize all the
power in one group. Is not that the ideal you are striving for, to
prevent this uncertain and erratic situation? Here is one banker
who says, for instance, " I am worried, and I will withdraw." Are
you proposing to take away that discretion from him and make him
submit to the judgment of a board here?
Mr. L E E . Certainly not.
Mr. W I N G O . Unless you centralize the controlling volume of possible bank credits in the hands of the board—and you say they have it




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STABILIZATION

now—unless you centralize it there, how can you control the fluctuations in the volume of credits ?
Mr. L E E . That is a question of fact that I am not prepared to
prove to you.
Mr. W I N G O . That is the very thing I want to get you to do. We
can sit here and other men can sit here and hear a beautiful theory
discussed, but what we want to know is your mechanism for doing
this thing. How are you going to do it?
Mr. L E E . The underlying fact is that the volume of bank funds
comes from their ability to utilize the Federal reserve notes.
Mr. W I N G O . You think so? You are not an expert on that, are
you?
Mr. L E E . No; but is not that the fact ?
Mr. W I N G O . I think not.
Mr. L E E . A large share, anyway.
Mr. W I N G O . Of course a large share, and of course the question is
debatable as to how much a share constitutes a control. I will admit
it will have to be a majority, but that is the thought. All agree with
you about the evil effects that flow from violent fluctuations. We all
agree that this inflation and subsequent deflation have had a bad
effect upon Government employees and salaried people and wage
earners—and everybody, as far as that is concerned. You may be
possibly interested in one particular group, but we see a survey of all
groups. Somewhere in this vicious circle, all classes are affected.
At one time one group loses and at another time another group loses.
The question is not, is it evil; but the question is now, how it is
proposed actually to correct it, because I understand the proposed
machinery is to make a stump speech to the board—"Be good and
exercise the machinery you have; do not gouge out any cat's eyes."
How can you correct this evil by simply making a declaration to a
board, " Go on and do what you ought to do under the law and what
you are supposed to do n o w ? " I want a more practical plan. If
you can convince me this is a practical plan, I should like to have
you do it. I t may be my dullness, but somehow I can not see it. I
have been in Congress long enough to know—and this may not be
so complimentary to us—that most people of the country seem to
resent a declaration by Congress, and seem to think it is an effort to
impinge on their liberties. What good would a stump speech by
Congress in a resolution do, that a stump speech on the floor would
n o t do ?
Mr. L E E . Your contention is the Federal Reserve Board has not
the power
Mr. W I N G O . YOU might give them t h a t power, and the Lord, out
of pity, might endow them with superwisdom and remove all elements
of selfishness, etc., b u t it would be a physical impossibility for one
board to sit in Washington and determme each night or each week or
each month what are the needs of the industries of this country and
what would be the effect. Some of the wisest financiers in this
Nation will admit t h a t in every crisis, the leading financiers have been
mistaken as to the effect of passing movements on finance and credits.
You might give this board superwisdom, b u t I do not believe any
group of men have the physical endurance to take up all the industries
and different factors t h a t enter into the credit necessities of the
continental United States, ignoring the effect on outside trade—I do



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257

not comprehend how you can have one board with that superwisdom and capacity.
Mr. L E E . Your theory is that the board has not such power.
Mr. W I N G O . I am still laboring under the delusion that when I
voted for the original Federal reserve act, the Federal Reserve Board
was to be the servant or agent of the people and not a dictator to our
industries.
Mr. L E E . Then, perhaps I am mistaken, b u t m y assumption is
that they do have the power and all I have to say is based on that
assumption. They have the power to enlarge or diminish the
volume of bank credit that is based on the Federal reserve system,
and that obviously is very large. If it is not large enough to affect
seriously the money supply of the country, why all this talk about
t h e g r e a t importance and usefulness of the Federal reserve system?
Where do we get money from? Where do the banks get it? All
the money we have is either coin or bank credit. (In coin, when
thus speaking, I include greenbacks, which are paper coin, and bullion
deposits circulating by means of certificates.) Now we have much
more coin than we used to have; yet we do not have near so much
additional coin, I suppose, as would account for the greater volume
of money we now have, compared with what we had formerly. The
rest is bank credits, and if all the inflation of that nature were removed,
very likely it would be enough to correct the difficulty.
An objection has been made in the past to the proposition to stabilize money by regulating the weight of the gold dollar in accordance
with the price index, the objection being that this remedy would not
reach the trouble, for the reason that so much of our real circulating
medium is not gold, b u t bank credits. The object of the present bill
is to regulate bank credits, so that that part of the circulating medium
will be stabilized in value.
Mr. W I N G O . H O W will the bill regulate these bank credits?
The CHAIRMAN. Have you completed your general statement ?
Mr. L E E . N O , sir.
Mr. W I N G O . I beg your pardon. I thought you had finished.
Mr. L E E . On the assumption that the Federal Reserve Board could
regulate the volume of bank credits to a sufficient extent so that it
would have an important influence on prices—in fact, a controlling
influence on prices—I urge that this duty be laid upon the Federal
Reserve Board, for those reasons that have been stated; and I urge
t h a t it be done now, before prices go higher. They have been up,
as you know, to a very high level and now they are down lower.
They may go up again. We want to fix it so the price level will
never go any higher than it is at present.
I t would be highly desirable, in some aspects, if it were possible,
to restore the former price level, but, of course, there would be difficulty in doing that.
Mr. F E N N . Where would you start your price level? I am asking
t h a t for information. Would you start it at a period say 5 or 10
years back? Would you start it at 1914, or what year? I do not
know what year you would fix. I simply ask this in order to'get
it into the record.
Mr. L E E . I would ask to have it fixed where it is now.
Mr. F E N N . YOU would make the present price level par—to use
that term?




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STABILIZATION

Mr. L E E . Yes. That is the proposition, and I join in it. But
this is only because of the practical difficulty of establishing a price
level arbitrarily even on the basis of sound reason. I t is necessary,
practically speaking, to take it right where it is now, and try to prevent further fluctuation. That is the most hopeful way of preventing
further injustice of the kind that has been so terrible in the past.
SCALING

DOWN

OF

EXPRESSION OF INDEBTEDNESS,
CREDITOR AND DEBTOR

TO

PROTECT

If it were possible to do the best way—the way that would do the
most good—that way would be to reestablish the price level where
it was before the war, or even earlier, with the provision that all
debts contracted at a higher price level than that would automatically
be scaled down according to the price index of the date at which they
were contracted. Such scaling down would not be a scaling down of
the real indebtedness; it would be simply a scaling down of the
figures used to express the indebtedness in order to express the real
value of the indebtedness more truthfully, and bring about the just
payment of such indebtedness.
In this way all creditors would receive full value. The creditors of
more recent date would get, for instance, 1,000 one-hundred-cent
dollars instead of 2,000 fifty-cent dollars. At the same time the
creditors of longer standing, those whose claims date back to the
date of the price level selected, would receive what is justly coming
to them, but which they never can receive if a later and higher price
level is permanently established; namely, they will receive the 1,000
one-hundred-cent dollars they originally contracted for, instead of
having to take 1,000 fifty-cent dollars which a later price level would
give them.
The advantage of tjiis course would be that it would restore and
preserve the true worth of the savings that were made before 1914,
and the life insurance that was paid for up to that time, and the
endowments of colleges and benevolent institutions, built up by the
generosity and sacrifice of the people of bygone years, and all the
private investments in bonds—^Federal, State, municipal, and corporation bonds. All these savings and investments in the aggregate
are very important interests, and they ought to be protected—if it
is possible to do so.
Therefore it would be only justice to go back to the time before
the war and use the price level then existing; provided—and only
with this proviso—provided that all debts contracted since that time
would be scaled down by law so as to express their true value.
Mr. F E N N . GO back to 1914 and scale down to that point?
Mr. L E E . Yes, sir. And this would mean absolute justice to
recent creditors as well as to old-time creditors. Every creditor
would receive full value, without making any debtor pay more than
the value that he really owed.
Mr. F E N N . A creditor, then, would receive full value. If he had^
a debt of $2,000 and that were scaled to $1,000
Mr. SHIBLEY. AS gold has an international value, it would be impossible to scale down the price of gold for the rest of the world.




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That is an impossible proposition, gold being an international
monetary standard.
Mr. L E E . We have the gold in this country and can not get it out
again very readily; but if prices were to come down, and all debts
were scaled down in accordance with the price index in the manner
that I have indicated, every creditor would receive full value.
I t is an indispensable element of this proposition, however, that
the scaling down principle be established by law without any possibility of waiver. I t would have to be recognized that the scaling
down is not a remission of part of the debt, but a restatement of the
whole debt to make the statement agree with facts.
To deflate without this scaling down provision would simply
mean new injustice, and plenty of it. Business disaster would follow,
as a matter of course; and social disturbances.
If the just and rational course which I have suggested is impracticable, then by all means the price index should be fastened where it is
now, instead of leaving such legislation until a time when the price
index is higher, and instead of permitting deflation without scaling
down.
The scaling-down provision would mean absolute justice, and I
respectfully urge attention to this principle, which has not, so far as
I am aware, been discussed or proposed previously.
FLUCTUATION DISCOURAGES SAVING

Think what a discouragement to saving we have in this uncertain
value of money. Take life insurance, for example. Life insurance
is constantly pointed to as a splendid means of thrift and cooperation,
and so it is. ' Here is a card on which the Metropolitan Life Insurance
Co. quotes from President Coolidge:
Considering all the elements of security which it represents, I am convinced
that no other mode of investment can provide so much of assured and available
indemnity as good life insurance.

But the indemnity it provides now, at the present value of money
paid to beneficiaries, is so small compared with previous standards of
value that it seems to have lost much of the element of security
after all.
Everybody, we are told, ought to carry life insurance; but those
who denied themselves to keep up their premiums years ago are now
(in this present decade) getting only two-tnirds, one-half, or onethird of what they contracted for; that is, they or their widows are
getting only t h a t much in effect. The life insurance companies are
not to blame; they are paying in dollars, and that is the best they
can do. I t is up to the United States Government to keep the dollars
right, and the Government is delinquent in a most important di ty
if it fails to keep the dollars right.
The banks keep hammering it into us, Save! I t is generally considered good for social welfare if people will save. Many people,
however, think—
What is the use of saving? If we invest in business the business may go wrong.
If we leave our money in the bank the bank may break. If we buy bonds, even
United States bonds, we do not get back what we put in. It is all very well to




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STABILIZATION

talk about the credit of the Government, but if money is inflated then the Government does not really pay back what it borrows. We might as well spend
our money while we have it, and get the good of it while we can.

I ran across a little verse that I will read, as it seems to apply to
this situation.
Dollar, dollar, gleaming bright,
Can I keep you overnight?
Ah, your beauty fades so soon;
Your life is but from morn till noon.
Why so quickly get you hence?
I see; you're worth but 30 cents.

That was true in 1920; and the dollar now is worth about 60 cents
compared with pre-war values, instead of 30 cents. But it may get
down to 30 cents again. In justice to existing interests, I think it
should be fixed now instead of at a still smaller purchasing power.
Gentlemen, it is no light matter to have your dollars become worth
only 30 cents, when you have but a limited number of them, and the
number is fixed. Those people who are in active business and whose
receipts rise as their expenses rise, do not feel it the same way. But
think of the thousands and millions of people whose receipts do not
rise, but consist always of the same number of dollars. When their
dollars are worth but 30 cents it is terrible.
A sound money system would do much for thrift.
STABILIZATION WOULD STOP LABOR TROUBLES

Then again, it would abolish labor troubles, in large part.
It was in 1920 that we had this high price level. It was in 1918,
I think, that the anthracite coal miners submitted to arbitration;
and they afterwards considered that they were stung, Because their
agreement lasted over 1920 and there was an immense depreciation
oi money, so that although they were satisfied at the start, their
satisfaction was rendered quite empty. The justice that was done
to the miners in 1918 was neutralized in 1920; and that, as we are
informed, was the reason why they were afraid to accept arbitration in 1925-26. They were not demanding more wages so much
as they were demanding safety.
This inflation of money has been the cause of a large share of our
labor troubles. I want to urge this point. Labor troubles could be
avoided, to a great extent, by stabilizing money. Wages become
adjusted to a certain level; but if inflation follows, further demands
for more wages must necessarily follow; and granting increased wages
at the inflated prices amounts to giving the workers, after all, simply
what they had before. This happens over and over.
If industrial peace is desirable (and we are always hearing about
that), why not take this step, which would do more for industrial
peace than all the conciliation boards and court injunctions in the
world can accomplish without it.
RANGE OP SUPPLY AND D E M A N D — T H E ARM AND THE HAND

Before closing, may I say a word about the matter of supply and
demand. The objection is constantly made against stabilization of




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261

money, that supply and demand are what determine prices, and hence
it is not a money question at all. But we know that the separate
fluctuation of each separate commodity is a different thing altogether, from the universal rise or fall in all commodities, which
takes place without reference to changes in supply and demand for
all the material means of civilized living.
I have sometimes used this illustration, that a man's extended
arm may represent the general price level, and his fingers at the
end of his arm may represent the prices of particular commodities.
See, I extend my arm. I can move each finger separately up or d o w n but only within a narrow range. M y whole arm, however, I can
move up or down over a wide range. The arm carries the fingers
with it; and whatever the height of the arm may be, the fingers still
have their own little ups and downs.
Most of us ate potatoes for breakfast this morning—they are a universal breakfast food. Potatoes now are selling at 10 cents a pound
retail. If they were scarcer they might be 15 cents; if more abundant, they might be only 5 cents. If all prices, of all commodities,
were doubled, potatoes would be 20 cents, with exactly the same
supply and demand for potatoes that there is right now. Potatoes
vary in price on their own account, but the range of their variation
is limited by the general price level—just exactly as my middle finger
may rise or fall 2 inches while the other ringers stand still, but whether
that 2-inch range of one ringer is at a height of 3 feet or 5 feet from
the floor is determined by the position of the arm, and the separate
activity of the finger has nothing at all to do with it.
Now, the fingers must be left free to move; b u t the arm should not
be allowed to move—in this metaphor. In other words, the prices of
separate commodities are to take their own course, and that board
of superhuman wisdom, which Mr. Wingo referred to, does not have
to consider the conditions of any separate commodity or the needs
of any separate business; but only to keep the average price of all
commodities (in their totality) at the same level. The board is not
asked to hold the fingers still, nor to provide the right amount of
leeway for each finger; it need pay no attention at all to the fingers.
What the board is asked to do, under this bill, is to decide whether
the arm should be stretched out at a level of 3, 4, or 5 feet from the
floor, and then hold the arm steady at that level.
It seems to me it is an imperative duty of the Government to fix
the price level so it will not go higher or lower. That is the object
of this bill. Mr. Wingo holds that it would not attain that object;
but there is reason to believe that it would. I am assuming that it
would, and on that basis I urge that the action be taken now instead
of five or ten years hence.
I think that is all I have to say.
The CHAIRMAN. The committee will adjourn until Thursday
morning at 10.30.
(Whereupon, at 12.10 o'clock p. m., the committee adjourned
until Thursday, April 8, 1926, at 10.30 o'clock a. m.)
93869—27—PT 1




18

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STABILIZATION
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Thursday, April 8, 1926.
The committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden
(chairman) presiding.
The CHAIRMAN. Before Governor Strong proceeds I would like
to call the attention of the committee to the hearings we held in connection with the Federal Reserve Bank building at Baltimore and
the statement by Governor Seay of the Federal Reserve Bank of
Richmond and Mr. James of the Federal Reserve Board, and without objection I would like to lift from those hearings those portions
of their testimony which is pertinent to this subject and insert them
at the opening of this hearing this morning. There appears to be
no objection, and I will do that.
(The portions of the previous hearing referred to by the chairman
are as follows:)
(The following taken from the hearings before the committee
on Banking and Currency, March 16, 1926, on the joint resolution
(H. J . Res. 191) authorizing the Federal Reserve Bank of Richmond
to contract for and erect a building for its Baltimore branch—Mr.
George Seay, governor, Federal Reserve Bank of Richmond, Va.:)
The CHAIRMAN. Are you willing to say that the surplus of the
Federal Reserve Bank belongs to the Government?
Mr. SEAY. N O , sir; I would not be willing to go that far. But as
the act now stands, it reads that way.
Mr. L I N T H I C U M . If you will allow me, I would like to ask the
governor in connection with Mr. Black's inquiry: You will remember that the banks took over the subtreasury system ?
Mr.

SEAY. Yes,

sir.

Mr. L I N T H I C U M . And that subtreasury system for salaries
amounted to $463,740, besides all the other expenses. This system
is saving the Government that much, is it not ?
Mr. SEAY. Yes; and^you must not forget it is saving them a great
deal more than that, because it would probably be impossible for
the Government to conduct its financial arrangements at the present time for securities and bonds but for the Federal reserve system.
Take it the other day, the Government floated a half billion of
securities, $500,000,000. I t had redeemed about $715,000,000. There
is a total of $1,215,000,000 both ways. All those things are done
through the Treasury Department.
Mr. BLACK. NO one would dispute the value of the Federal reserve system. On the other hand, they have the power to issue currency, which is a governmental function; and the Government is
supposed to get a franchise tax, and while it is true that these bank
buildings come out of the capital stock of the bank, but the depreciation charges come from the expense account, and by reason
of their being so heavy it amounts to the condition that the Government is getting no franchise tax.
Mr. SEAY. Don't you think it is fait to take this into account?
You are describing a condition which I believe and I know is a
temporary condition, charging off by some of these banks due to
construction and due to extreme cost of construction, a certain percentage to reduce it to a level. When you allude to the Government




STABILIZATION

263

being deprived, of the franchise tax, don't you think you ought
to go back and see how much ?
Mr. BLACK. During the war the^ operations of the bank were abnormal, and I recall we had Governor Harding of the Federal Reserve Board before the committee, in which he pointed out very
clearly that a very large part of the earnings were due to the expansion of the currency.
Mr. SEAT. Yes,

sir.

Mr. BLACK. Which was a governmental function ?
Mr. SEAY. That is right. Another thing I want to call attention
to, and that is that the earnings of the Federal reserve banks can
not be large unless they employ the resources in the market in some
way. So that earnings depend to a very great extent to the use of
reserves.
You know there is considerable controversy and difference of
opinion as to whether or not the reserve banks haven't used reservies
too freely, in that it tends to expansion of credit and some believe
inflation.
There can be no earnings unless they use Federal reserve bank
reserves. A t the same time, we know it is not intended to be a
money making proposition; yet they can not pay franchise tax
unless they use reserves, and I never regarded it as sound finance
to use reserves except when called for by the safety of the country
and relief.
The CHAIRMAN. I n this flush time referred to why should you have
Federal reserve notes of $400,000,000 outstanding?
Mr. SEAT. Not for the currency of the people. You can not
keep any more of those notes out than used to save your life, the provision for redemption is such.
The CHAIRMAN. I t is a fact, is it not, that the Federal reserve
notes have supplanted to a certain extent other forms of circulating
medium?
Mr. SEAT. I do not see how this country could have had adequate
currency but for some such arrangement of the Federal reserve system,
with between one billion six hundred million and one billion seven
hundred million outstanding, and with that there is in the hands of
the banks of the country between $700,000,000 and $800,000,000 of
currency of all kinds, where before the system was established they
were accustomed to hold about twice that amount or about $1,400,000,000.
The CHAIRMAN. What effect does the fact that we have $1,750,000,000 of circulating notes out more than we had when the Federal
reserve was organized have on prices ?
Mr. SEAY. Have on prices?
The CHAIRMAN. Yes; is it inflation or is it not inflation ?
Mr. SEAY. My own argument is that there is no inflation; that
if you didn't have those notes out you would have to have the
gold out; that those notes about take the place of an equivalent
amount of gold.
The CHAIRMAN. YOU do not think there would be any difference
in the situation, whether the gold was out or whether the notes
were* out?




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STABILIZATION

Mr. SEAY. There is none at all; one is equivalent to the other, and
equal things to the same thing are e.qual to each other.
The CHAIRMAN. I S there any difference between Federal reserve
notes and the gold certificates ?
Mr. SEAY. Practically none.
The CHAIRMAN. What is the difference?
Mr. SEAY. Some technical arrangement. The Federal reserve
notes outstanding are redeemable by the Treasury in gold, and are
redeemable by the Federal reserve bank in gold, or lawful money,
which means gold, because lawful money bears a very small proportion to gold.
The CHAIRMAN. YOU do not feel, then, that there is any obligation on the part of the banks to return the franchise tax to the
Government on outstanding Federal reserve notes?
Mr. SEAY. I don't think so sir.
The CHAIRMAN. I n other words, you consider it is perfectly rigfit
and proper that the Federal reserve system should absorb all of its
net profits, wThether derived from the loaning of reserve funds or
from the issuance of Federal reserve notes?
Mr. .SEAY. I think so, since they pay the entire expense of the
production of those notes and of the upkeep of those notes—everyt h i n g ; that is one thing to bear in mind. The cost of that operation
of clearance is borne entirely by the Federal reserve banks. If they
did not do it, the Treasury Department would have to do i t ; and,
as was mentioned a while ago, the cost of subtreasury is a very substantial franchise tax, and bearing all expenses of the issuance of
Federal reserve notes except the small expenses incident to these
periodical issues.
The CHAIRMAN. What proportion of the expenses of your Richmond bank is the cost of the transit department—the collection of
checks and other items?
Mr. SEAY. We have in the transit department, I think, sir, about
110 people. We have altogether in our employ 371 employees, so
that it requires a little more than one-third.
We do issue an annual report, in which we divide the operations
of the Federal Reserve Bank in Richmond into functions, and we
do estimate in that report the cost of performing the collection
function, and of the money functions, and of the other functions of
the bank. I can not speak definitely, but my recollection is that
it is somewhere between $300,000 and $400,000 a year.
Mr. WINGO. Are you right there?
The CHAIRMAN. I S that one-third of your gross expenses? You
say about one-third of your employees are engaged?
Mr. SEAY. I should say that is about one-fourth of the gross expenses. I think that bears out the statement I made that the
transit department is the costliest department in a bank.
Mr. WINGO. I n figuring on that do you also include gold transfers and money transfers, as a p a r t of that expense?
Mr. SEAY. That is in a separate department., I find that the cost
of transit and collections, which is not the entire cost of the transit
department, is $289,000.
You can not separate the bank into separate and distinct functions except in a general way. The total operating expenses last




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265

year were $1,458,000. So that I think I am right in saying that
the cost of conducting the transit department is about $300,000.
So that it is almost 25 or 30 per cent.
Mr. W I N G O . I s that currency allocation, if you will permit me,
and rediscount?
Mr. SEAT. T h a t is not currency.
Mr. W I N G O . Cost of rediscount and your currency, isn't it very
small compared to other operations?
Mr. SEAY. The cost of receiving and handling so many pieces of
currency and so many pieces of coin, the shipment charges, expense by the Treasury Department covering cost of printing and
maintenance, $321,000. That is what it would cost the Government
in our bank if they were performing the services.
Mr. W I N G O . Your bank is now performing functions with reference to sorting currency and sending in currency of the Federal reserve bank which the member bank would have to perform ?
Mr. SEAT. The shipments between the member banks and correspondents; and we are now paying the cost of the currency both
ways.
Mr. W I N G O . I was proceeding on the idea that member banks own
the Federal reserve system and get the benefits out of it.
Mr. SEAT. S O they do. They are not prepared to admit it
Mr. WINGO. YOU do not contemplate doing away with the profits
to the Government, whenever there are any, and asking the Government to make a contribution?
Mr. SEAY. W h a t kind of a contribution?
Mr. W I N G O . A contribution to charitable operations and serving
those member banks.
Mr. SEAY. W h a t kind of a contribution are they making?
Mr. WINGO. I got the impression from your suggestions that possibly you thought you were rendering an extraordinary favor to the
Government for which you might possibly feel like being compensated instead of giving some.
Mr. SEAY. We should be compensated and the Treasury Department held we were entitled to compensation, but Congress didn't
make any provision for it.
Mr. WINGO. T h a t is the point I am getting a t : I s it your position that this system renders such great benefits, which any man
who goes into the infinite details of the wonderful service that you
and every other Federal reserve bank renders its stockholders and
its members, that you can contemplate and justify the theory that
possibly the Government ought to compensate you for something?
Mr. SEAY. I think so, but it is as broad as it is long.
The CHAIRMAN. What is that service in your bank, for instance,
that you have rendered the Government?
Mr. SEAY. The cost of the transit department amounts to $321,000,
but the cost of shipping charges which the Federal reserve banks
pay into the member banks is about $93,000 of that $321,000.
The CHAIRMAN. T h a t is in addition to the cost of the transit
department ?
Mr. SEAY. Oh, yes; in addition to the cost of the transit department. The position that I took just now was that perhaps the
Treasury Department ought to pay the expense of performing the




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STABILIZATION

services of subtreasury which they formerly did pay and which the
Treasury Department took the position it was called upon to pay,
but there happened to be no appropriation by Congress, or Congress
took a different view.
The CHAIRMAN. I n other words, the Government is getting in
the way of services from you an amount which might be construed
as being in lieu of the franchise tax.
Mr. SEAY. Undoubtedly. I do not think that any fair consideration could result otherwise.
Mr. WINGO. I am talking about this: Bankers, like wholesale
grocers, where there is no profit, will liquidate. I think one of
the evils of the Federal reserve bank system is the national banks
crying about being imposed upon and doing it out of a sense of
public duty. I think that is unfortunate.
. Mr. SEAY. YOU haven't gathered that impression from anything
I said, have you?
Mr. WINGO. I thought you covered that matter that the Government was imposing upon a charitable institution known as the Federal reserve system?
Mr. SEAY. When you come to consider getting a franchise tax
I think we can make a showing that the Government is getting it
either directly or indirectly. Certainly we are performing services
which it would cost the Government a great deal to perform.
Mr. W I N G O . And the Government, having set up your system and
maintaining it, is giving the bankers of the country—I am not
complaining of i t ; I was for it—an inestimable benefit, which they
seem to overlook every time when they are looking at what the
Government is getting.
Mr. SEAY. Unfortunately they overlook it, and that is that they
do not properly appreciate the benefits of the system.
The CHAIRMAN. I understood you to say a few moments ago that
the surplus of the Federal reserve system belongs to the Government ?
Mr. SEAY. Their accumulated earnings, and I think if you will
turn to the act you will find that in case of liquidation of the Federal reserve banks that after the repayment of the reserve deposits
and after the repayment of the capital subscribed by the member
banks, that whatever remains is the property of the Government;
t h a t is all.
There are two sources of profit in the Federal reserve system:
One arises from the employment of the reserves of the member
banks, which are $2,200,000,000, whatever proportion of those reserves is loaned out and income is derived from. Then there is the
partnership of the profit arising from the issue of Federal reserve
notes. Federal reserve notes can be issued against gold and, as
you know, can be issued against discounted paper, provided a reserve of 40 per cent is maintained. So there are two sources of
profits—from the issue of Federal reserve notes and from the employment of reserves of member banks; of those two sources of
profit $2,200,000,000 is'reserve deposits and about $1,600,000,000
Federal reserve notes outstanding. My recollection is t h a t those
notes are all covered by gold at the present time. They are in our
bank, so that they are the equivalent of gold.




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267

Those two sources of profit, one arising, as you have heard, from
the power to issue currency, the cost of which I only insisted was
borne by the system itself; the cost of furnishing the rest of the
currency of the country is borne by the Treasury Department.
The CHAIRMAN. Just before you go, Governor, pertinent to this
question is the volume of business that you are doing in the Federal
Eeserve Bank of Eichmond. You have stated here that practically
50 per cent of the cost of operation of the Eichmond bank is work
done for the Government and in the transit department. You have
also stated that 50 per cent of the cost of operation
Mr. SEAY. JSTot quite 50 per cent.
The CHAIRMAN. I understood you to say $350,000, approximately,
was the cost of the transit department.
Mr.

SEAY. Yes,

sir.

The CHAIRMAN. And $350,000 the cost of the work done for the
Government.
Mr. SEAY. Pretty nearly.
The CHAIRMAN. I n addition to that, you have the transmittal of
currency and coin, which is an additional expense?
Mr. SEAY. Yes; that is right.
The CHAIRMAN. Your earnings are derived, of course, from the
amount of rediscounted paper and interest on other moneys invested?
Mr.

SEAY. Yes,

sir.

The CHAIRMAN. What per cent of your earnings is derived from
discounted paper; in other words, how are you investing your funds
at this time of the Federal reserve system? How are the earnings
derived—what per cent of rediscounts of member banks' paper and
what per cent is derived from investments of bonds, securities, and
other investments?
Mr. SEAY. We have invested in short-time Government securities, as I recall, about $8,000,000; we have invested in discounted
paper about $50,000,000.
I do not know whether all these gentlemen recall the outlines of
the district. I t is the Maryland district, Virginia, West Virginia,
and all except about six or five counties in the panhandle of North
Carolina, composing about 10,000,000 inhabitants.
The CHAIRMAN. I n your statement, of course, those are called
earning assets?
Mr.

SEAY. Yes,

sir.

The CHAIRMAN. What percentage of total reserves is invested
in earning assets?
Mr. SEAY. Total deposits, about $65,000,000—just about total deposits. Suppose we had 35 per cent reserve against them, that would
be deposits $65,000,000 against the required capital permanent reserve of 35 per cent.
Mr. WINGO. Suppose the members and chairman of the committee recognize it is very essential to have commodious quarters in
Baltimore. That branch is in the heart of the most rapidly growing part of the United States, as we all recognize, since it covers
the Carolinas, the District of Columbia, and Maryland.
The CHAIRMAN. The point I was getting at, from what the governor has stated, which has a bearing upon the whole point at issue,
but more particularly upon the operation of the Federal reserve




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STABILIZATION

system, is the fact that over 50 per cent of their expenses is devoted to the transit department and the work being done for the
Government. I t is clear, I think, to all of us, from the statement
the governor has made here this morning, that the Federal reserve
system is assuming many burdens, such as maintenance of the circulating medium, which heretofore has been done at the expense of
the United States Government and many other services. I am speaking of the time prior to the establishment of the Federal reserve
system.
The question naturally arises to my mind here whether or not the
Federal reserve system itself is not assuming an undue portion of
the burden of these expenses and cost of buildings and whether perhaps a portion of the cost of these buildings should not be properly
paid by the United States Government.
As I understand you, an amount in excess of the deposits of member banks is invested in earning assets ?
Mr. SEAY. N O ; just about the same. I n other words, the total
deposits are going down. Ours is a borrowing district, and ordinarily the income is derived from discounting operations.
The CHAIRMAN. What proportion of the earning assets of your
bank is the proposed loan of $200,000,000 which was arranged for
Great Britain? What is your share of this established credit?
Mr. SEAY. I think perhaps if they were called upon to make the
loan that our proportion would be between 4 and 5 per cent, that
being about the proportion our capital and surplus bears to the
entire capital and surplus of the Federal reserve system.
The CHAIRMAN. H O W is the Federal Reserve Bank of Richmond
obligated under that agreement?
Mr. SEAY. I t is obligated only to this extent, that the Federal reserve bank will participate in any advances which may be made.
The CHAIRMAN. I S that a liability to the Federal Reserve Bank of
Richmond ?
Mr. SEAY. I should think it would be.
The CHAIRMAN. H O W do you report that liability in your statements ?
Mr. SEAY. There has been nothing to report, because no loan has
been made; it is only contingent.
The CHAIRMAN. An obligation to loan if called upon?
Mr. SEAY. Could not be put in.

The CHAIRMAN. There has never been any information furnished
this committee on that obligation, and there are apparently several
versions as to the obligation of the Federal reserve system outstanding ; just what is the obligation of the Federal reserve system ?
Mr. SEAY. I know I have seen in print everything I have told you>
that there was an agreement upon the part of the system, sanctioned
by the Federal Reserve Board, and has been so published.
The CHAIRMAN. I S there an agreement of participation in that
between the Federal Reserve Bank of Richmond and the Federal
Reserve Bank of New York, or some committee, which authorized
that loan to Great Britain?
Mr. SEAY. Nothing but a verbal understanding, which has been
confirmed by correspondence, that if and when advances were to be




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269

made on adequate surplus that the Federal Reserve Bank of Richmond would be willing to participate upon the customary basis, based
upon its proportion of capital and surplus to the proportion of capital and surplus of the entire system. Nothing more definitely than
that, and I have certainly seen that in print.
Mr. STEAGALL. Who commits for you ?
Mr. SEAY. The directors of our bank.
Mr. STEAGALL. Nobody else could commit you ?
Mr. SEAY. N O .
Mr. STEAGALL. But
Mr. SEAY. I do not

at whose instance do you take that stand ?
take it at the instance—certain of the Federal
reserve officials who are responsible for the administration of certain
banks stated that this kind of an arrangement might eventuate, and
if it did would our banking institution be willing to participate.
Mr. STEAGALL. YOU think this suggestion came from the certain
bank?
We just want to know who this is. We want to know the
source. I am not complaining; I just want to know.
Mr. SEAY. I do not know that I can say definitely about all the
banks, but I think all the larger Federal reserve banks were associated together.
Mr. STEAGALL. YOU know who took it up with your bank and made
the suggestion ?
Mr. SEAY. The direct intimation we got came through the New
York bank, but I am quite sure that all the larger Federal reserve
banks, by understanding and by conversation, were likewise concerned. As far as we were concerned, the tentative arrangement
came through the New York bank.
The CHAIRMAN. Governor, to whom does your commitment r u n to the Federal Reserve Bank of New York or to the Bank of
England?
Mr. SEAY. I t does not run to the Bank of England. The commitment, as far as it stands with our bank, is that our bank by direction
of the directors is willing to pay to any advances that may be made
to the Bank of England in the purchase of bills or advances against
gold.
The CHAIRMAN. I wanted to ask under what authority of the
law have you the right to make such a commitment ?
Mr. SEAY. The purchase of bills at home or abroad.
The CHAIRMAN. What section of the Federal reserve act?
Mr. SEAY. Section 4.

The CHAIRMAN. D O you think the framers of section 4 of the
Federal reserve act had in contemplation the loaning of $200,000,000
to Great Britain?
Mr. SEAY. I t is not to Great Britain; it may be any kind of bills
of exchange.
The CHAIRMAN. T O whom, then does the commitment run?
Mr. SEAY. A S far as our bank is concerned ?
The

CHAIRMAN.

Yes.

Mr. SEAY. I t is nothing more than the expression of a willingness
to participate in the advancement of such-and-such sum, equivalent
to 4 or 5 per cent of the sum, in advances to be made, or advances of
other nature, I think specified in section 4 of the bank act.




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STABILIZATION

Mr. BEEDY. T O whom was that expression made?
Mr. SEAY. I have answered.
Mr. BEEDY. T O the New York bank ?
Mr. SEAY. The correspondence came to us from the New York
bank—not to us only, but as one of four or five of the larger banks
of the country.
The Federal reserve banks, through their own banks, had expressed a willingness to participate in this business, and some of
the larger ones got together and agreed they would participate.
The New York correspondent took it up with this bank, asked as
to the willingness, and our bank answered in the affirmative.
The CHAIRMAN. Have you on file in your bank any statement or
agreement of committal?
Mr. SEAY. T O whom ?
The CHAIRMAN. T O the Federal reserve bank or anyone else ?
Mr. SEAY. Yes, I have a copy of a letter in answer to the proposal
to the Federal Reserve Bank of New York, stating our directors
would participate.
The CHAIRMAN. I S it your understanding that the Federal Reserve
Bank of New York negotiated directly with the Bank of England
or with the Government of Great Britain?
Mr. SEAY. I t is my understanding that the negotiation was entirely with the Bank of England, a banking transaction.
The CHAIRMAN. What kind of bills is in contemplation of purchase ?
Mr. SEAY. The usual bills we are authorized to purchase—bills of
exchange—you know England is the great open market handling
continental bills of exchange from all over the world, and there
might be bills made in this country.
The CHAIRMAN. Was the rate of discount fixed in this agreement
or understanding?
Mr. SEAY. NO, I don't think so.
Mr. WINGO. Do not the bills of exchange in England circulate
very much like currency?
Mr. SEAY. Not exactly like currency.
Mr. BEEDY. Not exactly; but they are used as a medium of exchange in different countries, and in England particularly.
Mr. SEAY. The banks there having excess reserves invest those
excess reserves in these bills of exchange in the English open market
or sell bills of exchange in the open market, and do not discount
them in the Bank of England—they sell these bills, for which there
is always a market, and thus supply themselves with funds.
The CHAIRMAN. Did you answer as to who negotiated this arrangement ? Did the Federal Reserve Bank of New York negotiate this ?
Mr. SEAY. I do not think they did, in and of themselves. I can only
say that the proposal came to us from the Federal Reserve Bank
of New York, and it is pretty well known there is what is called the
" investment committee " of the Federal reserve banks. You know
that, do you not?
The CHAIRMAN. Yes; made up from the officers of the 12 Federal
reserve banks?




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271

Mr. SEAY. Yes; and this came to us from the chairman of the investment committee.
The CHAIRMAN. Who is chairman of that committee?
Mr. SEAY. Governor Strong of the Federal Reserve Bank of
New York.
Mr. F E N N . From the chairman of the committee and not directly
from the New York bank ?
Mr. SEAY. Oh, no.
Mr. WINGO. Governor

Strong wrote you as chairman of that
committee ?
Mr. SEAY. That is the light upon which we looked upon i t : yes,
sir. I might say that that is nothing unusual; there are other instances in which we agree to participate in the purchase of bills in
this country.
Mr. STEAGALL. Would there be any objections to submitting that
correspondence to the chairman of this committee ?
Mr. SEAY. SO far as I am concerned, I do not think there would
be any. But there is not anything in it which I have not repeated,
so far as I can recall. I would rather you would not ask me for it,
in the nature of the correspondence, but at the same time there is
not anything in it I would not be willing to read to you. I told you the
exact substance, and so far as I can understand there is nothing to
it at all.
.
Mr. WINGO. So far as you can understand, what was the benefit
to flow to the Bank of England or necessity to the Bank of England ?
Mr. SEAY. I t was entered into as an aid to the Bank of England
in placing the banking business of England upon the gold basis.
Mr. WINGO. Here is what I would like to get at, Governor: The
agreement you talked about is the agreement that was made that
the Federal reserve system would furnish to the Bank of England
$200,000,000 gold?
Mr. SEAY. N O ; the Federal Reserve Bank of Richmond would
participate.
Mr. WINGO. I am talking about the agreement; not who would
make it.
Mr. SEAY. Mind you, it was conducted on the basis of the individual banks.
Mr. WINGO. The Federal reserve system includes all banks?
Mr. SEAY. We had better say Federal reserve banks.
Mr. WINGO. I am cutting out the detail. The outstanding, substantive proposition was that the Bank of England thought possibly it would need $200,000,000 of our gold to maintain the gold
standard which it was resuming, and our system or some of our
system or parts of our system agreed that if it became necessary
we would let them have that $200,000,000. Of course, you can not
pay for gold with gold, and the Bank of England said, " We will
pay you in prime bills that you have already been in the habit,
especially the New York Bank, of going into the open market and
buying;" and in order to keep that practically going continuously
until it can be whittled down, these bills as they matured were replaced by other bills to mature in the future ?
Mr. SEAY. That is all there is to it.




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STABILIZATION

Mr. WINGO. H a d not the Federal reserve system prior to that
agreement, for more than two years, maintained on an average more
than $200,000,000 invested in that very same kind of bills?
Mr. SEAY. Oh, yes.
Mr. WINGO. So practically

all you agreed to do was that you
have continued the policy of the last two years for about three
years more or less; in other words, you gave the Bank of England
the definite assurance, pending operations, that we would continue
for the period of that agreement to invest wherever necessary and
pay gold therefor to the amount of $200,000,000 at least, which was
about the average amount we had been carrying?
Mr. SEAY. About the average amount.
Mr. WINGO. That is what you were talking about when you were
talking about this agreement?
Mr. SEAY. Nothing more nor less.
The CHAIRMAN. Governor, in that connection, supposing this
whole $200,000,000 should be drawn on, what would be your proportion?
Mr. SEAY. As I think, between 4 ^ and 5 per cent. The Federal
reserve system, about 1919 or 1920, had about $600,000,000 invested
in acceptances in this country. I think at the present time they
have something around $250,000,000.
The CHAIRMAN. Governor, the total capital of the entire Federal
reserve system at the present time is around $200,000,000?
Mr. SEAY. Our capital is $120,000,000 and the surplus at the
present time is nearly twice that, or $220,000,000.
The CHAIRMAN. Entire capital of Federal reserve banks of the
whole Federal reserve system?
Mr. SEAY. That is right.
The CHAIRMAN. That surplus, in case of liquidation, would belong
to the United States Government?
Mr. SEAY. Yes; after payment of reserve deposits and the return
of capital, with accrued dividends.
The CHAIRMAN. The only funds you have outside of capital and
surplus in the Federal reserve system are the deposits of member
banks or the legal reserves of the member banks in the Federal reserve ?
Mr. SEAY. Capital of banks and the reserve of the member banks.
The CHAIRMAN. Are you of the opinion that it is a good plan toloan to a foreign government reserves or make commitments which
might absorb the legal reserves of the Federal reserve system?
Mr. SEAY. I do not think we are loaning to a foreign government.
The CHAIRMAN. YOU are buying notes or bills?
Mr. SEAY. Yes; but we are not buying from any foreign government.
The CHAIRMAN. YOU are buying then how?
Mr. SEAY. That would be such bills as we might deal in with t h e
Bank of England.
The CHAIRMAN. Are they obligations which would be readily
marketable in case of a sudden outbreak of war ?
Mr. SEAY. I should think so, sir. You know how the bills flow
in the open market of London, which amounted to, I think, about.




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STABILIZATION

a billion and a half when the war broke out. The English treasury
undertook the guaranty of those bills—about a billion and a half
to-day—but so far as those bills are concerned they might be bills
in this country which we are authorized to purchase.
The CHAIRMAN. Are you of the opinion that it is the spirit of the
Federal reserve act that there might be invested these legal reserve
deposits or the capital of the Federal reserve system to the extent
of $200,000,000 in foreign securities such as is provided in this
agreement?
Mr. SEAT. Beyond any question; we have that right to deal at
home or abroad.
The CHAIRMAN. Under section 4?
Mr. SEAY. Yes, sir; at home or abroad in foreign exchange, and
no limit is placed on that.
The CHAIRMAN. The newspaper reports of this loan indicate that
when this credit was granted the Federal Reserve Banks participated
to the extent of $200,000,000 to either the Bank of England or Great
Britain, and it indicated at the same time there was a credit of
similar nature granted by J . P . Morgan & Co. The newspapers
also reported that J . P . Morgan & Co. was getting a commission on
that transaction, so far as their loan is concerned, but that the Federal reserve system was getting no profit from the transaction; and I
have here a newspaper clipping from a recent issue of the New
York Times which I want to read to the committee [reading]:
MORGAN SILENT ON F E E — R E F U S E TO T A L K ON $ 1 , 1 2 5 , 0 0 0
0 0 0 CREDIT TO B R I T A I N

CHARGE FOR

$100,000,-

Officials of J. P. Morgan & Co. refused to comment yesterday on the statement of Winston Churchill, British Chancellor of the Exchequer, that the
cost of the $100,000,000 credit which Great Britain obtained from the Morgan
firm at the time of the return to the gold standard, was $1,125,000 to the end
of the first year.
The interest charge in connection with the credit never has been announced
here, but it was said yesterday that it was a matter of public record in London
and was published there when the credit was obtained last April. The Bank
of England obtained a $200,000,000 credit from the New York Federal Reserve
Bank at the same time the British Government arranged the Morgan credit.
Neither credit has been drawn upon. Both were obtained as a precaution
against exchange pressure when Great Britain resumed gold payments.

That naturally raises the question as to who negotiated this $200,000,000 credit; whether J . P . Morgan & Co. or whether it was arranged jointly with the Federal Reserve Bank of New York; and
if the Federal Reserve Bank of New York arranged their part
of it why didn't they make a charge for this service, the same as
J . P . Morgan & Co.? I s there any agreement as regards payment
for this service?
Mr. STRONG. Because J . P . Morgan & Co. got all the traffic would
bear; there would be nothing left.
Mr. WINGO. I want this in the record: The agreement contemplates that the $200,000,000 of paper that shall be purchased with
gold under this agreement; that those bills will have to be created
so as to give the Federal reserve banks 1 per cent more than the
current rate. I think that is the current rate of discount in the
United States, isn't it? I n other words, it would be 1 per cent
premium going to the Federal reserve bank on that $200,000,000;
isn't that true, Governor?



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STABILIZATION

Mr. SEAY. I can not recall definitely.
Mr. STEAGALL. That statement was made; I remember that.
Mr. SEAT. There is a difference, you know, between discount rates
in this country and what is called the open-market rate for acceptance there.
Mr. WINGO. One per cent premium over some basic rate, whether
the current basic rate of exchange or the open-market rate in the
United States?
Mr. SEAY. The open-market rate.
Mr. WINGO. Or rediscount rate. I have an idea it is the openmarket rate.
Mr. SEAY. At the open-market rate; yes, sir.
The CHAIRMAN. I am not saying that that is not a perfectly
legitimate and proper thing to do. I. am not unsympathetic with
the United States rendering such assistance as they can to Great
Britain.
Mr. SEAY. I understand.

The CHAIRMAN. B u t the question has been raised in the minds
of a good many people as to the participation of the Federal reserve
system in a loan of this character and as to the authority and as
to the terms and the reasons for and as to just what the commitment was; in other words, if this Federal reserve system is t h e
sacred reservoir for the maintenance of the liquid reserves of the
banks of this country for use in emergency, is it proper that those
reserves shall be invested in a foreign credit of this kind ?
Mr. SEAY. A S the question

The CHAIRMAN (continuing). I s it proper and good for the Federal reserve system? I do not ask you to answer that one way or
the other, but I wanted to make that statement, in view of the
questions that have been p u t to you here.
Mr. SEAY. I n the first place, I want to say that there is not anything wrong about this transaction to which you are not perfectly
welcome, and I am not withholding anything whatever.
The CHAIRMAN. And I will say that there is no intention to embarrass you. B u t you are the first governor of any Federal reserve
bank that has been before this committee since this matter happened.
I t is a matter in which the committee is extremely interested, and
they will in all probability want additional information.
Mr. SEAY. There is not anything to which you are not perfectly
welcome or to which I feel I have any hesitancy in saying. If I
have appeared reluctant, it was because I was searching my mind
for the exact terms of the agreement. There always is a difference
of opinion on large subjects. There might be some question about
the propriety of doing this thing. Some people might hold one
thing and some people might hold another. B u t upon the right
and authority of the Federal reserve banks to do this, according
to the counsel of our bank and according to our opinion and the
opinion of the Federal Reserve Board, there is no question whatever
about i t ; and, moreover, as the gentleman (Mr. Wingo) has just
said here, it is to extend the operations we are constantly conducting.
Mr. WINGO. I n other words, your defense against the restraint
of the law is t h i s : that the spirit of the law—I can understand that
there might be some doubt whether or not the letter of the law




STABILIZATION

275

permitted what you have done—the answer to that from your
viewpoint is that you were called upon to make the commitment
in the regular line of open-market purchases; you had ample funds
and you were in the habit of investing surplus funds in bills in the
open market, and it was nothing unusual, especially for the New
York bank, to buy in the open market these foreign bills that
are used to finance our exports and imports. For illustration, if
my friend Strong, of Kansas, took in a million dollars' worth of his
wheat at that time and exported it to Europe, it has to be settled
mostly by those bills of exchange. There is nothing, you think,
that bars you under the law, the Federal reserve bank or your bank,
from buying that $1,000,000 exchange to finance the export of that
wheat, buying in the open market? You feel like that is perfectly
legitimate and one of the functions for which your institution
was created ?
Mr. SEAY. According to my own judgment and the act, according
to the advice of our own counsel, and the combined advice of the
Federal reserve banks, there is nothing unusual about it contemplated by the bank. I t is a little larger transaction than we are
accustomed to. We haven't been called upon to advance anything
and we might not be called upon to advance anything; but if we
were, we would do it in the regular way.
Mr. STEAGALL. YOU may have gotten the benefit of it by the
agreement.
Mr. SEAY. Certainly; and as a leavening influence, I think that
the benefit of it has been world-wide.
Mr. STEAGALL. I t is sort of like the fellow who owes you something
and he comes and wants to pay it and you say " All right. I will
just carry it a little longer, if you like."
Mr. SEAY. And perhaps those who have been benefitted most by
it have been the people of this country. But that is a collateral
thought in view of the suggestion.
Mr. BEEDY. Governor, it is doubtful that all your surplus is invested, and that if you were suddenly called upon to fulfill the
terms of your agreement you would be obliged to draw upon your
reserves up to this commitment ?
Mr. SEAY. More than our surplus is invested, and our capital,
too.
Mr. BEEDY. Then, as to the wisdom of allowing the Federal reserve banks to participate in purchases in the open market of foreign
securities when to do so means to draw upon their liquid reserves,
what do you say about that ?
Mr. SEAY. We are drawing upon our liquid reserves all the time.
Mr. BEEDY. Ought there not in your opinion be some amendment
or some restriction in that regard?
Mr. SEAY. There is. The act says we must maintain 40 per cent
against Federal reserve notes and 35 per cent against deposits.
There is that restriction now.
Mr. BEEDY. YOU are drawing upon those reserves.
Mr. SEAY. Not the 40 per cent and 35 per cent.
Mr. BEEDY. What reserve are you drawing on?
Mr. SEAY. The reserve deposits. The capital of the Federal reserve banks consists not only of the capital subscribed by member




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STABILIZATION

banks and their accumulated surplus, but consists of reserve deposits. Those are the reserves of the country.
Mr. BLACK. There is kept on hand at least 40 per cent ?
Mr. SEAT. There is kept on hand at least 40 per cent and also 35
per cent; in other words, if our reserves get low we can sell some of
our discounted paper or bills purchased in the open market to the
other Federal reserve banks.
(Continuation of excerpts from hearings before the Committee
on Banking and Currency March 16 and 17, 1926, on the bill House
Joint Resolution 191, authorizing the Federal Reserve Bank of
Richmond to contract for and erect a building for its Baltimore
branch—Hon. George R. James, member Federal Reserve Board—
March 17) :
The CHAIRMAN. I n the discussion before the committee yesterday, the governor of the Federal Reserve Bank of Richmond stated
to us that the cost of this fiscal work which the Federal Reserve
Bank of Richmond was doing was about one-fourth of their total
expense, and that that was paid for out of the earnings of the
Federal Reserve Bank of Richmond, and that if it was not for that
work that this money could be otherwise paid back to the Treasury
of the United States in the form of a franchise tax.
T raise this question now to get your opinion, or the opinion of the
board, for the committee, as to whether or not the Federal reserve
system is doing an unusual amount of work for the Government of
the United States for which they should be recompensed.
I n addition to that, there is a collateral issue also as to whether
or not the Federal reserve system is not carrying an undue amount
of burden and expense incident to the furnishing of the circulating
medium which did not exist prior to the passage of the Federal
reserve act; in other words, whether or not the Federal reserve
system is being charged with the responsibility of furnishing a circulating medium in the form of Federal reserve notes, the burden
of which charge heretofore has been borne by the Treasury of the
United States
Mr. JAMES. Well
The CHAIRMAN. There are other functions like the transfer of
funds and other incidental services that the Federal reserve system
is performing, which might be construed properly as a part of the
Government's expense. The question was raised here before the committee as to whether or not the Federal reserve system was or was not
returning as much franchise tax, or earnings in the form of franchise
tax, to the Government that it should and whether the Government
was not getting compensation in the form of services in lieu of franchise tax.
Mr. JAMES. There can be no question but what that is so.
The CHAIRMAN. W h a t is the view of the board on those points %
Mr. JAMES. I t is a matter I have not heard discussed in" the board
as a whole, and therefore I should be reluctant to talk as speaking
for the board. But in my judgment, there is no doubt but what the
Federal reserve banks are performing functions and services for the
Government that bear tremendously in the aggregate of expenses.
Many of those expenditures are of such a nature that I should say
they would vary in the different banks. Offhand, without having




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277

any figures before me to corroborate my statement, I should say that
the Federal Eeserve Bank of New York performs more services for
the Treasury Department than any other bank in proportion.
The CHAIRMAN. I will say to you, Mr. James, that when Governor
Seay yesterday stated that the expense of these fiscal operations is
costing the Federal Reserve Bank of Richmond in the neighborhood
of $350,000,1 was surprised, and I wondered if that was a fair comparison of the expenses of the other banks; and, as you say, probably
the New York bank's expenses are much greater, because a lot of those
transactions are centralized there ?
Mr. JAMES. Yes,
The CHAIRMAN.

sir.

Offhand, could you give the committee any idea
of what these fiscal expenses are in the Federal reserve system
throughout the 12 banks ?
Mr. JAMES. I would rather not attempt to give that opinion offhand, because they run into such an enormous amount that it might
be misleading.
Mr. WINGO. Would it not be well, Mr. Chairman, for him to call
on his banks to estimate the cost of these services, and to segregate it
and the character of services; in other words, to enumerate them and
the estimated costs?
The CHAIRMAN. I have no doubt that probably that is available.
Mr. JAMES. I t is right here.
The CHAIRMAN. I would suggest that for the year 1925 those figures be made available.
Mr. JAMES. I think right in our own Division of Bank Operations
here in Washington we can get that information, perhaps during the
day.
Mr. WINGO. I think you might have it in the aggregate, but I had
this idea: Taking into consideration the transfer of funds for the
Government and other things, undertaking to give a general statement—in other words, you have an idea of what we want, so that we
could study that?
Mr. JAMES.

Yes.

Mr. WINGO. Because there might be some dispute whether or not
the one character of service would be such a service as was contemplated in the original requirements that they should act as fiscal
agents.
Mr.

JAMES. N O .

Mr. WINGO. The service might be one the Government could not
really compel under the law that the banks render, but that the
banks are voluntarily rendering it. You get the idea ?
Mr. JAMES. Yes.
Mr. WINGO. We

want it segregated so that we can determine the
real services that the banks are rendering, which cost them dollars
and cents and which save the Government comparatively the same
amount.
Mr. JAMES. Of course, you understand that there would be a considerable difference in the figures for the various banks.
Mr. WINGO. I understand that. Certain banks in certain sections
have very much heavier volume in the handling of bonds, coupons,
and things of that sort.




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STABILIZATION

The CHAIRMAN. That brings up an interesting question which
I would like to ask you: I n its dealings with the Treasury in these
fiscal operations, do they deal with each one of the 12 banks
separately, or does this committee in New York speak for each of
the 12 banks; for instance in the distribution and issuance of
Treasury certificates or bonds ?
Mr. JAMES. Well, I should say where assisting the Treasury in
the distribution of an issue of bonds of debentures ?
The CHAIRMAN. Yes; is that handled separately by each one of
the banks, or does this committee act for them ?
Mr. JAMES. The committee acts for them.
The CHAIRMAN. Does the committee of which Benjamin Strong
acts as chairman handle those fiscal operations and make distributions to the banks ?
Mr. JAMES. I n that particular case, yes. The committee operates
with the Treasury, in order that the point of contact may be more
direct; and then the distribution is made by agreement throughout
the other banks.
The CHAIRMAN. The fiscal expenses would, because of the very
fact of that concentration, be heavier on the New York bank than
any others?
Mr. JAMES. Greater in proportion than to any others.
The CHAIRMAN. Have you any idea whether they distribute those
expenses to the other banks ?
Mr. JAMES. I think not. I think the New York bank absorbs
the major portion of it. There may be some expenses in detail that
they prorate to the various banks in accordance with the volume of
business in the transaction.
Doctor Miller has just called attention to the fact that schedule E
of the Federal reserve records shows that about 25 per cent of the
expenditures of the banks of the system is incurred through the
service rendered to the Government.
The CHAIRMAN. Twenty-five per cent of the total expenses of the
Federal reserve system is for fiscal operations for the Treasury
Department ?
Mr. JAMES. For the Treasury Department.
The CHAIRMAN. I understood from the Governor of the Richmond
Bank yesterday that about one-third of the expenses of the system
is account of the work carried on by the transit department. I s
that approximately correct?
Mr. JAMES. I think that is approximately right; yes.
The CHAIRMAN. SO that approximately 33% per cent of the expenses of the Federal reserve system is occasioned by those two
services which they are rendering?
Mr.

JAMES.

Yes.

Mr. WINGO. The transit part of the expense would include not
only currency items, checks, et cetera, but also the transfer of funds?
Mr. JAMES. Yes.
The CHAIRMAN. I

understood the Governor of the Eichmond Bank
to say that the transfer of funds by telegraphic advice, et cetera,
was an additional expense.
Mr. JAMES. Yes; from the transit.
The CHAIRMAN. From the transit department?
Mr. JAMES.

Yes.




STABILIZATION

279

Mr. WINGO. I had the impression that they were separate and
that is the reason I raised the question. So that, in other words,
the transit department refers to the services of the banks clearing
checks, that is the major item?
Mr. JAMES. Yes.
Mr. WINGO. Now,

the transfer of funds by telegraph is not included in the so-called expense of the transit department?
Mr. JAMES. N O .
Mr. WINGO. Which

is estimated at 3 3 % per cent—tne two items
would run more than 3 3 % per cent in your estimation ?
Mr. JAMES. Yes; it would.

Mr. WINGO. I t would run to more than 40 per cent.
The CHAIRMAN. Would it be possible, Mr. James, for you to give
us the total figures of the cost of the transit department and the
cost of transfer of funds and the cost of these fiscal operations ?
Mr. JAMES. I t is possible.

The CHAIRMAN. Give us those three designations.
Mr. BEEDY. And the percentages?
The CHAIRMAN. The total expenses of these operations.
Mr. JAMES. I think we could give you that without very much
difficulty—a more or less detailed statement of the total expenses
of the system.
The CHAIRMAN. I think it is important in this connection, because many people have the feeling that the entire net earnings
of the Federal reserve system are going back to the Federal
Treasury. *By your statement you have shown that only $59,000
have gone back last year. But, on the other hand, the charge of
depreciation, and the amount in these buildings, et cetera, and in
services to the Government, indicate an amount of value that has
gone back to the Government, which otherwise would have gone to
the Government in the form of a franchise tax, or added to the
surplus of the banks.
That is very pertinent to the situation, and the committee are
desirous of getting that as accurately as they can.
Mr. JAMES. I am sure we would be very glad to give you any information of that kind you want.
Mr. WINGO. Would it be possible, Mr. Chairman, in that statement to segregate the expenses that are incident to another character
of operation about which there has been some inquiry?
I am not undertaking to pass upon the merits of it—the cost of
the so-called foreign operations of member banks, especially New
York banks, in the matter of foreign finances, foreign agreements,
and the revenues derived from that same source, if that is the idea
you have in mind? Do I make it clear? You understand what I
am driving at, Mr. James?
Mr. JAMES. Yes. I am not prepared, though, to say that we have
that detail here.
Mr. WINGO. YOU might get it, because there was some inquiry.
Don't understand we are taking the stand that they are doing something they should not do ?
Mr. JAMES. I understand.
Mr. WINGO. There are some persons raising the inquiry that it
might be important from one standpoint to know what the cost is




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and what revenue the banks are getting out of it, whether or not
it is a gratuitous load beyond the scope of the contemplated authority
of the banks, or whether it is really within the contemplated authority-—whether or not it is a public benefit or, as a matter of fact, a
very profitable thing from the standpoint of the bank.
The CHAIRMAN. I n other words, Mr. James, the committee would
like to have the full information in regard to the contracts that have
been entered into in establishing a credit of $200,000,000 through
the Federal Reserve Bank of New York or through this investment
committee, either to Great Britain or the Bank of England, by the
12 banks composing the Federal reserve system, and we would like
to see the papers in connection with that, and know what obligations
and contracts have been entered into. There is more or less confusion as to just what has taken place.
There are some conflicting statements in the public press in regard to the matter. Some indicate that a loan of $200,000,000 in
gold has been made by the Federal reserve banks; another indicates
that they have entered into an agreement for the purchase of $200,000,000 worth of bills. And the committee would like to have the
facts.
Mr. JAMES. I do not know just
The CHAIRMAN. The opinion has been expressed indicating some
doubt as to whether the original intent of the Federal reserve act
was to permit a loan of $200,000,000, either in the form of credit
or gold or otherwise, to a foreign country out of the legal reserves or
capital and surplus of the Federal reserve system.
Mr. JAMES. I hardly feel qualified to answer in detail.
The CHAIRMAN. We are not asking you to do that now, but that
you furnish that information to the committee later.
Mr. JAMES. If you will have a little transcript made of the inquiry as you made it there, and let me have it, I will attempt to
develop the information for you and have it back here at the earliest
possible moment.
The CHAIRMAN. I think, Mr. Wingo, that covers what you had
in mind.
Mr. WINGO. Possibly he might know of some questions that came
up yesterday and some inquiries, and, of course, if he does not feel
like he knows enough about the details to feel free to say so. We
are endeavoring to get information and not trying to criticize.
Mr. JAMES. I understand.
Mr. W I N G O . The suggestion came I believe, at that time, as I
understood it, that this loan of gold was a rather contemplated
transaction, in case of necessity, in order to enable the Bank of England and the British Empire to go back to the gold standard—that
we stood ready during this period bf time—I forget when it expired,
some time in 1927, I believe—to let them have $200,000,000 in gold;
and as you can not pay for gold with gold, the question of how
the system or New York bank would Jbe reimbursed for discounting
the transaction; that the bank, in payment for that gold, would
take the bills which it ordinarily purchases in the open market operations to the extent of $200,000,000, and keep practically invested for
that period of time that given amount of $200,000,000; in other
words, as bills matured they would have the right to substitute other




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281

bills for purchase under the open market operations; is that a correct
statement of it, or do you understand there is some other arrangement ?
Mr. JAMES. I t is practically correct statement, up to this point:
T h a t this was not a loan made, but an arrangement whereby, if
the necessity arose, they could avail themselves of this privilege.
Mr. WINGO. That was my contention—instead of being a loan,
it was a sale of gold.
Mr. JAMES. P u t it on this basis, Mr. Wingo: Perhaps I would
understand it a little better if translated into transactions.
Mr. WINGO. I sympathize with your difficulty. I have the same
difficulty translating some of these financial questions.
Mr. JAMES. I am looking ahead in my business, being desirous
of doing certain things, and before I undertake to do them I go over
to my banking connections and say, " I want to arrange for a line
of credit and, tentatively, the terms/ 5 The first important question
is if I can get it if I need it, and if so, then on what terms.
That being arranged, then I feel free to go on and transact my
business as I have planned; and I think that is very comparable to
what happened in this case, that prior to the announcement of the
return to the gold standard the Bank of England desired to know
definitely whether or not they could count on obtaining $200,000,000
of gold and on what terms they could obtain it.
Now, under the provisions of the law, as interpreted by the banks
and the board, it was a perfectly proper transaction for them to
buy these bills in the open market, if they chose to do so, and they
would be very glad to go along with that sort of an arrangement,
with the further understanding that no (definite arrangement is
made as to the rate, but that the rate would be approximately 1
per cent above whatever the New York bank rate would be when
and as the credit was used. Now, as a matter of fact, they have
not used any of it.
So, if we were to undertake to develop what it cost, I don't know
just how we would go about it, or whether the New York bank has
any detailed record to show that, because it is a matter of exchanged cablegrams and Governor Norman's visit over here, which
may have been charged to the Bank of England.
Mr. WINGO. Of course we did not have in mind those little incidental expenses.
Mr. JAMES. S O far as I know there have been none.
Mr. W I N G O . SO far as I know on this particular transaction there
had been none. Let me see if I understand it. Even if they didn't
meet the $200,000,000 call, that is, the New York bank acting for
the system in allocating among the different banks by agreement,
and they were to pay for the $200,000,000 gold in eligible bills purchasable under market operations?
Mr. JAMES. That is true.
Mr. WINGO. That, as a further consideration, that these bills
should be loaded with a 1 per cent premium on the current openmarket rate prevailing in the New York bank ?
Mr. JAMES. That is substantially as I understand it.
The CHAIRMAN. Right on that point: Simultaneously with this
granting of $200,000,000 credit, through the Federal reserve system,




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STABILIZATION

J . P . Morgan & Co. granted a credit of $100,000,000. The newspaper
accounts stated that the Federal reserve banks were to get no compensation whatever. The newspaper accounts indicate that J . P .
Morgan & Co. are to get $1,250,000 commission.
Now, do I understand from Mr. Wingo's question there that the
compensation which the Federal reserve banks will get out of t h a t
will be the 1 per cent extra in discount?
Mr. JAMES. That would be my understanding, yes.
The CHAIRMAN. S O that the Federal reserve system is to get
payment for that credit?
Mr. JAMES. If it is used.
The CHAIRMAN. If it is used and, of course, the condition of the
contract is if they should call to-day for the $200,000,000 they could
take the $200,000,000 in gold and we would purchase then acceptances from them at 1 per cent premium ? Above the prevailing r a t e
for this class of paper?
Mr. JAMES.

Yes.

Mr. WINGO. If I might interrupt right there
The CHAIRMAN. And the compensation on that transaction would
be $2,000,000?
Mr. JAMES. I t would be more than that. You see, they would
not only earn this premium, but the discount on the bills themselves^ which would be a very satisfactory and very profitable bit
of business at the present time.
Mr. WINGO. As a concrete illustration, if we are doing it at 4
per cent, thei* these bills would have to be 5. So you would get
1 per cent additional loading, or the regular compensation t h a t
the ordinary transactions in the market would bring?
Mr. 'JAMES. Yes. If it were an American banl^ that came in
to sell its bills, then the earnings of the bank would be 4, but
if it comes in this other way, then the earning is 5.
Mr. WINGO. Governor, are you sure about that? That has been,
challenged. That has been my understanding, but I have been told
that it is not true. Are you pretty sure that that is the understanding ? I wish you would look into that.
Mr. JAMES. I am reasonably sure, I think.
Mr. WINGO. I also understand this, that for the two-year period
prior to the time of making this agreement, that the Federal reserve
bank, or, possibly it may have been the whole system, the Federal
reserve bank acting for them—had invested over $200,000,000 in
the same character of bills or acceptances under the open-market
operations; at one time I think it ran from $100,000,000 to $500,000,000.
Mr. JAMES. That has varied from time to time, and there is no
question but what the open-market operations are conducted along
in varying amounts, and it usually happens that when loans from
member banks go up the others go down.
Mr. STEAGALL. Let me ask you a question right there, Governor.
Mr. JAMES. Yes, sir.
Mr. STEAGALL. H O W long

is this agreement to run ?
Mr. JAMES. I should say approximately 18 months or 2 years.




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283

Mr. STEAGALL. Does it cost the Federal reserve bank anything
to hold that sum of gold in readiness ?
Mr. JAMES. Not at all; not a bit.
Mr. STEAGALL. That amount held

in anticipation of that obligation would not increase their idle holdinngs nor involve them in
any responsibility whatever ?
Mr. JAMES. Not at all, because, if it is, there is a very large
amount of idle gold at the present time—far more than is needed.
The CHAIRMAN. Who is that held by ?
Mr. JAMES. By the Federal reserve banks.
The CHAIRMAN. That is the surplus reserve over the legal requirements ?
Mr. JAMES. Over the legal requirements.
The CHAIRMAN. If the occasion should arise
Mr. STEAGALL (interposing). W h a t I had in mind was, if they are
not required under their obligations or agreement to hold this money
when, in the absence of that agreement, they would naturally be
seeking investments for it elsewhere.
Mr. JAMES. Yes; but you see there is a limitation to possible investments of the Federal reserve bank. The system has got to
depend on the demand of its member banks; they can not go out
and urge a bank to borrow money, but whenever the bank comes in to
borrow, the Federal reserve bank is very glad to let it have i t ;
and the reason why the franchise tax of 1925 was so low was
because of a lack of demand on the part of the member banks for
credit
The CHAIRMAN. This $200,000,000, if it should be called for, would
be supplied out of the loanable funds of the Federal reserve system ?
Mr. JAMES. Why, certainly.
The CHAIRMAN. And those funds are the legal reserve deposits of
member banks, are they not?
Mr. JAMES. Plus capital and surplus; yes.
Mr. WINGO. Let me see if I understand. My understanding of
this gold transaction is that we agree to give them a book credit
by which they could take the $200,000,000 in gold if they needed i t ;
is that true, Mr.' James?
Mr. JAMES. I should say perfectly true, but it would not make
any difference, Mr. Wingo; whatever credit was extended by the
Federal reserve bank; as a matter of fact, in whatever form it would
be, it would be just the same as gold.
Mr. WINGO. Of course, it may be gold exchange?
Mr. JAMES. If it were gold exchange, they never would hold a
pound of gold, you understand.
Mr. WINGO. The language of us both a while ago may have been
susceptible of misunderstanding in our interpretation of it, that the
1 per cent consideration was in return for the agreement by which
we would let them have $200,000,000 in gold in whatever form that
gold—exchange or actual bullion?
Mr. JAMES. Yes.
Mr. WINGO. And they credit us with sterling bills to that amount?
Mr. JAMES. If we take the bills in current rate, New York.




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STABILIZATION

Mr. WINGO. And in addition to that, we have an agreement for that
advance of $200,000,000 gold, we get 1 per cent.
Mr. JAMES. Yes.
Mr. WINGO. I think

that explanation ought to be made, Mr. Chairman, as being part of it.
The CHAIRMAN. Suppose, Mr. James, that England should call
for this $200,000,000. Of course, the Federal reserve banks would
supply the $200,000,000. Would they also supply the $100,000,000
for the Morgan loan? As a matter of fact, they would, would they
not?
Mr. JAMES. Yes. Our counsel just called attention to a very important point in that whole transaction. The transaction, in so far
as the Federal reserve system is concerned, would be with the Bank of
England; and our understanding is that the transaction to which
you refer—the Morgan & Co. loan—would be with the British Government—a very different transaction entirely.
Mr. W I N G O . I n other words, the Federal reserve system has not
made any loans to the British Empire?
Mr. JAMES. Absolutely not.
Mr. WINGO. They have entered into nothing there but market
operations; whether the form was proper or not, the spirit was t h a t
they entered into a contract for the transfer of gold and the sterling
bills of credit, and that meant with the 1 per cent premium for the
transaction on the current rate which the bills bear.
Mr. JAMES. Between the two banking institutions.
The CHAIRMAN. A S I understood Governor Seav yesterday to
say, this loan was negotiated by the chairman of this investment
committee of the Federal reserve system, directly with the Bank of
England ?
Mr. JAMES. Yes; I should say that is true.
The CHAIRMAN. And it met with the approval of the Federal
Reserve Board?
Mr. JAMES. I n addition to that, the proposition was put upon not
the individual responsibility of the chairman of the open market
committee, but was very frankly discussed with the Federal Reserve Board.
I s not that true, Doctor Miller; don't you think that is a fair
statement ?
Mr. MILLER. I think that is substantially correct.
Mr. JAMES. Yes; the Federal Reserve Board was advised at all
times as to what was going on.
The CHAIRMAN. And they gave formal approval of the consummation of the entire loan ?
Mr. JAMES. Certainly; they could not have made it without it.
Mr. MILLER. The transaction was not undertaken originally as a
system transaction, but was undertaken by the Federal Reserve Bank
of New York and the board approved the terms of the new account,
and the other banks were given opportunity to participate in it,
and I think all have participated.
Mr. JAMES. And that participation, I might say, is entirely a matter of voluntary action on the part of any one of the 12 banks,
I f any of them, or all of them, want to enter, they pro r a t e ; if any
one bank feels that its funds are in use to an extent that it does not




STABILIZATION

28a

care to participate, why, it does not enter into that transaction at
all.
Mr. F E N N . A S a matter of fact, did not all of the 12 banks
enter into it?
Mr. JAMES. They did; yes.
Mr. WINGO. You mentioned the open market committee; is that
the open market committee of the system or of the board ?
Mr. JAMES. I t is the open market committee of the system, operating in connection with the board.
Mr. WINGO. I n reference to the personnel is it identical with
the so-called investment committee, of which Benjamin Strong is
chairman ?
The CHAIRMAN. I t is the same committee.
Mr. JAMES. The same thing—open market investment committee.
Mr. WINGO. I n other words, you speak of the same committee
when you use the words " investment committee " one time and the
" open market committee" the other—it means the committee
handles investments, including all of the market operations?
Mr.

JAMES.

Yes.

The CHAIRMAN. Mr. James, Mr. Wingo asked a question a few
minutes ago which I interpreted to mean that this investment committee of the open market transactions, it is the common practice
with them to buy these foreign bills, such as proposed here, and
which at one time they had purchased as much as $283,000,000,
which was held by the 12 Federal reserve banks.
Mr. WINGO. Since talking with Doctor Miller I understand that
was an error.
Mr. JAMES. I t never reached that figure.
Mr. MILLER. These are domestic bills.
The CHAIRMAN. The point I was getting at is: I s it not the practice of the system to invest in foreign bills, the reserve banks ?
Mr. JAMES. Oh, no. I t is a matter of facilitating largely our export and import transactions, and when these bills come over they
are offered on the open market and, in most instances, I should
say the majority of instances, they come to the Federal reserve banks
through the offerings largely of the American banks; is not that
true, Doctor Miller?
Mr. MILLER. Yes; but I think, Mr. James, perhaps there is confusion here as to what is meant by " foreign bills " ; as we use the
term we mean bills drawn payable at some foreign point, in terms
of foreign guaranty—for instance, sterling bills drawn on London
payable at a certain date.
The great bulk of the bills we buy are spoken of as " foreign
bills " in the American market; they are simply bills drawn against
import or against export transactions, but payable in New York,
Chicago, or whatever point the accepting bank is located, and
those are the bills that the Federal reserve system has purchased
in these volumes of $200,000,000 or $300,000,000.
The foreign bills properly payable in foreign currency at foreign
points have never been dealt in by the Federal reserve banks to
anything more than a slight extent. I think a half million dollars
93869—27—PT 1




19

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STABILIZATION

was what was purchased as somewhat of an experimental purchase
a year ago in the London market.
Mr. W I N G O . May I just remark that when I spoke of foreign
bills, here is what I had in mind: The bills that finance our foreign transactions, exports and imports—that is what I meant—our
foreign-trade bills. I did not mean bills of foreign countries that
didn't have anything to do with domestic trade; I meant those
bills which grew out of foreign trade.
Mr. MILLER. Yes; by American banks.
The CHAIRMAN. Doctor Miller, how would you construe a transaction of this sort; as a foreign bill or domestic bill. An American
merchant has made a shipment of cotton to Germany, wjiich has
been sold to a German house, and the papers go along with it,
acceptance or otherwise; some one in New York has accepted for
the German house. That kind of a transaction comes into the open
market in New York, does it not? Would that be domestic or
foreign, if it had been accepted by the New York bank representing
the German purchaser?
Mr. MILLER. I t would be an American bill.
The CHAIRMAN. Although it represented goods which were sold
to a customer in a foreign country?
Mr. MILLER. But the credit is in an American bank in terms of
dollars.
The CHAIRMAN. And that would be readily and legally acceptable
by the Federal reserve system?
Mr. JAMES. I t would be very desirable.
The CHAIRMAN. And it would be an American bill ?
Mr. MILLER. Absolutely.
Mr. WINGO. I t would be for the purpose of facilitating that trade.
The CHAIRMAN. If that bill were payable in London or Berlin it
would be considered a foreign bill, would it not?
Mr. MILLER. Unless it were payable at an American branch bank
in London. If the terms of the transaction contemplated the payment of bills to an American bank in London, to the correspondent
of an American bank in London, it would be tantamount to an
American bill, payable in dollars.
Mr. F E N N . The same as in any country ?
Mr. MILLER. Yes; it depends really upon the nationality of the
bank that arranges acceptance of credit.
The CHAIRMAN. I would also like to put in the record at this point
the statement appearing in the Commercial and Financial Chronicle
of March 13, 1926, page 1378, being an article by Hartley Withers,
formerly editor of The Economist, of London, on " The powers of
central banks—Effectiveness of control by means of changes in discount rates," an article very pertinent to this subject, and I think it
would add very much to the value of the record of the hearings; and
I would also like to insert in the record an editorial in the same paper
appearing in the edition of March 27, 1926, on page 1678, headed
" Speculation in stocks and credit inflation"; and, without objection,
these articles will be here inserted.
(The two articles referred to are as follows:)




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T H E POWERS OF CENTRAL BANKS—EFFECTIVENESS OF CONTROL BY MEANS OF
CHANGES IN DISCOUNT RATES

By Hartley Withers, formerly editor of The Economist, of London
< Copyrighted by the William B. Dana Co. for the Commercial and Financial Chronicle.
Exclusive copyright in the United States)

From an interesting paper by Dr. Henry Chandler in a recent number of
Commerce Monthly, published by the National Bank of Commerce in New York,
it appears that there has been a good deal of discussion in America concerning
the control exercised over credit in the United States by the Federal reserve
system. Some maintain that the control has been powerful and beneficial,
others have denied the stabilizing character of the system's recent actions and
have attributed to it an inflationary policy. A control, the results of which
are open to such a wide difference of opinion, is evidently an influence which
has not yet been measured with any approach to accuracy.
The question is by no means one of merely academic interest, but is of very
practical moment to all who are engaged in any kind of business, to all who
hold investments and to all who buy and sell goods—that is to say, to every
man, woman, and child of us. Because it is through the power of the central
banks to control credit that the stabilization of prices is expected, with more
or less confidence, according to the view that one holds on this subject, to be
secured. If they are now doubting in America as to whether the policy of
the central banks has been effective in stabilizing, or has produced inflation,
it is clear that a great deal has yet to be done before we can look forward to
the day when the index number of commodity prices will run in a straight
line across our charts.
Many people seem to think that now that England has gone back to the
gold standard this question of stabilization by credit control has been abardoned there and that prices will be left to the influence of the automatic
action of the gold standard. But this is by no means so. In the first place
the gold standard was not nearly such an automatic machine as its critics
seem to think. In pre-war days the state of the Bank of England's gold stock
was a highly important item which the directors had to consider; when deciding to make, or refrain from, movements in their rate of discount, they exercised a wide latitude of discretion in the matter, as is shown by the fact
that the city was often in doubt as to what their action would be. Moreover,
the world has suffered so acutely in recent years from the effects of fluctuations in prices that efforts toward stability are' now recognized as part of
the duty of the central banks of all countries; and a conference of central
banks has been proposed to discuss the question of keeping gold prices steady.
In America the gold standard has long been effective, though complicated by
the possession of an abnormal mass of gold; nevertheless, controversy rages
as to the stabilization policy of the Federal reserve system, showing that a
gold standard by no means ends the question.
With all deference to the distinguished authority of those who hold that
trade and prices can be contracted and expanded like a concertina through
movements in the rates of central banks, there is surely good ground for the
view that in normal times the influence of credit manipulation may be greatly
exaggerated. Even in abnormal times it is not all-powerful. The after-war
boom and collapse are often attributed to the fact that the central banks, in
London and New York, first delayed much too long in raising their rates and
then raised them too quickly. But it is at least possible that the boom happened because everybody thought that a boom was bound to follow war, and
that as long as prices were rising, as they rose in those hectic days, no
raising of the rate for money—short of a rise that would have produced
immediate panic—would have stopped it; and that the collapse came because
the public refused to buy at the prices asked, and as soon as it was discovered
that rising prices were not part of the scheme of the commercial universe, the
bottom fell out of the commodity markets.
In normal times, when business is proceeding on a more or less even keel,
it is by no means certain that trade does not influence money at least as much
as money influences trade. As far as actual producers are concerned, the
price that is paid for overdrafts and advances from banks, or for discounting
bills is an almost negligible item in the cost of production; as long as manufacturers can, or think they can, see their way to a ready market for their




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STABILIZATION

goods, they will continue to turn them out. To merchants, and wholesale
dealers, who carry big stocks of goods on credit, the price of money is a
much more serious consideration, but even they are probably influenced more
by the probability of a free offtake by the retailers, than by any normal movement in rates for money.
Believers in the almighty power to swing trade and prices of the discount
rates of central banks lay great stress on the psychological effect produced
by their movements. They argue that when a rate is raised, with the object
of making prices lower, all the business world knows that the authorities
are working for lower prices, and accordingly reduce their commitments, stop
their demand for materials and finished goods, and so produce the result
aimed at by the central bank. But this contention leaves out the fact that
prices do not all move in unison. A fall in the general average is quite compatible with a rise in several particular commodities. And it is the particular
commodity that he produces or deals in that exercises the minds of the manufacturer or merchant. The tea merchant is not anxious about the index number
of general prices, but about the price of tea. If, from his knowledge of the
statistical position, he foresees scarcity, and consumption running ahead of
production, he is not going to be frightened out of his holding by a rise in
price of bank credit.
As to the effectiveness of falls in central bank rates in promoting a rise in
prices and a recovery in trade, it must surely be evident that in certain moods
of the business world, when every one is taking a gloomy view concerning
the probable demand for goods, it would be impossible to stimulate optimism
even by bringing down the money rate to nothing—in fact, such a movement
would only be marked ^as one more symptom of the hopelessness of the situation.
The price of money is a factor, undoubtedly, but it is not the only factor
in the trade position, as seems to be believed by those enthusiasts who credit
the central bank with overwhelming power over prices.
SPECULATION I N STOCKS A N D CREDIT INFLATION

No hard-and-fast line is to be drawn between investment and speculation.
One may buy to hold for earnings, or to sell for profit, or combine both
motives in one act. In fact, the last is often done. And one may buy for cash,
or on credit, or combine the two. And this, also, is often done. But buying
and selling on margins has come to be a recognized means of speculation.
Though even here, as in the case of real-estate options, the size of the deferred
payments do not always mean that the full purchase price will not be paid
and the transaction completed by transfer of ownership. Selling short—
selling what is not owned, selling with a view to future buying at a lower
price—is another thing. Consequently there is a legitimacy attaches to a
bull movement which does not attach to a bear movement. It is for this
reason that the public is inevitably drawn into the former, buying upon rising
prices, but not in anything like the same degree selling on falling prices. The
raids of the " bulls " and the " bears " are never the same thing to outsiders.
In the former, they do not have to remargin, save for temporary fluctuations,
and in the latter, unless they do remargin, they are peremptorily closed out.
Contrary to some opinions recently expressed, it takes longer for a " b u l l "
movement to establish itself than a " bear" movement. One inspires confidence; the other excites fear. Confidence begets increased buying; fear produces desire for quick selling and final disposal. Confidence gives strength;
fear induces panic. The outsider, the public, should carefully consider these
truths before dealing in the stock market.
To some extent " professional" dealers can protect themselves against the
short, sharp fluctuations in prices by rapid buying and selling not possible in
equal degree to those far away from the scene of action. But so many are
the " issues " dealt in, so complicated the incidence of " pressure " by " pools,"
that the most powerful and experienced " traders " are often caught unawares
and suffer heavy losses. And, over a period of years, instances are rare
where professionals retire with a large fortune directly made by pure speculation. Few men fully and finally " beat the game," as few ever break the
" b a n k " at Monte Carlo. And while it is inadequate to say that speculation
in stocks is pure gambling there remains an element of luck, chance, uncertainty, call it what you will, in " speculation " which renders it a hazardous
undertaking for the best equipped of traders. And it follows that the speculat-




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289

ing public had better stay out of the market even when the conditions appear
the most favorable in a long continued rise in prices. For, as the movement
gains headway the volume of shares dealt in increases, professionals organize
pools, extraneous circumstances come to have undue influence, and the difference between values based on earnings and values based on prices becomes
greater until finally there is no end but a " smash."
The toppling of prices of stocks the present month does not indicate the
beginning of a period of " depression " in business, as has been pointed out
by Secretaries Mellon and Hoover. But it must be said that it is not a salutary
thing for the country. For months, with only a few reverses, quotations
of stocks had been continuously rising. Prices in many cases had come to
bear no relation to intrinsic values and current earnings. Factors, such as
" mergers " and splitting of shares, and combines, have shown very large paper
values. And upon a continuation of these factors prices have been enhanced
by trading on the exchanges. Their worth was not allowed to prove itself,
but was discounted in advance. As a consequence, under the influence of
easy money and the liberal use of reserve credit, the whole market became
speculative. Now, when through some unforeseen element (the shout of a
human voice has been known to start an avalanche), prices fall suddenly,
it must be true that tens of thousands of " outsiders" are caught in the
slump and lose their all. For this desire to speculate seems to be .innate in
human nature. Most persons like to " make money " fast, and seeing others
" make," albeit the profits are on paper, are induced to buy at the then " top."
And these losses bode no good to business, though they do not necessarily mean
" depression."
The inestimable benefit of a " market" for the buying and selling of stocks
is not to be denied. But it is equally true that money and credit policies
which enable a wave of speculation to engulf the country are not desirable
The joint action of the stock exchange and the Federal Reserve Board in giving out statistics regarding brokers' loans has served to reveal in a startling
way the extent to which bank credit was being used in aid of stock exchange
speculation. Rediscounts of commercial loans with the Federal reserve banks
have been consistently low for a year. Federal reserve note currency during
the entire " boom " has been excessively large. The influence of the Federal
reserve note element must be viewed upon the broad base of the best interest
of business as a whole and if the collapse of the boom is not to cause depression we must try to understand why. This much is certain in any event,
namely that as a result of the gigantic stock speculation of the last two
or three years a vast deal of financial energy has been absorbed in nonproductive uses. And it follows that a redundant money supply has been a
sustaining element to the detriment of legitimate business. In this view the
consequences of a " smash " provided producing business is not disastrously
affected, may augur good to the country at large. And this effect, if indeed
it eventuate, will be widespread. How much good money, credit, and property
transformed has been drawn into this maelstrom of " speculation " from the
" provinces " and their crossroads divisions it would be impossible to estimate,
but in proportion to the loss of opportunity in " stock dealing " in the future
it will remain at home and engage in productive enterprise. This amount is
undoubtedly large. Country brokers in not a few localities have complained
of withdrawals to " deal" in Florida real estate, withdrawals that seldom
come home again. How much has in like manner gone into stocks, to be lost
on margins, it is more difficult to determine. But it is not to be doubted
that the total is large. Will another " boom " quickly succeed this one when
it shall have run its course? Time only can tell, but so long as easy recourse
to Federal reserve credits exists, and such credit remains available to an unlimited extent, fertile ground for a repetition of the orgy will remain. Here,
therefore, the remedy will have to be applied.
There is a valuable lesson in the present experience to the people and to the
Government. In the midst of continued attempts to enact blue-sky laws
to protect uneducated investors, there might well be a study of law making
with reference to its influence upon the condition of investment versus speculation. The individual who has been " sold out" now has the experience
of the child with the fire—but is it not probable that one hidden cause of excessive speculation is to be found in the constant interferences of law and
government with legitimate industry and enterprise? "Idle money" is never
satisfied. If it can not find its way into productive uses it will engage in
nonproductive on the hazard of a quick profit.




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We have been attempting to differentiate between the means of excessive
stock speculation and its cause. The former is in our immediate power to
cure. We have but to cut off the " inflation " and the means is extinguished.
But the cure for the speculative mania or disease—that is another matter.
The disposition to " try your luck," to challenge fate, seems innate in human
nature. Sociologically it received a tremendous impetus by the Great War.
One fell, one was untouched by the flying bullet. And yet, when the trading in securities, a valuable and highly important legitimate field of finance,
is turned into a prolonged orgy of speculation it is time to think and act.
At least the means ("inflation" in large part) can be controlled, and this
must be done.

The CHAIRMAN. I have to announce to the committee that Governor Strong, of the Federal Reserve Bank of New York, is here
this morning, in connection with the consideration which the committee is giving to the Strong bill on stabilization, as well as the
general subject of stabilization.

STATEMENT OF HON. BENJAMIN STRONG, GOVERNOR OF THE
FEDERAL RESERVE BANK OF NEW YORK
The CHAIRMAN. I will say to you, Governor Strong, that the committee are and have been for some two weeks considering this question of stabilization, and along with it, because of the fact that there
is pending before Congress, and particularly the Senate, a proposal
to extend for an indefinite period the charter of the Federal reserve
system, the committee is evidencing interest in the various phases
of the operations of the Federal reserve system. I may say to you
that the committee deems itself fortunate to have you here to give
us some information pertaining to the operations of the Federal
reserve system. Not only does the committee recognize the importance of the Federal Reserve Bank of New York to the Federal
reserve system, but they recognize you, not only as being the governor of that bank, but as chairman of the open market committee.
as having a particularly important position in connection with the
entire operations of the Federal reserve system.
I think it is fair to state also, in that connection, that we recognize
that perhaps you might be a little modest about assuming to speak
on a number of things pertaining to the Federal reserve system
because you are not a member of the Federal ReserYe Board. I
might say to you, however, that the committee is hoping that you
will be frank and open, and, so far as the committee is concerned,
we are not going to hold you responsible to criticism from any
source whatsoever. I t is information that the committee is seeking
in regard to the operations of the Federal reserve system.
Particularly, I might point out to you, interest is being manifested
in regard to the effect, now that the war is over, of the repeal or
continuance of the war amendments which called into the Federal
reserve system a large amount of gold and provided for the operations of the open market transactions. The committee is interested
in information as to whether or not it might be advisable, now that
the war has closed, to go back to the old plan in that respect, and, if
not, what reasons are advanced as to why that should not be done.
I n connection with stabilization, the committee is interested in
the amount of Federal reserve notes outstanding; why there should
be that amount of $1,635,000,000 in times of apparently ample credit



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291

facilities, and we are also interested in the effect of the open market
transactions on credits, prices, stabilization, etc.
I t has been stated before the committee by some economists who
have appeared that the open-market transactions and the operations
in connection with the Treasury are considerable factors in regard
to stabilization of prices, money rates, etc. The committee will be
particularly interested to know how the Federal reserve banks,
particularly through you as chairman of the open market committee,
cooperate with the Treasury in these fiscal operations which have an
effect on prices and rates of interest.
The committee is also interested in the question of the conduct
and the detailed operations, to quite some extent, of the Federal
reserve system. They are interested to know what part of the
system's expenses are in connection with the carrying out of the
fiscal operations of the Treasury, and they are interested also in
the collection and transit operations, and particularly the transfer
of moneys and credits through the wire system.
A question has also been raised in connection with the granting of
a loan to the Bank of England of $200,000,000; that question being
raised at a meeting here when Governor Seay, of the Federal Reserve Bank of Richmond, was present. As I recall, the governor
said that that was negotiated by you on behalf of the Federal
Reserve Bank of New York and distributed pro rata among the
Federal reserve banks at their option. The committee would like to
know, particularly, the negotiations that entered into that; the
reasons why, and under what authority of the Federal reserve act
such an arrangement was entered into, and how this loan differs
from a simultaneous loan of $100,000,000 which was granted by
J . P . Morgan & Co., and matters pertaining to that.
I am endeavoring to give you a brief outline of some of the
problems. The committee will be very glad to hear you in connection
with any or all of these matters. While I have not attempted to
cover the entire scope, as the hearings develop I am sure many angles
will present themselves which you will be glad to discuss with the
committee.
So I am going to suggest, if you will do so, that you proceed in
your own way to treat these subjects which are under discussion.
Because of the fact that there is pending this proposal to renew the
charter rights of the banks for an indefinite period, a general discussion of the Federal reserve system is quite important to this committee at this time.
I might say to you here that in connection with any of the questions that may be raised, if there are any embarrassing questions
raised which, because of the public interest, should not be stated in
open meeting, the committee can arrange to hear you privately in
regard to those matters. But, so far as possible, I think it is not
only to the best interests of the committee in considering this matter,
but of the Federal reserve system and of the country to have these
hearings conducted in open session.
We are very glad to hear you, Governor Strong.
Governor STRONG. Mr. Chairman, your letter of invitation to me to
appear before the committee named a few of the subjects which the
committee desired to have me discuss. You have added quite a few.




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I would like to say, generally, that I welcome the opportunity to
appear before the committee, and if there is any information that
I have or can, get that will be of any assistance to the committee
it will be gladly furnished.
To cover all of the ground that you have mentioned will involve
my taxing my memory quite a bit as to past occurrences, Mr. Chairman, and I hope it will be possible for me to go over the record and
make any corrections that may be due to failure of memory, and
possibly fill in some gaps in my statement.
The CHAIRMAN. That right is granted to you, of course.
Governor STRONG. Of course you understand that I can not speak
for the Federal Reserve Board, and in what I say to the committee,
when it involves an expression of views, I hope you will understand
that they are my own views and possibly those which fairly represent
the views of the Federal Reserve Bank of New York.
To cover everything that you have mentioned will take a great
deal of time. I am quite able and willing to give the committee
all of the time that it is willing to give to me, and I think it
is fair to say that I am always willing to talk about the Federal
reserve system as long as I can get people to listen.
First, Mr. Chairman, about the bill that is the immediate subject
of consideration. I shall possibly express some views about it that
differ from the views of those who have preceded me before the
committee, and possibly differ from the views of some of the members of the committee; and I would not have the members of the
committee feel that that is due to the slightest hostility to the purpose of this bill.
The CHAIRMAN. I can say to you in that connection, Governor
Strong, that I believe the minds of the committee are open on the
subject. We are seeking light on this important subject.
Governor STRONG. I say that because, without differing with the
gentlemen who have preceded me as to the desirability of reasonably
stable price levels and the avoidance of what we call inflation and deflation, I have considerable doubt as to whether the method proposed
by this bill will accomplish what is claimed for it.
The CHAIRMAN. I might say in that connection that there is pending before the committee a bill proposing, in a little different manner, the same principle, introduced by Representative Goldsborough,
a member of this committee, which is generally known as the Fisher
plan. I am assuming that you are familiar with that proposal, as
well as with the Strong proposal.
Governor STRONG. Yes, sir; I am. The last sentence of House bill
7895 is in this language:
AH of the powers of the Federal reserve system shall be used for promoting stability in the price level.

I assume that that means stability in what is commonly called
the general price level of all commodities, and I will make this one
general comment about the theory of that language as it strikes me.
If this means a recognition by law that some power exists to
bring about stability of prices, and that it is to be exercised by some
group of men, or some man, it seems to me that the public might
easily interpret this amendment to the Federal reserve act as intending that Congress has issued a mandate to those men or to
some man to fix prices.



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293

Now, I can not believe that any such power to fix prices would
prove acceptable to the people of this country or to the people of
any democracy—if that is what it means. I n fact, personally—I am
speaking dogmatically, I know—I do not think that any such power
exists or can be created to fix prices.
W h a t disturbs me about this proposal—not the purpose of the
proposal, but the way in which it is attempted—is this: Much of the
discussion of prices recently has arisen from the great misfortune
which the farmers of the country have-suffered, which we all recognize and deplore. If the Federal reserve act is amended in these
words, is it possible that the farmers of the country will be advised,
or will be led to believe upon reading it, that a mandate has been
handed to the Federal reserve system to fix up this matter of farm
prices?
Mr. SHIBLEY. Mr. Chairman, the wording of the bill is " price
level," not prices in general.
Governor STRONG. I am assuming, if you please, what interpretation may be put upon it, and especially by the farmers. Is it possible
that the farmers of the country will interpret this as an effort by
Congress to place the responsibility upon the Federal reserve system
for attending to the particular problem of prices in which they are
interested ?
Mr. GOLDSBOROUGH. Would that not be simply a temporary interpretation, if they did place that interpretation on the language of
the act? I do not see how any very responsible mind could place
that interpretation on it; do you ?
Governor STRONG. Well, frankly, Mr. Goldsborough, I have been a
little disturbed by having had the opportunity to read the discussion
which has already taken place before the committee. One can only
gather by inference what is in the minds of men, sometimes, by their
statements. But it seems to me it expects too much of the Federal
reserve system, if I am to be guided by the statements that have
already been made.
Mr. WINGO. Governor Strong, that rule, which very naturally you
would use in arriving at*a conclusion, applies to ordinary sensible
human beings; but I thought your experience with this committee
had demonstrated to you clearly that you could not always judge this
committee by it.
Governor STRONG. NO ; I am endeavoring, if you please, to express
some doubts about the effect of the bill on the minds of people who
are not economists, and who really can not distinguish between individual prices and general prices.
Mr. WINGO. Mr. Luce, of Massachusetts, is quite an economist.
Have you read his suggestions about what had happened to him?
Governor STRONG. Yes.

Mr. WINGO. That is the viewpoint expressed in this bill; not the
farmer's.
Governor STRONG. Well, of course, the reaction upon different
classes of changes in prices varies. H e described a class of sufferer
that in some respects paid a worse penalty from the inflation period
than the farmer did.
Mr. WINGO. NOW, the farmer already thinks that you have that
power and already thinks you are exercising it. If you will just
93869—27—PT 1




20

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STABILIZATION

reflect for a moment upon what their chief spokesman or body
says, the farmer has already voted on that question. H e thinks
that you already have that power and are exercising it.
Governor STRONG. Yes. Well, can we not disabuse his mind of
that?
Mr. WINGO. I doubt it very seriously; although Mr. Strong,
the author of the bill, is quite a farmer himself.
Governor STRONG. Mr. Wingo, is it not a fact that a large p a r t of
the farming community of the United States has a feeling that there
is some method possible, by the employment or management or
regulation of credit, to deal with their price problem ?
Mr. WINGO. Oh, yes; it is. They are led to believe by a great
many of their leaders that it is possible for legislative resolution
either to make or to unmake. They are led to believe that their
eviJs can be traced directly to evils of government, and that those
evils can be corrected by governmental action. There are a great
many of them who believe that.
Governor STRONG. Yes. Well, if this language is employed in an
amendment to the Federal reserve act, may not that somewhat intensify that belief by the farmers that the Federal reserve system can
exercise some power over the prices of a particular commodity ?
Mr. WINGO. Of course some of them would think that.
Governor STRONG. This proposed amendment to the law creates no
new powers for the Federal reserve system.
Mr. WINGO. I have been under the impression, and have so expressed it, as you have found if you have read the record, that the
bill is nothing but a stump speech.
Governor STRONG. I t seems to me that it is a declaration of a purpose which would be expressed in some policy which is neither defined
in the amendment nor any method set out for accomplishing it.
Mr. WINGO. That is what I mean. I t is merely a declaration of
of an abstract opinion that the Board ought to do something. How,
when, where and for whom, is left to the sweet pleasure and ingenuity of the board to fathom.
Governor STRONG. Yes.

Now, Mr. Chairman, even if the danger could be fescaped of a general assumption that this power, resting in the Federal reserve system
under this mandate as expressed in the amendment, can be exercised
to influence individual prices, as distinguished from the general
price level, I would like to suggest a few difficulties that would
arise in any recognition that the Federal reserve system has the
power alone to deal with this price problem.
The CHAIRMAN. I n that connection, Governor, can you outline
what the elements are now that are under the control of the Federal
reserve system tending to stabilization ?
Governor STRONG. Yes; I think I can do so very briefly.
The power of the Federal reserve system so far as credit is concerned can be exercised within certain limits in two ways, or at
least in two directions. One is to regulate or to influence the amount
of credit that is being employed in the country, and the other is
to regulate or influence the cost of that credit; and within certain
limitations I think it is possible to do that. But there are conditions which I can easily describe to you where I think even that
would not be possible.




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Of course, the assumption that the Federal reserve system has
powers of great magnitude in the control of prices ought to be considered not alone from the standpoint of economics, but from the
standpoint of human nature to some extent. If it is assumed that the
Federal reserve system has the power to raise or lower the price
level by some automatic method, by some magic mathematical formula, what safeguards are we going to introduce in regard to ignorance, stupidity, and bad judgment in the exercise of this power?
How are we to deal with the problem of divided counsels in the
system, where no action is possible because of differences of opinion ?
I s it possible to guard the misuse of these powers for selfish or even
improper purposes, or even political objects, if you please?
Then there is another possibility that has always struck me as
inherent in any recognition of a power resting anywhere to regulate
prices, and that is in the everlasting contest that takes place with
all humanity between the producer and the consumer. For instance,
take the laboring man. When he is working in the factory during
the day, he is a believer in advancing prices. H e thinks that will
aid him in giving him constant employment at good wages. H e
goes home, however, and then his character changes. He is a consumer then, and he is liable to complain about the amount of rent
that he has to pay, or his wife is complaining about the cost of
sugar, and his whole attitude toward the regulation of prices
changes. I t seems to me that if the Federal reserve system is recognized as a price regulator it is going to be somewhat in the position
of the poor man who tried to stop a row between an Irishman and
his wife. They both turned in and beat him.
So both the producer and the consumer would complain.
Mr. Chairman, I want to suggest some of the difficulties that are
bound to arise in accepting the theory that the general price level
can be controlled entirely by credit, by the employment of credit, or
by the regulation of credit.
The CHAIRMAN. Before you get to that, Governor, I do not think
you have quite fully covered the elements of control of credit, etc.
Perhaps I misunderstood you. This question has been discussed
somewhat before the committee. There are some 30,000 banks in
the United States. Some 10,000 of them are members of the Federal
reserve system. To what extent can the Federal reserve system control the credit of nonmember banks? Or is that one of the elements
that you were referring to ?
Governor STRONG. Yes; I think the Federal reserve system does
exercise some control, at times, over the total volume of credit that is
employed in the country. I can explain readily later how that is
done.
I also think that the Federal reserve system exercises some influence upon the cost of that credit, by its discount rate and its openmarket operations. Beyond that, the Federal reserve system has no
power to direct or control how the credit is used. We deal with it
quantitatively; the member banks deal with it qualitatively, as to
its particular application, and if member banks or nonmember banks
find it more profitable to lend money in one direction than in another
we have no power, of course, to control that.




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The CHAIRMAN. Of course, I think we all recognize the important
p a r t that the Treasury operations from time to time play in the
whole credit situation.
Governor STRONG. Yes, sir.

The CHAIRMAN. I S it your observation that the fact that the Secretary of the Treasury is ex officio a member of the Federal Reserve
Board causes Government situations to enter into the credit situation
at times, which the Federal reserve system must either work in
unison with or combat?
Governor STRONG. A t the present time?
The CHAIRMAN. N O ; at different times.
Governor STRONG. I think the situation now, Mr. Chairman, has
practically eliminated the Treasury as being a possible disturbing
influence on credit operations of the Federal reserve system.
The CHAIRMAN. I n other words, the Treasury operations are so
well in hand at this time that they do not affect the credit situation ?
Governor STRONG. Yes, sir. Experience in handling the Treasury
accounts, in the collection of taxes, and in making new issues through
the Federal reserve system, has very much reduced the possibility of
disturbance caused by the large operations of the Treasury.
The CHAIRMAN. A n d the committee understands correctly when
it believes that the open market transactions are a factor in this
question that we are now discussing?
Governor STRONG. Yes, sir.

The CHAIRMAN. B u t when you deal with that, I suppose you
will deal with it separately?
Governor STRONG. Yes, sir.

The CHAIRMAN. SO we will not go into that at this moment.
Are there any other factors that enter into this question, over which
the Federal Reserve Board has control, that you have not stated ?
Governor STRONG. I think the fundamental thing about the Federal
reserve system is that, holding the reserves of so many banks, the
gold reserve of the country, and being the source of supply of additional credit when it is required by business, and the means, if
you please, of retiring that credit when it is no longer needed by
business, the Federal reserve system, through changes in the rate of
discount and preliminary purchases or sales of securities in the
market, has the power to influence to some extent, at times, the total
volume of credit in the country and its cost.
The CHAIRMAN. D O you consider publicity, or the utterances of
the Federal Reserve Board in regard to proposed operations or
changes in the discount rate, a factor in stabilization?
Governor STRONG. A t times; yes. I t is a pretty dangerous thing to
rely upon advising the people of the country what they ought to
do. I t is liable to misinterpretation.
The CHAIRMAN. I t has been suggested here that publicity in
connection with the operations of the Federal reserve system might
be quite a factor in connection with the stabilization of the price
level.
Governor STRONG. I think the Federal reserve system probably publishes more data about the operations of the system than any other
similar banking system of the world. Whether it could be supdemented by enlightening discussion or not is a question of policy,
argely, and of personal opinion.

{




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May I return to one point about this question of price stabilization, Mr. Chairman ?
I t seems as though the language used in the discussion of this
bill assumed that the management of credit by the Federal reserve
system had a greater influence upon prices than sometimes it is
possible for it to have, and I would like to point out a few cases
where, despite anything the Federal reserve system might do, we
could have an inflation in this country which the Federal reserve
system could not necessarily control, or even a decline in prices that
the Federal reserve system could not control by inflationary or
deflationary moves, if you please; that is, by enlarging or reducing
the volume of credit that was in their control.
Every member of the committee recognizes that the amount of
gold produced in the world has an effect upon prices. So far no
method has been devised to prevent an increase in monetary gold
drifting into the banks from having an effect upon the volume of
credit. Changes in the reserve laws are specific examples of the
possibility of occurrences quite beyond the control of the Federal
reserve system. As you know, a suit was brought? by a group of
banks against one of the Federal reserve banks, one of the prayers
of which was to require 'that reserve banks give immediate credit
on checks deposited with the reserve banks in course of collection.
The suit applied only to checks payable within that Federal reserve
district, but the principle would apply to the whole country, and
might be extended readily.
Now, we have calculated that if that theory should be sustained
by the courts—it has not been—it might add from six to eight hundred million dollars to the reserves of the banks of this country
over night. I t would be the equivalent of an importation in one
lump sum of six or eight hundred million dollars of gold. The
effect of that would be to place at the disposal of member banks a
sum of reserves sufficient to pay off all the discounts of the reserve
banks for their members, and if that should be done—it would be
quite possible-—we would have no loans on which our discount rate
would operate. For a time at least, until a period of inflation
had again built up a discount account in the Federal reserve banks,
we would be helpless to arrest it.
Here is another possibility: There was a bill pending before the
last Congress to repeal, in effect, the amendments to the Federal
reserve act which were passed by Congress in June, 1917. That
bill sought, among other things, to bring about the return to the
member banks or their city correspondents of the reserves transferred
at that date to the Federal reserve banks, but it failed to increase the
reserve requirements of member banks to the amount of 18, 15, and
12 per cent, which had been the reserve percentages in the act before
it was amended. Now, we have calculated that the provisions of
that bill would free some $400,000,000 of the reserves of member
banks of the country, which would be capable of supporting a very
large inflation of credit, possibly eight or ten times that amount, and
any such influence as that upon the operations of the Federal reserve
system might tie our hands. We would have no influence at all
until the inflation had run its course.




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The CHAIRMAN. T h a t would be brought about by releasing those
reserves from the Federal reserve banks and placing them at the
disposal of the member banks wherever they should choose to put
them, in the;r own vaults or with their city correspondent banks?
Governor STRONG. Yes; that would be due to this fact, in p a r t : That
all banks carry cash in their vaults which does not count as reserve.
At the time this calculation was made the member banks had something over $500,000,000 of cash in their vaults which did not count
as reserve. As soon as the return of this reserve is made, that cash
would immediately count as reserve.
The CHAIRMAN. Suppose the law was repealed on the old basis,
which you have just referred to
Governor STRONG. Increasing the reserves ?
The CHAIRMAN. Increasing the reserves.
Governor STRONG. I think the effect then would be possibly the reverse. I do not know of any calculation that has been made as to the
effect upon the reserve position of the banks; but if the reserves
which we nowjhold under the provisions of that amendment were all
returned to tKe member banks and the reserve requirements were
increased to the old requirements of the act, it would probably reduce
the reserves of the reserve banks from their present level, around 75
per cent or above, to under 60, possibly to 55 per cent. The danger
of doing that just now would lie in the possibility of the time coming
when we may lose a lot of our gold reserves to the rest of the world;
and we need this margin of reserve in the reserve system now to meet
that possible demand.
The CHAIRMAN. A moment ago you suggested the effect of the
decision as liquidating all of the rediscounts of the system.
Governor STRONG. Yes.

The CHAIRMAN. And the only way that the system then would be
able to rediscount would be through inflation. Does the releasing
of credits to that extent tend to encourage inflation ?
Governor STRONG. I should say that it the member banks had five or
six or eight hundred millions of reserve placed at their disposal
inflation would be inevitable. I t could not be escaped.
The CHAIRMAN. Then, on the other hand, if the old rates were
renewed—that is, if we should go back to the old basis, before June,
1917, of 12, 15, and 18 per cent—would the opposite be true? Would
that tend to lower the price level ?
Governor STRONG. I can not say as to that.
The CHAIRMAN. By tying up that amount of available credit in
reserves? *
Governor STRONG. I think it might result in some reduction of
credit, but it would have to be calculated, Mr. Chairman.
The CHAIRMAN. I t would not be in the same proportion that
prices might be inflated by putting that amount of credit into the
open market?
Governor STRONG. Well, what would happen if the reserves were
returned to the basis of the act before it was atnended in June, 1917,
would probably be an increase in the reserve requirement to-day;
but that is guessing. I would have to have it calculated.
The CHAIRMAN. A S I recall, one of the purposes of the amendment of 1917 was to call in from the country a certain amount of




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gold which the system apparently needed at that time to take care
of the demands occasioned by war and the Government's financing.
Governor STRONG. Yes.

Mr. MACGHEGOR. I think it might be interesting, to cover the
subject, if Governor Strong would tell us what governs particular
prices and what governs general price levels.
Governor STRONG. I should correct my answer first to your statement
about that amendment. I do not think the war was necessarily
the occasion for the amendment, entirely. That amendment had
been recommended by the Federal Reserve Board before the beginning of the war, Mr. Chairman; and I do not think it can be
considered simply as a war measure. I t did greatly strengthen the
Federal reserve system for war purposes; that is, for the purpose of
war finance.
Mr. WINGO. I t was simply an advance along the lines of the original Federal Reserve Act, was it not?
Governor STRONG. Quite so.
Mr. GOLDSBOROUGH. Governor Strong, I doubt if any member of
the committee has it in mind that the Federal reserve system could
control credits, or could by its open-market operations serve at all
times adequately to control the price level. But one question that
I am sure the committee is interested in is this: You have said that
the Federal reserve system, by its open-market operations and by
changes in the discount rate, would influence the supply of credit,
which, of course, influences the price level. Now, that being so,
what is the objection to a general direction to the Federal reserve
system to use such powers as it has for the purpose of stabilizing
the general price level? That is certainly one question in which
the committee is deeply interested.
Governor STRONG. I t might be possible, Mr. Goldsborough, to frame
some language, as an amendment to the act—which might more
properly go into the declaration of purpose of the act rather than
in the text of the act—that would safeguard the system against
misinterpretation of the intention of that declaration. I have not
tried to frame such language, but if it were attempted it certainly
would need to contain the limitation, or the recognition of the fact
that credit alone does not control prices.
Mr. GOLDSBOROUGH. I S not that generally understood? Do you
not think that is generally understood?
Governor STRONG. I aim afraid not.
Mr. GOLDSBOROUGH. YOU think not?
Governor STRONG. NO. If I felt so, I would not feel as strongly as I
do about this amendment, which I would fear on that account principally.
Mr. GOLDSBOROUGH. YOU do not think that if the act were passed,
in a very short time the general public would come to understand
its purpose? Now, as bearing that out, I get from time to time
Wallace's Farmer, a farmers' publication which is edited in Des
Moines, Iowa. There have been some very striking editorials in
that publication from time to time in connection with the Goldsborough bill and in connection with the Strong bill, and the bills
and the purposes of them are very clearly analyzed and discussed
in a very philosophical manner. Now, that paper has a very wide
circulation; it goes to all those farmers out there, and it is incon


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ceivable, it seems to me, that they would get from that paper, which
they take and use, any misinterpretation of the purposes and the
legitimate scope of the act.
Governor STRONG. Mr. Goldsborough, it is a fact, is it not, that the
farmers of the country were led to believe that the Federal reserve
system put them in their difficulties in 1920 and 1921? Has there
not been a great deal of feeling of that sort among the farmers?
Mr. GOLDSBOROUGH. Yes; I think there has.
Governor STRONG. Would it not be natural—I hope I am observing
the proprieties in asking you these questions—would it not be natural, if this amendment should pass, for them to say, " This is to
correct the evil that was done to us before ? "
Mr. GOLDSBOROUGIT. I t seems to me—I am not here as a witness;
you are the witness—but it seems to me that the answer to that is
this: The public always expects too much from any sort of legislation. I t expected too much from the Federal reserve system. Now,
if it is good legislation, it occurs to me that any misapprehension of
the scope of the legislation or the possibilities of it would in time
be corrected; and if it is a good thing, that we ought not to defer
the legislation because the purposes of it might be misapprehended.
Governor STRONG. I would like to set up a hypothetical situation as
to farm prices—not that it is liable to occur, but it might well occur—
to see whether in the event of that occurrence, and this amendment
being made to the Federal reserve act, the farmer might not feel
that again we were to blame for his troubles.
I n the year 1294 we harvested an exceptionally good crop of small
grains in this country and it happened that the rest of the world was
not so fortunate. We had enormous exports of wheat and flour at
good prices and the rest of our surplus farm production was moved
to foreign markets at satisfactory prices. Last year we had somewhat the same situation. Our foreign markets were fortunately able
to take the surplus agricultural production of the country. Now, I
have not seen very much comment upon the very interesting problem
involved in that operation, as to how it was paid for. The fact is
that in 1924 the investors of this country, after allowing for refunding^, and not taking into account short-time bank credit, furnished to
the rest of the world a billion dollars of capital, and in 1925 another
billion dollars, after allowing for refundings of maturing loans and
not taking into account bank credit.
Now, it is my belief, although this can not be proved, that if for
any reason these American investors had buttoned up their pocketbooks and said, " We don't care to take these foreign loans; they don't
interest /us," there would have been great difficulty in the rest of the
world in paying for the exportation of our surplus crop production.
I t is that marginal surplus which we do not consume that makes the
price of the whole crop.
Now, let us suppose that any occurrence abroad that might disturb
American investors should result in a sharp closing of our investment
markets. Europe is still in need of financial assistance. They are
still in a period of recuperation and reconstruction. How would
these crops be paid for ? No amount of credit that we could introduce into the market would have any effect upon the prices of the
production of the farms that are fixed by world prices. The only




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301

result of efforts to raise the price level by an enlargement of the
volume of credit would be to raise the prices of all the domestic goods
which the farmer consumes, and his fix would be worse than ever.
Mr. GOLDSBOROUGH. Your view, then, as I understand it, is t h i s :
That legislation of this kind, whether it is good or not, would probably result in unfair criticism on the part of the public of the Federal reserve system, and therefore undermine the influence of the
Federal reserve system as a permanent Government structure. Is
that something like what you have in mind ?
Governor STRONG. Well, I have in mind the possibility especially
that the farming community of the country "might be led to believe—
they might assume at once—that this would provide a remedy for their
difficulties, and if they were disappointed and disillusioned later, and
a sharp revulsion of feeling took place as to the position of the Federal reserve system in the matter and what it could accomplish, it
might do us very great injury. I t might do the system great injury,
and I think it would do the country injury.
Mr. GOLDSBOROUGH. NOW, Governor, there are pending before the
Agricultural Committee various bills providing for farm relief. Some
of them are obviously unsound; and some of them a great many Members of Congress think are sound. I recall the Curtis-Aswell bill,
which a great many Members of Congress think is sound. I t occurs
to me that the farmers of the country, in so far as their present
emergencies are concerned, and in so far as any ultimate specific
help to their specific crops is concerned, are looking to other legislation and not to this. They are not pushing this legislation; they
are pushing other legislation, which is before- other committees.
Governor STRONG. Mr. Goldsborough, I think in a quiet way—possibly there is not enough advertising about it—the Federal reserve systetn in the last two or three years has done more for the farmer than he
has yet begun to realize, and more than could have been done by
any other agency.
Mr. GOLDSBOROUGH. I do not know that that will be disputed.
Governor STRONG. I shall be glad later, when we come to the
operations of the open-market committee, to describe that in detail.
My principal fear, as I have expressed it—very inadequately, I
am afraid—is the misinterpretation of the possibilities of control of
prices resting in the Federal reserve system, both specific prices,
that is, prices for specific things, and the general price level as
well.
Mr. GOLDSBOROUGH. And you do not feel that that misunderstanding would be gradually and normally eliminated by education as the
workings of tn6 system progressed ?,
Governor STRONG. I think it would be eliminated in the course of
years; but probably as the result of the restoration in time of a more
normal operation of the gold standard throughout the world, which
is more or less under way, as you know.
Mr. WINGO. You have in mind to cover the open-market operations and all these other things ?
Governor STRONG. Yes, sir.

Mr. WINGO. Pardon me for interrupting you again, but I want
to be able to follow you. You have a fear, as I understand, that




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your capacity to render this service will be misinterpreted by the
country. You realize that this bill gives you no power that you
do not already possess ?
Governor STRONG. That is correct.
Mr. WINGO. And you are afraid that without giving you any
power that you do not already possess, or without making it possible
for you to have any greater desire or ability to serve the common
good, the country will be led to believe that by mere legislative
declaration the capacity to remove all the economic evils incident
to control and fluctuation of credit will be lodged in this superwise board?
Governor STRONG. Thank you, Mr. Wingo. You express it better
than I could.
Mr. WINGO. I think I begin to see where your fears are, and you
demonstrate your usual sagacity.
Governor STRONG. If I felt that a declaration of this sort in the
Federal reserve act would accomplish that, I should be delighted to
see it go in.
Mr. WINGO. I have seen wonderful political effects attained by
declaration, and especially by declamation; but after all, as a
practical man occasionally, and a politician frequently, when it
comes down to framing legislative acts, not declarations, I want to
know what is going to be the practical effect. Will it bring about
any public good? I do not object to declarations or declamations
if they will serve any public good; but, as you say, if they will
cause misunderstanding and only increase the political confusion, I
am a little bit afraid of them. I might not have been so afraid of
them 10 years ago.
Governor STRONG. Well, there is no magic formula that can be introduced into the Federal reserve act to control prices. You can not
eliminate human judgment in the adminstration of these matters. I
think possibly, Mr. Chairman, I might express this as I did to
you in your office a few minutes ago. I have discussed these matters
with many economists and students of prices, and purposely have
always carried the discussion through the same course. We have
agreed on the record of the past in the Federal reserve system pretty
generally, as to what has been done and the effect of what has been
done. We have generally agreed as to the conditions at the present
moment, when we have been discussing these problems. But when
I ask them, " Now, we have got to decide something to-day; you are
in the position of running the Federal reserve system; what are you
going to do to-day that Will have an influence upon the future?"
the answer is always the same: " W e l l , you are the practical fellows who are running this; you have got to decide that." And that
is the difficulty. Our examination of the past produces the most accurate knowledge of past action and reaction, but when it comes to
a decision as to what we are going to do for the future, then just
human judgment has got to govern. There is no mathematical formula for the administration of the Federal reserve system or the
regulation of prices.
The CHAIRMAN. Governor, in that connection, and referring to
your statement that you fear the effect that the passage of such a
bill as this might have on the public mind, and particularly the




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SOS

farming element of the country, supposing Such a law as this had
been in effect during the period from 1913 to 1921, do you think it
would have tended to stabilize those conditions?
Governor STRONG. I do not think any declaration of this character
in the act, Mr. Chairman, could have overcome the influence upon
prices of the war and war finance and the distortions that were caused.
If we had had more experience and more intelligence—everybody
having to do with these questions—it might be that the extent of the
price distortion would have been modified somewhat. The energies
of the Federal reserve system during the war were devoted to one
thing—everything else had to be laid aside—and that was raising
the money with which to finance the war and win it, and it did not
exercise very much control over these matters during that period.
I do not think it could have done so.
The CHAIRMAN. Might it not occur, if a bill of this kind were in
operation, and under the administration of the Federal Reserve
Board, that the price of wheat might be soaring because of a world
scarcity, which you referred to as occurring in 1924? The fortunate
position of the farmers was reflected in better prices because of that
world-wide shortage. Suppose a shortage like that should occur
again, and the price of wheat should be gradually going up, and
should attract the attention of the Federal Reserve Board in the
operation of this proposed law or a similar law, what might be the
effect on the farmers' minds if they understood that the Federal
Reserve Board was stabilizing and possibly reducing or holding level
the price of wheat, which otherwise might double in price ?
Governor STRONG. Well, that could, of course, only result from a
complete misunderstanding of what the Federal reserve system is
capable of doing; and what applies to wheat applies to stocks, real
estate, and everything else.
Mr. MACGREGOR. Well, there would be an awful howl going up
from the farmers.
Governor STRONG. I should think so.
The CHAIRMAN. Not only from the farmers, but from everybody
who is affected by what they would consider control of prices.
Governor STRONG. If any important group of commodities enters a
period of decline or advance of such magnitude that it affects the
index number of the general price level, we will say, then the question before the management of the control of prices, if such existed,
would be whether to influence the general price level to counteract
that particular movement of some one set of prices, which might
be an unfortunate thing to attempt.
Take the situation at the present time and for quite a period past.
We have had a remarkably stable level of prices for general commodities, with the exception in the last few months of a decline in grain
and cotton prices. Prices of cattle and hogs have remained pretty
steady, but there has been a decline in agricultural prices sufficient
to bring about a gradual reduction in the index number of general
prices.
Now, take the problem of to-day. Is the Federal reserve system
to step in and attempt to regulate this movement which seems to have
started, and if so, how? That is the practical thing that the price
regulator would face from time to time.




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The CHAIRMAN. I was not suggesting that the Federal Reserve
Board should pick out a certain item that enters into the fixing of
the price index to stabilize it ? but in their general activities in the
administration of some 400 different items that enter into the price
index. If, under the administration of those items in the usual way,
the farmer should, in connection with his observation of a world-wide
shortage—in the wheat crop, we will say—conclude that the Federal
Reserve Board was interfering with the ordinary normal price increase because of supply and demand, would he not be greatly disturbed?
Governor STRONG. Certainly.
The CHAIRMAN. I n that connection, I recall that during the war,
when the price of wheat was fixed by law, there was considerable of
a feeling among the producers of wheat that had that restriction not
been placed on the price of wheat tlrey would have procured a larger
price, and therefore when the deflation started they would have been
in better position to have withstood it, as compared with the predicament that the manufacturers were in. I n other words, the prices of
their commodities.were not fixed, and they were therefore enabled
to go ahead and receive the unusual profit brought about by war
conditions, and therefore better able to withstand the deflation when
it did occur.
Governor STRONG. Mr. Chairman, I do not understand that anybody claims—that is, intelligent people—that the Federal reserve system can, by some manipulation of credit, deal with the price of wheat
or any other particular commodity, or even 404 commodities appearing in the index number of the Department of Labor.
The'CHAIRMAN. I quite agree with you in that. I t was a hypothetical situation that I was creating here for the purpose of bringing out the viewpoint in case a stabilization law was passed similar
to this.
Governor STRONG. I think the farmer would complain. I think he
would have a right to complain.
Mr. WINGO. Would not this always obtain, if you tell the public
that this board can exercise a mastery over the operation of the
law of supply and demand? Taking the usual illustration, when
there is a* shortage of wheat, of course the farmer would very
sincerely believe that the public welfare required that the law of
supply and demand be permitted to operate. When there is a
surplus of wheat, the consumer would become suddenly aware of
the sacredness of the law of supply and demand, and it would be a
question of " be damned if you do and be damned if you don't."
You would get caught both ways.
Governor STRONG. Yes.

Mr. GOLDSBOROUGH. Governor Strong, is it your idea that this
proposed legislation is intended as a legislative direction to the
Federal Reserve Board to control the normal operations of the law
of supply and demand as it affects any particular commodity?
Governor STRONG. By implication I think it would be so interpreted.
Mr. GOLDSBOROUGH. You do think so?
Governor STRONG. Yes.

Mr. GOLDSBOROUGH. I can not conceive of that, Governor.




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305

Governor STRONG. Some of the gentlemen who have appeared before the committee—I can find their statements—have spoken of this
as a mandate by Congress to the Federal reserve system. Now, such
a mandate is not going to do a bit of good, Mr. Goldsborough.
Mr. GOLDSBOROUGH. That may be. I am not directing my question now as to whether or not it is wise legislation or otherwise,
but as to whether or not it amounts to a legislative command to
undertake to control the normal operation of the law of supply
and demand.
Governor STRONG. I do not think that would necessarily be read
into the act; no. I n a general way, I think the possible interpretation
of the amendment would be by farmers who are not students of
economics, that this is a way of fixing up their troubles, and that
now this matter of price readjustment is in the hands of the Federal
reserve system.
Mr. CANFIELD. Governor, do you think it would be only the
farmer? Do you not think that that would apply to all classes
who are suffering from a depressed condition ?
Governor STRONG. Yes; in time, as different classes were affected by
price movements; but at the present moment we think of the farmer,
because undoubtedly he has not been restored to the relative position
t h a t he occupied just before the war, as to the value of what he
produces as against the cost of wThat he consumes.
Mr. CANFIELD. That is not only true of the farmer; there are other
classes that are suffering, too; but the farmer is the one that is
talked about most.
Governor STRONG. Yes; and it is a very large class.
Mr. ALLEN. Governor Strong, I was interested in what you were
saying about the foreign market, the purchaser of our surplus, and
this list of items that have been maintained on a fairly even keel
except the grain; cattle and hogs holding up at a fair price. Cattle
and hogs are affected by the purchasing power of the foreign market
as well, are they not?
Governor STRONG. Yes, sir; but I think not to the same extent as
some of the others.
Mr. ALLEN. YOU think that the depression in the grain price to
the farmer is largely on account of the inability of the foreign
market to purchase?
Governor STRONG. Well, this is partly surmise. I t is not the result
of any study, nor would any study be capable of covering this ground.
] think what has happened as to the prices of wheat, to some extent,
may be this:
During the war the Governments of Europe fed their armies
and their civilian population pretty well—they had t o ; and there
was a very considerable expansion in the consumption of white or
wheat flour. Now that the readjustments of the postwar period
have had the effect of reducing living standards very considerably
in some parts of the world, it may be that the use of substitutes
for wheat—rye, barley, and even kaffir corn—the inclusion of
cheaper grains, may to an extent have affected what would otherwise
be the present consumption of wheat.
Before the war we had not been very large exporters of wheat,
and at times we imported; and we import a great deal from Canada




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to make a mixture for our flour, as you know. But wheat is not
a very good example of the effect of a restriction or enlargement of
foreign markets. Cotton is the best example, and the influence of
the foreign market on the consumption of our cotton would be widespread. Incidentally, as you realize, we export about half of our
cotton crop, and that is about equal to the value of all other agricultural exports. So that in referring to that as simply one of the
influences upon prices, it would be wholly beyond control of the
Federal reserve system. I use cotton as the outstanding example,
because that is the crop in which, more than any other, our farmer
depends upon his foreign market.
Mr. WILLIAMSON. Governor, wpuld you intend to say that the
matter of high money rates or low money rates has any influence
upon marketing conditions at all? I n other words, at a time when
we have plenty of money the rates are low. Does not that have a
tendency to inflate prices as a whole ?
Governor STRONG. Yes; if credit is furnished beyond the reasonably
exact amount required it would-, of course, affect the price level.
Mr. WILLIAMSON. And is not the converse true when unreasonably
Jiigh prices fall?
Governor STRONG. I n time it would have that effect, undoubtedly.
But we all recognize that other very important influences are also
affecting it.
Mr. WILLIAMSON. But could not the Federal Eeserve Board to
some extent, at least, have some considerable influence in stabilizing
the price levels by the inflation or deflation of credits, if I may use
those terms ?
Governor STRONG. I should say that strictly within the limits of
influence which volume and cost of credit exert upon prices, it is
one of many influences.
Mr. MACGREGOR. That power you say they have now ?
Governor STRONG. All the powers we have now are probably adequate. Mr. Chairman, I am trying to say that if declarations are to
be introduced into the Federal reserve act for the purpose of promoting stability of prices generally, there is a declaration which could be
made which I believe would be more effective than the one which is
proposed, and that is a declaration, within reasonable limits, for a
return to the gold standard by former gold standard countries. I n
the course of time, when the effect of the gold standard, which we
recognize and have always recognized, begins to be felt upon prices
throughout the world and the readjustment of bank reserves resulting from that, then, I think a very important step toward stabilization of prices will have been taken.
Mr. WILLIAMSON. I think that theory underlying the Strong bill
is substantially this: That the Federal Eeserve Board in the past
has not exercised its power in the extension and restriction of
credit to the extent that it ought to have done to stabilize the general
price level, and if a bill should be passed declaring to be the policy
of Congress that the board should exercise that power to a larger
extent than in the past, if it means anything that is what it means,
and I say the committee is entirely open minded upon the matter.
Governor STRONG. I am not differing with the purpose at all, Mr.
Congressman.




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307

Mr. WILLIAMSON. D O you think that the Federal Reserve Board
could, as a matter of fact, stabilize price level to a greater extent
than they have in the past by giving greater expansion to market
operations and restriction or extension of credit facilities ?
Governor STRONG. I personally think that the administration of the
Federal reserve system since the reaction of 1921 has been just as
nearly directed as reasonably human wisdom could direct it toward
that very object.
Mr. WILLIAMSON. Of course, there has always been a very material
stabilization of price level since that time, and you think the Federal
Reserve Board has been a considerable factor in accomplishing that
end?
Governor STRONG. I think they have made their contribution in the
administration of credit with some success.
Mr. WILLIAMSON. And how has that been done—in lowering of
rates in open market operations ?
Governor STRONG. Well, it is a combination of the two. The operations in the open market are designed, I should say, to prepare the way
for a change of rates. Unfortunately, it has always seemed to me that
the country has given exaggerated importance to change of the discount rate, sentimentally. The danger is that an advance of rate
will operate as a sort of sledge hammer blow to the feeling of confidence and security of the country as to credit, and that reaction has
been somewhat modified by these open-market operations. The
effect of rate changes by the Federal reserve system sentimentally
upon the country would, in my opinion, be very much less if the
changes were more the result of international movements of gold,
which the world has come to understand pretty well—that is, reserves
going up or down. When we have had a period of some speculation,
and prices showing a tendency to advance, and the world selling us
goods at advancing prices—those are the normal conditions that
justify an advance in the discount rate, which is thoroughly understood abroad and has been practiced there for many years. I think
the people of this country have a better understanding of what is
the traditional orthodox practice of the bank rate as a result of gold
movements than they have of changes made as a result of these more
obscure open-market operations.
Mr. WILLIAMSON. Was there ever an advance of rates from 3 per
cent to around 7% per cent? Was that a mere coincidence, the collapse of prices at that time, or did the Federal reserve system have
something to do with the collapse of prices then ?
Governor STRONG. Well, Congressman, I would like to say two
things about t h a t : I n the first place, it just happened I was away during the entire year 1920 and was not here in the midst of the discussion and living in the atmosphere of that period. So far, however,
as I had anything clearly in my mind I think you will find that expressed very fully in the hearings before the agricultural commission
in 1921, and those hearings took place so soon after the occurrence
that I think my ideas were probably better expressed there than I
can give them now.
Mr. WILLIAMSON. I read those; I know what those are. When the
Federal discount rate went up the member banks complained because
the rates were so high they could not afford to carry the loan. Your




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member bank, in turn, began to call in on their correspondents, witt
the result that all along the line a considerable restriction of credit
took place, at least in my section of the country, the Northwest, so
that by March 4 no man was able to borrow five cents, no matter
how much security he had. I am wondering how much the system
has to do with that.
Governor STRONG. Oh, it has had something to do with i t ; but the
rate did not get as high as you state.
Mr. WILLIAMSON. I t got beyond 7 per cent, did it not ?
Governor STRONG. N O Federal reserve bank had a rate above 6 per
cent for loans on Government bonds, and the country had an ample
supply of Government bonds, and the banks could get practically all
the money they needed from the Federal reserve banks at 6 per cent.
Mr. WILLIAMSON. They could not afford to borrow money at 6 and
6% per cent, and so in place of borrowing money for the purpose of
saving their own credit they sought to pay up what they owed and
called in their own loans.
Governor STRONG. NOW, Congressman, that collapse of prices was
bound to come.
Mr. WILLIAMSON. I realize that, but I have always felt, myself,
that if they had not shoved up the discount rate that the collapse
would not have come as rapidly as it did.
Governor STRONG. Of course, if I may digress just a moment, that
seemed a very cruel thing to many people, and yet in some respects it
had compensating features, and I would like to mention to the committee something that I have never seen discussed very generally
about the policy of the Federal reserve system just during that period:
When we declared war on Germany, Congress immediately passed
an act permitting the Secretary of the Treasury to borrow money,
and the first money that he borrowed was $50,000,000, which he
borrowed from the Federal reserve banks. Except for those loans
which are made to finance the turnover on the quarter days, when
these immense tax payments and security issues are made, when
we make the large redemptions for the Treasury—except for those
temporary loans which are cleaned up in a week, the Federal reserve
banks have never loaned money direct to the Treasury aside from
that $50,000,000.
Generally speaking, therefore, at the peak of advances of credit by
the Federal reserve system, when we advanced $3,4-00,000,000 to the
member banks and others, the reserve banks had in their portfolio a
private obligation of some borrower, with the indorsement of a bank,
for every dollar they loaned. Later, when the deflation took place
(which I believe was inevitable) it resulted in the liquidation of a
mass of reserve-bank credit which otherwise, had we pursued the
policy that other governments pursued of borrowing from the bank
of issue, would have remained as static Government debts to reserve banks to the extent possibly of $3,000,000,000, and it would
have bothered us for a generation to get rid of it. Can you imagine
the people in this country or the Congress being willing to have
the Treasury appropriate $3,000,000,000 out of revenues or out of
other bond issues made to the public, in order to repay to the Federal reserve banks, say $3,000,000,000—1 use that figure arbitrarily—
the result of which would have been to bring about a deflation of
credit? I can not believe it would have been possible.




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309

The deflation which took place in the United States following
the collapse in prices resulted in extricating the reserve system—the
whole monetary system of the country—from a position of permanent entanglement, if you please, such as wa$ witnessed in greater
or less degree abroad; ancl I think that was one of the fortunate
results of the policy very wisely pursued by the Secretary of the
Treasury of never borrowing directly from the reserve banks.
One of the results of this liquidation in that fashion has been to
put this country on as sound or a sounder monetary basis than any
other country in the world, without the introduction of a lot of
money or credit into circulation, based solely upon the Government
debt to the bank of issue. I mean to explain that there have been
offsetting advantages to that deflation, for which I think we are
entitled partly to take credit in the reserve system, but mainly in
the administration of finances by the Treasury.
Now, Mr. Chairman, that I have made my little plea for the gold
standard, I would like, as it seems to come along in natural order,
to take up the subject of operations in the open market.
The CHAIRMAN. Might I suggest, Governor Strong, that the committee are not at all familiar with the machinery that is set up in
connection with open-market transactions, and that you explain
to the committee at the outset, if it is not contrary to the plan of
your statement, the organization of the open-market committee, so
that this committee may have full knowledge of that?
Governor STRONG. I have that in front of me. I n the latter p a r t
of 1921 and early in 1922, the member banks had liquidated so large
a portion of their discounts at the reserve banks that there was
some concern felt by some of the Federal reserve banks as to their
earnings.
I would like to explain that with so little experience in banking
of this character, it is quite impossible to ask nine active, intelligent, progressive business men, three of them bankers, to serve as
directors of a reserve bank, and at once, before they learn a little
of the philosophy of reserve banking, not to assume that one of
their responsibilities is to earn enough money to pay dividends on
the stock; and I think I should state very frankly to the committee
that many directors, or many of the reserve banks, strongly held
the feeling that a part of their duty was to earn enough to pay
expenses. Any business man of experience would feel that way, not
possibly realizing, as was the fact, that there were times when it
would not be desirable to earn the expenses and dividends.
So that in that period the reserve banks, being autonomous and
having the power to invest money, were making considerable investments in the market, buying bills and buying Government securities. I t was found that in the actual execution of the orders, and
in the effect upon the price of Government securities in the market,
there seemed to be some cause for complaint in the Treasury; that
sometimes we were treading on the toes of the Treasury, so to speak,
and as the reserve banks are the fiscal agents of the Treasury, it was
highly important that they should not be in that position. So, in
May of 1922, at a meeting of the governors of the reserve banks, it
was decided to get some sort of supervision of the way this was
done, so as to satisfy the Treasury and equally so as to have a more
orderly procedure. A small committee was appointed to deal with



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the matter. The first committee consisted of the governors of the
Boston, New York, Philadelphia, and Chicago reserve banks. A
few weeks later that committee met and laid out a program of how
the matter should be handled. I will not give that in detail, as it
is not really material; it was a matter of administration. I t is important to know, however, that the supervision of these purchases
and sales by the committee was not intended and never has been
intended to extend into any interference with the local autonomy
of any reserve bank, or its relations with its member banks, or its
dealing in Government securities with its member banks. I t simply
had to do, in the first instance, with the execution of orders in an
orderly way in the open market.
I n September of 1922 the Federal Advisory Council reviewed
this procedure and expressed its approval of it. I n October of 1922
the committee rather extended its duties, by agreement among the
governors of the Federal reserve banks, undertaking to make recommendations to the reserve banks in regard to purchases and sales of
Government securities; and this plan for a recommendation by the
committee was approved at a conference of governors of reserve
banks held in October. That committe.e executed no orders, purchased or sold no securities for system account, but simply supervised
the execution of orders for the individual reserve banks.
I n 1923, in the spring of that year, the Federal Reserve Board
decided that it was wise to reorganize the committee procedure.
The original committee was discharged, a new committee was appointed, consisting of the same men; and commencing in 1923 purchases of Government securities and sales of Government securities
were actually made for the account of the system as a whole; and
those purchases and sales are generally executed through New York
but they are also made in other Federal reserve districts where
markets exist and where we can effect purchases and sales satisfactorily. But, of course, the principal market is in New York.
The CHAIRMAN. YOU speak of rendering that service to Federal
reserve banks?
Governor STRONG. Rendering it to Federal reserve banks.
The CHAIRMAN. Did they render the same service to the Treasury
in any instance?
Governor STRONG. The committee acts as the instrument for harmonizing the execution of orders for the Treasury, the issue of Treasury securities, and the execution of orders for the Federal reserve
banks for their own account.
The CHAIRMAN. The same committee that you refer to as having
been appointed in 1923 are now the committee acting?
Governor STRONG. They are the same committee, except that the
governor of the Federal Reserve Bank of Cleveland has been added;
it is now a committee of five.
The CHAIRMAN. I t is made up of the governors of the reserve
banks ?
Governor STRONG. Yes.

The CHAIRMAN. And you are acting chairman of the committee?
Governor STRONG. I am acting as chairman of the committee. The
market for, Government securities centers so largely in New York,
that, of course, it is necessary that the transactions be largely conducted there.



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311

The Federal Keserve Board in 1923 considered questions of
system policy in the execution of these orders, buying and selling
Government securities and set out certain principles which should
apply, which I think have been scrupulously observed. The principles have been published in the board's annual report, and you
may or may not care to have me read them.
The CHAIRMAN. I think you might place them in the record, if
that is agreeable.
Governor STRONG. I can just give the reporter this marked copy.
The CHAIRMAN. Let me ask you this, Governor
Mr. GOLDSBOROUGH. I n order not to break the continuity of your
statement, I will suggest that Governor Strong be asked to read
those principles, and then go on. I see they are not very long.
Governor STRONG. They are not very long [reading] :
That the time, manner, character and volume of open market investments
purchased by Federal reserve banks be governed with primary regard to the
accommodation of commerce and business, and to the effect of such purchases
or sales on the general credit situation.
That in making the selection of open market purchases, careful regard be
always given to the bearing of purchases of United States Government securities, especially the short-dated issues, upon the market for such securities,
and that open market purchases be primarily commercial investments, except
that Treasury certificates be dealt in, as at present, under so-called " repurchase " agreement.
In order to provide for the proper administration of the policy defined above,
the board rules that on and after April 1, 1923, the present committee of governors on centralized execution of purchases and sales of Government securities be discontinued, and be superseded by a new committee known as the open
market investment committee for the Federal reserve system, said committee
to consist of five representatives from the Federal reserve banks and to be
under the general supervision of the Federal Reserve Board; and that it be the
duty of this committee to devise and recommend plans for the purchase, sale
and distribution of the open market purchases of the Federal reserve banks
in accordance with the above principles and such regulations as may from
time to time be laid down by the Federal Reserve Board.

The CHAIRMAN. Governor, in connection with the oj:>eration that is
outlined in there, by giving you the authority to buy and sell temporary certificates of indebtedness of the Treasury, does not that have
an effect upon the money rate; might it not make money easier
or tighter?
Governor STRONG. Oh, yes; undoubtedly.
The CHAIRMAN. Will you explain to the committee also the repurchase agreement referred to % What is the nature of that repurchase agreement?
Governor STRONG. May I come to that a little later ?
The

CHAIRMAN.

Yes.

Governor STRONG. I have that all in here.
The CHAIRMAN. All right.
Governor STRONG. The committee, as I have said, carefully avoids
any intrusion into local or district matters which would be disturbing
or in any way unsettling to the local management of any reserve bank
in its autonomy and in the local responsibility of each reserve bank.
The committee meets frequently, usually at Washington, and at
times at other reserve banks, with their officers and directors. Its
supervision comprehends the following: Purchases and sales of
Government securities which are for the system account, but not
local transactions with member banks; purchase of bills in the central




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STABILIZATION

markets, but not local purchases by other reserve banks from their
members,
The CHAIRMAN. What kind of bills?
Governor STRONG. Bankers' acceptances.
The CHAIRMAN. I t is confined entirely to bankers' acceptances?
Governor STRONG. Yes, entirely.
Mr. BLACK. D O those bankers' acceptances cover various commodities, such as manufactured goods, agricultural products, and so on?
Governor STRONG. Yes.

The CHAIRMAN. Exports?
Governor STRONG. Yes, exports and imports. I think much the
largest amount of them, as a matter of fact, is drawn to finance our
exports and imports. The largest individual item, again, is cotton.
The committee.arranges periodically for a division of the purchases
between the reserve banks; it also supervises such foreign business as
we do, and one of its principal functions is to make recommendations as to policies in making purchases and sales which are submitted to the Federal Reserve Board.
The CHAIRMAN. Purchases and sales in the open market ?
Governor STRONG. Yes; in the open market—all action by the committee is subject to ratification by the directors of each Federal
reserve bank before it is effective as to that bank.
The CHAIRMAN. J u s t right there. I n that connection, is there
any notice to other bankers of the beginning of the open-market
transactions from time to time, or the purchases in the open market ?
Governor STRONG. N O .

The CHAIRMAN. That is kept entirely within the knowledge of
your committee?
Governor STRONG. Yes. Of course, careful scrutiny of the statement of the reserve banks of the changes taking place in investment
account
Mr. GOLDSBOROTJGH. But that is after the investment has been
made?
Governor STRONG. Yes.

The CHAIRMAN. There is no announcement made of the policy
that is adopted by the committee as to purchases or sales ?
Governor STRONG. N O . And possibly you prefer to discuss that
later, where it would naturally come. But I think there is great
doubt about the wisdom of publishing it in advance. All of the actions of the committee and its recommendations are submitted to the
reserve board when their approval is legally necessary.
But as to the foreign accounts, I would like to deal with those—
they are much less important—first; and take up the question of purchase and sale of Government securities later, if I may.
The CHAIRMAN. Suit your own pleasure.
Governor STRONG. The Federal reserve act provides that the Federal reserve banks may open accounts with foreign banks and that
foreign banks may open similar accounts with the Federal reserve
banks. I t also provides that one Federal reserve bank may act for
the whole system in handling these accounts. Such foreign business
as we do is of that character.




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313

All of the accounts are carried in New Y ork by the FeSeral Reserve Bank of New York, and are divided up among the other reserve banks—that is, most of them are; there are one or two that
are not.
The CHAIRMAN. The securities are held at the New York bank?
Governor STRONG. The securities are held there, but the balances
are divided among the other reserve banks. You will observe an
item in the statement of the Federal reserve system showing how they
are divided among the various reserve banks.
The business that is done in New York by our foreign correspondents consists in carrying these deposit balances with us. We
buy bankers' acceptances for them; that is, invest some of their
balances. We also purchase short-dated Treasury issues. When earmarked gold is piling up here and they ask us to do so we ship the
gold to them abroad.
The accounts are confined strictly to banks of issue, that is, to
banks of the same character and rank as the Federal reserve banks.
The CHAIRMAN. This " ear-marked " gold is not held as a part
of the reserve in the Federal reserve system, but is kept entirely
segregated ?
Governor STRONG. N O ; it is segregated in separate vaults.
We do no business at all with commercial banks abroad, but
simply with the State banks of issue.
This business has grown, and represents, at least in my opinion, a
natural development in the transition period between the abandonment of the gold standard and the resumption of the gold standard,
which you would generally describe as the period of operation of
the gold exchange standard, where banks of issue of various countries maintain accounts with the State banks or the banks of issue
in countries which have free gold markets.
That, in a general way, describes what is happening in this
foreign business that we do. Of course, if not conducted under the
supervision of a committee of this kind—because New York is the
market that has contact with foreign money markets—all the accounts would necessarily have to be conducted solely by the New
York bank for its own account, which our directors and, I think,
all directors in the Federal reserve system would consider to be undesirable.
The handling of these matters is a system responsibility and the
submission of the management of the foreign business to system
supervision and control rather than leaving it to one reserve bank
alone, is desirable.
Are there further questions about this ? I am coming to the Bank
of England matter later.
The CHAIRMAN. Suppose you proceed in your own way.
Governor STRONG. New York is the main market where bills are
dealt in, and it is the principal market on which bills are drawn in
foreign countries and in this country. Boston is the next important
point. So that the operations of the committee are largely conducted
in New York and somewhat in a few other cities.
The CHAIRMAN. Who decides, Governor, as to when you shall buy
paper, and as to when you shall sell paper?




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STABILIZATION

Governor STRONG. All of that I have laid out to describe, and I
will come to it later.
The CHAIRMAN. All right.
Governor STRONG. This method of handling what we call the purchase of bills in the open market—really discount of paper—is necessary because it results in an orderly market and, more important, it
affords protection to the banks that are extending these drawing
credits to the rest of the world, and to the New York dealers who
deal in the bills and the banks which buy them. The development of
the bill market in New York is the outgrowth of the need of the
rest of the world to draw on the surplus credit of this country to
finance the movement of goods, and especially of trade taking place
between this country and foreign countries. I t is highly important,
when an exporter in some, other part of the world is making a
shipment of goods to America and drawing time bills representing
the sale price of those goods, that he know with certainty upon that
bill's arriving in America in New York that it will be promptly
accepted, have a certain market at a pretty certain rate; that is the
foundation of a bill market.
The foreign banks also must know that when that bill is discounted
and they get bank balances in that market that they shall be able to
get the equivalent in gold, if they want i t ; otherwise they may suffer
a loss by the depreciation of the exchange.
So, in a word, we are engaged in endeavoring to develop a market
in New York where definite, certain, and dependable facilities will
be created for financing our trade with the rest of the world; and
the war has resulted in a development that has come much faster
than would otherwise have been the case; and on the whole it has
been exceedingly satisfactory.
The freedom with which the reserve banks stand ready to buy
bills is one of the most important factors in developing that market.
Are there any questions on that subject, because I just propose to
touch on it very briefly?
The CHAIRMAN. I n that connection, my understanding is that only
such bills as are indorsed by American institutions and as are rediscountable in the Federal reserve system are bought ?
Governor STRONG. We require the indorsement of a banker on
every bill.
The CHAIRMAN. American bankers or foreign bankers ?
Governor STRONG. There are some exceptions where indorsements
of foreign banks are accepted. We do accept the indorsements of certain foreign banks which have agencies in this country, which were
established here urlder the law of the State of New York and which
carry assets here and furnish us with satisfactory statements. There
is a very good reason for that, Mr. Chairman. The facilities afforded
by American banks in foreign countries to accumulate these bills
and pour them into our market are as yet rather slight. We have
not yet developed our foreign banking agencies very widely, and there
are many thoroughly responsible foreign banks with branches in
New York or offices there
The CHAIRMAN. For instance, the International Acceptance Bank?
Governor STRONG. I t is more banks like the Hongkong and Shanghai Banking Corporation or the American bank named the Interna-




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315

tional Banking Corporation, which have branches throughout the
world, through which the bills come to the New York market, and we
do accept indorsements from some such foreign banks. These bills
are not purchased in the market in the same way that Government securities are. The purchase takes more of the nature
of a discount of commercial paper; that is to say, we have fixed rates
at which we take paper that is offered to us, almost exactly like the
rate of discount, and we do not go out and bid for bills and buy them
as we would Government securities. I n fact, it is not a " voluntary "
purchase of securities in the sense that the reserve banks purchase
Government securities upon their own initiative. These bills are
offered every day, but if our rate is above the market rate they do
not come to us except when money is tight; if our rate proves attractive they do come to us. There is an important distinction there,
because it might otherwise appear that the $225,000,000 of bills of
this kind held by the system were acquired by our initiating purchases in the same way that we do Government securities. That is
hardly true. With some few exceptions, they simply come to us for
discount, just as commercial paper does from member banks, and we
purchase the great majority of all the bills from the member banks
the same as we discount commercial paper for them.
The CHAIRMAN. Suppose your committee should decide they
wanted to buy $100,000,000 of open-market bills. You have a daily
knowledge of the bills that are available ?
Governor STRONG. Oh, yes; pretty closely.
The CHAIRMAN. SO that you always know beforehand what there
is available for purchase ?
Governor STRONG. Pretty well.
The CHAIRMAN. And the rates ?
Governor STRONG. Yes.

The CHAIRMAN. I suppose the fact that you are in the open market determines largely what will be the rate?
Governor STRONG. At times.
The CHAIRMAN. Your operations determine the rate to a great
extent ?
Governor STRONG. At times our operations determine the rate to a
great extent; at other times the rate gets below us and the bills go
out of our hands. And the movement to the Federal reserve banks
is very considerably seasonable. When the cotton crop is moving
to Europe in the fall, the amount of bills made increases rapidly and
more bills come to the reserve banks.
The CHAIRMAN. May I make the suggestion that it is now 12.30
and that we take a recess until 2.30, when we will resume with Governor Strong?
(Therefore, at 12.35 o'clock p. m., the committee took a recess until
2.30 o'clock this afternoon.)
AFTER RECESS

The hearing was resumed at 2.30 o'clock p. m., at the conclusion
of the noon recess.
The CHAIRMAN. The committee will resume its hearings.




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STATEMENT OF BENJAMIN STEONG, GOVERNOR FEDERAL RESERVE BANK OF NEW YORK AND CHAIRMAN OF THE OPEN
MARKET COMMITTEE OF THE FEDERAL RESERVE SYSTEM—
Continued
Governor STRONG. Mr. Chairman, there were one or two questions
asked this morning where possibly my answers have been a little misleading. May I refer to them again ?
The

CHAIRMAN.

Yes.

Governor STRONG. One was the question asked as to a decision
which might be made by the open market committee to purchase, say,
$100,000,000 of bills. My answer might have led to the conclusion
that such a decision was made at times. That is not the way bills
are purchased for the system. We do not go into the market and
buy them, making a decision on our own initiative to buy a certain
quantity of bills. There is a rate established, at which we are
known always to be willing to take bills from the market and they
just come in to us at that rate as the banks offer them, and rapidly
as they do come in they are divided up by the committee, partly to
fill orders received from foreign banks which have balances with us
for investment and partly divided among the other reserve banks in
certain proportions which are fixed from time to time by the committee with the approval of each participating bank. So, the possible inference from my answer that, in the purchase of bills—that
is, acceptances—we take that affirmative initiative, is not accurate.
We simply buy bills which are offered to us in the usual course of
business, mainly by the member banks in New York.
There are dealers in bills in New York and in some of the other
reserve bank cities who, at times, come to us when a temporary
sharp advance in money rates occurs and make temporary sales of
their bills to us in order that they may not be driven to dump
their bills on the market and sustain heavy losses, and while that is
not a very active function of the reserve bank in New York City,
it nevertheless has a degree of importance in insuring that there
will always be a stable market for bills at a fixed rate at the reserve
bank. The maintenance of that is important in all parts of the
world where cables are sent to buyers of bills at points of origin,
so that buyers may know that they can be discounted at a certain
rate. I n fact, most bills drawn in foreign countries, on New York,
with documents attached, representing shipments of goods, are sold
with forward rates of discount already fixed by cable, so that the
holder may know that when the bill reaches New York and is accepted and the documents are detached, he will realize a given
amount for his bills.
Mr. BLACK. All of those bills have a maturity of not more than
90 days, do they not?
Governor STRONG. Except bills drawn in trade where credit terms
are four to six months.
Mr. BLACK. They may have a maturity of as much as six months ?
Governor STRONG. Yes, sir.

The CHAIRMAN. From what you say, there is not much active
competition on this paper; that is, the Federal reserve bank is not
in active competition with other banks? I n other words, is there




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317

a keen market developed in competition when the Federal reserve
banks are in the market for that paper?
Governor STRONG. I t would depend entirely on the rate fixed.
Sometimes the rate we fix is such that we will get a large amount of
bills. Then it may be said we are in competition with the general
market for bills. A t other times—for instance, a period in 1924
when interest rates were very low—most of the bills find other
buyers because our rate may be a little higher than others will
buy at.
Mr. WINGO. Who fixes the rate?
Governor STRONG. A t which we buy?
Mr.

WINGO.

Yes.

Governor STRONG. That is fixed by each bank, by the directors of
the bank, subject to a minimum rate approved by the Federal Keserve
Board.
Mr. WINGO. Here is what I have in mind, that your committee
handles the buying for what you call the joint account.
Governor STRONG. F o r the system.
Mr. WINGO. And that, of course, does not cover the direct purchases that are made locally by each Federal reserve bank?
Governor STRONG. Not at all.

Mr. WINGO. I n addition to the buying done by your committee,
will there be, theoretically—and I guess actually—buying of local
bills on the local market?
Governor STRONG. Yes, from their own members.
Mr. WINGO. NOW, what I had in mind is, who fixes the rate for
the joint purchase—your committee?
Governor STRONG. The purchases made in New York, where most
are made, of course, are made at the rate established by the directors
of the Federal reserve bank in New York. That is, at the market
rate in that market.
Mr. WINGO. I see the point. I n other words, your committee supervises the purchases for the joint account, and if it is in New York,
of course you purchase at the rate fixed by the bank in New York.
Governor STRONG. Exactly, and if purchased in Boston, the rate is
fixed by the Boston bank.
Mr. WINGO. H O W frequently are changes made in that rate? I s
it more frequently changed than the rediscount rate?
Governor STRONG, Yes, sir.

Mr. W I N G O . I assumed it was, but I never inquired into it. What
considerations, if you do not mind—it might interest the committee—what considerations, or rather what elements, enter into the
determination of that open market rate by your bank and, necessarily, by other banks when they fix the rate ?
Governor STRONG. I think I ought to begin by a description of
what these rates mean, Congressman.
Mr. WINGO. I think that is a good idea. A n d assume we do not
know anything about it. What elements control the fixing of thp
rate which necessarily will have a major effect on the volume of
business you do?
Governor STRONG. May I begin by endeavoring to overcome a misapprehension which is very widespread about the discount rate—a
93869—27—PT 1




21

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STABILIZATION

misapprehension which has grown from the close study people
have made of the British system of rate making. The discount rate
of the Federal Reserve Bank of New York, using that as an example, is sometimes criticized for being below the market rate for
"money." To-day, our discount rate on commercial paper is 4 per
cent and the governing rate among the commercial paper brokers
will be from 4*4 to 4 % per cent. The suggestion is made that the
proper rate for the Federal reserve bank would be somewhat above
the rate at which commercial paper sells.
That grows out of the knowledge we have of the Bank of England's
rate, I believe, but the facts in the two markets differ materially.
There is no commercial paper in England, as we know it here. The
loans made by the big commercial banks of England to their customers are not made by taking a note from the customer, as a rule, but
by an over-draft arrangement which does not produce a negotiable
instrument at all. The rates charged by them for the over-drafts
or advances, are fixed somewhat above the rate of the bank of England. When the Bank of England advances its discount rate, generally the rates charged by the joint stock banks to their customers
on their advance accounts also advance. So, the rate for the type
of loan made to commercial borrowers by British banks which corresponds to our commercial paper is generally above the rate made
by the Bank of England, just as our commercial paper rate is somewhat above our Federal reserve discount rate. The difference is
that our business loans produce commercial paper eligible to be
brought to our bank. The British system does not. The Bank of
England minimum rate is the rate at which they will discount the
same kind of bills (acceptances) referred to as being purchased by
us under section 14 in the open market. The proper way to show
the relation of rates would be to compare our purchasing rate for
bills (acceptance) with what is known as the minimum discount
rate in England. The rate at which we discount commercial paper
and make loans to our member banks which is somewhat higher
corresponds more to the rate for what in Europe they call Lombard
loans or collateral loans such as are made by the banks of issue to
their customers, secured by various types of collateral. I n the course
of evolution of the Federal reserve system, as our money market
develops and changes its character somewhat under the influence of
the Federal reserve system, it may be that the real discount rate will
be the rate which now applies simply to accepted bills and the rates
at which we make loans to our member banks will correspond, in
the course of time, to the so-called " Lombard " rates for loans to the
customers of foreign banks of issue which are 'usually secured by
collateral and which rate is usually about 1 per cent above their
discount rate.
The reasons for the difference of rates for bills and for commercial paper are various. The commission charged by a bank for
accepting a bill of exchange will run, on the average, at a rate of
about one-quarter of 1 per cent for a 90-day bill. That is 1 per cent
per annum. So, the cost of credit to the borrower, who is financing
a commercial transaction by a bankers' acceptance instead of a note
of hand, is partly made up of the commission, which is at the rate
of 1 per cent per annum. That is the value of the bank obligation




STABILIZATION

319

on the face of the paper and corresponds to the indorsement which
we get on commercial paper when it is brought to us for discount at
the reserve bank.
There is possibly a reasonable allowance which should be made
for the very narrow shave that is made by dealers in turning the
bills over, of say an eighth or a sixteenth of 1 per cent. B u t the
difference between that rate and the rate at which commercial paper
sells in the market, 4 % per cent, and acceptances, Sy2 per cent, fundamentally represents the value of the acceptance of the bank on the
face of the draft, which does not appear on the face of commercial
paper, and that is the compensation that the accepting bank gets for
lending its credit to a customer—for extending credit in that form.
The CHAIRMAN. A n d that ratio is usually in the quotation?
Governor STRONG. Yes, sir.

The CHAIRMAN. D O you find, in your operations in the open
market purchases and sales, you sell in competition with the Bank
of England or any other foreign bank at times?
Governor STRONG. That is not individual competition. I t is competition of markets, very largely. If the rate at which bills can b e
discounted at New York is somewhat below the rate at which t h e y
can be discounted at London, the tendency of drawers of bills, with,
facilities for financing the drawing of bills either on New York
or on London, would be to draw on New York. If the London rate
is below our rate, the tendency would be to draw on London, and
the initial competition does not arise in the market where the bill i s
accepted, but in various markets, all over the world, at the point
of origin of this paper, where drawn, in connection with the
shipment of goods. I have no doubt if you were on the Malay
Peninsula, talking with a producer of rubber who had a large
shipment to make to New York or possibly to London, and he had
banking facilities in both centers, he would go to the agency of
some bank there and say, " Now, what can I get for a bill in dollars or in sterling," and he would get a quotation from the bank
which would be largely fixed by the knowledge t h a t the bank manager had of the rate at which he could get discount for that bill
either in the London market or the New York market.
The real difference, or the main difference, between the rate for
commercial paper on the one hand and for a bill accepted by a good
bank on the other hand is due to the fact that one has the obligation
of the bank on it and the other has not, and the compensation of t h e
bank that accepts the bill runs, roughly, at 1 per cent per annum.
The CHAIRMAN. Many of these bills are the result of the shipment
of cotton abroad, as I gathered from what you said this morning.
Governor STRONG. Yes.

The CHAIRMAN. That might mean the origination of paper in England, Manchester, or Germany, or perhaps in Kussia.
Governor STRONG. I t would be drawn by an exporter in thi»
country.
The CHAIRMAN. I f it was drawn by the exporter in this country,
how would it become a banker's acceptance ?
Governor STRONG. Of course, the usual route that a bill follows is
the same route that the goods follow, and it is a little unusual in fairly
recent practice for bills to be accepted in New York when represent-




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STABILIZATION

ing the financing of shipments of cotton to Europe. They would
generally be drawn on the point of destination of the cotton. Before
the war almost all bills that were drawn to finance our export of cotton were drawn on London or Liverpool, or on Havre or Milan or
other centers.
The CHAIRMAN. I understand a great deal of the cotton has gone
to Russia, through the All-Russian Textile Syndicate, which has
its offices in New York, for instance. How is t h a t settlement made ?
Take a bill of cotton sold to the All-Russian Textile Syndicate as an
example.
Governor STRONG. I can get you the particulars of that, but I have
not got them at hand. The bills drawn in connection with that particular cotton movement, as far as I understand, have not come in to
us at New York up to now.
The CHAIRMAN. They have not been a matter of rediscount generally yet?
Governor STRONG. N O , sir.

Mr. WINGO. F o r the purpose of the record, assume that the committee, as well as those who read the record, have never heard of
bankers' acceptances and bills of exchange. Take a shipment of
$100,000 of cotton to be exported. Will you, for the purposes of
the record, give the A, B , C's of that, the kindergarten operations,
and how it would get into the Federal reserve bank ?
Governor STRONG. I t takes a great many forms, Congressman.
May I give the simplest form?
Mr. WINGO. You get what I am driving at ?
Governor STRONG. Yes.

Mr. WINGO. F o r instance, there may be a great deal of confusion
even in the committee, but for the benefit of the record take cotton
as an exported article.
(Discussion off the record.)
The CHAIRMAN. The committee will stand in recess for 10 minutes.
(The committee thereupon took a recess for 10 minutes, at the
conclusion of which the following occurred:)
The CHAIRMAN. The committee will resume the hearings.
Governor STRONG. Mr. Chairman, I was asked to give a description of a transaction involving the origin of a bill drawn to finance
a shipment of cotton;
The CHAIRMAN. I n that connection, Governor, I think it would
be well for you to distinguish between the two classes of paper.
Governor STRONG. The bill that is dealt in in the open market in
New York is identical with the bill that is dealt in in the market in
London and practically all the banking markets of the world. I t is a
bill drawn upon an acceptor, usually a bank, representing a shipment, and usually a sale of goods, and I understand you wish me to
describe that type of bill as applied to a cotton transaction.
Mr. WINGO. Take that as a key; in other words, any commodity
imported or exported. J u s t go into a kindergarten explanation of
the transaction in connection with that.
Governor STRONG. I shall describe the case of a shipment of cotton,
purchased in Texas by or for account of a firm of Liverpool cotton
dealers, shipped from the port of Galveston and financed in New
York City. The buyer of the cotton assembles it at some cotton




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321

assembling point on a railroad, visually where there are some facilities for storing the cotton temporarily pending shipment, and
frequently where there is a cotton gin. The cotton is carefully
examined, weighed, and graded. Each bale bears a number or
identification mark. When it is actually shipped to Galveston and
has been loaded on the steamer there will have been produced and
delivered to the representative of the buyer of the cotton a bill of
lading and grading certificates. He will also hold an insurance certificate representing the insurance on the cotton during shipment
and possibly other papers not material to this description. The
local shipper of the cotton has probably drawn checks on his account in the local bank to various farmers or dealers from whom
the cotton has been purchased, and he must provide funds in his
bank balance for the amount so paid. I n order that he may be
able to do this the Liverpool firm of cotton dealers, for whose
account the cotton is purchased, has opened a commercial credit
through, say, the Bank of Liverpool with a New York bank which
we will call the National City Bank. The buyer of the cotton in
Texas, therefore, draws a draft upon the National City Bank in New
York, which is made payable, say, at 90 days sight. He attaches the
bill of lading, insurance and grade certificates, and other papers to
this draft and deposits it in the local bank where he keeps his
account and upon which he must draw checks to pay for the cotton.
The local bank may give him the cash at once for the full amount
of the draft less a discount at an agreed rate, representing the interest for which the cash is advanced until the bank gets reimbursement
in New York. I t is by this method that, the local buyer of the
cotton for Liverpool account is able instantly to make payment to
the farmers or cotton dealers from whom he purchases the cotton.
The Texas bank, in order to get reimbursement for what it has
paid for the draft, sends it at once to its New York correspondent,
which we will call the Hanover National Bank, with which it has
some regular arrangement for handling such documentary drafts.
When the draft and papers reach the Hanover National Bank they
at once present them to the National City Bank which affixes a
stamped indorsement on the face of the draft stating that the draft
is accepted on the date presented. I t detaches the documents and
returns the draft itself to the representative of the Hanover National
Bank. The disposition of that draft by the Hanover National
Bank will depend somewhat upon its arrangements with its correspondent in Texas and somewhat upon whether it has funds of its
own to invest in bills or not. I t may at once discount the draft at
some rate agreed upon with the Texas bank and credit the proceeds to the account of its Texas correspondent, thereby reimbursing it for the advance it has made to the local cotton buyer, or it
may call in a dealer in bills, which we will call in this instance the
discount corporation, and if satisfied with the rate quoted by the
discount corporation, will sell it the bill and credit the proceeds in
the same fashion to its Texas correspondent. U p to this point it
will be seen that the Texas bank has been reimbursed for its advance, the local cotton buyer who represents the Liverpool firm has
been reimbursed for the amount which he paid for the cotton and
the farmers and cotton dealers have received payment for their crop.




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STABILIZATION

The course of the bill thereafter in the New York market is a
matter of concern to the Federal reserve bank. Buyers of bills who
are conducting a regular business in dealing in bills, such as the
discount corporation, handle very large amounts, far in excess of
the amount of their capital. They carry a large portfolio of bills
on which they must borrow money at banks, and the business is
conducted on such a narrow margin of profit that if any sudden
advance in interest rates should occur, causing the banks which
carry the bills for them to charge much above the rate at which
they bought the bills, it would impose many losses. I t might so
disorganize and discourage the dealers that it would be impossible
to develop a well-organized market for a type of paper upon which
a considerable part of the business community depends for the
financing and marketing of what they produce. To meet the situation the Federal Eeserve Bank of New York has developed a practice with the dealers in bills of making temporary purchases of their
bills for 15 days or less under resale contracts so that they have a
place of refuge in the event of a little money pinch. These dealers,
whom we are seeking to protect, are engaged constantly in selling
bills to banks and others having funds to invest in them and many
member banks are regular purchasers of bills from these dealers.
These banks frequently, in fact almost as a matter of constant practice when for one or another cause their reserves become impaired,
bring the bills to us and discount them with their indorsement at
the regular fixed rates which we quote from time to time, the present
rates running from 3 % per cent for bills of short maturity to 3 %
per cent for bills of 90-day maturity.
I t is now necessary to trace the course of the documents which
have been detached from the bill by the National City Bank. They
are, of course, needed in Liverpool to release the cotton when the
steamer arrives. And the National City Bank under some arrangement with its Liverpool correspondent, the Bank of Liverpool, will
probably mail the documents at once to them where they are dealt
with in accordance with the usual practice of the Liverpool market.
These bills representing cotton and a great variety of commodities,
as was recounted earlier in my statement, plus many bills drawn on
New York representing imports of goods into the United States
which go through a somewhat similar course, aggregate at times
from six to seven or even eight hundred million dollars. I t is the
best type of paper created in connection with the country's commerce. I t is more distinctly self-liquidating than any other and
the great bulk of it, as is shown by the amounts which we buy, is
the vehicle now being largely employed to finance the export of
cotton and other farm produce. One of the objections to the bill
proposing to repeal the so-called war amendments of the Federal
reserve act passed in June, 1917, is that it would tend to operate as
a distinct discrimination against the best type of paper in our banking system and the most liquid type of paper which comes to the
Federal reserve bank, and that type which is especially designed
for the economical financing of agricultural produce as well, of
course, as many other kinds of goods.
The diiference between the practice described above and that
which prevailed before the war can be briefly described as follows:




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323

When the cotton buyer in Texas had assembled the cotton and had
possession of all the shipping documents he drew a bill, not in dollars on a New York bank, but in sterling, francs, marks, or other
foreign currency on a bank in the country to which the cotton was
to be shipped. That draft, under a system of telegraphic exchange
rate quotations, was promptly sold in Texas to a bank which made
a specialty of handling documentary bills payable abroad at rates
which were quoted by telegraph every day, usually by New York
City banks. The Texas bank would attach to the sterling or other
foreign currency draft a separate draft for the dollar equivalent at
which it had been sold to the New York City bank, and this draft
went through to a New York correspondent exactly as the dollar
draft was described as being handled. Upon its arrival in New
York the dollar draft was paid and the proceeds credited to the
Texas bank and then the New York Qity bank remitted the bill
and documents to its correspondent in the foreign capital where it
was to be accepted and made payable, and there it went through
somewhat the same course as I have described to be the course of
the dollar draft under present practices in New York City.
Please bear in mind that I have described above one of the simplest
types of transactions of this character, eliminating quite a few details of technique' wThich might serve to confuse the description.
Drafts representing our exports are drawn in conformity with certain customs which have grown up around different trades, those
representing shipments of grain being quite different in technique,
although the same in principle, as those representing shipments of
cotton, but the cotton draft being the largest in volume is possibly
more typical in form and serves best to describe the principles.
Broadly speaking, the result of the development of this market
in New York is to transfer* the financing of a considerable part of our
foreign commerce from foreign markets to the New York market
where it otherwise would not have been financed. I n essence it is
in the nature in the aggregate of a temporary loan but more or less
constant in total volume; varying between a minimum of five or six
hundred millions, to a maximum of eight hundred millions or more,
whose function it is to move goods. I t has, of course, the effect of
relieving European markets of the burden of that amount of financing; but, on the other hand, it does produce some profit to th&
American banking system and does produce other advantages which
do not bear upon this description.
Mr. BEEDY. F o r how long a period are these bills drawn ?
Governor STRONG. Many bills are drawn for a longer maturity
than 90 days, which are then carried until they reach 90 days' maturity, whereupon they may be brought to us for rediscount.
Mr. WILLIAMSON. YOU only take those that constitute bankers' acceptances ?
Governor STRONG. Yes, sir; except that we sometimes take trade
acceptances with a bank indorsement.
Mr. WILLIAMSON. If it is drawn on an individual and an individual accepts it, before vou take it, it would have to be indorsed by a
bank?
Governor STRONG. Yes; and those are mostly trade acceptances.




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STABILIZATION

Mr. WINGO. That is the reason I asked for a distinction between
the two. You would be surprised how many business men and local
country bankers confuse that and think you can buy every conceivable kind of bill, whether a bank acceptance or a bill of exchange
created through the indorsements of the banks.
Governor STRONG. That is a very different type of paper from the
ordinary commercial paper.
Mr. WINGO. I think it might be well to assume we never heard of
it, for the benefit of the record.
Governor STRONG. The other type of paper, which is simply a
promissory note made by the customer of the bank for the borrowing
of money, we never buy in the opeil market and have no authority to
do so under the law. We get it from the member banks after they
have indorsed it.
Mr. WINGO. Whenever you go into the open market, you buy something that really represents a transaction?
Governor STRONG. Yes; a sale of goods.
Mr. WINGO. While a member bank may loan on a straight loan,
and it may be a credit that has goods or commodities back of it or
merely a promise to pay
Governor STRONG. YOU can not tell what is behind it.
Mr. WINGO. YOU are limited by law to what is really commercial
paper ?
Governor STRONG. Yes; in open market purchases to bills which
identify themselves.
Mr. WINGO. And grow out of commercial transactions ?
Governor STRONG. Yes, sir.

Mr. WINGO. NO fictitious artificial credit created by an individual
asking the bank to lend money on his name ?
Governor STRONG. If you went through our portfolio in New York
and examined them, with a little practice you would be able to tell
very promptly what the evidence of genuineness is. Frequently you
will find the name of the commodity to which the bill applies, and
you would be amazed at the commodities—cotton, hides, human hair
from China, hair nets, coffee, jute, rubber, and every conceivable
commodity.
The CHAIRMAN. D O you make any distinction between such basic
commodities as wheat, cotton, and copper and manufactured commodities—that is, prime raw materials that are world products and
fabricated materials in this country ?
Governor STRONG. The great bulk relates to primary commodities.
May I give you a list of bills covering two months' purchases by the
reserve banks in their operations in the spring of the year, to indicate
what a variety of commodities is financed ?
The CHAIRMAN. Certainly.
Governor STRONG. $75,000,000 cotton; $27,000,000 grain; $20,000,000 sugar; $18,000,000 coffee; $15,000,000 silk, largely imported from
J a p a n ; $11,000,000 wool; $7,000,000 hides and skins; $7,000,000 copper; $5,000,000 lard and meats; $5,000,000 flour; $4,000,000 tobacco;
$3,000,000 rubber; $2,000,000 cotton manufactures; $2,000,000 woodp u l p ; $2,000,000 lumber; $2,000,000 furs; $1,000,000 farm implements, and all others $41,000,000, making a total of $247,000,000 of
bills of that character purchased in 60 days, representing the flow of
goods in the commerce of the country, mainly with foreign countries.



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325

The CHAIRMAN. I n making up these price indexes do you understand that it is perfectly right and proper to include the staple
articles, like wheat, copper, and cotton and fabricted or manufactured goods in this country ?
Governor STRONG. Mr. Chairman, I do not pretend to be an expert
on these index figures, there is such a variety of them and such a
variety of theories. I can show you here, in one chart, an exposition
of the variety of types of index figures that are prepared and what
results you can get from them.
Mr. WINGO. Before he does that, may I offer this suggestion to
the Governor with reference to that detailed information he is
showing as to what his bills amounted to over a period of time, as to
cotton, wheat, silk, etc ? I t is obvious from that that the volume of
actual transactions of commodities that are shipped, bought, and
sold in the ordinary business of the country is the major factor in
determining the volume of paper that is handled by you.
Governor STRONG. Oh, yes; I think so.
Mr. WINGO. The popular idea that you create something to suit
your idea of what the market should be, to the contrary notwithstanding? I n other words, you are meeting the demands of exchange for the country?
Governor STRONG. Quite so.
Mr. WINGO. Instead of creating these things, you take them as
offered ?
Governor STRONG. That is shown by the seasonal change in the bill
holdings.
Mr. WINGO. I just want those who read this to understand the
real effect of your transactions.
Governor STRONG. What happens to the Federal Reserve Bank of
New York applies to the system as a whole. I n the fall, when cotton
and other things begin to move, our bill holdings go right up. Practically all the credits required to finance the increased movement of
goods automatically find their way into the Federal Reserve Banks.
Mr. WINGO. While that is true with the commercial transactions,
of course you can, in the open market, buy bonds—Government
bonds—and of course you could automatically increase or decrease
the supply of money because there is such a large amount outstanding of Government bonds. You could arbitrarily increase or decrease the volume of credit that is available, but as far as the commercial bills are concerned, the financing of cotton and silk and
other things imported and exported, and making up the great mass
of the trade of the country, you are more nearly the servant than
the master in that transaction?
Governor STRONG. Yes; we respond to the natural demands of the
country.
Mr. BEEDY. I would be anxious to have you finish that sentence
you were on—takes the peak off the
Governor STRONG. By furnishing the amount of credit that the
peak demand calls for in the fall. Following immediately upon this
demand for credit in the movement of commodities comes the demand for currency for the holiday trad£. I t amounts to no less a
sum than $400,000,000, and that results in the bankers coming to
us to borrow very heavily. The currency flows out to the retail trade
of the country, and, commencing about the last two days of Decern
93869—27—PT 1




22

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STABILIZATION

ber, it commences to come back, and at once we see the total go
down.
Mr. WILLIAMSON. A S to the discount rate on these bills of exchange when these bills of exchange are sold—they are sold at about
what rate of discount, on the average?
Governor STRONG. I t depends on the maturity. Our rates are fixed
with regard to the length of time the bill has to run. A t present
the minimum rate is 3 ^ per cent.
Mr. WILLIAMSON. If it goes through an intermediate bank, do
they also discount the exchange so that each bank it goes through
takes off a discount?
Governor STRONG. Yes; the member banks in New York get about
Y8 per cent per annum for their indorsement that is all; that is, the
quotation on bills in the market, without the indorsement we get
when they come to us, is, to-day, about 8% per cent. To any bank
coming to us and putting its name on the back of the paper and
giving that additional security, we discount at the rate of 3 % per
cent, for 90-day maturities.
The CHAIRMAN. If the Federal reserve banks were not now in the
open market buying, it would be bought by other banks, and, in
the fall, for instance, that demand would be satisfied by rediscounts
by the member banks and the money they would get out of the
Federal reserve by rediscount rather than on the paper.
Governor STRONG. Yes, sir; but this is a lower rate and the banks
take advantage of it.
The CHAIRMAN. I rather got the impression this morning, when
you referred to repurchase agreements on the purchase of Government bonds, that it was the practice of the Federal reserve banks
to take the securities from the member banks in times of stress, and
when that time expired they would be repurchased from the Federal
reserve banks ?
Governor STRONG. Yes, sir; but that applies to dealers, not
members.
The CHAIRMAN. That is what is embodied in the repurchase
agreement ?
Governor STRONG. Yes, sir.

The CHAIRMAN. T h a t is operated to a great extent by member
banks in getting credit with the Federal reserve banks?
Governor STRONG. By the dealers.
The CHAIRMAN. By the dealers?
Governor STRONG. Yes, sir.

The CHAIRMAN. H O W many dealers are there in the open market
paper—is it confined to a few houses ?
Governor STRONG. Possibly a dozen in New York.
Mr. WILLIAMSON. J u s t how does the dealer get his profits out of
the bill of exchange?
Governor STRONG. By the shave in the discount rate, (he buys and
sells at a small fraction's profit), and in a difference in interest in
carrying bills.
Mr. WILLIAMSON. About what is his fractional percentage ?
Governor STRONG. I think it is rarely more than an eighth—sometimes a quarter, if the bill is not as well known. All these inequalities
of rates are ironed out before they reach us by the system of in-




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327

dorsement, because when the bills reach us the value of the indorsements on them makes them of about the same value.
Mr. BLACK. Suppose a cotton firm, like Anderson, Clayton & Hill,
of Houston, should sell $100,000 of cotton and draw an acceptance
with maturity more than 90 days; would that be such paper as,
under the Federal reserve law, could be handled by the Federal
reserve banks for a longer maturity than 90 days; or would that be
one of the transactions where the maturity would have to be within
90 days?
Governor STRONG. Within 90 days.
Mr. WINGO. Is that such paper as would be eligible at a Federal
reserve bank for purchase or eligible paper to be rediscounted
through the Federal reserve banks ?
Governor STRONG. I t would become eligible as soon as it reached
within 90 days of maturity.
Mr. WINGO. I think I remember something with respect to that
90 days. Tramp steamers carrying cotton in export, take considerable time to make the trip. I was under the impression that that
could be handled within six months.
Governor STRONG. I S that so now ? I have forgotten. I think that
is so.
Mr. WINGO. I know in the original writing of the act thafr' was
pointed out, that cotton and heavy commodities are carried in tramp
steamers, and it would take six months to clear itself.
Governor STRONG. Yes; it takes a long time on some voyages. To
cross the Pacific and the continent requires so long a time that that
period is too short.
Mr. BLACK. YOU could handle that paper when the maturity may
be as long as six months ?
Governor STRONG. Yes, sir. These refinements sometimes escape me.
May I also correct another misunderstanding I am afraid has
arisen in reference to a question that was asked this morning?
The

CHAIRMAN.

Yes.

Governor STRONG. The chairman inquired whether when we decided to make some purchases of Government securities, say, in the
open market, we notified the banks in advance. I understood the question to refer to banks generally—whether we gave notice generally—•
but I since learn that he wanted to know whether we notified the
other reserve banks not represented on the committee. We do not
give any public notice or notify the member banks that we intend
to buy #rtificates, but we give notice to all reserve banks and no reserve bank is obligated to participate in the purchase until it has been
submitted to and approved by that bank. So, if the committee were
deciding, with the Federal Reserve Board's approval, to make purchases of securities and one of the reserve banks is poss