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Restoring and Maintaining the Average
Purchasing Power of the Dollar





H.R . 11499

S. 4429
MAY 12, 13, AND 18, 1932

PETER NORBECK, South Dakota, Chairman
JOHN G. TOWNSEND, JR., Delaware.
JOHN J. BLAINE, Wisconsin.
THOMAS P. GORE, Oklahoma.
CORDELL HULL, Tennessee.







Statement of—
Anderson, Benjamin M., jr.. economist of the Chase National Bank
of the city of New York
Brenckman, Frederick, Washington representative, National G r a n g e
Busby, Hon. Jeif (Representative)
Copeland, Morris A., professor of economics, University of Michigan,
article by
Elbert, Robert S., New York City
Fisher, Prof. Irving
124, 280
Goldsborough, Hon. T. Alan (Representative)
Gregory, C. V., editor, Chicago, 111
Hushing, William C , legislative representative of the American Federation of Labor, Washington, D. C
King, Willfred I
Miller, Hon. A. C , member of the Federal Reserve Board, Washington, D. C
Mills, Frederick C , professor of economics, Columbia University
Meyer, Hon. Eugene, governor of the Federal Reserve Board, Washington, D. C_,
O'Neal, Edward A., president American Farm Bureau Federation
Poe, Clarence, article by
Shibley, George, Washington, D. C
Stern, J. David, Philadelphia, Pa
Strong, Hon. James G. (Representative)
Wagel, Srinivas Ram, New York City, letter of
Wallace, H. A., Des Moines, Iowa
Warren, Prof. George Frederick, Cornell University
White, C. R., president New York State Farm Bureau


THURSDAY, MAY 12, 1932

Washington, D. G.
The committee met, pursuant to call, at 10 o'clock a. m., in the
hearing room of the Committee on Banking and Currency, Senate
Office Building, Senator Peter Norbeck presiding.
Present: Senator Norbeck (chairman), Goldsborough, Townsend,
Walcott, Carey, Couzens, Fletcher, Wagner, Gore, and Hull.
The CHAIRMAN. This hearing is on H. K. 11499, the Goldsborough
bill, which has passed the House; also on Senator Fletcher's bill,
S. 4429, being an identical bill, except that it has one additional
section; section 3 not being in the House bill as it comes over to
us. I ask that the Goldsborough bill and the Fletcher bill be printed
in the record at this point.
(H. R. 11499 is here printed in full as follows:)
[H. R. 11499, Seventy-second Congress, first session]
AN ACT For restoring and maintaining the purchasing power of the dollar

Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That tlie Federal reserve act is amended
by adding at the end thereof a new section to read as follows:
" SEC. 31. It is hereby declared to be the policy of the United States that
the average purchasing power of the dollar as ascertained by the Department
of Labor in the wholesale commodity markets for the period covering the years
1921 to 1929, inclusive, shall be restored and maintained by the control of the
volume of credit and currency."
SEC. 2. The Federal Reserve Board, the Federal reserve banks, and the Secretary of the Treasury are hereby charged with the duty of making effective this
SEC. 3. Acts and parts of acts inconsistent with the terms of this Act are
hereby repealed.
Passed the House of Representatives May 2, 1932.

(S. 4429 is here printed in full as follows:)
[S. 4429, Seventy-second Congress, first session]
A BILL To restore nnd maintain the average purchasing power of the dollar by the
expansion and contraction of credits and currency, and for other purposes

Be it enacted hij the Senate and House of Representatives of the United
States of America in Congress assembled, That it is hereby declared to be the
policy of the United States that the average purchasing power of (he dollar
as ascertained by the Department of Labor in the wholesale commodity markets

for the year 1026 shall be restored ami maintained by the expansion and contraction of credits and currency through the powers of the United States and
its agencies.
SEC. 2. The Federal Reserve Board., the Federal reserve batiks, and the Secretary of the Treasury are hereby charged with the duty of making effective this
SEC. :>. To enable the Federal reserve banks to achieve this end they arc
hereby given the right to receive, and the Federal reserve agents are directed
to deliver. Federal reserve notes at par for United States obligations deposited
as security therefor.

The CHAIRMAN. In view of the fact that the House lias held extensive hearings and has gone into this matter very fully, it does not
seem necessary for this committee to £>o over the whole ground. I
think the whole matter might be simplified by printing in the record
the report made by the House as a summary of the matter; and if
there is no objection, that will be done.
(The report by Representative Goldsborough, from the Committee
on Banking and Currency of the House of Representatives, is here
printed in full as follows:)
[IIouso Report No. 1103, Seventy-second Congress, first session]

The Committee on Banking and Currency, to whom was referred the bill
(H. R. 11499) to amend the Federal reserve act by adding at the end thereof
a new section, and for other purposes, having considered the same, report favorably therein with recommendation that the bill do pass without amendment.
Within the scope of a committee report it is not possible to discuss in detail
the technical economic principles involved in II. R. 11499, but it is possible to
determine the anticipated workings of the action of the principle if it is
crystallized into legislation.
The bill has two features; an emergency feature and a permanent feature.
The emergency feature contemplates a rise in the general commodity price
level to the average existing between 1921 and 1929, inclusive, and the substantial maintenance of that price level.
As to the emergency feature all authorities agree, first, that it is impossible
for the debts of the country to be paid at the present price level, and that unless
the price level is raised the business of the country is headed for inevitable
bankruptcy; and, second, that the present price level is unjust to debtors.
Speaking'roughly, but with substantial accuracy, the dollar will purchase
about #1.00 more of commodities than in the 1921-1929 period, and about
$1.5rt more oi: commodities than it would purchase between the period of
1918-1931 and the first quarter of 1932, inclusive. It would purchase now
what it would have taken #1.25 to purchase about a year ago, which means that
the producer—that is, the debtor—is being confronted with an ever-increasing
burden. His debts, principal and interest, remain fixed. The commodities
he sells and which would have purchased a given number of dollars when he
borrowed them have decreased in their purchasing power.
To go one step further, unemployment is constantly increasing, because on
a constantly declining market business can not go on. It is impossible to produce below the cost of production.
The Committee on Banking and Currency, after a most painstaking and careful investigation by a subcommittee, reached two conclusions: First, that the
average price level from 1921 to 1929 would reestablish substantial justice
between debtor and creditor; and, second, that a rise to the price level of
1921-1929 would make lower standards of living unnecessary, would justify
salaries and wages at the pre-depression level: in short, would make unnecessary the process of painful economic readjustment, which will have to
be consummated if the price level is not raised.
The committee also reached the conclusion that unless the price level were
raised substantially to the point above indicated, the burden of debt would
not only seriously hamper production and destroy the producing class as
now constituted, but that the creditor class, being unable to collect their fixed
obligations, would also go down in the crash.



Then the question arose as to what could be done.
The Federal reserve system under the leadership of Benjamin Strong, former
governor of the Federal Iteserve Bank of New York, measurably stabilized
for several years, the price level by open market operations, and by adjustment
of the rediscount rates of the Federal reserve banks. The Federal reserve
system has boon accumulating gold at the average rate of $200,000,000 a year
for about six years, and is now in a much stronger position than it was at the
time of the open market operations just referred to.
It is in a position to put into the market $4,000,000,000 in Federal reserve
notes, and still maintain its 40 per cent reserve requirements. By utilizing its
power to lower reserve requirements of the Federal reserve banks the system
could put into the market nearly $9,000,000,000 of Federal reserve notes.
Either sum, if the country knew that because of a congressional mandate., the
Federal reserve system was going to raise the price level to the point indicated,
would be much more than sufficient to raise it, because as soon as the country
understood what the policy of the Federal reserve system, as provided by law,
was. confidence among the banks and business men would be restored, bank loans
would expand, the retailer would buy from the wholesaler, the wholesaler would
buy from the manufacturer, the manufacturer from the producer of raw
materials, and the masses of the people would find employment, so that through
buying of securities by the Federal reserve banks and through the restoration
of confidence as above indicated, the normal business activity of the country
would very speedily be reestablished.
Even more important than its emergency feature the committee deems the
stabilizing feature of the bill. It would be the duty of the Federal reserve
system under the bill, if enacted into legislation, to control the credit and
currency of the country in a manner to satisfy the legitimate needs of business, and prevent unwholesome and unjustified expansion. If unjustified and
unwholesome expansion were controlled, periods of inflation and depression
would also he controlled, because periods of deflation and depression always
follow periods of unwholesome overexpansion and speculation.
In conformity with section 2a of Rule XIII of the House, there is herewith
printed in italics the proposed new section (sec. 31) to be added as an amendment to the Federal reserve act:
" SEC. 31. It is hereby declared to be the policy of the United States that the
average purchasing power of the dollar ax ascertained by the Department of
Labor in the wholesale commodity markets for the period covering the years
1921 to 1929, inclusive, shall be restored and maintained by the control of the
volume of credit and currency.
"SEC. 2. The Federal Resewe Board, the Federal reserve banks, and the
Secretary of the Treasury are hereby charged with the duty of making effective
this policy.
" S E C . 3. Acts and parts of acts inconsistent with the terms of this act are
h ere by rcpea led."
The CHAIRMAN. The first witness will be Representative Golds-

borough, who has assured us that he wants only 5 or 10 minutes. We
have a large number of witnesses, and we are going to try to hold
them down pretty close as to the time allotted.
Representative GOLDSBOROUOH. Mr. Chairman and gentlemen of
the committee, I am going to take only a few minutes, and shall rely
upon the witnesses who are not Members of Congress.
This measure does not grow out of the emergency situation. The
principle involved in the bill was first introduced into the House in
1022, in the Sixty-seventh Congress, and afterwards in the Sixtyeighth Congress. We had very extensive hearings. Also, extensive
hearings in the Sixty-ninth Congress and the Seventieth Congress
on the Strong bill, which embodied the same principle. We have
also held very extensive hearings, both pro and con, during the



present Congress. So that this is not proposed legislation which is
of a mushroom kind growing out of the depression.
The principle of the bill is simply a declaration of policy by the
United States that commodity price levels should be raised to the
1921-1929 level, inclusive, and maintained at that level. The responsibility for doing this is placed upon the Federal Reserve Board,
the Federal reserve banks, and the Secretary of the Treasury.
Senator TOWNSEND. Then you have no definite plan? The plan
of working that out is left with those bodies ?
Representative GOLDSBOROUGH. That is true. I can, however, if
you would like me to, give you the powers they have. There are
two things they can do
Senator FLETCHER. I would be glad, Mr. Goldsborough, if you
would suggest how they can accomplish what you have in mind;
and you might refer to section 3 of S. 4429 in which I have attempted to state the process by which they might accomplish it.
Representative GOLDSBOROUGH. I think I should say that I know
of no objection to section 3 of S. 4429, introduced by Senator
Fletcher, of Florida. The only reason that it was left out of the
House bill was because the subcommittee thought that sufficient
elasticity was given by the Glass-Steagall bill, and we felt that if
the House bill were passed the Congress would make the GlassSteagall bill permanent legislation. As far as I know, Senator
Fletcher, there is no objection to section 3 which is embodied in your
Answering Senator Townsend, there are two methods of controlling the "price level. One is by the control of the rediscount rates.
That was a method that they used in 1920. In February of 1920
the Federal reserve system decided that the price level should be
lowered and that the process should go into operation on the 20th
of May. They did not disclose to the public the fact that this was
to be done. They did not, in my judgment, consciously intend to do
what they did do, but their operation was that rediscount rates, particularly in country banks, were made exceedingly high. I remember
that in one case in Alabama it was as high as 87 per cent. They
made them so high
Senator TOWNSEND. The Federal Reserve Board did that ?
Representative GOLDSBOROUGH. Yes; or the Federal reserve bank
that the Alabama bank was doing business with, under the direction
of the Federal Reserve Board.
The CHAIRMAN. They established a pyramiding rule where loans
in excess of a certain amount carried a penalty rate. That is what
you have reference to. It was not any large volume of loans, but
it was a loan they kept stepping up until one loan reached that point.
That is right, is it not ?
Representative GOLDSBOROUGH. Yes. They did adopt that policy
unquestionably. That is indisputable. I make that statement without any possible qualification. They did adopt that policy.
Senator COUZENS. Can you describe how they did it in that particular case ?
Representative GOLDSBOROUGH. Yes, sir. They did it, as I said
before, by raising the rediscount rates on country banks.
Senator COUZENS. Just tell us how they did it and what raised
the rates up to such pyramided heights.



Representative GOLDSBOROUGH. The rates ran from 7 per cent to
40 or 50 per cent, and in one case, as I said, as high as 87 per cent.
Senator COUZENS. By the edict of the bank itself, or by the individual banks? How did it work?
Representative GOLDSBOROTJGII. When the member bank would send
an obligation to the Federal reserve bank for rediscount, it would
be charged such an exorbitant rate that it would be unable to rediscount its paper.
Senator COUZENS. Give us an example of it. You just make general statements. I want some specific information as to what rediscount rate the bank actually charged to bring it up to 87 per cent.
Representative GOLDSBOROUGH. X did not know that that question
would be asked, Senator Couzens, at this meeting. Senator Townsend introduced the subject and I was undertaking to tell him how
it had been done in the past.
The result of the process was such that not only a great many
country banks failed, but the farming industry in the United States
was destroyed.
Senator TOWN SEND. IS it your charge that the banks failed for the
reason that the Federal Reserve Board insisted on these excessive
Representative GOLDSBOROUGH. Yes. It is not a charge, it is a
fact. It has been known to be a fact for so many years that it has
long ceased to be a charge; it is a fact.
In 1922 Benjamin Strong, who was then governor of the Federal
Reserve Bank of New York, combined with the governor of the
Federal Reserve Bank of Philadelphia, the governor of the Federal Reserve Bank of Boston, and the governor of the Federal
Reserve Bank of Chicago, and afterward with the governor of the
Federal Reserve Bank of Cleveland, set up what they called an
open-market committee, which undertook to stabilize the purchasing
power of the dollar. As long as it was allowed to operate as he
intended it should operate, it did stabilize the dollar to such an extent
that conditions in the country were so normal that the Federal
reserve system had very little to do.
Then Governor Strong went to Europe and while he was there
the Federal Reserve Board decided to take these open-market operations out of his control, and they made up an open-market committee consisting of the governors of the 12 Federal reserve banks
and the advisory board, a rather unwieldy body. But, as long as
Governor Strong lived, the stabilization process continued with very
great advantage, not only to business but to every element of society;
and, as I said before, it was so cogent in stabilizing the business of the
country that the Federal reserve system had very little to do.
Senator GORE. IS it not rather difficult to tell which was cause
and which was effect?
Representative GOLDSBOROUGH. I do not think so, Senator Gore.
I realize the fact that there are human elements which enter into the
consideration and which have a great deal to do with these periods
of inflation and deflation; but I have no doubt whatever that if the
Federal reserve system would use its restraining influence in periods
of rising prices and periods of lowering prices before the swing
gets away from them, an immense amount could be done to avoid



these periods of inflation and speculation and these periods of
depression and despair.
Senator GORE. If they happened to guess right on it, you are
probably right. But I saw a statement the other day to the effect
that the Federal Reserve Board or system had undertaken this very
process and had bought bonds in order to increase the banks' resources, and in each of two cases the banks had used their increased
resources to reduce their debt at the Federal reserve bank and it
had no effect on prices.
Representative GOLDSBOROUGH. That is what they are doing now.
May I say, Senator Gore, that the Federal reserve system, since the
open market operations began the last time, have purchased about
$500,000,000 of Government bonds and of that $500,000,000, $300,000,000 has gone to pay the debts which the member banks owed to
the Federal reserve banks, and about $200,000,000 has gone to increase
the reserves of the member banks with the Federal reserve banks.
Yesterday I was down to the Federal Reserve Board and saw a
chart showing the increases of the reserves of the member banks of
the Feneral reserve system since the beginning of these open-market
operations, and, strange to say, the increase is not confined to New
York banks or banks adjacent to New York; that increase is practically the same in every Federal reserve district except Dallas. I
noticed that the rise in the Dallas district of reserve deposits was
not as great as in other districts. But the beneficial operations
of the Federal reserve system in buying bonds in the last few weeks
has resulted in raising the reserves of member banks all over the
United States.
Senator COUZENS. What good did that do industry?
Representative GOLDSBOROUGH. I can answer that, I think, in two
ways. Senator Oouzens. My opinion is that if there had been no
open-market operations at all we would have had another flood of
closed banks much more severe than the first one.
Senator COUZEXS. I was not speaking of that: I was speaking of
the fact of the
Representative GOLDSBOROUGH. I am coming to the next factor.
Senator COUZENS. All right.
Representative GOLDSBOROUGH. The next thing would be this, that
when these banks accumulate reserves they are forced to find, if
possible, an outlet for them.
Senator GORE. Right on that point: You say they bought $500,000,000 and retired debts with $300,000,000,'leaving $200,000,000
available for other purposes. The statement that I saw said that it
placed the banks under an urgent necessity to find some outlet for
the surplus funds or reserves, and that was one thing which contributed to the inflation.
Representative GOLDSBOROUGH. What inflation do you have reference to, Senator Gore?
Senator GORE. I mean, in 1028-29; that they had these available
reserves on hand and had to find an outlet for them, and that accelerated the movement, the lending for speculative purposes.
Representative GOLDSBOROUGH. May I suggest. Senator Gore, that
at that time it seems to me the Federal reserve system should have
adopted a different policy than they did. They should have then
adopted a restrictive policy. But now it seems to me that the



liberal policy which they are adopting is resulting in an accumulation of funds in the member banks of such a character that they will
have to find an outlet for those funds.
Senator GORE. Of course. The first use of the funds was to pay
off their debts.
Representative GOLDSBOROTJGH. Yes, naturally.
Senator FLETCHER. DO you think the effect of that will be to increase the circulating medium ?
Representative GOLDSBOROUGTT. It is bound to, because when a bank
has funds that are not draAving any interest, it immediately tries to
find a place to put those funds. Not only that, but the fact is those
funds increase their confidence and make it easier for borrowers to
borrow from the institution.
I have consulted a great many commercial bankers. I was in
New York last Monday and consulted several very distinguished
and prominent commercial bankers. I have never seen a commercial
banker who was not also engaged in the investment business, who
was not in favor of this legislation. They give as their reason, that
unlcsss something is done to raise the price level, not only will the
debtor be unable to pay his debts, but as he is unable to pay his debts
the banks will have to fail.
Then I xny to them. ** Why, then, can you not appear before the
committee and make this statement ( " And their answer is, w* You
know our condition: you know we are loaded up with securities
which, if sold now, would not liquidate the bank. You know we are
allowed by the Comptroller of the Currency to cany these securities
at inflated prices, and we are not in position to antagonize the Federal
reserve system at this time."
I want to say this, gentlemen, that in all of this discussion since
the 5th of December I have never received a letter or a telephone call
or a communication of any kind from a commercial banker opposed
to this legislation—not a single one.
I do not want to be in the position of taking up much time, but I
want to add just one thing. The commercial bankers also say this to
We know what the Federal reserve system is doing now; we know that now
they are buying at the rate of about one hundred million a week, but we do not
know what their future policy is going to be. We can not tell what influences
will be brought upon them. We believe in their probity; we believe in their
honor, in their common sense, but they are just as human as we are or anyone
else; and we can not tell when the pont will be reached that iniluences will be
brought to bear upon them to stop this purchasing of Government bonds. I>ut
if you give them legislative direction, if you pass a law which requires them to
raise the price level to a certain point, then we have the assurance that that
policy will be carried out. and that immediately reassures the commercial
bankers of the country and reassures business.

Gentlemen, just as soon as you reassure the banks of the country
and they begin to make loans, then this rise of the price level wiil
take place of itself.
My judgment is no better than that of anyone else, of course, but
I believe that if this law were passed and were on the statute books of
the country now this whole situation would be cured in 90 days. I
believe the country would know within 90 days that we were on the



Senator GORE. NOW, Congressman, you say we can give them legis-.
lative power. That is undoubtedly true. But you can not give
them legislative power to
Representative GOLDSBOROUGII. I mean legislative direction.
Senator GOUE (continuing). Legislative authority to exercise
superhuman wisdom or to suspend the fundamental laws and tendencies of economics that are a little stronger than congressional
enactments. Your theory goes on the assumption that they will
have wisdom enough to exert this power to accomplish the result,
without taking into account the limitations on human wisdom and
the limitations imposed by economic conditions and forces that are,1
superior to them.
Representative GOLDSBOROUGH. Senator Gore, it is always, of
course, the part of unwisdom for a lawyer to undertake to antagonize
the judge
Senator GORE. YOU may feel at perfect liberty here to express your
Representative GOLDSBOROUGH. I just want to say this, Senator,
that you will see that the Federal reserve system, without legislative
authority, has undertaken to exercise these open-market operations
in accordance with their own will. This is a power that is more
vast than any oriental despot ever exercised. This legislation is a
measure of restraint, because it says to them, " You can not use your
own judgment as to how to manipulate the currency of the country.
You mast direct it to a certain point." So it does restrain them.
I t has a restraining influence.
Senator GORE. YOU can give them power and directions to accomplish certain tilings, and I think they can accelerate tendencies either
up or down. I am not certain they can arrest them and reverse
them. I think there is the trouble. You are setting them up against
tendencies that are more powerful than they are, or any power that
you can give them,
Here is what I have in mind: I think it was between 1919 and
1927 that the bank deposits in this country went up from $27,000,000,000 to $42,000,000,000, an increase of 52 per cent. That is potential currency, we will say. Gold increased, if T remember rightly,
from about 1920 to 1927,* 50 per cent. During those nine years we
had an increase in bank deposits of 54 per cent; and that is potential
currency. We had an increase in gold of 50 per cent, and that is
the basis of $10 of credit to one of gold. During the same nine
years, taking 1919 as " sea level," as i00 per cent, wholesale prices
declined from 100 to 72 per cent, against all this increase in money
and credit and gold and actual and potential currency.
Is not that movement contrary to your theory ?
Representative GOLDSBOROUGH. I do not think so.
Senator GORE. Ought not prices to have gone up, with all that?
Representative GOLDBOROUGH. Senator, to be, of course, frank,
as I must be, I have not the same picture of the deposits of the
country that you have. You have been so precise in your statement
as to the deposits that I am not going to controvert it, of course.
Senator GORE. I think I am correct about thatRepresentative GOLDSBOROUGH. But I have not that same picture.
In the hearings before the House committee—and I think this may
throw some light upon your inquiry—Governor Harrison agreed



that an increase in credit had a very definite Teffect on raising the
price level, and a decrease of credit bad a A ery definite effect on
lowering the price level. I asked him this question, in substance:
" Governor Harrison, late in the fall of 1929 I made the suggestion
to the Federal Reserve Board, that due to the collapse of the New
York Stock Market there was apt to be a feeling of apprehension
throughout the country, and that it seemed to me that the commodity market should be supported for psychological reasons, if
for no other." I said: " If you will remember, the Federal reserve
system did support the market through the first three months of
1930 and it looked as if we were going to get back to a normal condition, when there was a reversal of policy which caused
the beginning of this present depression. Why was that done? ?'
He said that they were afraid that tlie New York Stock Market
would get away from them again, and for that reason they reversed
the policy.
Of course we may have to pass other legislation. The Federal
Reserve Board might come down and say, " We are in a period of
incipient stock-market inflation and we have got to have some sort
of legislation which will be an attempt to separate the commercial
banks from the stock market."
Congress will have to meet that issue if it arises. But all through
the period of which you speak, Senator Gore, if I may remind you.
it was a period of increasing stock-in a rket prices
Senator GORE. And declining commodity prices.
Representative GOLDSBOKOUGH. Correct. A great many economists
thought that the crash in the stock market would come, in 1925.
That condition continued from about the middle of 1923 until October, 1929. Money was being taken out of commercial and commodity activities and used in the stock exchange.
Senator GORE. YOU are right. Security prices went up during
those nine years. Taking the general trend for the period, commodity prices went down during that period; that is, wholesale
commodity prices. Why? Because wholesale commodity prices are
on a world iDasis. Primarily, what we all would like to see brought
about is an increase in the prices of cotton and wheat. Do you
figure that by any sort of domestic manipulation—and I use that
word not offensively—you can increase the price of wheat and cotton
when those commodities must sell in a world market and on a world
basis ?
Representative GOLDSBOKOUGII. Of course. Senator Gore, I am going to try to answer your question, but I think I ought to say that
it is a difficult question to answer, for this reason, that we are not
attempting to regulate the price of any commodity. What we are
attempting to do is to create a commodity dollar.
Senator GORE. I know; but unless it increases prices, it is just a
vain thing.
Representative GOLDSBOROTTGH. Yes, I know; but there are 784 commodities involved in the index number of the Bureau of Labor Statistics. Wheat and cotton are only two of those commodities.
Now I want to try to answer your question, if you will allow me.
Practically all of'Europe, except France, if off the gold standard.
Switzerland is still on; Holland is on, in a modified form, but they
are insignificant. France is the country on the gold standard. As



far as our transactions with England and the other countries off
the gold standard are concerned, we can raise our commodity prices
without controlling the world market, because the exchange of money
between a country off the gold standard and the money of the United
States will take care of the differential in price. As far as France
is concerned, it might be that we would have some trouble. It might
be that we would. But in a short time, if conditions were such that
some of our gold went to France in exchange for her commodities,
that would soon cause a leveling process and turn the tide in our
Senator GORE. That is the point I was coming to. As you say,
there are seven hundred and some odd commodities. I think it is
conceivable, at least, that as to those commodities, or some of them,
which enjoy a protective tariff, the price of them might possiblye be
raised; but I do not see how you can raise the price of wheat and cotton and farm products which do not have an effective protective
tariff to bolster up their prices. And if you did raise the price of
protected articles and did not raise the price of farm commodities,
you would just multiply the burden of the farmer, because he would
have to still sell in an unprotected world market at low prices and
have to use those low prices to buy manufactured products that do
enjoy protection.
Representative GOLDSBOROTTGH. I am sure that, your argument
would not hold good as to countries off the the gold standard, and I
think the effect would be negligible as to France, because, as I indicated before, as soon as she sold to us for a while her prices would
become just about ours, so that there would not be any detrimental
But let me suggest this, that a rise in the general commodity level
which would restore the productive power of the country—I leave
farming out for the moment—would give an added buying power
for the commodities of wheat and cotton that you mention, not only
in this country, but world wide.
Senator CAREY. AS to the products on which we have a surplus and
which are exported, you do not figure they would raise the price, do
you ?
Representative GOLDSBOROTJGH. Yes, sir. I do not think we can do
it as immediately; I do not think the effect would be as immediate as
it would on products which are simply sold in this country, but I
think the effect would be very prompt.
Senator CAREY. But where we have an exportable surplus our
prices are more or less regulated by the world market, are they not?
Representative GOLDSBOROTJGH. Yes.
Senator CAREY. DO you think we could do it as to these exportable
products ?
Representative GOLDSBOROUGH. I may not have made myself plain
in my answer. In the first place, my answer would be that we would
have no difficulty in countries which are off the gold standard, because the exchange between our money and theirs would take care
of the differential. So we are confronted only with France, which
I do not think would be sufficient to pull our prices down to any
great extent. If that were done and French goods were let in here
and our money went to France, that would soon equalize prices between those two particular countries, and I think the effect would



be negligible. If all Europe were on the gold standard I could
very well see why we would have to build up prices all over the
Senator GORE. England, while she is not on the gold standard, is
evidently accumulating gold in prospect. I do not know whether
that is true in Scandinavian countries or not. But suppose you
raised prices away above the world level, would not gold immediately
leave here and go to a country where it would buy more?
Representative GOLPSBOROTOH. NO. It is dollars, Senator Gore,
that foreign countries want, not gold. Let me illustrate. For instance, an Italian buys some American product and he goes to his
exchange to get dollars to pay for them and he finds that dollars
are selling at a premium. The reason they are selling at a premium
is because we have a balance of trade. Not only are we exporting
more than we are importing, but in addition to that we have a
tremendous balance of foreign debts due us, and therefore there is a
demand for American dollars. That is what they want—not gold,
but dollars. They go for this dollar, and they find that they have
to pay more for it than they have to pay for the gold. So instead
of buying dollars they buy gold, and pay in gold instead of in dollars,
because dollars cost them more than gold.
Senator GORE. DO you think it would have the same effect here
as in England if we went off the gold standard?
Representative GOLDSBOROFOIT, If we went off the gold standard,
instead of our dollar becoming cheaper than gold, it would become
higher than gold, because the demand is for "the dollar; and when
an Italian or an Englishman who had bought American goods had
to pay for them, he could not say he would not pay the premium.
He would just buy dollars and pay that way, because if we were
off the gold standard he would have to buy dollars, and dollars
•would be at a premium
Senator GOUTS. YOU think that if we went off the gold standard
dollars would be at a premium?
Representative GOLDSBOROTJGH. Of course I do.
Senator TOWNSEND. DO you think it would be of any advantage
to the United States?
Representative GOJJXSBOROTJGH. NO, sir; and I made no such suggestion. The Senator asked me a specific question as to what the
effect would be. It is unnecessary for the United States to go off
the gold standard. The United States can issue $5,000,000,000 of
Federal reserve certificates and still maintain about 45 per cent of her
gold reserve; an inconceivable sum, enough to take the price level
clear through this roof.
Senator GORE. DO you not think that gold would leave the country
and shrink the world basis of credit?
Representative GOLDSBOROTTGH. Why?
Senator GORE. Because it would buy more in other countries than
Representative GOLDSBOROUGTI. If the price level rose?
Senator GORE. Yes. If you run prices up in any such porportions as that.
Representative GOLPSBOROUGII. I did not suggest we should do



Senator GORE. If you run prices up substantially, gold will go
where it can buy more than it can buy here, and shrink the basis
of credit until the sea level is restored.
Representative GOLDSBOROUUII. I can not follow that at all, Senator Gore. I do not see any reason why that should be. The history
of all countries where the price level has raised, and therefore
money has been cheapened, lias been that exports have been increased and not imports. In other words, if our price level is raised
that means our dollar is cheaper. It is cheaper in English money
and cheaper in French money, and therefore our goods would tend
to go there rather than for their goods to come here.
Senator GORE. If our price level were raised, gold would go to
this country where it was dearer in proportion and where it could
buy more. If you make gold cheap here, it will go where it is dear
and can buy more.
Representative GOLUSBOROX GH. I think we can well afford to meet
that contingency when it arises.
Senator GORE. If you raise prices here it tends to attract goods
to this country to get the benefit of the high prices.
Representative GOLDSBOROUGH. In my judgment, that is a contingency so infinitely remote that we need not consider it. But let
us assume that it should arise: Congress can declare an embargo
on gold in 24 hours and stop the exports, if that became necessary.
Senator GORE. Yes; that is true. Those arbitrary and artificial
regulations, I think, are responsible for our present plight, to a
large extent. You multiply the causes of our grief instead of
diminishing them when you extend the artificial interference of
Senator COUZENS. YOU do not concede that at this time it would
be necessary to put an embargo on gold?
Representative GOLDSBOROTOH. Not at all. I have not the slightest idea of that, Senator Couzens. I only suggested that if that
possibility, which I do not regard as even a possibility, did take
place, we could declare an embargo on gold immediately."
Senator CAREY. DO you not believe that an inflation of our currency would cause a withdrawal of gold from this country—that is,
if there were a great inflation?
Representative GOLDSBOROUGH. My conception of it is that we
would be lowering the price of the dollar. If we make commodity
prices higher, then we are making the dollar cheaper. In other
words, it is not an inflation of the dollar but a lowering of the price
of the dollar. That is what you do when you raise the price of
Senator CAREY. Under the provisions of this bill it would be an
inflation, would it not? We would have more money in circulation,
and that would necessarily mean an inflation of the currency?
Representative GOLDSBOROUGH. It would mean an increase in the
price level, and it would mean a further extension of credit.
Senator CAREY. Would it not require more dollars to do that ?
Representative GOLDSBOROUGH. NO. Permit me to give my reason
for that, if you please.
We have now, Senator, about $8,000,000,000 of discountable paper
of member banks which has not been sent to the reserve banks for
discount at all. In the first place, all of that paper could be used



for the purpose of extending credit for business before anything else
would have to be done. In addition to that, the reserves of the member banks could be used up in extending credit. So I really can not
conceive of a condition where there would have to be any inflation
except the extension of credit due to the resumption of the normal
business of the country.
Senator CAREY. It would contemplate the Federal reserve banks
issuing additional Federal reserve notes, would it not?
Representative GOLDSBOROTJGH. Of course, Senator, if the banks
with their present resources and with the discountable paper had
their confidence restored now without any action at all of the Federal
Reserve Board and would begin to lend money and production
started up, the price level would rise immediately, and there would
be no necessary action at all on the part of the Federal reserve system.
The purpose of this legislation, in so far as the emergency aspect
is concerned, is to put money or credit into the market to take the
place of the frozen loans of the country and to restore confidence
among the banks and business men, because the very knowledge that
the Federal reserve system had been instructed to do this thing
would enable the country to resume its normal functioning, and it
would then be unnecessary for the Federal reserve system to further
operate in the matter.
Senator CAREY. What would be the mechanics of this ? Would the
Federal Reserve Board continue to buy bonds in the market and to
issue currency?
Representative GOLDSBOROUGH. Yes. I can think of other things
that would be more immediately effective, but that, in my judgment,
would do it in 90 days.
Senator CAREY. That would really be the only way that this could
be put into effect?
Representative GOLDSBOROUOII. Under the law as it is at present,
Senator GORE. DO you not think that the excessive use and abuse
of credit was one of the causes of the collapse ?
Representative GOLDSBOROUGH. I certainly do. The large investment houses, the big private bankers who are the only private organizations that I know anything about that are opposing this legislation, are responsible for this whole situation. They are the people
that are responsible for unloading 17,000,000,000 of foreign bonds
on the people of this country. They are the very people who are
opposing this legislation.
I was talking to a broker in Baltimore the other day, and I said
to him, calling him by his first name. " What in the name of God did
you mean by"selling these foreign bonds? Didn't you know they
were worth nothing'when you sold them? " He said, " I did." I
said. " Why did you do it, then? " He said, " We are all members of
a syndicate and we are sent a certain amount of this stuff to sell,
ami if we don't sell it we are kicked out of the syndicate."
Of course, all that detail was new to me. But it is my deliberate
judgment that they brought this country to destruction and despair,
anil they are the forces who are opposing this legislation now.
Senator COUZENS. May I ask you, Congressman, just how you expect these three agencies to function? In section 2 of your bill there



are three authorities to make this effective, the Federal 'Reserve Board,
the Federal reserve banks and the Secretary of the Treasury. Just
what have each of those agencies to do to make this effective'(
Representative GOLDSBOROUUH. The Federal reserve banks, acting
under the direction of the Federal Reserve Board, issue Federal reserve notes on the collateral of any discounted paper which they have,
or on Government bonds, as they see fit, under the Glass-Steagall
bill, and they buy Government bonds with it. In other words, you
take out of the market Government bonds which are interest-bearing
and which are not a circulating medium, and replace them with a
noninterest-beai'ing circulating medium.
Senator COUZENS. Just what does the Secretary of the Treasury do
in the matter? What are his activities?
Representative GOLDSBOROUGII. The reason that was put in, to be
perfectly frank about it, was this. In our previous hearings there
was a very strong intimation that, due to the very high office occupied by the Secretary of the Treasury who was ex oflicio a member
of the Federal Reserve Board he exercised a dominating influence.
Senator COUZENS. That is quite true.
Representative GOLDSBOROUOIT. And we therefore felt that it was
proper to place upon him that responsibility so that he would be
unable to exercise his influence adversely to this legislation. That is
the cold-blooded truth of the matter.
Senator COUZENS. Supposing these authorities did not agree. How
do you get action from these three authorities set up in this bill?
Representative GOLDSBOROUOII. Senator Couzens, of course if the
Federal Reserve Board are not sympathetic with the legislation they
can arbitrarily say that they are doing what they can to carry out
the wishes of Congress. I understand that.
Senator COUZENS. That is the reason I think your bill is weak, because it does not go into detail enough with respect to what these
agencies are to do to accomplish the purpose desired.
Representative GOLDSBOROUGH. All they have to do, Senator
Couzens, is this—because they have had 18 years experience, that is,
they and their predecessors, and they know perfectly well that their
two agencies have been the adjustment of rediscount rates and their
open market operations. They can not contradict that. We felt,
on the Banking and Currency Committee, that we had no right to
assume that if the act were passed they would not operate it sympathetically.
Senator COUZENS. I think you have a right to assume that.
Senator FLETCHER. They know how to do it if they want to.
Representative GOLDSBOROUGH. Absolutely, Senator.
Senator TOWNSEND. DO you feel that the Federal Reserve Board
and the Federal reserve banks at present, under the Glass-Steagall
bill, are doing exactly what you require under this bill?
Representative GOLDSBOROUGH. I can say no.
Senator TOWNSEND. YOU do not think they are?
Representative GOLDSBOROUGH. NO : but I should like to explain my
answer, because if I did not I would not be expressing the true view
that I have.
Senator TOWNSEND. I understood from your former statement
that you did feel they are doing that.



Representative GOLDSBOROUGH. I have to amplify my statement in
order that you may understand what I mean when I say u no."
Under the Glass-Steagall bill they began purchasing twenty-five
millions a week, which it seems to me anyone would know would
be totally ineffective. When this particular legislation became imminent in the House, and not until then and not until numerous conferences with them, did they begin to buy at a hundred millions a
week. When I asked Governor Harrison about it, he said, "Why
do you want to pass this legislation, the emergency part of it, when
we are doing exactly what your bill contemplates that we should
I said, " When did you begin? " He said, " Day before yesterday."
That is the reason. Unless some legislation is passed—and as I
said before, I do not mean anything improper; these gentlemen are
friends of mine; but they continue this for a little while and some
influence is brought to bear upon them, saying, " You have gone
far enough. The big people can pay their debts. The big bankers
are going to be safe, and maybe you had better not go too far into
teaching people that there is some other way to correct their economic difficulties besides borrowing money. You had better stop."
The public does not know what they are going to do or when they
are going to stop, and neither do the commercial banks know what
their future action will be.
Senator TOWNSEND. What has been the amount of their purchase?
Representative GOLDSBOROUGII. Five hundred millions.
Senator TOWNSEND. If they continued to purchase the present
amount of $100,000,900 a week, do you think that would cover the
Representative GOLDSBOROUGH. Senator Townsend, if what they are
doing now is protected by such legislation as will enable the public
to know what they are going to do, what they are compelled to do,
I think it will, unquestionably. But now nobody knows whether they
are going to buy a hundred millions next week or sell a hundred
millions next week.
Senator GORE. That has to be governed by circumstances, even
under your bill?
Representative GOLDSBOROUGH. Oh, yes.
Senator GORE. By the exigencies and requirements ?
Representative GOLDSBOROUGH. Yes.
Senator COUZENS. What would you say if we amended your bill
and left this all to the Secretary of the Treasury?
Representative GOLDSBOROUGH. In what way?
Senator COUZENS. I mean, to take out of section 2 the words " the
Federal Reserve Board, the Federal reserve banks " and provide that
the Secretary of the Treasury " is hereby charged with the duty of
making effective this policy."
Representative GOLDSBOROUGH. I would say this, that if the Federal
Reserve Board and the Federal reserve system, which are really the
fiscal system of the country, were not to operate the act, I would
rather it be given to some entirely separate organization. I do not
think that the set-up at the Treasury is such that they could operate
without a great deal of additional legislation. I do not see how they
could, because the Treasury has no authority to go into the open
market or to regulate rediscount rates.



Senator GOLDSBOROUGH. May I ask 3^011 if a letter was addressed by
your committee or subcommittee to the Secretary of the Treasury or
the Federal Reserve Board asking their opinion on the measure?
Representative GOLDSBOROUGH. Yes, sir; you may.
Senator GOLDSBOROUGH. And your answer to it ?
Representative GOLDSBOROUGH. I am very happy that you ask me
When these hearings were about to be held I had several talks with
Governor Meyer over the telephone about coming down and appearing at the hearing. He said he was busy over in the Senate with
other measures and did not have time. He said also that he would
like to have an opportunity to read the first hearings before he came
down. So, as soon as I got the first print, before the hearings were
bound, I immediately sent a special messenger up to him with the
hearings and asked him when he thought he would be ready, and he
said, in about a week. So we put it off for about 10 days, and as
soon as this [indicating] was printed I sent it to him.
The CHAIRMAN. Speaking of the first volume of the House
hearings ?
Representative GOLDSBOROUGH. Yes, sir. Governor Meyer appeared and his testimony is in the second volume; and Governor
Meyer will tell you that every possible consideration was shown
him. We had difficulty in getting him to the hearing, Senator
Goldsborough. He did not seem to care particularly about coming.
He did not come until he had the hearings and until he had taken his
own time. We wanted to get the bill 011 the floor, but we delayed it
and we were severely criticized by members of Congress for delaying
Senator FLETCHER. Does your question also have reference to the
Secretary of the Treasury?
Representative GOLDSBOROUGH. The Secretary of the Treasury,
so far as I know, was not spoken to about the bill. I know that was
not intentional. We would have been only too happy to have had
the Secretary of the Treasury before us. We felt, I am sure—and
there are some members of the subcommittee here—that Governor
Meyer would speak for the Federal reserve system.
Senator GOLDSBOROUGH. My only purpose in asking the question
was that I think it is customary for the chairman of a committee
to address such communications on measures of this kind to the
Secretary of the Treasury and to the Federal Reserve Board.
I think that is the custom of this committee, is it not, Senator
The CHAIRMAN. Yes. That is the plan we have followed here.
Senator GOLDSBOROUGH. That was my only purpose in asking the
Representative GOLDSBOROUGH. In answer to that, Senator Goldsborough, I went up to see Governor Meyer and talked to him about
it and begged him to come down, did everything I knew how to do
to induce him to come before the committee.
Senator FLETCHER. DO you think it is entirely practical, with this
index figure showing the wholesale commodity market for this
period, for the board to devise some means by which the value of
the dollar may become increased?



Representative GOLDSBOROUGH. There is no possible question about
it. with the enormous reserves that the Federal reserve system now
has. You see, Senator Fletcher, without reducing their gold reserve
they could issue five billions of Federal reserve notes. They can not
only do that, but under the Federal reserve act they have a right
to do away with all reserves, so that after that, if they wanted to
exercise power they actually have, they could issue Federal reserve
notes indefinitely. All they would have to do would be to buy either
Government bonds or securities from member banks to place as
collateral to the notes.
Senator FLETCHER. That refers to the power they have to control
the volume of currency, and there is no doubt but what they have
that power ?
Representative GOLDSBOROUGH. NO, sir.
Senator FLETCHER. And then the other point was as to its being
practicable to fix the wholesale commodity market prices for this
Representative GOLDSBOROUGH. YOU mean, after the price level
is reached, have they the ability to sustain it at that price ?
Senator FLETCHER. Yes.
Representative GOLDSBOROUGH. I will tell you what was done
between 1^2 and 1928 by Governor Strong and the other members
of the open-market committee. What they did was this. When
the market went up to above the point which they thought was
correct, they immediately put Government bonds into the market
to pull it down, and when it went down they bought Government
bonds. And may I interpolate right there, because I think it is
only fair to say that there was no possible question about what was
In 1920 and also in 1927 Governor Strong came before our committee and asked us not to pass this legislation, because he said that
he and his committee were attempting to stabilize the market and
had done it very successfully; and I think he was right. But he
overlooked the fact, as we all do, that he was not immortal, and
he has passed to where beyond these voices there is peace.
In a speech that I made in 1924, Senator Fletcher, at Atlantic
City, before the Maryland Bankers' Association, which was two
years before I had definite information on this stabilizing process,
but when it seemed to me perfectly apparent that it was going on,
I made this statement—it will take- me only a moment to read it
[reading] :
Not so generally understood is the fact that the open-market operations of
the Federal reserve banks in the first half of 1023 tended to cur]) the involuntary 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 openinarket 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 our indices, money in
circulation was increasing faster than the volume of trade, and later in the
year when these same guides began to point in the other direction the openmarket operations put more money into circulation.
We were cautious in
1923 because we had had a recent lesson, ^\re will be less cautious as time
goes by, and in a very short time, when credit begins to be demanded all over



the country for developments of all sorts, the Federal Reserve Board, without,
express legislative authority, will not be able to restrain a period of inflation,
greater, probably, than any we have ever known.
Senator CAIIEY. Has not the Federal Reserve Board the power

to do this thing- now?
Representative GOLDSBOROUGH. Senator, they really, in my judgment—I did not come here, of course, to criticize them from that
standpoint—they really, in my judgment, usurped power when
they initiated their deflation policy in 1920 and when they instituted
their open-market operations from 19*22 to 11)28. There is nothing
in the Federal reserve act which contemplates giving them authority to regulate price levels, but they did do it, and from 11)22 to
1928 they helped the country immeasurably by doing it.
Senator CAREY. They can do it by selling securities and buying
bonds, can they not?
Representative GOLDSBOROUGH. They can do it, but the difficulty,
as I see it, is this, that, in the first place, they really have no authority to use open-market operations for that purpose. There is no
authority given them by the act to do so; and the second thing
is this, that there never has been such a thing as a benevolent despot,
and it does seem that their activities ought to be addressed to a
particular point which indicates fairness to debtor and creditor and
which indicates some sort of stability in our economic system, so that
we will not have terrible wrenches, one of which we are going
through now. I do not think any man now is justified in going into
business or in borrowing money, not having the slightest idea what
the situation will be five years from now.
Senator FLETCHER. One purpose is to raise the commodity price
level and the other purpose is to stabilize it?
Representative GOLDSBOROUGH. Yes; and that is really the most important thing. The only reason the emergency feature is put into
this legislation is this. Not only all economists agree, but Governor
Harrison and Governor Meyer agree that with about two hundred
and three billions of debts there was no way for those debts ever to
be paid unless the price level is raised. In other words, that the
present price level was so unfair to the debtor that the debts could
never be paid, and that production would be terribly retarded by
virtue of the fact that the producer was so encumbered with debtSenator GORE. There is the rub—the increased burden of debt.
How to meet it, I do not know. •
Representative GOLDSBOROUGH. This is an attempt to achieve justice as between debtor and creditor, to allow the country to resume
its normal production, and then to so stabilize conditions that we
will not have these economic wrenches and these terrible periods of
unemployment—one of which we are passing through now.
We do not claim that the bill is perfect. The bill is not what I
would prefer, but it seems to me that it is a tremendous advance
over anything we have ever had before, because. Senator Gore, if
nothing else, it does show to those who have been in control very
largely of the medium of exchange by their control of credit, that
the people propose in so far as they can to assume their own control
over their own medium of exchange, not to let some one else decide
arbitrarily when their prices are to be increased or when they are
to be decreased.



Senator GORE. If the problem were as simple as that, your solution might be all right. But you remarked in your speech at Atlantic
City, which Avas a very wise speech, that as time passed the demand
for money or credit for development purposes would increase and
become irresistible. Between 1927 and 1928, speaking roughly, bank
loans did increase to one and a half billion dollars in a year, and
those increased loans were for the purchase of securities. Commercial loans declined during that year $250,000,000.
Representative GOLDSBOKOTTGII. That is true. As I indicated before, Senator Gore, unless this legislation will act as a restraining
influence to hold back an incipient, unwarranted business expansion,
which leads to speculation—unless it will do that, as I firmly believe
it will, then it may be necessary for us to have other legislation
which will separate the credit of the commercial banks from the
New York stock market.
Senator GORE. I think that probably ought to be done, but I am
afraid your additional legislation, Congressman, will have to repeal
the laws of human nature and prevent people from buying on a rising market and prevent them selling on a falling market. If you
can do that, you can solve this problem.
Representative GOLDSBOROTTGH. Senator Gore, all legislation that
I know anything about is based on the fact that you have to control
human selfishness. This is one attempt to control human selfishness
and to establish justice. .Nobody claims that we are going to create a
Nirvana by legislation. I know perfectly well that if you were to
take a shovel and pour gold dollars in the streets and on every country road, if everybody was in a state of fear and panic and would not
pick them up and use them, you could not change this situation a bit.
But the first thing we have got to do is to make an honest effort to
reestablish the confidence of the country, and I believe that it can be
done if the banks of the country know that the Federal reserve system is specifically directed by law to continue to do just exactly what
it is doing until it achieves a certain definite end; and I believe that
when that time comes these periods of inflation and speculation and
of depression can be very greatly modified by the restraining influence of the Federal reserve system when they see an incipient unhealthy boom coming, because these periods of deflation alwaysfollow periods of sj^eculation.
Senator WAGNER. Have they not that power now, to some extent,
of controlling rediscount rates to arrest excessive expansion?
Representative GOLDSBOROUGH. They are given authority by the
Federal reserve act to adjust rediscount rates for the purpose of
accommodating commerce and business. That is very nearly the
exact language of the act. They are given no express legislative
authority either to adjust rediscount rates or to conduct market
operations for the purpose of controlling the expansion and contraction of business or the raising or the lowering of the price level,
but thoy are exercising the very authority you are- speaking of, and
I think that their operation should be directed toward a given
point, first, to reestablish a price level which will be fair as between
debtor and creditor, and start production and employment, and then
continue on a measurably even keel so that when business becomes
adjusted to that price level there will not be these terrible wrenches
that come when there is either a rise or fall. A rise beyond a fair



point is very hard on the person with a fixed income, salaried person
and the laborer, because wages and salaries are not raised as fast as
these prive levels are raised. On the other hand, as soon as you
have a period of declining prices from a reasonable price level, producers are unable to produce with profit, and they have to stop their
operations and throw people out of work.
Senator GORE. And that is the reason that the banks will not loan
money. They do not see any business that can promise a profit
on its operation.
Senator TOWNSEMD. Just in connection with that, may I ask you
this question? Will you point out to the committee what can be
accomplished under that bill that can not be accomplished under the
Glass-Steagall bill, just in a word?
Representative GOLDS BOROUGH. What the Glass-Steagall bill does,
Senator Townsend, if you will permit me
Senator TOWNSEND. All I want to know is what can be accomplished under your bill that can not be accomplished by the GlassSteagall bill.
Representative GOLDSBOROUGJI. I am going to try to answer as
briefly as I can. The Glass-Steagall bill simply furnishes resources
to the Federal reserve system. It tells the Federal reserve system,
" You do not have to issue notes only on paper that you rediscount.
You can use Government bonds as collateral." It also allows the
Federal reserve banks to rediscount paper from member banks which
were not previously eligible. In other words, it gives power to the
Federal reserve system to be very liberal in its credit policy.
This act directs what the activities should be in so far as the price
level is concerned—which is a very different proposition.
Senator TOWNSEND. Could they not accomplish the same thing as
set forth in your bill, if they desired to do so, under the Glass-Steagall bill?
Representative GOLDSBOROUGH. Of course the Glass-Steagall bill is
the only means that they have in addition to those they previously
had to expand the credit of the country.
Senator TOWNSEND. Exactly.
Representative GOLDSBOROUGH. That is true. You do not know
and I do not know how they are going to exercise the powers that
the Glass-Steagall bill gives them.
Senator FLETCHER. It is not permanent legislation.
Senator TOWNSEND. I recognize that, Senator.
The CHAIRMAN. In other words, the purpose of that bill is to give
them a mandate to follow out a policy and to adhere to it for a
specific purpose.
Representative GOLDSBOROUGH. Yes.
The CHAIRMAN. Using every provision of law available, including
the Glass-Steagall bill, for that purpose.
Representative GOLDSBOROUGH. That is very concisely stated. Mr.
Chairman, and much better than I could have* stated it/
Senator GORE. IS it your feeling that the fundamental need of the
country is more money or more credit, or both, or either?
Representative GOLDSBOROUGH. There is no way to get it into circulation under our system. We do business entirely on a credit



basis, Senator Gore, and the only thing that any legislation can
Senator GORE. Well, I had in mind the issuance of Federal reserve
notes or the extension of credit.
Representative GOLDSBOROUCJH. Yon see what happens to Federal
reserve notes. Bonds may be bought from the banks directly, in
which case the Federal reserve notes go to the banks. Or the Federal
reserve banks may buy from a private individual and give him
Federal reserve notes, but he deposits them in some bank, so they go
to the banks. What the bank does with that money is this: If it owes
any money to the Federal reserve bank because of rediscount, it
pays off its debt to the Federal reserve bank. That is the first thing
it does. The second thing it does, if it has any money left, is to
deposit that money in the Federal reserve bank as a reserve.
Senator GORE. Or let some other bank take it to pay off its debts.
Representative GOLDSBOROTTCH. Correct. And then, of course,
when it establishes sufficient reserve to put itself in what it believes
to be a sound position, then it looks for an outlet for its reserves.
Senator GORE. That is the trouble now. They do not see any
business in sight that promises to earn a profit on its operations.
That is the reason they do not make business loans. It brings it back
to the point that we have to restore confidence.
Representative GOLDSBOROITGH. That is one of the major things
we are trying to do by this legislation.
Senator FLETCHER. YOU had before your committee, and his statement appears in the hearings, Dr. Willfred I. King, professor of
economics, New York University. Doctor King writes me a letter—
and I will ask to have this letter go into the record—saying that you
had in your original bill a provision something to this effect:
If, in carrying out the purpose of section 3, the gold reserve is deemed by the
Federal Reserve Board to be too near to the prescribed minimum, the board
is authorized to raise the official price of gold if the other methods already
authorized appear inadequate: if, on the other hand, the gold reserve ratio
is deemed to be too high the Federal Reserve Board is authorized to lower the
official price of gold if the other methods already authorized appear inadequate.

He thinks that that provision ought to go into any bill that is
passed here; and I just thought I would like to ask you what you
think about the importance of that provision.
Representative GOLDSBOROUGII. Senator Fletcher, I drew that bill
myself; it was my bill; the suggestion was not given me; and, therefore, when I put the gold clause in it, I put it in there because I
thought it ought to be there. I reached two conclusions: First, that
I could never get a bill out of the Banking and Currency Committee
go the House with the gold clause in it; and the second conclusion I
reached was this, that in all human probability we would never,
within many, many years, need the gold clause because of the
tremendous amount of gold reserve that we now have, and that it
really was not necessary as an emergency proposition.
Senator FLETCHER. YOU do not regard it ;>s a very essential part
of this legislation ?
Representative GOLDSBOROUUII. Not at the present time; no, sir.
Senator FLETCHER. I will ask to have that letter inserted in the



The CHAIRMAN. That may be done.
(The letter referred to and submitted by Senator Fletcher is
here printed in full as follows:)

W<fshi):</1on Square East, New York, May 9, 1932.

United States Senate, Wasiihn/lon, D. 0.
MY DEAR SENATOR FLETCHER: Thanks for your letter of May 4.

I was

delighted to rend that the Goldshorough hill passed the House hy such an majority. I hope that it, or your bill, will go through the
Senate with equal speed.
I sent you a few days ago a substitute section to make your bill effective
in case the gold reserves of the Feiieral reserve banks should prove inadequate.
The section which was deleted from the original Golrtshorou^h bill before it
passed the House w a s :
" If, in carrying out the purpose of section 1, the gold reserve is deemed
by the Federal Reserve Board to be too near to the prescribed minimum, the
board is authorized to raise the official price of jrnld if the other methods
already authorized appear inadequate: if, on the other hand, the gold reserve
ratio is deemed to be too high the Federal Reserve Board is authorized to
lower the official price of gold if the other methods already authorized appear
For the reasons which I have previously stated, I believe that some such
section should be reinserted by the Senate: for by so dointr, the Federal
Reserve Board would be enabled to carry out the directions of Congress under
difficult as well as under easy conditions.
With best wishes for your success. I remain.
Very sincerely yours,

Professor of Economics.

Senator GORE. What do you mean by the price of gold?
Representative GOLDSBOROUGT-I. What would be done would be this:
In case the gold clause were used, the Federal reserve system would
get in out of the market all its gold and would use nothing but gold
certificates. Then it would measure this gold. How many grains
are there in a gold dollar now ?
Senator GORE. 25.23; fine gold, 25.8.
Representative GOLDSBOROUGH. What they would do, as a matter
of calculation, would be to increase or decrease the gold content of
the gold dollar.
Senator GORE. I S that what you contemplate here ?
Representative GOLDSBOROUGH. That is what would have to be
Senator GORE. Why not just change the number of pounds in a
bushel of wheat or the number of pounds in a bale of cotton? If
a man owes a thousand bales of cotton of 500 pounds each, let him
pay the bill with a thousand bales of 400 pounds each.
Representative GOLDSBOROUGH. YOU are getting away from the
principle of this legislation
Senator GORE. If that is afield I would not want to detain you or
the committee by going into it.
Representative GOLDSBOROUGH. The situation is this. What we
have now
Senator GORE. That is, the Fisher plan?
Representative GOLDSBOROUGH. Yes. But the Fisher plan, that is,
the change of the gold content in the dollar, is not involved in the
present legislation.
Senator GOTJE. INTo; I understand that.



The CrrAiRMAN. I would like to ask you one question just to get
it clear in my own mind. The thing aimed at in this bill is to bring
up the general price level without any regard to inequalities that
exist in commodity prices at the present time 4
Representative GoLDsiiOROTion. Yes. There are 784 commodities
involved, and this would simply result in the raising and lowering
of the index number constituting the whole 784 commodities. The
laws of supply and demand, of course, would be completely operative
as to any individual commodity; but if you could keep the credit of
the country at a parity with the business of the country, you would
have a stabilized price level.
The CHAIRMAN. I think I understand the purpose, and I think
you have made a very good presentation before the committee. I
just want to make this clear. If an inequality appears in the exchange value between agricultural goods and manufactured goods,
the passage of this bill would have no relation to that?
Representative GOLDSBOROTGH. That Avould have to be corrected by
some other legislation.
Senator GORE. The manipulation of the number of grains in a
gold dollar would not help and could not be applied to Government
debts or corporation debts or farm mortgage debts and others that
are made payable in gold?
Representative GOLDSBOROTJGH. In my opinion, they could not.
Senator GORE. YOU do not know the aggregate amount?
Representative GOLDSBOROTJGII. What the Supreme Court would
say about it, I do not know.
Senator GORE. I think they have already passed on it.
Senator HULL. Have }'Ou the commodity price levels of the different important countries measured by a common yardstick, so
that we can see what they are?
Representative GOLDSBOROTTGIT. NO; I have not, Senator Hull.
The CHAIRMAN. We thank you very much, Congressman.
(Witness excused.)
The CHAIRMAN. I see that this hearing can not be concluded this
forenoon, and we will arrange to continue this afternoon, starting at
2.30, over in the Capitol Building in the room of the. Committee on
Interstate Commerce, Senator Couzcns's room, which is on the west
side, one floor above the Senate Chamber.
We have two Congressmen here who have made a study of this
bill and would like to make brief statements, and we shall have time
for that, at least, before we recess.
I will first call on Congressman Strong of Kansas, who has made a
long study of this proposed legislation and who i? a member of the
House Banking and Currency Committee.
Representative STRONG. Mr. Chairman and Senators, I think I
ought to say first that I have never had any banking experience. I
am not a banker, though I have been an attorney for little banks.
My life has been devoted as a lawyer and business man and farmer.
I came to Congress in 1919, went on the Banking and Currency Committee and watched the price level rise. Then after May 20, 1920,
I watched the deflation process.



You referred. Senator Fletcher, to Doctor King. He has expressed the opinion that in the deflation the owners of property in
this country lost $40,000,000,000, the amount of tha cost of the war.
I began to study the cause and the prevention of inflation and
deflation. My attention was called to the fact that when the Senate
passed the Federal reserve act it provided that the discount rate
should be used not for the accommodation of business but for the
stabilization of the price level. In conference the language was
changed to the accommodation of business and commerce.
I introduced a bill asking or directing the Federal Reserve Board
to use their powers for the stabilization of the price level. That was
in 192C. We had hearings upon that bill. I found that those who
opposed it were trying to educate the country to the belief that I
was trying to fix prices, which was not my purpose at all, except
to fix the purchasing power of money.
In the next Congress I introduced a bill for the stabilization of
the purchasing power of the dollar; my idea being that the people
having in the Constitution given Congress the rig]it ** to coin
money—and to regulate the value thereoiy' we never bad regulated
it or never had any chance to regulate it until we had the Federal
reserve system.
The CHAIRMAN. Was that bill of yours along this same line?
Representative STRONG. Yes; and" for the same purpose and the
bill now under consideration.
Among the man}7 economists and financiers who came before our
committee in the years 1920 and 1927 was Governor Strong, the
then governor of the Federal Reserve Board. He referred to the
fact that lie had been using these powers for stabilization for several
years with success, but took the position that we ought not to direct
the Federal Reserve Board to so use them.
I went to lunch with him one day, he trying to persuade me to
abandon the bill and I trying to persuade him to help me with his
great ability to prepare a proper bill that he thought
he could support. In the course of the conversation he said, u I am doing this
thing now that you want done." I said, " That is true. If you
always were to continue at the head of the board that bought and
sold the Government securities, and at the head of the Federal reserve system, I would be willing to withdraw the bill. But that is
not going to happen, so I would like to have you help me."
I said to him, " Where were you on May 20/1920? " He said, " I
was in Washington." I asked him if lie was with the Federal Reserve Board, and he said he was; and he looked me in the eye and
.said, " With all the energy that I could possibly command I tried
to prevent the passage of that deflation legislation."
Then I said, " Well, Governor, if this law had been on the statute
books at that time you might have pointed the members of the board
to the law, and, you dare not pass such a resolution." From that
time on I got his assistance and help: and the bill that I introduced
on March 0, 192K, was a bill that he had a large part in the preparation of.
Senator GORE. Will you attach that bill to your statement in thisrecord ?
Representative STRONG. Yes, Senator.
(The bill referred to is as follows:)



[II. R. 11SOG, Seventieth Congress, first session]
A BILL To amend the act approved December 2o, 101'-), known as the Federal reserve act;
to deiine certain policies toward which the powers 01 the Federal reserve system shall
be directed ; to further promote the maintenance of a stable gold standard ; to promote
the stability of commerce, industry, agriculture, and employment; to assist in realizing
a more stable purchasing power of the dollar, and for other purposes

Be it enacted by the Seriate and House of Representatives of the United
States of America in Congress assembled, That the act approved December 23,
1913, known as the Federal reserve act, as amended, be further amended as
follows: Add to section 14 the following paragraphs :
•' (g) The term * Federal reserve system,' iss used in this act, shall mean
the Federal Reserve Board, the Federal reserve banks, and all committees,
commissions, agents, and others under their direction, supervision, or control.
"(h) The Federal reserve system shall use all the powers and authority
now or hereafter possessed by it to maintain a stable gold standard; to
promote the stability of commerce, industry, agriculture, and employment;
and a more stable purchasing power of the dollar, so far as such purposes
may be accomplished by monetary and credit policy. Relations and transactions with foreign banks shall not be inconsistent with the purposes expressed
in this amendment.
"(i) Whenever any decision as to policies is made or whenever any action
is taken by the Federal reserve system tending to affect the aforesaid purposes
of this amendment, such decision or action and reasons therefor shall be
thereafter published by the governor of the Federal Reserve Board at such
time, place, and in such detail as may be deemed by him to be most effective
in furthering such purposes, and at least once each year in the Annual Report
of the Federal Reserve Board to the Congress.''
SEC. 2. After section 28 add the following:
" {SEC. 28A. The Federal Reserve Board and the Federal reserve banks are
hereby authorized and directed to make and to continue investigations and
studies for the guidance of the system's policies, at least to the extent and
in the manner described in paragraphs 1, 2, 3, 4, and 5 of this section, and to
such further extent as they may deem to be desirable; namely,
"(1) Of the manner and extent to which operations of the Federal reserve
system affect (a) the volume of credit and currency, (b) the purchasing
power of the dollar, (c) the general level of commodity prices and of other
relevant prices, (d) the prices of stocks and bonds, and (e) business activity;
through changes of rates of discount, purchases, and sales of securities in
the open market, relations and transactions with other banks of issue, or
through any other means.
"(2) Of the influence of activities of agencies of the Government of the
United States or of domestic or of foreign banks not under the control or
influence of the Federal reserve system, or of any other agency or agencies
upon the purchasing power of the dollar; and of the influence exerted upon
the policies and affairs of the member banks and of their customers by means
of direct representations, by publicity, or otherwise; and of the effect of such
operations as are conducted by the Federal reserve banks with foreign banks.
"(3) Of the effect upon the purchasing power of the dollar of changes in
the supply of and demand for gold, either actual or prospective.
"(4) Of existing means and proposed plans, both national and international,
having for their aim the stabilization of agriculture, industry, commerce,
employment, and the purchasing power of money.
"(5) Of existing or proposed index numbers of prices or other measures of
the purchasing power of money, which are used or might be used, singly or
in combination by the Federal reserve system as a guide in executing its
" SEC. 28B. The Federal Reserve Board shall report to the Congress from
time to time, and at least annually, the methods pursued and the conclusions
reached, either final or otherwise, resulting from the aforesaid investigations,
and any legislation which will, in its judgment, best promote the purposes of
this amendment to the Federal reserve act.
" SEC. 28C. Acts and parts of acts inconsistent with the terms of this act are
hereby repealed."
Kepresentative STRONG. The bill provided that all the powers of

the Federal reserve system should be used for the maintenance of
the gold standard and the stabilization of industry, agriculture, and



business, and for the stabilization of the purchasing power of the
dollar. It also provided a system of study that he wanted the
Federal reserve banks to engage in as to their powers, and the proposition of the price index number.
He came before the committee on that bill. Previous to that
time he arranged for a conference between himself, the Federal
Reserve Board and myself in the hope that we might induce them
to go along on the bill. We began the conference a little after 10
o'clock in the morning and continued until 1^2, and came back at 1.30
and continued until pretty near 5 o'clock. I thought, and I think
he thought, that there was some hope that the Federal Reserve
Board would go along on the proposition.
When Governor Young came before our committee and the question was asked him, he said,w4 We are opposed to it."
As I have studied the proposition from then up to this time it
looks to me as if the Federal Reserve Board should use its powers
to stabilize the purchasing power of our dollar.
The people for and against this bill are composed, to my mind,
of two classes: the banker-minded who uses money as a commodity
for making profit, and those who believe that money should be
used as a measure of value and for the purpose of exchange between
the people who buy and sell their labor and their goods.
Senator GORE. 1)O you not think that we might add another class—
those who think that however desirable, it is beyond the compass
of any human power ?
Representative STRONG. Yes. They did not want and opposed
being directed and we have reached the condition that we are now in..
I am convinced that if we had passed the bill in 19:2(5 we would not
be in this condition.
This bill simply follows the law of supply and demand, and regulates the supply and demand of money. I think everybody will
agree that when money is plentiful and cheap the things that money
buys will bring a good price, and when money is scarce and high
priced, the things that we use to buy money with are very cheap,
because the money is high.
We have reached a condition where labor must work longer hours
at less prices to get its dollars. The dollar is inflated. Commodities are not so much deflated as the dollar is inflated. Its purchasing power has largely increased. When the farmers went into debt
a bushel of wheat bought a dollar. Now it takes three bushels. It
also takes about three bushels of corn to purchase a dollar. When
they went in debt they could take a hundred pounds of pork and
buy $12 with it. Now, hogs are only worth $2.75 a hundred. If
they want to buy a dollar it takes 1(> dozen eggs and 9 pounds of
butterfat and 20 pounds of cotton where it used to take -i dozen
eggs and 3 pounds of butterfat and 5 pounds of cotton in my country; and everything else in proportion. The people are discouraged. They do not see any hope of being able to earn enough money
by their labor or by their products to get this high priced dollar
to pay their debts with.
That is the reason the farm organizations, realizing the impossibility of redeeming agriculture and the business of the country without depreciating the high priced dollar, met together and hired



economists and began to study this question, and that is the reason
they are here to-day to urge you gentlemen to pass this bill.
I respect the members of the Federal Reserve Board very highly.
They have been my friends. As a member of the Banking and Currency Committee I have worked with them these 13 years; but I
do not know whether appointment on the Federal Reserve Board
gives a man superhuman power that enables him alone to decide
when to buy or sell Government securities. They started in to buy
twenty-five millions a week about two months ago and they admitted before our committee that they were not going fast enough.
Then they commenced to buy a hundred millions a week; but if
you talk with them they say, w% When we get so many hundred millions we have got to quit."
Who told them so "4 Where did they get that information as to
the time to quit'( The only time I see for them to quit is when they
have deflated the dollar, so that people who are in debt can get hold
of those dollars to pay their debts with. If they say, " We have
bought seven hundred millions now and we are going to quit," there
will be a flunk. If they keep it up there will be a gain—in what?
In the price of labor and of commodities in general. That is what
we want by this bill; that is what we want to secure.
Senator WAGNER. YOU mean, if they keep it up even without this
direction and legislation?
Representative STRONG. Yes; if they would; and if they had used
the powers that Congress had given them for stabilizing the purchasing power of the dollar in 1920, we would not be in the condition we are now in in 1932. But they did not do it. Somebody
influenced them to believe that they should not go on with it. Millions have been made by those who still own the dollars, but millions
have been lost, yes, billions, by those who had to exchange their property for the high-priced dollars. The man who has money is perfectly satisfied because his dollars are worth two or three times as
much as they used to be, but the man who is in debt and must pay
it by his labor and the things he produces is not satisfied; and there
is discontent all over the country and it is going to continue until
something is done to change this condition; and the only way I
know of is to increase the supply of money and reduce interest rates.
Senator COUZENS. What would you say if we provided by legislation that they were to buy a hundred million dollars of Government
bonds every week up to December 1, 1932?
Representative STRONG. I would not know whether that was the
place to stop or not.
Senator COUZENS. Who can tell them whether they should keep on
or whether they should stop? I just want to know if you wanted
to assume responsibility.
Representative STRONG. NO. But we have a Department of Labor
in this country that weekly puts out a price level, a price level of
wholesale commodity prices. When the dollar goes up the commodity price level goes down, and when the dollar goes down the commodity price level goes up. I would like, as this bill proposes, to
govern the use of their powers by the condition of the price level as
published each week by the Department of Labor.
Senator GOKE. On that point I appreciate your description of the
condition and the end that you are trying to arrive at, but there are



two or three things that puzzle me, and I would like to get your
reaction to them.
The first week in October we had in this country $5,015,000,000 of
gold. That is the greatest amount of gold we ever had in this country since it was organized. We had one of the worst breaks we ever
had both in security and commodity prices and credit at that time.
In addition to that, according to the official statistics of the department, on the 30th day of last November there were $700,000,000 more
in circulation than on the 31st of October, 1929, the week of the crash,
and according to their figures trade and production had declined
30 per cent during that period. Prices had declined 31 per cent during that period. There is an enormous increase in the volume of
money and yet a terrific drop in the price of products.
Representative STRONG. Yes; and during that time the sentiment
of fear had settled over the Nation, and people were hoarding their
money. The reason we passed legislation this fall was to prevent
the crashing of great banking institutions, because the people were
withdrawing their money from circulation; railroads were going into
receivership; there was a general financial crisis, and the people took
their money out and put it into a " sock," as we call it, hoarding it.
Of course we had more money but it was not in circulation. That
money was withdrawn from circulation, and you can not figure on
that money as being in circulation.
Senator GORE. Your point is that it is lack of confidence instead
of lack of money and credit?
Representative STRONG. Both. But if the people of this country
knew that through the Federal reserve system they were going to
continue to pour money out until there was a reaction, they would
have a restoration of confidence. But they do not know so now.
Nobody knows whether to-morrow we will pick up the paper and see
that the Federal Reserve Board have decided to quit buying securities. Nobody will know whether they are going to sell them.
I think we ought to have a policy in this country, directed by the
Congress that gave them those powers, as to how they should use
them and to what purpose they should use them. I do not think
they ought to be used to regulate the price of stocks and bonds. I
think they ought to be used to stabilize the purchasing power of the
dollar as it affects all the people of the United States. The man who
works for a salary, the man who produces food, clothing, and all
commodities, the man who owns property—all should be protected.
The idea that a man who loans money may be repaid in 20 years by
a 50-cent dollar, or the man who borrows it at a 75-cent dollar may
repay it in a dollar worth $1.25 is absolutely wrong.
Senator GORE. DO you think the effort to empower the Federal
Reserve Board to stabilize the dollar is entirely analogous to empowering the Farm Board to stabilize the price of cotton ?
Representative STRONG. NO ; I think they are now moved by then
ideas of what is the best thing for banks and big business. I want
them to be moved by what is the best thing for the whole people.
Senator GORE. I mean, the policy projected in the bill here or in
this measure. Do you think it is at all related to the efforts of Congress and the Farm Board to stabilize the price of cotton and wheat?



Representative STRONG. NO. But everybody but those who are
hoarding it is hoping and praying that this high-priced dollar shall
be reduced. I got very little encouragement in 1920. Why? Because the dollar was down, as I term it, on speaking acquaintance
with everybody. But now it has got so high in its purchasing power
and it takes so much labor and so much the people produce to purchase it, that everybody wants it stabilized. You are going to find
a great demand for this bill.
Senator GORE. The point I was making a while ago was that the
volume of money had increased and yet prices went down.
Representative STRONG. I know. 'Money went into hoarding. In
any credit structure it is a good deal like a fire company running
a nre hose and attaching the hose and turning on the water. If
there is a leak the water does not come out of the nozzle until the
pressure overcomes the loss. It takes time. The Federal Reserve
Board commenced to pour money into the credit structure. They
might not see a reaction for two or three months. The governor of
the Federal Reserve Bank of New York said, " We have been purchasing $25,000,000 of bonds for seven weeks." Only day before
yesterday there was a cessation in the falling of bank credits that
had been going down for a year and a half. You can't just buy
a few hundred million dollars' worth of bonds and see a reaction
the next week. The first thing a banker does that sells his bonds
to the Federal leserve system and has the money in the bank, is to
go over to the Federal reserve system and pay his indebtedness.
The Federal reserve system thus only takes money out of one pocket
and puts it into the other. There is no change in the amount of
money in circulation. But if they keep on, the banks are sooner or
later going to try to loan the money, because, there is nothing on earth
that a bank hales as much as having money in the bank that is
drawing no revenue. The people will sell their bonds and put the
money in the bank, and if you keep pouring into the credit structure
additional money by buying bonds it will get out into investment and
production and a restoration of better times, the dollar will come
down to a reasonable price, as it should be in comparison with the
things that it buys.
I want to repeat: There are two classes of people—those who want
to use money and do use it as a commodity on which they make
a profit, and those who want to use it as a means of exchange and
a means of measuring the value of what they buy and sell.
Senator WAGNER. DO you think it would resist the deflationary
movement in wages that is going on now ?
Representative STRONG. Why, absolutely. If you will bring the
dollar down to a reasonable price, then there will not take so much
labor to purchase a dollar or so much of the commodities that labor
must produce.
Senator WAGNER. The wage earner now is being cut both ways.
You are giving him
Representative STRONG. YOU would probably stop the wage cutting in the United States if you would bring the dollar down to
where the day's work would bring more dollars.
Senator WAGNER. The tendency is the other way just now.
Representative STRONG. Yes; certainly, because the dollar is high.



Senator TOWNSEND. YOU were a member of the conference committee on the Glass-Steagall bill; you remember that"'(
Representative STRONG. Yes; day and night.
Senator TOWNSEND. In your judgment, can the express purpose of
this bill be accomplished under the Glass-Steagall bill?
Representative STRONG. Certainty. That is what we passed the
bill for. That is what we passed the Reconstruction Finance Corporation bill for, to do the very thing that this bill will do.
Senator WALCOTT. DO you have any way of bringing pressure on
the banks to make them do what we expected them to do?
Representative STRONG. NO. But when they get so much money
in their vaults that is not bringing in any revenue, they will find a
way to get interest on it.
Senator WAGNER. Would that perhaps result in undue expansion
again ?
Representative STRONG. If so, then you would turn around and use
the purpose of this bill and sell bonds in the open market and take
the money out of the market and raise the discount rate. I do not
want inflation: I want to deflate the high-priced dollar and keep
it upon a fair basis at a stabilized purchasing power, as compared
with the things that a dollar will buy, as measured by the commodity price level issued by the Labor Department.
Senator TOWNSEND. DO you think the Federal Reserve Board and
the banks are doing exactly what you desire them to do under your
bill when they are purchasing Government bonds every week now ?
Representative STRONG. Yes; right now; but I want them to keep
it up until the dollar comes down where we can get acquainted with
it again, where it will have only the'purchasing power it had in 1921
to 1929.
Senator GORE. In your division of people into two classes, the first
class was those who use money to make money ?
Representative STRONG. Yes.
Senator GORE. And would you include in that class the bankers?
Representative STRONG. Yes, certainly; they use money to make
money out of it. They handle it as a commodity, to make a profit.
Senator GORE. They will get busy to make their money earn
money ?
Representative STRONG. Yes. If you take away their bank. You
understand that in England and in France they do not allow a
banker on the board of directors of their great banks. Why ? Because they do not feel that it is a proper thing to put on the board
of directors of their great banks men who deal in handling money
for profit. They put business men on as directors.
Senator GORE. I was wondering about the banks. I think the deposits are about forty-seven billions, and yet they are hoarding it.
Representative STRONG. Because they are afraid. They do not
know when this policy of buying bonds is going to stop and money
retain its high purchasing power.
Senator GORE. They lack confidence in the future.
Representative STRONG. If they knew that the Federal Reserve
Board was going to keep on buying bonds and keep the interest
rate down until the dollar was reduced in price in comparison with
what the dollar used to be, there would be plenty of confidence in this



Senator FLETCHER. Your idea is to make it mandatory for these
Federal agencies to accomplish this purpose, and not leave it simply
in their discretion?
Representative STRONG. Certainly. We have left it in their hands
for several years and had these periods of inflation and deflation
which have cost us much more than the wars we have had. It seems
to me that it is time that Congress should tell the agencies that they
create to use the power we have given them in the way that we think
it ought to be used. To stabilize the purchasing power of our dollar.
(Witness excused.)

The CHAIRMAN. Mr. Busby is also a member of the Banking Committee of the House.
Representative BrsnY. Mr. Chairman and Senators, I might suggest this to the distinguished body that I am now facing, that if we
believe conditions in this country are satisfactory and if we believe
it is better to drift than it is to try to do something, I concede that
this legislation is a useless effort on the part of the House and Senate;
but if. on the other hand, a contingency and emergency faco us, that
we feel as responsible agents of the people we should try to solve, I
believe we should approach it with such a sympathetic attitude—an
attitude that will cause us to question the things that be, and to work
on something that may bring about better conditions.
I will direct your attention primarily to the Goldsborough bill and
the provisions of it relating to conditions that are now confronting
the country.
The Goldsborough bill does two things: First, it declares it to be
the policy of the Government to have a dollar with the purchasing
power, on the average, of the period of 1921 to 1029, which practically
settles around the year of 1926. There is a reason for that: Because
the country entered into debt to a large extent during that time;
because the standard of living was acceptable at that time; because
wo had advanced over the 1913 period to such an extent that we found
our commercial conditions, our living and our hoine life and our
advancement in a general way, through the automobile, transportation, and radio, and other things, at a very satisfactory level during
that time.
That is the reason, as I see it, why we should select that period.
Varying price levels are not new. About 1834 John C. Calhoun
called attention to this in these words:
Place the money power in the hands of a combination of a few individuals.
vnd they by expanding' or contracting the currency may raise or sink prices
at iheir pleasure.

In 1929 there was practically $60,000,000,000 of bank credits working which served as a type of currency on mediums of exchange.
Those bank credits had a velocity of turnover of about 25 times per
annum in 1929. If you multiply the $60,000,000,000 by the 25, which
was the velocity, you would have the equivalent of 1,500 times 1,0005000.000 working."
In 11)31 our hank credits were reduced to $45,000,000,000, with a
velocity shrinkage from 25 to 13, giving us, if we multiply the 45



by the 13, 585 times that 1,000,000,000 would be working. In other
words, we would have just exactly the efficiency of the bank credits
of 1029 compared with 1931, of 38 per cent, a reduction in efficiency
of 02 per cent of the business activity of checks and bank credits.
That is equivalent to taking out of use bank credit to the extent of
62 per cent or leaving only $38 of each $100 of 1929. That would
cause a scarcity of our currency and this would slow down our trade,
because when you reduce the activity of the dollar you certainly curtail its effectiveness in business.
I t is true we had about a billion dollars more of issued and coined
currency in 1931 than we had in 1929. But $1,000,000,000 added,
where you have $14,000,000,000 of bank currency subtracted, would
-leave you a net loss of $13,000,000,000 of effective currency, and if
you divide that so as to have your velocity uof 25 reduced to 13, you
would certainly reduce the efficiency of the currency " again.
In order to have a proper amount of currency it ought to relate
to the needs of business. If you have too much currency, as they did
in Germany, in relation to the requirements of business, the money
will become cheap. If you have too little bank credits and currency,
as in the United States now, in relation to the business needs, of
course the money will become high and dear in relation to commodities and labor.
Last week's commodity price index showed farm commodities to
be around 42 per cent of what they were in 1920. In 192G if you
had made a debt and expected to pay it with farm commodities—
and other commodities work very similarly, but not to the same extent—you would pay two or three times as much as you planned to pay
when the debt was made. That is the trouble to-day in this country—
the debts are iixed and remain so, regardless of the price of commodities or the earning power of the people.
Professor Pierson and Professor Warren, who are here, both of
Cornel! University, state that the debts, private, public, and all
kinds, in this country in 1929, were $203,000,000,000. Those were
fixed absolutely. The national wealth was $362,000,000,000. It was
not fixed. The debts at that time were 5G per cent of the wealth.
Since that time the wealth has shrunken greatly, but the debts have
remained the same. To accept a lower standard of living than that
at which the debts were made and make it possible to reproduce
properties at a lower cost decreases the national wealth by that
standard. As the cost of reproducing the things we have, railroads,
steamships, houses, fences, machinery, or what not, the wealth of the
Nation is lowered. It will tend to resolve this country into a condition of bankruptcy as the national wealth is reduced; and if we
accept a condition of bankruptcy we will do it with full knowledge
of the fact that the debts are fixed and unchangeable under our
present plan and under our present system. We will arrive at the
point where receiverships become general when conditions of livingare much lowered or labor becomes available at three-fourths or twothirds or one-half of its present price. That makes it possible to
reproduce these7 things we call property at that much lower figure,
and no property is worth more than it costs to reproduce it new.
When we lower the wealth of this country 25 or 30 per cent we
have certainly resolved this country into a condition of bankruptcy,
because when we owe in this country more than our assets are worth,



even on a market that is not affected by enforced sales, there is nothing that will absolve us from that condition except a period of
general bankruptcy which will wipe out the debts.
1 assure you-that I am going to take but just a little more time.
I am trespassing on the committee now.
The CHAIRMAN. • No; the committee is very glad to hear you.
Use your own judgment as to the length of time you will take.
Representative BUSBY. I will stop at the end of five minutes, Mr.
The CHAIRMAN. That will be entirely satisfactory to everyone,
I am sure.
Representative BUSBY. Referring to the wholesale commodity
index price as determined by the Bureau of Labor statistics, you will
find in the House hearings, if you care to examine them, on page 257
that Mr. Ethelbert Stewart, Chief of the Bureau of Labor Statistics,
tells you about the method that is used in obtaining wholesale commodity index prices.
On page 207 you will find that he quotes from Mr. Sloan of the
Standard Statistics Co., where Mr. Sloan says that the very best
price index is that obtained through the Bureau of Labor Statistics.
That is, the Standard Statistics Co. handling that type of business
believes it is the best, and Mr. Sloan of that company says so.
On page 35S of the House hearings Doctor Fisher was asked the
question by Mr. Frail, of ^New York, ""What do you consider the
best index price P
Doctor Fisher discussed that at some length and said:
I have my own, ami others have their index prices, but I am convinced that
the .Bureau of Labor Statistics' wholesale commodity index price is the best
that I know of.

And so I merely call your attention to those tilings so that you can
examine that point, because it is involved in the bill.
Senator FLETCIIEK. Doctor Fisher gives, I believe, about 14 ways
in which this can be handled.
Representative Bosivr. I know, but he comes down to the point
exactly, Senator.
Senator FLETCHER. I understand that. lie says it is possible to
accomplish what you desire here, and practicable to do it.
Representative BrsiiT. And none of those several ways varies very
much from the thing desired.
The final clause of the bill* directs the Secretary of the Treasury,
the Federal Reserve Board, and the Federal reserve banks to assume
responsibility of trying to bring the purchasing power of the dollar
back to a desirable level.
If we are at a desirable level, there is no use in worrying about
this bill. If the people in our districts are employed, if the people
back home have the things they need to keep them enjoying life,
there is no use of our worrying here in Washington. But we have
recently found, in drafting a revenue law, a situation where the
springs of revenue in this country have so dried up that the- revenue
acts which formerly produced a surplus do not produce half enough
revenue. We have recently passed and are now preparing new revenue laws which will bring sufficient revenue to balance the Budget.
If we balance the Budget this year and do not restore the purchasing
power to the people through this method or some other method, be-



cause of a very deficient set of revenue raising laws—and there is no
way around it, because when the springs dry up the streams dry
up—we are certainly driven from bad to worse, because you notice
week after week commodity prices drying up at the rate almost of 1
per cent a week, and that indicates that the consuming power of
the people is being dissipated and that more people and more people
are being sold out of house and home and turned on the streets and
into the roads to travel from the place where they lived to some
other place, they are not certain where, to become recruits to the
great army of the unemployed, members of the under-consuming
classes that this countiy is confronted with to-day. There is nothing
In sight; there is nothing to indicate the slightest ray of hope.
I am pretty familiar with all of the details. When we go to offer
some suggestion of hope there is no hope in sight.
For that reason the members of the committee, Mr. Goldsborough,
Mr. Strong, and myself of the subcommittee, the active members of
the subcommittee, with Mr. Frail and Mr. Beedy who were with us
part of the time, have thought we might come before you and assist
in any way we could in offering, if nothing more, a spirit of interest
in the subject.
Senator GORE. Let me ask one question, because you represent my
old district in Mississippi. I agree with ail you say, Congressman,
about the burden of these debts—and the tragedy of it is that they
have got to be paid two or three or four times over—but the thing
that puzzles me and the thing that I am tiying to settle is which
is the cause and which is the effect. You state correctly that during
the last three or four years the volume of money has increased more
than a billion dollars. Bank credits or deposits have declined 14
billions. The velocity or efficiency of money and bank credits has
declined about 60 per cent. Now, have the velocity and the efficiency of money and credit decreased because business decreased, or
has business decreased because the velocity and efficiency of money
and credits have decreased? There lies the point in this problem.
Representative BUSBY. I am very glad to give you my reaction
to that proposition.
Business during the period from 1020 to 1929 went along in an
accelerated sort of manner until we reached the climax in 1929.
That was due largely to the velocity of credit. It was due largely
to the fact that people overbought their ability to pay through the
modern methods of selling.
Senator GORE. The overuse of credit?
Representative BUSBY. Yes; the overuse of credit.
Senator WAGNER. Buying on installments?
Representative BUSBY. Yes; and the people overconsrmied in relation to their ability to meet their obligations. The high-power
salesmanship induced people that wanted real estate to buy to the
extent that we had $35,000,000,000 of amortized real estate loans.
We perhaps had that much of deferred or installment obligations
which mortgaged the future income of millions of people to the
extent that the slightest reverse in conditions would throw them
into a servile attitude toward their creditors, so that a person would
have to take everything over and above a bare living to apply to
the promises he had already made. It took millions of people out



of the consumer class and they became simply slaves to their own
As that condition increased through this very lax credit period,
and it became more depressing, and as it became more distressing
the creditors, wanting their obligations met, began to press for
payment? and as the payments were forced, commodities, properties
of all kinds, became available at a lower figure, and as they became
more available and as the price lowered, the trouble was accelerated,
and as we came on down the line to this point where the forced sales
have become more numerous, receiverships, bankruptcies more general, the debt situation that existed then, which was not altogether
easy even in the best of times, has become, as I pointed out, the thing
that has enslaved the people.
Senator GORE. For 10 years prior to the war there was a hue and
cry in this country with regard to the increase i;in the cost of living.
It got so that we just referred to it bty initials, H. C. L."
Representative BUSBY. Was not that later ?
Senator GORE. NO. I remember making a campaign speech in 1912,
myself, on that point.
The CHAIRMAN. YOU were committed to a policy of reducing the
cost of living, were you not, in 1912 ?
Senator GORE. Yes. The prices of things were going up and the
value of the dollar was going down, and everybody was complaining
about it. It simply illustrates that our psychology goes in cycles,
so to speak, and that we do not have the sea level that we used to
Representative BUSBY. I believe this—leaving out of consideration
the debts or fixed charges—that the thing would work out nicely if
you could depend upon the levelSenator GORE. I t is the debts that constitute the difficulty in the
Representative BUSBY. If we could make our obligations in relation to our ability and the price of the commodities at that time and
disregard the ones that we made out of relation to the commodity
level, we would have no trouble. If you swap eggs for bacon you
come out all right, but you have got to complete your transaction.
If you swap one commodity for another commodity you will find it
pretty much the same way
The CHAIRMAN. But if you swap eggs for a pair of shoes, it takes
a basketfull or a wagonload of eggs, does it not?
Representative BUSBY. It certainly does. But the price of some
things do not yield as readily, and you find that farm commodities,
being perishable in their nature and being hard to house and carry
over, always hit the slump much more decidedly than steel and iron
and other things that are not of a perishable nature.
Senator GORE. That is true of raw materials generally, because
manufacturers can stop all at once.
The CHAIRMAN. I want to close pretty soon, but I can not resist
the temptation of asking one or two questions. I do not challenge
the correctness of your theories at all. I think 3^011 have brought out
a very important point, that some commodities do not yield to the
law of supply and demand. That is one of our difficulties, that we
have so much price control in certain commodity lines that such
commodities do not yield to the law of supply and demand.




Representative BUSBY. That is largely true, but that same price
control if followed by interested parties will ultimately, with this
period continuing and persisting, bring bankruptcy to the people
who are involved in the scheme.
I call attention to the fixed price of rentals. That is largely true
because most of the apartment properties were built and mortgaged
uj) to the limit, and the present ostensible owner only has the legal
title and lie must get so much rent all along or quit; and he holds
those prices up until the foreclosure conies and he is squeezed out.
The CHAIRMAN. IS not one of our real serious difficulties the fact
that so many of the commodities are price-controlled now?
Representative BUSBY. That is undoubtedly a serious difficulty,
but I do not believe that, that being the fact, we should surrender
any effort to take care of the whole situation because of that development
The CIIAIEMAX. I am not suggesting that, but I am suggesting
that it will take a great deal more than this to bring about a normal
Representative BUSBY. I believe you are right about that.
Senator GORE. Let me interject one remark there. I was talking
to a man. Mr. Chairman, yesterday, who told me that lie had a
solution for this question. His solution was that the farmers raise
horses and mules and use them instead of tractors. He said that
would solve the whole problem.
Representative BUSBY. I want to say this, that the wholesale
commodity7 index price is made up from the prices of 78-1 commodities. To my mind, those commodities taken as a whole represent
a great rope of many strands, and on some days you will find this
strand on the top of the rope. At other points you will find it on
the bottom; and so the different commodities will play up and down
and in and out, like wheat and cotton do, and a large crop undoubtedly will put them on the bottom of this great rope and tend
to pull the level down, while others will go to the top and tend to
pull the level up. But taking them as a whole, you will find remarkable stability in the wholesale commodity index price, because
it goes right along and it is not controlled by any one or two things,
but is made of so many things that there is little variation.
The CHAIRMAN. But to the extent that it includes price-controlled
commodities, to that extent the index is misleading, is it not?
Representative BUSBY. It would be slightly misleading; but
Professor Fisher said that it would be—I believe I am quoting him
correctly; he is present and can correct me later if I am not—he said
that he thought it would not be of sufficient weight to cause any
trouble whatever, on the whole.
Senator GORE. It is the farm products that I want to see primarily
go up.
Representative BUSBY. I believe. Senator, with a rise in all of these
commodities, the index price, you will find farm commodities will
go right along up with them, and at a more accelerated rate, because
they are more sensitive, for the reason I spoke of a while ago. But
you can not raise them unless you put the consuming power in the
people. As long as people are walking up and down Pennsylvania
Avenue starving and freezing for lack of clothes and food, and as



long as there are 25,000,000 to 40,000,000 people in this country who
are imdereonsuming, losing weight because they have not the staff
of life, we are an under consuming Nation.
The CHAIRMAN. Just one more suggestion and I am going to let
you close, because it is getting late.
There has been a great deal of emphasis here on the lack of ability
of the farmer to pay his mortgage, but there lias been very little
emphasis put on his lack of ability to buy. I think it is admitted
here that this does not change tfie proportion of the purchasing
power of agriculture as compared with industry. Am I .right?
Representative BUSBY. Yes. I could take a little bit of time,
which I am not going to do, but I think I could very clearly demonstrate to you how this would affect the farmer and give him purchasing power.
The CHAIRMAN. If Doctor Fisher or others do not bring that out,
we will ask you to come back.
Representative BUSBY. I think I can demonstrate it very
Senator GORE. I do not want to raise the price of what the farmer
has to buy, because that would aggravate his burden.7
Representative BUSBY. YOU would not do that b} this bill.
Senator FLETCHER. YOU might increase his purchasing power.
, Senator GORE. YOU can not do that unless you increase the price
of what he sells.
Representative BUSBY. It is hard to get a lever that will operate
on it.
Senator WAGNER. If we can put 8,000,000 people back to work
the farmer would naturally
The CHAIRMAN. If the farmer had been earning anything he
would have been buying enough machinery and implements to keep
the factories going and the people would have been working.
Representative BUSBY. There is no use putting the factories to
work and running them 30 days, with the present condition of the
buying power of "the people. They would, have to shut down in a
very short time because there is no consuming power.
The CHAIRMAN. They would shut down for lack of customers.
Senator GORE. The farmers did not have money enough to pay
their debts, their taxes, and their freights when those 8,000;000 people were employed at high wages.
Representative BUSBY. I think you are largely correct in that,
because since 1920 farm prices have been woefully out of line.
Senator WAGNER. There is no question about that.
Senator GORE. The farmer has been on the toboggan for 10 to 12
years ;
(Witness excused.)
The CHAIRMAN. I would like to ask Mr. Stern whether he would
like to be heard now or at 2.80. I realize that a great many of the
members have already left the committee room.
Mr. STEWART. I would rather come back at 2.30.
The CHAIRMAN. We will take a recess, then, until 2.30.
(Whereupon, at 12.30 o'clock p. m., a recess was taken until 2.30
o'clock p. m.)



The committee resumed its session at 2.30 o'clock p. m., pursuant
to the recess.
The CHAIRMAN. IS Mr. Steam here?
Mr. STERN. Yes,


If you will take a place opposite the committee
reporter, we will go ahead and do the best we can.

Mr. STERN. I appreciate the honor, Mr. Chairman, of being asked
to come here,
I thought I might give you the result of my experience, as I
believe we are the only paper in the East which is advocating such
a policy as you are now considering, and we have for the past six
months. When we first proposed it, in November or December of
last year, we were a lone wolf howling in the wilderness. Business
leaders and bankers of Philadelphia and of the country generally
looked askance. There has been a tendency to change their opinions,
as evidenced by my personal contact with leaders in that community and by letters to the editor, and in other ways. The
public is becoming gradually educated to this principle as a solution
of their problem. Some of our business men and most thoughtful
bankers are adopting this principle of inflation. I believe it will
come inevitably, if it does not come too late to help in the situation.
It will bring about a change in the condition which is now tending
to destroy us. I believe that you will find that the leading bankers
of New York are tending toward inflation as the only solution.
To maintain the integrity of its currency is a fundamental duty
of government.
The Goldsborough bill recognizes that obligation and applies it
to modern conditions.
Maintaining the integrity of currency is more than the ancient
duty of preventing sweating of coins, counterfeiting of paper tokens.
It is just as disastrous to allow currency to appreciate as to
depreciate. It is the duty of the Government to keep the value of
currency stable in relation to commodity prices.
Abnormal change in a nation's money unit, whether up or down,
entails the greatest injustice and can eventually destory its whole
economic structure.
Distortion of the money unit will eventually bankrupt all debtors,
and thus in turn all creditors. The debtor goes broke first and in
turn wrecks the creditor bank.
Who is guiltv of this terrible injustice? The Government which
failed to stabilize the value of its monetary unit.
Confusion in the discussion of currency arises from the natural
tendency to think only of cash currency issued by the Government.
This country's medium of exchange is largely credit currency.
Actual currency plays a very minor part in our economic system.
In normal times we have more than $65,000,000,000 of bank deposits, counting savings deposits, as against less than $5,000,000,000



of actual currency in circulation. Tlie business of this country is
done by the exchange of bank credits. Even the housewife and the
boy at college have checking accounts.
The value of the dollar is fixed b}^ a combination of four elements:
(1) The quantity of credit dollars on deposit in banks, eliminating
interbank deposits; (2) the quantity of cash currency in circulation;
(3) the velocity with which these credit dollars and cash dollars circulate; that is, the frequency with which they change hands; (4)
the amount of wealth that is for sale.
The fewer dollars, both credit and cash, the higher prices. But
even more important than quantity of dollars is the velocity of
I do not believe it has been mentioned at this hearing this morning that the bank clearings of 179 reporting cities dropped from
$700,000,000,000 per annum to a vnta of less" than $800,000,000,000
per annum at present; and I think that drop in bank clearings is a
more important factor in the value of the dollar than quantity of
dollar?. If the dollar becomes sluggish and does not change hands,
it becomes harder to get and therefore more valuable. There has
been more of a drop in the velocity of the dollar than there has
been in the quantity of the dollar.
The process of deflation is self -accelerating; that is, as the dollar
becomes more valuable prices go correspondingly lower—and every
merchant to-day will say that one reason business is declining is
because people are waiting for the prices to go lower, because they
have seen them declining from month to month.
The longer people hold their dollars the more the condition tends
to intensify itself. First, because the owners of dollar sense that
their dollars are becoming more valuable, or that prices are going
continually lower. Therefore, they use their dollars less and less
frequently, and bank clearings continue to go down.
Secondly, because as debtors become bankrupt creditors are forced
to wipe out credits and to refuse new credit, and so the general
volume of bank credit shrinks.
A dollar, whether it be hoarded or left idle in the bank, has a
velocity of zero, and therefore might as well not exist. The only
way to arrest this process of deflation is to make the owners of dollars feel that their dollars are becoming less valuable and therefore
should be changed into other forms of wealth. The moment prices
start to go up, and the value of the dollar starts to go down, these
sluggish dollars will start to change hands with increasing rapidity.
The people will go to the stores to change their dollars into merchandise, to the markets to change their dollars into securities or
real estate. Business will revive and tjie deflation will have been
While the Goldsborough bill is right in principle, it will be dangerous in execution unless joined with it is some protection to the
gold reserve of the Nation.
The Philadelphia. Record took this stand six months ago and, as
far as I know, is the only eastern newspaper in this position. We
believe that during the process of bringing the dollar down to its
former value, our gold reserve should be protected by an embargo



similar to that declared by President Wilson in 1017. The President should be given the right to declare an embargo if necessary.
The Goldsborough bill, as originally introduced in the House, proposed that the same result should be accomplished by allowing the
Federal Reserve Board to vary the gold content of the dollar. I
will not discuss the relative merits of these two methods.
But one or the other is essential to the orderly accomplishment
of stabilization of the dollar. Just as too much thought has been
given to actual currency instead of credit currency, so too much
emphasis has been placed upon the importance of maintaining our
gold standard. We are apt to think in terms of several generations
ago, when the business of the country was largely transacted in cash
currency. Credit currency in banks played a secondary role previous
to 1800. Through the past several decades that condition has been
completely changed.
The value of gold is really fixed by the condition of credit currency.
Strange as it seems, the value of the gold dollar varies according to
quantity and velocity of credit dollars. Ours is as much a managed
currency to-day as if we had no gold standard.
Whether the world eventually is to remain on the gold standard
or adopt some other standard is not pertinent to the problem before
this committee. What is pertinent is the immediate effect of inflating the currency upon our gold reserve. The more currency, whether
it be paper notes or credit, that is issued by any country against a
given gold reserve, the more tendency to put gold at a premium and
therefore to drain it from the Treasury.
Because inflation has been allowed to go so far it will be necessary
for the Federal Reserve Board and the Secretary of the Treasury
to issue great quantities of new currency in order to arrest and reverse the process. It would immediately cause a gold raid on our
Treasury. In the process foreign and domestic investors would
dump their securities at any price in order to exchange them for gold
and take gold out of circulation in this country. This could cause
an intensification of deflation until all the gold was gone.
The Wilson administration recognified this obvious principle of
economics. President Wilson asked Congress to authorize a gold
embargo, and Congress granted him this power in June, 1017. He
exercised it on September 8, 1917, the day after the House had
unanimously passed an $11,000,000,000 war credit.
It is the Record's slogan that we must fight the depression as we
fought the war, that we must declare a gold embargo or some other
form of gold protection at the same time that we increase our currency to stabilize the value of the dollar.
If we do not provide such protection, we will be eventually forced
off the gold standard under "the most destructive and humiliating circumstances.
The CI-IAIRMAX. That is very interesting, and we appreciate your
coming down and are very glad to have you with us. We thank you
for coining, and we will excuse you now.
Is Mr. Wallace here?
Mr. WXVLLAOE. Yes, Mr. Chairman.
The CHAIRMAN. Mr. Wallace, of Wallace's Farmer, of Iowa, will
be the next witness.




Mr. WALLACE. My name is II. A. Wallace. I am editor of Wallace's Farmer, Des Moines, Iowa, a paper that has about 250,000 circulation, largely in Iowa, but in many other States in the Middle
I also have been vice president of the Stable Money Association
since 1921.
The CHAIRMAN. YOU may proceed in your own way, Mr. Wallace.
Mr. WALLACE. I noticed from your morning discussion that there
was question as to whether the purchases of the Government securities would really take effect on the price level. And there seemed
to be confusion in some of the Senators' minds as to the precise
machinery by which it would take effect. Anticipating that discussion, I prepared some figures showing the way in which the credit
manufactured by the Government purchases thus far had been absorbed.
The $500,000,000 of purchases of Government bonds since March 1
has been absorbed, first, by the paying off of about $350,000,000 of
indebtedness to the regional banks. Next, it has built up during the
past month about $200,000,000 additional in demand and time deposits. This is in the weekly reporting member banks. There has
not been, as yet, any expansion in the total loans and investments^
and that is the part which has effect on the price structure. There
may have been this past week—I have not seen the reports this past
week—but it is right on the point of taking effect there, because the
borrowings from the regional Federal banks have been now cut down
to such a small amount that the increases in deposits should soon
flow over into increases in loans and investments. I would say, from
my own study of Federal reserve credit, that the thing would spill
over into loans and investments in a very short time.
I would like to call the attention of the committee to the way in
which loans and investments of weekly reporting member banks
have acted during the past four years. You have here a chart
covering the period from 1029 to date. You will notice that up to
May, 1931, the loans and investments did not vary greatly but that,
beginning in May, 1931, loans and investments took a nose dive, until
in late April of 1932 the low figure of $19,033,000 was readied, which
is nearly $1,000,000,000 less than a year ago.
This continuous nose dive in the loans and investments (the most
active indication of credit) has been alarming since May? 1931. I t
is a thing altogether unprecedented in modern banking history.
Those of us who have stood for this Goldsborough bill have been
exceedingly pleased by the active open-market operations of the
Federal reserve system since the 1st of March, and especially during
the past four weeks. We feel that if this activity is continued
steadily for several months—we would not care to say just how
long—it would accomplish the objective which we have in mind.
Senator COTTZEXS. When would you say the objective would be
reached? What would be the objective?
Mr. WALLACE. In the Goldsborough bill the objective is stated to
be a price level.
Senator COUZENS. Yes, I know that.



Mr. WALLACE. In my own mind, Senator Couzens, I would feel it
somewhat more desirable if the objective were to restore loans and
investments of the member banks to where they were when the
depression began.
Senator COUZENS. That would be more specific, would it not?
Mr. WALLACE. It seems to me it more nearly describes the mechanism.
Senator COUZENS. DO you think that could be reached in several
months, did you say ?
Mr. WALLACE. The first effect of further purchases of more Government securities would be increased deposits. That is the first
effect. That thing has already taken place to the extent of $200,000,000 in these reporting banks. And their borrowings from the
regional banks are now so small that there will not be any more pouring of water down that rat hole. Then, the pressure will be for
further loans and investments. Therefore, it would seem to me to be
altogether probable that another $100,000,000 of purchases of securities would be reflected in loans and investments. In other words,
credit would be on the way to be cheap and abundant. It would be
crying for use, and the fact that it is cheap and abundant would
shift the psychology of our people from " credit " to tangible physical
Senator COUZENS. YOU would amend the bill in that respect ?
Mr. WALLACE. Yes; I have the draft of a bill here which I think
more nearly describes the mechanism.
Senator COUZEMS. Will you read it into the record?
Mr. WALLACE. I have some whereases here which are not altogether appropriate, I think.
Senator COUZENS. Read it anyway.
Mr. WALLACE. It reads like this:
Whereas the Federal reserve system has ceased properly to function as an
agency i'or accommodating commerce and stabilizing prices and has allowed
deposits to decline by $10,000,000,000, thus crippling commerce, disorganizing
agriculture, and throwing labor out of employment, the Congress of the United
States hereby directs the Federal reserve system to raise the price level by the
following means:
1. Restore the reserve balances of the member banks to the 1927-28 level.
To bring this to pass the Federal reserve system shall, within three months
of the passage of this act, purchase whatever volume of Government bonds are
necessary to a accomplish this end.
2. Thereafter reserve balances of the member banks shall be held at the
1927-28 level as a minimum.
3. Furthermore, these reserve balances shall be increased at the same percentage rate of growth as the long-term rate of growth in production of
physical goods.

And you might put in a fourth, providing for a variable gold
standard, if you felt unusually cautious.
That is essentially the reciprocal of the Goldsborough bill. It
looks on physical production as being a safer criterion of expansion
than the price level. According to our studies of past prices in
relation to credit, we would conclude that the actual working out
would be identical.
Senator GORE. Would be what?
Mr. WALLACE. Would be identical; you would get the same result.
Senator GORE. I did not catch the word.



Mr. WALLACE. I have noticed since the passage of the Goldsborough bill in the House a number of inspired articles in the
Senator COTJZENS (interposing). What do you mean by inspired
Senator GORE. Are you a newspaper man, Mr. Wallace?
Mr. WALLACE. Yes; I happen to be the editor of Wallace's Farmer
and the Iowa Homestead.
The CnAimiAN. You know what a newspaper means, then; you
can pick them out when you read them, can you?
Senator COUZEXS. Frankly, I would like to have your definition
of an inspired article while you are here.
Mr. WALLACE. Well, there are a number of newspaper men present.
I have a friendly feeling for them, of course.
Senator COUZENS. This is a good time for an open confession.
The CHAIRMAN. YOU do not have to answer, unless you want to.
I am sure the members of the committee would like to have you
Senator COUZEXS. Mr. Chairman, I insist on it.
Mr. WALLACE. Well, the point is that many editorial writers are
true to their bread, are true to their salary; and many publishers
are also true to their financial backers; and that the financial
backers, in turn, are true to their original source of support, and
that that original source of support feels that it has more to gain
from having credit periodically scarce and high priced, and periodically abundant and low priced; that that fundamental source of
support prefers to allow the—shall we say the insurance of price
structure—to be borne by the producers of commodities, rather than
to have that insurance of uncertainty which is characteristic of
all things borne by the banking system. Therefore, I do not blame
these folks for being true to their bread all along the line, but I
thing it is wise to recognize the way in which some of these things
Senator COUZENS. I am looking for information. When you read
one of those articles, just how can you tell whether it is genuine
or inspired, if that is the distinguishing factor?
Mr. WALLACE. Of course, you learn to know that this paper represents one thing, and this another interest; and you may know the
men who write these things. And you know how they feel themselves internally, and how they write.
Senator COUZEXS. I am trying to learn so that I will know when
an article is inspired.
Mr. WALLACE. Of course many of these writers feel honestly about
the thing, so far as that goes.
The situation is that at the present time if we adopt the Goldsborough plan there is danger that we will engage in inflation like
the Germans did; an inflation like this country engaged in following
1(S37, the Andrew Jackson inflation: or we may g^i into an inflation
of uncertainty, like 1873: or that we may get into a free silver and
fiat money campaign, as we did in the nineties.
The suggestion is made that we are now in another situation like
that, and "til at the fanners and others are prepared to do very foolish



things which will lead toward a shaking of the confidence of the
entire world in the financial structure of this country.
I would call the attention of the members of the committee to this
fact: That at the present time the relationship of the United States
to the rest of the world is totally different from what it was in any
of those three preceding periods^ and totally different from the German situation which began at the close of the war; that we have 40
per cent of the gold of the world; that we are, from a financial and
economic standpoint, the storm center of the world; that what we do
with our money here can determine the price structure of the entire
Senator CorzENS. Is it not a fact that this is the first great depression that we have gone through when we were a creditor nation?
Mr. WALLACE. Yes; it is true that this is the first depression that
we have gone through when we were a creditor nation.
Senator COUZENS. And that is what I would wish the public to
understand, that we do have a different situation.
Mr. WALLACE. We are not in a situation of peril with respect to
our fundamental soundness as we were at the time of those other
price depressions. And it is very important, I think, for these
bankers and this committee to recognize that fact.
Of course, you gentlemen are perfectly familiar with the fact that
we have been on the gold standard in the past 10 years, on a supergold standard; that if we had been on the old-fashioned gold standard our prices would have gone up and our gold would have flowed
out to the other countries. It may have been wise to sterilize this
gold. You are familiar with that, of course.
The CHAIRMAN. DO not assume that we are familiar with anything, and go ahead.
Senator WAGNER. I was going to suggest that.
The CHAIRMAN. YOU state your point briefly to cover that very
ground so that it will connect up with the rest of your statement.
Mr. WALLACE. Well, before the war this country had about 18 per
cent of the gold of the world. Since the war we have had, at varying times, from 38 to 46 per cent of the gold of the world. We have
gold which, if used with the utmost economy, would have permitted
a price structure anywhere from two times to three times what we
have now.
I am, to some extent, giving that statement on the basis of a statement made to me by the statistician of one of the leading Federal
reserve banks.
Senator GORE. NOW, have you figured out in that connection how
much our trade and production have increased as related to the
trade and production of the rest of the world ?
Mr. WALLACE. This particular gentleman is an expert on calculating the volume of total production in this country and the total production in the rest of the world, and I am sure, in making that statement he had that in his mind.
In this money problem the first thing, of course, is to hold an evenhanded justice between classes and between nations. The second
one is to handle it so as to make possible as high a standard of living as possible. And the third thing is to prevent, as much as pos-



sible, purely monetary things entering into production problems and
disorganizing them.
I think we all realize that the reason we are so badly offcenter
IIOAV is because of the war, and we do not want to blame on the
money system things that have grown out of the war.
But we also realize when a great war comes along, that everything is thrown so badly oifcenter that monetary mismanagement
can produce a continuing offcenter influence. The men who feel
that everything revolves around money have been in a position to
minimize the shock to themselves, and the result has been that the
shock has been passed on to those who are engaged in the production
of goods.
Senator COUZENS. In the consideration of that question, have you
given any consideration to what we should do with our surplus earnings? That is, not only in the production system.
Mr- "WALLACE. I think you are quite right, and if you were going
into that I would have some man like Mr. W. T. Foster, who is well
versed in consumption economies, come before the committee and
tell you about savings of that kind.
Senator COUZENS. I mean by that, do you think we have gotten
past the point where we should take our surpluses and put them into
productive industry ?
Mr. WALLACE. YOU are getting around to planning, of course ?
Senator COUZENS. Not exactly that, but here is a class of business
that is called productive, and some is not productive, and the theory
that we have been going on for years is that our savings, and all
of our savings, should be used in productive industry. Does it not
occur to you that the place we are at now indicates that we have carried that too far ?
Mr. WALLACE. YOU mean there is an overproduction in certain
classes of goods?
Senator COUZENS Obviously.
Mr. WALLACE. And that that should be shifted over to other classes
of goods ?
Senator COUZENS. Not exactly, but to the building of schoolhouses
and theaters, and institutions for the common good, that are not
Mr. WALLACE. I would say the place where I would step in is to
bolster up the export market—you see, I am speaking from the agricultural viewpoint; I am from the agricultural country. I would
first bolster up the export demand for our surplus cotton, which is
one-half; our surplus wheat, which is one-fourth; and our surplus
automobiles, which are one-tenth, so that the foreign demand for
those particular products would restore purchasing power to our
farmers and thus put the laborer to work. Being from the agricultural region, I approach it from that angle. I appreciate, from
Senator Gore's questions of the morning, that there is trouble in
Oklahoma because of surplus wheat and cotton.
Senator COUZENS. Since you make that proposal, how are those
countries going to pay us back ?
Mr. WALLACE. Of course, that gets you into the field of gradually
reducing the tariff.



Senator WAGNER. Are we not going to have to face that problem
sooner or later?
Mr. WALLACE. I think, Senator Wagner, regardless of whether we
are Republicans or Democrats, we must decide whether we are going to go the route of isolation or the route of world cooperation.
Senator GORE. In other words, swap surpluses.
Mr. WALLACE. Yes; and I think that thing is so big and so crucial
that it must be approached without regard to party.
Senator WAGNER. IS not that confronting us now?
Mr. WALLACE. I think it is even greater than the money thing.
Senator COUZENS IS not the money thing the second thing?
Mr. WALLACE. I think the money thing is exceedingly important,
and in view of the present emergency the decline in loans and investments which has taken place in the last nine months, which is going
beyond all resistance points I would say, from the short-time point
of view, that the money thing is the most important immediate
problem. At the same time we should endeavor to decide between
the path of isolation and the path of world cooperation. But it
may take several years before we get to facing that clearly.
Senator COUZENS. In the meantime we had better follow the isolation policy, in the three or four years?
Mr. WALLX^CE. That is what Dean Donham of Harvard says. I
would not say we should be bound irrevocably to that policy.
Senator COUZENS. We do not bind ourselves irrevocably to any
policy. We have to make a policy as circumstances arise.
Mr. WALLACE. In the meantime you have a very, very acute
Senator WAGNER. I have a question, Mr. Wallace, and perhaps
you can answer it.
Mr. WALLACE. Pardon me.
Senator WAGNER. What are we going to do with our surpluses of
wheat and cotton?
Mr. WALLACE. YOU mean if we go the isolation route ?
Senator WAGNER. Yes; and is not that a shaking up of our economic structure ?
Mr. WALLACE. Decidedly so. What that brings you to is this:
Either revolution, or State socialism. On the one hand you are
going to beat the farmers over the head with low prices until you
get less production; and on the other hand you are going to have
a system of bureaucracies to say that this State shall grow 8,000,000
acres of corn instead of 10,000,000 acres; that this county shall grow
100,000 acres of corn, instead of 150,000 acres; and this farmer shall
plant 40 acres instead of 50; and those farmers that have been
displaced are to be moved by a population bureau to certain factories. And you are going to have to develop unemployment insurance and similar devices from one end of the Nation to the other.
I am not condemning the thing; I am just saying that you must
have infinite bureaucracy if you are going to go Senator Couzen's
Senator COUZENS. Just a minute. You call it my route. I call to
your attention that yesterday Senator Eobinson of Arkansas introduced a bill that is the most socialistic bill that has been presented,
calling for the loaning to the State of $2,000,000,000 for industries



that are self-supporting, and various other features. That is not
my idea.
Senator FLETCHER. That has nothing to do with the isolation.
That is an emergency matter, is it not ?
Senator GORE. The force in your point is that each nation shall
become independent as an economic unit. You do not have in the
back of your idea that each farm shall become an economic unit and
stop trading with the neighbors?
Mr. WALLACE. We are trending that way. I deplore it, but we
are fast trending in that direction.
Senator GORE. DO you not think that one is as bad as the other
as a final policy?
Senator COUZENS. We

are not talking about a final policy; we
are talking about conditions.
Senator GORE. I realize we do not have a choice as to what other
nations do to us. They enforce their ideas on us more or less.
Mr. WALLACE. Senator Gore, the idea the bankers have is to be
thrifty and not spend any money. We have all been naughty and
have been spending too much money, and the idea is that we shall
not spend our money.
Senator GORE. What money?
Mr. WALLACE. The money that we owe the bankers, is what they
are talking about. They would lead us back to pioneer days—they
would lead us straight back to the cave, in an ever descending spiral
of liquidation and reduced consumption and reduced production.
Senator COUZENS. And they are trying to force the Federal Government into the same policy.
Mr. WALLACE. Yes, as Congressman Busby said this morning,
when you get prices lifted, prosperity will return automatically and
you will not have to worry so much about budgets and cuts.
I think I had better return to the bill, do you not think,
gentlemen ?
Senator FLETCHER. YOU do not advocate a policy of extravagance,
instead of thrift? Do you not think this whole thing depends largely
on the practice of each and eveiy man ?
Mr. WALLACE. Senator Fletcher, I believe we have a scientific understanding, mechanical knowledge, and methods of mass production
sufficient to enable us to enjoy a standard of living at least twice as
high as we had in 1929. And I think we can have such a standard
of living when our hearts are in the right place and we have up-to
date machinery for industrial and social justice equivalent to our industrial progress and development. Monetary policy is a part of
•that machinery.
Senator GORE. DO you not think, Mr. Wallace, that in 1929 we
were in a speculative delirium, and that that is what is the trouble
with us: that is what we are going through now? The judge and
the janitor and the waitress and the heiress were all dealing in this
stock market, and they knew nothing about the earning capacity
of the stocks, and cared less about it, as long as they could buy one
day and sell the next at a profit. Did we not run away with
ourselves ?
Mr. WALACE. Did your farmers in Oklahoma do that, Senator



Senator GORE. I do not believe the farmers did it so much; they
were broke long ago; they took theirs in 1921. They are on the
board of trade a little, but I do not think they are in this stock
Mr. WALLACE. Senator Gore, wouldn't you suggest, to control that,
certain powers of moral suasion located in the Federal reserve?
Senator GORE. I remember, in 1921, there were suggestions that the
Federal reserve take steps to correct that delirium, and I think the
public would be ready to keep the admonitions of the Federal reserve.
The CHAIRMAN. It was in the spring of 1928 that this committee
recommended a resolution asking the Federal Reserve Board to take
Senator GORE. In 1928 ?
The CHAIRMAN. Yes; and we could get no support in the Senate,
much less the Federal Reserve Board.
Senator GORE. Yes; nobody wanted to stop the runaways.
Mr. WALLACE. In conclusion, I would like to give you this, gentlemen, which appeared in our issue of May 14. It is merely a suggestion that we are getting ready out our way to look at this problem
from a moral and religious standpoint. You see, we live in what
H. L. Mencken calls the Bible belt out there. Some of us still read
the Bible out there. We believe in the message of the old prophets
about justice between classes and justice between nations, and we
look on this money thing as fundamentally a problem of that kind.
And this particular article gives quotations from some of the old
prophets, including, incidentally, that one from Leviticus, about the
year of jubilee.
And bringing the matter up to date we quote from the Royal Bank
of Canada—
Can it be that had the growth of credit paralleled the increase in the volume
of production and trade, there would have been no substantial changes in the
general price level, no major business cycles, nor booms, no severe depression?

These comments are made relative to a chart which proves these
facts. [Continuing reading:]
This is indeed a startling concept, affording the hope that the social injustices
which are inherent in all major changes in the general price level might be
avoided by a proper control of credit. This is surely a counsel of perfection
which is not fully attainable in human affairs, but it is clearly within the
power of the great central banks, through appropriate rates of interest and
open-market policies, to control, within certain reasonable limits, too rapid an
increase in the volume of credit, and also to prevent contraction of the normal
growth of credit, which is the basis of the present world tragedy.

There are many others to speak here, and I do not want to take
any more of the committee's time.
Senator GORE. DO you want that in the record ?
The CHAIRMAN. DO you want that published in our record, Mr.
Wallace ?
Mr. WALLACE. YOU can use your own judgment about that.
The CHAIRMAN. It is not long. I suggest that you have it printed
following your remarks.
Mr. WALLACE. Thank you, gentlemen.
The CHAIRMAN. Thank you, Mr. Wallace.
(Article from Wallace's Farmer, presented by Mr. Wallace, is
printed in the record in full, as follows:)




Dcs Monies, Iowa, May l/h 1932.


(By Henry A. Wallace)
The Jewish prophets
of old undoubtedly lived in times somewhat like these.
They cried out i or justice but know that justice could not come until the
spirit of fairness and understanding permeated the hearts of all the people.
With a far-seeing spiritual eye, they looked toward the day when there would
be justice between the classes and justice between the nations, and universal
peace would prevail.
To-day the peoples of Ihe world have in their hearts intense prejudices, prejudices which work out to cause them intense suffering. When we hate foreign
nations and refuse to lower our tariffs and refuse to lend them money, they
must of necessity refuse to buy any large quantities of wheat, lard, or cotton,
or anything else, from us. And then the very folks who hate the foreign
nations are faced with low prices for the stuff they have to sell. They squirm
around, not knowing what has happened to them. If it is suggested that, they
should study the world situation and adjust their production to a domestic
market instead of to a world market, they become angry.
Prejudice, ignorance, and fear are the only things which now keep us from
enjoying a standard of living at least twice as high as that which we had at
the best time during the past 15 years. We have the necessary machinery,
the inventive genius, the scientific understanding, and mass production of a
type which would enable us to turn out two or three times as much goods per
capita as we are now consuming. Moreover, this production could be accomplished without it being necessary to work more than seven hours a day.
The dragons which stand between us and the promised land are hatred,
prejudice, and fear. These great dragons are striding back and forth across
the entire world, and are making themselves felt just as much in the Corn Belt
as they are in Washington or New York City or France or Germany.
To slay these dragons, we need understanding people with tolerance in their
hearts, who are hungry for a machinery for social justice. More and more,
this intense desire for justice is becoming a passion in the hearts of the people.
But we have yet. to see whether this or the bitterness which makes for revolution will grow the faster.
The Jewish prophets only went part way in their search for justice. From
a religious point of view they were doubtless perfect in their presentation, but
from an economic point of view it is necessary to work out a definite machinery.
For the first time in the history of the world such machinery is now possible.
We now know how to measure definitely the physical production of goods
all over the world and the production of effective bank credit. We now know
in a definite way that prices are a direct ratio between the quantity of credit
on the one hand and the quantity of goods on the other.
The Royal Bank of Canada, in writing a year ago on this idea of machinery
for social justice, said:
" Can it be that had the growth of credit paralleled the increase in the
volume of production and trade, there would have been no substantial changes
in the general price level, no major business cycles, no booms, no severe
depressions? This is indeed a startling concept, affording the hope that the
social injustices which are inherent in all major changes in the general price
level might be avoided by a proper control of credit. This is surely a counsel
of perfection which is not fully attainable in human affairs, but it is clearly
within the power of the great central banks, through appropriate rates of
interest and open-market policies, to control, within certain reasonable limits,
too rapid an increase in the volume of credit and also to prevent contraction
of the normal growth of credit, which is the basis of the present world
A just monetary machinery is. oi; course, only a part of the problem with
which the world is confronted. We must at the same time have a just social
machinery so that we may plan more accurately the adjustment of production
to consumption year by year. To some extent this may perhaps mean a type
of bureaucracy, but. after all, bureaucracies are not so terrible except when
they are lazy and selfish or when they are run for private gain by wealthy
outside interests.



When our people get over their " grabby " pioneer tendencies mid become
genuinely convinced of the desirability of justice in the distribution of the
national'income, we may expect to see a reconciliation between capitalism and
communism which will be quite surprising in the results that it achieves.
Chnnges during the next 10 years will be rapid, and it is very important
that the suffering during this period should finally bring about social justice
instead of the disorganization which so often results from sudden revolution.

«"Woe unto them that * * * turn aside the needy from judgment, and
* * * take away the right from the poor of my people, that widows may
be their prey and that they may rob the fatherless."—Isaiah.
" Hear this, O ye that swallow up the needy, even to make the poor of the
land to fail. Saying, When will the new moon be gone, that we may sell
com? And the Sabbath, that we may set forth wheat, making the -epah
[the Hebrew bushel] small and the shekel great, and falsifying the balances
by deceit? That we may buy the poor for silver and the neody for a pair
of shoes."—Amos.
''And ye shall hallow the fiftieth year and proclaim liberty throughout all the
lands unto all the inhabitants thereof; it shall be a jubilee unto you; and ye
shall return every man unto his possession."-—Leviticus.
"And he shall judge among many people, and rebuke strong nalions afar off:
and they shall beat their swords into plough shares and their spears into pruning
hooks; nations shall not lift up a sword against nation, neither shall they
learn war any more. But they shall sit every man under his vine and under
his fig tree; and none shall make them afraid; for the mouth of the Lord of
Hosts hath spoken it."—Micah.
The CHAIRMAN. Mr. O'Neal, president of the American Farm

Bureau Federation, is the next witness.

Mr. O'NEAL,. MY name is Edward A. O'Neal. T am president of
the American Farm Bureau Federation, with headquarters at
Chicago, 111.
Senator Norbeck and Senators, as we have such a distinguished
committee here and a large number of the committee, I just want to
say very briefly that I think this is the most important question before the Nation. If you gentlemen in Congress do not settle it, I
do not know what is going to happen to the country; and I want to
say this, that I would like to file my statement here,"otherwise I shall
read it out; but time is so valuable to you gentlemen.
We are very whole-heartedly for the Goldsborough bill, and for
Senator Fletcher's bill. But 1 would like you gentlemen to devote
your time to this matter, and I yield my time to one of the most
distinguished economists of the Nation and of the world, who will
throw more light on this in his discussion than I would if I talked all
day. I refer to Doctor Warren. That is all I will say, unless somebody wants to ask me some questions.
Senator COTJZENS. I do not know how we can ask you any questions
if we do not know what you are going to say.
Mr. O'NEAL. Senator, all I wish to say is that I am for this bill.
Senator COTJZENS. I do not like a statement going into the record
without a chance to examine the witness.
Mr. O'NEAL. I hate to take this time. At some subsequent time
I can read you my statement and submit to any questions.



The CHAIRMAN. He is subject to call at any time.
Senator GORE. Yes.
Senator COUZENS. I think it is unwise to put a statement into the
record when Senators are present to hear it and to ask questions if
they care to. I think it is a bad policy, and I would not permit it
if I were chairman.
The CHAIRMAN. It is one we have been driven to by lack of time.
We would all prefer to have him discuss it at length.
Mr. O'NEAL. I would be glad to do it. But I think that you would
get more from hearing the statement of the distinguished economist,
Doctor Warren, of Cornell.
The CHAIRMAN. There is no conflict between you and the doctor?
Mr. O'NEAL. NO ; none at all.
The CHAIRMAN. Then we will ask him some questions.
Mr. O'NEAL. I will be glad to answer questions at any time.
Senator FLETCHER. I think the statement should go into the record.
The CHAIRMAN. Unless there are objections, it will be printed in
the record. [After a pause.] It is so ordered.
(The statement of Mr. O'Neal is here printed in the record in full,
as follows:)

In appearing before you this morning to support the so-called Goldsborough
bill, H. It. 11400, I am not acting for an organization which hastily has come to
the conclusion that something needs to be done in regard to establishing the
purchasing power of money. This problem has been discussed in our organization for several years.
In 1027 we stated " We indorse the effort now being made in Congress to effect
a stabilized pri<e level and stable purchasing power of money through additional instructions to the Federal Reserve Board.*'
In 1931 fit our last annual convention we adopted a very complete and studious statement in regard to the monetary problem, which I desire to incorporate
into the record but will not read at the present time unless members of the
committee desire to hear the resolution.
" The present period of depression and the falling price level has increased
the burden of taxes, interest, debts, and other fixed costs on all producers to an
intolerable degree. It now requires 45 per cent more of all commodities, and
70 per cent more of farm commodities, to pay these costs than it did a few
years ago. The long-continued deUation is crushing farmers, merchants, transportation agencies, and all manufacturers except a few most favorably situated
and has caused a declining price of property to such an extent that it has
largely eliminated equities and is effecting basic securities to such an extent
as to seriously impair the stability of our banking and insurance institutions,
thereby endangering the welfare of the general public. It is causing a lowering of all wages and salaries, a process which has only started and which must
of "necessity lower the standard of living if continued.
"The principal cause of this deflation of values is monetary. When the
price of any one commodity falls, many causes may be responsible. When
the average price level of all commodities fall with the rapidity of the last
few years, the principal cause is a shortage of money and credit in actual
use. Commodity prices are expressed in this country in terms of dollars.
Every purchase and sale is the exchange oil commodities for dollars. When
dollars are scarce, it takes a larger amount of commodities to get them. In
other words, money is at one end of the balance, commodities at the other.
Add to the effective supply of money and prices go up. Reduce the effective
supply and prices come down. The above statements are justified and supported by the incontrovertible evidence coming from the experience or' all
former depressions.



" The problem divides itself into two parts; first, the restoration of the price
level; and second, the stabilization of the purchasing power of money."
Prior to this action on the part of the American Farm Bureau Federation
there had been set up a committee to study the general problem now contained
in I-I. II. 11490. The result of six months' activity on the part of this committee was a definite statement of position- of our entire organization as contained in our last resolution just above offered.
We are following this program through at Washington. We have appeared
before the House Committee on Banking and Currency along with the other
two farm organizations—the National Grange and the Farmers Union—together
with much support from many sources. That committee has reported, and
the House has adopted, with a gratifying majority, the bill now pending before this committee in regard to stabilizing the purchasing power of money.
An indication of public sentiment and of the studious consideration which has
been given this measure is had in observing the speed with which the bill has
moved through the usual process on the House side and the almost overwhelming vole with which the House approved it. This evidence of support,
however, is no" greater than that given the idea contained in this measure by
the general public.
Editorial writers in our best magazines and in our daily press are not unanimously in favor of the idea contained in this bill but are so observant of the
general good effects of the measure that few definite points of opposition are
discovered. Singular to state, the few opponents which the measure seems
to have are very largely in those centers to which reference commonly is
given by naming them the money marts.
The question is logical in our minds whether or not this Nation should go
much further along what seems to be its present course of forming all legislation to benefit first the aggregation of wealth. In this connection may I there
say there are two ways to approach a legislative problem such as that which
we are considering to-day. First, it may be approached in regard to its effects
on what I may call giant industry; or in a second way, it may be approached
in regard to its effects on the people as a whole. I may be permitted to observe
that legislation thus far passed this session of Congress seems largely to be
of the first classification. H. It. 11499, however, will have its beneficial effect
on the great masses of our people in bringing more nearly into equilibrium
the prices of the commodities purchased and sold by the .people whether on
the farms or in the cities with the prices of our monetary standard.
The American Farm Bureau Federation in all of its approaches to legislative
projects surveys their effects on the common people. It is our belief that if
the people can be made to be thrifty and prosperous in due time all else in
our Nation will become prosperous. We antagonize the seemingly current
idea that all must be made well for gigantic aggregations of wealth, after
which the common people will be made servilely happy by infiltration of
prosperity from above, by the droppings of crumbs, so to speak, beneath the
Lazarean tables of the rich.
This bill is, however, when scientifically examined, not a poor man bill.
Nor is it, as I have just stated, exclusively a farm measure. It is a bill which
will stabilize our entire economic structure so far as money matters can
stabilize that structure all the way from the biggest bank or trust company
in our Nation down to the least conspicuous industrialist or farmer in our
Nation. The tendency of the measure will be in effect that when a citizen
has something to sell, whether it be his time expended in labor, his products
raised on the farm, or his industrial products fabricated in his plants, a
condition will be brought to pass which in soiling these commodities in exchange for a unit of value will be fairer than it is now, and ordinarily has
been in times past.
To show the need of this legislation on the part of banks as well as the
average citizen, may I state that in excess of 8,000 banks have closed since
1923 in this Nation of ours. The American Federation of Labor gives us
various estimates as to the unemployed, which estimates run from five to
seven million individuals, I believe. In Mississippi, according to recent press
reports, one-fourth the farms in that State are being foreclosed under the
sheriffs hammer for taxes. These incidents show that our banking interests,
labor, and agriculture are alike in desperate condition.



Among the causes, differing in name and nature, which have brought on
such a calamity, a main contributing cause is that the people of the country
having something to sell, whatever it may be, on account of the high prices
of the dollar, are required to exchange more units of whatever commodity
they offer for sale to secure the dollar. We assert the previous inflexibility
of the value of the dollar is a false standard if we really desire to secure
stability in our economic structure and a more noticeable equilibrium in the
prices we secure for whatever commodity we may produce and sell.
All this has caused a slogan to be used known as the honest dollar. We
do not mean to assert that the present dollar of itself is dishonest but manifestly does create a false standard when commodities of any form are required
to be exchanged for it year after year.
The bill now pending does not check, does not even infer, that there shall
be any fundamental change in our monetary system, so far as the basis, gold,
of that system is concerned. In fact the pending measure is an effort to lit
into our monetary system, whatever it may be, a recognition of commodity
values as well as a continuation of monetary values of undoubted integrity.
We are not asking an abandonment of present monetary standards. We are
merely asked, and in the asking, expecting, that Congress will realize the
necessity to put at work all instrumentalities and powers resident within
the Federal reserve system to stabilize juices somewhat on that average which
existed between the years 11)21-1029 inclusive, as stated in the present law.
I have a supplemental statement to the above introduction to our position
which I shall be glad to file for inclusion in the record.
" Money, the love of it. is the root of all evil, and the love of it, and the
desire for it are the chief sources of our world troubles to-day." Our worship
of the golden calf has brought disaster upon the world. The whole world has
lost faith and confidence in its money as medium of exchange. We have applied science in all our economic affairs, which has helped greatly the advancement of the human race, but not to our monetary system. Antiquated methods, no scientific development to meet the demands of modern affairs are found
to exist in our money affairs. Are we going to let this destroy our civilization?
Now, there are those who say that our capitalistic system has failed. What
is the cause? The manipulation of money in the selfish control of a few is one
cause. As the Right Honorable Winston Churchill said in an address on the
world economic crisis: "The hideous processes of deflation have but to go on
to isolate the nations and reduce them to the barbarian and barter of the dark
ages * * * Frankly, I think we are all in the same moats. * * * We
have slipped off the ledge of the precipice and are at the bottom. The only
thing now is not to kick each other while we are there."
World trade has broken down. Commodity prices have tumbled, all because
there is no adequate medium of exchange. The supply of gold, "the basis of
world exchange, has run low. It is in the hands of practically two nations—
France and the United States. How can other nations trade with us, which
have no gold? The result is the terrible increase in the purchasing power of
gold. It is the cause of the greater part of our suffering to-day. The hardships under which so many millions of our people are laboring are chieily due
to the fact that prices have so terribly dropped, bringing trouble and sorrow
and disaster by the great fall in the general price level in the last three years.
The producers of the wealth of the world have lost faith in their commodities.
Economists tell us that the deflation of the Federal Reserve Board in 1921
brought about the confiscation of wealth from its rightful owners amounting to
$40,000,000,000. The present deflation of commodity prices it is estimated, because of confiscation of wealth in this Nation has resulted in the loss of over
Not only the loss of wealth, but suicides, the wreckage of homes, the destruction of happiness, and the general discontent has brought about disaster in
the Nation.
A recent statement shows that the value of our dollar is 1G1 in our basic
commodities. How is America going to liquidate on this basis? The cotton
farmer pays his debts with cotton; the wheat farmer with wheat, the hog farmer
with hogs\md so on. This golden dollar will destroy him.
Doctor Warren, of Cornell University, in his February report shows the estimated public and private debts of the United States to be over $200,000,000,000.



He goes on to say that " most of the indebtedness doubles since 19-2 and is
about fouL' times the pre-war amount." How are we going to pay them? He
goes on to say '* the total debt is approximately $1,700 per capita, or about onelialf of the national wealth." Might I say to-day I think it is more than we
would sell for under the hammer.
We farmers can not pay in the commodities we produce that the world must
have. Unless our commodity prices are raised, American agriculture is ruined.
The papers we see daily are saying that the foreign nations are not going to
pay their debt to us. How can they, with our high-priced dollar? What does
this nieanV If they can't pay us, are we isolated, or are we to take the other
alternative? Are we going to have to light other nations of the world to collect
these debts? This was the old way. A horrible thought. Would it not be
best that we have a fair dollar, one that our foreign debtors may pay us? If
they don't and the heavier tax burden is put on us, as I say—there may be
revolution. If we do not have an honest dollar, capitalism is threatened. The
Twenty-five per cent of the farms in Mississippi were foreclosed for taxes.
The State became the owner of the. property not so much because taxes were
too high or that property taxes were out of proper proportion with other taxes,
but, primarily, because commodities produced on the farms of Mississippi
are so low in value they can not meet their fixed obligations. What will become
of this land and these people? Other great sections of our Nation, while not
in quite as bad shape, are threatened with the same situation.
France has been the wonder of the world since the French Revolution. Her
leaders have protected her farmers; and that lias been the prime object of
her statesmanship, not the building of industry and commerce. They were wise
enough to know that in protecting her rural people would mean not only success but a survival of the nation and the nation's welfare.
The policy of Great Britain lias been to build industry and commerce primarily and how she has suffered and is suffering. Let us adopt the policies
of France and we will survive through the centuries as she has. She is the
wonder of Europe and the world.
The Chicago Tribune of. Sunday, May 8, in a leading article, Steel Leaders
Asking Higher Tariff Wall, goes on to say that the American steel manufacturers, led by the iron and steel institute, have launched a concerted drive
for the exclusion of foreign steel. They are demanding higher tariffs to prevent
dumping of European steel on our markets; as one of their leaders said,
" Taking work right out of the hands of American wage earners." They say,
''While any increases which are obtained would be partly offset by the depreciated currencies of several European nations, the American Iron and Steel
Institute and many steel executives are urging the passage of an emergency
bill which would adjust the tariff to the depreciation in foreign exchange."
Hadn't these leaders better join hands with the farmers in order that we may
have an honest dollar? This would help solve this problem of theirs. Other
groups in this Nation will be making the same appeal, to raise the tariff, if
we continue our present dishonest dollar.
According to the press, some of our bankers and political leaders are fighting
our honest-dollar bill. Wish you would all read the May number Review of
Reviews; on page 10, Albert Shaw says, " This, of course, is good as far as it
goes. The local banks do not desire to be loaded up with unsalable farms;
white, in turn, the farmers' families shudder at the thought of losing their
homes and their familiar possessions. They all work desperately to pay the
mortgage interest, but all the * farm relief that we are reading about does
not emancipate the farmer from any part of his burden of indebtedness. It
does not reduce his obligations in proportion to his ability to pay. Nothing can
relieve him except higher prices for what, lie has to sell."
In spite of all the measures that have been passed by Congress to restore confidence, none of them have gone to the grass roots; none OL them have helped
to restore commodity prices. On the commodities we produce we base the
wealth of our Nation. The last report of April HO from the Department of
Agriculture, showing the average price of farm products up to April 15 last,
gives the farm-price index as 50; prices paid by farmers 314: ratio of prices
received to prices paid 52; a gradual decline in the farm-price index, still
going down. Unless there is some radical change the price the farmer receives
for his products will not pay his freight to the nearest consuming market.



The passage of the Goldsborougli Mil through the House, largely on a nonpartisan basis, was a great victory for organized agriculture. The three national
farm organizations fought hand in hand for this measure; 220 to 50, a nonpartisan vote. It was a vote to stabilize the buying power of (he dollar and
restore commodity prices.
Congress lays down a mandate to the Federal Reserve Board to use its powers
to stabilize the purchasing power of the dollar and restore commodity prices
to the average price level for the years 1021 to 1020. This is declared to be
the policy of the United States. The bill has the double purpose of restoring
eommodtiy prices and retaining that noimal price level once it is attained.
We regretted the omission of seel ion 8 in the original Goldsborougli bill
that said, " If, in carrying out the purposes of section 1. the gold reserve is
deemed by the Federal Reserve Board to be too near to the prescribed minimum,
the board is authorized to raise tho official price of gold if the oilier methods
already authorized appear inadequate: if, on the other hand, the gold reserve
ratio is deemed to be too high The Federal Reserve Board is authorized to
lower the official juice of gold if ihe other; methods already authorized appear
Frankly, gentlemen of the committee, I feel that this must be done in order
that we may control our medium of exchange. I think that currency and credit
control will go a long way to stabilize our price levels but let's do the job
thoroughly by changing our gold standard. Let's dethrone the golden calf and
make gold a servant of humanity. This will give us an honest dollar: an
honest medium of exchange; restore commodity prices. This will go a long
way to open our commerce with nations of the world and bring back confidence
to us all.
A distinguished friend, a Member of Toni^'ess. who is a great advocate for
this bill, said, "We must first have an elevation in the general level of commodity prices and thereafter stability in commodity prices. This bill, if enacted
into law, will direct the Federal Reserve Board, the Federal reserve banks,
and the Secretary of the Treasury by
their control over the volume of credit
and currency to restore the average1 commodity price level to the same level
that existed when the fanners and other producers contracted their debts."

During the war England, while theoretically holding the gold standard,
actually abandoned the gold standard because of her heavy obligations abroad.
The pound sterling was pegged at about $4.70, or slightly below par (^4.^(105).
This went along until the war closed, ilien the pound was unpegged by the
withdrawal of the Government siabilizaiion operations. The value of the
pound dropped from $4.70 to $4.4: > in 11)10, $3.6C> in 1920. In the period 10211024 the value of the pound rose somewhat, due to a more favorable position
of Great Britain in its international payments, which in itself had a tendency
to increase the value of the pound.
In 1025 the government decided to restore the gold standard. Instead of
continuing the reduced valuation of the pound, it attempted to revalue it on
a pre-war basis of $4.86 in oar money. The effect of this action was to lower
prices and thereby make it more difficult to pay debts and interest charges.
Unemployment was increased and business was stagnant. The maintenance
of the pound on a $4.8o* basis caused a continual drain on the gold supply of
Great Britain. Despite great efforis lo maintain the gold standard, it was
found necessary to abandon it on September 20. 1931, on account of the disastrous conditions created following the revaluing of the pound in 1025.
When England abandoned the gold standard and the attempt to value the
pound at the $4.86 level, the effect was to increase prices for domestic products
in England. Lard ai Liverpool increased from 42 shillings in early December
to f>8 shillings in late December. During the same period, when the United
States was pursuing a deflation policy, lard at Chicago dropped in price from
$7.50 a hundred to $r> a hundred. While there were no increases in the
prices of numerous commodities, the sharp decline in prices which had been
going on in England was greatly checked as a result of this action, and the
unemployment situation was relieved to an appreciable extent. There was
also some improvement in the export trade, particularly in the case of textiles
and 7nannf;ictured goods. The benefits to the British export trade would have



been still larger had it not been for countervailing* duties put on by countries
importing British goods.
In other words, the abandonment of the effort to maintain arbitrarily a high
value for the pound, and the decision to let it be valued by supply and demand
lias reduced the exchange value of the pound, but has resulted in increased
prices in England, greater ability to pay debts, stimulation of the business, and
improvement in the export trade.

France, instead of pursuing a deflationary policy such as was followed by
the United States and such as was followed by Great Britain in 11)2."). revalued
the franc at a level oi: one-fifth of its pre-war value. It did this by reducing
the weight, of gold in the franc to one-fifth the pre-war amount, reducing it
from 3212.5S milligrams of gold 000/1000 line to 65.5 milligrams of gold
900/1000 line. This action was taken bv the French Government on .Tune 25,
If France had attempted to revalue the franc a t the old pre-war ratio, it
would have precipitated a torrilic decline in prices because the prevailing
prices were based on the prevailing value of the franc which was about onefifth of the pre-war level. Obviously an increase in the value of: the franc to
five times the prevailing level would have resulted inevitably in a crash in
commodity prices which are valued in terms of currency.
France therefore avoided a deflationary policy by revaluing its franc at
one-tifth ol: the pre-war level. As a result no serious decline in prices took
place until 1J.W0-81. Debts could be repaid without paying back a great, deal
more than was borrowed. Farm land has a higher value than before the war.
The following extract from special circular No. 143 published by the United
Stales Department of Commerce, contains the following analysis of the favorable results expected to follow this action in France:
"A further revival of economic activity which is, with few exceptions, already
at a satisfactory level, may reasonably be expected and, if political stability
and the equilibrium of the budget can be maintained and the sound policies
that have been strictly adhered to by the present Government are continued,
France should enjoy a period of increasing productivity and growing prosperity."
The action of France shows how a government can avoid the evils of deflation and stabilize commodity values at a reasonable level so that debtors can
repay their debts, employers can keep their factories running, and farmers can
sell their products at prices somewhere commensurate with their true value.
The CHAIRMAN. Doctor Warren, please come forward.
N. Y.

The CHAIRMAN. Give your full name, your residence, and your
occupation, and your experience, please, and then proceed in your
own way.
Mr. WARREN. My name is George Frederick Warren. T am professor of Agricultural Economics, Cornell University, Ithaca, X. Y.
I have been working on the price question
for a considerable period
of time. I have been in this position for %2(J years.
I brought a very brief statement, and if you do not object to proceeding in that way I should like to read it, and then perhaps go over
the details afterwards, if that is satisfactory. I have a couple of
copies for the record. I thought perhaps some of the Senators
might want to follow it as I go through. This is a very brief state-



ment, and I think perhaps we will gain time if the questions are
left until I run through it.
All of the available statistical evidence indicates that this is much
the most serious economic crisis that has ever occurred in this
The'most violent drop in prices that ever occurred in the United
States came in 1920-21, but at that time, as in 1815 and 1865, the
high prices had not lasted long enough to cause debts and taxes to be
adjusted to the high price level.
The depressions of 1837 and 1873 were comparable to the present
crisis, except in degree. In the first three years of the panic of
1837 wholesale prices of all commodities declined 2-i per cent. In
the first three years of the panic of 1873 they declined 18 per cent,
and in the last three years they have declined 31 per cent, .showing
it is much more serious.
Every per cent of decline in commodity prices destroys more
equities than the previous per cent decline. That is, the bankruptcies caused by a 30 per cent decline are much more than twice
as numerous as those caused by a 15 per cent decline.
I have here a table showing these changes in wholesale commodity prices during three major panics.
Senator FLKTCIIEE. DO you separate agricultural commodities from
other commodities in that table?
Mr. WARREN. Not in this table. I have them separately. But
this is all commodities.
Senator FLETCHER. DO you know how agricultural commodities
compared with other commodities?
Mr. WARREN. They dropped more. Basic commodities dropped
much more.
(The table presented by Mr. Warren is as follows:)
TABLE 1.—Chanr/cs in wholesale commodity prices during three major panics

Panic of 1S37
March, 1S37
March, 1S-10
March., 1S-13
Per cent decline:
In 3 yeans
In 6 years

Panic of 1S73


March, 1N73
March, JSTfi
March, 1*70

Panic of 1929
139 i >. I arch, 1920
1J4 ; March, 1932
87 ! March, 1035




is j .
37 i.

Mr. WARREN. Index numbers of wholesale prices for 135 years are
shown on the following pages. The index numbers since 1890 are
the Bureau of Labor statistics index numbers of wholesale prices of
all commodities converted to a 1010-1914 base. Those before 1890
were prepared by Professor Pearson and myself and are comparable with those of Bureau of Labor statistics.
(The index numbers referred to are here printed in the record in
full, as follows:)




Index numbers of the wholesale prices of all commodities
[iino-hu 4=100]


Feb. Mar. Apr.

! 45 144
1806 _ - _ ... -. 137
1808 _
_ . .
1817 _
1819 _
1824 .
. 102
1841 _
1843 _
1844 _
1847 -.
1849 82
1852 85
1857 - - 95
1859 95
1860 _ . _
94 • 94
1863 _. _
217 ! 206
1868 158
1869__. .
1872.__ ,
1874__ .




I June July



Aug. Sept.








;NOV. Dec. Year

102 ]

13 5




Index numbers of the wholesale prices of all


1884 _
1911__ ._






S3 .
S3 i

88 '




86 ,



June July


SO '' so

100 . 98
93 '< 92
85 • S3 !
80 ' 79

82 '


80 !
88 '

m •

(>S 1
71 !




1 4 1 140


140 i 139
i 114



no ' in

Aug. jSept. Oct. Nov. Dec. Year



8:> i 8 4 S 3
85 ' 84
81 i 81
82 • 81
74 ; 74 i 76
80 ' 78 :! 76
74 : 73
67 : 66 ! 66
76 , 71 . 70
74 : 75 i 76
81 ! 82
X6 '• 86
86 : 86
85 . 85 I 85
87 : 87 i 87
97 • 97
91 : 92
99 ! 99
107 105 104 ' 104
101 101
101 102
98 j 99
100 ; 101
121 ' 121 122 ;
176 • 178 ISO i
187 ' 188 193 !
198 ' 198 206
244 • 243 242
136 i 136
141 145
147 ! 144 ,
139 ! 140 '
119 : J4S
lf.0 152
147 1 .147 , 147 ! 145
137 : 138 ; 137
141 ! 142
139 • 141
127 • 123
107 i 105 i 105 |




ioo ;




10S ' 109 '

103 | 102
183 ' 179
196 ' 190
145 ! 146
150 i 152



s7 . 86
106 ;


91 :
89 i 89
97 , 94
96 i 07



1924. ...
1927._ .

Feb. Mar. Apr.




108 .






90 !


SO 1

94 •

97 !


98 •
81 I
84 ! 85
81 1 80

90 :



/ 4


























87 i


97 ! 98



92 ' 93


























! 151
1 141
144 ! 141
140 : 139























Warren, G. F., and Pearson, F. A., Wholesale Prices- in the United States for 135 years. Farm Economics, No. 32, p. 15S6-87, September, 1931.
Warren, G. F., and Pearson, F. A., Revised Index Numbers of Wholesale Prices. Farm Economics,
No. 74, p. 1634, February, 1932.

Mr. WARREX. A given amount of decline in prices is much more
serious than it was in 187o, because a greater dependence is placed
on credit than was the case at that time. The various units of government perform more services, hence taxes are more important and
farmers as well as others arc less self-sufficient than they were 50
years ago. Communities are also less self-sufficient. Progress of
society depends on division of labor, commerce, and credit. The
more highly developed society becomes, the less able it is to withstand a breakdown in the exchange system.
Most measures of industrial activity arc 40 to 50 per cent below
normal. During the depression of 19:21, Ayres's index of American



industrial activity fell to 27 per cent below normal. The panic of
1893 was the only other one in which business fell as much as 20
per cent below normal.
The credit structure is primarily based on commodity prices—
livestock on the farms, goods in the stores and warehouses, and commodities in the more permanent forms such as fences, steel rails,
box cars, homes, and the like. A drop in the price level undermines the credit structure. If the cost of building a house is reduced
a third, the houses already built decrease in value one-third, and
wipe out owners with small equities. This throws such properties
on the market, and prospective buyers are frightened by the losses
that their friends have suffered. Such a situation might cause the
market price to drop a half. This would destroy the equities of
all those who had paid a half down and throw many of these properties on the market. There are no buyers and many sellers, and
it is very easy to have the price level drop to one-half! That wipes
out the equities of those who paid a half down, and throws many
of those properties, as I said, on the market, and thus continues until
the liquidation is completed, because you lower the value of the
properties already built. They are not worth any more than the
cost of building new ones. And when you lower the values of the
properties already built, they are thrown on the market, not at
cost of production, but at any price. For example, a house in
Rochester that sold for $14,000 was just foreclosed. The owner has
lost all his payments. The second-mortgage holder has lost $2,500.
The first-mortgage holder got it at $5,000. That is not the cost of
producing that house, but probably it could be bought for less
than $5,000 now.
This explains why the more reductions in wages in the building
industry we have the less building there will be until liquidation is
completed. The public is clamoring to have Congress take the lead in
reducing wages, not realizing that every wage reduction destroys
values and causes bankruptcies until liquidation is completed. Those
who expect wage reductions to restore prosperity will be disappointed.
I have a few facts here on the debt situation.
The CHAIRMAN. Would you mind if I asked you some questions at
this time?
Mr. "WARREN. NO ; I would be glad to have you do so.
The CHAIRMAN. I do not find myself in disagreement with you.
I have been hoping that our higher cost levels could prevail. But
what is your thought of equalizing agriculture with industry under
the high wage scale?
Mr. "WARREN. I think that that will be easily done. I have some
data just a few steps further along that will take that up.
The CHAIRMAN. Very well. I want you to go into the relation of
wages to commodity prices while you are here.
Mr. WARREN. I will do that just a little later on, if you do not
mind. I have a statement on debts here first.
This is in relation to deflation and debts. In 1920 the national
debt was about sixteen billion, and State, county, and local debts
about seventeen billion. The sum of these two which had to be paid
by taxes amounted to about 9 per cent of the total wealth. The total



of all private debts was estimated at about one hundred and seventy
billion, or the total indebtedness was obout $203,000,000,000.
The national wealth at that time was estimated at $302,000,000,000.
The debts were 56 per cent of the national wealth. The debts in 1912
were M per cent c± the national wealth: those of 1922, 42 per cent.
Debts in 1929 were rather high even for the price level at that time,
but most of them could have been paid without difficulty if the
price level of that time hrd continued.
The wealth of the country is shrinking so fast that any estimate
at this time must be a guess and if right to-day would be wrong
to-morrow. But I think, as a wild guess, if you were to sell the
pirfsical1 property of the United States to-ctay at to-day's prices,
you wo, Id be foilunate if you got half of what it was worth in 1929.
If that is the case, the debts are equal to the value of the property.
Senator FLETCHER. HOW about the incomes?
Mr. WARREN. The incomes I have not figured, Senator.
Senator WAGNEK. In 1929 about $90,000,000,000.
Mr. WARREN. I have the debts in tabulated form.
Senator GORE. Breaking them down into different kinds ?
Mr. WARREN. Yes.

(Tables 3 and 4 on debts, presented by Mr. Warren, are here
printed in the record in full, a,s follows:)
TABLE 3.—Estimated debts in United States

in 1020 *
Total debts
$1G, 000. 000, 000
17, 000, 000, 000
7(1 000, 000, 000
37,000, 000, 000
42, 000, 000, 000
9, 000, 000, 000
2. 000, 000, 000
3, 000, 000, 000
1, 000, 000, 000
203, 000, 000, 000

State, county, and local
Urban mortgages
Bank loans
Farm mortgages
Life insurance policy loans and premium notes
Ketail installment paper
Pawnbrokers' and similar leans

TABLE 4.—Estimated public and 'private debts in the United States, 1912-1020

Public debts

Private debts
] 05,000,000,000

Total debts

debts per debts per debts per







TABLE 5.—Relation of irealtli to debts

w e a l t h of t h e
U n i t e d S t a t e s "•
$ISO, 000,000,000

Estimated pub- Per cent
lic and private indebtdebts

* Estimate of National Industrial Conference Board.
Warren, G. F., and Pearson. F. A., Effect of Declining Prices on Debts.
Economics No. 74, p. 1GG7, February, 1932.





Mr. WARREN. Many farm and home owners arc out of debt, but
must pay taxes. If public debts amounted to 9 per cent of the property in 1920, they are probably nearer 20 per cent to-day, because
the" property has shrunk. Taxes do not yield the anticipated income
and expenditures for relief are high. This results in deficiencies
which mean more public debts.
Coming to this question of price disparity, which is your question,
Senator ISTorbeck.
Whenever prices rise or fall, disparity in price relationships results. For example, if the retail price of food rises 10 per cent, prices
which farmers receive rise nearly 20 per cent. Conversely, when
retail prices decline 10 per cent, prices which farmers receive decline almost 20 per cent.
The following are some facts from the index numbers for the entire
United States. From June, 1916, to June, 1917, retail prices of
American-grown food rose 42 per cent. Prices paid to farmers for
the same food rose 73 per cent. Now take the deflation side: From
June, 1920, to June, 1921, retail prices fell 29 per cent and prices
paid to farmers fell 50 per cent. Then, again, in a deflation situation. From August, 1929, to March, 1932, the retail prices of food
fell 86 per cent, and prices paid to farmers for the same food fell 57
per cent.
The reason for this disparity is that distributing charges tend to
remain fixed or change very slowly. In fact freight rates were
actually raised following the panics of 1920 and 1929. The same
principle applies to all basic commodities when compared with manufactured goods. The law, which is just as fundamental as the law
of gravitation, is as follows:
When prices rise, producers' prices rise by a larger percentage
than retail prices. When prices fall, producers5 prices fall by a
higher percentage than retail prices.
In other words, if you will raise the price of food in the United
States at the present time by 20 per cent, you will raise the farm
prices by about 40 per cent. For example, not so very long* ago eggs
were selling for 30 cents wholesale in Now York City. "The California man got 20 cents. Now the New York price at wholesale has
dropped to 20 cents, or from 30 cents to 20 cents. This is a drop
of one-third. The California price dropped from 20 cents to 10
cents, or a drop of 50 per cent. Now, if we tarn it around and raise
the wholesale price in New York City from 20 cents to 30 cents, the
California price will go from 10 cents'to 20 cents. That is, this price
disparity is an inevitable result of a decline in prices and a recovery
in prices restores the balance. It will also bring labor back into line.
The CHAIRMAN. Assuming that the wages "respond to the same
influences as others, you mean ?
Mr. WARREN. NO'; it is because they do not respond. Wages
respond very slowly.
The CHAIRMAN. Well, you spoke of the freight rate here as having been increased in recent years. What is your explanation of
Mr. WARREN. Because the railroads were not making money. They
had less to haul and so they raised the rates on what they did haul.
The CHAIRMAN. Would that rule hold good all the way back during the 15 years of railway rate increases7?



Mr. WARREN. NO; not altogether. If we could restore the price
level to the commodity price level that prevailed from 11)21 to 19295
we could pay the freight rates and the railroads would have products
to haul.
The CHAIRMAN. Yes; but is it not a fact that the freight rates
increased almost in proportion to the wage increase 2
Mr. WARREN. They increased somewhat less. Of course there was
a greater increase in efficiency of labor.
The CHAIRMAN. But are not the high freight rates that now prevail a direct reflection of the wage scale that prevails'4
Mr. WARREN. They are partly a reflection of the wage scale and
partly of the quantity of freight being handled.
The CHAIRMAN. Yes. Of recent years there has been an effort
made to increase the freight rate to increase the revenue, and in some
cases that has resulted in a loss of revenue instead of an increase
in revenue, has it not?
Mr. WARREN. Yes.
The CHAIRMAN. GO ahead.
Mr. WARREN. It is important,

I think, in deciding whether anything should be done or not to see the duration of similar panics.The panics of 1815, 18G5, and 1920 were not similar to the present
situation, because they came after a period of reduced building and;
after such a short period of high prices that public and private debts
were not adjusted to the price level. The panics of 1837 and 1873
were similar to the present one but much less severe. In each of the
previous cases the declines lasted for six years, and the after effects
continued for many years. The panic could, of course, be ended
quickly by a rise in commodity prices to the level at which debts
were contracts and make liquidation unnecessary. If the present
movement of cutting wages, taxes, and everything else so as to complete the deflation process is continued, it will take a long time to
complete the bankruptcy procedure, if we follow the present donothing or laissez faire plan.
Senator WAGNER. Because of what, did you say?
Mr. WARREN. Bankruptcies. This is the important part of the
situation, it seems to me, at this moment, with city real estate.
The process of mortgage liquidation is very slow. For several
borrowers and lenders both hold on, expecting that prosperity
is iw just around the corner/' There are no market quotations for
homes, hotels, and office buildings, so that neither party realizes the
situation. When foreclosures do occur, properties are commonly
taken over by the creditors, like the house I just mentioned, the
process is not complete. The owner lost hi* homo. The secondmortgage owner lost everything. The first-mortgage holder has
a place that will not pay expenses. The liquidation is not complete until this man can sell. We do not know when that will
be. When foreclosures do occur, properties are commonly taken
over by the creditors, partly because of the dearth of buyers and
partly because the creditors do not realize the situation. Before it
is cleared up, the creditors must be willing to sell at market pricesy
and the properties must pass back into the hands of persons who
want them. Many creditors still hold farms that were taken overin 1921. These have been held because of unwillingness to accept
the loss, expectation of profit, or fear of breaking the market. Be-



fore the situation is cleared up, these properties must pass into the
hands of persons who want them. This is entirely different than
the process of liquidating prices of stocks and bonds which are
usually sold on the market of the day and not taken over by the
When a cieditor who has loaned on stock finds the stock falling
below the loan, he knows it. Ordinarily he does not take the stock
over, it is sold to some mil buyer and the job is done. It may
have to be done over. But it is done for that time. With real
estate the creditor often takes over the physical property and the
job is not finished. He has to wait to find a buyer. That is why
no selling takes place.
The CHAIRMAN. Would you pardon me if I interrupted you?
Mr. WARREN. Certainly.
The CHAIRMAN. I can follow you on the general theory very well,
but 1 wish you would devote some time to the interferences with
these plans. There are certain natural forces which, if permitted
to work, bring certain results. That seems quite simple. But what,
for instance, is the effect of the monopolistic control of certain commodities or the fixing of wages by the Government or by agreement?
Do they not interfere with this plan in a substantial way"?
Mr. WARREN. They are a part of the picture, and a rise in the
value of dollars interferes with the situation. The more complicated
our civilization gets the more numerous the debts which are fixed.
The CHAIRMAN. And the less elastic the situation?
Mr. WARREN. Everything is less elastic.
The CHAIRMAN. And the less effective all these remedies we are
talking about; isn't that right?
Mr. WARREN. NO; the more these remedies are needed.
The CHAIRMAN. Yes; hut the less effective they are. If a lot of
these are controlled, you are dealing only with those that are not
- controlled.
Mr. WARREN. If we are going to deflate everything down to the
pre-war situation. The biggest situation that is not deflated, and
which is the hardest to deflate, is debts. That means bankruptcies.
Mr. WARREN. NOW, telephone

rates will come down slowly. Postage is going up instead of down. That is one of the costs. Railroad
rates are going to come down pretty slowly.
The CHAIRMAN. They are going to come down slowly because they
are based on a wage level that does not change easily—not only in
;the movement of the trains but in the production of the ties and
;the building of the cars and the locomotives; is that not true?
Mr. WARREN. Yes, that is true; but it is also true that there are
other reasons why they do not come down quickly.
The CHAIRMAN! Yes"; but is it not a fact that most of the railway
revenue goes directly or indirectly to labor?
Mr. WARREN. Very largely.
The CHAIRMAN. Very largely. It therefore is a matter of a wage
level, is it not?
Mr. WARREN. I would say this: That the chief difficulty is not
wages but debts. The big problem of the railroads is to pay the
interest on their bonds, and I think you would find that the chief



people who are interested in having freight rates raised were bondholders of railroads, financial institutions.
The CHAIRMAN. DO you mean to say that the larger part of the
railway revenue goes to pay interest on the debt?
Mr. WARREN. NC. But I would say that the debts are much harder
to reduce than the wages.
The CHAIRMAN. Yes. Would you mind putting into your remarks
here exactly what percentage of the railway revenue goes to pay
interest on bonds and what percentage goes for other purposes?
Mr. WARREN. I do n«»t have the figures here with me.
Senator COUZENS. Eighty per cent of the income of the railroads
goes to labor.
The CHAIRMAN. Direct to labor. The material they buy is also
largely labor.
Senator COUZENS. Well, that is included, in the SO per cent. The
other 20 per cent goes to interest on bonds and dividends practically,
Mr. WARREN. I would like to call attention to the wage question,,
if you are interested in it
The CHAIRMAN. I am interested in it only in this, as the controlling element in commodity prices. Assuming that the laboring
man is not so much interested in. whether the wages for labor are
$5 a day or $10 a day, but he is interested in what the wage will buy.
And when you speak about the wage question relating to agriculture, etui you maintain a high production cost in this country and
produce products at a profit that crane in competition with cheap
foreign labor? I wish you would enlighten the committee on this.
Mr. WARREN. I would like to answer just a little further on wages
at this point. There is a difference between wages and debt. The
efficiency of labor steadily increases.
The CHAIRMAN. That may be true as an average, but are there
not very notable exceptions to that?
Mr. WARREN. Yes.

it not apply especially to what we call
ma chine prodi i cti on ?
Mr. WARREN. N O ; it applies generally.
The CHAIRMAN. Does it apply on the farm?
Mr. WARREN. Yes; about the same rate as the average of industry.
Senator GORE. YOU mean that the efficiency of labor goes up?
Mi*. WARREN. Decidedly.
The CHAIRMAN. YOU mean that the laboring man milks more cows
than 20 years ago?
Mr. WARREN. Yes.
Senator GORE. I see

some concern in Connecticut in .19:21 had laid
oil 20 per cent of its hands during the depression, and they were
getting more labor output from the 80 per cent than they had from
the 100 per cent of the employees before. The point being that the
80 per cent were afraid of losing their jobs and increased their
Mr. WARREN. We made a study of that on 500 farms in New York
State over a 20-year period, and we found that the average iv:te of
increase in efficiency, cows milked per man, and so forth, on these
farms, was keeping pace almost exactly with the increase in efficiency
or output per capita in the United States, which is 1.7 per cent a.



year. Over a long period of: time in this country the physical quantity of output per worker increases 1:7 per cent per year. And on
the average the purchasing power of wages increases 1.7 per cent per
year. That is over a long period of time.
Senator FLETCHEI*. YOU say the output increases 1:7 per cent.
How would the wage increase''{
Mr. WARKEN". The wages increased in buying power 1.7 per cent.
Comparing wages not with money, but waaes with the actual product
of labor, which is not money, but commodities.
There is a serious misconception about wages. The prevailing idea
is that if the commodity price level goes to pre-war, wages should
•go to pre-war. That would be an entirely unstable situation, because it has been a long time since pre-war. And this increase in
buying power of wages. 1:7 per cent per year, if we had proceeded
with just our normal increase in efficiency, just multiplying that out
would mean 137. In other words, if the price level of commodities
should go to pre-war we would expect wages to be at 37 per cent above
Senator GORE. State that again.
Sir. "WARKEN. If the whole price structure should go to pre-war
and get adjusted there, then wages would be in adjustment, not out
of adjustment, but in adjustment at 37 per cent above pre-war. That
would take care of the normal increase in efficiency. Now, we have
probably increased efficiency a little more rapidly than normal in
this peri oil, but that would ];e the normal increase. If there had
been no war and if prices had stayed at pre-war, wages at 137 would
be in adjustment with prices at 100.
But deflation wrecks tlie machinery. For 1931 the average of
wholesale prices, according to the Bureau of Labor index, the one I
have given you here on a 1910-1914 base, the average wholesale price
of all commodities was 107. when pre-war is 100.
If a man produced all the products of America last year, including all the farm products, and sold them at the average price of
1931 lie would have received 107. For him, wages of 137 if he had
got 100 would have been normal. But with his price at 107 he could
have paid 147 for labor and done business. In fact, he would have
made good profits.
But the laborer needs a buying power of 37 per cent above prewar to consume our products, and he does not buy at 107. He buys
at the cost of living figure, which was 151. And to buy 137 products
at a price level of 151 calls for wages of 207.
Now, that is the inevitable thing you get into when you raise the
value of the dollar. The manufacturer can hire labor and go ahead
and do business and make money, last year, say, at a 150 wage level.
The consumer can not buy at that wage level. He has to have wages
at 200. So that the manufacturer can not see what is the matter
with the laborer. He is asking too much. And the laborer can not
see what is the trouble with the manufacturer; he is paying too little.
"We have a stalemate. And it takes years to overcome it. This is an
inevitable result every time you drop the price level. The manufacturer's price goes so low he can not pay much for wages. The
cost of living remains up and the laborer can not buy the product
that he, himself, produces.



Senator COUZENS. IS there any relationship between those figures
that YOU have been giving* us, and those of the white-collar workers?
Their various scales of wages?
Mr. WARREN. Their wages would be approximately in this line.
Senator COUZENS. YOU make that answer from a. study of the
Mr. WARREN. Yes. But I will say this. The white-collar worker's
cost of living falls less, so he needs a higher wage. For example,
the cost of living figure with index of 151 as an average of last
year—it is ]ess now, of course—includes one item of miscellaneous,
in which there are books, and railroad fares, and telephone charges,
and newspapers, and doctors' fees, and so forth. I made a study of
that with university professors. And that item, which is about 20
per cent in the average cost of living is about half of the budget.
It stands at an index of about 200 at this time. Since university
professors spend half their money for the miscellaneous item instead of 20 per cent their cost of living would be—I haven't the
figure in mind—about 170. In other words, the white-collar worker's
cost of living declines more slowly than the Bureau of Labor figure.
And if you will go to the other extreme, to the lowest class of
labor, where the living is very little besides food and clothing, the
cost of living has declined more than the Bureau of Labor figures.
Senator COUZENS. SO that, in the up and downs there is a constant relation between the industrial workers and the white-collar
workers ?
Mr. WARREN. Well, you see the relation is thrown out of joint in a
situation like this.
Senator COUZENS. But I mean during normal times, is it?
Mr. WARREN. In normal times: yes. But if we go ahead with
deflations, we probably won't get these various classes—the white
collar one and the average workman and the lowest group of day
laborer—into proper adjustment again in 10 or 15 years. That is,
if we throw things out of line they will come back, but it may be
in the next generation.
Senator COUZENS. Would you say it would be the next generation
before we ^et back out of this condition ?
Mr. WARREN. I think so. I think if we go ahead with the deflation process, that the children of the next generation may be born
out of debt, unless they assume their father's debts.
Senator FLETCHER. Can we not do something to check that deflation? We want reflation, do we not?
•Mr. WARREN. I think there are two ways to proceed. One is
reflation and the other is this liquidation of debts, which has not
begun to be finished. The liquidation of city real estate and real
estate generally lias not really begun. You can take the tax situation. I asked a hotel man, the manager of quite a chain of hotels,
this question: "How much taxes can you pay on a hotel normally,
and what would you say was a normal t a x ? " Well, he said he
could pay 2 per cent.
Senator COUZENS. On the value?
Mr. WARREN. On the full value. He figured it over and said that
was a reasonable tax. He has a chain of hotels in a number of
Senator COUZENS. What basis of income would that be?



Mr. WARREN. I do not know. I did not ask him. But he said 2
per cent on the full value. I asked him, " What
is the value of
those hotels nowadays? " "' Well," he said, "the}7 have gone down
more than one-half." In fact, he cited one very good one. He said,
" I would not give anything for it." Suppose the hotel dropped
50 per cent; it has a tax rate of 4 per cent. Then I asked him the
next question: "Now, if you do all you can in reducing taxes, how
much do you think you can cut them? " Well, he didn't think lie
could cut them to 3, because the sewers have been laid, and they
are not paid for; the city has obligations of many kinds. It can
not stop? I asked, "What is the hotel woiih? " He said, "Precisely what it is bringing. Nothing." Now, you have got to wait
until finally somebody will buy one of those.
Senator GOUE. In connection with the real estate liquidation, I
heard a man who was more or less familiar with stock liquidations
say yesterday that the speculators had just about completed their
liquidation and the investors had just started theirs.
Mr. WARREN. Scarcely begun. And there are two steps in it. A
hotel sold here recently in Washington; I am not certain who got
it, but I will certainly be pretty safe in making the guess that tlie
creditors got it. Then it has not beep liquidated. It is no liquidation. The creditors do not want it.
Senator COTTZENS. It is liquidation so far as the original owner
is concerned.
Mi1. WARREN. Yes. He is gone. But the job is not done.
Senator COUZENS. It has been done for a Jong time, I can assure
you that.
Mr. WARREN. The job will not be completed until the creditors can
Senator COUZENS. Are you going to tell us how we can stop the
deflation ?
Mr. WARREN. There are many ways.
Senator FLETCHER. In other words, we want to know if any legislation can help out that situation.
Mr. WARREN. I think there aie some fundamental questions here
that will need some further discussion.
Senator GORE. Are you passing on from wages now?
Mr. WARREN. Yes.
Senator GORE. Would

you mind if I ask you a question right here,
or would you rather have me ask the question when you get through ?
Mr. WARREN. Perhaps it would be best to ask it here, Senator.
Senator GORE. It is this, Doctor, and I might call it the equation
of purchasing power. I have a concrete case in my mind. A farmer
down in a county in my State had a plumber come out and do his
day's work. I suppose he had his helper with him. He charged
$15 for the day's work.
Now, that was a half a bale of cotton at present prices. That was
about 45 bushels of wheat at present prices. Now, then, in considering this equation, if you cut down this $15 a little, this farmer's
purchasing power that he is getting out of 5-cent cotton and 30-cent
wheat would go a little farther from his standpoint. Now you want
to bring back an approximation of some sort. Do you not think
that both ought to move a little in order to establish that ?



Mr. WARREN. Of course we have a question whether that plumber's
wages were in adjustment with the price situation in 1021 to 1929. I
think some were out of adjustment even then. But we have another
situation. We have increased the value of money and stopped business. Therefore most of the plumbers were not working the day that
man went out. Therefore, they could not buy cotton. Therefore,
cotton is cheap. If we can restore the value of the dollar to say what
it was in 1921 to 1929—I am not particular whether these exact years
be used—that would restore the buying power for cotton and cotton
would not be 5 cents a pound. The under consumption of cotton has
continued for some time. The resulting high stocks could not be
disposed of at once. And if the plumber was at $15—that sounds a
little high for a rural region
Senator GORE. Yes.
Mr. WARREN. Perhaps a little high for a city at any time.
Senator GORE. He came out of a city.
Mr. WARREN. But if it was high that will get adjusted. The general wage level was not badly out of line.
Senator GORE. Let me ask you this. We are talking about reducing the salaries of Government employees, say, 10 per cent.
Mr. WARREN. Yes.
Senator GORE. A Government

employee who now gets a thousand
dollars under that would get $900. A clerk with $900 could buy more
to-day than in 1929 with $1,000. Now, considering this equation of
purchasing power, these farmers have to pay the governmental services of this particular clerk that I have in mind, they have to pay
that salary with the purchasing power acquired from the sale of
cotton at 5 cents and the sale of steers and hogs at 3 cents. Now, if
that was cut down $100 dollars, what little purchasing power he gets
out of these prevailing prices would go a little further.
Mr. WARREN. I do not think it would make enough difference so
that you can ever find it.
Senator GORE. It illustrates the point. That is what I had in
Mr. WARREN. There is one objection to the Government cutting
wages, which lias nothing to do with wages.
Senator GORE. There is more than one, as everybody who is employed knows.
Mr. WARREN". Well, the person who ought to be the chief objector
to the Government cutting wages is the man who owns physical
property. The Government is looked upon as the key mover in the
wage situation. And if it will cut wages, then we will all cut wages.
Then the building trades should be cut. Then the house that the
laborer perhaps had paid 50 per cent down on, can be reproduced for
say 50 per cent less.
Senator GORE. Yes.
Mr. WARREX. He has lost his equity. In other words, the chief
objection to^ cutting wages at this particular time is that it destroys
the value of the physical property of America which underlies our
Senator GORE. Yes; but if you keep wages artificially high that is
an artificial maintenance of the prices.
Mr. WARREN. Prices are artificallv low.



Senator GORE. Well, one way or the other. Should we move both
Mr. WARREN. It is essential that you raise the price level, because
it is not merely wages, but debts and innumerable other things.
Now. if you can cut Avages 30 per cent over the whole United States,
and cut debts 30 per cent over the whole United States, and cut every
figure that has a price involved 30 per cent we might proceed—well,
that, of course, is purely visionary. It can not be done. Debts, not
wages, are the major situation in this matter.
Senator GORE. They are the big factors in the equation.
Mr. WARREN. Yes.
Senator GORE. But I was wondering if you
Mr. WARREN. Well, wages are not pegged.

could peg wages.
In the long run wages
go up as the production per capita. Whenever prices rise or fall
wages rise or fall less rapidly. That is not pegging. Because wages
are not a commodity. It happened a century ago. For example, in
the Napoleonic war period in England, which certainly gets it away
from any of our pegging of the wage situation—in the Napoleonic
war period in England prices declined one-half and the wage level
declined 15 per cent.
Senator GORE. Pretty much the same after the Civil War, too.
Mr. WARREN. It was the same. Prices declined one-half and
wages declined 15 per cent. Then they turned upward. And prices
went on down. When wages turned upward and prices went on down,
it was because we had then reached a point where, with the increased efficiency, wages were not out of line. If we would hold
wages at the level of to-day long enough they would be too low because of the increased efficiency: they should rise relative to commodities. I do not know whether I answered your question or not.
When you get back to the question of a particular employer, he
has to keep solvent. And what he personally should do with wages
I leave to him. I am merely stating what a general reduction of
wages over the country will do to the country. Not to one firm.
To the country, a general reduction of wages reduces the values of
the properties already built without a corresponding reduction in
the debts. There fore'undermines the equities, undermines the banks.
Don't think that I am saying that wages should or should not be
reduced. I am merely stating that wage reduction is not a solution.
It is a solution that gets us into a woive difficulty.
Senator FLETCHER. Of course, there is some limitation on that.
You can not carry that too far.
Mr. WARREN. Oh, no.
Senator FLETCHER. The

time comes when you can not adopt that
Mr. WARREX. I am not saying that you should not cut wages at
all. I am saying what the effect is on cities. What I am really
emphasizing is not wages, but the thing I want to bring out by contrast is debts.
Senator GORE. That is one reason why the rents are so stubborn in
going '.town. The capitalization in buildings.
Mr. WARREN. Yes. If a man has a mortgage on a building lie does
not want rents to go down, and if the owner thinks he has an equity
he does not want rents to go down. We have a great resistance to
reducing rents. We have empty properties before we reduce rents.
I t is just a resistance which is not the fault of anj'body.



Senator WAGNER. Professor, you sa}T that you do not advocate,
that you are not taking a position as to whether wages ought to be
reduced or not.
Senator WAGNER.

Yet you do say that our reduction of wages will
cause a further depression.
Mr. WARREN. Yes.
Senator WAGNER. NOW,

we ought not to do anything which might
add to our difficulties, should we ?
Mr. WARREN. If we are to follow out the deflation proposal, then,
of course, we have to cut wages and go through bankruptcy.
Senator WAGNER. YOU mean go through a complete deflation ?
Mr. WARREN. Yes. If we are to deflate everything down to the
present commodity price level, we have a long job ahead.
Senator WAGNER. Well, do you not think that ought to be arrested?
Do you think we ought to go so far as that ?
Mr. WARREN. I think we ought to have sense enough not to have
gone this far.
Senator WAGNER. I think so, too.
Mr. WARREN. And not having done it before, we should change
now. Not having changed this year, we should change next year.
We can not afford to go through it.
Xow, the general impression is held that depression is due to overproduction. Some charts were presented in the hearing in the House
on H. E. 10517, pages 220 to 220. which I did not present, but
which were prepared by Professor Pearson and myself, which show
the physical value of production in the United States and in the
world for many years, and they show that there lias been no unusual
production. But the depression is causing unusual underproduction.
Senator COCZENS. Would you discriminate there between the facilities for production and the actual production? Is there not a difference there?
Mr. WARREN. Yes; there is a difference between facilities and the
actual production, but I do not think that the facilities are strikingly out of line with the actual production when we are working
in a normal situation.
Senator COUZENS. Arc yon talking now as an isolationist or an
internationalist ?
Mr. WARREN. Either -one.
Senator OOI'ZENS. I do not think you can talk as an isolationist
when it is evident that many of the countries of the world can not
purchase products which we have facilities for.
Mr. WARREN. Well, there are other countries besides us suffering
under the same difficulty.
Senator COUZENS. Yes. But take the shoe industry, for instance,
That industry has a capacity for two or three times as mairy shoes as
we can use. Certainly they are overproduced, and the products of
those factories can not be used in the oriental and other countries,
because they have not got the purchasing power. Now, have we
got to wait and keep on expanding, or must we be isolationists
enough to conserve our facilities for our own consumption ?
Mr. WARREN. Well, of course, to a very large extent the whole
world situation has been brought on by the same situation as we have,
which I think I can show a little further about on this point. And



it is underconsumption rather than overproduction that is the difficulty, I think.
Senator GORE. In connection with whose statement were these
charts presented in the House hearing?
Mr. WARREN. I think with Mr. White's. They are in this bulletin,
which I have handed to yon. It shows the original figures also.
Senator GORE. In this''bulletin?
Mr. WARREN. Yes. And I will give you the conclusions very
The physical volume of production of all kinds of commodities in
the United States normally increases about 4 per cent per year, That
includes everything. All the agriculture and all the lumber and
Senator COUZENS. There were some industries that expanded at a
greater rate than that, were there not?
Mr. WARREN. Yes.
Senator COUZENS. Have

you got what percentage the automobile
industry expanded per year?
Mr. WARREN. The automobile industry is not included in this figure. It is physical volume of basic production, which includes all
the iron and not what was done with it. It includes all the lumber
and so on. The production of manufactures increases more rapidly.
But about 4 per cent per year is the normal increase for all.
Senator GORE. That is in the United States?
Mr. WARREN. Yes. The world physical volume of production normally increases 3.15 per cent per year. The production was interfered with by the war and has been low since the war.
The rates for some groups in the United States are as follows:
From 1839 to 1914 the rate increase in production of food and feed
•crops was 3 per cent per year. Of agriculture, 3 per cent. Fuel and
power was nearly G per cent. And if we take all minerals and
metals, other than fuel and power, 7 per cent. All products put
together, the average rate increased 4 per cent. And for the world,
3.15 per cent.
Senator FLETCHER. That did not exceed the increase in population,
did it?
Mr. WARREN. Yes. You see we are steadily becoming more efficient. It is about 1.7 per cent increase in production per capita per
year in the United States.
Senator COUZENS. What do you have to say to that question that
I asked the previous witness with respect to whether we can keep on
taking our earnings out of industry and saving them for further
productive industry ?
Mr. WARREN. I think that we have probably not quite rapidly
enough put our earnings into consumption. That is, there are millions of farms in the United States without any facilities for taking
a bath, without electric lights, houses unpainted, poor houses.
There are any number of people in the cities who are living far
below the standard of what the efficiency of the American people
justifies us in having. Now, somewhere you have to bring a balance
in using the year's earnings—a 'balance between what you consume
that year and" what you put into facilities for future production. I
am merely expressing an opinion. I have no figures on this.
Senator OOUZENS. The old statement used to be made by industrialists and bankers that you must plow back your earnings into



your business and keep on expanding and putting your money back
into productive industry. I wonder whether we have gone as far
as we are justified in going back and plowing ovv earnings back into
expanding industry beyond the point where we can consume the
products of industry?
Mr. WARKEN. I think not over a period of 30 or -iO years, but
over a short time we have expanded our living a little too slowly.
For example, during the past few years there has been a vast portion of the population, not only in the rural communities and on the
farms, but in the rural cities as well, that have not increased their
consumption in accordance with production. Somewhere we must
have a balance between capital facilities and consumption. Also between increased consumption and increased leisure.
Senator WAGNER. They did not earn enough to do that.
Mr. WARREN. It was because of instability of money primarily.
It throws the earning power of different classes out of line. It gives
first this group a jolt and then that group a jolt.
Senator WAGNER. I was wondering if you have figures as to what
is earned per year that is not consumed? That is left over for capital investments That is what you had in mind, Senator?
Senator COUZENS. That is what I meant; yes.
Mr. WARREN. I have no statistics on that subject.
Senator COUZENS. Would it not be interesting to ascertain how
much further Ave can keep on going in plowing back into industry
all the surplus earnings (
Mr. WARREN. Yes.
Senator COUZENS. My

judgment is that we have gone off on a wild
trend of saving; saving and saving to put into more productive
industries and not consuming or building enough of nonproductive
Mr. WARREN. Nothing throws the point of view of people more
out of line than what we are getting right now. The rise in the
value of money. Not just manufacturers but individuals. That
we must not spend the money we get; we must keep it.
Senator GORE. It is a buyer's strike, don't you think i
Mr. WARREN. Yes; you can call it a buyers strike.
I don't like
the word. The people have suffered, and they say ki I will never be
caught again without money." And some of them say, " Without
money in the house."
Senator WAGNER. Yes; a good many of them just now.
Mr. WARREN. NOW, it will take us a generation to get over that
point of view. A man who has been caught by this is not going to
want to spend. And so we are going to get into the situation of
not the capitalist class alone, but the individuals, figuring that we
must save most of what we earn. A man who is going through
this is going to figure on saving hereafter. He does not want to
get caught again.
Senator COUZENS. What do you think as to consumers credit as an.
effect on the situation?
Mr. WARREN. It is rather minor. That is, the situation is so
enormous. For example, in this list of debts in 1029 the retail installment paper is estimated at $8,000,000,000 out of $203,000,000,000..
Senator COUZENS. Yes; but I was not speaking so much of the
specific figures as the psychological influence on the population.



whether you sj)end it in cash or whether you spend it on installment
buying. You had it preached into you day in and day out—consumer's credit. It used to be a disgrace to be in debt, so they changed
to consumer's credit.
Mr. WARREN. But if we go on with deflation, it will be a disgrace
to be in debt again.
Senator GORE. Don't yon think that the reason why the standard
of living in the country has lagged behind is that the installment
credit buying did not come out into the country as much as it did in
the city?'
Mr. WARREN. I think it was primarily because of the disparity
between prices brought about by the fall of prices in 11)20. The farm
prices never got fully back in proportion to the retail prices. They
had not even reached that in 1929- So that the farm population was
in" effect feeding the city unreasonably cheaply. That happens in
every case when prices decline. And in every case the first deflation,
as in 1920, and as in 1805, and as in 1815, the first effect of the depression is to drop retail prices with the cost of distribution remaining up. The farmer then gets a small proportion. And then with a
shortage of building you have this situation. The farmer feeding
the city for less than his normal share. That accentuates the building boom. Xo small factor in the building boom which followed 1865
and followed 1920 was the fact that the farmer got less than his
normal share. Then the cities, not knowing that this was not a
permanent thing, and that prosperity had not been made permanent,
not knowing that, they began to expand their housing needs-on the
basis of cheap food, which could not be permanent. We have called
.attention to that repeatedly since about 1916. Incidentally, this
panic was correctly forecasted by the fact that following the Civil
War it was exactly nine years after deflation began before the break
Returning to the physical volume of production that T have mentioned. In 1914 we produced 74 physical units. In 1929 we produced 104. The production of the Nation rose from 74 to 104. In
1931 it was about 85.
Senator TOWN SEND. That is production?
"Mr. WARRKN. Production about 85. It is very low. Entirely out
of line.
Senator TOWNSEND. And this year it will be very much lower than
.Mr. WARREN. Yes. In other words, instead of overproducing we
rare so much more below normal than ever before in the history of the
Senator TOWNSEND. If we follow that cvcle along?
Mr. WARREN. If we go on with deflation we will be even lower
than that. Agriculture holds up, of course, and industry is less than.
85. Everything put together is 85.
Senator WAGNER* Well, isn't there a danger of social upheavals
if this deflation continues?
Mr. WARREN. I think there is grave danger. I think it is something we must carefully consider before we go ahead with deflation.
Trying to cut everything down.
We have made a study of the relation of gold to prices for a long
period of time. The world gold production was high from 1848 to



18G0. A long period of decline then set in. The production of other
things continued to increase while gold production declined and its
value steadily rose. Production then began to increase and reached
a peak in 1915. Since that time it has been low. It is now increasing, but gold production is still less than that of 23 years ago.
The influence of gold supply on prices also was presented in the
House hearings (pp. 229—23$), the same material which we have
here. Probably you do not care to read it. But I will just give
one or two points.
Senator GORE. Was that recently, Doctor?
Mr. WARF.EX. Yes; in the hearings on the same bill in the House.
Senator FLETCHER. Doctor, may I ask: Ts it your view that deflation is still continuing? That there has been no check or stop in
Mr. WARREX. Yes. There has been no check.
Senator FLETCHER. YOU think it is still going on?
Mr. WARREN. There is no evidence that I have seen of any check.
Senator FLETCHER. DO you think that if we try to pass some legislation here we might check that?
Sir. WARREN. I etui not see any chance of deflation stopping of
its natural causes, if you call them that, until city real estate is
liquidated, which is several years. We might get a little recovery. I
think we had a business cycle of good business last year. I think
last year there was a little business improvement, which was a cycle
on top of the depression.
Senator GORE. Have you got a microscope that you detected that
with? It would need a microscope, wouldn't it?
Mr. WARREX. One is needed. But later we will be able to tell
whether it was a cycle.
Senator FLETCHER. With this reconstruction finance act and the
Glass-Steagall Act and these various other measures that we have
adopted, you do not think they have had any effect yet?
Mr. WARREX. We have not stopped the depression. Take the
lending plan, for example. If a farmer owes the Federal land
bank and can not pay his installment, he can get another loan to
pay the installment. And next year he will have two installments.
Unless prices rise, two installments will not be any easier to pay
next year than one was this year.' He is merely putting it off. Shifting the debt burden from one agency to another does not pay the
Senator GORE. Hie break in the stock prices in the last six weeks
since these measures were enacted has been the worst break we have
had. About 37 per cent.
Mr. WARREX. There are only two possible cures for debts. One
of them is to restore the price level to the one in vogue at the time
the debts were incurred, and the other is finding some money to
pay them or going bankrupt.
Senator GORE. Or doing like France did.
Mr. WARREN. Well, that is restoring the price level.
Let me pick out from this study of many years two or three points
on the gold situation.
The world total stock of monetary gold in 1870 was 131.000,000
ounces. By 1890 this had increased to "169,000,000 ounces. Then as



now some persons said the trouble could not be gold as there was
more gold than ever before in the history of the world.
If these world gold stacks are placed on an index number basis,
with 1880-1014 as 100, the figure for 18T0 is 57 and for 1800 is 73.
These were the relative amounts of gold in the world. The index
numbers of the production of all commodities for these two years
were 42 and 74. Gold stocks increased less rapidly than other
things. If we divide the gold by the other things, the 57 divided
by the 42 gives 136. The prices at that time were 131. If we divide
the 73 units of gold by 74 units of production of other things we
get a ratio of 00. And prices fell to 08. Gold then began to increase more rapidly than other things so that in 1014 the ratio was
115. Prices then went to 117 on and 1880 to 1014 base.
This 75-year relationship can be expressed as follows: Prices in
England equalled world gold divided by the world physical volume
of production of other things. The details of this are, as I have
said, published in the House hearings. A graph showing this is
on page 1G80. Those of you who wish to turn to it may see it there.
Senator GORE. What page?
Mr. WARREN. 1080 in Form Economics that you have here.
It is reproduced in the hearings on page 232. By looking at this
graph one will see that the price level followed the ratio of gold to
other things for 75 years before the Avar.
Similarly in the ITnited States for 30 years before the war our
gold supply divided by our production of other things equalled our
The short time fluctuations are largely business cycles; a little
overexpansion and a little underexpansion.
Prices went out of line with the 75-year relationship, from 1015
to 1031, and they are now back again.
That leads me to this, which I think is the key to many of the
questions we ask. Why were prices high? Why were they out
of line?
It is commonly said that supply and demand govern prices. This
is a half-truth and leads to endless confusion. The price of wheat
is a ratio of the supply of gold and demand for wheat to the demand
for gold and supply of wheat. An increase in the demand for
wheat or decrease in the demand for gold raises prices of wheat.
An increase in the supply of wheat or an increase in the demand
for gold decreases the price of wheat. The supply of gold or demand for it are just as important in wheat prices as the supply of
wheat and demand for it. The same principle applies to prices
for other commodities.
Many economists are misled into thinking that gold has nothing
to do with the present situation, since no phenomenal change in the
supply of gold has occurred since 1020. They forget that demand
affects the value of gold the same as it affects the price of pigs.
If there were in the world just two countries using gold as currency
and each of them used half of it, and if one of these countries discontinued using gold and discontinued bidding for it, prices in the
other country would be expected to double. If at a later date the
first country decided to reestablish its currency and bid for gold,
prices in the other country would be expected to be cut in half.
Such phenomenal changes in the circulation of the first country



would cause a first period of prosperity and then a period of collapse
so that prices would be expected to overshoot the 20 mark on the rise
and to fall below the 100 mark on the decline.
For half a generation most of the gcld-using world left the gold
standard and most of the countries ceased to bid for gold, and many
of them lost nearly all of their supplies. As a result, prices in tlie
United States on a gold basis rose to over 200. After the war wTas
over one after another of the countries became interested in returning to a gold basis. From 1921-1929 the pi ice level in the United
States stood at 40 to 50 per cent above pre-war. The countries
desiring to return to a gold basis, observing that we were on this
price level on a gold basis, assumed that they could return to the
gold standard and that all could have a price level 40 to 50 per
cent above pre-war. A few economists in England and the United
States called attention to this foolish assumption, but they were not
listened to by the majority of economists in either country or by
the public. Americans took a leading part in helping the world to
go into debt to reestablish the gold basis. The soundness of the
debts was based on the assumption of the continuance of prices in
gold 40 to 50 per cent above pre-war. From 1925 to 1929 many
steps were taken to restore the gold standard. Only a few of the
countries had fully established a full gold basiSj most of them had
a gold-exchange basis. The gold panic came long before the gold
standard was fully established.
This gold panic is not a business cycle. A cycle is rhythmical fluctuation. This crash was due to the returning demand for gold and
was accompanied by a business cycle just as a tidal wave may be
accompanied by a tide. The business cycle assumption led to the
erroneous idea that prosperity is jast around the corner.
It is not a question of confidence. If the demand for gold is to be
almost double, what it was during the war period, the value of a.
house, railroad, or a bushel of wheat is reduced, and no amount of
confidence can change it. The country was not short of confidence in
1929, but the world was short of gold to support the price level to
which business was adjusted.
In other words, the thing to explain is rot merely the decline in
prices but the rise in prices. Then the question is: What are we
going to do about it ?
Efficiency in the use of gold is one of the next questions.
The amount of currency and circulation per dollar of gold is shown
in the accompanying table. The monetary circulation per dollar of
gold has steadily declined. Bank deposits per dollar of gold have
risen. But there has been no striking and sudden increase that has
not been followed by a reaction. Before the war, a total of about
$11 of monetary circulation and deposits per dollar of gold seemed
to be normal. Apparently a little more than this can now be supported without panic, but no phenomenal increase in the efficiency in
the use of gold has occurred.
Debts, taxes, and most other business relationships are adjusted
to a commodity price level 40 to 50 per cent above pre-war. If
all the former gold-using world returns to gold, it is doubtful if
there is gold enough to maintain pre-war prices, unless some phenomenal increase occurs in the efficiency with which gold is used. No





such increase in efficiency is probable after 18 years of monetary
chaos. Decreased efficiency and prices below pre-war are more
Figure 1 shows the total monetary circulation plus bank deposits
in the United States per dollar of gold. The credit structure based
on a gold dollar appears to have been too high in 1920 and 1929.
(Table 6 and a graph were here placed in the record as follows:)
TABLE 0.—Alonctarij gold, money in circulation- and bank
deposits in the United
States on June 30, 1SS0-19311


Mone- I Total
fcary gold j monetar;
coin and2 i eirculabuiletin ' tion 3
(000,000 j (000,000
omitted) \ omitted)

j MoneTotal
Monetary cirindivid- tary
cir- Deposits i dilation
ual de-i culation
and deposits
dollar of gold ! posits per
(000,000 per
2. 76
2. 33
2. 32

6. 06


2 28 '

1, 372
1, -120
1, 497
i, f>r» t
1, 506
1, 641
1, 838




2, 553
2, 623
3, 079
3, 263
3, S35
3, 459
3, 320
3, 649
4, 066
4, 482
5, 46.8
4, 463
4, 823
4, 810
4, S85 '
4, 851
4, 707
4, 746
4, 522

2. 01
1. 04
2. 03
2. 05
2. 31
2. 11
2. 67

2. C>5
2. 52

2. 51
2. 36
1. 93
1. 86
1. S3
1. 57
1. 50
1. IS
1. 08

5. 0"
4. 84
5. 55
5. 83
7. 03
6. 60
7. 65
7. 53
8. 36
8. ?S
8. 94
8. 59
0. 34
9. 07
9. 36
9. 34
9. 79
9. 55
S. 09
8. 76
13. 01
10. 62
0. 81
9. 56
12. 06

6. 78
7. 58
7. 88
8. 80
10. 75
9. 01
0. 01

0. 48
0. 54
0. 57
10. 29
10. 8G
9. 80
10. 51
11. 26
10. 03
9. 35
12. 05

10. 04
13. 39
12. 81

Warren, G. F., and Pearson, F. A., Monev and Prices, Farm Economies No. 71. p. 1606, February,
2 Statistical Abstract of the United States 1030, United States Department of Commerce, No. 52, pp.
240-7; 1030.
3 From 1880 to 1809, inclusive, Statistical Abstract of the United States, 1923, No. 46, p. 605,1024; and from
1900-1029, Statistical Abstract of the United States, 1030, No. 52, p. 247; 1030.
« From 1880-1014, Statistical Abstract 1923, No. 40, p. 70S, 1921, and from 1015-1920 from Statistical
Abstract of the United States 1030, No. 52, p. 262; 1930.
5 Annual Report of the Comptroller of the Currency, Dec. 1, 1030, pp. 57. and 138, 1931; and Text of the
Annual Report of the Comptroller of the Currency, pp. 128 and 46; December, 1031.



The chart shows rhe monetary circulation plus bank deposits per
dollar of gold in a long time trend. They were high before the
panic of "1)7. In the early stages of the war we had an influx of gold,
and so the circulation and deposits were very low per dollar of gold
because a lot of gold suddenly came in. Our circulation and deposits were very
high before the panic of 10:20 occurred. They were
high again in ?29. I t looks as if our gold was over used in 1029.
Senator WAGNER. By "over used" you mean what, more credit?
Mr. WARREN. Used so much that we got scared.
Senator GOIIE. Just what idea do you attach to the world circulation there, Doctor?
Mr. WARREN. I t is the monetary circulation as reported by the
Treasury Department.
Senator GORE. Oh, yes.
and deposits
per dollar
of gold

PIGTJRE 1.—Monetary eircnlation pins bank deposits per dollar of gold in the United
States, 3 000—1931. Apparently, the money and credit structure per dollar of gold
was too high in 1920 and in 1029

Mr. WARREN. The figures I am giving are monetary circulation
plus deposits. We have added the two together. For example, the
monetary circulation plus deposits in 1920 "amounted to a little more
than $13. In 1931 they were reduced to $11.
Senator GORE. AS related to gold?
Mr. WARREN. Yes; for a dollar of gold.
My conclusions are as follows:
A rise in commodity prices to the level that prevailed when public
and private debts were incurred would quickly restore equities, stop
bankruptcies, start the sale of commodities, and restore employment.
This does not mean that any commodity would be freed from
fluctuations in its value due to changes in the production of it or
demand for it.
A restoration of prices to the level to which debts are adjusted
is commonly said to be injurious to creditors. This is not the case.
A slight decline is a benefit to creditors, by the amount which it
unjustly takes away from debtors, but a drastic decline such as the



present one leaves such a high percentage of the debts unpaid that
creditors lose. Even if creditors do lose an opportunity for an
unjust gain, there would be few individuals who would not be benefitted by stable prices. Because there are only a few persons who
are not interested in the prosperity of some industry or in employment and who do not have dependents thus interested. The person
who owns a house and who has life insurance and a job is a capitalist, a lender and a wage worker.
Commodity prices can be raised by increasing the amount of currency in circulation. A considerable amount is necessary for a time.
Every bank is trying to improve its liquid position, which means
that it is increasing its ratio of currency to credit. In many regions,
there are no banks and persons much use currency instead of bank
checks. The proposed tax on checks is also a deflationary-measure,
because it will cause some substitution of currency for checks. Under
these circumstances, a material increase in currency is necessary to
start recovery.
The present situation is not merely bankrupting individuals and
causing physical suffering, but is likely to place a severe strain on
our social structure, which is based on private enterprise. This
social structure should not be blamed for failure to invent a stable
measure of value, any more than it is blamed for the present calendar.
It is not to be expected that a flawless plan can be instantly put
into effect. All that is necessary to make a plan worthy of consideration is that it work better than the present system is working.
Sooner or later a stable measure of value must be established.
The use of any given weight of any single commodity can never
be a stable measure of value. It makes money a fixed weight with
varying value. If we are to avoid having our social and business
structure perpetually subject to accidental discovery of a single commodity or chaotic changes in world demand for that commodity,
it is necessary to be in a position to allow the price of gold to vary
with the supply of it and demand for it.
This bill is a step in the right direction. It recognizes first that
the fall in commodity prices "is the major source of the difficulty.
That is an important contribution, the recognition of that fact.
Second, it recognizes that when the whole price level falls it is
due to money, which is another distinct distribution. It attempts
to use the present machinery as far as possible. Personally, I would
say that this is good if you will do nothing more, but it does not go
far enough. To really be sure of being able to take care of the
situation it would be necessary to take the next step and allow the
price of gold to vary, and to do that might require, in getting it
started, authority to prohibit exports of gold.
Senator WAGNER. YOU mean an embargo?
Mr. WARREN. Yes; the same as we had during the war. I suspect
that foreign countries might withdraw too much gold. The question
in my mind is not whether this bill or any of these measures are
ideal. The question is, what are you going to do about this situation
we are in, which is also not ideal ?
Senator GORE. I notice that.
Senator FLETCHER. YOU will agree, understand, Doctor, to the
policy expressed in this bill?



Mr. WARREN. Yes. I agree first that the commodity price level
is the trouble. Money is the reason for the commodity price level.
There are many ways of proceeding from that point, and this is
one way. Personally, I would go considerably farther. I think it
is not far enough.
The CHAIRMAN. YOU think this bill does not go far enough?
Mr. WARREN. Net far enough. But it is much better than doing
nothing. For one reason, if you will pass a bill like this we will
try it and if it does not go far enough we can take the next step,
and we will at least know whether this will be sufficient by trying
it. My own judgment is that it is not sufficient. I think we will
have to be in a position to vary the price of gold in order to solve
the situation.
The CHAIRMAN. In ether words, we may have the quantity of circulation but we will net be able to secure the velocity to bring about
the desired result; is that it ?
Mr. WARREN. YOU see, I am favorable to doing this rather than
The CHAIRMAN. Yes; I undeistard.
Mr. WARREN. XOW, the reason why I think this will probably not
be fully successful, although partially successful, is that I do not
believe there is enough gold in the world, with the amount of confidence there is in the world, if England and other countries come
back on the gold, standard, to allow the world suddenly to have
its price level 30 ci 40 or 50 per cent higher than normal in proportion to the world's ounces of gold.
The CHAIRMAN. In other words, our business has outgrown our
gold, and credit has supplemented it and that will do it in periods
of confidence; is that it ?
Mr. WARREN, I would charge that a little. While you were out
I called attention to the explanation which I would make of how
we got adjusted to the liigli-price level; that about half of the goldusing world stopped bidding for gold. They not only went off
the gold standard, the;y didn't care whether they had the gold or
not. Then, regardless of the location of that gold, it became cheap,
because of its reduced demand. Therefore, we having a large
amount of gold available here or in other countries, much of which
we owned although not located there, could have a price level rise
decidedly on a gold basis, because a large supply of gold became
available. Xow the rest of the world wants the gold back again
and they are bidding for it.
The CHAIRMAN. And that creates a condition that you feel might
have to be remedied only by arbitrarily changing the price of gold?
Mr. WARREN. I think so.
The CHAIRMAN. I am very glad to get your idea. Now, as I
understand this whole matter, the whole purpose of this bill is to
change the relative prices between money and commodities as a
whole ?
Mr. WARREN. Yes,

will have no appreciable effect where there
is a discrepancy between commodities and their exchange, like between agriculture and industry?
Mr. WARREN. It will correct that, because raising the price level
automatically raises the price level to producers as compared to con-



sinners' prices. And not only that, it corrects the situation as between parts of the United States, which is extremely important. It
is no accident that the western people in all these depressions, the
people far from markets, raise most trouble, and a rise in prices
corrects that.
The CHAIRMAN. And speaking of prices, are you thinking of
American prices or world prices?
Mr. WARREN. American prices.
The CHAIRMAN. But is it not a fact that while we maintain here
an American price on most of our commodities, certain agriculture
staples are always on a world basis?
Mr. WARREN. Yes; but with some qualifications.
The CHAIRMAN. And does not that create another problem there?
Mr. WARREN. Cotton is the best illustration of the point you are
making, because it is shipped so cheaply. The chief difficulty with
cotton at the present time is that we have stopped consuming it.
It is an industrial crop, and if we raised the price of it
The CHAIRMAN (interposing). But is it not also a fact that it
costs more per pound to produce it than it has in previous years ?
Mr. WARREN. Decidedly.
The CHAIRMAN. And is that not the chief difficulty with cotton, as
well as with certain other agriculture staples that have to be sold on
the European basis?
Mr. WARREN. N O ; I would say the chief difficulty with cotton is
unemployment, and raising the price of cotton
The CHAIRMAN (interposing). But if it could be produced cheaper
there could be more of it bought %
Mr. WARREN. It is pretty cheap now.
The CHAIRMAN. I think it is altogether too cheap, but I do recall;
a southern Senator, when I asked how low had cotton been in previous years, said there was some time, 80 or 40 years ago, when it was
lower than this. I said,, "Did they lose money on it then? '' And
he said, " No; it was profitable at that time."
In other words, the cost of living was less, the wages were less.
and machinery was cheaper, and it wsis a different condition.
Mr. WARREN. If the wholesale prices of all commodities as reported by the Bureau of Labor Statistics could be raised—I am not
particular what level, whether it is 1921 to 1929, somewhere near to
that—that would restore employment. Then people would begin to
buy cotton and the price of cotton would rise because of demand
And. furthermore, if we would do something which raises our
price, level we are influencing the whole world most decidedly at this
time. England is largely waiting for action here to.see what will
The CHAIRMAN. Ob, there are certain relations, even though they
are not close relations; of course, it has its effect. But if this will
remedy the relative purchasing power between cotton and manufactured goods or wheat and manufactured goods, then it might be
another way of saying that it was the cause of that relationship
being wrong.
Mr. WARREN. I should say that it is primarily; that the primary



The CHAIRMAN (interposing). You do not attach an}7 importance
to the higher manufacturing cost coining into the picture so that it
costs more for a binder or a fork or a suit of clothes or a pair of
shoes than it did before then %
Air. WARREN. If the price level is raised, the price of a binder
would raise a very small amount.
The CHAIRMAN. Of course, I can not analyze exactly what will
happen in the future. I know what we have had in the past. Does
this relation between money and commodities do two things? Does it
first fluctuate the general price level up and down? Second, does
it create discrepancies between localities and commodities also?
Mr. WARREN. Exactly.
The CHAIRMAN. Weil, I do not think you made it clear. Does it
send the freight rate up on wheat so we can not ship it to Europe,
Mr. WARREN. Yes.

Let me back up a minute on that and take a few illustrations.
For example, the price of a horse in Massachusetts was $150 and
the price of a horse in Montana was $50. There is a difference of
$100. That $100 still exists, but the price of horses in Massachusetts
has dropped to $105 now and the price of a horse in Montana is substantially zero. Now, the Massachusetts price dropped a third.
The Montana price—there is not any.
The CHAIRMAN. Then, how in the world could this discrepancy
develop when these changes did not take place in the monetary
system ?
Mr. WARREN. They developed when it did take place.
The CHAIRMAN. Then the change in the monetary system sends
wheat up and shoes down, doesn't it?
Mr. AVARREN. The change in the monetary system and the rise in
money reduces the price of shoes a little, but it reduces the price
of hides immensely more.
The CHAIRMAN. I do not see how anything can reduce the price
of hides any. They are down to about nothing now, arc the}7 not?
Mr. WARREN. That is like the price of that horse in Montana.
The CnAIRMAN. There is no danger there any more, is there 2
Mr. WARREN. A very trivial rise in the price of shoes would put
the price of hides back where the}' were.
The CHAIRMAN. For instance, a labor group decides that they
want a certain price for a certain kind of work, railway work or
plastering, and they succeed with it. That is due to the monetary
system, is it not?
Mr. WARREN. NO ; not necessarily.
The CHAIRMAN. Then there are other causes in the picture; is
that it?
Mr. WARREN. Certainly.
The CHAIRMAN. Then there must be other remedies necessary also.
Mr. WARREN. Remedies for what?
The CHAIRMAN. For the inequality that exists.
Mr. WARREN. I would not want to make the statement that at all
times in history the relative pay for a carpenter, say, a plumber, a
janitor, a Congressman, were always in adjustment; correct



The CHAIRMAN. NO ; but when you get one out of line, does that
not tend to throw the balance out of line?
Mr. WARREN. Yes.

not the very fact that it costs more to build
a house now than it formerly did one reason why people are holding
back on further house construction?
Mr. WARREN. Not at the present time.
The CHAIRMAN. Well, I don't know. I had a Los Angeles man
tell me that that was the feeling out there; that houses had already
shrunk in value and wages were shrinking, and they had the feeling
that with further shrink in wages, there would be shrink in the
production costs and shrink in values and they did not like to be
caught in it and they were holding off.
Mr. WARREN. I think that is the general opinion:, but I think it is
entirely wrong.
The CHAIRMAN. In other words, you think whether one pays plasterers $5 or $15 does not change the price of the house?
Mr. WARREN. Yes; I think the less you pay the builders at this
time, with the situation as it is to-day, then the less value for all the
houses built, and that those houses which are built and which already
have debts on them are thrown on the market and will be sold for
less than whatever this new cost is, and, therefore, the more you
reduce the wages, the less building you get until you get liquidated,
which will be several years.
The CHAIRMAN. All right; I can follow you on that all right.
Therefore, as I said in the beginning, I should like to have maintained our high cost and our high prices, once having reached that
level. But, of course, we were up against this thing; that we should
be deflated out West because we had gone up during the war and
the rest of the country should stay up because they belonged up.
I am wondering how the change" of the currency' system would
change that relationship.
Mr. WARREN. It changed it most decidedly. I ha\e some figures
The CHAIRMAN (interposing). We are up against this now. As
you said, the cost of producing commodities is greater. Our market, or rather, the fanners' market, is the European market. Other
people with the high costs had the American market, winch was a
different price level from the other. How can a change in the currency system bring about anything like a situation similar to that?
Mr. WARREN. The major market for the American farm products
is the American market.
The CHAIRMAN. It ought to be. May I ask now, what difference
does that make, that we sell 09 pounds of butter in America and one
in Europe, providing the one we sell in Europe fixes the price on
the other 99 at home ?
Mr. WARREN. Well, it does not. It is the total supply balanced
against the total demand that fixes the price.
The CHAIRMAN. Well, this you arc agreed; that we can not get
any better price for a pound of butter consumed in New York than
we can realize for it on export?
Mr. WARREN. The biggest discrepancy in that situation is not as
between America and Europe but between an American farm and
an American export point.



The CHAIRMAN. All right; but, of course, it has been generally recognized, and I think you will agree to that, that Liverpool generally
fixes the price of wheat in the world, and that we get Liverpool price
less cost of transportation.
Mr. WARREN. N O ; I can not agree with that.
The CHAIRMAN. Generally.
Mr. WARREN. NO; not generally true. It would be just as true to
say that Chicago fixes the world price. In fact, we know definitely;
we have worked out a percentage basis on the relative importance of
American production on American price and world production on
American price and work! production on workl prices. The statement that the Liverpool market fixes the price is not true. In fact, a
great deal of the time, most of the time, our price is higher than
Liverpool prices.
The CHAIRMAN. I realize that when the Farm Board tried to peg
it, it had no relation to Liverpool. I realize that. But I am speaking of the 30 or -10 years I have had experience in selling wheat. The
Liverpool market is what has governed it. I will admit that the
markets in every land have an influence, including the Chicago market. It seems to be a sort of a clearing house. However, we have
never been able to get Liverpool prices except under extraordinary
Mr. Yf ARISEN. The most important effect of a decline in the price
level to an American faim is the discrepancy that it injects between
the American farmer and the American consumer's price if he sells
here, or on the American export point price if he sells foreign.
Now, for example, when prices rise, prices in Saskatchewan as
compared with eastern Canada I happen to have in mind, prices in
western Canada trebled, Saskatchewan selling on the same market.
The CHAIRMAN. YOU are speaking of just recent yeans?
Mr. WARREN. Yes; in the rising-price period. Now, the same in
the reverse. For example, take this egg situation. Eggs are 5 cents,
I understand, in Texas, Those same eggs would be about 15 cents
in New York. Now, a Rhode island farmer—of course, he will have
better eggs than that and he gets more—but, suppose he had the same
eggs, ond if eggs drop from 30 cents to 15 cents in New York the
Rhode Island farmer would be getting half what he got, but the
Texas farmer's price would drop from 20 cents to 5.
The CHAIRMAN. On account of the longer transportation?
Mr. "WARREN. The fixed charges in between. And here is an interesting result of that
The CHAIRMAN (interposing). Let me ask, does that not also
establish the domestic price in Texas? In other words, the New
York market price fixes the domestic price in Texas i
Mr. WARREN. Always less a constant amount, and there is
The CHAIRMAN (interposing). Oh, yes; but comparatively speaking?
Mr. WARREN. Yes; that is right.
The CHAIRMAN. I think that illustrates the revy point I was speaking of about Liverpool and here. In other words, if you have a
central clearing place
Mr. WARREN (interposing). Provided they ship to that point.



The CHAIRMAN. Yes; but the man who sells eggs in Texas that
are eaten in Houston does not ship to New York, and still he gets
the New York price, less transportation to New York.
Mr. WARREN. Provided most of the Texas eggs are shipped that
would be true; but if most of them are eaten in Texas, that would
not be true.
That situation, or that discrepancy, is also illustrated by this
point, that when we had this terrible agricultural depression which
lias lasted so long, the Federal land bank, up until recently at least,
had never taken possession of a farm in the State of Ehode Island.
Now, you may think that there are no farms there.
The CHAIRMAN. I have been there. It is quite a farming district.
Mr. WARREN. Yes.
Senator GORE. IS all
Mr. WARREN. There

the farm in the State?
is about the equal of three or four Oklahoma

Senator GORE. And if this one farm lay within the State of Ehode
Mr. WARREN (interposing). It would be equal to two or three
good counties.
But the point is this, that southeastern New York, northern New
Jersey, Connecticut, and Ehode Island, when this depression came
on, 'because they are near market and these distributing charges do
not eat them up, have not had a real depression. Western New
York is hit a good deal like the Western States, not so much.
The CHAIRMAN. I agree absolutely with your statement as to the
effect of shipping and transportation cost between New York and
the interior of the country, only I insist that it is a general rule;
it is not a special American rule; it is a rule any old place.
Mr. WARREN. Certainly.
The CHAIRMAN. That if you sell goods, you have got to deduct
the transportation charges.
Mr. WARREN. That is certainly true; and when transportation
charges remain fixed, then a drop in the price level which might not
be serious near a market, becomes overwhelming when you reach
Iowa, and when you reach Montana, things may have no value.
Now, conversely, if you restore the price level it might raise very
little the man near market, but to the man farther from the market
it becames of supreme importance, and the difference is greater than
is generally realized. We have worked that out for different regions
in the United States, and it explains very definitely why in every
period of depression it is the farmers far from market who are considered to be radical. It is because they are hurt so severely. Now,
you take right now
The CHAIRMAN (interposing). That is on the theory that it is the
hungry man that is radical?
Mr. WARREN. Yes; that is it; the man that is hit becomes radical.
The CHAIRMAN. In other words, there may not be anything the
matter with his head; it is his stomach ?
Mr. WARREN. We have an interesting situation on that this year.
The Department of Agriculture figures show that the incubation of
eggs in California is decidedly down. For the United States about
the same, I believe, as last year, and for the Eastern States it is
rising. For instance, New York is incubating more eggs than before.



New York competes directly witli California on eggs; two competitors in the same New York market. We will say a year ago they
were both getting ?>0 cents in New York, and now prices have
dropped to :J0 cents. The California producer was getting 30, less
about 10, or '20 cents. The New York farmer was getting about 28.
Now California is getting 10, the New York farmer IS. My illustration is just a little too optimistic for New York City is now below 20.
Rising prices, conversely, vvIII help the California man more. The
West had a stimulus to agriculture in the rising price period. It
was the principal cause of the rise in price of land in the West.
The CHAIRMAN. The West had the rising land values. Did anything else rise in the West faster than it did in the East in the same
Mr. WARREN. Yes. The land values rose decidedly in the West
on farms.
The CHAIRMAN. HOW much did they rise?
Mr. WARREN. Well, 1 haven't the figure right here; about doubled.
The CHAIRMAN. Seventy-five per eont; ail right.
Mr. WARREN. Here is what has happened to farm values
The CHAIRMAN (interposing). What was the increase in the price
of building in the East during that period?
Mr. WARREN. During that period relatively little. It came later
when they got cheap food.
The CHAIRMAN. What was the cost of replacement of building at
that very period in 1919 ?
Mr. WARREN. I think more than the price of buildings?
The CHAIRMAN. In other words, if you were to rebuild a building
in the East it would cost you at least 75 per cent more than it would
a few years before?
Mr. WARREN. I would have to look it up and check it.
The CHAIRMAN. N O : but you recall that in 1919, the high production costs, and still you are talking about western lands going
high. You will find your eastern stuff went higher than the western
lands did, if you use the census figures. If you take a certain Iowa
newspaper that wrote up the sale of a piece of land somewhere, of
course you get a different idea.
Mr. WARREN. The figure I have taken is the comparison I wanted
to make about eastern farm land ami western farm land competing
on the same products.
The CHAIRMAN. That is hard to do. because that is often a question of fertility. Land values are not based on acreage. It is often
based on soil conditions. So I will admit the difficulty in that. The
rise was less than in the East.
Mr. WARREN. The rise in the East was less and the decline is now
The CHAIRMAN. Of course, there was this element, that some of
the eastern land like Connecticut and Rhode Island is really a residential section. It is not so much dependent upon the earnings of
the land. The other thing is the very thing you stated and that was
this, that they did not suffer in earning power like the West did.
They were closer to market.
Mr. WARREN. Yes.

mentioning ?

does not that explain the very thing you are



Mr. WARREN. If you had identical farms near market and far from
market, a rise in prices causes a greater rise in prices of that farm
which is far from market than the one nearest, and the decline in
prices hurts the farm far from market much more than the farm
near by. It may overwhelm it.
The "CHAIRMAN. I agree with that absolutely, but there is one more
element in it. The production record shows the West and the South
raise staples. They confine their market largely to Europe. This
section products for local consumption, and the Industrial Conference reports show this, that when the western and southern farmer
took a shrink of 15 per cent, New York State took only li' per cent,
Pennsylvania about the same, and that the New England farmer
actually gained about C per cent in his current income over that same
period when the shrink was in the West. Was it not due to the fact
that he had the ability to boost his price in proportion to the cost of
production, and having a local market he was not dependent on
Europe ?
Mr. WARREN. Well, you take the egg situation, which has4 nothing
to do with Europe. You have the New York farmer competing directly with the California fanner, both using Iowa corn and selling
in the same market. It is a much better market than anything that
ever existed in Europe for eggs. They are absolute direct competitors. Now. when the price level was rising it was a much greater
stimulus to California and the Pacific coast pushed into the poultry
business. Now, this stimulus has fallen and the eastern farmer is
not so bad off as the Pacific coast, because the 10-cent intermediary
charge sits there, and if prices in New York City drop to 10 cents
the western farmer gets zero.
The CI-IAIRMA:N. Well, if you want us to admit a man remote from
the market with a high transportation cost is in a risky business, I
think we can all agree that the record should show that, and that
raising Qggs 3,000 miles from the market is more hazardous than
raising them 30 miles from a market and it is bound to fluctuate
more. I do not think we have any difference of opinion on that at
all. And you will pardon me for so many interruptions here, but it
is helpful to me if it is not to the other members of the committee.
Senator THOMAS of Oklahoma. May I ask some questions?
The CHAIRMAN. Certainly, Senator Thomas.
Senator THOMAS of Oklahoma. I am not a member of the committee, but for the benefit of Congressman PettengilL of Indiana,
I would like to ask these questions.
You stated that you did not believe this bill would do as much
as you would like to see done. As inflationary measures what are
your views about the respective merits of the Goldsboi ough bill and
the pending soldier bonus bill or bills ?
Mr. WARREN. YOU have two questions, if I may divide it. One
is as to what would happen if you do a certain thing and the other
is which is it desirable to do? The latter includes the question of
expediency. The monetary effect of any two measures will depend
on which causes the greatest increase in 'monetary circulation. That
is equal amounts of additional currency put in circulation, for whatever reason, would have the same effect on prices.
If you were to take the soldiers' bonus, say, with X dollars
increase in the currency and we w r e to. say, change the weight of



gold in a dollar or by some other means increase the currency by X
dollars, the effect on prices would be the same.
Senator THOMAS of Oklahoma. Do you hold to the quantitative
theory of money i
Mr. WARREN. Yes.
Senator THOMAS of

Oklahoma. Do you not agree that the velocity
of the money in circulation would have something to do with the
commodity prices ?
Senator THOMAS of

Oklahoma. In other words, the banks might
be full of money but if that money could noc be gotten out where the
people could g^t it, it would not have any particular effect upon commodity prices I
Mr. WAT^KEX. Under a situation such as we are in to-day, with
banks of necessity having extremely high cash reserves and thereby
in effect practically sterilizing 11101163% many individuals fearing
to put money in the bank, with a proposal to tax checks, which will
tend to suggest payment with cash—ail those different things show
that a larger amount of currency than normal would be necessary
to get normal price results, because much of it would be idle.
After we have put out enough currency in some form to satisfy
the cash reserve which the banks need, and the man who wishes to
hoard, then we will get come effects of increasing currency.
Senator THOMAS of Oklahoma. The Federal reserve at this time
is buying approximately one hundred million dollars of bonds
weekly. Do you not believe that it would be necessary for the Federal reserve to continue this operation until such time as they have
bought enough bonds to permit the banks to liquidate their indebtedness with the Federal reserve, so that the excess notes will begin to
coagulate or assemble in the banks, and that we must wait till that
point is reached before we see any perceptible change in commodity
prices ?
Mr. TVAP-KJKN. If they would buy enough securities and continue
long enough, ultimately it would result 111 an increase in currency
and accomplish the same result. Of course, we do not know how
long they are going to continue that policy or whether the}7 are
buying fast enough.
if we had legislation such as this proposes, it would recognize
two things: the importance of the commodity price level, and we
would recognize what commodity price level to use, the United States
Bureau of Labor statistic index of wholesale prices of all commodities, which is the best there is; that monetary means can raise
it, and we expect our banking system to act with that in view. If we
adopted any such policy it would also have a psychological influence
on prices.
Senator THOMAS of Oklahoma. If the Federal reserve policy is
continued it will be away up in the summer, August or September,
before we see any appreciable change in commodity prices. Do you
not agree to that?
Mr. WAIJREX. I should hesitate to say at what date we would
reach it with that particular sum. Apparently progress in effecting
a price level is not in sight.
Senator THOMAS of Oklahoma. Well, the facts show that the more
bonds they buy the scarcer money is, because circulation shows that.



Last week it decreased and the week before it increased, and it has
fluctuated in that way from time to time. So the net results since
the first of the year is that we have had a decrease in circulation of
200,000,000. This shows that we are going in the Avrong direction.
Mr. WARREN. We are either going in the wrong direction or we are
not going fast enough in the right direction.
Senator THOMAS of Oklahoma. I agree with you thoroughly.
The CHAIRMAN. I am quite impressed. Doctor, with your thought
that after all there may not be gold enough in the. world to meet
the present business situation with the present state of mind and
that these matters we are trying to work out may not have anywhere near the desired effect. What would be your thought as to
the method of working that out? Supposing it should be found
here by fall that we are not getting the increase in the price level
that you hoped for? Is it your thought that this country alone could
change the ratio of gold in the dollar or the weight of gold in a
dollar or that it would have to come in some other way.
Mr. WARREN. We can change it any time we wish. France
changed hers, and is therefore on a certain price level. There is
about a fifth as much gold in the franc as there used to be. Of
course, we do not need to do anything so drastic.
By the way, we changed the weight of gold in a dollar in this
country in 188-A by congressional action. We reduced it by about G
per cent, and that is the way we got on a gold basis without intending to. We changed the ratio of gold to silver by reducing the
weight of gold.
The CHAIRMAN. The discouraging thing to the layman is to have
his attention called to the fact that so many things "happen that we
do not intend should happen as a result of certain acts.
Senator GORE. That effort in 1834, the change in the weight of a
coin, was intended to establish a parity between gold and silver,
was it not?
Mr. WARREN. Yes.
Senator GORE. And to reconcile the
Mr. WARREN. But it went too far,

legal ratio?
because Europe had different
ratios, and therefore we shipped silver and they shipped gold.
Senator GORE. Yes; and we changed again in 1837.
Mr. WARREN. Pardon me. I do not think I answered you yet
[addressing the chairman].
The CHAIRMAN. Yes; I think you did that very well, Doctor. You
take the position that simply an act of our own Government will
accomplish that purpose.
Mr. WARREN. There are many ways in which you can increase the
currency. The soldier bonus will do it. That is issuing money.
The CHAIRMAN. That is simply by the inflation method ?
Mr. WARREN. Yes.
The CHAIRMAN. By more money?
Mr. WARREN. Yes.
The CHAIRMAN. May I ask this:

Do you feel that an issue of
$2,000,000,000 of Government currency at "this time would still keep
us on the gold standard?
Mr. WARREN. I should doubt it, as I should think we would have to
put restrictions on the withdrawal of gold by foreign countries.



The CHAIRMAN. YOU think with that we might have inflation
and still be on the gold standard of the present gold dollar, do you?
Mr. WARREN. Of course, there are various degrees of the gold
standard. You might maintain a gold standard in this country but
not allow export, as we did during the war. Yet we were on gold
standard internally. There was a slight premium at one time on
gold in Mexico, showing that they began to think that they would
rather have gold than our dollar. But within the United States
we were on a gold basis, although gold was not too easy to get.
The CHAIRMAN. AS I understand it, then, there are two methods
of inflation; one is to inflate on the gold standard, and the other is
to cut the gold dollar and get the inflation that way?
Mr. WARREN. That would be one of a number of ways.
The CHAIRMAN. And the third one would be to ignore the gold
dollar and be on some other basis; is that it ?
Mr. WARREN. Yes; you could do it any number of different ways.
A large part of the world has reduced the weight off gold in the
monetary unit. France and Belgium and Italy and most of the
Continent of Europe has done so. If England should finally decide
to establish the pound on their approximate present ratio, she would
cut down 25 per cent. Of course, it is within their power
The CHAIRMAN (interposing). Would we not be materially handicapped if we were on a different gold standard from the rest of the
world? Would we not find it difficult to compete in the markets of
the world Avith our commodities v
Mr. WARREN. If England reduces the weight of gold in the pound
by 25 per cent it wiil help her in the competitive position in foreign
countries rather than hurt her. Her pound then would be just as
stable relative to our money as it was before the Avar, and by reducing
the weight of gold in a pound she would reduce her costs of production and make it easier to sell in foreign markets, just as France
made it easier for her to sell in the foreign market when she stabilized
the franc with one-fifth of its former weight of gold.
Senator GORE. But that. Doctor, was virtually a repudiation, Avas
it not ? That is what it was, was it not ?
Mr. WARREN. Any such means, of course, means that the internal
debt of the country is ordinarily reduced by that amount.
Senator GORE. She reduced her external debt; that is5 she paid
people Avith her francs at full value?
Mr. WARREN. Yes.
Senator GORE. There

is no controversy about that. NOAV, I want
to ask you a question or tAvo about this changing the number of
grains in a gold dollar, jbecause I rather get lost in a moral and
economic morass there.
I think you put your finger on the correct
spot when you sajT the debt is the chief trouble, but it seems to me
that you bring us up against the choice of evils.
Now then, supposing I enter into an agreement with you to pay
you a thousand dollars in gold. Time passes and Congress decides
that that is a little too heavy; that my debt is a little too heavy for
me to pay. Under our agreement I would have paid you a thousand
gold dollars 25 grains fine, say, 25 grains in round numbers. That
would be 25 grains of standard gold, not fine gold. Congress comes
along and says my debt is a little too heavy for me to pay and passes
a law reducing the number of standard grains in the standard gold



dollar to 20 grains, and says that I can pay you a thousand dollars
"with that kind of gold. I pay you with gold which would have paid
$800 at that time."
Now, then, at the time I made that contract with you to pay you
a thousand gold dollars I agreed to deliver you a thousand bushels
of wheat at the same time. Congress comes along and says that
wheat debt is a little too heavy to pay, and Congress passes a law
providing that I can pay you a thousand bushels of wheat with 800
bushels of wheat.
And I also made a contract to pay you a thousand bales of cotton
•with a 500-pound bale. Congress says that debt is just a little too
heavy to pay and passes a law that I can pay you a thousand bales
of cotton "with, bales of cotton that weigh only 400 pounds.
Now, is that honest?
Mr. WARREN. The situation as I see it is about this: That we have
incurred debts which if paid would be very good for the creditor,
but they can not be paid.
Senator GORE. That is the pity of it, Doctor.
Mr. WARREX. The creditor was not expecting to use gold when
lie made the contract.
Senator GORE. The trouble is a great many of them stipulate gold.
Mr. WARREN. Yes: but I mean the creditor was not expecting to
use gold. He expected to use the buying power when the debt was
returned. If the creditor gets the buying power which he anticipated when he lent the money there has been no injustice done him.
Senator GORE. Then you think the 800 bushels of wheat—wouldn't
that he the shorter route, just to have that 800 bushels of wheat count
for a thousand?
Here is what I have in mind in my question: One king of France
is reputed to have changed the weight of their standard of value
seventy-one times in nine years. The Roman Empire increased the
alloy in its coin in course of history down to three-fourths of the
value of the coin, and the legal tender of the value of the coin stayed
the same. When the French Revolution broke out they changed their
unit of value from a lire to the franc. The standard of tlie lire at
that time contained one-seventy-eighth of the amount of precious
metal it contained when it was adopted as a unit of value.
Now, you know kings who have done that have been reprehended
in the course of history as being dishonest.
Now then, I get your point and I agree with you that it is a great
tragedy for these public debts to have" to be paid three times and the
farmers have got to dig three times as much out of the ground to pay
these debts as they were worth when they were contracted. But if I
shoot you accidentally it is just as bad for you as a misfortune, but
if I deliberately aim a gun at your heart and shoot you dead it is a
very different moral transaction from my point of view.
How do you escape that moral phase of this problem? I know
France repudiated, and I think it would be better and a little more
straightforward for us to pass a law and sav that $500 should pay a
$1,000 debt. It is mystifying to me.
Mr. WABREN. I should think that as a long-time policy ultimately
we have got to come to an all-commodity dollar of some form, rather
than a one-commodity dollar. This means varying the price of gold



from time to time so that all our currency will have a constant buying
power instead of being a constant weight as it is now.
Senator GORE. Would it not be better to vary the amount of the
debt instead of tinkering with the gold dollar and changing a few
grains now and then and taking a few away and putting a few back
now and then; just pass a law and say you owe $1,000 and you can
pay it off with $600?
Mr. WARREN. YOU would have to change too many other things.
Senator GORE. That is all you have to change. Of course, you
would have to stratify your debts in a way.
Mr. WARREN. I think we will eventually come to an all-commodity
dollar which has a constant buying power but varying weight as the
best dollar for society. The way in which it is feasible to change is
a political and public question. The justice of it is not debatable.
Senator GORE. That is true. I wondered about this and I would
like to ^et your reaction to it: When I was a youngster I used to
tinker a good deal with perpetual motion. I tried to make a thing
move all the time and it showed an uncontrollable disposition to
stand still. In our efforts to change and vary this dollar are we
not trying to make a thing stand still that has an ungovernable
tendency to move? Are not the two things equally impossible?
Mr. WARREN. N O ; I should say not. A decided change in the
weight of gold in the money, such as has been made by a large part
of the world and promises to be made by most of the rest of the
world, such a decided change as that, which looks as if it were
likely to be nearly world-wide, is only justified by being better for
society than the next best alternative.
Senator GORE. I am not certain that repudiation is always the worst
of evils. I am not passing opinion on that.
Mr. WARREN. But as a long-time proposition I think we have the
wrong kind of a dollar. It is a measure of weight, not a measure
of value, and when I borrow a thousand dollars of you I lend you
buying power.
Senator GORE. Yes.
Mr. WARREN. Not gold.
Senator GORE. Surely, and if you could return the equivalent
Mr. WARREN (interposing). I want to return to you the equivalent buying power.
Senator GORE. That would be ideal, but now, Doctor, is not this a
fundamental and insuperable difficulty, that value is not inherent in
things? It is not the property of things; it is a relation between
different things, and our dollar attempts to measure that relationship and used to do that which it does not do now.
Mr. WARREN. If we took this Bureau of Labor index number that
is the best measure of relationship as a standard. But I think
really I should not be going on with this particular phase of the
Senator GORE. Well, I beg your pardon.
Mr. WARREN. This is a thing that Professor Fisher or some one
who has worked more in that field would be much better qualified
to answer than I am.
The CHAIRMAN. The committee is in no hurry to adjourn, and if
Mr. White will come forward we will be glad to hear him.






Mr. WHITE. C. K. AYhite, president of the New York State Farm
Bureau Federation, Ionia. X. Y.
Mr. Chairman and members of the committee. I want to say that
I am going to be very brief, because I am very close to Doctor Warren in the work he is doing, and I induced him to come down here
to give you the actual facts and statistics in regard to this, which
I thought would be very much more valuable than anything I might
1 want to say this, that I am a very strong supporter of the theory
of an index dollar governed on commodity values, because the purchasing power of commodities, a level price of commodities, is the
basis on which we can arrange all of our human affairs. Our difficulties and our distressing conditions come from the uneven conditions that are brought about through decline or the enhancement of
these values and the adjustment of all other things to correspond to
the decline or the increase in the value.
When we have a stable commodity price everything else finally
adjusts itself to it. Wages, salaries, values of property, transportation charges, every last thing adjusts itself finally to commodity
values. That is to say, if we should have a period of 10 years of a
stable price level, that is, the average commodity price level should
be stable, we would finally find adjustment of all of these things and
we would be in a very fine position as long as that remained.
We have the example of that during Benjamin Strong's administration of the Federal reserve bank, where we had a very stable level
of commodity values. Before that time
when we were inflating, we
were talking all the time about the u vicious circle " we were going
through. Labor was making its demands for increased wages.
Salaries had to be increased, and you know the. papers were full of
the fact that we were going through a vicious circle. Wages only
increased cost of commodities, and then it just went on and on.
We are now in a " vicious circle " going back, and the vicious circle
going backward is very much more tortuous because it is very much
harder to adjust than where the vicious circle is going up. Because,
as has been pointed out here, our debts do not come down. Of course,
in the going up the creditor or the person with fixed incomes were
the ones to suffer, because they did not have income enough to buy
the necessities of life. Now we have just the opposite case, where they
can buy more but other people can not get enough to meet their
obligations, and therefore we are in state of liquidation.
I see no difficulty, especially through the more arbitrary means of
changing the price of gold to" correspond to an index level in raising
the general price level.
The CHAIRMAN. I am not sure I understood your last statement.
Mr. WHITE. I see no difficulty in having either a bureau in the
Treasury or the Federal reserve bank change the price we pay for
gold from time to time as shall be indicated on an index figure of
commodity prices.
The CHAIRMAN. Paper gold in commodities?
Mr. WHITE. NO, what they would pay for gold in the dollar. We
are paying $20.67 an ounce for gold, t h a t was established in 1837.



We have paid it ever since. If we should pay $30 an ounce for gold
now we would be approximately with the dollar on the same corresponding value of the English pound. They deflated their pound
to the market value of gold, deflating it about one-third. If wo
paid $30 an ounce we would have lo.o grains of gold in a dollar,
which would be a deflation of the value of the dollar by about onethird, which means a corresponding increase of commodity prices.
I think we have got to come and should come to a scientific basis
of fixing a static value in the dollar.
I just want to call your attention to this fact, that section Sr
Article I of the Constitution places the burden of doing just that
thing upon the Congress; that they should coin money and fix the
value thereof on the value of foreign coin and establish weights and
And, gentlemen, when you study into the weights and measures
that we have to-day and see how finely they are adjusted, and even
the Bureau of Standards is not satisfied with adjustments that are
so fine that to the layman they are almost beyond their comprehension, yet we havo taken two plans of fixing the value of the dollar.
One is that we will pay a constant price of gold regardless of what
the world demand is or what the world supply is. and the other is
that we will allow a banking institution, semiofficial and semi business,
to, without any mandate or any particular standard that they shall
work to. solely upon their judgment, increase or decrease the
currency as tliey see fit.
I want to say, gentlemen, it seems to me that is a tremendously
dangerous power to place in the hands of any body of men. I do
not believe that any group of men, public officials, ought to want
such a power. I was for some years connected with the Department
of Agriculture and markets of tho State of New York, which is a
regulative department very similar to the Agriculture Department
in Washington in many respects, and I know that the officials in that
department do not like to have laws passed by the State of Xew
York which give them wide discretionary powers. It is necessary to
give them some discretionary powers, but they like to have the direction made in the statute just as clear as possible to govern them in
the exercises of those powers. Because, when you grant broad discretionary powers to men they may be perfectly honest in the exercise of that discretion, but if they err, why, they are subject to very
severe condemnation.
On the other hand, without any reflection on the Federal Reserve
Board or anybody else, I can not conceive of an institution so close
to great monetary interests that there might not be pressure brought
to bear upon that body to do things which were contrary to the best
interests of the people of the United States. It puts a man in a
position of that kind in a very difficult situation indeed.
I want to say there, as I said before, I am not reflecting on anyone
and I do not want to cast a suspicion, but there is a possibility.
I would like to just give a little illustration of my conception of
money and say it is the lifeblood of trade. It is just as essential to
trade and commerce and all things that relate to the welfare of our
people as the blood of the human body.
But I want to make a contrast, gentlemen, upon how the blood of
the human bod}7 circulates and how the circulating medium upon



which commerce is carried on circulates. The supply of the lifeblood of your body responds to your brain as to the action of the
members of your body and does it properly. That is, you start and
walk or run. It is the inspiration coming from your mind that
compels you to do it. But when you use those muscles your heart has
to respond with increased circulation.
And the opposite is true, and we all know, gentlemen, what happens when that heart takes a notion it wants to run the machine.
You do not run and you do not walk, and the probabilities are you
are gone. That is exactly what has happened in the United States.
Senator GORE. NOW, in your illustration, Mr. White, you say when
a man runs his blood circulates faster. It does not increase in quantity; it just increases in velocity?
Mr. WHITE. Velocity, yes. But what I am getting at, Senator, is
the fact that that power which dictated that is not the heart itself
but is your brain. Therefore I want to bring this fact out, that it
ought to be the brains of the commerce and the business of the United
States that directs the amount of circulation and those things which
direct the flow of lifeblood of business, and not some central organ
which closes it down either because it can not function because some
one's desire or judgment keeps it from functioning.
Senator GORE. I was wondering, your illustration being money as
the lifeblood of the body economic, if it might not be the increase
in the rapidity or velocity of circulation that would suffice there, like
the increase of volume of blood in your veins. It is not the volume
of blood; it is the velocity.
Mr. WHITE. YOU have to have quality of blood as well as velocity,
which is a very essential thing, and that is the same thing as the
quality of money.
Senator GORE. Without any change in the volume or quality of
blood, in your illustration a while ago about running, you accelerated
the flow there.
Mr. WHITE. Yes; but it is the mental part of the body that dictated
what the circulation should be, not the heart which does the pumping. That is what I was getting at in this. I feel that the American
business man and the American people are more competent to decide
when they ought 7to do business and the flow of money into channels
of trade than an} body of men that can be selected by the President
of the United States or by Congress or by anybody else. I believe
we would be on a perfectly safe basis when money responds to the
requirements of the people, rather than through any arbitrary power.
The value of money I think should be maintained as static as possible,
just as near comparable with our other units of measure as it is
humanly possible to make it on a scientific basis.
And, gentlemen, I have a very strong suspicion—I have not been
to see them—that if you should ask the Bureau of Standards to set
you up a dollar which would be static as their other measures are,
those gentlemen would give it to you.
When we get it out of the generalization of thought into a scientific consideration, I think you would find a solution. You know it
occurred to me sometimes as I hear the discussions over the country
that so many people are about in the same position as the woman was
who had a sick boy and sent for the doctor. The doctor came in
and looked over the child and said, " Well, he is a very sick child,"



and the woman's remark was, " Larniir is a very great thing." That
is the great trouble of this. Our learning is all right, but we have
not got it boiled down to a scientific basis.
And how much more necessary and material it is that this particular measure be accurate than any other measure we have. We
use it pretty nearly as much as we use all other measures. We use
it to make measurements, as the criteria to enter into bargains which
last over long terms of years. It certainly ought to be static. No
manufacturer would care to make a contract for a given number
of yards of cloth if he did not know whether his yardstick by which
lie measured it would be 24 inches long or 48 or 36.
Senator GORE. IS that quite an applicable analogy, Mr. White?
The point I made a minute ago—value does not inhere in commodities; value is the relationship between different things, and if either
one varies flie relationship varies and therefore the value varies, and
how can you have a fixed measure of value when value itself, being
a relationship between different things, is constantly varying?
Mr. WHITE. There will be between the individual things but with
an average price level of 740 commodities as your index it will not.
We want that dollar to agree to that index figure, because you can
not make it agree to all different commodities any more
Senator GORE (interposing). And on your own theory you will
have to change the number of grains in the gold dollar off and on
from time to time.
Mr. WHITE. N O : we would buy and sell. We would do just what
France does, stop coining gold entirely, and would use it purely
for redemption purposes, and we would redeem our money in the
dollar of gold that carries the exact value that was indicated by the
index figure. That is what we want.
Senator GORE. YOU do not mean that we fix the number of grains.
You do that now.
Mr. WHITE. NO. It would fix the price of gold, which is the
equivalent of determining how many grains the dollar would
Senator GORE. From time to time?
Mr. WHITE. Sometimes it would be one amount and some another.
Senator GORE. Yes.
Mr. WHITE. But it would correspond to the value of gold and not
the quantity.
Senator GORE. Something has got to vary in this measure of value.
If you stabilize your value and vary the standard, if that were a
human possibility
Mr. WHITE (interposing). You raised the question with Doctor
Warren a few minutes ago, Senator, on the basis that if you had
made a contract that would require a certain amount of gold and it
ran for a certain period of years and then he wanted to pay you
with half as much gold, if that half as much gold bought as many
of the commodities and the things we require in life as double the
amount bid when the contract was made, it was just, and that is
exactly what we want to do. to scientifically adjust the dollar. Y\e
want to give you an amount of gold which will buy the same commodities that would correspond exactly with the same things that
you could have bought when vou made the obligation.



Senator GORE. If YOU could buy only half as much with the gold
when you paid me
Mr. WHITE (interposing). Why, I ought to be placed where I
"would give you twice as much gold, and that is exactly what the
index figure will do. If prices went up, and up, and up, why,
then the amount of gold that you redeem your dollars on would go
up correspondingly, and that will give you gold enough to buy the
same amount of commodities.
Senator GORE. Why wouldn't it be just as well, Mr. White, from
time to time to provide that we pay it off with $500?
Mr. WHITE. That would be just if you happened to have a man
who happened to be in the particular situation that you offer here.
If it were a man who made a $10,000 salary and I loaned him
$1,000. there would not be any particular reason why I should make
any adjustment with him at all.
As a matter of fact, there was an article in Forum Magazine some
time ago where a man offered the plan based on the index, changing the amount of gold in a dollar to keep the dollar static, with
the idea that we should adjust every transaction upon the index
basis. That is. if a man gave a note for $1,000 due in six months,
if commodity values increased he would give a correspondingly
increased number of dollars. If they had gone down he would be
let of!' with a correspondingly less amount of dollars. That would
mean with hundreds of thousands and millions of transactions we
are entering into every day among our people adjustments would
have to be made all the time, and I am very fearful that the man
who is very smart would probably get the best of the bargain. I
think it is a good deal better for the Treasury Department or the
Federal Reserve Board to fix those adjustments in one item.
I want to go back on just two matters. We go back to the Colony
of Massachusetts and they recognized that exact point. There was
a bond issued in the Colony of Massachusetts on which they used
the index. They agreed to pay a certain number of Spanish mill
dollars, and then they enumerated certain articles which were the
articles of common production for use, and named the prices, and
stated the amount should be less or more as the average price of the
said commodities was less or more.
In another case Franklin I). Roosevelt, when he was Assistant
Secretary of the Navy, 1adopted an index number before the war
broke out to determining of wages that the employees in the navy
yard should get, and the first year their checks through the accounting department were changed five times to keep up with the amount
of salary that was necessary to cover the index on the cost of living, and they changed when it went Vae other way. It all comes
down to a scientific problem.
I want to say this, that the favorable sentiment o:i this matter
is gaining, Mr. Chairman, very rapidly in the State of Xew York.
As a. matter of fact, our people are understanding this proposition pretty well up there.
The CHAIRMAN. And you think it has gotten so the creditor would
rather take the commodity than foreclose on the property?
Mr. WHITE. Well, Mr. Gannet, head of a chain of newspapers,
I think some i'2 or I-L came out with a very long article this week
in which he is taking that position very strongly. The lieutenant



governor of the Stute of New York, Mr. Lehman, who is one of
the four members of the Lehman Bros, banking institution, made
a speech in New York City to the Ad Club, in which he said we
must have some inflation.
And yesterday I happened to meet the governor and talked to
him just as he was leaving the hotel where I was, and told him
I was coming here for and something about it, and he said, ik AVell,
we must have some inflation, Mr. White, but we do not Avant any
fiat money business, but we must have some kind of inflation."
The CirAiifMAN. If they do not want one kind they might ^t4 the
other kind.
Mr. WHITE. They will, and that is what we fear. "We want the
right kind and not the wrong kind. I do not have anything more
to say, but in closing I will say that we held a meeting of the secretaries and presidents of the farm bureaus and some other men of the
States of New England, New York, Pennsylvania, and New Jersey,
at Albany a short time ago, and they passed this resolution
[reading] :
Rcsolrcd. That we reiterate our approval of the program of the American
F'arm Bureau Federation in relation of money adjustment and restoration of
the commodity price level as of 11)21), as a sound means of relieving economic
depression. The decreasing supply of gold which lias caused gold to increase in
value 21) per cent since 1021). has brought commodity prices below pre-war
7iV.N'o7ny7 further. That we request all groups interested in economic welfare
to study the monetary problem and note the situation whereby the supply of
gold determines .'he level of commodity prices.
licHolvci] further, That we urge support of this farmer movement for u the
honest dollar" as a protector of the property and investments of the American people.

Those in attendance were as follows:
William 0. Spargo, president New Jersey Farm Bureau, Mendham. X. .1.
George M. Putnam, president New Hampshire Farm Bureau, Concord, N. H.
N. M. Flagg, secretary New Hampshire Farm Bureau Federation, Concord, N. Ii.
Howard I). Russell, secretary Massachusetts Farm Bureau Federal ion, Waterbury, Conn.: Ueorgo H. McKay, secretary-treasurer Connecticut Farm Bureau
Federation, Danbury, Conn.: A. IT. Packard, president Vermont Farm Bureau
Federation, Burlington, Yt.; J. E. Carrington, acting extension director, Burlington. Yt.; W. K. Boanblossom, secretary Pennsylvania Farm Bureau Federation,
Harrisburg, Pa.; C. It. While, president New York Farm Bureau Federation,
Ionia, N. Y.; K. S. Foster, secretary New York Farm Bureau Federation, Ithaca,
N. Y.: M. S. Winder, secretary American Farm Bureau Federation. 58 East
Washington Street. Chicago, III.

Now, Mr. Chairman, I had a written statement that I wanted to
put in and I dictated it day before yesterday just before I left Ithaca,
but I failed to get it before I left. I had to go to Albany, and it
lias not arrived. I would like to have that put into the record.
The CJIAIILMAN. If there are no objections, when the committee
meets it will be placed in the record. I shall be glad to otfer it
for the record as following your remarks.
Mr. WHTTE. It is short and concise along these lines that 1 have
stated. I thank you veiy much.
I de-sire to plead for immediate action on the part ol! the Senate to permit
restoration of commodity prices to the 1021—1921) level as the only sound
and effective method of relieving the unprecedented economic depression
and of restoring reasonable purchasing power of the American people in their
effort to meet their obligations, and to maintain their equilies in American



business and property. There lias never been a time in all history that the
American people have suffered such great economic loss as is being experienced
at the present time. All individuals are losers during a period of deflation,
and drastic steps should be taken to prevent further loss. Temporary measures
of checking deflation or restoring business confidence can be effective to only
a minor degree, and never until we establish a scientific method of governing
the value of the dollar can we hope to escape the calamity which results from
overinflation and undue deflation.
The American people must have an " honest dollar." The " honest dollar "
could be made possible through control of money value. Such a dollar demands
of the debtor that he should give as much of his products or his services
as he would have been called upon to give at the time the obligation was
contracted, and guarantees to the creditor that he should receive payment
in dollars with the same purchasing power as the dollars which lie loaned.
Commodity prices represent the center of gravity of all business relationships. Wages, salaries, fees, interest, taxes, property values, etc., are either
directly or indirectly, ultimately determined by the general commodity price
level. When the general commodity price level is permitted to fluctuate
unduly, corresponding readjustments must be made by all classes of society,
bringing about strained relationships between debtor and creditor, capital
and labor, the people and support of government.
The purchasing power of fhe dollar should be made constant in so far
as is humanly possible, thereby guaranteeing to producers honest values for
their products and services while protecting consumers against inflated prices.
The index of the general commodity price level should be used to determine
the purchasing power of the dollar.
The Goldsborough bill is designed to increase and stabilize the commodity
price level to that existing before the present deflation.
The CHAIRMAN. We thank you. That will conclude the hearings

for to-day. We will try to continue to-morrow in this room at 2.30,
and will if we can get a quorum. The committee has another meeting on another matter to-morrow morning. That is why we can
not, have a morning meeting, but we will try to have one in the
afternoon if we can, in the hope that we can complete the hearings
to-morrow afternoon.
(Accordingly, at 5.55 o'clock p. m., the committee adjourned to
meet at 10 o'clock a. m. the next day, Friday, May 13, 1932, on a
different matter, but to continue this hearing at 2.30 o'clock p. in.)

FRIDAY, MAY 13, 1932

Washington, D. C.
The committee met at 2.30 oVlock p. m. in the hearing room of the
Committee on Interstate Commerce in the Capitol, Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Goldsborough, Townsend,
Walcott, Blaine, Carey, Fletcher, and Gore.
Present also: Senators Howell, of Nebraska; Smith, of South Carolina ; and Thomas, of Oklahoma: and Representative T. Alan Goldsborough, of Maryland.
The CHAIRMAN. The committee will come to order. I will ask
Senator Fletcher to take the chair and take charge of the meeting.
At this point I desire to submit for the record the report of the
Secretary of the Treasury on Sir. Fletcher's bill (S. -1421)), which
has just been received, as follows:

Washington, May IS, 19.12.

CJioirman Committee on Banking and Currenej/,
United States Senate, Washington, I). 0.
DEAR ME. OHAIKMAN : In your letter of April 21 you requested a report from
the Treasury Department on S. 4421), entitled "A bill to restore and maintain
the average purchasing power of the dollar by the expansion and contraction
of credits and currency, and for other purposes."
Under the terms of this bill the Federal Reserve Board, the Federal reserve
banks, and the Secretary of the Treasury would be charged with the duty of
making effective a policy that the average purchasing power of the dollar in
the wholesale commodity markets for the year 1020 shall be restored and maintained by the expansion and contraction of credits and currency through the
powers of the United States and its agencies.
In my opinion, it. would not be possible for the Government of the United
States to carry out such a mandate. Price levels are dependent upon a large
number of factors that are beyond the control o(i the Federal reserve system,
the Treasury Department, or any other agency of the Government, and I do not
believe that it would be wise to impose upon them a duty and a responsibility
which they could not discharge. Such an attempt would tend to undermine
the confidence of the people in the various agencies of the Government and the
result would be unf or lunate.
In this connection, a subcommittee of the Committee on Banking and Currency of the House oi: Representatives held extensive hearings on the subject
matter of a bill having a similar purpose, which lias passed the House of Representatives and has been referred to your committee. During the course of
these hearings Governor Meyer, of the Federal Reserve Board, and Doctor
Goldenweiser, chief of its division of research and statistics, appeared before



that eoinrnittoe and testified very Cully as to factors which are beyond the
control of legislation of this character and which would render it ineffective.
For your convenience, 1 inclose a copy of the nurt of these hearings which
contains this testimony.
I may add that the passage by the House of the bill referred to was a disturbing factor both at home and abroad, and that the members of the Federal
Keserve Board unanimously oppose the enactment of legislation of this, character and approve the position taken by Governor Meyer in his testimony on
this subject.
Very truly yours.

Sec ret (ail of the


Senator FLETCHER (presiding). Mr. Gregory, please come forward
to the table and state your name, place of residence, and occupation.

Mr. GREGORY. Shall I proceed, Mr. Chairman?
Senator FLETCHER. Mr. Gregory, yon have seen the bill H. E.
11491) and also the bill S. 4421) and examined them, I take it. You
may proceed in your own way to give your views on the subject.
Mr. GREGORY. The purposes this bill seeks to accomplish are two:
1. To raise the average commodity price level to a certain specified
point; and
2. To stabilize the price level at that point.
I think that particularly after the testimony given to the committee on yesterday, and probably before that time, there is needed
very little argument on the question of the desirability of a stable
price level. It seems to me after the experience of the last three
years all of us are pretty well convinced, as I think most economists
were before that time, that there is great advantage to the entire
community in stability in the average commodity price level. On
the other hand instability, where the price level goes up or down,
creates a dislocation between prices, and causes the exchange of goods
and services to face more difficulties and brings into being a great
many economic strains that have serious consequences.
So as I say I think we will all agree that stability is a desirable end
to be achieved.
The objective which the bill seeks to achieve, to raise the price
level, presents a question whether or not, if we agree that stability is
desirable, we shall attempt to stabilize prices on the present level or
somewhere near that, as some people evidently believe should be
done, or to raise them.
The first and most obvious difficulty of course to seeking to stabilize on the average of the level where we are now, is injustice to
debtors—and any fall in the general price level brings about injustice to debtors, just as a rise in prices brings injustice to creditors.
But we are now beyond the situation of mere injustice to debtors.
We have readied a point where a very large portion of the debts,
not only private debts but many public debts as well, can not be paid
on the present price level and on the basis of the present earning
power of the community.
You gentlemen are having a great deal of trouble in Congress now
attempting to balance the Budget. I do not see how you can hope
to balance the Budget until we can balance the budget of the tax-



payer. I think we must raise the earning power of the people before we can balance the national Budget, and that any temporary
balance will prove to be only temporary unless we increase the earning power of the people; and when we do that the balancing of the
Budget will come about more or less automatically.
The farmer in particular, and I am speaking particularly for
the farm folks of the Middle West in appearing here; the farmer
in particular faces a situation that is so difficult now as to be almost impossible. His products on the average are selling for about
half I think now, or a little less than half, the price level of 1926,
or as this bill puts it, the average from 1921 to 1929, which is about
the same as 1926.
That means that farm indebtedness which was incurred on that
price level, and practically all of it carries over from that time, some
of it being worse than that, some of it carrying over from the high
price period before the deflation of 1920-21; that indebtedness now
must be paid on the basis of 2 for 1. In other words, the farmer
must raise and sell and market fully twice the amount of products
to secure a dollar to apply on his indebtedness as the dollar would
buy when that indebtedness was incurred.
NYnv, as to this farm indebtedness—and when I speak of farm
indebtedness I might say that that could be very easily expanded to
cover practically all indebtedness, but I am speaking particularly in
farm terms at this moment. This farm indebtedness was not excessive at the time it was incurred. Practically all of it could have
been paid as it came due on the basis of prices as they existed then.
It ear, not possibly be paid on the basis of present prices. If we
are to accept the present price level as permanent, there is only one
alternative for the farmer and for a large part of the business community. and that is to go through a period of deflation of debts.
Xow, there are two ways in which it can be done. It can be done
in a legal way, and it can be done in an extralegal way. A good
deal of it lias already been done in a legal way: that is. by the
process of bankruptcy in the case of private debts or defaults in the
case of public* debts. There has already been a great deal of it.
We have had out through the Middle West, the country with which
I am most familiar, <uiite a large amount of defaulting in public
debts, arid there will be a great deal more if this situation now existing continues.
Senator 1YT;T< MEK. What do you estimate t]ie farm indebtedness
to be i
•Mr. GittXioiiY. It is said to be somewhere around $10,000,000,000.
Senator lYy/rcnim. I have seen the statement that there are $i>,000.000,000 of mortgages.
ilr. GUKOORY. I was referring to mortijra<ros. Between nine and
ten billions of dollars of niorf^a^es. As to the short-time indebtedness 1 am unable to jjfive you the figure. I think perhaps Doctor
Fisher, who is to follow me, could irive you that iitrnre.
Senator TOW.XSKXD. .Have you ixuy estimate of the amount of dofa n Us in public (iel)ts out in your section of the country:
Air. GKI-.G^KY. XO. I have not estimated thai in order to <ret it
down into the matter of figures. I am just speaking from cases that
have come t<> my attention.
Senator TOWN SEND. That is, of counties and towns and cities (



Mr. GREGORY. It may be possible that I might exaggerate that a
little, coining from Chicago, where we have not paid our schoolteachers for so long that they have pretty nearly gotten used to getting along without any pay. But it is a notorious fact, I am sorry
to have to report here, that the city of Chicago is bankrupt, and
there are several other large cities in this country that are practically in the same shape. In the matter of our smaller communities
I will say that we have many communities in southern Indiana and
southern Illinois particularly where the schools had to be closed this
spring and are closed now, one or two months before the close of the
.school term, because they had no money with which to operate,
Senator TOWNSEND. Has the city of Chicago defaulted on its
interest ?
Mr. GREGORY. I can not answer that question. I think they have
on certain obligations, certain governments, the South Park board,
I believe, defaulted on a recent interest payment. The city itself,
I think, has not as jet defaulted on any interest.
Senator CAREY. DO you know of any cases where farmers have
given up their farms on account of mortgages and buying other
places for less money ?
Mr. GREGORY. We have had many cases of that kind. And wes
have had many cases of debt reduction by private negotiation,
where the holder of the mortgage has been willing to scale it down
rather than accept the land. Some insurance companies have done
Senator FLETCHER. Speaking about the condition of the city of
Chicago in a financial way, can you give us an idea as to the relation
between that and the situation of agriculture?
Mr. GREGORY. Well, there is a very distinct relation as to that.
I intended to get to that a moment later, but I can take that up
right now just as well.
Senator FLETCHER. YOU may pursue your own course. I will not
interrupt you.
Mr. GREGORY. I can just as well go into that now. Some of us
who have been rather close to the farm situation have felt for some
time that the cities were bound to suffer if the farm situation were
not remedied. We felt that even before the close of 1920. The
deflation of 1920-21 hit the farmer more severely than it did the
rest of the community. But it was a rather short period of deflation. The superior resistance to deflation on the part of industry
kept the cities from being affected as severely as the farmer was.
Senator SMITH. Have you any figures to show the aggregate income or the aggregate value of farm products over a period of
years, and you can take pre-war or postwar, as compared with their
•earnings for the last three years, to show the gross shrinkage of
income to the farmer and therefore the contraction of the currency
in that respect?
Mr. GREGORY. I did not attempt to bring any figures here with
me. Senator Smith, but I can give you that- in general terms. The
high point of farm income was 1918 and 1919. when it reached
about $19,000,000,000. During the period from 1922 to 1929 it ran
along, roughly, about $10,000,000,000. And it was down in 1031,
if I remember correctly, to something like four and one-half billions



of dollars, down to less than one-fourth what it was at the highest
Senator SMITH. It would be very instructive and interesting if
we could get the farm income from 1921 to 1920 as compared to
what it has been from 1929 to the present date, showing the distribution of wealth. That is, all returns from sales of farm commodities have shrunk in such volume as to be felt in every department of our commercial life. I think it is something like $5,000,000,000. I think that is the shrinkage from 1928 when compared
to the last three years. Can you tell me about that ?
Mr. GREGORY. Just about that shrinkage, I believe. The 1931
total farm income was less than half that of 1929.
Senator SMITH. NOW, we are attempting to inject back into the
arteries of our commercial and economic life about two or three
billions of dollars through legislation, whereas if there was any
possibility of raising the price level back to where it was even just
antedating 1929 you would have already provided something like
four to four and a half billions of dollars in circulation.
Mr. GREGORY. That is very true, Senator Smith. Now, in answer
to Senator Fletcher's question, this questioning has brought out the
way in which farm income has shrunk. The farmer, like everyone
else, has certain fixed expenses. First, he must pay the interest and
make the payments on his indebtedness. Second, he must pay his
taxes. Those are expenses that have to be paid and that can not
normally be reduced in any degree. Whatever income he has over
that certain amount goes for living expenses which is flexible. In
times like these he can secure more of his living from the farm, so
that those expenses can be reduced. Then he has his operating expenses, such as fertilizer, farm machinery, and so on, and only after
he gets beyond that expenditure in his earnings does he have any
surplus left for general buying.
Now, the situation at this time is this, and I am speaking not
statistically but from observation. However, the statistics will bear
this out if I had them here: That farm income has shrunk to the
extent that the farmer has almost stopped buying equipment. Any
farm machinery maufacturer knows that. He has been patching
up his old equipment. The effect of that on the City of Chicago,
where we have the largest manufacturers of farm machinery, is, of
course, very direct and very considerable. Many thousands'of men
are out of employment in Chicago who normally are employed in the
farm-machinery industry.
Second, he revises his living expenses, and that affects concerns
like Quaker Goats and the food companies, and it affects the clothing companies and all concerns of that sort, of which we have many
in Chicago, producing the daily necessaries of life, and which of
course depend roughly upon 40 per cent of the people living in the
country. While there is not 40 per cent of the population" on the
farm, there is about that percentage on the farm and in towns of
under 5,000 population, and those towns go up and down in their
buying power almost directly as the farmer himself does, because
they depend almost entirely upon agriculture for their income.
The net result of that is that the farmer's buying power has shrunk
io almost nothing. It takes almost all of his income to take care
of indebtedness and taxes and certain items of operating expenses



which can not be deferred. So that the general buying power of the
farmer has almost evaporated.
The result of that situation, on Chicago particularly and to the
balance of the country in general, is very direct. "We often talk
about our foreign markets and regret the shrinkage in them. But
the shrinkage in the farm market is far more important to any
manufacturer in this country, it has a more direct influence on the
unemployment problem, than any foreign market. We can lose all
of the foreign markets and it would be only a small fraction of what
we have lost in the farm market, a restoration of which could be
brought about if we could restore the buying power of the farmer
even to the point of 1929, which was still low as compared to his
pre-war relationship.
Does that answer your question. Senator Fletcher?
Senator FLETCHER. Yes.
Mr. GREGORY. NOW, right at this point, if I may be permitted, and
I do not think it is necessary to say much to you gentlemen as all
of you are closely in touch with conditions back in your States, but
I do want to say this: That in my own State of Illinois we are facing an extremely serious situation, which to my mind makes it impossible for us to think of continuing the policy of continued deflation, or even of stopping deflation now and trying to stabilize on the
present price level.
Last fall we raised in the city of Chicago by public subscription
ten and one-half millions of dollars to feed the unemployed, That
money was all gone by February. The city and county had no
credit. The State came'to the resettle and issued $20,000,000 of anticipated warrants, practically all of which money went to the city of
Chicago, and which will be entirely exhausted by the middle of
Now, the State of Illinois still has some credit, but I do not believe the State of Illinois has enough credit at a reasonable rate of
interest anyway to take care of the situation for another winter. I
feel that if this present price situation continues you gentlemen are
going to have to come to the rescue, not only of our city but of many
cities next winter, because much as we regret having to do some
things, there is one thing I think the American people will not fail
to do, and that is to feed the people. I think in the matter of any
other evil we will decide when the time comes but almost anything
is preferable to the people going hungry.
Now if we do continue, as some of my friends, particularly as
some of my banking friends feel we should do, if we continue deflation, if we accept the viewpoint- that the job is not yet done, and that
we must take the consequences, it will mean not only a continuation
of unemployment, a continued charge on the public, but it will increase our financial difficulties. The one financial institution which
is still stable and in which the public still has confidence, and that
is life insurance, can not stand very many more months' continuation
of this situation. As all of you probably know, the life-insurance
statements have all been made up on the basis of security prices as of
July 1 last. These has been a great deal of shrinkage since then, so
that life-insurance companies are not nearly so solvent as their reports might indicate. A tremendous load of credit loans has been
transferred from banks to life-insurance companies. Their position



is such that farther deflation is bound to affect them seriously, and I
think you will all agree with me that the failure of even one large
insurance company would be something that we could not contemplate at this time except with a great deal of trepidation.
Senator SMITH. It is true that a good many securities in which
they have invested surplus funds are jeopardized. They can not
find a profitable market for the securities that they have invested
their money in, and that goes right back down to this situation, it is
Mr. GREGORY. These things all come back to that. We have temporarily checked bank failures. But the United States Government
or the Reconstruction Finance Corporation can not indefinitely
underwrite the entire banking structure of this country. It ail
comes down to this point, that fundamentally there is only one
answer, and that is to increase the earning power of the people.
Now, there are two primary ways in which the earning power of
the people can be increased, and they are very closely interrelated.
One is to put the N.000,000 or 10,000,000 idle men back to work. The
loss from idleness is x\\^ biggest JOSS from this present condition.
Deflation of values, as long as we have the property, does not make
so much difference as to what we may call its worth. A. transfer
of wealth from debtor to creditor is not a loss, but the loss of labor
of workingmen is something that can not be made up. Xo man can
do to-day's work to-morrow.
The other thing that must be done to restore earning power is an
increase in the price of farm products, restoring the farm buying
power, and as I say that is so closely interrelated with the unemployment problem that the two are tied right up together.
Some of you were not here on yesterday when Doctor Warren of
Cornell University proved convincingly to all present that farm
products and raw materials of all kinds have IONS resistance than
anything else to inflationary or deflationary tendencies. And the
statistics which he gave were very convincing in proof of the factthat when the tendency is in the direction of price deflation raw
materials bear the brunt of it, they have almost no resistance. And
on the other hand when the tendency is inflationary their resistanceis just as small and they go up more rapidly than other prices. He
estimates that farm products will go up in price about twice as rapidly as other products when the current turns in that direction.
1 think perhaps all of you gentlemen will agree in the main with
what I have said so far. Now we- come to the question as to what
can be done to increase the price levels, to start, say, in the direction
of raising prices, reversing this current of falling prices. I think
there is very little disagreement among economists or business men
who have studied this question, as to this point, and that is that there
is a very direct relationship between money and credit and the general price level.
In other words, money responds to the law of supply and demand
just as directly as wheat does, or pig iron, or anything else. If
money is scarce it becomes more valuable. But the Government of
the United States has fixed the price of money. Consequently any
change in its value has to be reflected in the price of commodities.
The result of that is that in times of money scarcity—and bank deposits when you are talking about money must be included as money



because they have the same economic effect; when there is a scarcity
of money and money becomes more valuable the effect of it is shown
in a falling price level. Supply and demand of course affect the
price of any individual commodity, but when prices of all commodities go down or up the effect is very largely monetary.
It is true that there are many non-monetary causes of price
changes, and those non-monetary causes, at least until recently, have
received I think perhaps an undue share of attention.
I am convinced that the more anyone studies this question the
more he comes to the conclusion that the monetary factor is the
overwhelming factor, that changes in the average commodity price
level are very largely due to monetary factors, and that those monetary factors are so important that they can be used in such a way
as to largely minimize the effect of the nonmonetary factors.
Now, the thing that this bill proposes to do is nothing more than
is being done at the present time, with the exception of the end
to be achieved. We have not had since the World War the old
fashioned gold standard of money in the sense that we know it and
learned to revere it. We have had since the war in this country,,
in common with almost every other commercial nation, managed
money. Even though we have been on the gold standard our money
has been very definitely managed. When the great inflow of gold
was on towards this country last year we had at one time I believe
about $1.05 worth of gold for every dollar in currency in circulation.
Now, without a condition of management of money that would not
have happened. That influx of gold would have caused a very rapid
rise in prices, and that rapid rise in prices in turn would have caused
gold to flow out. The chief advantage of the gold standard is that
it is automatic in its effect, that it flows from nation to nation and
tends to keen price levels of the various nations in adjustment. But
we have stopped it from operating in the normal way. We have got
managed money in this country.
Senator FLETCHER. And that has been true ever since we passed
the Federal Reserve Act, has it not?
Mr. GREGORY. Yes. Of course we had the war conditions that
were not normal, but it has been true oven since that time.
Senator SMITH. Perhaps you would use the term "* mismanaged "'
instead of managed, but they are interchangeable.
Mr. GREGORY. Well, I am trying to be polite.
Senator SMITH. I see you are.
Mr. GREGORY. I think we must face this fact, that that condition
is going to continue. We have the Federal Reserve Board with
broad powers, and I think it is only reasonable to assume that the
Federal Reserve Board will continue to manage money, and will
continue to expand and contract credit, and very rapidly and
severely at times, and the only question to my mind involved in this
bill of any particular importance is this: Shall the Congress of the
United States, the policy-making body of this country, lay down a
definite policy to guide the Federal Reserve Board in its management
of money and credit ? Or shall we leave the Federal Reserve Board
free, as it is now, to manage it, and if so by what standards?
The Federal reserve system is a sort of dual system. It owes,
obligations not only to the Government but to the people who own
it, the bankers of the country. And the question of profit to banks



can ]iot help, and, legitimately, from having an influence on the
policy of the Federal Reserve Board.
There are many other questions that comj* up from time to time
which are almost certain to aifeet the policy of the Federal Reserve
Board. And without any criticism of the Board, and I am not desiring to make any criticism of the board in this connection, and
without any criticism of the system, I will say that in the absence of
any mandate from the Congress as to what should be the guiding
factor in its policy, that guiding factor at certain times in the future
as in the past, to be something that is not always compatible with
the highest public interest.
The question before you gentlemen, and the only important question involved in this bill is: Shall the Congress lay down a policy to
guide the Federal Reserve Board in its management of the credit
and money of the country? Or shall we leave it un guided, or rather
guided by influences that are not the public interest?
Senator FLETCIIEK. HOW can we connect that up in a way that
will accomplish the result and improve the situation? Will this
legislation enable you to raise the price level and stabilize it?
Mr. (TKEC.OKY. Of course you all know that the Federal Reserve
Board has two principal means of contracting and expanding credit.
One is to change the rediscount rate, and the other is through open
market operations. Rather recently the Federal Reserve open market committee has been buying Government bonds. I think about
four weeks ago their buying was accelerated to about $100,000,000
a week, and I understand it was contemplated there would be a continuance of that, policy for several weeks, I believe seven weeks, and
three weeks are still to run. The effect of that so far has been
obscured. It has resulted in improving the1 reserve position of the
banks but very little of it has been translated into expanded commercial loans, partly I think due to the policy of commercial bankers.
I will say that commercial bankers have been through a great
deal of punishment in this country. The ones that have" not failed
are naturally in a wry conservative mood because they have seen
so many of their fellow bankers fail and they are very cautious.
They hesitate to expand loans, and the most of them are not doing
so. Out in my country at any rate they are still liquidating, and
are still refusing to make loans for business purposes to any "extent
even on the best of security.
I will say that I know personally of a number of business concerns
in Chicago and in the Middle. West which could sell more goods than
they are now making, could give employment to more men than
they are now employing, if they could got even a fraction of the
amount of credit which they normally enjoyed in 10:29. But they
are unable to get it. The banks still do not want to make new
loans. They still do not want to renew old loans except in lesser
amounts. In other words, in the minds of most commercial bankers
with whom I am familiar, liquidation is still a desirable tiling.
Now, the open market buying policy on the part of the Federal
reserve system runs up against that thing. My own opinion is, and
it is only my opinion, that a continuation of open market buying at
the rate of'$100,000,000 a week will pump up enough credit, will
create enough credit pressure, enough idle credit in the banks, so that



sooner or later we will overcome that condition. I think perhaps
even next month we will begin to see some effect from that in the
shape of expanded commercial credits, which will mean an expansion of business activity.
Senator SMITH. Have you any figures as to the amount that these
banks that are receiving this money in lieu of their bonds, I mean
what is the total figure that they will absorb in adjusting their
reserves and their indebtedness before there will be any overplus
to reach the very object to which you are calling attention ?
Mr. GREGORY. I think Doctor Fisher, when he comes on the stand,
will be able to give you those figures. They are in the weekly
reports of the Federal Keserve Board, If I remember the actual
bank indebtedness to the board is down now to about a little over
Senator THOMAS of Oklahoma. I think it was $530,000,000 last
Mr. GREGORY. It has been reduced very considerably. It will take
a few weeks more of this policy before that process is completed.
I have just been informed that for the reporting member banks last
week it was down to $200,000,000. But the reports for all banks
do not come out as regularly as for the reporting member banks.
Senator SMITH. What assurance have we that the policy inaugurated by the Treasury Department of its own initiative to supply
this liquid currency in lieu of bonds will go on to the extent where
it will give relief by way of creating an abundance of money.
Mr. GREGORY. TO my mind that is one of the principal arguments
for a bill similar to this one you are considering. One reason why
bank confidence has not been restored to the point where they are
willing to cease liquidation and perhaps begin a credit expansion
policy is that no one knows how soon this policy on the part of the
Federal Reserve Board may be stopped or even reversed. The
story is going the rounds that there is a gentleman's agreement that
it was to continue for seven weeks, but they may change their minds.
Or, at the end of seven weeks we may not begin to see any effect.
And there is no assurance that they will not turn around and begin
to sell.
Senator SMITH. Doesn't that imply that there has been some understanding that tliis policy will only be pursued until the condition
of financial institutions is relieved, and that so far as the public
is concerned, that will have to depend upon some other process?
Mr. GREGORY. Well, that is possible. I have not talked to any
of the members of the Federal Keserve Board and I can not speak
from first-hand knowledge as to what their policy is.
Senator FLETCHER. Some of the banks claim there is no real demand for loans, safe loans, and that that is one reason why they are
not making them and they are storing up their funds. Have you
any observations on that? Do you think there is a real demand on
the part of business and on the part of industry and on the part
of agriculture for new loans now ?
Mr. GREGORY. That is a question I can not answer statistically,
and probably no one else can. But I should like to give you just
two instances on that: One is the case of a farmer down inlllinois,
who last week went to his banker and wanted to borrow $500. He
needed $500 for feed, some equipment, and one thing and another



connected with his season's operations. This farmer has 160 acres
of good black Illinois land, free of encumbrance, with no chattel
mortgage or any other indebtedness. The banker refused to make
him a $500 loan. I happen to know about that case concretely.
But that case could be duplicated many times, so far as farmers
are concerned.
Senator SMITH. Well, isn't it a fact that under present conditions
no one can say what is a safe loan? And who can judge as to what
will be a safe loan ? All our standards are submerged. Real estate
has gone. The prices of commodities have gone, and no one has
any assurance as to what to-morrow will bring forth.
Mr. GREGORY. That is true, Senator Smith; but if a loan of $500
against a quarter section of Illinois land is not a safe loan, then we
better shut up the country.
Senator SMITH. Well, we have shut it up now. You see we are
giving away what we have and through this tax bill we are paying
them something to boot to take it.
Mr. GREGORY. Well, this thing is true, of course, that a loan to
an industry, like agriculture, which is producing at a loss, is not a
safe loan no matter how much the property back of it may be,
because it is likely to become a frozen loan.
Senator FLETCHER. YOU may proceed.
Mr. GREGORY. Here is another instance that is a little more significant, I think. I was talking last week with the manager of the
industrial development department of the Chicago Association of
Commerce. He told me that he has had repeated instances in the
last few weeks of business men coming in to see him and telling
him that they had definite and bona fide orders for goods, and
that they would like to make those goods and give employment to
more men, but that in order to do it they must have credit to meet
their pay roll and to buy raw materials during the 30 days or
so those goods were going through the manufacturing process, but
that the banks of Chicago were not willing to make manufacturing
loans at this time, which in normal times would be regarded as the
best kind of commercial loans any bank could get.
Senator SMITH. And that immediately reflected itself upon the
price of raw materials?
Mr. GREGORY. Certainly.
Senator SMITH. And that reflected itself upon the thing out of
which the raw material was gotten.
Mr. GREGERY. NOW, personally, I do not criticize commercial
bankers so much for that, because the central banking policy of
the country is so obscure. In fact, there is no policy so far as the
public is concerned. There is a policy now of credit expansion,
but there is no assurance that that may not be stopped or even
completely reversed. Three weeks from now the Federal Reserve
Board m'ight sell $200,000,000 worth of bonds and contract the
credit. It is that uncertainty which is a big deterrent to commercial
expansion at this time.
Senator FLETCHER. If that would work in the way that this bill
would provide, then it would increase the circulation.
Mr. GREGORY. I think there is no doubt about that. If Congress
sets up a guide-post for the guidance of credit expansion and contraction for the operators of the Federal reserve system, that guide-



post being the, price level as given each week by the Bureau of
Labor Statistics, why. the country will then have assurance that
we are at least going to follow a definite policy in our handling and
management of money and credit. When you talk about confidence*
this whole country is based on that and confidence is largely absent.
What could give more confidence than assurance to the commercial
public that we are going to have a certain definite credit policy in
this country?
Senator FLETCHER. What do you think of the index of 1D:2G?
Mr. GREGORY. DO you mean as to whether that is proper or not t
Senator FLETCHER! Yes.
Mr. GREGORY. Well, I personally feel that that is about the right
point. The correct point, of course, is the average point at which
the present outstanding indebtedness was incurred, and I think if
you were to figure that out statistically it would probably fall at
about that point. I think, however, that is less important than that
we have some substantial increase in the price level. Now, if this
committee were to decide to amend that and say, wC We will go back
75 per cent of the way to that point,'' I would feel that that is not a
vital matter.
Senator FLETCHER. Weil, we thank you. That is a \evy interesting
Senator ELAINE. Mr. Gregory, where do you find the power for
the Federal agency to carry out the public policy declared in this
Mr. GREGORY. Well, the Constitution gives to the Congress the
power to fix the value of money, and the most accurate index of the
value of money is certainly its purchasing power.
Senator ELAINE. Perhaps I did not make myself plain. That
answer was not responsive to the question I intended to propound.
Where is the power conferred upon the Federal agency, set forth in
the bill, to carry out the public policy declared in the bill and imposed as a duty upon Federal agencies?
Mr. GREGORY. That power is implied rather than specific in the
Federal reserve act. The Federal reserve act, as I recall it, giving
the board the power of expansion and contraction of credit, is somewhat indefinite, and the guide given is the advantage to business and
commerce, or something of that Id nd. that they shall use those powers
for the benefit of business and commerce. And I think that certainly
would be proper to add to that stability of the price level.
Senator BLAINE. A Federal agency created by act of Congress has
no implied powers. It has only the- powers expressly conferred by
Mr. GREGORY. Well, I think there is perhaps some question as to
whether or not the Federal lieserve Board has not exceeded its
powers in some degree in the matter of expansion and contraction.
Senator ELAINE. The Federal lie-serve Board, in some of its reports,
disputed the power designed to be given in this bill. That dispute, I
assume, will continue or else the matter will rest entirely upon the
judgment of men as to whether they have the power or not. Why
shouldn't that power be expressly delegated in the bill, and then
there will be no question about it. "
Mr. GREGORY. I think it would be important in the bill to do that..



Senator SMITH. Senator Blame, what is it that you suggest we
express in this bill, the power to do the thing* that the bill contemplates doing?
Senator ELAINE. Yes; and make it definite and specific, confer
the power upon a Federal agency, the power to carry out the public
policy declared by the bill. The duty is imposed upon them, but
duty and power are two entirely different things.
Senator SMITH. And that is not included in the present Federal
reserve act ?
Senator THOMAS of Oklahoma. Under the Federal reserve act, the
board, through the banks, has the right to buy and sell bonds, and lias
the power to increase circulation by buying bonds, and the power to
contract such circulation by selling bonds. Now. all that this bill
does is to direct the board to exercise that power granted to them.
That is my understanding of the bill.
Senator BLAINE. I appreciate that; but it seems to me like this bill
declares a public policy. That is not a law. That is just a resolution.
Senator FLETCHER. Rut section 2 provides for that, doesn't it?^
Senator BLAINE. Section VJ charges them with the duty of making
effective this policy. I suppose that they have that duty now. But
the complaint is that they have failed to do it.
Mr. GREGORY. Well, they hare not a definite policy. They have
not been asked to do it.
Senator BLAINE. Xot specifically as provided in the bill; that is
true. I was just concerned about that.
Mr. GREGORY. I think your suggestion is a good one, that an
amendment to that effect would improve the bill. There is one other
point I should like to make, and that is this: That there has been
.some little consideration given in Congress to other means of increasing currency and credit than by doing it through the Federal
reserve system, such as that proposed in the soldier bonus bill, and
in some of the; suggested silver legislation. I want to make this
remark in that connection: I realize that those measures are not
before this committee now, but I do want to say that if the Congress
were to decide to adopt some such form of increase in money and
credit as is provided by those suggestions, that that, in the absence of
this bill, might easily be entirely ineffective. For instance, if the
Patman bill were passed and the Treasury Department were to issue
$2,000,000,000 in unsecured paper money, the effect of it could be
easily offset by the Federal reserve system by the sale of Government
securities, and to a considerable degree the effect of the proposed
silver legislation might be offset in the same way.
Senator SMITH. They might work just in proportion as that would
be inverse.
Mr. GREGORY. Yes, sir. They have the power to do it, and there
is nothing in the law to prevent them from doing it.
Senator BLAINE. That is exactly the proposition. The Federal
Keserve Board now has the power to expand the currency and it
has the power to contract the currency. It has that power, and now
if we confer upon them direction as to the operation of those powers
in order to accomplish the purposes set forth in this bill it would
make it specific.
Mr. GUEGOUY. Yes, sir.
Senator BLATNE. And it

would prevent contraction expressly.



Mr. GREGORY. I think that would improve it.
Senator FLETCHER. Your suggestion then is that it be charged with
the duty and vested with the power of making effective this policy,.
Senator Blaine?
Senator BLAINE. I have not considered the language. I mean I
have not settled upon it. I have not really given serious consideration to what language would prevent that beyond a peradventure of
a doubt. It may be effective as it is, but I was inquiring.
Senator SMITH. Suppose there is this power conferred upon them
by the law in the Federal reserve act, and in pursuance of that law
we give them a mandate to proceed to put into operation that law to
the extent contemplated in this bill and they refuse to do it, wouldn't
they then be acting in violation of law?
Senator BLAINE. They certainly would.
Mr. GREGORY. NOW, there is one objection that is raised, and I
understand it has been raised to this measure, by certain members
of the Federal Reserve Board, and that is that they would be given
by this bill a mandate to do something that is impossible for them
to do. It seems to me the answer to that is this: That it is very
apparent to anyone whether or not they are honestly trying to carry
out this mandate. Their weekly reports would show very definitely
whether they are trying to do it or not. And I think after an
honest effort, if it proved impossible, then certainly the logical thing
for them to do would be to come back to the Congress and .say, " If
we are to carry out this mandate, we need certain additional powers.**
And I am sure that they would be given every consideration by Congress in that respect.
It seems to me that in these times the situation is so serious, so
tremendously serious, not only in the way of business consequences—
and we have suffered severely from them—but in the way of social
consequences, governmental consequences, from a continuation of
this condition for even another year, that it is so fraught with peril
that we are justified in adopting legislation that might have an
element of experiment in it. I am willing to grant that this proposed legislation has that. But it does not have a dangerous element in it. If it fails it can not leave us any worse off than we are
now. At the most they can attempt to do this, which in effect they
are doing right now. and probably it will do some good. If they do
not accomplish the entire purpose, it will help some. I can see
nothing in here that would make the situation any worse than it is
now. And if they make an honest effort to carry out this mandate
and yet can not do it, I am sure the Congress will give them whatever powers they may feel are required to do that.
Senator BLAINE. lit is experimental, but it could not be harmfully
experimental, you say?
Senator BLAINE. The

board very effectively exercised the same
power in 1020 when farm commodities were so tremendously depressed as well as farm values. They may have the power, but it
was just nn open question with me.
Senator GORE. I will say that I think the House of Representatives passed the original Federal reserve act with such a provision,,
and the Senate took it out, and it then went to conference.
Senator BLAINE. Was that it?



Senator GORE. Yes. They put in a provision attempting to give
this power.
Mr. GREGORY. It was placed in the original bill by one of the
Houses of Congress, but I do not remember which one.
Senator BLAINE. My suggestions were intended to be helpful and
not critical.
Mr. GREGORY. I think they are very helpful. Senator Elaine. I
quite agree with you.
Senator GORE. Mr. Gregory, you say this experiment could not do
harm. If it should cause a Might of gold from this country, and
if it should cause a dumping of American securities in this country
from abroad, might it not be harmful and defeat the very ends of
this legislation?
Mr. GREGORY. Well. that, of course, leads into matters that are
questions of opinion.
Senator GORE. Yes.
Mr. GREGORY. My own opinion is that, if the flight of gold resulted
in this country going off the gold standard, it might be a very good
Senator SMITH. Senator Gore, may I ask you if. with the presence
of gold here, we are in our present fix, where would we be if it were
not here?
Senator (TORE. I do not know.
Senator SMITH. "Well, so far as I am concerned, we could not be
any worse oft.
Senator (TORE. Well. I am not certain that if this legislation were
enacted, we might not remember these days as the good old days,
bad as they are.
Senator SMITH. We are looking up now in order to see the bottom.
Mr. GREGORY. Senator Gore, there is one further remark I should
like to make in that connection: That, while the temporary withdrawal of gold from this country would scare certain people from a
psychological standpoint, yet the effect of that would be very helpful,
particularly to our farmers, because the transfer of gold abroad,
where gold is very scarce, would have a price-raising influence
abroad, and would tend to raise the world price of farm products,
which would have a very definite tendency here in that direction.
Senator GORE. Yes; that might be the only way it would help the
farmers, too. Because if you raise the farm prices here, I think you
must, by some sort of manipulation, raise the price of articles manufactured here. But I do not think by any sort of manipulation of
the currency, so far as this country is concerned, you can raise the
price of wheat and cotton. And I think anything that would arbitrarily raise the price of manufactured products, that are protected
by a tariff, would make the farmer pay more for those protected
articles and would be an increased calamity to the farmers.
Mr. GREGORY. There is nobody in this country who has made a
more thorough study than Doctor Warren, aud his testimony given
on yesterday was that, regardless of the international situation, a rise
in the average price level in this country would cause more than an
average rise in the price of farm products.
Senator (TORE. I understood his testimony.
Mr. GREGORY. I have not studied that subject as much as Doctor
Warren has, but I have a £Teat deal of confidence in his iud



Senator GORE. SO have I. I regard him as one of the best economists, certainly agricultural economists, in this country.
Senator FLETCHER. Doctor Warren said, if the price level were
raised 10 per cent, the farmers would get a 20 per cent advance in
their products.
Mr. GREGORY. There is another factor we .should not overlook in
discussing the foreign situation, and that is that, in spite of the fact
that some people have blamed the world for our troubles, I think
most economists agree that we are to a considerable extent to blame
for the world's troubles; that the severe deflationary process in this
country has had a very great effect in deflating world prices, and
that, when we take steps toward price restoration in this country,
that will have a beneficial effect on world prices, particularly in view
of the fact that many of the leading statesmen of England have expressed themselves very definitely to the effect that they will follow
our policy in that respect.
Senator FLETCHER. Representative Goldsborough, do you wish to
ask any questions ?
Representative GOLDSBOROUGH. I believe not.
Senator FLETCHER. DO any of the members of the committee want
to ask any further questions?
Mr. GREGORY. What I want to say. in closing, is that this question
which you have before you is an extremely live question all through
the Middle West. Not only farmers, but business men, many bankers
and country bankers, particularly, are deeply interested in this, and
there is very little disagreement with the opinion that the only salvation for us is to do something that will raise prices. There may be
some differences of opinion as to the proper and expedient thing to
do, but they feel that we can not stand a continuation of this deflation policy. That is strongly the sentiment of the country.
Senator FLETCHER. We are very much obliged to you for your
extremely interesting statement.
(Witness excused.)
Mr. BRENCKMAN. Mr. Chairman and members of the committee,
my name is Fred Brenckman, and I represent the National Grange.
When this hearing was arranged, we invited Dr. Clarence Poe, editor and president of the Progressive Farmer and Southern Ruralist,
also a recent master of the North Carolina State Grange, to testify in
our behalf. Doctor Poe explained that, owing to a previous engagement, it would not be possible for him to be present, but he is so
deeply interested in this question that he prepared a very convincing
and illuminating statement on the subject of monetary stabilization.
He sent it to me, and in order that the members of the committee
might have the benefit of it in advance of the printed report of the
hearing, I had it mimeographed and have passed it around.
If there is no objection, Mr. Chairman, I would like to have the
statement inserted in the record at the conclusion of my remarks,
which will be very short.
I think that this article throws so much light on the subject that it
is well worth printing.



Senator GORE. I hope that will be done. I know Doctor Poe
very well and have a very high regard for his opinion.
Senator ELAINE. It contains very valuable information, Mr.
Senator FLETCHER. Then, if there is no objection, we will insert it
in the record at the close of Mr. Brenekmaii's remarks.
Mr. BREXCKMAN. At our last annual convention, which was held
at Madison, Wis., in November, the Grange passed resolutions in
favor of monetary stabilization. In outlining our program we had
the benefit of the guidance and advice of Dr. John E. Commons of
the University of Wisconsin, in whom we have great confidence.
Our program asked the National Government and the Federal
reserve system to take all possible steps to secure:
(1) The restoration as nearly as may be of the wholesale price
average to the level prevailing in 11)20, or the average of 1923-1928,
and (2) stabilization of the price level as nearly as practical at
that point.
Contributing to these ends the National Grange recommends:
1. Increased purchases of securities in large volume in the open
market by the Federal reserve banks.
2. Reduction of rediscount rates by the Federal reserve banks.
3. Reduction of the legal minimum gold reserve ratios of the
Federal reserve banks to points materially below the present 35 and
40 per cent established hy law.
4. An international monetary conference for the purpose of (a)
stabilizing the gold price of silver, and (b) stabilizing the purchasing power of gold in terms of the average of wholesale prices of
The Grange is heartily in favor of the Goldsborough bill, Mr.
Chairman, because it is an attempt to raise the prive level of commodities. Unless that can be done, agriculture is sunk. We must
restore the commodity price level to restore the purchasing power
of agriculture and to enable the farmer to pay his debts and taxes,
We have compiled a statement which shows that if the farmer
borrowed a dollar in 1919, in order to pay back that dollar to-day
at the prevailing commodity price level he must pa}' back $3.33.
If he borrowed a dollar in 1925, in order to repay it to-day in terms
of commodities which he produces, he must pay back $2*17. Even
if he borrowed a dollar as late as 1930, under prevailing conditions
he must pay back $1.77.
We all know that that is an utter impossibility. We are not asking for inflation, but we are asking for a restoration of values.
President Hoover remarked, about the time of the beginning of
the present session of Congress, that we must do something to reverse
the processes of deflation. That is what we are in favor of.
Senator ELAINE. I thought we bad done that with the establishment of the Reconstruction Finance Corporation.
Mr. BEENCKMAN. Well, Senator Blame, we think that something
more is needed.
Senator ELAINE, I said that, of course, in irony.
Mr. BKENCKJVIAN. I was interested to note yesterday, Mr. Chairman, an article appearing on the first page of the Philadelphia
Public Ledger, which was written by Raymond G. Swing, which
shows that the people of Great Britain are thinking along the same



lino as we are with reference to raising the commodity price level.
If there is no objection, I would like to read a few paragraphs of
this article, because 1 think it will throw some light on the subject.
It is dated at London, May 11, and reads as follows [reading] :
Groat Britain has indirectly asked the United States to take part in a
conference to raise prices. The invitation is vague and it came through
Walter Elliot, the Financial Secretary of the Treasury, who spoke at the close
of the debate on the second reading of the finance bill in the Hou^e of Commons
last night. But he spoke under the strong pressure of two former Chancellors
of the Exchequer. Sir Robert I-Iorne and Winston Churchill, both of whom
urged international cooperation and spoke with unusual gravity of the dangers
of continued deflation.
"Any attempt at friendly collaboration," said Mr. Elliot, " to work more and
more along parallel lines, to bring us to relations with men of good will who
are pursuing a similar policy to our own. would be welcomed, and more than
welcomed, by the Government/'
All*. Churchill asked whether such an important statement would be made
known officially to the United States. Elliot replied that he was speaking for
the Government and had no doubt that his statement would be received with
attention both here and across the Atlantic.
A few hours earlier the Chancellor of the Exchequer, Neville Chamberlain,
had told the British Bankers Association that " i t might b e " the policy of
the Government to raise prices, but that this would only be, done by international cooperation. This same speech was notable for its warning to the
British to expect further painful sacrifices and by a forecast of economies
amounting nominally to $300,000,000.
These statements taken together are considered here to be of real significance. But they do not mean that Great Britain believes it is possible to
hold a conference with America to raise prices at an early date. The British
Government knows that Congress adjourns on June 11 and that a presidential
campaign is on. It knows that it is impossible to get American cooperation
before the Lausanne Conference.

In order to conserve the time of the committee, Mr. Chairman,
and appreciating your willingness to print the splendid statement
prepared by Doctor Poe, I shall not continue my statement any
Senator FLETCHER. We are very much obliged to you.
(The statement by Clarence Poe, president Progressive FarmerRural ist Co., referred to and submitted by the witness, is here printed
in full, as follows:)

(By Clarence Poe, president Progressive Farmer-Ruralist Co.. Raleigh. Atlanta,
Birmingham, Memphis. Dallas)
WaxhiHition-,, I).


GENTLEMEN : Having been invited by the National Grange to appear as one
of its spokesmen in connection with the hearings on the Goldsborough bill
"** F\>r restoring and maintaining the purchasing power of the dollar'' and
finding it impossible to attend in person on the day named, I bog to ask the
privilege of presenting by Jotter the viewpoint of southern agriculture, as I
believe T know it, and to ask, if you will grant it, that the fads be included in
your published report.
in advocating the Goldsborough bill we are ol" course concerned mainly
with a principle and ;• moral duty rather than any particular phraseology. The
principle is stable money. The moral duty is that of enabling debtors to pay
debts with dollars of the same value as \ hey received from the creditor.
America. MIKI the whole world in fact, has been through a Gethseniane of
economic agony in recent years, but. if out of i! all we learn the chief lesson—
namely, rhar Hie tragedy is largely ihe result of an unstable and hence dishonest m-ney system—the knowledge gained and the reforms instituted may



be worth to future generations all that it. has cost this generation. On the
other hand, if we fail, while the full sense of financial disaster is upon us
and while the impulse for correction is strongest—if in this situation we fail
to work out permanent and effective reforms, then no one can name the day
or the hour when humanity may not be called upon to again go through the
heartbreak of another national and international '* detlation."
When Owen !>. Young said recently. "The proper handling of price stability
is one of the most important, matters facing the capitalistic system; in it will
be found the roots of those maladjustments which result in unequal and unfair distribution of wealth, in unemployment, and other serious problems," lie
uttered a tremendous but thoroughly considered indictment of our unstable
money system. And what he said of America is paralleled by the conclusion
of the recent MacMillan Committee Report on Finance and Industry in Great
*A study of history would, we believe, confirm the opinion that it is the
changes in the level of prices and in the consequential alteration in the position
of debtors and creditors that the main sen-ret of social trouble is to be found."
Upon the correctness of these statements and the need for some such action
as the Goidsborough bill proposes, I now wish to introduce the testimony of
official statistics and of leaders in agriculture, business, economics, and







Every Congressman and Senator know?; how tremendously all forms of debt
have increased in the last 15 years—Federal debts. State, county, municipal,
and private debts; debts to commercial banks, land banks, mortgage companies,
and all financial institutions—aisd all these- debts. publV and private, have
practically doubled because of the increased value of money. As National
Master Taber of the (Irange has pointed out, if a farmer made a debt so recently
as 19130. it now takes 77 per cent more farm products to pay the principal of
the debt than then, and Mr. Tabor has compiled the following table showing
in terms of what the fanner has to sell just how much he now has to pay in
the form of farm products (in principal alone besides interest) for each $100
borrowed or for each *1<>o of debt incurred in any of the ye.irs indicated .in the

a HI on-it

in comwoilitu

Year $.1<;<» borrowed :
•SI 77



Year .SI00 borrowed :






22 •)

There can be no economic recovery that ignores this fundamental situation.
As Mr. James <\ Stone of tl.e Federal Farm Hoard said recently:
"The fellow who is in debt and whose debt was created when commodity
values were much higher than now has only three ways to get out. lie can
repudiate his debt because lie can l-ot hope to pay it when the commodity upon
which he based the debt was then selling for four times what it is now. For
example, if a cotton grower borrowed money on Siis land when cotton was 25
cents a pound, it now takes live bales to pay the debt where it took only one
when the debt was created—and it is impossible for him to produce five bales
where be produced one then. The second way out for the farmer is for the
price of the commodity to vise within a reasonable distance of where it was when
rliat debt was created. The third alternative is in some way to provide cheaper
money for him to \n)y his obligation. One of these three things is going to
happen. We are going through the repudiation stage now and have been for
several years. If that continues, it will keep business and finances upset. A
great many people think that is the natural normal way for it to adjust itself,
but personally 1 do not. One of the other ways should be adopted, and1 1 do
not believe it will be necessary for us to go off the gold standard to do it. '



" One of these three tilings is going to happen/' as Mr. Stone correctly said—
increased commodity prices, cheaper money, or repudiation. There is no other
way out for it is physically impossible to produce and sell enough extra commodities to equal the volume of debt unjustly imposed by our present money

And not only is it impossible for agriculture to recover without either increased commodity prices or deflated debts, but the same thing is true of all
business. From no farm leader, from no spokesman of agrarian opinion, has
Congress had any warning more emphatic or clear-cut than this voiced by the
ablest organ of American business, The Business Week of New York City, in
its issue of February 3, 1932:
" The only remaining road to recovery for ourselves and the world is by
concerted and courageous action, through governments and central banks, to
raise the commodity price level and reduce the value of gold to the level at
which it was when the bulk of the world's public and private debt burdens
were contracted. Otherwise universal bankruptcy, default, and repudiation
are unavoidable.
" Every means to accomplish this purpose is justified, and every influence
the United States can exert in this direction as the most powerful financial
force in the world to-day is indispensable. If it can not be done- by action of
central banks, or collateral agencies like the Iteconstruction Finance Corporation in forcing credit expansion through ordinary banking channels, it must
come through deliberate devaluation or direct inflation of currency.''


If the " universal bankruptcy, default, and repudiation" suggested by the
Business Week are necessary as a result of following rigid rules of honesty
and fair dealing, that would be one thing. But when all this disaster is the
result rather of a fundamentally immoral and dishonest, standard of values
(or absence of standards) the situation becomes entirely different. When we
reflect that all debts must really be paid in commodities, and when we find the
financial committee of the League of Nations reporting that whereas in 1928
it took 100 units of commodities to pay a debt of 100 gold units, to-day it
requires 170 units of commodities, we must agree that this is not only " the
crux <sf (he crisis" but presents a ghastly and flagrant perversion of essential
morality. As O. V. Gregory said: " If Congress had passed a law in 1926 requiring every debtor to pay back $1.50 for every $1 he had borrowed, besides
interest, we would have had a revolution. Yet that is just what deflation has
done. Suppose Congress had passed a law in 1020 doubling the size of the
bushel basket or the number of pounds in a bushel, and had told us that in
measuring out products to pay our debts we must give the -same number of
bushels of grain but measure it out in tliese new and enlarged bushel baskets.
By failing to take action to stabilize the value of money Congress has done
what amounts to the same thing."
When such conditions prevail and when a man may pay and pay on the
principal of a debt and still find himself owing the creditor more in goods and
commodity values than at first, then government is simply permit ling and promoting robbery under the sanction of law. As Dr. Irving Fisher, of Yale University, is quoted as having said before a congressional committee recently:
"Not only are we having a tragic liquidation of debts through foreclosures,
etc.. but it is a liquidation that does not liquidate. You may pay $300 on a
$3,000 debt, only to find that you have increased your indebtedness to $l,10O
in terms of commodities. So in spite of all that America has paid on its debts,
there has been no real liquidation since 1920. We are now in debt more than
we were then in terms of what we have to pay with. We are told that the
national debt has been reduced by 28 per cent, but that is an iilu^iun. The remainder must be paid by taxes paid by the farmer and factory in commodities.
Instead of our debt being reduced from twenty-five billions to eighteen billions,
it now stands at thirty-live billions in market-basket dollars—ten billions more
than it was in 1024. Of America's gross debt we have liquidated fifty billions
of two hundred billions indebtedness, but now find ourselves with a debt of
two hundred and thirty billions in market-basket dollars. Some think that we
are working our way out, but we are working ourselves in."




Not only does out present money system unjustly rob all debtors but it
penalizes and pauperizes the groups who have made America great, while it
rewards and enriches the timid, the unenterprising, the inactive. The men
who had faith in America and wished to serve it, the men who from 1915 to
1930 invested in farms and homes and factories and buildings and machinery
and equipment—they have been deflated or bankrupted down to $50 or less
for each $100 invested. On the other hand, the timid man who put his money
in a safety-deposit box can take it out and find it worth $200 in purchasing
power for each $100 it formerly possessed. The unprofitable servant who hides
his money in a napkin was condemned by the master, but he is the very man
whom our money system selects for its richest rewards to-day, while the man
of enterprise and courage is punished for his virtues.
And of all enterprising Americans who suffer, the farmer suffers most.
This is true, because when hard times come and prices drop factories shut
down and cut off production, but the farmer keeps right on producing for
his fellows in normal volume and finds his prices cut more and more because
of the surpluses accumulated in the face of a vanishing market.

In this connection I wish to stress the fact that we need a money system
that will enable industry and business to render to mankind the almost limitless services they are prepared to render, instead of deliberately curtailing
production as our present money system necessitates. About the most absurd
figure in America to-day is some alleged statistician present charts of the
deflation that followed the Napoleonic wars—in days before a locomotive was
ever invented, a telegraph ever dreamed of, hydroelectric power ever conceived, a modern factory ever built, or a modern technician ever trained—
and arguing that because a long period of near starvation followed Napoleon's
wars we must suffer similar privation now in post World War days, when
science has remade the world, studded the continent with factories, harnessed
the rivers, bound all sections together with railroad and telegraph, automobile
and airplane, and given the keys of science and education to high and low
alike. On this point it is appropriate to quote the forceful words of President
Glenn Frank, of the University of Wisconsin, who said recently in an address,
The Problem of Economic Recovery:
" The supreme battle of this generation is on between the deflationists and
the consumption}sts. The deflationists are those business leaders who think
that the way out of the current economic muddle lies in reducing the standards of living. The consumptionists are those business leaders who think
that the way out of the current economic muddle lies in raising the standards
of living."
Nothing Congress can do to raise living standards is more important than
stabilizing the value of the dollar at average levels of the decade 1920-1930,
so that the farmers of America (and all other citizens) can pay their debts,
with money of the same value as that prevailing when the debts were created.
It is not merely the burden of debt, but the excess and extra burden of debt
which has been added through the unjust increase in the value of money—it
is this which is making any economic recovery impossible*. If the people could
only pay debts on the basis of commodity values prevailing when the debts
were made, they would not only pull through, but the mere prospect of this
result would give a new confidence that would itself go far toward restoring
And J. M. Kenworthy, a member of the British House of Commons, 1919-1931,
writing under the title, " The Way Back to Prosperity," in Current History
for May, points to America's supreme opportunity to serve a new age when
lie says in language of such memorable import that I quote him at some length;
" It would be possible to-day for the Federal reserve banks to raise prices
in the United States to the 3927 or 1929 level by buying securities in the open
market. This would make more funds available for the member banks; eight
or ten times that amount could be given in credit or lent out to industry. But
this might weaken the dollar in the world markets. Fluctuating exchanges
are another great hindrance to international trade. Yet if the central banks
of all thp leading financial and industrial nations decided to expand credit



simultaneously, there would be no lluetuation or little fluctuation in the exchanges and world trade would revive. Better still, the exchanges could be
pegged in relation to one another and fluctuations thereby avoided. If prices
rose too high, by soiling securities the central banks could restrict credits and
check the boom. The ideal would be to keen prices steady, to encourage the
growth of production ami to issue enough credits and currency to meet the
increased needs of expanding activity. By this means we could steadily raise
the standard of life of the people of all countries, avoid alternate slumps and
booms and eventually abolish unmerited poverty.
"The economics of to-day, as taught by the orthodox, are out of date because
they1 were meant for a world situation in which famine and scarcity were the
noni .; 1 conditions and in which mankind was engaged in a fierce struggleagainst the forces of nature. Men had to save and hoard and put by for a
rainy day. But now modern science and industry, with better means of
transport and communication, have removed the specteir of famine and want.
The need now is to spend, consume, and thereby use up the overflowing abundance which every civilized community can produce. Mass production must
be accompanied by mass consumption, otherwise society will either bankrupt
itself or seek relief in warfare and destruction. Nevertheless, we continue to
urge the practice of thrift and penury, to deflate and restrict credits, when
markets, warehouses, and granaries are. choked with unsalable goods. * * *
"The test ol: whether our present civilization wiil survive depends upon our
solving the modern problem of underconsumption in a world materially richer
than ever before. Is mankind really to sit down and starve, because of lack
of leadership and courage in the invisible governments of high finance, or
will the common sense of the common people demand that a way out of the
apparent impasse be found?"

Farm leaders and others interested in an "honest dollar" are not asking
for the abandonment of standards of value, but rather for the establishment
of real standards of value. As President Edward A. O'Neal, of the American
Farm Bureau, said to a congressional coinmiiiee:
'* In asking that Congress give us an honest dollar, we are not asking that
we abandon our standard. "We want gold to be back of the dollar, but we
want it to be ba<*k of an honest dollar. We ask that you regulate the value of
our money so iliat money itself:' will not distort the exchange value of <ommodUies. but will serve as an accurate medium ol: exchange expressing the
true exchange value of two commodities or two services/'
It" the commodity price level of 3020-1030 can be restored and thereafter
steadily maintained wholly by Federal reserve action, good and well. But
millions believe that it is going to be necessary to provide that hereafter the
quantity of gold in our standard dollar shall be increased or decreased so as
to equal the average 10-0—30.*>0 purchasing power of a dollar. This could be
done by storing gold bullion in the United States Treasury and issuing not
coin but certificates against it—.just as is now done with our silver certificates.
Farm leaders and others recognize the danger of asking the Government for
flat, or printing-press money, without intrinsic metallic value behind it. No
inflation beyond 1020-3030 levels should be tolerated. We wish to have a
genuinely honest dollar—just to creditors as well as to debtors.

And here indeed is a moral issue that should stir America. For this whole
problem has its roots deep, very deep, in basic and essential moralities—
in sheer fundamental common honesty as between man and man. Certainly
every man in America ought to see it who professes to revere a God who
hears "the needy when lie crieth, the poor also, and him that hath no helper";
every man who professes to serve a God to whom, " a false balance is an
abomination but a just weight His delight " and who wrote it into the statutes
of Israel 4.000 years ago—
" Ye shall do no unrighteousness in justment, in meteyard. in weight, or in
measure. Just balances, just weights, a just ephah. and a just hin shall ye
have * * * not divers weights * * * not divers measures. Cut tliou
shalt have a perfect and a just weight; a perfect and just measure shall tliou



It would bo impossible, it seems, for the genius of man to conceive and bring
forth a more gigantic and colossal invention for making "the rich richer and
the poor poorer ** or for sheer robbery of the debtor class under the form
of law than is such an unstable measure of value as our dollar now is. It is a
system which makes the law an aid, an ally of the robber rather than defender
of the robbed. "When, for example, a debt is contracted when the dollars loaned
represent 10 bales ol! cotton or 500 bushels of wheal, and the governments and
iinancial systems of the earth make it so that the creditor collects, dollars
that represent 30 bales of cotton or 1.500 bushels of wheat (and in similar
proportions as regards all other commodities), in addition to having all interest
payments correspondingly increased—when this happens, has not a robbery been
permitted as essentially immoral as the burglary of a home* or the holdup
of a bank? There may be law, but there is no morality ami no honesty in requiring a man to pay in values twice or thrice what he received in principal
plus twice or thrice in values what lie agreed to pay in interest also.
And here, too, is an amazing contrast. In 1X90 our captains, lords, and rulers
in business and ihianre thundered in indignation against *' permitting 100-cent
to be paid with oil-cent dollars'" and rallied America in behalf of
honest money'* to protect the creditor classes. But to-day from what high
quarters in press or pulpit or rostrum have we heard any Nation-summoning
alarm in behalf of "honest money" to protect the debtor classes—any soulstirring protest, tense with moral indignation, against the immorality of requiring debtors to pay with lHO-cent dollars the debts they contracted with 100-cent,
SO-eent, or even (»4-eent dollars? Why the difference?
Why. is it that Congressman McFadden can denounce1 the Goldsborough bill
with the charge that it ** is dishonest to the American people, because it will
permit bills contracted in terms of to-day's dollar to be paid in terms of dollars
of one-half their purchasing power and values," when for three years past
he has apparently seen nothing even remotely dishonest in requiring the
fanner's debts contracted in terms of yesterday's dollar to be paid in dollars of
twice their purchasing or commodity value? Why is if that men in high position can see great danger in "uncontrolled inflation " but have apparently seen
none in (he long tragedy of uncontrolled delation with its foieclosures, its
bankruptcies, its unemployment, its starvation, its suicides?

Is is not enough just to remedy or patch things up to meet the present emergency. Congress will be guilty of an unpardonable crime against America's
present and future if it does not provide that permanently from this time on the
dollar shall be a stable measure of purchasing power—a real yardstick of value.
We have a standard of time that never varies—the hour; a standard of length
that never varies—the yard; a standard for liquids that never varies—the
gallon; a standard for measuring corn and wheat that never varies—the bushel.
And yet our national standard ol! value, the dollar, in real purchasing power,
interpreted in terms of what it will buy, we permit to be as variable as would
be a yardstick sometimes 18. sometimes -4. and sometimes 30 inches long;
as variable as would be a bushel measure sometimes 2 peeks, sometimes 3
pecks, sometimes 4 peeks in capacity; as variable as if we had hours sometimes 30, sometimes 45. and sometimes 60 minutes in length.
And in proof of this declaration one has but to look at the following official,
statistics of the Department of Labor. Uureau of Labor Statistics, showing
the purchasing power of the dollar expressed in terms of wholesale prices
since 1015, taking average 1920 prices as UK) or #1 :
PurclHisitu/ poircr of #Z


_ — 1.170
. 851
. 762
. 722
. 648
1. 025
1. 034
. 994
1. 019

1931 (January) _.
1931 (December)
1932 (March)

0. 956
1. 000
1. 048
1. 024
1. 036



After the tragic experiences America lias just been through, all improvements
will lag, all business will halt, all enterprise will be frightened, all development on farm and in business will be checked if every man must make future
plans with no assurance as to whether the dollar at pay time will be worth
50 cents, $1, $1.50, or $2 in commodity values. On the contrary, if, as a result
of this depression, Congress will for all future time provide two such measures
as are now under consideration, (1) some effective plan for guaranty of bank
deposits, and (2) a stable currency system based on average 1920-1930 commodity prices, then both American agriculture and American business can at
once go forward to an assured and permanent prosperity.


Senator FLETCHER. Doctor Fisher made a full statement at the
House hearings and it has been printed, and I do not suppose it is
necessary to go over all that, Doctor, but whatever you desire to
say will be very interesting.
Doctor FISHER. My statement took a day and a half, so I think
I will not try to cover it all this afternoon. Probably the best
way would be to try to answer some objections that have been
raised and that have been in the public mind, rather than to try
to repeat the statement I made.
I have brought in some copies of that statement and would be
very glad to give them to any member of the committee who Avould
like to read it.
Senator FLETCHER. I am sure the committee would be glad to
have it.
Doctor FISHER. I have noticed that some of the newspapers
have reacted to the Goldsborough bill as though it were the same
sort of bill as the Patman bill, " i t is not. Without going into the
reasons for making that statement, I can simply say that I appeared
in favor of the Goldsborough bill and I appeared against the
Patman bill and gave my reasons for it at the hearing.
Senator GORE. I did not catch that, Doctor.
Doctor FISHER. I said, I was trying to separate in the public
mind the Goldsborough bill from the Patman bill and other bills
like that, and without trying to explain the differences I meroV
wish to say that I appeared in favor of the Goldsborough bill an I
appeared against the Patman bill.
Senator GORE. YOU appeared before the House Ways and Means
Committee against the Patman bill?
Doctor FISHER. Yes, sir; and you can find the hearings there if
you want to go into the reasons.
I have, probably as much as any writer, perhaps more than any
writer, inveighed against unlimited inflation, in many books, including The Money Illusion which, at the suggestion of the House committee I offered to any member of either branch of the Congress
who would like to get it and read it. I have inveighed against
inflation, so that I am on record as not being an inflationist.
I do not regard the Goldsborough bill as being subject to criticism
on that basis. On the contrary, it is to negative the deflation from
which we have suffered, what Mr. Mills "spoke of in55his speech
against the Patman bill as "controlled credit expansion, the object
of which is to raise the price level. You can call it inflation, but



it is * reflation " which means a great deal more than inflation.
Reflation means inflation which is justified by virtue of its counteracting recent great and rapid deflation. Both inflation and deflation are harmful and should be prevented, and the only way to
prevent it is to correct any sudden, great and rapid inflation or
deflation by a movement in the opposite direction.
In order to answer objections I think we ought to start with
the seriousness of the situation. I should like to make a few statements dogmatically, and if I do not justify them in what I say
later, I hope you will ask me questions and see if I can justify them
I do not think the situation in this country lias ever been as
serious as in the last few weeks. I think we are at the parting of
the ways, and it would not surprise me at all if within the next
month we would know definitely which direction we are going. We
have been one an even keel. I mean, the price level lias stayed for
the last few weeks about the same. It has sunk just a little. My
index number went down 0.2 this last week; but I think the indications are that it will either make a fairly quick turn up or a very big
plunge down, and if we go down I want to emphasize this, that there
is practically no bottom.
It is a common idea—and that is one of the popular thoughts that
I want to answer—that there is a natural resistance as you go down;
that there is a sort of accumulation of pressure of some spring that
will gradually stop the fall. There will be no such resistance until
we have gone down a great deal farther than we are now. It would
be quite possible, according to economic theory, for the price level
to go down to half of what it is now, to one-fourth, to one-eighth,
to one-twentieth, before we would get to the bottom where it could
not get any lower, and that would be when we have everyone bankrupt who is in debt at all.
On the other hand, we may go up, and if I were to bet, I would bet
that we are going up. That bet is based on two hopes—one is that
the efforts of the Federal reserve system now being made will be
successful. We have got a good chance there. The other, on which
I count even more than that, is that Congress will mandate, through
the Goldsborough bill, the Federal reserve to continue to do this
thing and will pass any other necessary legislation to enable them
to complete it. If this mandate is not given we do not know what
they will do, because they have always had some difference of opinion
with regard to how far they should go in the open market operations. In this morning's paper a representative of one of the big
banks in New York seriously advised that they should stop now.
To my mind that would be disastrous. If that is also the opinion
of Congress it seems to me it ought to be crystallized into law so
that the Federal Reserve Board will have no option in the matter.
I do not believe that we ought to leave to the discretion of a dozen
men what they shall do or may do. It is stated in the Constitution
of the United States that Congress has the right and the duty to
regulate the value of money. We have never exercised that right
Before I can answer the objections that have been raised, as I
have heard them here to-day and yesterday, I think it might be



well very briefly to try to give you my diagnosis of the situation,
because everything grows out of that.
I listened yesterday with the greatest interest to what Professor
Warren said, and I hope that you who heard him appreciate that
he is one of the world's authorities on this subject, very likely the
greatest, and he has the greatest arsenal of facts which he lias accumulated—he and his associate, Professor Pearson, who is here
this afternoon. I do not think there is a syllable that he uttered
that I did not thoroughly agree with a hundred per cent.
So what I shall say will be merely rehearsing what lie said, putting it perhaps in a somewhat different light.
I would say that we are suffering from two diseases, the debt disease and the dollar disease, and that the dollar disease has grown
out of the debt disease, although it was not necessary. You know,
when a man gets grippe he is likely to get pneumonia, but it is not
necessary to get pneumonia just because he has grippe. We are not
now discussing how we might have prevented the debt disease. I
think it could have been prevented, and I believe that you can prevent and cure the dollar disease.
Let us see what those two mean and how they start. In the first
place, in 1929 we had the largest accumulation of debt in the history
of the United States. The best figures are those of Professor-Warren
and Professor Pearson that were given to you yesterday. The estimate is that the total debt was $203,000,000,000. The debt was so
large on account of, first, the war, and, secondly, speculation. Those
two are the great reasons. The war, of course, left a great reparation debt; a great intergovernmental debt, most of which the United
States is concerned in; international debts due to the investing
of the United States in attempting the recovery of Europe; the debts
of our farmers who helped in the frenzied production during the war
and the speculation in land that was caused by the inflation that
went on at that time. And besides those war-engendered debts there
were a great many more that came from speculation. That speculation came very largely from the great prosperity that we had during
the years 1921 to 1929. That prosperity was very largely due to
a great flood of new inventions, so that people found great opportunities, as they thought, to make money out of these new inventions—the automobile, General Motors, airplanes, radio, as well as
all sorts of little inventions. Look at the names of the stocks on
the New York Stock Exchange, and you will find a large number
of them are named after the devices which those companies were
organized to vend. Our Patent Office was choked by inventions.
There had never before been so many inventions in the history of
the United States.
After the war, because of the example of Germany with her technological schools, our industries engaged scientists in a way never
before done, so that the American Telephone & Telegraph Co. and
other big companies spent millions of dollars and had thousands of
scientists engaged solely for the purpose of making inventions.
First, the people invested in those inventions and bought stocks
in the companies that were exploiting them, and as they rose in value
people began to invest—not for a long time, but for a short time—in
other words, to speculate; and when people see their chance to make
a big sum in a short time they go in debt for that purpose. So we



got the tremendous stock-market debts, the brokers' loans as well as
the debts of banks, which were very largely for the same purposeThen we had the device of installment buying, which was especially fostered, and which led to a great deal of overindebtedness on
the part of the consumer. So, all together, we had over $200,000,000
on the basis of 260 billions estimated valuation of the real wealth,
of the United States.
"When we have a state of overindebtedness like that, somethingpricks the bubble. In this case it was the Hatry disaster in London,
as far as one pin could prick the bubble. You have an inflation, and
it becomes progressive
Senator GORE. What was that disaster, Doctor?
Doctor FISHER. The Hatry disaster. Hatry was a fraudulent promoter ; and he tried, by forging securities, to keep on getting people
to invest in his companies, and when it was finally discovered it led
to a great collapse in the London Stock Exchange, and the Londoners
began to unload, to get their cash, on the New York Stock Exchange,,
and the stock exchange in New York was already overloaded. The
result was that people could not carry any more, and selling their
went on in a torrential way.
First, under those circumstances, comes the phenomenon called,
distress selling. It is different from normal selling, in that it is in~
duced, not by high prices, but by low prices. Normally people hold)
off until the price goes high enough to satisfy them before they sell:;
but when they are too much in debt it is just the opposite. As soon
as anything disturbs this house of cards and it begins to tumble,
then they try to preserve their solvency, which is more important
than mating a profit, and their solvency becomes the only thing tosave.
This distress selling in various ways tends to reduce prices, and
as prices go down it brings more distress selling, and as you have
more distress selling, the prices continue going down, and so on in a
vicious spiral; and that has been going on ever since the stock market crash up to the present moment.,
The price went down suddenly. That is because the stock-market
loans are call loans. Then there was a shift to the banks. When the
due dates came around, there was another wave of distress selling and
another wave and another; and as it was explained to you 3^esterday, there is imminent the liquidation of real estate and "mortgages.
That will take years, because mortgages run a long time. The process of liquidation is not complete. In fact, it has not really started.
When prices fall it is the same thing as saying the dollar rises. That
is the dollar disease. What has really happened is that the dollar
to-day has become $1.50 as of 1929, before the crash, in terms of commodities. The farmer's dollar has become $2, so he has to pay twice
as much in his wheat and cotton and other products to liquidate his
debt, and he has less with which to pay it.
Senator GORE. Sometimes five times as much.
Doctor FISHER. Yes; in many cases much more than twice as much,.
This could have been prevented if sufficient currency had been
injected into the circulation to prevent it. It should have been prevented, in my opinion. I think that it was a great pity that it was
not seen in time and not prevented in time; but it was natural that it
should be overlooked. We did not realize, until it was too late, that



this thing was going on in such a fierce way; and now we have this
increase of indebtedness by 50 per cent that has vastly more than
offset the liquidation. In other words, there has been no' real liquidation. The liquidation has been purely nominal. There has been a
reduction in the number of dollars owed, but the dollar has increased
faster than the number of dollars has decreased, so that the amount
of commodities, which are the real things owed in the United States,
is now greater. In other words, in spite of the fact, as I said, that
in 1929 this countiy was more in debt than it had ever been before
in its history, it is still more in debt now even than then, and is
less able to pay than it was in 1929.
Senator THOMAS of Oklahoma. Would it disturb you if I asked
you a question. Doctor?
Doctor FISHER. NO ; not at all.
Senator THOMAS of Oklahoma. You just stated that Doctor Warren's estimate is that we have 203 billions of amassed indebtedness 1
Doctor FISHER. That was in 1929.
Senator THOMAS of Oklahoma. And do I understand you to sat
that we have less than 400 billions of value in the United States?
Doctor FISHER. Yes.
Senator THOMAS of Oklahoma. And I understand you now to say
that those debts had increased one-half?
Doctor FISHER. That the dollar has increased by 50 per cent in its
Senator THOMAS of Oklahoma. Then would not that mean that
those two hundred and three billions of debts, measured by commodity prices, are now more valuable than the assessed or real value
of the United States ?
Doctor FISHER. That is what I was coming to, Senator. There
has been a certain reduction. The number of dollars now owed is
apparently about one hundred and eighty billions.
Senator HULL. That includes governmental and public debts ?
Doctor FISHER. Yes. There has been a reduction from two hundred and three billions to one hundred and eighty billions, approximately, as a rough estimate.
Senator BLAINE. TO what year do you apply the four hundred
billions ?
Doctor FISHER. 1929. Three hundred and sixty-two billions was
the estimate of Professor Warren.
Senator FLETCHER. And it has been reduced how much ?
Doctor FISHER. TO about one hundred and eighty billions, approximately. But the dollar has been magnified 50 per cent so
that in terms of the 1929 dollar the indebtedness is not one hundred and eighty billions but about two hundred and seventy billions,
about 50 per cent more.
The estimated valuation of property has shrunk from three hundred and sixty billions to about two hundred billions. So we are
probably mortgaged, so to speak, over 100 per cent to-day on our
real wealth. The only other asset against this debt is labor power,
the personal wealth of the United States, which is not included in
the estimate of the real, tangible wealth of the United States. You
would not allow any city to get into debt in relation to the realestate valuation on any such basis as that.



There has been only one of the many groups which has liquidated,
and that is the stock market. And "that has been more apparent
than real, because lots of those debts have been shifted to the banks.
There has been a liquidation of the stock market. *
With a few very trifling exceptions out of a dozen different categories that I have separated there has been no liquidation, but instead there has been an increase.
Kow, apply this real increase of debt to the United States Government. The United States Government to-day is more deeply in debt
than ever before. Most people would, on first blush, say that my
statement could not be proved, that we were in debt in 11)10 twentyfive billions and now we are only in debt eighteen billions, and that
there has, therefore, been a reduction of seven billions. But the
dollar has been magnified twofold since 1919 so that in terms of
1919 dollars the debt of the United States is about forty billions—
50 per cent more than it was then—and we are poorer now than we
were then.
One of the curious paradoxes is that if you try to balance the
Budget at this time you have a deflationary effect at once. The
result is that if the price level should decrease by s or by less than
6 per cent it would increase the debt from eighteen billions to nineteen billions, in effect, in the terms of the same dollar; that is, if we
attempt to balance the Budget in that way, causing deflation, the
effort to keep us from getting into debt will really put us deeper in
You can not get anywhere on that subject unless you translate into
real things, and that is the essence of the whole business. When you
talk in terms of dollars you are fooling yourself with what I call the
money illusion—that a dollar is a dollar, when realty it is changing
all the time.
Senator THOMAS of Oklahoma. Supposing our national debt is 20
billions. Supposing that instead of raising a billion dollars in taxes,
as proposed to-day on the floor of the Senate, we authorized the
issuance of a billion dollars in bonds and put those bonds in the
Federal reserve and issue money against them and put the money out
in payment of our obligations, and supposing that that act would
raise commodity prices 50 per cent, would not that $1,000,000,000 of
additional indebtedness in effect actually reduce the value of the
total indebtedness of the United States?'
I do not want, to mix other questions here. I did not mean, really,
to refer to balancing the Budget. The proper sequence is to reflate
first and balance the Budget afterwards; and even if we now pass
laws which will balance the Budget next year, between now and then
we ought to reflate. Reflation is the lesson of the hour for everything; for balancing the Budget as well as other things.
Senator FLETCHER. The exact figures are not very material, but
my recollection is that we had an indebtedness of 20 billions and we
paid on that indebtedness 10
billions. That left 10 billions.
Doctor FISHER. It was 251/v> billions—a little more, nearly 20—and
we cut it down, in number of dollars, to 17 billions, if I remember
rightly. But in the last year it has gone up again, so that it is 18
billions now, approximately, speaking in round figures.
The most curious anomaly in the whole business is that this increase
of the dollar has the effect of putting us in debt, trying to <iet out.



I f there had been a moratorium in 1929 by which it had been agreed
that no one should try to get out of debt, we would have been much
better off to-day. The effort to get out of debt has put us deeper into
debt, when we translate it into real things.
Of course, it is true that an individual who pays his debt of a
thousand dollars, even if he only paid a hundred dollars on it, is out
of debt more than he would have been if he had not paid that hundred
dollars. But if, while he is paying that hundred dollars, millions
of other people are also trying to pay their debts, then his $900 debt
lias been magnified by their action; so that instead of being ninetenths of his original debt it may be 50 per cent more. It may be
the equivalent in the original dollar of $1,500.
So please do not misunderstand me as saying that any individual
would have been better off if he alone had not paid something on his
debt. He would have been Averse off, perhaps, than he is; but the
fact that other people put him deeper in debt by trying to pay their
debts at the same time is just like a crowd trying to get out of a
burning theater. You can not blame the individual for trying to
protect himself and his wife and children by aett ino* out first. If
^everybody else would stay in their seats while he was doin<r it, they
would probably escape. But if they are all scrambling, he can not
.-afford to be left behind. The fact that they all scramble jams the
doors and they do not get out as well as if they went more slowly.
So the effort has been self-defeating. The more the debtors as a
whole have paid, the more they owe. There has been no liquidation.
'There has been only an apparent liquidation, a reduction in the number of dollars, but an increase in the actual amount of wheat and
cotton, and so forth, that is actually owed.
That is the fact with which we have got to reckon; and simple
honesty and justice, throwing aside all technicalities, require that we
should have some restoration of the dollar, to deflate the dollar, or
inflate prices, or reflate, so that the present debtor will be able to
pay his debts on something like the basis on which those debts were
The object of the Goidsborough bill is to declare as the policy
of the United States that that is the objective, that we should try
to undo the injustice of deflation; and, after that is done, not to go
•on and inflate, the way Germany did—we would be worse off than
we arc now—but to stop at that point which is just, as between
debtors and creditors, and then stay there, and forever after resolve
that we shall never have another great inflation or deflation.
I am writing a book on the depression, and while I am not at all
well versed on the literature of depressions, I feel, as you heard
Doctor Warren say yesterday, that this is the secret of tliis depression—the fact that overindebtedness has led to distress selling and
various other things that I shall not take your time to go into now,
but which are fully covered in this pamphlet.
We have magnified instead of reduced the debts by magnifying
the dollar, and we have created a great injustice which should be
It has been objected that this bill is merely a good resolution and
-that therefore it will do no good. That is not an objection. Granted
that it is true, for the sake of argument—and I do not grant it as a
matter of fact—but granted, as some of you may believe, that this



bill will do absolutely no good, nevertheless I think you ought fco
report it out and get it passed for the chance that it will do some
good and that those of us who believe that it will do a great deal
of good may be right after all.
I will turn the argument around and say it can not do any harm,
and for. that reason, since some believe it can do a good deal of good,
it should be passed.
What good will it do ? It will do good in two ways. In the first
place, it will insure that the Federal Reserve Board will go on and
not stop to-morrow, as has been proposed by one writer in this
morning's paper, that it knows where it is going and will not be
swayed by sometimes one faction and sometimes another faction in
the Federal reserve system. There has been a good deal of controversy, particularly between the Bank of New York and the Federal
Reserve Board here, differences of opinion between the Chicago bank
and the Federal Reserve Board here, in regard to these very things
in times past. Sometimes it made very bad blood within the system.
All that can be avoided and we can be assured of a uniform policy
if this bill is passed. It seems to me that that is something good
and very important. It would insure that we can get out of the
Federal reserve all that there is to get out of it. We can not do very
much until we have got a declaration of policy. I believe that other
things should be done. I do not regard this bill as sufficient. It may
be true that the Federal reserve will not be able to accomplish this
objective, but they can certainly go on their way in that direction,
and it will soon appear whether they can accomplish it or not.
It is claimed that they can not accomplish it. The head of the
.Federal Reserve Bank of New York said, in opposing this bill in
the House, that he did not believe they could accomplish it, at least
not alone. This bill does not say that they shall accomplish it alone.
It says that the responsibility shall be on the Federal reserve system
and the Secretary of the Treasury representing the United States.
If the Federal reserve find that they can not do it alone, they will
immediately come back to you and say, " We need this or that or the
other "; and I thoroughly believe that if the stabilization clause had
been in the original Federal reserve act, as proposed by Senator
Owen, we would not have had this depression to-day, because we
would have developed a technique to do the thing if it had been
definitely in the act. It was left out of the act. It was not thought
of as of any prime importance, and it was stumbled on accidentally
in 1922, after the great deflation which the Federal Reserve Board
was responsible for, which was a great mistake. Governor Strong,
of the Federal Reserve Bank of New York, seeing the situation and
seeing that we were in for a big inflation if we did not look out, began
to sterilize the gold, as it were, to produce a stabilization, and he gave
us the greatest prosperity that the country has ever seen, and which
lasted as long as he lived, and would have lasted to-day if he had
been willing, as he was, finally, when he was dying, to have it embodied into law. If it had been embodied in the law when the 1922
Goldsborough bill or the 1926 Strong bill was up, I do not believe we
would have had this depression, a t any rate, in anything like the
degree that we have it now.



I regard this bill as of basic importance, not simply a gesture.
It is a platform on which you can operate. I would like to see half
a dozen other measures erected on this platform, and if you like I
will go into those.
Senator BLAINE. Would you mention them briefly?
Doctor FISCHER. First, 1 am in favor of the Steagall bill as an
emergency measure. I know there are arguments against it. I
know the experience has been bad, but it is for the same reason that
a great many insurance companies fail, because they were not set
up right in an actuarial way. In Kansas and Nebraska they let
in everybody, whether a good risk or a bad risk. I think it was in
Nebraska they attempted to keep out a bank that they know was a
bad risk, and the Supreme Court said they could not keep it out,
under the law. Of course, that policy will bankrupt any insurance
company. But the principle of insuring bank deposits is just as
sound as the principle of insuring anything else. I think it would
do a great deal to help the affairs of the banks, especially the little
banks which are not able to extend the credit and not willing to
extend the credit that they ought to extend now.
Senator FLETCHER. It would tend to restore confidence, too, would
it not?
Doctor FISHER. Yes.
The second measure would have the same effect, and that is one
that is proposed by the Federal Reserve Board. It was in the original Glass bill and was taken out for some reason, I do not know
what. I was told it was because it would not be understood and
would be hard to pass through Congress. But, to my mind, it was
about the best thing in the Glass bill. It was to base reserves on
velocity, on rate of turnover, on activity of accounts, instead of having it arbitrary. As you know, we have now three ratios: 7 per cent
in the county districts, 10 per cent in moderate-sized cities, and 13
per cent in big cities. We have a 3 per cent rate on time deposits,
and a different rate on checking accounts. All those differentiations
are based on the idea of activity.
Why not have a sliding scale of activity? The proposal is that
a reserve shall be at least 5 per cent and not over 15 per cent, but
between those two limits it shall move up or down with the activity,
specifically that it shall be 5 per cent plus half of the daily turnover,
so that if a bank had deposits of a hundred thousand dollars it would
have $5,000 of reserves required, plus half of the daily turnover.
If the daily turnover of the last week or month or whatever period
was taken was $8,000, half of that would be $4,000, which would
be added to the $5,000 as the minimum, making their required reserve at that time $9,000. Next week it might be more or less.
That would mean that when you got a period of speculation, as in
1928 or 1929, and were exceeding the speed limit, automatically the
reserve would curb the bank. The bank would find it could not
extend loans or increase its deposits beyond a certain point because
it was going so fast that the legal requirement would automatically
check it.
That would have stopped speculation in 1928 and 1929 to a large
extent. When there is a slump, when activity Ceases, as at the
present time, when it is almost zero, it would enable the banks to



reduce their reserves nearly to 5 or 6 per cent and would again
strengthen their confidence to go. ahead.
Senator FLETCHER. I think it is a sound measure and I think the
committee were practically unanimously in favor of it. Most of
the banks are coming to see it now. At first they objected, and that
is one reason, I suppose, that it did not get through.
Doctor FISHER. I think it is important now.
Third, I think that something along the line of Senator Wagner's
idea would help to get the consumer started, and with the efforts
of the Federal Reserve Board to buy bonds would put the banks
in better shape. Before any real effect on employment is had we
have got to have this money go into the banks, or purchasing power
or credit, and then the banks have got to hand it on to their customers who want to start up factories and so forth, and then they have
got to hire new men. There may be a quicker way of getting men
hired, even if the Government has to do it, and I am inclined to
think that that can be done.
Then, I think if we are going to have a high price level, as we
should, it is absolutely necessary
Senator SMITH. Excuse me. You say you are in favor of supplementing this by having the Government provide for public
building %
Doctor FISHER. I did not mean, specifically. I have not studied
the bills enough to say that I am definitely in favor of any particular bill.
Senator SMITH. I mean, that principle that they should go into
the construction of public buildings?
Doctor FISHER. Yes; and more particularly projects which will
repay their costs, as suggested by Owen D. Young and yesterday by
the President. The point is to get purchasing power into the hands
of the consumer and help the unemployed. It will all work out ultimately from the open-market purchases, if they are big enough, but
it will take a longer time than if we work out both ends at the same
Then, I think something might well be done to enlarge the base of
precious metals behind our credit structure.
Senator FLETCHER. DO you mean, to increase the purchasing power
of silver.
Doctor FISHER. I mean, to have a larger reserve. Of course, there
are many ways of doing it, but I have a specific way in mind, but it
would take an hour or so to go into it in detail. Then, there is the
Glass bill.
And. then, there is another measure which I also will not try
to go into at this time, especially as the author of it, the president of
a large industrial concern in New York, is taking it up with men
in Congress. I believe that it is a measure which would do the
same thing as open-market operations are doing, but would speed
it up very much faster.
Senator BLAINE. What proposition is that?
Doctor FISHER. AS I said, 1 would rather not go into it, because
this man has it in charge, and I know of it confidentially. I believe
it is a very important measure.



Senator FLETCHER. Doctor, with reference to the Goldsborough
bill, S. 4429 is very much the same, but it has a section 3 in it,
To enable the Federal reserve banks to achieve this end they are hereby
given the right to receive, and the Federal reserve agents are directed to
deliver, Federal reserve notes at par for United States obligations deposited
as security therefor.

Doctor FISHER. Yes. That is the same as the Glass-Steagall bill,
perpetuated. The Glass-Steagall bill is an emergency measure for
one year, and I think it should be permanent.
Senator FLETCHER. The point is, whether-you would regard it as
worth while to amend the Goldsborough bill by putting that on,
or just leave the whole subject open to the Federal Reserve Board
to find a way. They know the way to do these things, I suppose.
Of course, this would direct them to accomplish it in this way, partially, anyhow. But whether it is worth while to put that into the
bill or not, I do not know.
Doctor FISHER. My advice on a question of that sort would not
be worth very much, as you men, being experts in legislative procedure, would know very much better than I. But so far as I have
an opinion it would be that as time is of the essence it would be better
to leave out anything that would require to revote on this in the
House, and I would go right ahead and pass the Goldsborough bill
as is, and then I would introduce this and the Federal Reserve
Board proposal in regard to velocity of deposits, and some of these
other things, in 1, 2, 3, or 4 bills/as seems best, and I think you
would be making better speed, since you have momentum, to keep
right on.
Senator FLETCHER. I think the House would agree to it if we
thought it was advisable to amend at all.
Doctor FISHER. I think Mr. Goldsborough would be glad to insert
several things in the bill, but in order to get it through, they had
to be left out.
Senator FLETCHER. The question is whether we should leave the
whole field wide open for the Federal Reserve Board to do this thing
in its own way, or whether we should specify one of the ways of
doing it. Senator Blaine said that we have made it their duty to
accomplish this thing but we have not told them how to do it.
Senator BLAINE. Senator Fletcher, section 3 of your bill goes
beyond the Glass-Steagall bill.
Senator FLETCHER. I thought you had reference to another bill.
Yes; this goes beyond that.
Senator BLAINE. This makes Federal bonds the basis for the circulating medium.
Senator FLETCHER. Yes.
Doctor FISHER. I assume that the Federal reserve notes issued
would be subject to the 40 per cent gold reserve laws, anyway.
Senator BLAINE. That is probably true.
Senator FLETCHER. This makes permanent the Glass-Steagall bill.
Senator BLAINE. I see, now. It probably makes it permanent.
Doctor FISHER. Senator Gore spoke a short time ago in regard to
this as an international problem. It is. The money price level
is always an international problem, so long as there are other countries having the same standard as we. If we are on a gold standard,



we can not raise our price level materially without at the same time
raising the price level of all other gold-standard countries; and that
is one of the objections that the Federal Reserve Board will have.,
that they can not be expected to do this alone. It is true that they
will be limited, and that a complete solution will require the cooperation of the central banks of all of the gold-standard countries.
But at the present moment the Federal reserve, in the place.
is the most powerful of all these banks. They could do it for the
Tv'hole world, to a certain degree, anyway, even before the crash.
Mow they can do it more easily for two reasons. One is that so
many countries are off the gold standard, including England. We
can raise the gold-standard prices in this country without the
Chinese having to raise their prices in terms of their silver standard, and, by the same token, we do not have to have England raise
her prices in terms of their paper standard. AH we have to do is to
raise the prices in France and Switzerland and Holland. They arc
the other gold-standard countries. If we did raise the price level,
it would cause a flow of gold to those other gold-standard countries
at first, and as soon as that caused a rise in the prices abroad, in.
France and other countries, then the processes of recuperation would
apply there as here. France already has more gold than she wishes
or needs. Ultimately the effect would be very much more easily
achieved than before the depression. In other words, you have asmaller area on the gold basis than you had before. This is to be
remembered, also, if you are thinking about the cotton and wheat
producer, as I assume Senator Gore was thinking particularly.
Senator GORE. Yes; I am.
Doctor FISHER. A rise of a very small amount in the international market would help very materially the producer back home.
That was brought out yesterday very emphatically by Doctor
Warren, that an increase oi 10 per cent" in Paris and New York in
the price of any international commodity would mean an increase
of 20 per cent in the cotton and wheat 'producing States.
Then I might add to that that, according to what we just heard.
England is probably going to cooperate with us in her price level,
It should be independent of ours, but it will probably be made to go
up and down with ours.
And finally I would add that once you get this idea of stabilizing
the price level and raising the price level started in this country,
it is going to go like wildfire, because they need the same thing over
You will find in this book [exhibiting a book to the committee]
of Sir Arthur Salter, formerly head of the economic work of the
League of Nations, the very same doctrine that you have heard here,,
that in order to solve this question of the depression we must do
two things—raise the price level and stabilize it after it is raised.
Reflation and stabilization are the program we have got to follow.
That was also proposed in the Lord Maemillan report in England, and I would like to quote from that just a little. It was
published about a year ago. [Reading:]
Thus our objective should be, so far as it lies within the power of this
country to influence the international price level, first of all to raise prices a
long way above the present level and then to maintain them at the level thusreached with as much stability as can be managed.



That was an extremely important report.
I might say that the stabilization movement has gone very fast in
the last few years. There is a Stable Money Association. Paul
Warburg was one of the honorary vice presidents. Others who were
connected with it were Bernard M. Baruch, K. Fulton Cutting,
Pierre S. du Pont, George Eastman, Otto H. Kahn, Thomas Nelson
Perkins, John J. Easkob, Alvin T. Simons, who apeared in favor
of the. Goldsborongh bill in the House. I do not know whether
those other people would be in favor of it or against it. I am not
saying* anything about this bill now but about stabilization. Also
Alfred P. Sloan, jr., Silas H. Strawn, and Owen D. Young.
Among the honorary vice presidents are Nicholas Murray Butler,
John W. Davis, Charles G. Dawes, William Green, Frank O.,
Elihu Root, Sir Josiah Stamp, and Paul Warburg.
Reginald McKenna, who was one of the signers of the Lord Macmillan report, said, away back in 1922 [reading] :
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.

Then I quote from a letter from the German economist W. A.
Schulze-Gaevernitz, formerly a member of the Reichstag, and the
first German to be on any committee of the League of Nations before Germany joined the League of Nations. He wrote to me, coming over to this country September 27 last, from the steamer. I
had never met him before. He says [reading] :
It is wonderful, though very painful, how your theory is verified by the
facts. I really believe that the world depression was to be avoided if according to your advices the value of the dollar would have been stabilized. But
even now it might not be too late. The chief thing in order to give a turn to
the cycle seems to be to cut down the value of the dollar and by that make
the prices rise again. America with its enormous hordes of gold can do so
without leaving the gold standard. I am sure that you and your adherents
have worked out the technical side of the matter.

Senator GORE. He did not elaborate that last point, did he, Doctor?
Doctor FISHER. I have only quoted a part of it.
One of the first great steps in the stabilization movement was taken
at Genoa at the Genoa Economic Conference in 1922. There are
certain resolutions from which I would like to quote. At the economic conference at Genoa in 1922 an epoch was marked by the
unanimous adoption, by the representatives of more than 30 nations,
of resolutions favoring such stabilization, and indicating some of the
methods to be employed. These included cooperative action among
the great central banks of the world concerning the use to be made
of gold reserves and as to the discount policy to be pursued. These
The essential requisite for the economic reconstruction of Europe is the
achievement, by each country, of stability in the value of its currency.

Then they proceeded to outline the specific steps which should
immediately be taken, adding [reading]:
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.

The most momentous step, I believe, has been taken by Sweden
which has definitely decided, through its Riksbank, to try to stabi-



lize. That was reported in a Swedish journal from which I quote
Such endeavors should aim at maintaining the value of money, as far as
possible, constant.

And that is what we are talking about.

[Continuing reading:]

This aim, of course, can be attained even with a paper currency. The proposals on these lines submitted by several well-known political economists—
e. g., Wicksell and Keynes—the essential feature of which is that the value
of money should be regulated according to a price index, are now being tested
in practice by the Swedish Riksbank. The latter has made arrangements
for the compilation of a price index, covering both wholesale and retail prices,
and specially adapted for serving the purpose indicated. It is noteworthy
that the riksbank has thus set up a definite goal for its monetary policy in
the immediate future. And as the Swedish national bank has previously
succeeded in pursuing a predetermined course of monetary policy with a free
paper currency, there is reason to expect that its' similar endeavors to the

economic experts, at the Genoa conference, recommended [reading] :

same end will meet with success. If similar declarations of policy were made
also by other countries with a paper standard, first and foremost by Great
Britain, this would greatly conduce to clear up the present monetary situation.

Senator GORE. What is the date.of that, Doctor Fisher?
Doctor FISHER. I am sorry, Senator Gore; I have not got the date
hero. I think it was about six months ago.
Then, in regard to England, it looks very much as though the
men in England feel that this would eventuate in a different policy
for the English nation. Major Bellerby, in England, who is now
a professor in one of the universities there, wrote me as follows
[rending] :
I think you may take it that this country has fairly definitely in mind
two ends: The first is to secure the expansion of industry through the
expansion of currency and credit, and through the recovery of prices; the
second is to institute a system of stabilization of the price level when prices
have reached a position at which they yield an adequate margin of profit
and when unemployment has fallen well below a million. These two aims
were accepted by the Macmillan committee as ideal. It is fairly safe to say
that they are now the accepted objectives of the government.

That is merely the opinion of an English professor.
Senator FLETCHER. YOU do not think it is necessary for the United
States to wait for some international conference, do you?
Doctor FISHER. Most assuredly not. On the contrary, I think
that we should take the lead. Other countries are more dependent
on our lead than we are on theirs.
The correlation between trade and demand deposits, shown by
various groups, you wTill find on pages 24 and 25 of my testimony
before the House committee. There are some charts showing this
very clearly.
Unemployment is definitely related to deflation. That has been
proven by various studies, including a very extensive one by the
International Labor Office, at Geneva.
I think I have already said too much, and I am willing to answer
questions if anyone has any.
Senator FLETCHER. We are certainly indebted to you, Doctor
Fisher, for your statement and your views about this matter. The
committee will not act just now, but will wait until the hearings
are printed; but we hope to act very soon.



So far as I know, that closes the hearings, does it not, Mr.
••Goldsborough ?
Senator GORE. Are you going to have somebody representing the
contrary view? As I see it, this is all ex parte; it is all on one side.
I t has been very line, so far, but I would like to have the other side
Senator FLETCHER. DO you know of anyone who wants
to appear?
Senator GORE. I do not know of anyone. I know7 one or two who
hold contrary views, but I do not know whether they are available
or not.
Senator FLETCHER. Everybody lias had notice of these hearings.
We did not exclude anybody. However, we will not close the hearings at this time.
•Senator GORE. I will speak to the chairman about it.
Senator FLETCHER. Yes. I suppose when we adjourn we should
•adjourn subject to the call of the chairman.
Senator GORE. Doctor Fisher, you have not elaborated your view
about increasing the number of grains in the dollar this afternoon,
have you?
Doctor FISHER. NO. That is not in the Goldsborough bill. But
1 have gone into that very extensively in Avritings.
Senator GORE. Yes; I know that. I was called away from the
hearing room part of the time when you were making your statement.
Doctor FISHER. NO ; I said nothing about that. I think that what
Mr. David Stern said here yesterday is well worth thinking of—
giving and entrusting to the President the authority to put an embargo on gold, or to put back into the bill what was originally in it
and was taken out in order that it might pass; or, still better, to
make a separate bill of that section. Section 3 originally, I think,
in the Goldsborough bill in the House, provided that the Federal
Reserve Board, I think it was, would be given authority to change
the price of gold; and if I were writing it I would have it so that
they could make a separate price for buying and selling price. The
prices of gold would be at the discretion of the Federal Reserve
Senator GORE. That is, with a view to stabilizing the price of gold?
Doctor FISHER. Yes. But also, Senator Gore, if it should be necessary for us to safeguard our gold, or seemed to be so, by an embargo,
a change in the price would do it.
Senator GORE. I thought, Doctor Fisher, because I think I know
your general views in regard to these international restrictions and
limitations and prohibitions, that gold embargoes and the arbitrary
control of foreign exchange, and tariff's, and ali those things, obstruct
trade and aggravate our present evil. I do not think we can ever
-escape these by mere local action. But, of course, I want your views.
Doctor FISHER. My views, I think, on that subject are quite the
same as yours.
Senator GORE. But I have not been able to figure out how you
could change the values of gold. As I understand, the purpose is
to stabilize the purchasing power of gold. Would you make it more
universal and apply it to corn, coal, cotton, and everything else as
well as gold?



Doctor FISHEK. No; I am very much opposed, Senator Gore, to
the general idea of price fixing.
Senator GORE. SO am I ; and I am so fixed in that, Doctor, that
I can not quite separate it from this. That may be my confusion.
Doctor FLSHER. It is. to my mind, a separate matter. An individual price and a price level arc different lands of things, just as
different as velocity is different from momentum. A price level
is a scale or ratio, a percentage compared with a previous set of
prices. It is not a price itself, at all. It is easier to lix a scale of
prices than it is to lix a price. For instance, of you should pass a
law that every cent should be called a dollar—which, of course,
would be a foolish lav;—you would multiply prices by a hundred
at once by changing the name of the cent to a dollar. It is easy
to change a scale of prices; it is too easy. It is subject to abuse.
But it is hard to change one price. It is a great deal easier to
double the general level of prices in this country than it is to change
the price of cotton 10 per cent.
Senator GoitE. Yes. I have had this in mind with reference to
this matter. This is a rather wild assumption, but suppose Senator
Fletcher has a thousand dollars in gold, and I have got a thousand
dollars in gold, and you come to me and say, " I want to borrow a
thousand dollars in gold," and try to negotiate a loan. I say, " Congress has figured on stabilizing the value of gold money. I believe
I will lay off and see what they do." And I keep my gold locked
up in a strong box.
You go to Senator Fletcher and talk to him, and he loans you
his thousand dollars in gold, payable a year from now. The year
rolls around, and let us suppose that Congress in the meantime
has cut the number of grains in the gold down one half. You go
to Senator Fletcher and count out these little gold dollars, and the
Senator says, " That is not the sort of gold I let you have. I am
getting back only half as much gold as I loaned you." You say,
"Yes; but Congress has changed the law, and these are dollars."
You pay him, and he has got half as much gold as he let you have.
I have kept my thousand dollars, and Congress in changing the
law has made my gold worth $2,000, and Senator Fletcher's gold is
worth only half. I do not know whether in morals or in law you
ought to return the equivalent in purchasing power, or whether
you ought to return what you got from him.
Doctor FISHER. It is obvious that you ought to do what was
implied in the original contract, what was expected by the contract. Presumably, it is purchasing power.
Senator GORE. NOW, time rolls on a year longer, and you decide
that }Tou want to borrow another thousand dollars, and you go to
Senator Fletcher and say you want to borrow it. The Senator
might say, " I don't like those little dollars you paid back. If I
let you have another thousand dollars you have got to agree to
pay me back in gold dollars of the weight and fineness that I let
you have." I assume creditors are looking after their own business, and as a rule the position of the creditor is to have a strategic
advantage over the debtor. He can dictate his terms and keep his
money. The borrower can accede to those terms or refrain from
getting the money. I assume that every contract in the United
States would stipulate the sort of coin that the debt would be repaid



in. and the Supreme Court would hold it was a valid contract. I
do not think that you can start out with any idea that these changes
are going to be able to make it possible that borrowers will pay
only half of what they got.
The CHAIRMAN. Might it not happen that the debtor, being unable to pay, the creditor gets the property and finds he has not
got as much as he thought he had ?
Senator GORE. I am going to come to that.
Let us suppose that I am living in Buffalo, and I have a thousand
dollars in gold of the fineness of 25.8 grains to the dollar. Suppose
Congress passes a law making one-half of that much gold consti-'
tute a dollar. I say I will not keep my gold in this country, but
I will take it across the river into Canada. I do not know of any
way that you can stop it, and I think that would be a natural
Here is another illustration, and I do not think it is far afield,
and that is why I asked you if you would limit this effort to stabilizing the purchasing power of gold.
Suppose I hired a team of mules, at the outbreak of the war, worth
$250 or $200. The war comes, the price goes up, and I hire them for
a year. Fall comes along, and the price of the mules is $100 a span.
I go up to your barn with one mule, and you say, i; Here, I let you
have two mules." I say, but you are getting back as much mule as
you let me have- This one mule has as much purchasing power as
the two mules you let me have, and I am returning equivalent value."
I do not see the difference in ethics between those two propositions.
Doctor FISHER. If you make a contract in terms of mules, both
parties know that you are not talking about purchasing power. But
when you make a contract in terms of dollars, that is an implied
contract. People are not interested in gold as gold. You talked
about my borrowing a thousand dollars in gold of Senator Fletcher
or a thousand dollars in gold of 3^011; but I venture to say that neither
one of you has a thousand dollars in goldSenator GORE. Double check, as far as I am concerned.
Doctor FISHER. YOU may have a million dollars, but not gold. I
do not want to borrow gold. I can not eat it and I can not wear it.
People are just using gold because it came down from the times
when jewelry was used as a crude way of measuring value. Now we
have better ways.
Senator GORE. Our national bonds and State bonds are payable
in gold. A great many farm mortgages are payable in gold. Do
you think that if you went down to the Riggs Bank and borrowed
a thousand dollars, if Congress changed the weight and fineness of
the gold, the Eiggs Bank would make a note that it shall be paid
in gold of standard weight andfineness?
Doctor FISHER. Such contracts, if made specifically that way,
should be fulfilled that way, I suppose.
Senator GORE. Yes. I figure they would all be made that way.
Senator FLETCHER. They were a few years ago. That was the general practice.
Doctor FISHER. That is not in this bill.
Senator GORE. Oh, no; it is not in this bill, but I was just getting
your reaction to that.



Doctor FISHER. You will find quite a lot in regard to that in my
book on stabilizing the dollar.
Senator GORE. I have thought about it a great deal as an ideal.
It seems to me it would be desirable. I just have not figured out as
a practical thing that it could be done. I t seems to me as hopeless as
perpetual motion. I agree with all that you have said about the
burden of debts. It is the tragedy of the age that they have got to
be paid two or three or four times over. If there is any practical
way to do it, I am anxious to do it.
Senator FLETCHER. YOU spoke about the promotion of installment
buying. What was realty behind that? Was an effort being made
by some particular interest ?
Doctor FISHER. It is really an old device, but it was particularly
cultivated b}r the automobile manufacturers, and especially by General Motors.
Senator FLETCHER. YOU could buy anything on the installment
plan. I do not know whether it was an effort to make a showing of
prosperity, even though it did not exist.
Doctor FISHER. It induced people to buy who could not otherwise
buy. It gave them a kind of credit and allowed them to borrow;
and it is perfectly sound, but it happened to come when there were
so many other debts and it was so overdone itself that it increased
this oveiindebtedness in 1920.
Use CHAIRMAN. I was out of the room when you were testifying
about that. Do you think that in a great many families it resulted
in their buying more than they were able to pay for?
Doctor FISHER. Yes: but I don't think that was the main tragedy.
The main tragedy was that after this great burden of debt resulted
in tremendous selling and reducing prices and therefore magnifying
the dollar, then it made it impossible to pay, far more so than if the
price level had been stable.
The CHAIRMAN. But did not these people who were out selling on
the installment plan ignore the limited purchasing power of their
customers and override them in many cases?
Doctor FISHER. N"o; I do not think so, very much. There have
been very few defaults.
The CHAIRMAN. Yes; but did it not mean that the buyer had to
quit a year or two to catch up on his earnings before he could buy
any more?
Doctor FISHER. Yes.
The CHAIRMAN. IS not that the same thing?
Senator GORE. He mortgaged future earnings for present enjoyment.
The CHAIRMAN. They thought they could sell a man more than
he could pay for, but they found afterwards that he was trading on
the future years, and therefore the business sloughed off.
Doctor FISHER. Yes; they undoubtedly oversold in some cases; but
my point is this, that if the dollar had been kept the same it would
have been two or three times as easy as it has been to pay off.
The CHAIRMAN. Oh, certainly.
Senator GORE. YOU say there have been very few repossessions.
That is true, but people have paid out a half or three-quarters and



they have been denying themselves other things in order to hold their
equity in the things they had bought?
Doctor FISHER. Yes.
Senator GORE. And that has discouraged the purchasing power of
the people?
Doctor FISHER. Absolutely.
The CHAIRMAN. In other words, the strong-arm selling was trading on the future to the extent that it was bound to help to bring on
trouble (
Doctor FISHER. Yes.
Senator GORE. I think one trouble about the banks to-day is this.
There are two sorts of credit. One is for consumptive purposes and
the other is for productive purposes. I think the banks have almost
absolutely shut down on loaning for consumptive purposes. On the
productive side they have shut down because they can not survey the
situation as it exists and see any business concern manufacturing Vnything with the hope of being able to sell it for what it cost, and for
that reason they will not make advances.
Doctor FISHER. I do not think that point is as important as the
banks are making it out to be. That is their excuse or alibi, that the
business will not be sufficiently productive. But their real trouble
is that they are in trouble. They do not want to tell their customers
that, that they can not loan because they are broke themselves.
Senator GORE. I think it is a matter oi contrast. As far as I am
concerned, I do not much blame the banks or individuals for hoarding, in view of this prevailing psychology.
The CHAIRMAN. We are very much obliged to you. Doctor Fisher.
(Witness excused.)
Mr. Edward O'Neal, president of the American Farm Bureau
Federation, has requested to have made a part of this record a
pamphlet entitled " Honest Money, an Explanation of the Eelation
of Money, Prices and Prosperity," published by the American Farm
Bureau Federation, Chicago, 111., January 7, 1932.
Without objection, it will be inserted at this point in the record.
(The document referred to and submitted by the chairman is here
printed in full as follows:)

This booklet, prepared by the committee of the American Farm Bureau Federation on stabilization of the unit of value, is intended to give to our members
and others a clear, simple explanation of the money question, and the effect of
monetary policies on agriculture, business and labor. The policy of the American Farm Bureau Federation on this question is expressed in the resolution
adopted at our last annual meeting, and reprinted herewith.
It is our opinion that the money question is of fundamental importance, not
only to agriculture, but to all classes of our population. We do not assume
that stabilizing the purchasing power of money will automatically solve all our
other problems. There will still remain many such questions as taxation,
transportation, tariffs, marketing and surplus control, which must be settled
before agriculture can live and trade on terms of equality with other industries.
The position of the American Farm Bureau Federation on these questions is
well known, and we shall continue to demand a fair solution of all of them.
We do believe, however, that the money question is of such fundamental
importance that its proper settlement will make a solution of all other problems
much easier, and that without such a settlement we shall still be subject to the



hardships that hit farmers hardest of all during alternate periods of inflation
and deflation, no matter how happily we may settle our other problems.
It is with the hope of assisting American farmers to study this question and
put themselves in position to use their influence intelligently to secure action
by Congress to solve it that this booklet is being distributed.

President American Farm Bureau Federation.
The United Stales of America is JI country of almost unlimited natural resources—coal, oil, iron, timber; in fact, almost every raw material needed to
make goods to supply human wants.
It is a country of fertile farm* and capable farmers. Then can easily produce food and cotton and will in such, abundance that everyone can have
plenty to eat and wear.
It is a country of factories and power, of mass production, with plenty of
skilled labor and competent management.
For centuries the world was hungry because it could not produce enough
food. In fact, until recent times the world never had enough of anything, for
everything had to be produced by hard hand labor.
The United States has solved the problem of producing food and clothing
and manufactured goods. It can easily produce enough of everything so that
everyone could live like a king.
Then why are millions of people who are capable and willing to work,
hungry and cold and homeless?
Why are factories closed when so many people need goods? Why are people
out of work when so many others need the things that they might be producing?
Why are so many people hungry when the farms are glutted with surpluses?
Why are hard-working, thrifty people being sold out under the hammer, the
savings of a liftime lost?
Why all this misery and poverty and despair in a land of plenty?
Millions of people are asking these questions. The future of the Nation
depends on finding the right answer.
All through the ages mankind has struggled with two problems:
1. To produce enough.
2. To divide up what is produced.
We have solved the first. We have failed to solve the second. We do not
dare to produce too plentifully, for we do not know how to divide up what we
produce so that we can all use and enjoy it.
We know that the more we produce the more we all ought to have. But
somehow it does not seem to work out that way. We produce until the warehouses are fullr and then shut down factories and try to shut down farms,
throw men out of work, shiver and grow thin, and wonder what the trouble is.

What is the trouble?
To answer that question we shall have to go back a few thousand years.
In primitive times there was no money. The man with a herd of cows traded
with a man with a field of wheat, so that, both could have bread and butter.
All exchange of goods was on a trade or barter basis. There were no hard
times except as the result of some natural calamity or of failure to work.
Barter was a clumsy and inconvenient way of doing business. We could not
possibly carry on the complicated business of to-day on a barter basis.
So money was invented—shells or beads or pieces of metal or paper—any
article or token that would be generally accepted in exchange for goods because
of its own value or promises back of it. We exchange our labor or the products
which we produce for money, and exchange that money in turn for the goods
or services of others. Money is the oil without which the complicated machinery of modern civilization could not run.
While many different materials might be used for money and have been so
used, it was found that two metals were best for that purpose—gold and silver.
Both were scarce enough and valuable enough in themselves to be generally
accepted, regardless of confidence in governments or banks.
For a time the leading commercial nations used both metals as their basic
money, with a definite ratio of value between the two. In this country the
ratio was 16 to 1. Gradually the nations dropped silver as part of their basic
money, and began to use gold alone. To-day China is the only large nation



using the silver standard. All other important nations are at least nominally
on the gold standard, or were until recently.
But as business grew in volume and complexity, it. soon became apparent
that there was not enough gold. For that reason, and for reasons of convenience, governments began to issue paper notes for use as money instead of
gold. The value of paper currency is. maintained by making it legal tender in
payment of debts, customs, and taxes, by confidence in the government, by
limiting its quantity, or by government promise to redeem it in gold on demand.
A nation whose paper currency is payable in gold on demand is said to be
on the gold standard. Since governments may or may not keep their promises
to redeem, it is evident that the value of paper money depends wholly on confidence in the government. Whenever confidence in government wanes, paper
money depreciates in value. In a nation with a stable government, in which its
citizens have confidence, however, the value oi: paper money depends upon its
quantity in relation to the need for it more than upon promises to redeem it in

The only way a government can be sure of its ability to redeem its paper
money at all times is to keep a dollar's worth of gold in its treasury for each
dollar of currency outstanding. No nation does this, for the simple reason that
there is not enough gold to finance the business of the world.
The United States has in circulation $927,030,120 iu gold certificates, backed
by an equal amount of gold in the treasury; $380,701,217 in silver certificates,
redeemable in silver dollars and legal tender in payment of all public obligations, such as taxes and customs; $G54,SGS,412 in national bank notes backed
by United States bonds; $294,447,138 in United States notes, backed by $150,000,000 in gold; $1.232,2H0 in Treasury notes of 1S90, redeemable in gold; and
$2,463,281,089 in Federal reserve notes, redeemable in gold and backed by at
least 40 per cent of their value in gold in the vaults of the Federal reserve
banks. The actual gold reserve is usually considerably greater than this legal
minimum. All these various kinds of paper money circulate at par because of*
confidence in 1he Federal Government, and the public hardly knows one kind
from another.
But even this amount of paper money is entirely inadequate to finance thn
business of the country. It is supplemented by "bank money M—checks against
bank deposits. Something like 90 per cent of the business of the country is
done with checks instead of cash. For all practical purposes bank depositssubject to check are just as much a part of the money supply of the country
as currency or gold.
There are about $51,000,000,000 of bank deposits subject to check in the United
States. Most of this great volume of bank credit was not created by the deposit
of money. The majority of credits are created by borrowing. When William
Jones borrows a thousand dollars from his bank, the bank simply gives him
credit for $1,000 on its books. The outstanding credits of that bank are $1,000
larger than before, and $1,000 has been added to the money supply (considering
bank credit as money) of the country.
When business is transacted by check, little actual cash is used. It is largely
a matter of bookkeeping in the bank and between banks. For that reason
banks can lend money (create credit) up to something like 10 times their actual
reserves. In order to meet the needs, of business we have built up a great monetary pyramid (paper money and bank credit) on a small gold base. The required
gold reserves provide only $1.00 in gold to meet each $100 in promises to pay
gold. Actually the gold reserves are somewhat larger than this.
Our whole monetary structure depends on confidence rather than on gold,
however. If there were any concerted attempt to convert currency and bank
credit into gold, gold payments would have to be stopped. The gold standard
is theoretical rather than actual, and must be so unless vast new supplies of
gold are discovered.

The common notion about money is that it is a medium of exchange. That
is a correct but not a complete definition.
Money has another very important function. It is a measure of value. The
unit of value in this country is the dollar. We measure all values in terms
of dollars.



We ordinarily think of the dollar as being an accurate measure of value, as
the yard is an accurate measure of length, and the pound an accurate measure of
That is not true. It is been use the dollar is such an uncertain measure of
value that the whole economic machine gets into trouble every now and then.
The fundamental reason for hard times is not overproduction nor underconsumption nor any of the other reasons so frequently given. The real reason
is that the dollar, by which we measure all values, is such an inaccurate
measuring stick.
The dollar is a fixed measure of value only in one respect—it will always
buy 23.22 grains of gold. But what does that amount to? We can not eat
gold nor wear gold, nor will gold keep us warm.
When it conies to measuring the value of the things we do want, the dollar
is far from being a fixed unit of measurement.
"Wheat is our most important article of food. We eat about 4 bushels apiece
every year, and could not very well get along without it. We measure wheat
in bushels. A bushel of wheat is always the same amount.
We value wheat in dollars, but a dollar's worth of wheat varies greatly. A
dollar would buy less than half a bushel of wheat in 1910, a bushel in 1929,
and 3 bushels in the early summer of 1931. Yet each of us needed his 4 bushels
of wheat just as badly one year as another. It is plain that the value of wheat
as human food does not change from year to year. Even its value in relation
to its supply and demand does not vary in any such ratio as the price changes
of the past 12 years would indicate.
Certainly wheat in itself is more valuable than gold. Yet the dollar that
would buy exactly the same amount of gold in 1931 as in 1919 will buy six
times as much wheat. It is plain that as a measure of the value of wheat
the dollar falls far short.
A bushel basket that would hold 4 pecks one year and 24 pecks another could
not be called an honest bushel. Neither can a dollar whose purchasing power
changes in that proportion be called an honest dollar.
In the Middle Ages the yard was the distance around the king's middle. It
was then the same kind of a measure as the dollar is now. You can imagine
the difficulty of doing business with a yard that would go around Taft in 1913,
shrinking to the circumference of Coolidge in 1928.
We have been wise enough to make the yard a standard, unvarying measure
of length. Some day we shall be wise enough to make the dollar a standard
measure of value.

We have a method of measuring changes in the purchasing power of the
dollar by what is known as the wholesale commodity price level. This price
level is determined each month by the United States Bureau of Labor Statistics
by taking the average of the wholesale prices of some 500 commodities, each
figured according to its importance.
This wholesale commodity price level is expressed by a percentage figure
called an index number. The year 192G is taken as a base. The price level
of that year is expressed by 100. For several years following 1926 the price
level was fairly stable. Those were prosperous years for everyone except
farmers, and farm prices were steadily coming into better relationship with
other prices. In the fall of 1929 the price level was 97, only three points
below 1926. During the two years since then it dropped to 68. (November,

We say that goods are that much cheaper. But what has really happened is
that dollars are worth more. A dollar would buy 45 per cent more goods in
November, 1931, on the average, than in 1926. The 1931 dollar, in terms of
what it will buy (and that is all that dollars are good for) is worth $1.45.
That means that if we borrowed a dollar in 1926., we must pay back (in terms
of goods) $1.45 at the price level of November, 1931. Every dollar in taxes,
interest, and other fixed expenses has become $1.45.
The farmer is oven worse off, for his prices have dropped more than the
average. The farm price index has dropped to 5S, and the farmer's dollar of
debt and taxes has become $1.70.
When we borrow money we expect to pay it back, but we do not expect
to pay back $1.45 for each dollar we borrow. Most of us can not do so. The



debts of this country and of the world, public and private, can not be paid
back in $1.45 dollars.
The effect of the deflation since 1920 has boon to increase public aud private
debts in this country (in terms of commodities) by $80,000,000,000. On the
present price level, when we have paid off our debts on the basis of what those
debts were worth in terms of commodities in 192G, we shall still have eighty
billions more to pay. Even the most avaricious loan shark never dreamed of
legalized robbery in such terms as thai:.
Worst of all, it is the most, able and most ambitious part of the population
which is in debt. This country has been built up by people who were willing
to work and borrow and take a chance. The Nation can not afford to crucify
this most virile and valuable* portion of its population.

The value of every product depends on supply and demand. That is just
as true of money as it is of wheat and hogs. When the price of hogs goes
down while other prices are stationary, the reason is that there are too many
hogs in proportion to the demand for pork.
But when the average level of all prices goes down, as from 07 to 68 in two
years, that is not due to the supply and demand of goods. It is hardly possible
that there could be such a sudden increase in the production of all goods in
two years, or such a sudden lessening of the desire of people for goods.
The cause in such a case is a change in the supply of money and credit.
The price of money can not change, for it is fixed by law. So when the supply
changes the effect can only be shown by a change in the price of goods.
Commodity prices not only must change to compensate for changes in their
own supply and demand, but also to compensate for changes in the supply of
money and demand for it.
Suppose we think of all the money and bank credit of the country as being
on one end of a pair of balances and all the goods on the other end. Take
off part of the goods, and that end of the balance goes up. That is, goods
are scarce and prices rise. We are all familiar with that result in the case of
individual commodities.
We are not so familiar with (he fact, that a change in the supply of money
on the other end of the scale will have exactly the same effect. If we take
off some of the money,r the money end will go up and the goods end will go
down. That is exactlj what has happened during the past two years. The
goods end of the scale has gone down—the average wholesale price level has
dropped 20 per cent—not because we put too many goods on that end of the
scale but because there was not enough money on the other end.
As a matter of fact, the amount of goods on the scale never varies much.
The total production of goods in the world is about the same one year with
another, excepting only times of world war and severe world depression. Even
then the change—remember we are speaking of tho total production of all
commodities—is not so very great. Over a long term of years the annual
production oj; goods, in the world has increased steadily at the rate of a
little more than 3 per cent a year, with little change from that amount
The rate of production increase in the Tmted States is about. 4 per cent'
The changes are chiefly on the other end of the balance. The volume of
money and bank credit, and hence its value in terms of goods, varies greatly.
That variation in the buying power of money is the cause of most of our business troubles.

It is quite apparent that we should all be better off if the scale were kept
in balance—if the average wholesale commodity price level were kept just
about the same from month to month and year to year. All business could
then plan for the future with much greater confidence, and we could all go
ahead producing to somewhere near the full capacity of our farms and factories. That would mean real prosperity. Because we should produce more
of everything, everyone could have more.
We can only go on producing when the goods produced are moved steadily
into consumption. That means solving the problem of dividing up what we
produce. We can only do.that when prices are in such relation to one another,
that we can trade among ourselves on a fair basis.



While sucli things as tariffs, wage and price-fixing agreements, etc., sometimes work against a fair price relationship, the tendency is always for prices
to adjust themselves in a fair relationship to one another so that, commodities
can be exchanged freely when the average price level is stable.
But when the average price level changes greatly, all these relationships are
thrown out of joint. There are other causes than the supply of money and
credit that tend to disturb price relationships. But these causes are of minor
importance compared to the monetary factor. That is more important than
all the others together—important enough so that, properly handled, it can
largely offset, the eiVect of all the others.
We can keep money constant in purchasing power—keep the average commodity price level stable—by maintaining just the right amount of money on
the money end of the scale; in other words, by providing business at all times
with just the amount of money it needs to keep going in a normal way.
That means fitting the volume of money and credit to the volume of business,
instead of having to close down factories and farms and throw men out of work
every now and then in order to fit the volume of business to an arbitrary volume
of money.

When we consider keeping the volume of money and credit in proper relation
to the need for it, there is another factor that needs to be taken into consideration. That is the amount of work that each dollar does—what economists call
the velocity of circulation.
The amount of work done by a crew of men depends on how hard they work.
If some of them sit iu the shade, and others work only half-heartedly, they will
not accomplish as much
as if they all worked steadily.
It is the same w7ith money. The dollars that are idle, perhaps hidden away
under the mattress or in safety deposit boxes, are not working. Neither is the
credit which in times like these bankers are afraid to loan in a normal way.
We have already seen that by far the largest amount of " money " is not
money at all but bank deposits created by borrowing. When the future is
uncertain because no one knows what further changes may occur in the average
price level, both borrowers and bankers are timid.
The rate of turnover of demand deposits in 141 cities in August, 1929, was
5.83 times per month. In August, 1931, the rate of turnover in the same cities
was only 2.44 times per month. A given amount of deposits, in 1931 would
finance only 40 per cent as much business as in 1929. When we talk about
" frozen assets '* we mean that the velocity of circulation of money is low. In
other words, that confidence, on which our whole credit structure is built, is at
a low ebb.
So when we are talking about the necessary amount of money and credit, we
must consider velocity as well as quantity. We have the right amount of money
and credit when business is proceeding normally without any appreciable change
in the average price level. When prices are going up and speculation is increasing, we have too much. When prices are going down, factories closing, and
men being thrown out of work, there is not enough. Enough money at one time
may be too much or not enough at another. The measure is its purchasing
power—the average wholesale commodity price level.
The problem, then, is to expand and contract currency and credit, not. in
accordance with the amount of gold we may happen to have but in accordance
with the needs of business.
The monetary system of the United States is largely under the control of the
Federal reserve banks and the Federal Reserve Board, together known as the
Federal reserve system. The Federal reserve system can expand or contract
currency and bank credit at will in normal times, subject only to the limitations
of the Federal reserve act relating to gold reserves, member bank reserves, and
rediscount eligibility rules. In abnormal times lack of confidence may weaken
the effectiveness of measures adopted by the Federal reserve system.
When the Federal reserve act was adopted by the House of Representatives
in 1913 it contained a provision directing the Federal reserve system to use its
powers to stabilize the purchasing power of money. That provision was eliminated in the Senate. The system has at various times used its influence to
maintain stability. At other times it has not. Its ability to maintain stability
under normal conditions can hardly be questioned. Additional powers may be
needed to enable it to maintain stability under abnormal conditions.



Two tilings are necessary at this time.
1. Restore the wholesale commodity price level to a point somewhere near that
at the beginning of the present deflation.
2. Stabilize the price level at that point.
The first is necessary in fairness to debtors and in order to prevent further
wholesale defaults and'bankruptcies. A large part of the outstanding indebtedness, both public and private, can not be paid on the present price level. An
increase of 30 to 40 per cent in the price level would restore confidence, put men
to work, stimulate business activity, and definitely put an end to the present
depression. It would cause farm prices to increase faster and farther than
others, just as deflation caused them to fall farther and faster.
To start that process at a time like this is difficult. The chioi: inflationary
powers now possessed by the Federal reserve system are as follows:
1. Open-market operations.—When the Federal reserve banks purchase Government securities in the open market, the effect is to turn those securities into
cash. And because of the pyramiding of credit, an open-market purchase of
$100 in Government securities makes available approximately $1,000 in bank
Early in 1931 the Federal reserve system bought large quantities of Government securities in the open market, until it had accumulated more than $700,000,000 worth of such securities and about the same amount of bankers' acceptances. Such purchases were insufficient to start the price level upward,
and the attempt has apparently been abandoned.
2. Rediscount rate.—One of the functions of the Federal reserve banks is to
make loans to member banks by accepting securities of various kinds from them
and issuing Federal reserve notes in exchange. The rate charged on such
loans to member banks is known as the rediscount rate. When that rate is
low, it is profitable for banks to borrow from the Federal reserve and reloan
to customers. Low rediscount rates tend to expand credit. High resiscount
rates tend to contract credit.
During the summer of 1931, however, reducing rediscount rates to 1% per
cent failed to have any appreciable inflationary effect because bankers lacked
confidence to loan in a normal way. Rediscount rates have since been raised
to around 3% per cent, which is still low compared with normal times.
3. Rediscount eligibility rules.—Under the law the Federal reserve banks can
rediscount for member banks only certain kinds of securities and commercial
paper. By their own rules the Federal reserve banks can still further restrict
the kinds of paper eligible to the rediscount privilege. Liberal rediscount rules
tend to make money " easy" and to expand credit. Strict rediscount rules
tend to restrict credit.
At the close of 1931 the reserve banks were following a " tight-money " policy
as far as rediscount eligibility was concerned. They were reluctant to accept
anything but Government securities for rediscount.
It is apparent that the Federal reserve system could use its present powers,
especially (1) and (3) above, more effectively in an effort to expand credit
and start the price
level upward. But even if used to the limit, they might
not be effective wTith public confidence at the present low level.
Certain additional powers would help, particularly broadening the rediscount eligibility requirements. A large proportion of property owners, particularly owners of real estate, are now practically without credit. If highclass, sound real-estate securities could be made eligible to rediscount temporarily, a marked expansion of credit would be almost sure to result. Admitting debentures of the intermediate credit banks to rediscount would aid
those banks in providing farm credit, which would also aid in credit expansion.
President Hoover has proposed a system of emergency credit agencies, which
to the extent it becomes effective will help to expand credit and raise prices.
The National Credit Corporation is already in operation and has had a
marked effect in checking the number of bank failures. His others—the home
loan discount banks, the Reconstruction Finance Corporation, and a Government subscription to stock in the Federal kind banks—will all help to start
the necessary inflation.
Once started, inflation, like deflation, will move rapidly of its own momentum.
That is why some people are so afraid of any inflationary move, even though
they know that it is necessary to get business off dead center. They fear that
once started, inflation will go too far before it is stopped. Those fears are
unnecessary. The Federal reserve system has ample power to stop inflation,



and has learned how to do so. By selling Government securities in the open
market, and by making rediscount rates abnormally high, it can contract credit
so rapidly as to quickly put a stop to inflation once it has restored price levels
to the desired point,

Some of the other inflationary measures that have been suggested are as
1. Devaluing tlxe dollar.—If the price of gold were raised from $20.67 to $30
an ounce, which would mean that a dollar would be worth about 15.5 grains of
gold instead of 23.22, as at present, the price level would be restored very
quickly. The chief disadvantage of this plan is the fact that so many debts,
public and private, are payable in gold dollars of the present weight. Devaluing
the dollar would not help this class of debtors.
-. Paper money.—A large issue (perhaps two or three billion dollars) or
greenbacks (paper money not redeemable in gold),, to be put directly into the
hands of consumers by using them to pay Government salaries and other expenses and for unemployment relief. This is perhaps the most effective remedy
that has been proposed, although it is probably politically impossible because
of the popular prejudice against irredeemable paper money.
3. Silver.—Restoration of free coinage of silver on a definite ratio with gold
would be an effective plan of inflation, but would be impractical except by
international agreement with the other leading commercial nations.
4. SymnietaUsm,—Under this plan both gold and silver would be basic money.
Currency would be redeemable, not in either one alone, but in a definite amount
of each. Tins plan, too. requires international agreement.
5. Granting the national bank-note privilege to the one and one-half billions
of Government bonds issued in the spring of 1931. That is. such bonds would
bo made the basis of a national bank note issue when deposited with the
Treasury by national banks. The disadvantage of national bank notes is that
they lack the elasticity of Federal reserve notes and can not be retired readily
when they are no longer needed.
When a patient is/sick the chief consideration is to make him well. Any
medicine that will accomplish that purpose is good medicine, and even certain
unfavorable aftereffects can be tolerated if the medicine brings about a speedy
The present situation demands a speedy cure. Inflationary measures should
be applied promptly and until results are secured.
Deflation has reached the point where capital has been impaired so seriously
as to threaten the whole financial structure of the country. Continued deflation may easily bring disaster, the wreckage of which can not be repaired
in a generation. The results already have been bad enough. Two years more
of falling price levels- might easily bring financial, political, and social consequences that would wreck our civilization.
This is not a time to be afraid of radical remedies. No remedy can be as
radical as the disease.

After inflation has started prices upward and stimulated business activity,
the price level should be stabilized at a fair level, preferably near that of the
fall of 1929. This stability of the price level and of the purchasing power of
money is necessary in order to avoid a recurrence of the speculative boom of
1928 and 3929 and the dollniiou »uid hard times of 1930 and 1931.
The principal stabilization measures that have been proposed are as follows:
1. An lend the Federal reserve law directing the Federal reserve system to
use all its monetary and credit powers to maintain a stable price level. We
have already explained what these powers are. To make its efforts more
effective the reserve system should be directed to take the public into its
confidence, so that instead of iis moves being shrouded in mystery as is often
the case now, the public will understand just what it is trying to do and why.
2. An'.end the Federal reserve act to grant the following additional powers:
(a) To issue Federal reserve notes of its own volition against Government
bonds in times of emergency.
(b) To broaden the rediscount eligibility rules.
(c) To raise or lower the reserve requirements of member banks.



(d) To raise or lower the gold reserve requirements of the Federal reserve
(e) To raise or lower the price of gold.
3. Amend the Federal reserve act to direct the Federal reserve system to
expand credit steadily at the rate of 4 per cent a year in order to keep pace
with the expansion of business.
4. Hold an international conference to devise and put into operation plans
to maintain world monetary stability.
Of these, the first is the most important. Once we have adopted a definite
national policy of stabilizing the purchasing power of money, international
action will follow as a matter of course. It will be some time before the
stabilizing efforts of the Federal reserve system will be endangered by lack of
gold, and before that time we may reasonably hope for international action
to conserve gold and use it mainly for the settlement of international balances,
or to adopt some practictal substitute for the gold standard. The recent abandonment of the gold standard by England, Japan, and 13 other nations shows
how rapidly events are moving to force the world to find a solution of its
monetary problems.
It is highly important that the principles of (1) above be enacted into law
-at the present session of Congress. It would be very desirable if part or alJ
of the recommendations in (2) could also be written into the law.
Humanity has been enslaved long enough by an unstable measure of value,
resulting in misery and distress second only to that of war. Once we apply
to our monetary system the same intelligence that has solved our production
problems, another depression like the present one will have become impossible.

Q. Why is business always bad when prices are falling?—A. No sane person
will buy except for immediate necessities when the price is likely to be lower
next week. Merchants and manufacturers buy as little as possible when they
face the prospect of having to resell at a loss.
Q. What happens when money and credit expand faster than production?—
A. Speculation, increasing prices, complaints about the high cost of living, and
a tendency to unbalanced production, with overexpansion of production facilities and temporary overproduction of some commodities.
Q. What happens when the expansion of money and credit fails to keep pace
with production?—A. Production slows up. prices fall, men are thrown out
of wofk and business enterprise and relationships are thrown out of balance.
Q. What happens when the volume of money and credit is maintained in
proper proportion to production?—A. Producers and merchandisers can plan for
the future with confidence. From 1907 to 1915 the volume of credit expanded
at almost exactly the same rate as the growth in production. Prices were
stable and business was good.
Q. Does not stabilizing the price level mean price fixing, and has not Government price fixing always been a failure?—A. Stabilizing the average wholesale commodity price level does not mean price fixing. The price of each individual commodity would be free to fluctuate up and down in accordance with
the supply of that commodity and the demand for it. When the average price
level is stable, if the price of any one commodity falls because of oversupply
or failing demand, capital and labor will promptly shift to some other field
sufficiently to restore the balance. But when prices of all commodities are falling, capital and labor have nowhere to go. So capital goes into hiding and
labor goes into the bread line, and a long period of hard times ensues. Such a
state of affairs is due to insufficient money and credit, and can be prevented
by keeping the supply of money and credit in proper relation to the needs
of business.
Q. Is there not more money in circulation now than in 1929?—A. In November, 1931, total money in circulation was $44.46 per capita, as compared with
$37.72 per capita the same month in 1929.
Q. Then how can you say that our present troubles are due to a shortage
of money?—A. " Money in circulation" is an uncertain phrase. It means
money outstanding, but money behind the clock and in safety deposit boxes is
not in circulation. The amount of our money held abroad also varies greatly.
Bank deposits subject to check are the same as money for all practical purposes, and are about 10 times greater in volume. When we speak of the volume
of money we mean the total volume of money and bank deposits subject to



check. From 80 to 90 per cent of bank deposits are created by credit extended
by banks, which always shrinks when confidence declines.
It is the effective supply of money and credit that counts, and money is
effective only in proportion as it works. The actual circulation of money and
credit is only 40 per cent as rapid now as two years ago, and it is therefore
only 40 per cent as effective in creating purchasing power.
Q. How much monetary gold is there in the world?—A. About $11,625,000,000
This gold was held as follows June 30, 1931:

United States


Amoun fc



Per cent
of total
42.7 Germany
10.0 ; Russia
6.8 , 40 otber countries


Per cent
of total
2. 9

Q. How rapidly is the world's supply of monetary gold increasing?—A. Less
than 2 per cent a year. The increase in monetary gold falls more than 50
per cent short of keeping pace with the growth of production. That means that
we must do one of the following things:
1. Submit to a steadily declining price level for a long period of years.
2. Build up a still larger credit structure on the gold base.
3. Abandon the gold standard.
Q. Are new gold discoveries probable?—A. Xot large ones. The world has
been thoroughly explored for gold. Some chemist may at any time discover
a practical method of transmuting other elements into gold. Such a discovery
would force the world to abandon the gold standard. Once gold could be manufactured, it would become unsuitable for money because there would be no
limit to its quantity.
Q. What is meant by the gold standard?—A. A country which is fully on
the gold standard buys and sells gold on demand through its treasury or its
central bank, it redeems its currency in gold on demand, and sells foreign
exchange freely on demand, payable in gold abroad.
Q. What is the gold bullion standard V—A. A country which is on the gold
bullion standard does not mint and circulate gold coins. It keeps its gold in
bullion form, which it buys and sells freely, and with which it will redeem
its currency on demand. It also sells foreign exchange on demand.
Q. What is meant by the gold exchange standard?—A. A country which is
on the gold exchange standard does not redeem its currency with gold, nor
does it buy and sell gold on demand. It sells foreign exchange, payable in
gold abroad, freely in exchange for currency or bank checks.
Q. What is the reason for the gold standard?—A. It is an automatic regulatof of finance. It imposes a limit on the quantity of money and credit. When
a nation continues to spend more than its revenue, balancing its budget by
borrowing, or when it lives beyond its means by importing more than it exports, gold moves from it to other countries. Tins loss of gold serves both as a
warning and as a means of forcing deflation and economy. Without more
confidence among nations than at present, gold is the only satisfactory method
of settling international trade balances.
Q. What has caused so large a part of the world's gold to move to France
and the United States?—A. (1) Lack of confidence in other nations. People
and nations feel that their money is safer in France or the United States. (2)
" Management" of the gold supply. Since the war no nation has allowed the
gold standard to operate freely. It has been managed in all sorts of ways,
until some economists contend that we no longer have a gold standard at all,
but a " bankers' standard."
At times during the past year the United States has had more gold than the
total amount of outstanding currency. If this gold had been permitted to
make its influence felt normally, it would have caused such a marked expansion
of currency and credit as to have raised prices to twice the present level.
Prices would not actually have gone that high, because as soon as they reached
a certain point, the greater Imying power of gold abroad would have caused
us to lose part of our supply.
When gold is allowed to work automatically it seeks its own level, distributing itself among the gold standard nations, and keeping world prices in such



adjustment among the nations that world commerce can proceed on a normal
The managed gold standard or the " bankers' standard " interferes with this,
causing excessive accumulation of gold in some countries and a serious shortage in others, and seriously disrupting world trade.
Q. Why did England abandon the gold standardV—A. To keep from losing
all its gold.
All European countries abandoned the gold standard during the World War.
When France went back on the gold standard in 102."), it devalued the fi.#ane.
The gold value of the franc before the war, in terms of our money, was 1'.);*»
cents. In going back on the gold standard in 1925, France valued its franc
at 3.93 cents in gold. The effect of that was to reduce the burden of its
war indebtedness, incurred on an inflated price level, by 80 per cent. Relieved
of this excessive debt burden, France was able to balance its budget, and by
avoiding excessive taxation, its business became prosperous and its foreign
trade balances were maintained.
When England went back on the gold standard after the war, it disregarded
the advice of its economists to follow the example of France (and all other
European nations). Instead of devaluing the pound sterling and thus ridding
itself of some of its excessive indebtedness, it placed the pound on the pre-war
basis of $4.80 in our money.
The resulting burden of interest, debt payments, and taxes was greater than
it could bear. Business was stagnant, unemployment and the dole added to
its difficulties, and maintenance of the pound on a $4.86 basis caused a continued drain on its gold supply.
To stop from losing all its gold it had to abandon the gold standard and
allow supply and demand to fix the value of the pound. If and when England
goes back on the gold standard, it will probably be with a pound that hu*
been devalued to something like $3.50.
Q. What happened to prices in England following the recent abandonment"
of the gold standard?—A. They advanced. Lard at Liverpool went up from
42 shillings in September to 53 shillings in late December. During the
same period lard at Chicago went down from $7.30 to $5.65.
Q. Since no nation can possibly have enough gold to redeem irs promises
to pay gold, what is the advantage of having any gold backing for its currency?—A. To act as a check against inflation. With no gold cover for its
currency, the value of that currency is determined by its quantify. Experience
in countries like Germany and Austria, which issued currency after the war
in such excessive quantities that it became valueless, has created public fear
of currency inflation.
Q. Is there any other method that could be used to help maintain the \aluo
of irredeemable paper money?—A. Yes; by making it full legal tender in
payment of taxes, customs, and other legal obligations. The best method.
however, is to limit its quantity. A rising price level indicates that the quantity
is becoming too great.
Q. How much money is outstanding in the United States?—A. At the end
of November, 1931, $5,446,142,677, as follows:
Federal reserve notes
$2. 463, 281, 980
United States notes
Federal reserve bank notes
Treasury notes of 1890
1. 232! 250
National b;u?k notes
(J;*>4, 80S, 412
927, 930.120
Silver certificates
3So. 701, 217
Gold coin
382. 841. 032
Silver dollars
33, 220. 523
Other silver coins
Minor coins
117, <"43, 241
Q. Oan we not hop#i to hnve a more- substantial basis for prosperity aftei.1
prices have been deflated down to the pre-war level or lower?—A. No. We ran
be just as prosperous on a high level as on a low price level, or vice versa.
It is stability of the price level that nnikos prosperity possible, and ch?inv:es
in the price level that throw business out of adjustment and cause hard times.
The only possible reason for •lowering the price ievel is to bi-liig demands for
money and credit, more nearly in line with a limited sni]tply of gold.



It Ls unnecessary and a form of economic infinity, however, to endure the
suffering that would bo necessary to cut clown the world's business to lit a
limited gold supply. It i.-s much better to solve the problem by rearing a larger
credit structure on the gold bw><\ adopting a combination gold and silver
standard, or abandoning the gold standard altogether except for settling international balances.
Q. Did not the American people definitely go on record against bimetallism
(combination gold and silver standard) in ISO'oV—A. No. Both major parties
favored bimetallism in ISUtl. The liepublicans favored it only as a result of
international agreement. The Democrats favored it for the United States
regardless of international action. The Republicans won, but England blocked
their attempt to secure bimetallism by international agreement. Discovery of
vast gold iiolds in the Klondike and South Africa soon afterward relieved the
gold shortage for a generation. We are again facing the results oi: a gold
shortage similar to that of 1800.
{,}. What is meant by " symmetallism'?V What advantages are claimed for
it over bimetallismV—A. Under bimetallism a dollar in currency is redeemable
in a given weight of gold or a given weight of silver. Under symmetallism
the paper dolinr is redeemable in a given weight of gold and a given weight
of silver. Under bimetallism there is always danger of one metal driving out
the other. That is impossible under syimnetallisni, for both metals are always
used together for redemption, never one separately.
Q. During the period of 1!,)23-!1U29, was there any abnormal overproduction
of goods as a whole, or any abnormal falling off in the demand for goods?—
A. No. World production increased at about the normal rate of S per cent a
year, and there is no evidence to sh<»w that demand was other than normal.
Q. Did the supply of gold keep pace with this normal increase in production?—A. I\o. increase in gold output during this period was only about two
per cent a year.
Q. What was the effect of the adoption of the gold standard by India in
1927?—A. To l>ut a further strain on the world's gold supply. India drew
•$85,000,000 worth of gold out of the world's gold supply in 1928. It threw
a large amount of silver on the market and this, combined with the sale of.
50.000,000 ounces of silver by Great Britain as a result of debasing its silver
•currency, and the adoption of a partial gold standard by the French East Indies,
demoralized the silver market, reduced the price from (>5 to SO cents an ounce,
and paralyzed the purchasing power of China, the only large country to remain
on the silver standard.
Q. If gold production has been insullicient from 1924 on, why did prices not
drop sooner?—A. A market credit expansion in the United States, together with
large American loans abroad, compensated for this shortage until the hitter
part of 1929.
Q. Is not lack of confidence a more serious cause of the depression than lack
of money and credit?—A. Lack of confidence is a result rather than a cause.
There was plenty of confidence in 1929.
Q. Would monetary stability help the mass of people?—A. Yes; monetary stability is necessary to business stability. Stable business, proceeding year after
year at a normal rate, permits a wide distribution of national wealth and income, accompanied by a high standard of living for everyone who is able and
willing to work. Unstable business and widely lluctuating prices permit strong
and unscrupulous individuals to accumulate an undue proportion of the national
wealth and income. They take advantage of unstable prices and credit stringency to add to their possessions until we approach the undesirable condition
of great wealth for the few and poverty for the many. That is not a sound
foundation on which to build the Nation's future.
Q. What is meant by inflation and deflation?—A. Inflation means expansion
of money and credit. It is usually used to mean expansion of money and
credit beyond the needs of business. The result is a rising price level and
encouragement of speculation. Inflation reduces the buying power of money,
making money less valuable. Debts, taxes, interest, and other fixed expenses
can be paid more easily because commodity prices are higher. People with
fixed incomes begin to complain about the high cost of living, because their
money will buy less, and there are demands for wage and salary increases.
Itising prices stimulate business, increase profits, and there is little unemployment during such a period. Producers, especially producers of raw materials,
find a ready market at good prices. Inflation generates confidence which soon



may become overconlidence. If inflation continues long enough, speculation
reaches the point where people forget production and thrift in their desire for
speculative profits.
Ordinarily inflation is bad. though not as bad as deflation. The worst thing
that can be said about it is that if carried too far, it is almost sure to lead to
deflation. In a time like this, when a moderate degree of inflation would only
restore the price level of two years ago, the results would be highly beneficial.
Practicaliy all medicine has some undesirable after effects, but * that is no
reason for letting the patient continue to suffer from the disease. There is
no other way except moderate inflation to end the depression except by a
wearing out process that will take years and wear out a lot of the best
people of the country.
Deflation is the reverse of inflation. The supply of money and credit is
reduced or fails to expand to match the growth of business. Prices go down
and profits vanish. Business has to be cut down to fit the supply of money
and credit, and unemployment results. This reduces purchasing power still
more, and causes a further shrinkage of business and more unemployment.
Farmers are hit hardest of all, because of the falling demand for their products
and because they are least able to restrict production., control marketing, and
resist falling prices.
The future value of goods and property of every kind becomes uncertain.
Money is more valuable than anything else, because it is increasing in value
while everything else is decreasing. Everyone wants to turn property into
cash and hoard that cash. Money is a safety deposit box involves no risk, and
when its buying power is increasing, because of falling prices, faster than interest would accumulate, there is no incentive to put it to use.
Credit shrinks alarmingly. Bankers seek to collect all or part of their outstanding loans, because the property on which those loans are based is shrinking
in A'alue. New loans are made reluctantly. This hoarding of money and
shrinkage of credit cause still further deflation. It is a process which, once
well started, is hard to stop. It can not be stopped by individual action, but
only by action of the Government and the central banking system.
Deflation benefits the creditor, because his interest and payments on loans
are made in dollars that have greater buying power. When deflation goes
so far as to impair or wipe out the security, however, as in the present instance, many creditors join the class of sufferers from deflation.
The ideal condition is neither inflation nor deflation, but a steady price
level and an unchanging purchasing power of money—an honest dollar.
Q. What is meant by liquidity?—A. That is a word often heard in times
of deflation. Liquid assets are those which can be turned into cash quickly.
They include listed stock and bonds, and grain and other commodities for
which there is an open market. Basic property such as homes and farms
is not liquid because it can not be turned into cash readily in hard times.
While liquid securities may depreciate in value faster than real estate, the
banker always knows their cash price, and if the margin of security becomes
too small, he can force the borrower to sell them and pay his loan.
When that happens, however, the price is forced down still farther, throwing more loans into distress, forcing more sales, and so on. As a matter of
fact, all prices are based on confidence, and only a small part of the property
of the country can be turned into money. If lack of confidence should extend
to the Government, only gold would be really liquid, and gold payments would
stopped as soon as any large number of people began to as for them.
The demand for liquidity is just another name for fear—a selfish fear that
causes a person or an institution to grab for what he can get, regardless of the
effect on the general welfare.
Q. What is meant by the commodity dollar?—A. That is the term sometimes
used to mean a dollar whose purchasing power is always the same in terms of
average commodity prices.
Q. What is meant by a compensated dollar?—A. One plan that has been
advanced to stabilize the commodity price level is to change the weight of
gold in which a dollar is redeemable, as often and to the degree necessary to
keep the commodity price level constant in terms of dollars. A dollar redeemable in varying amounts of gold according to the commodity price level is
sometimes called a compensated dollar.
Q. What is meant by managed currency?—A. Currency, the quantity of
which does not bear any fixed relation to the amount of gold or silver in the



country, but the purchasing power of which is kept constant by regulating its
amount in accordance with the commodity price level.
Q. What is the Federal reserve system?—A. Twelve independent regional
Federal reserve banks and the Federal Reserve Board at Washington. There
are eight members of the Federal Reserve Board—the Secretary of the Treasury, the Comptroller of the Currency, and six members appointed by the President of the United States for 10-year terms. One of the six is designated us
governor and one as vice governor. The present governor is Eugene Meyer, jr.
Q. Who owns the Federal reserve banks, and how are they controlled?—A.
They are owned by the member banks. All national banks must be members,
and State banks are permitted to become members. Each regional Federal
reserve bank is governed by nine directors. Three of these are chosen by the
Federal Reserve Board and six are elector! by the member banks.
Each member bank is required to carry its reserve funds against deposits
with the Federal Reserve Bank of its district. These reserves are 3 per cent
of its time deposits and from 7 to 10 per cent of its demand deposits. The
reserve banks must keep a 35 per cent gold reserve against these member bank
Reserve banks may loan to member banks on notes secured by collateral or
on self-liquidating paper and may make such loans in the form of Federal
reserve notes—new money. Reserve banks must keep a gold reserve of at
least 40 per cent of outstanding Federal reserve notes. Such loans are called
lediscounts. Reserve banks may further restrict the paper eligible to rediscount when they desire to do so.
Q. What is self-liquidating paper?—A. Evidence of debt based on a definite
commercial or industrial operation which will automatically produce the money
to pay the debt.
Q. What is meant by the "banker standard"?—A. That is a term used by
Prof. Lionel D. Edie, economist, to designate the money system as " managed " by the Federal reserve system and other central banks.
Professor Edie points out that the supply of gold is relatively constant, increasing at a fairly even rate year by year. " The ultimate outcome of a properly working gold standard is to protect the community from * * * soaring
or collapsing price levels."
But he adds that " something has happened to the gold standard which has
destroyed its fundamental supply function. The link which unites credit
growth to gold has been cut." Central banks " have sanctioned that excessive
variability of credit volume which it was the very heart and soul of the gold
standard to prevent."
It is this new condition that Professor Edie calls the "banker standard,"
which term, he says, " emphasizes the responsibility which the central bankers
have usurped for themselves. They have arrogated to themselves the right and
power to say during boom times that credit shall be allowed to expand two or
three times as rapidly as the long-term rate of growth either of gold stocks
or of industrial production. And equally they have arrogated to themselves
the right and power to say during slump times that the reserve base of member
bank credit shall be allowed to shrink as fast as the mob psychology of a
frightened community of private bankers dictates.
" This banker standard has given the world the most unstable peace-time
monetary structure and price level that the world has had in the past century.
" It is useless to pretend that the gold standard can endure under these circumstances. The banker standard is killing it."
Q. What is meant by the "production standard"?—A. That term is used by
Professor Edie to describe a system which he recommends of expanding credit
steadily year after year in the same ratio as the increase in production—just
about 4 per cent a year. In boom times credit is now expanded much more
rapidly than that and in times of depression much less rapidly or is actually
contracted. A steady expansion of credit at the rate of 4 per cent a year would
do much to prevent booms and depressions, in the opinion of Professor Edie
and a number of other leading economists.
In 1920, for instance, Federal reserve rediscounts reached a total of $2,780,000,000, and then shrunk to $396,000,000 during the depression which followed.
The peak of rediscounts in 1929 was $1,096,000,000 followed by a shrinkage to
$149,000,000. With credit volume as unstable as that, it is no wonder that
price levels fluctuate so greatly, with consequent disaster to business.



Q. Would a bill directing the Federal reserve system to use all of its powers
to restore prices to the 1026 level result in corn prices going to where they were
at that time?—A. No money bill can afi'ect the price of any individual product
except insofar as it affects all products. It is conceivable, for instance, that
the general price level might be restored to the 1020 level and corn prices
remain at 40 cents a bushel in case we have some exceedingly large corn crops.
On the other hand, corn prices might be relatively better than they were in
1926. Nothing can be done through the money system to cause agricultural
prices to advance relative to other prices. This part of the agricultural program must be tackled through cooperative endeavor, systematic control of
acreage, the equalization fee or some other scheme which will effectively control production, storage, and selling.

Carl statistician, New York Federal Reserve Bank: '" It seems a blind
fatuity to trust the smooth working of this vast and magnificent engine of
modern industry to the chance forces of production or maldistribution either of
credit or of gold. Surely wo can not permit the fortunes of the nations, their
happiness and welfare, to be left to the caprice or finding new gold fields in
South Africa or California, or conversely, to their inevitable exhaustion. We
may look forward, I hope, to the time when the scientific organization of currency and credit will be deemed as essential as the scientific organization of
industry itself.
" Let us hasten the day; for the world-wide disorganization which is now so
vividly before us seems evidence enough that, as in the long ages, gold, not
science, is still the arbiter of economic destiny."
John It. Commons, University of Wisconsin: " Our own huge war debt has
been reduced about one-third; but if we consider the fall in prices since 1020,
the burden of the remaining two-thirds on taxpayers is greater than was the
whole burden at the prices of 1920."
George F. Warren, Cornell University: "Extended studies of the gold question by the League of Nations show that over a long period of time, when monetary stocks of gold in the world have increased at the rate of 3.1 per cent per
year compounded, commodity prices have been stable. For over a century
prices have fallen when monetary gold has increased less rapidly than 3.1 per
cent, and prices have risen whenever gold stocks have risen more rapidly."
Herbert Hoover (1921)-: "There is no economic failure so terrible in its import as that of a country possessing a surplus of every necessity of life in which
numbers, willing and anxious to work, are deprived of those necessities. It
simply can not be if our moral and economic system is to survive. * * *
" What our people wish is the opportunity to earn their daily bread, and
surely in a country with its warehouses bursting with surpluses of food, of
clothing, and with its mines capable of indefinite production of fuel, with sufficient housing for comfort and health, we possess the intelligence to find the
solution. Without it our whole system is open to serious charges of failure."
Daniel Willard, president Baltimore & Ohio Railway: " The mere existence of
the (unemployment) problem presents a serious challenge to our economic system."
After discussing our natural and human resources, our productive
capacity, and our surpluses he added:
"And with all this surplus of wealth and resources, we have millions, so it is
said, in dire need of food and clothing—in short, more of everything to eat and
wear than we can possibly use, and at the same time millions of human beings
hungry and cold. That is another problem, although closely related to the
first, and the two problems together—unemployment and the distribution of
resources—bring into question the very foundations of our political and economic
Sir Josiah Stamp, British economist: "A stable price level is the most bitterly practical of all questions."
Lord D'Abernon, British financier: " The fall in prices which has occurred
is nothing more or less than a rise in the price of currency, or means of payment. If the means of payment had been available in adequate quantity with
adequate dispersion, the general fall in prices would not have occurred."
T. B. Macaulay, president Sun Life Assurance Co. of Canada: " T h a t the
purchasing power of currency depends on the amount of that currency and
currency credits which may be outstanding can no longer be denied."



Claude L. Benner, vice president Continental American Life Insurance Co.:
" I am of the opinion that as long as basic commodity prices remain where they
are at present, there can be no large increase in business activity."
H. G. Wells: "The world requires (that money) must represent absolutely
stable purchasing power."
E. W. Kemnierer, economist: " The world sooner or later must either learn
how to stabilize the gold standard or devise some other monetary standard to
take its place."
Owen D, Young: " The proper handling of price stability is one of the most
important matters facing the capitalistic system. In it will be found the roots
of those maladjustments which result in unequal and unfair distribution of
wealth, in unemployment, and other serious problems/'
Sir Charles Addis, director, Bank of England: " It is simply intolerable that
we •should continue to sit with folded hands while industry and trade throughout the world are becoming the sport of our ineffectual monetary systems. We
must be masters in our own house, the rulers, and not the slaves of money."
Lionel D. Edie, economist: " The bankers have frightened everybody, including themselves, away from doing anything."
T. E. Gregory, London School of Economics: " The efforts of the politicians
(to end the depression) must be seconded by the central banks—a concerted
effort must be made, primarily through the financing of budgetary deficits
through central bank credit, to cause a rise in prices."
George N. Peck. Moline, III.: "We should have a measure of controlled inflation that debts may be paid with the 'same size dollar with which they were
incurred, as far as that is possible."
Frank (".). Lowden: "All classes now agree that unless there is an improvement in the general price level there can be no substantial relief from the unprecedented depression in which we find ourselves. The question therefore is
a vital one. We have boasted in the past of our ability to meet new situations as they arose. To say that nothing can be done in this matter is the
counsel of despair.
" Why not give heed to the opinions of the long line of eminent economists
who believe that, without any disturbance to our gold standard, we have it
within our power to erase some of the drastic deflation from which we are now
suffering. And that deflation is the greatest in our history and it seems to be
gathering momentum all the time. The decline in bank credit has been more
rapid in recent months than at any time since deflation set in. Unless some
way can be found to check this contraction of credit, thoughtful students fear
that we have by no means yet seen the worst."

The present period of depression and the falling price level has increased
the burden of taxes, interest, debts, and other fixed costs on all producers to an
intolerable degree. It now requires 4f> per cent more of all commodities, and
TO per cent more of farm commodities to pay these costs than it did a few
years ago. The long continued deliation is crushing farmers, merchants, transportation agencies, and all manufacturers except a few most favorably situated, and has caused a declining price of property to such an extent that it
has largely eliminated equities and is affecting basic securities to such an
extent as to seriously impair the stability of our banking and insurance institutions, thereby endangering the welfare of the general public. It is causing
a lowering of all wages and salaries, and which must of necessity lower the
standard of living if continued.
The principal cause of this deflation of values is monetary. When the price
of any one commodity falls, many causes may be responsible. When the
average price level of all commodities falls with the rapidity of the last few
years, the principal cause is a shortage of money and credit in actual use.
Commodity prices are expressed in this country in terms of dollars. Every
purchase and sale is the exchange of commodities for dollars. When dollars
are scarce, it takes a larger amount of commodities to get them. In other
words, money is at one end of the balance, commodities at the other. Add to
the effective supply of money and prices go up. Reduce the effective supply
and prices come down. The above statements are justified and supported by



the incontrovertible evidence coming from the experience of all former depressions.
The problem divides itself into two parts: first, the restoration of the price
level; the second, the stabilization of the purchasing power of money.
Two alternatives lace farmers and other business interests at this time;
the first is wholesale bankruptcy for farmers, industrialists, transportation
agencies, and mercantile establishments and the further deflation of wages
and salaries; the second is a rapid rise in the average wholesale commodity
price level to a point near that at the beginning of the present deflation, thereby
restoring confidence and making it possible for individuals, corporations, and
governments to discharge their obligations and to proceed with their undertakings.
All the powers of the Federal reserve system and the executive officials of the
Federal Government should be used to bring about the restoration of the price
level near the average level at which the present long-time indebtedness was
incurred. The most important of these powers are:
1. Open market purchases of eligible securities.
2. Lowering of rediscount rates.
3. Liberal interpretation of rediscount eligibility miles.
In order to relieve the Federal reserve authorities and other agencies connected therewith from discretionary authority, we recommend and insist that
the Federal reserve law be amended so as to make mandatory the exercise of
these powers so far as possible and to the extent necessary, to restore the
average wholesale commodity price level to the point indicated.
Permanent prosperity in this country demands that the dollar be made an
accurate measure of value—that its purchasing power be always constant. This
means stability of the average wholesale commodity price level instead of
alternate periods of inflation and deflation which are the principal causes of
business uncertainty and depression. Fluctuation in the purchasing power of
the dollar causes serious losses to debtors in periods of deflation and to creditors in periods of inflation, and benefits only the speculators.
We recommend the following action by Congress to stabilize the purchasing
power of money:
1. Direct the Federal reserve system to use all its powers, following restoration of price level, to stabilize the purchasing power of money in so far as
possible, using for that purpose all its monetary and credit powers, including
currency and credit control, open market operation, and changes in rediscount
rates and in rediscount eligibility rules.
2. Empower and direct the Federal Reserve Board to raise or lower reserve
requirements of the Federal reserve banks and to raise or lower the price
of gold.
3. Broaden the rediscount eligibility provisions of the Federal reserve act.

The deflation of the past three years has injured farmers more than any
other class of producers in the country. While the average of all wholesale
prices has fallen 30 per cent, the average price of farm products has fallen 45
per cent. This means that the burden of debts, most of which were contracted
more than three years ago, and of which there is estimated to be $11,000,000,000
secured by farm mortgages, has increased 80 per cent in terms of the products
which farmers sell.
In view of this serious situation, we urge upon the Federal reserve system
and the Federal Government to take all steps possible to secure: (1) Restoration as nearly as may be of the wholesale price average as computed by the
United States Bureau of Labor Statistics to the level prevailing in 1926, or
the average of 1923-1928, and (2) the stabilization of the price level as nearly
as practicable at that point.
Contributing to these ends, the National Grange recommends the following
1. An increased purchase in large volume of securities in the open market
by the Federal reserve banks.
2. Reduction of rediscount rates by the Federal reserve banks.
3. Reduction of the legal minimum gold reserve ratios of the Federal reserve
banks to points materially below the present 35 and 40 per cent legal ratios,
to the end that the surplus gold in the United States may be exported without endangering the gold standard.



4. An international monetary conference for the purpose of (a) stabilizing
the gold price of silver, and (b) stabilizing the purchasing power of gold
in terms of the average of wholesale prices of commodities.

The Banks and Prosperity. By Lionel I>. Edie. Published by Harper &
Eros., New York.
The Money Illusion. By Irving Fisher, Adelphi, New York.
America Weighs Her Gold. By James Harvey Rogers, Yale University Press.
The MacMillan Report. By British Committee on Finance and Industry.
His Majesty's Stationery Office, London.
Money. By Foster and Catchings. Houghton & Mifflin, New York.

The OIIAIKMAN. The committee will adjourn, subject to the call
of the chair.
(Whereupon, at 5 o'clock p. m., the committee adjourned, subject
to the call of the chair.)



Washington, D. 0.
The committee met at 10.80 o'clock a. m. in the committee room,
Eoom 301, Senate Office Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Townsend,
Walcott, Blame, Couzens, Fletcher, Barkley, and Costigan.
Present also: Representative T. Allan Goldsborough, of Maryland.
The CHAIRMAN. The committee will come to order. The first witness will be Governor Meyer.
The CHAIRMAN. YOU may proceed.
Mr. MEYER. Mr. Chairman and gentlemen, the bill which you are
considering differs in some details but in general resembles the bill
that has already been considered by the House of Representatives.
I had the privilege of testifying before the subcommittee of the
House on the Goldsborough bill, when I voiced my opposition to the
bill and gave the reasons for my opposition, which are printed in
the hearing of the subcommittee on April 13 and 14:, part 2 of the
hearings. If it please the committee, I would like to have that
testimony incorporated in this hearing, as it will save the time of
your committee.
The CHAIRMAN. If there is no objection, that will be done.
(The statement of Mr. Meyer before the House of Representatives
Subcommittee on Banking and Currency on April 14, 1932, being
pages 521 to 502, inclusive, of the printed record. Part 2 of the hearings, is here printed in full as follows:)

The CHAIRMAN. Governor Meyer, will you state your connections
for the purposes of the record?
Governor MEYER. Governor of the Federal Reserve Board and
also chairman of the board of directors of the Reconstruction Finance
Mr. GOLDSBOROUGH. YOU have read H. R. 10517, have you?
Governor MEYER. Yes, Mr. Chairman




Mr. GOLDSBOROUGH. Now Governor, I think when you appeared
before the committee before, you completed your statement and then
the subcommittee or any member as the case might be, might ask you
such questions as they thought should be asked, and, if you so desire,
this hearing will so proceed.
Governor MEYER. That would please me very much, Mr. Chairman.
I had the opportunity, Mr. Chairman, of reading a part of the
record of the hearings conducted by the committee which has been
put into print.
Mr. GOLDSBOROUGH. That was up to the time Governor Harrison
-appeared before the committee yesterday?
Governor MEYER. I think so. The subject is such a large one and
I have been so occupied with my various administrative duties—
and it has been necessary also for me to be present at hearings before
other committees—that, if I have not a prepared statement to give
you in the beginning, I hope you will understand that it was not that
I did not want to take the time to make a careful and formal record
of my views, but rather that I have not had the opportunity.
Mr. GOLDSBOROUGH. If at the conclusion of your statement,
Governor, you should like to correct the record before it is printed,
we shall be very happy to give you the opportunity?
Governor MEYER. I thank you, and possibly to add to it if I may?
Governor MEYER. Anything that occurs to
Governor MEYER. The whole question is


one that has been so
much under discussion in the press at home and abroad that it is
hard in any limited period to attempt to do justice to it. I appreciate
the fact that the members of the subcommittee are approaching the
problem in a serious and earnest way, and are anxious to make a
contribution of importance to the public interest. I have every
sympathy with your general purpose. If I see difficulties which
perhaps you do not quite visualize, it is perhaps due to my somewhat
intimate experience with the administrative side of this sort of work
and to my contact and experience with other factors which I think
affect the practicability of accomplishing your purpose entirely by
the means here suggested of control over the volume of credit or
Stability as I see it is affected in an important way by the volume
of currency, including both credit and currency in this general concept.
I do not feel, however, that it is the only factor, and I have in mind
that any instrument such as the volume of credit, if used in Accomplishing or attempting to accomplish such a purpose, lias to be considered in relation to a great many other important factors in the
situation. For example, I do not think anybody can say right now
how much currency is actually hoarded. We use estimated figures
to indicate that amount, but in view of the large number of banks
that have been closed within the last two years, and the consequent
greater use of cash in business, in small amounts in each case, perhaps,
but in a large aggregate amount, it is impossible to determine or even
to estimate how much of the so-called hoarded currency is not. really
hoarded but is made necessary by bunk closings.
Then, too, with the change in the banking situation, there has been
in the past year and a half or two years a considerable decline in the



number of small accounts that are paid by checks on account of
charges imposed by banks, and that may have been a factor affecting
the volume of required currency. Of course, offsetting that is the
fact that under normal conditions with the diminished volume of
business and the lower price level, it takes less money in circulation
to transact business. I mention this merely because it brings out
some of the difficulties with which anyone charged with responsibility
for regulating the volume of currency would have to contend.
I regard the efficiency of the banking structure as an important
element in achieving stability in the price level, and in using for that
purpose, to the extent it ran be used, the regulation of the volume of
currency and credit.
I had the privilege of appearing here, not before this subcommittee,
but before the whole Committee on Banking and Currency, as far
back as in January of 1923, when I said after a study of the banking
structure of the country
Air. GOLDSBOROUGK. On what bill was that?
Mr. MEYER. It was in connection with a bill on rural credits which
resulted, I think, in the establishment of the Federal intermediate
credit banks. After analyzing the banking structure in 1923, as a
result of a study of the 4,300 banks to which the War Finance Corporation had made loans in the 1921-22 period, I called attention of this
committee to the banking structure of the country as a primary element in our economic and financial structure. May I just quote from
that hearing for a moment, dating back as it does over nine years ago,
because I think it is of interest at this particular time? I said then:
There are necessarily many difficulties involved in our dual system of banking.
We have a State banking system, a national banking system, and a Federal
reserve system, the latter having a membership derived from both the State and
the national systems. The State banking departments supervise the State
banks, and the Comptroller of the Currency supervises the national banks, while
the Federal reserve system has a supervision of its own for the member banks,
and there has been at times some disposition to competition between the State
and the national banking systems.
The State banking laws frequently permit practices which national banks can
not legally engage in. This is creating competition between the two systems
which can not be regarded as wholesome and may lead to the gradual weakening
of both. The question of branch banking is one that is causing considerable
discussion at the present time.
Some of the States permit branch banking on an unlimited scale. As a result,
agitation is now going on for an amendment to the national banking act to put
national banks on a par with State banks in that respect. I do not propose to
discuss the subject of branch banking here. Branch banking may be good or it
may be bad. It may be good if carried on in a limited way and bad if permitted
on an extensive scale. But, whether it is good or whether it is bad, branch
banking should be considered on its merits and should not be the product of competition in the endeavor to expand either the State or the national banking
organizations. The competition that exists at the present time between State
and national banks can not fail to remind one of the competition that prevailed
a generation ago among the various States seeking to become domiciles for corporations—a competition that was based upon the laxity of the laws governing
incorporation. Nothing could be more disastrous than competition between the
State and national banking groups based upon competition in laxity.

I am mentioning this question of the banking structure, Mr.
Chairman, particularly at this time because you contemplate using
the influence of the Federal reserve system on the volume of credit as
a means of affecting the volume of business and the price level. It
seems to me that the instrument through which the volume of credit
functions is a vital factor in the efficiency with which the Federal



reserve system can function, and that instrument is the banking
In the hearings which we had a few days ago before the Glass committee with regard to amendments to the Federal reserve act, the
board, through me, presented its views in favor of a unified national
banking system, and I was rather interested that members of the committee did not seem to be opposed to that thought. On the contrary,
Senator Glass and others said that if it could be brought about constitutionally they would be in favor of it. The board, in expressing
its support of a unified banking system, did so unanimously. I
merely call that to your attention at this time because I think that it
is a vital factor in what you have in mind in achieving a greater stability for business. I think it can not be denied that an efficiently
organized and properly supervised banking structure is vital to the
control of inflation and deflation of credit, and efforts to stabilize
without fundamental improvement in the banking structure seem to
me not to pay sufficient attention to the agency through which sound
principles can be put into practice.
In the report which we, as a unanimous board, presented to the
Banking and Currency Committee of the Senate there was also
incorporated a recommendation for a new method of calculating
bank reserves. I quite appreciate that such an important matter as
a new method
of calculating reserves is one that ought to be given
careful stud}7 and thorough investigation; but we had in the Federal
reserve system a committee working about 18 months studying this
question of reserves and they made a report to which I think sufficient
attention has not been given by the Congress. It was the result of a
very careful study, and while it may possibly have some weaknesses,
we have the assurance from the men who have been studying it in a
conscientious way that they tested it over a considerable period of
past years. I think this proposal would be an important factor in
achieving stability and preventing undue speculative expansion of
and its contraction, from which we are now suffering. This
S3rstem of reserves would tend to safeguard the banking structure by
increasing the reserve requirements in a time of expansion and decreasing them at a time of credit contraction, and would, I believe,
assist in the achievement of the more stable conditions which you in
this committee are contemplating to a greater extent than this bill
which deals only with the control of the volume of currency and credit.
I do not know if this committee is familiar with that report on bank
reserves, but, in a word, it abolishes the difference between time and
demand deposits so far as their classification for purposes of reserves
is concerned, and I think in that respect the recommendation is wise,
because the low 3 per cent reserve on time deposits has been an
inducement for banks and for depositors to build up to an undue
degree time deposits which carry a higher interest rate and a lower
reserve. This has induced banks to invest in slower assets in order
to get the larger yield necessary to make a profit on the higher rates
of interest paid.
Now, the proposed, revision of reserve requirements provides for a
uniform minimum of 5 per cent on net deposits, both demand and
time, and reserves above the 5 per cent minimum are based on the
velocity of turnover. In a true savings deposit there would not be
any turnover;, therefore, on that business there would be a 5 per
cent reserve. Under this proposal, when business expands, and more



checks are drawn and the turnover of deposits is greater, as is the case
in an inflationary period, a greater reserve would be required based
upon the velocity of these deposits.
Mr. GOLDSBOROTJGH. That is in the member banks?
Governor MEYER. That is in the member banks. It would also,
owing* to the fact that larger reserves were required, result in the
banks expecting larger average deposits in those accounts that turned
over more rapidly, which is proper.
Those are the principal features. The other things are that it allows
the banks to count as reserves, up to a certain percentage, their cash
in vault. This provision applies to all banks, but country banks are
the ones that more frequently need to keep cash in their vaults because
they are not so readily accessible to the reserve banks, and to that
extent it would benefit the country banks.
There are a few cases where perhaps it would increase the required
reserves of individual banks, but as a whole the principle applied
would expand the reserves in relation to the expansion of business and
particularly would do so in speculative periods, like 1928 and 1929.
It would also make call loans made by others than banks result in
increased reserve requirements because checks still have to be drawn
to make settlements.
Our committee felt that the additional reserves required at the
time when loans for account of others reached such large proportions,
would have exerted a strong influence to check the inflationary and
speculative movement long before the time when it came to a head.
Mr. GOLDSBOROUGH. That is exceedingly interesting. Will you
Governor MEYER. I think it is an important factor in the whole
situation, and I would be very glad to furnish this committee copies
of the report which was made by the committee on reserves. We
have some copies of it here with us. It is quite comprehensive and
I think it is important for this committee that the question of bank
reserves should be thoroughly understood.
Mr. GOLDSBOROUGH. What I had in mind right at that point was
just how the expansion of the reserves would restrain loans for account of others?
Governor MEYER. What I intended to say was that even loans
for account of others, which, of course, would not be reflected in
deposits, therefore not under present law in additional reserves,
would still be reflected in the velocity of the turnover which under
the proposed splan would require an increase in the reserve. The
studies of the committee on the velocity of the turnover in relation
to loans for account of others indicate that a very substantial increase
in the reserves would have been made necessaiy, entirely apart from
increased deposits, because the requirement would be 5 per cent
on the deposit with the balance related to the turnover. That
turnover is there whether the loans are made for account of banks
or for account of others.
Now, on the broader subject, it is true, of course, that the volume
of money and credit in circulation is an important factor in the price
level, but some of the other things that seem to me to be vital in connection with a study of the "problem are conditions which I believe it
is difficult for the Federal Reserve Board, or any other human agency
that exists or that could be called into existence, to control.



If we look back at the history of the last 10 or 12 years with the
abnormal conditions at home and abroad in production and consumption, at the currency standards in various countries, at the political as well as the financial relations within and between nations,
we can see factors which it seems to me, while subject to influence,
nevertheless can not be definitely controlled by any one country or
by any one group of men or any institution in any one country. I
am one of those who agrees that the United States, with its large population, with its great productive and consuming capacity, is the
greatest single economic factor in the economic world. There are
nevertheless many others, and the changing conditions in many of
our relations, both national and international, are striking, whether
we analyze them by a chronological process or whether we analyze
them in view of the fluctuation of price, or of the volume of business
or of international financial movements. Everywhere we have
difficulties to meet and adjustments to make, dependent on the behavior of human beings in large groups; and if we go back to the 1921
situation for a moment, where we had what looked at that time like a
most acute depression we find that we came out of that depression
through a series of constructive developments in world relations,
particularly with respect to our own country.
We came out of the war and the temporary postwar inflation, first
and foremost, as the one country where the world felt that its capital
invested or its money deposited was safer than in any other country.
That led to a tremendous movement of liquid capital and investment money toward the United States, which resulted in a tremendous
amount of gold being imported into the country, representing foreign
bank balances and individual deposits and investments. That happened to combine with rather extraordinarily favorable conditions
at home from the point of view of the possibility of money affecting
industry, and the particular feature to which I want to call your
attention in that connection is expressed in this diagram.
This is a graphic representation of the per capita value of building
permits of 50 cities. From 1913 when business was slow there
accumulated during the war period of 1917-18 until 1922 a deficiency in the construction of housing and other plants such as
office buildings, which left a very large construction program necessary and sound. As soon as the money market began to ease
after the 1919-1921 tight-money period, money began to flow into
residential building—both apartments and private dwellings—and
into business office construction all over the country. I am sure
from your study of economics that you know that there is no single
activity which produces a greater employment of labor and a greater
purchase of material than the building industry. It emplo3rs labor
at good wages—gives it buying power. It puts traffic on the railroads and expands the employment of labor and material there, and
finds its way more thoroughly into the general volume of business
activity, I think from my observation over 35 years, than any other
one activity.
When this activity began, we began to have an improvement in our
general level of prosperity, because like many other good things, it
began on a sound basis to fill a legitimate need. Population had increased and housing and business plant had not. Therefore, a need
existed. The business began by filling a legitimate need, with the



demand large and the profits substantial, bat it developed more and
more, and cumulatively on a geometric ratio, into a tremendous speculative activity.
In this period a very important financial development occurred
which was the means by which the construction activity passed from
the legitimate stage into the speculative stage and to some extent, the
dangerous stage. That was the development of a new channel to
large amounts of capital through the real-estate bond market. Realestate bonds had been known previously on a small scale, localty.
But in this period of rapid development and profitable activity there
was found a way to large amounts of the savings of the country,
through the real-estate bond market, on a scale which had never existed before.
That led to two things: To some extent, to speculative building
where the business was carried on for the profit of the. people who were
doing it rather than to meet a legitimate need; and to overbuilding
in certain localities.
Now, it is generally- assumed I think, from the present condition of
the real-estate and construction industries that there is no building
need to be filled at present. There is, but with the breakdown due
to over-speculative building in certain areas in the recent past and
the consequent injury to banking, the credit of the construction industiy is greatly impaired. So that to-day, when we find that we
have the lowest building volume that we have ever seen in peace
times we also find, I think, one of the most significant factors in the
present depression and deflation of price levels.
These things I mention because I think they are so large in their
importance that they balk us in achieving results which, under more normal conditions, might be possible. I had a feeling last year, when an
easy money market prevailed for several months, that there might
be an opportunity for stimulating a little greater activity in housing
development in localities where there was a need for housing. In
some places there might be more activity even now, if money were
available in the mortgage market on an adequate scale.
As you know, cotton or wheat have a world market, and if there is
surplus anywhere there is a surplus everywhere; but housing is
different, and even last year there was considerable housing construction done in suburbs of large cities where new highways and automobiles nad buses are taking people out of the crowded sections into the
suburbs. That is a possibility that I think will be developed in the
future, and I think that there is a long time trend in that direction
where you will see results when conditions are a little more stabilized.
But I also think that the recent overexpansion in building is one of
the major factors in the present economic- depression.
Abroad last year we saw a major financial crisis in two of the four great
economic powers of the world. The German situation first etime to
ti critic til climax, following difficulties in the Balkan States and in
Austria and Hungary. At the end of a long period of reparations
payments and heavy borrowings, the German situation came to a
standstill, resulting in the so-called standstill agreement. I know it
might be argued that if the price level had been maintained perhaps
that would not have happened, but I doubt xery much whether the
maintenance of any price level could have prevented what happened



in Geririany where there was borrowing on short-time obligations to
pay debts which could not be liquidated in any short period of time.
The English situation followed not long afterwards, and if you
analyze that situation you will find that the English had large
amounts of foreign deposits payable on demand, and that they had
been making large amounts of loans abroad on less liquid and longer
terms, so that when the strain was put upon them through withdrawal of their short-time obligations they were unable in the circumstances to continue to meet their payments on a gold basis.
There has always been a difference of opinion with regard to the English
situation. The pound had been maintained close to the gold basis
during the war through artificial methods, largely by borrowing in this
country and the sale of investments. In February, 1920, I remember
that the pound got down to $3.18 at the low point. That resulted in
wage increases in England which could not be sustained, I think,
after the English had restabilized at the old gold basis. They were
unable to modify the wage scale and they became unable to compete
with other countries where labor was cheaper, or where plants were
more efficient. The result was that the whole economic basis on
which pre-war England had been developed was undermined in an
important respect.
Developments during the war also changed the world market
situation. I recently looked up what happened in the textile industry
in the Far East during the years of the war and immediately afterwards. Spindles in India and Japan and China grew from 10,415,000,
in 1915, to 18,161,000, in 1922, and looms in about the same proportion. In other words, in the war period, when England's capacity
for export production was interrupted, other countries which previously had depended on England or other European countries for
supplies were forced to build up a production which continued to
exist after the war. As a result Lancashire has been enormously
handicapped by these developments in other countries to meet the
demands which formerly had been supplied by England.
England's banking power, which was based on the fact that the
pound was the almost universal medium of exchange in trade relations
with foreign countries in pre-war days, became less dominant after the
war. Less banking went to England and more came to this and other
countries. The American interest in foreign trade went up by large
amounts. Substantially, in that period when all Europe was engaged
in war, America was called upon to take the place of many countries
which were put out of the business of supplying industrial markets,
and these figures indicate some of the fundamental changes that occurred in world economic relations which can not be ignored when you
approach the problem of how to achieve stability. I will give you
the figures: From 1913 to 1929, the share of the American market in
goods imported into South America grew in Argentina from 15 per
cent of the total to 26 per cent. In Brazil, from 16 per cent to 30
per cent; in Chile from 17 per cent to 32 per cent; in Columbia from
27 per cent to 46 per cent; in Peru from 29 to 42 per cent; and in
Venezuela, from 39 to 55 per cent.
In Asia, Africa, and the Oceanic Islands, our share in goods imported
into British India grew from 3 per cent to 7 per cent; into China, from
6 per cent to 18 per cent; into Japan, from 17 per cent to 30 per cent;



into Australia, from 14 per cent to 25 per cent; into New Zealand
from 10 per cent to 19 per cent; into South Africa, from 10 to 19
per cent.
That means that the United States developed the capacity to
supply the needs of a market which was temporarily deprived of its
normal sources of supplies, and after that productive capacity had
been duplicated in the United States it came into competition with
the other productive capacities. Certainly maladjustments in business conditions and competitive conditions and price levels must flow
from such a major development as that.
Let me just say that, in the light of these major difficulties in the
European economic structure, which were inherent in the situation
as a result of the war, we have had to struggle in the world with
maladjustments proceeding from the passions of war which did not
end with the so-called peace; and national animosities as well as international economic and financial instability have been vital factors in
our home situation.
I think that it was the large construction needed in the United
States, which was in good condition, that enabled us, in spite of the
disturbed conditions of the world to develop what appeared to be an
independent prosperity which we were able to maintain for a period
of years.
Total building contracts rose from $2,756,000,000 in 1921 to
$6,381,000,000 in 1926, went down to $3,093,000,000 in 1931, and
are on a still lower level at present. With the revival in building and
the resultant activity that flowed into all the channels of trade, the
purchasing power of the United States developed in a large way.
But at the same time, with the tremendous expansion in the volume
of industry, American industry, with more highly developed mechanization and larger production units, was able to make goods at low
prices and to invade foreign industrial markets with manufactured
goods, so that for a while it looked as though something impossible
was going on and could go on. It went on longer than seemed possible. What I mean is that we were a large creditor annually in
the world's balance of trade through exports of raw materials and
manufactured goods, and at the same time we were collecting interest
on debts and investments on a large scale.
It is interesting at this point to call to your attention that, in the
period from 1922 up to the present moment there has been no great
expansion of exports of crude materials, including raw materials and
foodstuffs. From $1,447,000,000 in 1922, the export of crude materials reached a peak in 1925 of $1,740,000,000, and then declined.
Exports of manufactured goods rose from $2,318,000,000 in 1922 to
$3,745,000,000 in 1929. I think that that is a measure of the ability
of the American manufacturer to sell in world markets at a competitive
price, which is interesting and important; but, at the same time,
it seems to me to be extremely difficult for foreign countries to buy
raw materials to compete with an industrial country which can expand
its market for manufactured goods on a competitive price level notwithstanding high labor costs. That is what the United States
achieved for a certain period and to a certain extent for the first
time in the world's economic history.



Mr. GOLDSBOROUGH. You are not making a very good Republic fin
high tariff speech this morning.
Governor MEYER. Mr. Chairman, I am not making any tariff speech.
Mr. STRONG. I might interject that the Democrats made a stronger
tariff argument when they brought in their bill and did not change
the tariff rates.
Governor MEYER. I believe in the tariff for protection of American
industry and agriculture. I think it is more important to protect
the domestic market than it is to invade foreign markets; but what
I want to say is that, during this extraordinary period, we appeared
to be able to do both. And it is not possible to do both. I think
the future may show that the United States can not continue to
operate on the basis of exporting raw materials and manufactured
goods at the same time, in the volume that prevailed in that period.
Mr. GOLDSBOROUGH. All political economv teaches that, does it
Governor MEYER. Yes. But it went on for so long it appeared
to be possible.
Mr. GOLDSBOROUGH. That is the way the world over, is it not?
Governor MEYER. TO some extent. Of course, there were so many
apparently constructive developments in this period from 1922 to
1929 that the world was lulled into a sense of security. There were
periods of acute and critical difficulties like the invasion of the Ruhr
in 1923, and the debacle of the mark; there was the degeneration of the
franc and its final stabilization; but, in spite of the several critical
periods that menaced the last decade, there was a gradual improvement in European international relations due to the stabilization of
of currency, which was helped enormously by the loans we made.
There appeared to be a prospect of being able to go on and continue
with a condition in the field of international finance that now is
obviously impossible; there is, for example, no possibility, in my
opinion, of Germany paying continuously for a long period of years the
great annual sums contemplated in the Young plan in 1930. But the
improved tendency and the satisfied feeling at times that we were on a
sound basis gave confidence to people everywhere that a condition
which was fundamentally unsound in major respects could be continued.
I particularly feel that such matters as this great invasion of the
world's industrial markets by our manufacturing industries are important to consider in connection with stabilization, because for such
a long period it looked as though something impossible was possible.
We all criticize the other fellow, but we were all subject to the same
delusions and mistakes in those periods, because they were worldwide. It is well to look backward with a broad point of view.
Speculation in stocks of course was reprehensible. Foreign loans
were made on a scale that should never have been made. Real
estate was speculative to a degree. There were other speculative
activities of great proportions and great unsoundness, and international relations were just as far from sound as many of the other
activities of human beings.
I am just mentioning, gentlemen, a few things that seem to me to
be important in the picture. If it were possible to take your resolution and put it into effect and accomplish the result you have in



mind—I would like to say absolutely this is the thing for you to do
and I will do my best to help to carry out every purpose, or if I can
not somebody else should be put in my place who can. But this
bill contemplates, it seems to me, that a small group of men will
understand things in the future that men nowhere understood within
the last 10 years.
I felt in 1928 that the indications were that the expansion of credit
had gone to a dangerous extent. In talking it over I found that a
lot of people did not agree with me. Some of them were very wise,
too. But they said business is good and we can't stop good business.
In a time like this, of acute depression in prices, there is not a man
who has any decency who would not want to see the price level rise
if ia sound method were available to raise it from the present level.
In times of good business and overexpansion, let me tell you it is
very hard to get people to agree that things are overcxpanded, and
it is often hard for men, even if they feel it, to have the courage to
say that it is the time to put on the brakes.
Mr. STRONG. That is the reason we want the law that we are
proposing to pass.
Governor MEYER. YOU can not accomplish it by law because it is
a matter of judgment. You can not supply judgment by law.
Mr. STRONG. If you adopt a measure that indicates what should
be done?
Governor MEYER. I do not think that there is now or ever has been
any failure on the part of the people in positions of responsibility to
endeavor to avoid unsound inflation.
I just want to try to give you a little picture of the problem we
have. Take the problem of cotton which is one of the world's great
commodities. It is more than just a matter of so many million bales
of cotton at so much a pound. I have ahvays considered that cotton
is one of the great- key commodities not only of this country but of
the world. In 1921 we had a large surplus of cotton. We had bad
international currency conditions. The export trade went down and
the price of cotton dropped to 10 cents. In the War Finance Corporation, if you will remember, we negotiated some large loans to
cooperatives mnd exporters and cotton started up quite promptly.
But let us take a few individual commodities, because your price level,
is, after all, a total of individual commodities. This very last year,
the present cotton year, in spite of a reduction of acreage and a substantial reduction in the use of fertilizer, the .yield per acre, due to
climatic conditions, or Providence if you like, and absence of boll
weevil and frost, was almost 200 pounds, compared with 150 pounds
the year before, and was the highest yield since 1914, which was
before the boll weevil swept over the Cotton Belt. A rise of 50
pounds per acre is a 33 per cent factor in the output of cotton. If
the cotton yield last year had been what it was the year before,
instead of nearly 200 pounds per acre, you would have had 12,750,000
bales of cotton instead of 17,000.000 bales, and you would have had
an entirely different price level for cotton in the absence of 4,250,000
bales. Cotton perhaps would have stayed around the 10-cent level
if it had not been for the abnormal yields last year.
If you take a commodity like cotton, it is not only of importance
in terms of so many million bales, but it is a vital factor iu 13 States.



It affects the buying power of the people of those States, and it is a
vital factor to the industries of the North which sell to the South,
and I fail to see how it is possible to avoid price level factors of major
importance entering into the situation where you have such violent
fluctuations in world production.
Now, let us take the 1921 yield per acre of 125 pounds, and the
last year's yield of 200 pounds. Let us say it is produced on 40,000,000
acres, using round figures. On the same acreage, the difference between the 1921 yield and the 1931 yield would be 6,000,000 bales.
We have another vital agricultural industry, and that is the beef
cattle industry. We had a good deal to do with that in the War
Finance Corporation. We loaned about $90,000,000 on cattle and
sheep. During the war the sheep population had gone down 25 per
cent and the cattle population had gone up 25 per cent. The result
was that when we came into a stabilized period of normal conditions
the beef cattle industry was reduced through attrition, a long period
of droughts and low production, and so forth, till the beef cattle
population which in 1921 was 45,000,000 dropped to 35,000,000; it
may be a little higher than that at this time.
The sheep population which had gone down to about 36,000,000
head in the war period has gone up as high as 54,000,000. But the
beef cattle industry, I would say, is in a sound statistical position,
and as soon as a turn comes in the general situation I look for an
important revival and improvement.
I think it is worth while to note perhaps for the record this chart
which shows the awarding of building contracts and how it developed
in 1921 and 1922 from small proportions to this large expanded area
of large proportions when it was being overdone.
Mr. GOLDSBOROUGH. Without objection, please insert that at this
(There was no objection. The chart referred to is as follows:)



200 —

37Eastern States- 3 month moving average, adjusted for seasonal variation.







The chart on the volume of manufacturing production shows some
interesting figures. It shows how closely some of the manufacturing



curves follow a normal trend and where the troubles of the inflation
and deflation periods manifest themselves in the volume of manufacturing production; and it is in these construction industries and
in the industries whose buying power is tied to the construction industry that you see the greatest expansion in good times and the
greatest contraction in bad times. In part, to a large extent, contraction in these industries is what causes bad times.
As you know, Mr. Chairman, I have been in the Federal Reserve
System only a year and a half. Naturally I was an interested
observer from the outside prior to that; but the last year and a half
probably has been the most difllciilt period from a banking point of
view certainly in the history of the system and perhaps in the history
of the country; although in the past there have been other difficult

AH Man factures





Steel, Autos Lumber, etc.





Textil •5 & Leather
Foo Is & Tobacco











periods. But again, out of this experience I feel, as I felt after the
1921-22 experience and study, that a sound banking system is an
essential precedent to any attempt to moderate these peaks and
depressions, whether you pass resolutions or not, or whether the
board or the Federal reserve banks be rightminded in their purpose
or intelligent m their efforts. The committee here supported me in
1921 when I recommended the revival of the War Finance Corporation as a method of adjustment in our economic machinery, and we
made a large number of loans principally to nonmember country
banks, although there were some member banks; and I think the
corporation was very helpful in easing the situation and in relaxing
the forced contraction that was going on—a contraction forced by
fear and other things. The work of the corporation, combined with
the gold imports which followed about that time, and with the need
for construction which had developed, enabled us to achieve a quick



I came here some weeks ago and asked you to authorize, and you
did, a reconstruction finance agency, and amendments to the Federal
reserve act, and I want to say at this time that I think the results
have been good—not as immediate, perhaps, as might be hoped by
some, but you can not just pull a financial lever, whether it be in the
Federal reserve system to ease credit or increase the volume of Federal
reserve credit, or loans in the Reconstruction Finance Corporation
to make loans to country banks, which feel easier with the corporation
than they felt with their correspondents, and immediately engender
confidence and a more open mind to do business. There is always a
lag, and it takes time for money to produce its effects on business. I
used to study that particular aspect quite closely many years ago,
and I found that when money became easy and available on mortgages
it would ordinarily reflect itself in construction activities about six
months later. You could see that under normal conditions when
money became tight and unavailable in the mortgage market, in the
days before the real-estate bond market, it would show up about six
months later in business. There is a lag between the entry of money
into circulation in the banks and its effectiveness in stimulating business in ways that are obvious to observers of business.
The first thing to do is to exert every effort to arrest adverse tendencies, and if you can hold the line, you can turn it eventually.
There is a time element and there is a lag, and 1 am hopeful that
we are now at the point where we are going to be able to hold the line.
That does not mean that banks will not close, because occasionally
there will be banks that will close because of events that are in the past,
but I think the banks that have reopened—opened within the past six
weeks—have had larger aggregate resources than the banks that closed
in that period.
Mr. STRONG. That is, it takes a little more time from the time the
corn is put into the hopper till the time it begins to come out?
Governor MEYER. 1 think that is a ~pvetiy good way to put it. I
was somewhat surprised and pleased over the speed with which we
were able to organize the Reconstruction Finance Corporation. We
were able to organize it and put it into operation rapidly, so that loans
have been made up to date to 1,392 banks.
Mr. GOLDSBOROUGH. Most of them are in small towns, are they
Governor MEYER. Ninety-two per cent of the banks to which loans
have been authorized are located in towns of less than 100,000 people
and 76 per cent in towns of less than 10,000 people. There are some
loans all over the country in virtually every State, I think. Everyday a
considerable number of small banks receive loans and more of them
are applying for money to be used not only to pay off indebtedness
that presses on them but also to meet their other requirements. I do
not like to prophes}^ and I do not like to promise, but I am hopeful,
with all the various things that are being done, and while we are not
going to be able to make good the irrecoverable losses that have already
occurred, or which may develop from time to time in the future,
that with your help we have made a contribution of real importance.
Governor Harrison told you yesterday, as you probably already
knew, that the Federal reserve system has been expanding credit in
the banks through purchases of United States Government securities.
There has been about $250,000,000 of hoarded currency returned
as nearly as we can make out up to date, allowing for seasonal adjust-



ments. That has been fairly stead}7 except for one period where there
was a little flare during the period around April 1 on account of tax
assessments. It looked as though currency was not returning but
that apparently was in connection with, tax matters; there were some
withdrawals all over the country in almost every district. The handling of our volume of currency has got to be considered with respect
not only to our domestic conditions but also with respect to international conditions as between our country' and our money market,
our investment market, our exchange market, and the rest of the
world, and in relation to what is going on between other countries.
Sometimes it might seem logical to pursue a certain policy, if we
could consider it from a purely national point of view, but we might
be hampered in achieving success, if such a policy were carried out,
by conditions with which we have very little to do and over which
we have no control.
Mr. GOLD8BOROUGH. Right at this point, I hope that you and
other members of the Federal reserve s3Tstem will understand that
this proposed legislation is not intended as a personal criticism. I
think I can add here that when the Reconstruction Finance Corporation bill was being discussed and I was on UIQ floor, I was aksed the
direct question whether I believed the act would be administered in
the public interest. My answer was that I absolutely believed it
would be administered in a patriotic American way and that one
of my reasons for saying so was because of your connection with it.
Governor M.EYER. I appreciate that.
Mr. GOLDSBOROUGI-I. That is a matter of record. You understand
that is how we feel. Have you finished your statement?
Governor MEYER. I would like to finish by saying that I am in
hearty sympathy with the general results that you have in mind,
Mr. Chairman and members of the committee and that I find that
other members of the Federal Reserve Board and the governors of
the Federal reserve banks, with whom we had a meeting this week,
are all earnestly disposed to search out how each and every one can
contribute to the improvement of the situation.
You must remember that, when you talk of this operation as
sufficient to control a price level at any particular point, you are
thinking in terms of a price level which was established by the greatest building activity in the history of the country. I may be that
it is the right price level, but it was a price level established with a
very extraordinary background of building activity. The justice of
it or the ability to restore it I am not discussing here because frankly
I do not know the future of price levels.
Mr. GOLDSBOROUGH. There is not any specific price level mentioned in the particular bill under discussion?
Governor MEYER. NO, not in the bill; but I have seen the 1926
price level mentioned as the ideal, raid it may be that it is. It may
be the price level to which the world will return, and it may not. I
would not profess to know. But if you get tA\e ideal of a fixed price
level which you can control by adjusting the volume of money upward or downward as prices move up or down on the average from
that price level, you are immediately confronted with the fact we
saw go clearly in the war, that to lix a price, whether you do it directly
or indirectly, is very difficult unless you control production.
Mr, (SOLDSBOROTTGI-T. Well, we can not do that.



Governor MEYER. NO; but it is necessary before you can level
Mr. GOLDSBOROUGH. There would be 784 commodities affected?
Governor MEYER. Yes. In times like these we all say we want
stability, winch means return to normal conditions; and that is the
desire of everybody. There is no creditor class and no debtor class
that has not got the same interest, because the creditor class has
losses which far outrun any possible gain in buying power arising out
of conditions of this kind. There is nobody that stands to profit or
benefit from this situation; and in my opinion, therefore, the desire
for a stabilized condition, by which we mean a return to more normal
prices, is the desire of everyone. But to assume from that that it is
a permanent, universal animating motive of human beings in the
long run I think is dangerous, because what does every manufacturer
in this country do to his price? He tries to make lower costs and
lower prices. Every farmer is trying to produce his products more
cheaply in order to make more money, but actually if enough do it
more cheaply it brings the price down. What did the United States
do to the European grain producer when we opened up the fertile
fields of the Mississippi Valley? Were we for stabilization? We
were for producing grain cheaper and selling it cheaper. What
happened when the Canadian wheat fields were opened? We were
interested then in stabilization and they were interested in invading
what had always been our market.
Now, there was Russia which by revolution was taken out of the
economic circle of nations. She always had been a large producer of
wheat in pre-war days—a large exporter. Canada came in and
supplied that demand when Russia was not able to supply it, and
one of the things to-day that the world price of wheat is suffering
from is the reentry of Russia into the world market.
Mr. GOLDSBOROUGH. You are segregating the items, instead of
developing in your own mind the picture of the price level?
Governor MEYER. Well, I have them both in mind, Mr. Chairman,
but I am choosing wheat and cotton and all those things, because
they are big factors, after all. You can take from the 784 commodities, as provided by the bill, a large number of commodities, and they
do not have the weight that a few of them have; and when you take
cotton and grain and wheat, you have the biggest factor in world
economics to-day.
Mr. GOLDSBOROUGH. Yes; and they are the very heaviest weighted
in the index numbers, too.
Now, Mr. Busby, have you any questions?
Mr. BUSBY. I want to ask some rather general questions as to the
testimony relating to these specific commodities to which you have
addressed yourself.
I would like to ask to what you regard our currency related, or
on what value do you base our currency? Is it your view of the
philosophy of our exchange system, that our currency should be
based on credit, or should it be based on wealth, or should it be based
on gold? If none of these things, what is your notion of the tangible
value expressed by the currency used for exchange purposes?
Governor MEYER. The law provides the method of issuing currency
Mr. BUSBY. I understand that, but that does not answer my
question. I am talking about the philosophy back of the situation,



disregarding the statute which fixes the standard of the dollar. I
might make myself plain by calling your attention to the fact that,
in all of your discussions about the things which have had to do with
our domestic economical welfare, you have coupled your premise to
Europe and foreign conditions.
Governor MEYER. I did not intend to do that. I did not think I
was doing that. I am giving it some weight, because it affects our
domestic situation.
"Mr. BUSBY. TO use one of your expressions, that the domestic
welfare is tied with the international credit welfare
Governor MEYER. N O ; I did not say that.
Mr. BUSBY. YOU did not say that? I do not mean to say that you
said that, but do you regard domestic welfare as being tied and intermingled with international credit and the welfare of other nations,
as it relates to their dealing in credit in this country?
Governor MEYER. I do, in some areas and markets. Tf you take,
for instance, cotton, in which your State is largely interested, roughly
50 per cent is for export, and the condition of the purchasing nations—•
their buying power and currency conditions—are economic factors
in the market for cotton.
Mr. BUSBY. I think we had better go back to the first question:
What should determine the value of credit as it is available through
the banking circles of this country? Should it be the wealth backing
up the things that credit represents? Should it be some ephermeal
notion that we call "confidence" in a vague sort of vrayi On what
would you base the development of credit that is used for normal
purposes, or in bringing it to the use of business and commerce in this
country, not in foreign countries?
Governor MEYER. The Federal reserve system is based on the
theory of commercial transactions as the basis of credit, of course.
Mr. BUSBY. What value do you regard money as being based on—
on gold that is represented by the statutory requirements or on commodities that are represented in possibly 60 per cent of your Federal
reserve note issues? And if not on those, on what would we base
the value of money?
Governor MEYER. Money has been the standard of value and the
medium of exchange, both, of course, as you know as well as I; but
when it comes to the exchange of goods and commodities you get back
to the fact that realty the 'bank check is the medium of exchange for
the greater part of business; and for that reason I go back to what I
said in the beginning, that a sound banking system, with the check,
which is the real money of business, as currency, is the vital factor
in the purposes I think the committee has in mind.
Mr. BUSBY. There are two objects, as I understand it, that we
have in mind at the present time: One object is to revive values in
commodities, to make them come back somewhat in -relation to our
outstanding debts, so that we can sell things that we work and produce,
and discharge the obligations we have assumed, and which we could
at that time reasonably believe were in proper ratio to iha commodity
values as they stood then. Now, that is the first idea.
You have suggested 1926 as having been mentioned by some one
as being the fair level to which we should return. I do not know what
you say about it being the fair level.
Governor MEYER. I would not say anything about it, because
I do not know.



Mr. BUSBY. Would you mention any other point?
Governor MEYER. NO, I would not know how. I would like to
bring* about an improvement in the present levels.
Mr. BUSBY. HOW far would you carry that improvement; how
far would you continue the work to carry that improvement?
Governor MEYER. I think it would depend a great deal on conditions. That gets down to another thing that is of vital importance,
and when you discuss these very fundamental questions, you hear a
great deal about the quantity of money, or the quantity of Federal
reserve credit. The quantitative theory is, of course, the basis of
most of our discussions and the discussions of people who are interested
in restoring things by that machinery, whereas I feel that more thought
has to be given to the quality of the credit. If the amount of building
that had been done in the United States had been done on a sound
credit basis, instead of an unsound credit basis, the picture of the
financial condition of the building industry and the present depression, I believe, would have an entirely different aspect.
Now, it is not only the quantity/ that has to be thought of, it is the
quality, and it is a warning to the banking authorities when they see
obviously dangerous speculative activities in larger areas.
Would not you, for instance, looking backward, feel that the Florida
land speculation was, in itself, a warning of something wrong in the
credit situation of the country?
Mr. BUSBY. Looking forward and backward both, I feel that itwas. It never cost me even a 2-cent postage stamp. I want to tell
you why, and give you my idea, and then I can question you.
Governor MEYER. I would be glad to hear it.
Mr. BUSBY. These gentlemen who happen to be in the Treasury—
and 1 am not speaking of you, but of the gentlemen who deal with the
financing in a broad sort of way, relate .your testimony to credit,
almost wholly. Credits are a substantial thing, in my mind, only as
related to the true values, and that is one trouble with the Florida
boom; and we have no system that is accepted by responsible persons
like yourself, and the others whose business it is to deal with this
particular thing, of determining the value of these commodities or
credits in relation to them; but the system has a drifting attitude,
without an objective to be attained, or likely to be reached, or any
purpose in maintaining the situation, unless, forsooth, some peculiar
notion should get into the majority of the managers that that situation
was right.
Now, money and currency and credit can be related properly only
to value, is my notion; and we have the Bureau of Labor Statistics
which are accepted in this country, and throughout the world, as
being wholly and fairly determinative of commodity values. It is my
idea that our currency and our credit and the quality of our currency
and our credit, since you have used the term, should be related to
those true commodity values. Certainly they are determined by
the utility and the law of supply and demand, which you have so
forcibly pointed out; but those values are something tangible and
definite; and currency and credit and faith in business, to my mind,
could measure itself, if it knew by what measure it could determine
its worth.
I can not see, in the attitude of you bankers who come here, any
disposition to direct the ship of finance to any point, any definite
point. You may tell us what way you think you ought to go for a



time, but we do not know 3iow long you are going to go that way.
If we give you the center of gravity of values, which is the wholesale
commodity index price, any farmer in the country could calculate his
propositions and his contracts in relation to that, and if we tell you
to take that center of gravity of prices to a certain point, if it be the
1926 price, your only objection is that we might not be able to do it
with the machinery that we have; and if we did it, we might not be
able to hold it with the machinery that we have; and every time the
subject is mentioned, we are thrown into the interlacing situation
with the conditions of other countries, and an examination of our
connection with the credits of other countries.
Some of the best authorities that we have, bold that we have, perhaps, at least $28,500,000,000 investment in credit, while foreign
countries have invested $7,500,000,000 in this country, leaving us a
net outlay, war debts and ail, of about $21,500,000,000, and hold that
the defaulted bonds and spurious issues of their countries—they got
credit and property out of this eountrv amounting to about
$4,000,000,000, already defaulted, and that there is $11,000,000,000 of
war debts, making a total of about $15,000,000,000 marked off, and
that is the argument, as I understand it, of most of those who are in
high financial positions, leaving a net amount, possibly, of
$6,000,000,000 or $7,000,000,000 of all credits we have extended in
all of our experience with foreign countries, that we can hope to collect.
There is always the same picture of the bankers connecting us
with the welfare of nations in the other parts of the world.
Governor MEYEE. I was discussing that in terms of the buying
power for our exports, and I was not discussing it with the view
to any interest we would have in the foreign countries, except so far
as the conditions in those countries, politically or financially, would
affect our export commodities; and you know it is important not
only from the point of view of the quantity of exports, but also
of the timing.
I have occasionally called the attention of the committee here,
in years gone by, to the fact that when conditions are normal, exchange
is stabilized on some basis or other and that the cotton crop used to
be sold, to the extent of 80 per cent of the annual exports, in the
months of September to January. At the present I would say that
probably the foreigners buying cotton would buy only about onetwelfth monthly. That leaves a large carrying problem for the
producers and the banks that finance the producers. That is why
we think that the change in the time element is one of the results of
disturbed foreign conditions, and that is why there is a larger visible
supply, really greater than it ought to be, because of the disturbed
condition of the whole scheme of distribution, and the change in the
time element. We think the timing apparatus on an automobile is
very important, to get our spark plugs coming in at the right time.
If they come in at the wrong time, you have a great deal of trouble.
It is just as bad for the cotton market, when its timing gets out of
order, because it affects the price and slows up the market.
People do not think very much of the time element.
Mr. BUSBY. That is a fine illustration, but I would not follow it to
any extent, not that it is mysterious, but because it does not bear a
great deal of logic, in my mind, just to speak to the point on the
subject, without criticizing you.



Governor MEYER. I am sure we want to be frank. I welcome
criticism and new ideas, and I am anxious to learn.
Air. BUSBY. Now, what ideas or plans do you have for financing these
foreign exports, or getting the pay back to the American exporter?
Would you do it with advancing more credit; or would you get more
gold from the foreign peoples, or would you exchange it for goods?
These are all practical things, as we understand, but that timing
business and all
Governor MEYER. I can not undertake to endeavor to solve the
problems of the breadkown in international trade.
Mr. BUSBY. Well, we can not sell commodities abroad unless they
can pay for them back home, can we?
Governor MEYER. The change in the time element—that compels
us at home to make some readjustment in our financial machinery to
cany the commodities for a longer period. If the exports of cotton
were to be 6,000,000 bales in the year, it would be a very different
thing if 80 per cent, or 5,000,000 bales, were exported in the first
four months of the year instead of being spread evenly over the year.
Mr. BUSBY. If they can not pay for it at any time, you can not
export it.
Governor MEYER. They would pay gradually; and, of course, if
they did not pay for it at any time, they could buy; that is all there
is to it.
Mr. BUSBY. That is most of the trouble now, instead of the time
Governor MEYER. It is both, because, after all, we are exporting
millions of bales of cotton, and we exported in the current cotton
year considerably more than Ave did a 3^ear ago, although conditions
are worse.
Mr. BUSBY. IS not it a fact that the foreign countries that have
somewhat depreciated currencies, as it is rated, currency exchange,
in selling commodities here, get their money back home and exchange
it for considerably more money in their own money, and thereby
undersell the American trader who seeks to go into his o\yn market.
Governor MEYER. Let us take the cotton textile industry, for
instance, and let us take the processes
Air. BUSBY. I know as much about cotton, of course, as anybody
else, but you keep talking about it because 3^011 think I don't know
anything but cotton.
Governor MEYER. NO, but that is one of the most important
industries in this country.
Mr. BUSBY. I might add that in 1929 the exports of cotton were
$920,000,000, before we passed the last tariff act. I happen to know
that, but I also know this: That the buying power is broken down
abroad, notwithstanding we have given them some $15,000,000 of
American credit.
Governor MEYER. I am not favoring credit to foreigners, Mr.
Busby, if that is what you have in mind.
Air. BUSBY. NO; but we have talked about it all of the time.
Governor MEYER. N O ; we have just discussed the effect of those
conditions on our trade. What does the manufacturer in England do?
He buys future cotton, to be delivered in three months, or six months,
and under normal conditions he transports it and manufactures it
and sells it to China, or somewhere else, and gives them six months
in which to pay for it. Now, that business is done on a manufacturing



basis, or on a fairly competitive basis; but in the last few weeks, the
pound has fluctuated from $3.25 up to $3.80, which is about 15 or 20
per pent. Well, where the manufacturers have to overcome fluctuations of that magnitude and have no basis on which to make their
calculations, because it is uncertain, it hampers business.
Mr. BUSBY. I tried to get over this idea, that the credit set-up at
the present time, being based on practically nothing but what the
world has recently been pleased to call confidence, that is as unsubstantial as the fabric of dreams, just as you pointed out, and nobody
knows how to make contracts
Governor MEYER. That is the trouble.
Mr. BUSBY. And if the currency and credit were based on the tine
values and stabilized values, commodity values, taking the quantity
of commodities, like the 784 used by the Bureau of Labor Statistics—
if those values remained reasonably constant and unvarying, and if
that currency was measured in relation to the values of that currency,
we would not have this condition you have pointed out, and we could
not have that condition that you have pointed out; but in answer to
that part of your statement, I say to you that there is practically no
commodity of importance in the world but what has fallen tremendously in value, as measured by the gold currency dollar, and it is not
the fault of the commodities, and it is not the fault of the people that
millions of them are walking the streets, having been sold out and
separated from the last vestige of tangible property, while we talk
about theories and the fine-spun notions of what somebody might do
that would upset the apple cart; while we find ourselves saying, if you
will, the private and public debt and measuring them by the present
national wealth, which is in a condition of bankruptcy, and we are
still spinning fine theories about credits and the lack of confidence
and all of those things. We have the largest part of the gold m the
world, and it is the measure of values at the present time, under our
standard set up by statute. It has been suggested that no minimum
gold requirement should be set up in the statutes of the countries of
the world that are on the gold basis, and
Governor MEYER. NO minimum what?
Mr. BUSBY. Requirement.
Governor MEYER. YOU mean as reserves?
Mr. BUSBY. As reserves. What would you have to say on that?
Governor MEYER. Well, the Federal Reserve Board, under the
present law, can suspend the reserve requirement.
Mr. BUSBY. It has not done it, though.
Governor MEYER. There has been no need to do it.
Mr. BUSBY. DO you believe that the United States and France can
continue to gather in the monetary gold supply of the world and ever
have anything like a uniform gold currency range throughout the
Governor MEYER. It is only a few years ago that the French had
a minimum amount of gold, and they would not have had it if the
people had been able to get it out; and now, by a change of circumstances, the gold has moved to France.
Mr. BUSBY. Most of that change was brought about by stabilizing
her franc at 3.9175 cents per franc, instead of 19.3 cents, and she was
able to cancel 80 per cent of her debts, and that is the trouble in this
country to-day.



If we could cancel 80 per cent of our debts, private and public, we
would have no trouble in getting along, but the debts are what is the
burden on the people of the country, and the fixed charges.
Governor MEYER. Yes; there is no doubt about that.
Mr. BUSBY. Every country in the world except the United States
has so manipulated its currency within the last 15 years as to cancel
all the way from a total of its international debts, such as Russia did
up to a large portion, such as has been done by England in going off
the gold standard recently. Is not that a fact?
Governor MEYER. Germany is struggling to maintain her currency
at the present time.
Mr. BUSBY. She has already, at one time, canceled her domestic
and internal debts.
Governor MEYER. Yes; but they are making, as the result of that
experience, which you regard as a happy experience
Mr. BUSBY. N O ; I do not. I beg your pardon.
Governor MEYER. Which their people regarded as the most
wretched experience in the history of the world—they are making a
tremendous struggle now to maintain their currency, and avoid
another experience of a kind which they abhor.
Mr. BUSBY. I do not regard that as a happy experience, and I
have spoken in the House many times and have never intimated any
such thing.
Governor MEYER. I misunderstood, then.
Mr. BUSBY. I have not come to that conclusion, nor have I suggested airvthing of the kind; but I am speaking now dealing with the
subject of a fair deal to the American debtor in the scheme of things
under which we try to carry on business and to live and get a livelihood, and not be forced out into the cold, homeless, and without the
hope of obtaining employment under our system.
That is why I allude to those things.
Governor MEYER. I think we are all symphathetic to that point of
view. I have just answered that Germany abhorred the thought of
the degeneration of her currency.
Mr. BUSBY. I should say so. They were all wiped out.
Mr. GOLDSBOROUGH. Governor Meyer, as far as I know, the feeling
of the subcommittee is that, as nearly as they have been able to ascertain up to this time, the 1926 level represents a fair sitxiation as to
debtor and creditor. There has certainly been no disposition on the
part of any member of the subcommittee, or Mr. Busby, to create a
situation that would be unfair to the creditor.
Now, if 1926 is not right, we would like to have all the assistance
we#can get to fix the point which is fair and would allow people to get
from under their burdens, and to resume their normal positions as
economic units. That is our position.
Governor MEYER. That is a fair enough position, Mr. Chairman.
Mr. GOLDSBOROUGH. Governor Meyer, we would like to adjourn
until 2 o'clock, and we would like to hear you again, as there are a few
questions we would like to ask you.
Governor MEYER. I will be very glad to come back.
(Thereupon a recess was taken in the hearing until 2 o'clock p. m.
of the same da}/.)




Mr. GOLDSBOROUGH. Gentlemen, the subcommittee will come to
order. Mr. Busby, you may proceed.
Mr. BUSBY. Governor Meyer, as you very well know, the object of
our activity is to try to discover some remedy for the present very
unsatisfactory financial condition in which the people of our country
find themselves, and also, if possible, to discover some fundamental
method or set-up whereby we can prevent a recurrence of this very
unsatisfactory condition.
I am sure you are as familiar as almost anyone else with the suffering and distress that is in existence from one end of our land to the
other. To my mind it is very clear that there is a breakdown, because
of the nature of the set-up of the currency and credit system of the
country; and I might add that, if we remain on the present currency
and credit set-up, I see no way of preventing the thing from recurring
at shorter intervals in the future as in the past to a like deplorable
financial condition. It is not necessary, under our set-up, to recur to
similar periods of depression as this, and I wish you would give us any
light that you may have regarding the subject of securing stabilization
that will prevent it.
Governor MEYER. I am not, Mr. Congressman, a believer in the
idea that you really want to achieve a static position, in all respects,
economically speaking. No matter how much a steady condition
appeals to anyone as an ideal, I think when you get down to it, any
business man will try to go ahead, and want to go ahead in the world.
You want your boy to go ahead. We have internal competition and
instability of economic factors between each part of the country, in a
way, as well as international competition and the instability of
economic factors: For instance, take Texas and Oklahoma, which are
big cotton-producing States. If you will go back 30 or 40 years you
will find that the proportion of cotton grown in the West has increased
enormously and has taken away the market for a lot of the cotton
grown in the Carolinas and Georgia.
Thai does not alter the fact that relative stability is desirable, and
limits to the area, of fluctuation are desirable. Therefore, I do not
think that you and I dill or, and I only make the distinction because I
do not believe the human race wants a static position, aiul I do not
think that any human being
Mr. BUSBY. DO you think it wants a, recurring condition like the
one we arc now unhappily passing through?
Governor MEYER. 1 certainly do not.
Mr. BUSBY. Well, now. what does your very far-reaching knowledge
of the handling of domestic and international credit to-day, and banking problems, point out to you as a way to prevent us from recurring
to this condition. 1 think it is worthy of us making almost any
sacrifice in throwing away some fetish, such as the ancient idon of
banking that we are still playing to, in order to prevent this condition
recurring. This ir, a real problem with me, and 1 do not believe in
theories. If we can lay aside theories, we can get to something
Governor MEYER. I am entirely sympathetic to your of
view. Now, if you. ask me what I consider the most important factor
in achieving relative stability, which is what you and I both think is



Mr. BUSBY. Surely.
Governor MEYER. We do not think absolute stability is possible,
but relative stability with the elimination of the inflation and speculation that we have discussed. I regard the reorganization of the banking situation as most important, in view of the concentration of
reserve bank activities and
Mr. BUSBY. YOU mentioned the reorganization of the banking
system of the country as being fundamental in 3^0111* idea.
Governor MEYER. 1 think it is one of the most important factors.
Air. BUSBY. Are you of the opinion that the comptroller's notions
of branch banking within trade areas ite the proper set-up?
Governor MEYER. Would you mind letting me tell you what I
Mr. BUSBY. Yes; but I do not want to take up too much time
with that phase of it.
Governor MEYER. I do not believe that you will get the kind of
banking that shows stability, relative stability, except through a
unified banking system; that is, if you put increased supervision
and control on national banks, organized under national charters,
you may have them withdrawing from the national banking system,
as they frequently do, or as it is frequently threatened that they
will do when legislation is passed to insure the proper banking safeguards is under consideration. You are being asked here, year
after year, to modify the national banking laws, because some State
legislation has been passed which enlarges the function of strictly
commercial banks, and all other kinds of banks. You can not make
real progress in banking uniformity under such conditions.
You can have a national banking system that is truly national in
effect, as well as in name.
The national banking system now comprises only a small part of
the total banking resources, and is really not entitled to the name
"national banking system/' because it is not national.
Mr. BUSBY. Well, now, I do not care to pursue that issue any
Governor MEYER. YOU asked me what I think is the important
thing, but when it comes to what kind of banking system you ought
to have, I think you can very much better determine what the system should be—whether it sliould be a State-wide branch banking
system, or a system without any branch banks, or with regional
banks, or other kinds of banks—when you have a system that permits
a proper definition of the functions of commercial banks, in the first
place, and adequate laws, regulations, and supervision in the second
Mr. BUSBY. Whatever the banking system may be, its primary
function is to sell banking credits to people who want those credits
Governor MEYER. It ought to be.
Mr. BUSBY. In order to transact business.
Governor MEYER. It ought to be.
Mr. BUSBY. Those credits ought, primarily, to be related to values,
ought they not, in order to have proper security for them?
Governor MEYER. Yes. Of course, as related to that
Mr. BUSBY. NOW, I do not know what your observation has been,
but I have never seen any section of the country where banks have
failed very extensively but what in that particular section values



fell prior to the time the banks started failing. Take that whole
section of the Northwest from 1921 to 1929, and even Georgia, Florida, and South Carolina territory, after the boom, and so on.
Now, I might add to that the entire country, the entire United
States, where we have had in the last 10 or 11 years losses of more
than 6,000 banks and where the national wealth undoubtedly has
depreciated $100,000,000,000 to $150,000,000,000; and whereas in
measuring values by the scheme or set-up of currency we used, the
annual actual income that the people have been accustomed to receiving has dried up at the rate of more than $3,000,000,000 a month,
or"$750,000,000 a week, compared with 1928 and 1929, do you not
think there is something wrong besides the bank credits?
Governor MEYER. Well, you asked me what steps I would suggest
that seemed important to my mind as a way of improving the
situation, and I was frank to tell you; that is all.
I think if you place commercial banking under national charter
and national supervision and have the fimctions of banking defined
and restricted within proper limits, you will begin to avoid a great
many of the maladjustments and difficulties due to the excessive
use of credit and the subsequent reactions of disastrous character,
such as those from winch we arc suffering. I do not mean to say
the present situation is exclusively the result of any one thing, but
bad banking is certainly a factor that has contributed to the situation and rendered much more acute a situation which probably
would have reacted in a milder degree.
Mr. BUSBY. I notice that Mr. Whitney is reported to have stated
before a Senate committee investigating the New York stock market,
that the securities listed on the New York Stock Exchange lost more
than $6,000,000,000 in value in the last two weeks.
Governor MEYER. YOU mean in price?
Mr. BUSBY. I mean in price, yes; I do not say in value, because
I want to use that in another way in a moment. Would you attribute that to a lack of proper financing through banking credit, or
through a fundamental weakness in the currency set-up, which holds
and prevents an ability to contract through our banking credit and
currency set-up, in order to use it?
Governor MEYER. I do not know whether I would attribute it to
any specific thing. I think there are probably things that were not
mentioned at the hearing that might have iiad something to do with it.
Mr. BUSBY. NOW, it is my opinion that the currency and banking
set-up with which we have been afflicted throughout our national
systems—that they will not stand great use in peace or war time,
without getting out of joint and being followed by a financial crisis,
such as we are now experiencing.
What is your suggestion along that line?
Is it your suggestion that the system is working all right if there
is no special use of it out of the ordinary, but if it is used in peace or
war time to any great extent, then it shows its efficiency following any
extraordinary use?
Governor MEYER. I am in sympathy with some of the criticism of
ther existing banking system. I do not think you could tell how the
S3 stem would work, though, until you have a truly national banking
system, with its functions restricted to commercial banking and activities of a character that properly can be added to the function of



receiving deposits and making loans, for the most part for commercial
purposes and business purposes, and avoid the undue use of the volume
of credit for speculative purposes. Speculation goes on in business at
times as much as it does in securities, or otherwise.
It is very hard to draw a line of demarcation between one part of
business and call it legitimate, and another part and call it speculative;
because in speculative times, there is a stimulation of legitimate business into speculative activity. You can not entirely separate legitimate business and speculative business during an inflation.
Mr. BUSBY. Well, in 1838 there began a very serious money and
credit panic, and there was no war on at that time, and had not been,
except the political wars such as we experience always in America.
In 1860 the banking and credit structure, with the national bank
set-up being tried out for the first time, caused a period of great use
of banking and credit systems. Following that, we had a time
similar to this. Within the 1890's we had another period of depression, and nothing was said about any war. Then, in 1921, those who
had no better excuse to offer said it was the result of the war, and I
hear many people in this present time, 1932, saying that we are just
now adjusting ourselves after the war, as the result of the destruction
of property by the war. What would you have to suggest with regard
to those effects, and what caused them? What I am trying to do is
to get at the fundamentals that are involved in our set-up, and the
manifest necessity to change from it so as to secure such light as we
can in looking forward to a proper move in making that change.
Governor MEYER. There are certain periods of great activity in
the growth of a youthful nation. When this country was expanding
to the west, new lands were being brought into cultivation, railroads
were being built, construction activities were being stimulated, and
with the successful results and profitable rewards for people engaging
in these enterprises, there was, of course, a tendency for speculation
to develop.
Mr. BUSBY. What do you regard
Excuse me. Go ahead.
Governor MEYER. An economically youthful country, with a rapidly growing population, is likely to have periods of extreme activity
and of speculation at the end of it, and reactions and depressions
after that.
I think that now we are more matured and our population is more
settled and will increase less rapidly, with the restrictions on immigration, and the reduced birth rate, I think that is one of the important fundamental factors in the situation.
Mr. BUSBY. Will that stabilize our commodities, though?
Governor MEYER. NO, it will not; but I will say this, that those
violent movements, which are the characteristics of rapid growth,
and the interruption in that growth, on account of overdoing the
rate of growth, economically, in proportion to the fundamental stability of the country, ought to be now more susceptible of control in
the direction of relative stability.
But I think that what we have talked about as normal, in the
United States in the past has been a rate of growth of population
and of industrial and agricultural production—a rate of about 3 per
cent per annum, compounded. Now, that is what we have called
in the past normalcy in the United States.



I doubt very much if that is going to be the normal measure of
progress in the future, because the population is not increasing as
rapidly as it did before.
Mr. BUSHY. I have examined, for 100 years, the question of the
normalcy of 3 per cent increase in business, in the growth of population, and in the gold production, and I find that each one of them is
about as variable as you could imagine, and that you must take a period
of 30 to 40 years in order to get anything like a substantial rule on
your 3 per cent increase in commercial development.
Governor MEYER. Well, I think it is more general than you refer
to. You can see an increase of about 3 per cent in the cotton production of the United States up to 1914.
Mr. BUSBY. Why do you regard it as being necessary for the
United States to relate its money to the value of gold?
Governor MEYER. Why do I regard it as necessary?
Mr. BUSBY. Yes.
Governor MEYER.
Mr. BUSBY. I am

The law states it.
not talking about the law. We are figuring on

changing the law.
Governor MEYER. I see.
Mr. BUSBY. Because the law, or something, has caused too much
suffering and privation and inequality in the money, when we are
supposed to have an equal chance in the game of commerce, to obtain
a livelihood, and the other things necessary for us to have, if we are
going to live here.
Governor MEYER. YOU want to ask me why the gold standard is
the standard for the country? You know that, I am sure, fully as
well as I do.
Mr. BUSBY. I asked you this:
Why do you regard it as being necessary to relate the money of
our country to the value of gold, independent of the statute to which
you have recurred—the commodity value of gold?
Governor MEYER. I suppose the justification for making gold the
basis of the standard of value is the fact that it is one commodity
which has been accepted by more people in the world as the basis or
standard of value than anything else. Gold can be used anywhere
in the world for the purpose of exchange. It is a standard of value
more than any other commodity.
Mr. BUSBY. But it happens that only about four countries in the
world to-day can claim to be on the gold standard, and you have got
45 countries in the world which, through their exchange rates, have
their currency related to gold, when they have not got the goldGovernor MEYER. But you can go with an ounce of golcfinto any
one of those 45 countries, and you can get a corresponding amount of
whatever money they have in exchange for the gold; but you can not
take what they have as money and come into a gold standard country
and in every case get gold for it. In other words, gold, as far as I
can see, is the standard of value for the greater part of the world,
even in countries where they have not the gold standard, and the
reason for that is that it is apparently more suitable for the purpose
of a standard of value and a medium of exchange than any other
product which has been heretofore used in human experience for those
I do not think that the value of gold has been made by its use
as a medium of exchange.



Mr. BUSBY. YOU do not?
Governor MEYER. N O ; I think it is the standard of value and the
medium of exchange because it is universally accepted as such, even
in countries where they do not have the gold standard.
Mr. BUSBY. The universality of it
Governor MEYER. I think you can go to a native in the heart
of Africa and, if you have gold in the form of gold dust, can get what
you want.
Mr. BUSBY. That might be true with the existing statute but
Governor MEYER. They do not know anything about the statute
in the jungles of Africa.
Mr. BUSBY. It is my information that about $1 out of every $14
mined is used commercially, and the other $13 are taken care of by the
statute, which declares that the forty-five, plus, grains of fine gold
shall be the unit of value here; and because the United States and
and France have maintained that kind of statute, gold is acceptable
in these other places that you mentioned.
Governor MEYER. I can not quite agree with that. Gold has
always had a purchasing value
Mr. BUSBY. That is what I am talking about.
Governor MEYER. Going back to Biblical days, you will find it
was good then. If you were to go back to prehistoric days, and you
could find out what happened then, you would probably find that it
was always acceptable as having a value in a small, compressed form,
and I do not
Mr. BUSBY. I concede all of that; and the world has been in trouble
with gold as the measure of value ever since the days you mentioned.
Do you not think that 784 commodities, associated together like the
strands of a rope, when some go up and some down, and some in and
some out, and yet all of them go along in a reasonably straight line,
dependable year in and year out, because humanity has to acquire
these commodities in utility, in order to exist, when, taken together
and their composite value determined in a scientific way, such as by
the Bureau of Labor Statistics, would be a better value to which
we should relate the currency, than one commodity, gold, simply
because gold, out of habit, has been accepted throughout the world?
Governor MEYER. Mr. Busby, I have this feeling about that:
I think it is easy to see the evils we know, but it is difficult to see the
difficulties of a different standard that we might adopt.
Of course, we all know that the gold standard has weaknesses, and
I believe that any standard would have weakness, because
Mr. BUSBY. Do you not think that gold and the gold standard can
be manipulated so as to cause an apparent scarcity of gold and
thereby a raise in the gold dollar, much easier than the prices of all
commodities could be manipulated and thereby swing our currency
out of relation, such as we find it now, to the true values?
Governor MEYER. I do not really think that the gold supply of the
world is subject to manipulation. I think there is a fair amount of
gold scattered around over the world.
Mr. BUSBY. The Federal Reserve Board, of which you are governor,
makes a calculation in its March number, where it discloses that our
country has sufficient gold to issue $3,500,000,000 of additional Federal reserve notes, and yet retain the 40 per cent basis for the currency;
and I think it is common knowledge that France needs $1,100,000,000
of gold, and has practically $3,000,000,000.



Now, if the currencies of the world are going to be based on gold,
does not it seem to you that the United States and France have gotten
things a little bit out of balance by acquiring this gold that each one
does not need and will not use?
Governor MEYER. HOW did the gold go to the United States and
Mr. BUSBY. I know how it got here, because we were a creditor
nation, and they owed us, and we continued to get it here.
Governor MEYER. We became the recipient of the bank balances
of the central banks and private banks of foreign countries. The
gold which came over here in periods when we had an inordinately
large supply of the world's gold was largely gold deposited here for
foreign account. While it was called our gold, it was not our gold,
because there was a demand liability against it. If we had used that
gold as if it were our gold
Mr. BUSBY. I am not talking about that.
Governor MEYER. If we had used this gold as if it were our gold,
and absorbed it into our credit structure, we would have been in a
very difficult position when the gold was demanded.
Mr. BUSBY. I admit that, but I am talking about something else.
Governor MEYER. This inordinate amount of gold over here was
not our gold.
Mr. BUSBY. I am talking about the inordinate amount that is
here now, when we roughly need about $2,500,000,000 less than that
with which to stabilize our currency, and we have got roughly
$4,350,000,000, in rough figures. We have got more, than $1,300,000,000, according to your bulletin
Governor MEYER. Surplus reserves.
Mr. BUSBY. Yes; surplus reserves.
Governor MEYER. Yes; and the required reserves
Mr. GOLDSBOROUGH. You still maintain a 40 per cent reserve?
Governor MEYER. Yes.
Mr. BUSBY. Well, what I am getting at is this:
Gold has gotten into the hands of two nations, with 162,000,000
people, to the extent of practically 70 per cent of all of the gold in the
world, and the other 45 nations are having to use makeshifts and get
along without this gold, this very desirable gold standard of monetary
Do you regard that as being a desirable situation?
Governor MEYER. I do not think you can consider it from the
point of view of desirability, because it was not a desire on our part
that brought it about. Other people's desires brought it about
more than ours.
Mr. BUSBY. That is what I am getting at, the weakness of the
set-up, because we can not control our own situation.
Governor MEYER. I think we could have a little more than we did.
Mr. BUSBY. With the international working of credit, so much so
that those foreign credits controlled our domestic supply of bank
credits and finances, and threw us entirely out of line
Governor MEYER. I am not quite in accord with that opinion.
I think we could have controlled it more than we did, and I think
that was one of the mistakes in the banking administration. The
gold exchange standard, which seemed to be a practicable and feasible



thing, was built up in this period through which we have just passed,
in the 1920's, and then suddenly came along Germany and France
and their needs, and there was built up the idea that deposits in
foreign countries, invested in bills or securities or anything else,
was the equivalent of gold in the vaults of the central banks.
Air. BUSBY. That was for the small countries.
Governor MEYER. Well, the big ones, too. There were huge
deposits built up here one way or another, and they were counted as
equivalent to gold reserves by the foreign central banks, until they
were waked up by the German and English incidents, and found that
maybe they were and maybe they were not.
Mr. BUSBY. Well, now, there have been built up credits in the
nations using the gold-reserve basis, or a supposedly additional
amount of $2,000,000,000 of gold, which was really an exchange
against the countries that had sufficient reserves of gold in the central
banks? That was the practical effect at that time, was it not?
When they woke up to this, and that gold prop was taken out from
under the inflation of gold itself, then there was a shrinkage not only
of the $2,000,000,0007 or 19 per cent of the world's gold supply,
and that acted naturally to bring about this catastrophe, but the
shrinkage of credit also, that was based on that fixation—was not that
a part of the world catastrophe?
Governor MEYER. Yes; I think that is true.
I think it was unfortunate that the gold exchange standard permitted pyramiding of reserves and caused a good deal of inflation
during the 1920 period—I mean 1920 to 1930. "That is what you are
Mr. BUSBY. Yes.
Governor MEYER.

I quite agree with you, but I think that should
have been avoided. I do not say that we want to establish control
over foreign bank deposits in the United States down to a fine point,
but I do think that it is a matter in which the public interest and
public policy should determine the hospitality which our banking
structure should afford to foreign banks desiring to deposit.
Mr. BUSBY. That seems to be agreeable to everybody.
Governor MEYER. The attitude generally seemed to be one of
welcoming indefinitely the deposits that foreign banks and bankers
built up here.
Mr. BUSBY. What I am coming to as my last question is, that if
we should base our currency and use gold as we have used it, as the
yardstick to make our international exchanges, and in some way
to limit the amount of our currency by that yardstick measure, and
applying the true values, and those true values determined by commodities as we now determine them through the Bureau of Labor
Statistics—would not that be a safer plan than one working alone on
gold, on the assumption that gold exists, which we have just discussed?
Governor MEYER. Well, I say this to you, Mr. Congressman:
I am not prepared to answer that, because I do not feel as though I
have any definite views as to whether or not the commodity base for
money is workable and practicable, and I have not been able to figure
it out to its ultimate conclusion. I can see the weaknesses of one
system. I can see the weaknesses of the maladjustment in our
economic structure, many of which are attributable to other things
than the gold standard; and I can also say that I can not see where
some weakness would develop under a new system, and I do not



believe you or anybody else can, but a whole lot of these maladjustments come from neither one standard nor another, but from the
conduct and behavior of people; and sometimes a large number of
people, en masse, get optimistic together, and overdo things; then
they get pessimistic and overdo things on the other side.
I think that all you can safely do is to try to restrain and limit the
extremities of the expansion and contraction of credit by the mechanism
of the banking systems, both in the commercial banks and in the
Federal reserve system, and I come back to the thought that no
better thing can be done for better behavior of our economic mechanism than establishing a sound banking system, which I say can only
be arrived at by a national or unified banking system.
Mr. BUSBY. In all of your statements, I gather that your view is
that credits should be the basis of our activities, and that those
credits are based largely on—I do not want to say manipulations, but
actions in banking circles, and pressures of different types, like discounts and interest, and buying Government securities, and so on,
which system is as dependable as any we can get; but my idea is, if
you turn around and relate the flow of those two values, which are
commodities that are usable, and the price is determined according
to the supply and demand for those commodities, you would have a
more substantial thing than the ephemeral things you speak of as
credit, which depend on the humor or disposition or attitude of
somebody, independent of the things themselves.
Governor MEYER. I accept your statement on behalf of yourself,
but I must protest against your interpretation of my views, because
what I want to say is that the banking and credit structure should
serve in the accommodation of business.
Mr. GOLDSBOROUGH. Mr. Prall, you were engaged this morning,,
and have not had the benefit of Governor Meyer's extremely interesting statement, but you may have some questions that you would
like to ask.
Mr. PRALL. I would like to ask Mr. Meyer one question: Assuming
that 784 commodities make the standard of value, could the producers of those commodities, by any form of combination, raise the
prices to any extent that they might produce fictitious values?
Governor MEYER. Mr. Congressman, I do not want to appear
unwilling to answer that, but I can not say that I consider myself an
expert on the commodity index basis for currency or the medium or
standard of exchange. I would like to have more time to study it.
In fact, I have been terribly busy with a lot of administrative questions, and I had to ask the indulgence of the committee in postponing
my appearance, and I do not feel that I can properly answer your
question with the background of study and thought that I think you
are entitled to have, if I make any answer to you at all.
Mr. PRALL. Well, the question was brought up here as to the control of gold, how it might be manipulated, and I wondered if there
would be any change in that sitiiation if the producers of these commodities could, by any combination, bring about a similar situation.
Governor MEYER. YOU mean by
Mr; PRALL. By rigging the values.
Governor MEYER. I should not think anybody could rig 780 commodities, or 680, or any such number of commodities. I would not
think so. I do not see how it would be possible to do it. Of course,
if you are speaking of the value of commodities in terms of some other



Value, you mean some other measure of value, or some standard of
Mr. PRALL. That is all.
Mr. STRONG. Governor Meyer, I noticed you used the language
of the statute, " accommodation of business." That is what the
language of the statute is in regard to the use of the rediscount
privilege, that it shall be used for the accommodation of business and
commerce. In the original act, instead of that language was the word
that it should be used for the stabilization of the price level. That
language went out in conference and the language "for the accommodation of business and commerce " inserted instead. In my original
bill, five or six years ago, I used the words of the original language of
the bill, stating that the powers of the Federal reserve system should
be used for the stabilization of the price level, and ever since then I
have been using the 7 words "for the stabilization of the purchasing
power of the dollar/ which, of course, you know, means the same
thing, but I used this language in order to get rid of the charge of
price fixing, which I do not think can be done or should be done in this
country. Aly idea is that the law of supply and demand is a very
safe law, upon which we can base most of our activities in commerce
and business. If that is true, the regulation of the supply and demand
of money largely tends to fix its price, and its price is what it is worth
in commodities in general. Therefore, it seems to me with the powers
we have given the Federal Reserve Board, to regulate the volume of
money and largely the price of money through the rediscount privileges, the Federal Reserve Board could regulate the volume or supply
and demand of money; and it is on that basis that I have, for the past
five or six years, advocated that the Federal Reserve Board should use
its powers to stabilize the purchasing power of money, regulating its
powers through the amount of speculation.
Now, Governor Strong of the Federal Reserve Board intimated to
me and this committee that he had used those powers in open-market
operations to buy and sell bonds on the rediscount rate quite successfully for the past two or three years, or up until the time of his death,
and he had several others with him, among whom was Governor
Harrison, who was here yesterday, who frankly admitted that he believed in and was sympathetic with this theory, and he thought the
Federal reserve ought to operate along this line, but he objected to
us directing the Federal Reserve Board to do so.
I would like to ask you what objection you see in Congress asking
the Federal Reserve Board to use its powers for such stabilization?
Why should not the Congress, having given these powers to the
Federal reserve system, direct the use of them?
Governor MEYER. Well, I think the authorization of powers
which Congress obviously intends to be used to accomplish the purpose within the limits of possibility should be used; but when you
give directions to a body to accomplish a result, and give them the
means, and make it more or less mandatory that they shall accomplish the result, which depends on a good many conditions, then you
are raising a difficult question. I think probably Governor Harrison
intended to convey the idea that you were charging the system with
the responsibility for the results as well as for the discharge of a



I think the Federal reserve system has always endeavored to do
just exactly what we are talking about, or what you are talking about,
within the limits of possibility; but, for instance, let us say that in
1921 and 1922 there were operations conducted with the view of
increasing the outstanding supply of credit and stimulating its use,
and you come into such a situation as I showed you prevailed at that
time, with the boom in the building of houses and partments and office
buildings, plants, and everything else, that money would be immediately effective in stimulating industry in an extraordinary way.
The same amount of money put out in the market to-day under
present greatly changed conditions would have different effects, in
my opinion.
Mr. STRONG. Well, I grant you that.
Governor MEYER. I think that is what Governor Harrison had
in mind.
Mr. STRONG. And I realize that perhaps you said the market operations and rediscount privileges would not, under our conditions, bring
about stabilization. I can realize that.
Governor MEYER. Especially if the overuse and overexpansion in
the period has led to expensive speculative actions, which cause reactions of a deplorable character.
Mr. STRONG. Of course, my answer to that would be that we did
not sell bonds and reduce the amount of money in circulation and put
up the discount rate enough to stop that expensive speculation.
Governor MEYER. That gets down to a very iine point; and of
course jrou know it is not only a question of the quantity of bank credit
that is available, but also of the velocity of the turnover of that same
volume, and the use that is made of it. In other words, you get down
to the factor of human judgment. Credit policy does not operate instantaneously, and the effect of an increase in volume of credit
to-day does not appear to-day or to-morrow, but after a period of
time. A considerable time must elapse before any kind of financial
work has its effect.
Now, then, there comes in the element of human judgment, in
deciding how much to do, and how far to go, and how fast to keep it
up, when to stop, and when to reverse.
Mr. STRONG. But you gentlemen have a pretty good idea now,
after these years of operations, of about where to stop, and about
when to stop, to reach a certain conclusion, a certain objective point.
Governor MEYER. I would like to feel that tyou are right on that.
But I would hesitate to agree with you that any of us has infallible
Mr. STRONG. YOU know I have a great deal of confidence in your
judgment, and I have always felt that way, ever since our experience
in the War Finance Corporation; but I do think, in the operation
and use of these powers of the Federal reserve system, which we have
used now for these years, that we could give—that in giving any
direction, we should give them a measure to follow. For instance, I
think, if wo should direct them to use their powers toward stabilization
of the purchasing power of money, which was the language worked
out by Governor Strong, and then say to them to accept as the
measure of value of the purchasing power of the dollar the index
numbers set up by the Bureau of Labor Statistics, with the large
number of commodities that are used in arriving at the index number,



that would be a pretty good measure to direct the Reserve Board or
system to follow.
Now, as to how long they should proceed, and when they should
stop, will be a matter of judgment, which I am willing to trust you on;
but it does seem to me that there ought to be some measure of value
that they should be directed to follow.
Now, I'want to ask you this question: The Reconstruction Finance
Corporation and the Glass-Steagall bill have for their purposes the
enlargement of the credit structure, so as to bring more credit into
use, and in a manner an inflation, or what probably you might term
a reflation of the deflation; is not that as practical a thing as if we
directed you to use the powers to stabilize the purchasing power of
If mone}r was unstable, credit was unstable and the country was
paralyzed; because of such condition we come to the Congress, and as
the result of an Executive proposal, we passed the Reconstruction
Finance bill and the Glass-Steagall bill, and that was done for the
purpose of trying to improve the price level, was it not?
Governor MEYER. AS I said this morning, there is the time element,
which it is very difficult to regulate. I think those measures have
certainly tended to improve the situation, yes; and I think it would
have been worse than it is, if they had not been passed. There has
not been any definite upward trend, but I think it has slowed up the
decline, and I do not think
Mr. STRONG. Governor Harrison told us yesterday that for the
first time in a number of months the decline of bank credits had
been brought to a halt.
Governor MEYER. Yes; I think that is significant.
Mr. STRONG. And bringing them to a halt is probably pretty good
evidence that they are liable to turn upward.
Governor MEYER. They have to stop going down before the}7
begin going up.
Mr. STRONG. NOW, he also told us that they were buying
$25,000,000 of bonds each week.
Governor MEYER. Yes; that is published weekly.
Mr. STRONG. That is continuing now, and has stopped the lowering
of credit, bank credit. If that condition keeps up, and you keep on
buying $25,000,000 a week, a turn will probably come, will it not?
Governor MEYER. YOU are getting me in the position of prophesying. I hope you are right. I personally am in favor of a little
stronger policy than you are.
Mr. STRONG. Well, fine. I hope your desire prevails.
Governor MEYER. But you see there are several things that enter
into tho situation in making a program—what it a suitable amount,
whether it is better to keep purchasing moderate amounts over a
long period, or to do it all in a short time in larger amounts, in addition
to which you have to take into account
Mr. STRONG. The use of it?
Governor MEYER. Yes, the

use of it. And furthermore, we have
been getting a return flow of currency from hoards since the beginning
of February, amounting to about $250,000,000, and aside from a little
interruption on April 1 on account of tax assessments, and the flow
has continued now for a good man}" weeks. If the expansion of the
program of Government bond purchases, which was referred to by
Governor Harrison here yesterday, is continued and the hoarded



currency continues to come in, I think we can look forward to improved conditions. But we still have lots of problems; the period
is difficult in many, many directions, and I wish as much as you do
that I knew a simple formula of turning a simple trick that would
change economic conditions all over the world.
Mr. STRONG. If you continue to play your cards as you are doing
right now the change will come.
Governor MEYER. Well, sir, I am hopeful that the change will
come at home and abroad.
Mr. STRONG. Along that line, Governor, you might not want to
answer this question, but in a speech last night Governor Smith made
a proposal that for every hundred million dollars in trade between
foreign countries and the United States we remit or credit that country
with $25,000,000 on account of their debt to us. Do you think that
is a good proposition? Do you think that would stimulate trade?
Governor MEYER. The people who can pay debts are paying them.
The people who can buy goods are buying them. I do not know
exactly whose debts should be cancelled for this purpose and whose
goods should be sold. Would you want to be chairman of a committee
when somebody's debts are canceled to saywhose goods should be
sold for that, purpose?
Mr. STRONG. NO, I do not think I would.
Governor MEYER. It is one thing to generalize and another thing
to get down to business.
Mr. STRONG. And when you have given this bonus or this money
that was loaned to Europe and that is exhausted, then what would
you do? Lend them some more money so as to give them some more
opportunity to have the amount remitted to them?
Governor MEYER, I did not hear the governor's speech. He may
have some good ideas.
Mr. STRONG. I would like to ask you what, if you know, caused the
recession in bank credits*during January? Why did they go down?
Governor MEYER. They were going down before that, and it was a
continuation of a movement that was in progress and had not been
checked. Bank closings in January aggregated 342 in number, and
that was not only an intrinsic factor but an important psychological
factor. Beginning in February bank closings which were heavy in
the beginning of the month slowed up and at the end of the month
they were very much smaller. I think in the month of March the
resources of banks that opened were as great as those of banks that
were closed. I do not mean to say that there will not be more bank
failures; but any way they have been less, and January was a bad
month from that point of view.
Mr. STRONG. Then if we had commenced along in October and
November and bought Government securities, would not we have
been apt to have checked those failures that happened in January
and prevented the recession in bank credits?
Governor MEYER. There were so many other complications, Mr.
Strong; beginning with the suspension of gold payments in England,
you have had a series of events which were very complicated. Within
a few weeks after September 21, $750,000,000 was withdrawn by
foreign countries from their balances here and taken in the form of
gold. No country in the history of the world has ever been able to
stand that kind of drain of gold. It is true that during* that period
we also imported some gold but in view of the large drafts on this



country by foreigners, chiefly due to repatriation of foreign central
bank reserves and, I believe, even some remittances by Americans
out of the country from fright, purchase of securities by the reserve
banks at that time were impracticable. We could not undertake
anything of that character in October without increasing the loss of
gold. That is my opinion. You will remember at that time we had
to raise the discount rate from 1}{ to 2% and 3K per cent. Purchases
at that time would not have had a stabilizing effect. They would
have tended to neutralize the effect of the advances in the discount
rate, which was an important intrinsic and also an important psychological factor at that time.
Mr. STRONG. If Congress should see fit to pass a bill of this kind
directing the Federal Reserve Board to use the powers we have given
it toward the end that we should have as near as possible the stabilization as to purchasing power of money, what harm could you see
coming from it?
Governor MEYER. It is a fact that we understand that it is our
duty to prevent inflation to the extent that it is feasible, and to stop
the deflationary forces as far as possible through our machinery.
Mr. STRONG. YOU would go along as you are doing now, would you?
Governor MEYER. I do not think we can do anything more than
we are doing, if you mean that.
Mr. STRONG. That is what I mean.
Governor MEYER. On the other hand, I do not think you would
like to be ordered to run a race of 100 yards in 10 seconds.
Mr. STRONG. Well, I never ran that far within that time.
Governor MEYER. I know you do not expect impossibilities to be
achieved; but I think in setting certain standards you ought to set
standards that are practicable, and what you have in mind is that we
should be charged with doing what we are doing now to the extent
that it is possible. I do not like either by definite or implied authorization or direction to lead people to believe that a thing can be done
if it can not be done under any and all circumstances, even though
it may be within our power to work in that direction.
Mr. STRONG. I would like to ask another thing. Congress is being
asked to pay off in advance the certificates we issued to service men
of this country due in 1945. It is being urged that we can do that
by issuing paper money based upon what gold is now in the Treasury.
I wish you could give us your opinion about that. It is a matter
• that is very perplexing to Members of Congress who would like to
pay the certificates if they could.
Governor MEYER. I suppose there is a committee studying that,
Mr. Congressman.
Mr. STRONG. I know, but .you know about the gold in the Treasury
and what it could do, and I think your opinion would be very valuable
if you care to give it to us.
'Governor MEYER. AS an offhand, opinion, I feel that the balancing
of the Budget is becoming a fundamentally important factor in rebuilding confidence in business. I should be reluctant to see a very
heavy expenditure which could not be paid for out of taxation at
this time. But I really have not been giving that particular question
special thought, although I have seen it mentioned in the papers.
I think the balancing of the Budget has become one of the most
important things for this country.



Mr. STRONG. That is to protect our credit at home and abroad?
Governor MEYER. Yes. And I think inflationary devices which
might be assumed to be beneficial are dangerous, because they might
have a very different effect from what is expected.
Mr. STROMG. Can you tell us how much gold there is in the Treasury which would be free to be used in guaranteeing; such currency?
Governor MEYER. I am told that it is $20,000,000.
Mr. GOLDENWEISER. That is not including the reserves of the
reserve banks.
Mr. STRONG. Well then, with that situation would yon care to say
what perhaps would happen if we should issue $2,500,000,000 worth
of paper money?
Governor MEYER. 1 think that it would be most unfortunate from
the point of view of the masses of the people of this country.
Mr. STRONG. Would it be liable to hurt our credit in foreign countries?
Governor MEYER. Not only in foreign countries but at home.
Mr. STRONG. YOU really think it would be an unwise thing to do
Governor MEYER. I do.
Mr. GOLDSBOROUGH. Governor Meyer, in various discussions of
this proposed legislation it has been spoken of as an inflationary
Governor MEYER. This bill?
Mr. GOLDVSBOROUGH. Yes; I have seen it spoken of as an inflationary measure.
Governor MEYER. Well, you know that is a word that is pulled
on everybody. If it is pulled on us, Mr. Chub .nan, why
Mr. GOLDSBOROUGH. It is intended as a reflection on the propriety
of the proposed legislation. Section 31, which is the first section of
the bill—I think you have it right there, have you not, in front of
Governor MEYER. NO; this is not that.
Mr. GOLDSBOROUGH. The first section of the bill directs the Federal
Reseiwe Board and the Federal reserve banks to take all available
steps to raise the present wholesale commodity level of prices as
speedily as possible to the level existing before the present deflation
and afterwards to use all available means to maintain such wholesale
commodity price level. If you will turn to section 2, which reads:
If, in carrying out the purposes of the preceding section, the Federal Preserve
Board and/or the Federal reserve banks, in selling securities, should exhaust the
supply, the Federal Reserve Board is authorized and directed to issue new

The obvious purpose of section 2 is to assist the Federal reserve
system if it should run out of bonds through the process of feeding
them back into the market, and provides for an issue of debentures
in order to prevent the price level from going above the pre-cleflation
price level. I direct your attention to that because I think it is important for the Congress and the country to know that this is not
intended to be an inflationary measure. It is intended to be a stabilizing measure, and that the measure has no more interest in raising
the price level than it has to keep the price level from going beyond
a proper and legitimate point. Now, if I may for just a moment,
I want to read from a speech that I made just 10 years ago, on May



23, 1922, in the House of Representatives, on a bill providing for
I firmly believe that the purchasing power of money can be stabilized. I b^
lieve that the solution when we have it will be found to be simple, and I trust
that that solution will soon be embodied in legislation. I never want to see
agricultural and industrial enterprises struggling in the agony of a lonjo; period
of falling prices or to see the young, active, bright business man, naturally
uninformed as to political science, feel that lie is rising to prosperity on the tide
of rising prices only to rind his business bankrupt and his hopes blasted in the
inevitable crisis just beyond the peak.

I read this to accentuate the fact that this committee and I personally are not interested in inflation but simply in an endavor to create
a fair and proper relation—reestablish a fair and. proper relationship
between debtor and creditor, and after that relationship is reestablished to make it impossible, because of these stabilizing influences,
for business to expand in an unhealthy manner. Now, that is the
purpose of the proposed legislation. This morning in a very full and
interesting statement you called the committee's attention to the
fact that other influences other than quantity of money and credit
and its velocity operated on price levels, and you undertook and did
very clearly state what some of those influences were. Now, the
reason I am making this statement is because I want you to comment
upon it. This subcommittee, I think, fully realizes the validity of influences which you mentioned. They realize fully that under uncertain conditions it would take more activity on the part of the Federal
reserve system in the matter, for instance, of purchasing securities,
than it would at another time in order to achieve the same result.
But I believe that the subcommittee feels that under anything like
ordinary conditions, with the enormous credit facilities of the Federal
reserve system that by applying its powers courageously enough and
strongly enough the result can be achieved. A man may be steering
his ship and because of conditions of wind and tide it may be more
difficult for him to reach a given point than it would be under other
conditions, but if he puts enough pressure on the rudder he can reach
his port in safety.
This subcommittee does not think that if the Congress directs the
Federal reserve system to stabilize at a given point "that the Federal
reserve system could keep always the level at that point; but it
believes it could measureably do that; and it also believes that if the
price level could be measureably stabilized that business would be
accommodated, and that a great many of these evils and difficulties
which you speak of would be obviated. We feel that if stabilization
were made the North Star of the Federal reserve system that you
would then have the power to prevent these periods of inflation as
well as periods of deflation from going beyond and getting out of hand,
and that is the theory I am sure upon which the subcommittee is
considering this bill.
Governor MEYER. YOU understand, Mr. Congressman, that the
open market committee which deals with open market operations is
composed of the governors of the 12 banks.
Mr. GoLDSiionouGH. If they will not act, you have the power to
change to another committee?
Governor METER. The Federal Reserve Board can only approve
or disapprove the open market policies and operations proposed by
the banks.



Mr. GOLDSBOROUGH.-The Federal reserve banks are authorized to
do the same tiling?
Governor MEYER. Yes; but in talking of the board I want you to
understand that it is not a central bank..
Mr. GOLDSBOROUGH. If you have any suggestion to make and could
put in this bill in order to give you power
Governor MEYER (interposing). You would find that that would
be opening a very interesting subject, which was discussed when the
bill was passed, and you would not think it advisable for a member
of the board to come up here and urge that the powers which now
reside in the banks should be transferred to the board, would you?
Mr. GOLDSBOROUGH. I do not know. As a matter of fact, if we
pass legislation we use this language: "Federal Reserve Board and
Federal reserve banks." We have the idea that there would be a
spirit of cooperation and that would accomplish the purpose.
Governor MEYER. When we get to talking about these things we
sometimes forget that the organization of the system was determined
after the most careful study by committees of Congress. There are
some powers reserved to the board and some to the banks, and some
lodged in the banks with the approval of the board.
Mr. GOLDSBOROUGH. It was suggested to the committee yesterday
by Governor Harrison that this legislation was unnecessary because
the system was now doing exactly the thing which was contemplated
by the legislation.
Governor MEYER. When was this?
Mr. GOLDSBOROUGH. This was yesterday.
Governor MEYER. Oh, yes. Well, I think that is the purpose.
Mr. GOLDSBOROUGH. And we asked Governor Harrison when it
began, and he said it began yesterday.
Governor MEYER. I think he was misunderstood if that is what
he appeared to say. 1 think it has always been the object since I
have been on the board to work in the direction you are talking
about; but it has been a struggle against conditions at home and
abroad and, as far as the particular present movement, buying
Government securities, is concerned, it was started some weeks ago—
seven weeks ago.
Mr. GOLDSBOROUGH. But he said the policy had changed in the
last day or so.
Governor MEYER. AS a result of a conference called a week or 10
days ago. Naturally, the governors have to come from all over the
United States—some of them are several days' distant—and it takes
them quite a little while to gather for a meeting. It was a question
at the time—seven weeks ago—as to what should be the rate at
which Government securities should be purchased.
Mr. GOLDSBOROUGH. DO you object to saying what the rate is
Governor MEYER. There is not any fixed rate, Mr. Congressman;
it is movable and changeable. I do not have charge of the open
market operations, as you know.
Mr. GOLDSBOROUGH. NOW Governor Meyer, in this time of abso-.
lute economic destitution, do you not believe it would be a tremendously helpful thing if the Federal reserve system could declare a
policy, if they could undertake to say that they were going to pursue
a definite policy in the purchase of Government securities till a certain
goal is reached? I talk to the bankers in my district and they say,



"Oh, yes; we know they have been buying $25,000,000 of Government
securities a week for the last few weeks, but they may start selling
them next week; and, therefore, we do not know what to do."
Governor MEYER. I do not think they believe that. To reverse
a policy and start to doing it the other way next week has never been
Mr. GOLDSBOROUGH. But the system does reverse its policies?
Governor MEYER. Yes; with change of conditions, but not with
just a whimsical this-week or next-week attitude. That is out of
the question; at least, as far as I know.
Mr. GOLDSBOROUGH. NOW then suppose this bill were passed, this
section 1 and section 2. I will leave out of consideration section 3
for the time being, and the responsible officials of the Federal reserve
system should say to the press, "We have been directed by Congress
to raise the price level to a certain point, and we are going into the
open market and buy Government securities at the rate of, we will
say, $25,000,000 a day, every business day, till that point is reached."
Do you not believe that that would have almost a magical effect in
restoring confidence and would cause hoarded money to be withdrawn
and the money put in circulation and cause the retailer to buy from
the wholesaler and the wholesaler from the manufacturer and the
manufacturer from the raw producer and put people to work?
Governor MEYER. I am doubtful of the advantage and expediency
of talk in connection with those matters, because the matters speak
for themselves.
Mr. GOLDSBOROUGH. NO; you do not understand me. I mean it
to say and do it, both.
Governor MEYER. A great many things happen to interrupt and
make changes necessary. I think you asked that question of Governor Harrison. I read it in the paper. I do not think I would
express it differently from his view. I think you would tie their
hands. It takes flexibility out of the program. I think flexibility
i s vital and you know just as well as I do that conditions change from
tjme to time, and if you announce a program like that you deprive
y ourself of flexibility which you ought to retain. I would not consider that a good or helpful thing to do.
Mr. GOLDSBOROUGH. YOU do not think it would restore confidence
almost immediately?
Governor MEYER. NO; I would not think so. I would not consider
it advisable.
Mr. GOLDSBOROUGH. Here is a question, Mr. Strong suggested,
and I think it is a good one. I do not know whether you care to
answer it or not. The question is whether you feel that the Federal
Reserve Board should have charge of the open market operations?
Governor MEYER. I do not, to tell you the truth. But you know
better than I that the functions of the board and the banks have
been defined after very careful consideration and investigation at
the time of the passage of the act, and at various sessions of the
Congress since then. I do not think it would, be sound to transfer
those powers. On the other hand, you have to realize that with the
advantage of decentralization of powers you get some slowness in
the working of the machinery. The whole banking system is based
on the idea of decentralization of power. It has been the historic
policy of the people of the United States not to allow too great centralization of power, particularly in banking. I agree with that



policy; but you can not expect the same quick action and the same
prompt decisions from a decentralized power that you would from
a central bank, as conducted in European financial centers, where the
board of directors of one bank directs the operations. In the interest
of efficiency and wise administration there is, of course, a constant
drift toward centralization of power. In the wise checks placed upon
centralized power which are fundamental in our Constitution, we do
do not permit the centralization of power—and I do not think as a
whole we are wrong in that, though sometimes it costs time and
inefficiency as well as delay. We have to stick to good principles,
even though we have to pay for them at times.
Mr. GOLDSBOROUGH. I gather from what you have stated to-day
several times that you feel we should have a central banking system,
unified banking; system?
Governor MEYER. I am not talking about a central banking system; I am saying that banks of deposit all over the United States
should be federally chartered; now part are so chartered and part
are chartered by the State. You could make it any kind of system
you want. You could make it unit banking or state-wide banking.
If the Federal Government were supervising and organizing the
banking of the country, so far as commercial banking was concerned,
it could determine what kind of banking system you should have.
As it is now, it is determined by the Federal Government and 48
States, each determining for itself what it wants to have.
Mr. GOLDSBOROUGH. Governor Meyer, this bill probably amended
in certain ways, is going to be considered in executive session by the
subcommittee and acted upon, and also acted upon by the full committee. It makes no difference what our report is the full committee will take its action on that report.
Now, we are extremely anxious in writing the mechanics of the bill
if we decide to report it, to make it as effective as possible, and we
would like to have the benefit of any suggestions you can give us?
Governor MEYER. If I can think of any suggestions by way of modification or amendment or otherwise I will communicate with 3^ou,
Mr. Congressman, I do not like to offer off-hand suggestions for
Mr. GOLDSBOROUGH. Yes. The other da,y—I do not know who it
was—showed me a typewritten statement about that long [indicating]
which involved a change in the reserves of member banks, which
changes depended upon the change in the deposits' condition and
the rapidity of circulation?
Governor MEYER. That is the report I gave you this morning.
Mr. GOLDSBOROUGH. And it might be in carrying out the purpose
of this legislation a section of that kind would be very helpful.
Governor MEYER. I told you this morning, Mr. Chairman, that
I thought serious consideration of that report would be worth while
as one of the things to help achieve what you have in mind, stability;
because if it should work as it is expected and intended, it would have
the value of checking undue expansion and undue contraction
automatically in so far as it can be done through monetary means.
An automatic device working in the right direction will be helpful in
not having to depend entirely on the exercise of human judgment.
Mr. GOLDSBOROUGH. That is what we think—to give some direction to rthe Federal Reserve Board which we feel would be helpful.
Have 3 ou any plan which you would prefer to this, assuming that



Congress is going to adopt or attempt to adopt a stabilization plan?
Have you anything in mind which you prefer to this?
Governor MEYER. Well, only the things about which I spoke this
morning, Mr. Congressman—a better banldng structure, an improved
method of reserves and better banking supervision, examinations,
which coulcl be accomplished with a unified system and better men in
public service.
Mr. BUSBY. YOU are introducing more uncertainty to our already
uncertain status.
Mr. GOLDSBOROUGH. Iii closing, I would like to say this: That we
do not have in mind
that any human institution can act perfectly,
and we realize full}7 that you will have the difficulties that you have
spoken of and possibly difficulties that you have not thought, of and
can not vixualize at this time. There are spiritual difficulties always
to confront, because human selfishness is operating all the time and
we are confronted with that. But this is one thing we hope may assist
in restraining human selfishness and promote justice as between
different classes of society. That is the purpose of it, and we believe
also that any legislation that is passed will be sympathetically administered by those in charge of it. There is just one question that has
been suggested to me. Has it been necessary to invoke the more
liberal rediscount powers of the Glass-Steagall bill yet?
Governor MEYER. YOU mean section 10a and 10b. There have
been a few applications under 10-b. In most cases banks that would
have borrowed under 10-b are using the Reconstruction Finance
Corporation. There have been a few cases where loans have been
obtained under 10-b, but not many.
I thank you very much for 3rour courtesy to me here.
Mr. GOLDSBOROUGH. We appreciate very much your kindness in
this discussion, which has been very interesting, and I think it will
be of help to us.
Governor MEYER. I am afraid I have not been able to contribute as
much as I would like to contribute.
Mr. MEYER. I may say that after the hearing was printed, which
was subsequent to iho time the House considered the measure, the
Federal Reserve Board passed a resolution approving and indorsing the position which I took in my statement before the committee.
So the position which was expressed in the hearing in opposition
to the measure has the indorsement and approval of the full membership of the Federal Reserve Board.
Senator FLETCHEU. Would you mind inserting in the record that
resolution, Mr. Meyer?
Mr. MEYEK. What resolution?
Senator FEETCJIEI;. The- resolution of the board. You said they
passed a resolution. I supposed you had it there with you.
Mr. MEYEII. There was a motion made that the board approve and
indorse the position taken by the governor in his statement before
the committee, and that motion was carried.
The proposed bill assumes that the Federal Reserve Board lias
the power to carry out the policy enunciated in the bill and instructs
the Federal Reserve Board, the reserve banks, and the Secretary
of the Treasury to make the policy effective. The attitude which I
expressed in the hearing was that the board did not have this power
and that the assumption therefore is not justified.



Of course, before I became a member and since, the board lias
been endeavoring to do what it could to stem the tide of contraction in business and deflation in prices. Xo one countiy, however,
can determine the world level of commodity prices. We have, it is
true, an unusually important position in world economic and financial
affairs. Nevertheless, although we have a most important position
among the world's nations, we do not and can not, in my opinion,
alone control the price level.
The importance of our position I do not underestimate. We have
85 per cent of the world's total of automobile production, 40 per cent
of the world's coal, (>8 per cent of the world's petroleum, 44 per cent
of the world's pig iron, 47 per cent of the steel ingots, 41) per cent
of the copper production, 3C> per cent of the lead, W \)vr cent of the
zinc, 10 per cent of the wool, 57 per cent of the cotton, 5!) per cent
of the corn, 11) per rent of the wheat, and '10 ]>er cent of the world's
de vel < >pe< I water \ x > we r.
1 introduce these figures, which came from the Department of
Commerce, to show that I understand and fully appreciate the important power that the United States wields in world ati'airs. Nevertheless, it <{{•(* not control Hit' world price level, and in my opinion
can not.
The conditions which we confront at the present- time arc the
most difficult, the most serious, that any of us in our lifetime have
seen. The forces which have produced these conditions are world
forces. The Federal ro^rxi* system, with youv assistance in amending the Federal reserve aK this spring, is at present engaged, in
operating to combat these forces in the iield of credit wkh greater
facility and greater elasticity than wa.s previously possible under
existing law. You passed the reconstruction act, which wa.s a measure of courage and progressive-ness on your part, in my opinion, and
I feel that a great deal of good has been done by the operations
under that ai'.thorny.
However, it takes time- for financial measures to be reflected in
business. Money or credit made available to banks and to industry
does not immediately enter into activity, and there is always a considerable lag in time between credit conditions and business conditions. It is true that when times are good and operations are being
carried too far on a speculative basis—I mean not only in the security
market but in real estate and in other lines of activity, such, for
instance, as in the construction industries, which are. so important in
our economic situation—the availability of funds for that activity
may diminish while the activity seems to go on for a certain length
of time unimpaired; in the end, however, the unavailability of funds
makes itself felt.
So on the other side, when funds are again made available to banking institutions, it takes time for those potential resources to enter
into active circulation, producing an increased volume of business
and an increased employment of labor and consumption of materials,
which is what we call business improvement.
Senator COUZENS. Would you mind an interruption there, Governor ?
Mr. MEYER. Not at all, Senator.

Senator COTTZEXS. AS I understand, you are opposed to both the
Goldsborou£;h bill and Senator Fletcher's bill?



Mr. MEYER. Yes.

During one of the hearings there was a Mr.
H. A. Wallace, publisher of Des Moines, Iowa, who appeared before
the committee, and he made a suggestion which did not instruct the
Federal Reserve Board to raise prices to any specific level. He made
this suggestion, and I would like to ask you what you thought of it.
He says that " the Congress of the United States hereby directs the
Federal reserve system to raise the price level by the following
means ":
First, restore the reserve balances of the member banks to the 1927-28 level.
To bring this to pas-; the Federal reserve system shall within three months
or" the passage of this act purchase whatever volume of Government bonds
are necessary to accomplish this end.
And second, thereafter reserve balances of the member banks shall be held
at the 1927-28 level as a minimum.
Third, furthermore, these reserve balances shall be increased at the same
percentage rate of growth as the long-term rate of growth in production of
physical goods.

Now, perhaps it is pretty difficult to ask you to answer that offhand, but it seemed to me that there was a germ in there of a legislative enactment that might be of some value.
Mr. MEYER. There are in both the bills before you. Senator, as
well as in that suggestion, the germs of some good ideas. But from
the point of view of our power and ability to carry out a mandate
expressed in those terms, I should say that it is inadvisable to enact
such legislation, that it might be impossible to carry it out, owing to
conditions which now exist or which might develop. Conditions
change too much for it to be advisable, in my opinion, for Congress
to commit itself to any specific mandate, such as is contained in
either of these bills or ,in the suggestion of Mr. Wallace.
Mr. Wallace rightly puts emphasis on the question of the reserves, and we have that in mind. But it is never possible to say in
advance whether or not in administration it is going to be possible to
carry out as fixed and rigid a program as is contemplated by the
Goldsborongh bill and the Fletcher bill or by a proposal of the character which Mr. Wallace suggests. I think the results are far too
uncertain to make them the subject of legislative enactment.
And furthermore, the board and the system are proceeding in that
direction, and while they are dealing with the situation not entirely
in accordance with the letter of the proposed mandate, they are pursuing a general policy of encouraging credit expansion. That was
one of the things the system had in mind when you were asked to
pass the Glass-Steagall Act. Obviously, it was with operations of
that kind in mind, as well as other things, that the recommendation
was made and your action was taken.
(Thereafter the witness submitted a letter to the chairman of the
committee amplifying his views concerning the proposal of Mr. H. A.
Wallace, as follows:)

Washington, May 23, J.932.

The l'nite.<l states Senate, Washington. D. C.

DEAR. SEXATOR NORBECK: Yon may remember that Senator Oouzens asked
me to comment in more detail about a proposal made by Mr. H. A. Wallace,
editor of Wallace's Farmer. This proposal, according to the transcript, reads
as follows:



" The Congress of the United States hereby directs the Federal reserve system to raise the price level by the following means:
" First, restore the reserve balances of the member banks to the 1027-28 level.
" To bring this to pass the Federal reserve system shall within three months
of the passage of this act purchase whatever volume oil Government bonds are
necessary to accomplish this end.
"Ami second, thereafter reserve balances of the member banks shall be held
at kthe 1927-28 level as a minimum.
• Third, furthermore, these reserve balances shall be increased at the same
percentage rate of growth as the long-term rate of growth in production of
physical goods."
As I stared in my testimony. I am opposed to all proposals that would impose
rigid regulations on the methods to be followed by the Federal reserve system.
Our credit, machinery is entirely too delicate and responsive to too many
influences to make it desirable to have any one indicator, whether it be the
price index or the level of member bank reserves, be the sole guide in determining credit policy. At the present, time Mr. Wallace's proposal would mean that
the Federal reserve system's purchases of United States securities should be
discontinued within a few days, because member bank reserve balances are
approaching the 1927-28 level, that he would prescribe as a base.
There are, however, other reasons why Mr. Wallace's proposal would not be
practicable. It is based on the assumption that the volume of member bank
credit, should always change at approximately the same rate and that changes
in member bank reserve balances accurately reflect changes in the volume of
the Nation's business. Neither of these assumptions is in conformity with
To take up the question of member bank reserves first. Experience demonstrates that there have been a number of periods, such as 1925 and 1920, for
example, when member bank credit was expanding rapidly while member
bank reserve balances remained unchanged. This is true also of 1929 until
after the break in the stock market. On the other hand, in 1930 and in the
first half of 1931 member bank reserve balances showed little change, while
the volume of bank credit was declining. In all such cases it. would be directly
opposite to the credit policy indicated by conditions to follow the reserve
balances as a guide.
One reason that the movement of reserve balances does not correspond to
the general movement of business is that under existing reserve requirements
there is a tendency at times of depression for bank balances to accumulate in
central reserve cities—an accumulation which results in duplication of deposits
as well as in concentration of deposits in cities where a 13 per cent reserve is
required. At times of business activity, on the other hand, when funds are
required throughout the country, there is a movement of balances from the
central reserve cities with a consequent decrease in reserve requirements. This
particular defect in member bank reserve balances as an indicator of credit
policy would be overcome to a considerable extent by the adoption of the Federal reserve committee's recommendations on member bank reserves. These
recommendations were indorsed by the Federal Keserve Hoard and submitted
to your committee as a part of its recommendations on the Glass bill. Adoption of this method of determining member bank reserve balances would make
their changes considerably more responsive to business conditions.
But even if member bank reserve balances responded accurately to changes
in business conditions, it would still be undesirable to direct the Federal re
serve system to maintain the growth of these reserves at a rate corresponding
to the long-time rate of growth in physical production of goods. Economic
progress is not a steady gradual growth. Some years the growth is more
rapid and other years it is much slower. A long-time average, or normal, has
no real significance, particularly in a country that is young like ours and has
been progressing at an extraordinarily rapid rate. This rate is likely to become slower as the country develops further, and it would be distinctly undesirable to write into a law a requirement that the annual growth of member
bank reserve balances conform to a computed normal average increase for
past years.
In terms of navigation, this proposal would be similar to an order to a
captain of a ship to steer his course in accordance with a definite number of
degrees of deviation from the compass, the deviation being determined by the
influence of known currents. A ship that was steered that way would never



reach its destination and would be likely to .iro on the rocks. This is for the
reason thai in tlie ocean there are many currents that have not been accurately measured and that, in addition, the direction and strength of winds
that may arise <*an not be. determined in advance. For similar reasons a
legislative mandate that the credit machinery of the country be steered with
reference to any one iixed indicator would S>e certain ultimately to lead to
un foresee; 11 >le a in 1 un t'ortun; i le results.
I shall appreciate it if you will have this letter incorporated at the proper
place in the record of the hearings.
Very truly yours.
EUGENE ME\EK. Governor.

Senator COUZENS. But what I had in mind. Governor, was, is there
any aversion to the policy of Congress establishing a policy and a
principle as well as the Federal Reserve Board?
Mr. MEYER. It goes beyond that in the bills and also in the suggestion, because it is not only a policy but it is also a practice that
has to be considered, and conditions often make it necessary to
modify a policy. The proposals prescribe objectives for Federal
reserve policy, which, from the administrative point of view, are so
rigid as to be highly undesirable.
Senator COUZENS. I want to say that in all enactments of Congress
they have to be administered by some one. Even in the criminal
courts, judgment is left to the judges to determine to the extent
that they will go within certain limits. What I am trying to bringout is whether or not it is advisable for Congress to put on the statute
books a policy which of course makes its flexible, but which would
be a mandate from the Congress to the Federal Reserve Board as
to what Congress thought they ought to do.
In other words, I disagree with the Goldsborough bill to the extent
of fixing prices on any specific level, but I do not find the same objection to establishing a policy which fixes reserves as I do to fixing
prices, and I just wondered whether you thought there was any
more likelihood that good would result by fixing reserves than by
fixing prices.
Mr. MEYER. I think fixing either is inadvisable. We are contending with unprecedented conditions at home and abroad. This country has had enormous foreign deposits of money here attracted by
confidence in American currency. A great deal of that is being
called back in the course of events, because with the breakdown in
what is called the gold-exchange standard, these foreign countries
now want to keep gold in their own vaults.
Senator COUZEX*. What happens if they do that?
Mr. MEYER. They are doing it.
Senator COUZEXS. What happens when they do it?
Mr. MEYER. Nothing happens, particularly.
Senator COUZENS. Then why do we find fault about it?
Mr. MEYER. We don't.
Senator Cox ZEXS. We are finding fault about it right along, because somebody is removing gold to their vaults.
Mr. MEYER. I have not found fault with it. But in addition to
that, there is the question of confidence at home and abroad, which
is important to the United States, as it is to every country. When
gold is exported on account of a state of fear it is a bad thing, no
matter whose money it is and what the other conditions are. Certainly, the United States has not sought to establish any brakes or
interferences with the free movement of gold or the withdrawal of



deposits by foreign central bank* or bankers or individuals if they
chose to recall their deposits.
However, it is a different thing when a state of fear arises all
over the world about the currencty of any country. That has nothing
to do with the United States particularly, or any other country, but
applies to all alike.
Senator CorzExs. Let me make a concrete case, then. Just what
would be the bad effect from restoring reserve balances to the 1927-28
level? Now that is a specific accomplishment. What would happen
from that?
Mi\ MEYER. YOU have already said that you would not ask me to
give an offhand answer to a rather elaborate statement which I
have not considered. I do not have in mind, as a matter of fact,
Senator, what the 1927-28 bank reserves were.
Senator COTTZEXS. Would you look it up and advise us as to what
effect that would have in your opinion if that were enacted into
legislation ?
Mr. MEYKLJ. I will be glad to do that, or have it done. I was expecting to be absent for two or three days and I may not be able
to do it immediately.
But what seems to me to be inadvisable is to commit the board or
the Federal Reserve System to a policy on an assumption that the
policy as expressed in the bill is a feasible policy. And I furthermore feel that, in general, legislation should not define administrative
procedure beyond the necessity of laying down principles, in its
proper capacity as the legislative body; it should not.undertake to
determine the details of the administration.
Senator COHZEXS. As a matter of fact, of course every administrative officer does not like to have his powers prescribed. That is a
perfectly human attitude of mind, is it not?
Mr. MEYER. N O : I think, Senator, I quite respect a proper restriction of power, and I feel that if we had the power that it is assumed
we have I should not want to be entrusted with it. I do not think
that any small group of men ought to be in possession of the power
to control the price level.
Senator COTJZEXS. I am not talking about that: I am abandoning
the idea of the price level.
Mr. METER. Well, of course, I am addressing myself to this bill.
Senator CorzExs. I was addressing myself to the suggestion made
by1 Mr. Wallace,
Mr. MEYEK. Which I would like to consider at greater length before I testify on it.
Senator COSTIGAX. Governor Meyer, may I ask you what the
object of the Federal Reserve Board has been in purchasing Government bonds?
Mr. MEYER. The object is to increase the reserves at the Federal
reserve banks to the credit of the member banks, in the hope and
expectation that they will be used. This has been successful up to
a certain extent, and it has had, in part, the effect of reducing member bank borrowings. The Reconstruction Finance Corporation also
has been helping by making additional funds available to banks for
use in financing agriculture and business.
But naturally, after an experience such as the country—the bankers along with other people—has had in the last two years, with



continuous declines in deposits and prices and the volume of business,
confidence has fallen correspondingly, and now we have the problem
of restoring confidence as well as making funds available.
Senator COTTZENS. IS there any lack of capital in the country?
Mr. MEYER. There is probably lack of capital for some people or
some enterprises in some places, and there may be surplus capital in
other places. But, of course, what we are seeking to do is to get
funds distributed so that they may be made more available throughout.
Senator COUZENS. I did not ask if there was capital nor did I
make any limited statement as to distribution of capital. But I
asked you, in the country as a whole, is there adequate capital to run
the country?
Mr. MEYER. There is, in my opinion.
Senator COSTK^AN. Has any appreciable effect on prices from the
bond-purchasing policy been observed?
Mr. MEYER. YOU mean in the commodity price level?
Senator COSTIGAN. In this country.
Mr. MEYER. I think there has, but you can not see it in a rise. You
see it in an arrest in the decline.
I will say at this point that we were in conference with the governors of the Federal reserve banks only yesterday, and some of the
things we considered were the commodity price level and how the
funds which are being made available by the Federal reserve system
to the banks can be made available by the banks to business men. to
agricultural interests, to commercial interests, and to construction
interests throughout the country; and I think the governors on their
return to their respective districts will seek to study ways and means
more aggressively to effect such a result.
You must not forget, gentlemen, in talking about the commodity
price level, a subject I discussed at some length in the House hearings
which will be reprinted here, that in conditions such as the present
there are serious dislocations in business; there is a dislocation of
the time element and a dislocation of the operation of the machinery
for production and distribution of wealth. The foreign exchange
demoralization—for instance, the fact that England has an unstable
exchange—interferes materially with the marketing of our agricultural products, because in a period of fluctuating exchanges in
countries off the gold standard they naturally hesitate to make longtime contracts and carry large stocks of commodities.
That is reflected at the present time in the figures on cotton, where
the present stocks outside of the United States, in England and on
the Continent, are down as compared Avith a year ago, I think, by
about six hundred and fifty thousand bales, in spite of the fact that
total American exports for the current crop year (including exports
to the Orient as well as to Europe) have gone up 1,500,000 bales.
That means that the United States and other producing countries are
carrying the stocks which ordinarily, in normal times, when currencies were stable, were being distributed all along the line of
orderly marketing, in storage, conversion, and finishing.
Now that creates a new situation in the producing country, and
we are giving thought and study to new adjustments and new
operations, with the view of making the carrying of our stocks
financially more easy. It even gets down sometimes to a warehous-



ing problem. I remember certain times when we have had to carry
cotton in inordinate amounts and we had a warehousing as Avell as
a financial problem.
The change of the time element is a vital factor. "With your
experience. Senator, you know perfectly well that the time element
in the How of commodities through a factory, the timing of the
movement of the goods, is just as important as any factor in the
whole operation.
Senator Corz.EXs. SO your conclusion is that until, the bankers get
a proper mental attitude there- is not anything that Congress or the
Federal reserve system can do to expedite the How of money into
Mr. MEYEK. I think the Federal reserve system is doing and can
Senator COIZEXS (interposing). I did not say that.
Mr. MEYER. I thought you said the Federal reserve system.
Senator COI'ZENS. I said, no matter what the Federal reserve system can do or the Government, there is no way of forcing the banks
to loan money until they get into the proper mental attitude?
Mr. MEYER. Of course, there are a great many bankers, and I
would not say that any one attitude was characteristic of the attitude of every individual banker.
Senator CorzEXS. Oh, I was speaking generally, of course.
Mr. MEYER. It is true, of course, that they have been through a
trying period, and they along with the rest of the world lack optimism. It is characteristic of human nature for bankers and others,
when a trend sets in, to believe that the trend is going to continue
forever. "When it is an optimistic trend, why. they see the sky as
the limit. When it is a pessimistic and a downward trend, there
is never any bottom until it occurs.
Senator CYVTZENS. YOU did not answer my question. I said, is
there nothing that Congress or the Federal reserve system can do
to spread out the loaning of money until the banks get willing
to do so?
Mr. MEYEK. I think that what the Federal reserve system is doing
tends to accelerate a change in the attitude of mind of bankers, and,
we hope, not only of bankers but of business men.
Senator FLETCHER. When did the Federal reserve system begin
that procedure, Mr. Meyer?
Mr. MEYER. The Federal reserve system—you mean the purchase
of Government securities?
Senator FLETCHER. Yes.
Mr. MEYER. There were purchases of Government securities before
I became a member of the board in 1030. There were some in 10iM.)
and in 1030.
Senator COSTKUZS;. YOU have recently started a new definite program, have you not. Governor?
Mr. MEYEK. I beg your pardon?
Senator CONTIOAX. YOU have recently started a program, of a definite sort?
Mr. MEYER. Yes; subsequent, to the passage of the Glass-Steagall
Act the systom embarked, on a program which was pursued at a
moderate rate, beginning with the latter part of February and at an
accelerated rate in April



Senator COSTTGAN. May I ask how fast and how far the program
has proceeded since the passage of the Grlass-Steagall bill?
Mr. MEYER. I should say the purchases of Government securities
since the passage of the (ilass-Steairall Act total about $645,000,000
or $650,000,000!"
Senator COSTIGAN. Has it proceeded at the rate of about a hundred
million a week?
Mr. MEYER. It did for five weeks. Doctor Goldenweiser has the
chart here of Government security purchases.










Senator COUZENS. Have you dropped off in the purchases now or
are you slowing down?
Mr. MEYER. I don't know what the total will be this week.
Senator COUZENS. NO; I am not asking what the total will be
this week.
Mr. MEYER. Up to this week, the total was at a rate averaging
about a hundred million a week.
Senator COUZENS. What is your program for the next few weeks 'I
Air. MEYER. It is to continue at a rate to be determined as conditions, which have to be judged from time to time, justify.



Senator COSTK;AX. May I suggest for the purpose of the record,
Governor, that you indicate from your chart how rapidly those purchases have recently been made.
Senator COT-ZUXS. ID other is a secret?
Mr. MEYER. N O : it is not a secret at all. It is an undetermined
fact which lias to he judged from time
to time as conditions justify.
Senator COUZENS. When you say u from time to time "—how long
from time to time?
Mr. MEYER. Oh, from day to day, and week to week.
Senator COUZENS. YOU have to settle this every day?
Mr. MEYER. NO; I don't settle it at all. The open market committee conducts the operation. But there is not any fixed schedule,
and there ought not to be, because it is a question of fine, judgment
as to what the host policy is.
Senator FLETCHER. YOU have not iixed any time when yon are to
discontinue this operation?
Mr. MEYEIL NO. The question is n matter of judgment and experience as to whether a more rapid rate or n slower rate or a larger
or smaller amount is best suited to conditions, and that gets back to
this, that you have to hear in mind, Senator, that the results of the
forces set in motion by the open market operations are seen only
somewhat later. So it is a matte]* calling for very good and fine
judgment and discretion as to whether or not a more rapid rate or
a variation in amount is desirable from time to time.
Senator Corzscxs. Could you call out the names now of the members of the open market operation committee?
Mr. MEYER. The governors of the Federal reserve banks—the 12
Senator COUZENS. And are any of the members of the Federal
Reserve Board on this open market committee?
Senator COUZENS. All 12 governors?
Mr. MEYER. The 12 governors of the

Federal reserve banks constitute the open market committee.
Senator COUZKNS. And how often do they meet?
Mr. MEYER. AS an open market conference?
Senator COTZEXS. Yes.
Mr. MEYER. They do not meet at stated intervals. They meet
whenever they call a conference or the board calls them into a conference, and they have an executive committee that acts under the
instructions of the full open market committee in the meantime.
Senator COUZEXS. SO the executive committee is called in by the
Federal Reserve Board?
Mr. MEYER. It may be, but the full committee is called in, too.
Senator COFZKXS. When did you call in the executive committee
of the open market committee last?
Mr. MEYER. I do not think we have recently called in the executive
committee. We had a conference with the open market committee
yesterday. We had one on April 12 also.
Senator COIZEXS. Who was at the conference yesterday?
Mr. MEYER. All the governors of the banks except one whose wife
was ill and his deputy came.
Senator COXZEXS. In other words, it was not the executive committee then: it was just the



Mr. MEYER (interposing). The open market committee.
The CHAIR MAX. Who are the executive committee % Will you give
their names?
Mr. ME YEP,. The governors of five of the reserve banks, those in
Cleveland, Chicago, Atlanta, Boston, and New York.
The CHAIRMAN. They have power to act for the committee?
Mr. MEYEK. On authority from the full committee only.
Senator BROOKIIART. What are the elements they consider and act
on when they decide this policy? What is it that determines their
Mr. MEYEK. They are acting under the authorization, whatever it
may be, of the full open market committee.
Senator BKOOKIIAKT. I understand that, but I mean what economic
facts or conditions now determines their judgment as to whether
they will buy these bonds or not?
Mr. MEYEK. It depends on the circumstances at the time. That
varies with conditions.
Senator BROOKHART. I am trying to get a specific name for some
these circumstances. That does not mean anything just to say
Mr. MEYER. Well, circumstances change at various times.
Senator BROOKHART. What are the circumstances that change now,
that they have talked about, that they consider?
Mr. MEYEK. The money market, credit conditions, business conditions, and so forth.
Senator BROOKHART. Price level?
Mr. MEYER. Price level, international exchange—everything that
enters into the financial and economic picture, I should think.
Senator BROOKHART. Well now, they will all concede, and you do,
that the present price level is abnormally low ?
Mr. MEYER. Yes.

you concede that the Federal reserve
administration has had anything to do with lowering that price
Mi*. MEYER. In what period?
Senator BROOK HART. Well, take any period.
Mr. MEYER. N O ; I think not. I think the Federal reserve system
has been trying to exercise a supporting influence and a sustaininginfluence in arresting the deflation and contraction and decline.
Senator BROOKHART. But it has been unsuccessful?
Mr. MEYER. It has been—I would not say that it has been entirely
unsuccessful, because conditions would probably have been worse if
the. system had not made the efforts that it did make.
Senator BROOKHART. Well, of course, we can always say it might
have been worse.
Mr. MEYER, We can sometimes say it truthfully.
Senator BROOKTIART. But has the Federal reserve used all its
powers to stay this abnormal decline of prices?
Mr. MEYER. If you want me to say that it has been perfect, I
would not say it was more perfect than you or I or the rest of us.
Senator BROOKHART. Have they been substantially using them?
I do jiot mean any theoretical perfection.



Mr. MEYER. I would hesitate to say that they could have done very
much belter in the light of conditions with which I am familiar in
the last year and a half.
Senator BROOKHART. Then does not the law need to be amended
some way so as to give them more power so they can meet the situation better?
Mr. MEYER. YOU have amended it.
Senator BROOKHART. Are those amendments sufficient?
Senator COUZENS. Does the board keep any minutes of its meetings
and its decisions?
Mr. MEYER. The Federal Reserve Board?
Senator COITZEXS. Yes; and the open market committee.
Mr. MEYER. I suppose the open market committee has some record
of its meetings, certainly.
Senator COUZENS. IS there any record of the discussion that goes
on to determine the factors that compel them or urge them to reach
conclusions ?
Mr. MEYER. Of course, they have meetings which last all day long,
and they can not make a complete record of the discussions that go
on for six or eight hours. There are no stenographic minutes of
Senator COUZEXS. "We were in session 8 or 10 hours yesterday and
there was a record of what went on in the Senate.
Mr. MEYER. I know the Senate is always meticulously careful to
take a record of everything that is said.
Senator COUZENS. That would be interesting, to know what was
said on the Federal Reserve Board and also on the open market committee. I think, at times.
Mr. MEYER. I have no doubt it is. Sometimes the discussions are
very interesting and cover a wide range of subjects—general conditions, banking conditions, and so forth. At the same time it never
has been the custom, so far as I know, to take stenographic minutes.
Senator CVrzcxs. When you decide to jump your purchases, say,
from twenty-five to a hundred million a week—I mean the open market committee—is a resolution introduced?
Mr. MEYER. Yes; they pass a motion which is approved or disapproved by the Federal Reserve Board. That is, a short resolution.
Senator COUZEXS. And there are minutes of all these meetings?
Mr. MEYER. Records of the resolutions: yes.
Senator CWZEXS. That is, the person who moves it and the person who seconds it, and there is a record roll call of the vote?
Mr. MEYER. I think so. I don't know about that. I am not sure.
Senator (VHTZEXS. When the open market committee passes a resolution to increase its purchases from twenty-five to a hundred million a week, the resolution is passed by the open market committee,
and then sent to the Federal Reserve Board for its approval or
disapproval ?
Mr. MEYER. Yes.
Senator (AHZEXS.

What if the board disapproves of that resolution of the open market committee—what happens?
Mr. MEYER. They can not act.
Senator COUZEXS. They can not act. Has any action of the open
market committee ever been disagreed to by the Federal Reserve



Mr. MEYKIJ. Not since I have been a member of the board.
Senator COTZENS. DO not you think it would be in the public
interest if we knew just what the arguments were, just what the
motives were, that inspired the variation in activities of the open
market committee and the Federal Reserve Board?
Mr. MEYER. I think they are generally understood. Senator.
There is no great mystery about it. Their discussions are not published, but I do not think there is any misunderstanding about them.
There are great numbers of financial writers and economic observers
constantly commenting on these matters, commenting with a good
deal of knowledge and experience, in some cases very good knowledge
and experience.
Senator COITZEXS. Yes; but they are not present at the meetings,
though, are they ?
Mr. MEYER. NO ; but the operations speak for themselves. There
is no mystery about the reasons.
Senator COUZENK. I wish I could agree with that, because I am not
quite sure that there are not discussious ao on in these open-market
committee meetings that are not of public interest and might not
have a very salutary effect on the public welfare.
Mr. MEYER. They might and they might not. Publicity of discussions sometimes interferes with an entirely frank expression of
opinion. You have executive sessions in the Senate occasionally
where you do not invite the public and where you do not publish
the proceedings, and I think probably you have good reasons for it.
Senator FLETCHER. Mr. Meyer, let us get back to this bill. You
have powers, do you not, now, that are conferred by the Goldsborouo-h
Mr. MEYER. "We think we have not; I think we have no power to
determine a price level or to restore, any given price level.
Senator FLETCHER. Tt is not a question of determining a price
level so much, it seems to me; it is fixing the purchasing power
of a dollar on the basis of a commodity price level. Now, you are
exercising this power now?
Mr. MEYER. Jfo. We are exercising a power which is designed
to make funds available to the member banks more freely and thereby help to improve business conditions, which would have some
effect on the price level, we hope.
Senator FLETCHER. That is what I am saying. You are doing
what is provided in section 3 in my bill now. You have the discretion to do these things. Now, the question is whether it should
not be made your duty to do it. You have the discretion to do it.
If Congress comes along and says, " We not only want you to exercise
this discretion, but we want to have the law provided that it shall
be your duty to do this thing continuously, not terminate next week,
not terminate week after next, but keep it up as a public policy,
permanent policy*'—isn't ihnt what wo are driving at here?
Mr. MEYER. 1 have no doubt that you and the other gentlemen
who propose these bills have entirely worthy purposes in mind. I
am not attacking the purposes or the intent.
Senator FLETCHER. I understand that, perfectly well.
Mr. MEYER. I am opposing this as a measure because, although
the proponents of it say, "Well, in any event, it can not do any
harm and it may do some good,'' I feel quite the opposite; I think



it can not do any good and may do harm. In fact, the passage of
the bill through the House was very disturbing. I did not want
to say at the hearing there that I felt it would be, because
Senator BROOKHART. What did it disturb?
Mr. MEYER. It disturbed people all over the world, there were
many excited articles in the newspapers and individual inquiries
wore numerous. I don't say that the disturbance was justified, but
it did have a disturbing influence. It disturbed the foreign exchanges.
Senator BROOKHART. If it were ail right you would not do it just
because it disturbed somebody?
Mr. MEYER. If it were all right I would favor it, even though it
were temporarily disturbing, relying on the ability to educate people
to the fact that a disturbance was not justified. But as it is not
capable of doing good and is capable of disturbing. I*oppose it
wi thout qu alification.
Senator FLETCHER. Your idea is that in your judgment these
financial institutions, investors, and the money power generally
would rather have this thing ^o along in an uncertain sort of way
and for an indefinite sort of time, rather than have it fixed so that
they will know what to depend on ( In other words, you think that
they would rather havo the discretion left entirely with the Federal
Reserve Board to do this thing or not to do it as they see fit from
time to time, than to have it fixed by law that they must do those
things ?
Mr. MEYER. YOU assume that, if you pass a bill ordering the Federal reserve system to do this thing, it can be done in accordance
with the the terms of the resolution; I do not agree with that.
Furthermore, there are many factors that enter into these situations, so that you may be fully able to carry out a policy under certain circumstances at a given time and not at all Jit another time
under other conditions. But, gentlemen. I think you hav* entered
here into a field of highly teehnira] financial operations.
Senator BLAINE. Governor Meyer, before leaving this question of
power of the Federal Reserve Board, I assume that the Federal
Reserve Board has the power now under existing law to eU'cetuate
tho purposes of section :•> of Senator Fletcher's bill. I assume that
because the open market committee is now doing that sort of thing.
Mr. MEYER. The Glnss-Steagall Act authorizes what I think is
intended to be authorized by section :•>. Of course, in the Glass Steagall Act the time is limited to one year. I recommended two years
at tho lime the bill was up for consideration.
Senator BLAIM:. SO that section ?> is compatible with existing law
undei' the Ghiss-Steagall bill and extends the life indefinitely of the
power conferred bv the Glass-Steagall bill?
Mr. MEVEIJ. Yes.
Senator 1>I,AINE, NOW

that being admitted and established, if that
power is exercised it may affect the price level?
Mr. MEYER. The exercise of that power does not affect the price
level except indirectly, if at all.
Senator BLATNE, Indirectly. But your attempt now is to ;rii'ect the
price level indirectly?
Mr. MEYEJI. YOU mean by the operations now being conducted?
Senator BLAIXK. Yes.



Mr. MEYER. It is intended to furnish funds which can, and wo
hope will be, used to stimulate business and the production and
consumption of material goods.
Senator COUZENS. And prices?
Mr. MEYER. And thereby aifeet prices favorably. Although some
of these prices are affected by conditions that are entirely unrelated,
as you understand.
Senator BLATXE. I am not getting at that. I am just getting
at your specific purpose.
llr. MEYER. Just take4 cotton for a minute. Let me give you an
illustration. Nearly all these commodities have had very low prices
within the last 12 years, and very high prices. In 11)21, cotton which
had sold above K) cents in 10*20, dropped to 10 cents, and we had
an enormous surplus as we have now. People were talking just as
pessimistically about that surplus as they talk now. In four months
in the autumn cotton rose to 20 cents. A year later it was 25 cents,
or 2H to 25 cents, and the third year thereafter it was •>(> cents.
Lambs sold in 11)21 under \) cents, and a few years later they were
15 cents a pound. We saw cattle decline in 1021, 1022, and 11)23,
to very low levels, and fat steers were selling in Chicago in 1027 at
18 (tents a pound. There is hardly a commodity which is demoralized now that has not within the last ten years sold at both a very
high and a very low price.
Senator BROOK HART. There was no such variation in the protected
industry commodities!(
Mr. MEYER. I have not made a study of them. I have not been
investigating them, Senator.
Senator COIZEXS. I think that is largely due because of the more
or less control of supply and demand in those protected industries,
which there is not in the agriculture industry.
Mr. MEYER. Yes; of course, if you want to fix a price level or
fix prices you have got to control production.
Senator CWZENS. Why, certainly.
Mr. MEYER. And that is a very difficult tiling to do. But just
a. moment. Senator—let me
Senator BROOKJIART (interposing). Ninety per cent of agricultural production is now consumed in the Ignited States.
Senator ELAINE. I did not want to get away from this power that
the Federal Reserve Board has. That is what I was pursuing
Mr. MEYER. All right, Senator.
Senator BLATXE. I appreciate what you said. Now, it bein^
admitted that the board has a power now to do that which section
3 prescribes, that means the expansion of credit if the power is
exercised to the extent of the policy defined in the first paragraph
of the bill. I am not saying that it is going to do what the first paragraph proposes shall be done, but it will expand the currency.
Mr. MS:YEIJ. It expands member-bank reserves in the Federal reserve bank in the first, instance. There is not an expansion of credit
or currency until those reserves are translated into use.
Senator ELAINE. I said credit first. I want to modify it. It is
not expansion of currency: it is expansion of credit.
Mr. MEYER. It may become so.



Senator BLALNE. It may become expansion of credit, and the more
that credit is expanded the greater becomes the inflationary tendency; isn't that correct?
Mr. MEYER. I do not like to use that word ;i inflationary/' It is
so misunderstood.
Senator BLAINE. "Well, I like to use it because it is the reality.
Mr. MEYER. I think there is an expanding force, let me say. I
would rather use that term, because you can have a rise of a very
extensive character in commodity prices from this level without getting into the area that could properly be characterized as an inflation area.
Senator BLAINE. That is a realistic proposition.
Senator FLETCHER. I would call it " reflation."
Mr. MEYER. Yes; that is a good word.
Senator BLAINE. "With deflation you just can not see them. But
on the inflation proposition you can see; you can feel it; you can
appreciate it. Now if this power were carried out to a much larger
extent would that have the tendency to bring about a discharge or
possibility of discharge of public and private debts?
Mr. MEYER. I don't know. That would depend on circumstances.
I think this is a power which if wisely used and intelligently used
and not over used can be very helpful. If it is carried on too far
and abused, it might become very dangerous. As I have occasionally said before, credit is like some drugs. If handled by people
who are experienced and competent in its use, it may have a very
helpful and healing effect. But if used by people who do not understand it. it may become very dangerous and perhaps disastrous.
Senator BLAINE. But your board would be the board that would
administer. Now. you do not want to characterize your board as
dangerous and incompetent?
Sir. MEYER. YOU asked me a question as to whether or not an
indefinite expansion and an indefinite quantity of operations of a
certain character could produce a certain result; I say I don't know,
because it is a question which
Senator BLATNE (interposing). Of administration?
Mr. MEYER. Yes.
Senator BLAIXE.
Mr. MEYER. And

And that is with the Federal Reserve Board.
I think it is a matter of very fine judgment and
•experience, and I do not think a resolution of Congress can contemplate all the circumstances under which that judgment must be
exercised, and therefore any definite policy laid down by a congressional enactment, in my opinion, is inappropriate and unwise.
Senator BLAIXE. NOW, following that proposition, you emphasized our relationship to the world production and the world prices.
You have not mentioned our domestic indebtedness, public and private, which amounts, according to the economic department of the
Agricultural College of New York, to $203,000,000,000. What program or what policy do you propose will permit of the discharge of
that enormous debt by the time the evidence of the debt matures?
Mr. MEYER. A large part of such debts are renewed and extended.
Some of them are paid off and some are not.
Mr. Chairman. I am glad to come up here and testify on this resolution. I did not prepare myself to discuss the entire debt problem
of the country.



Senator BLAINE. IS not the debt problem involved in this very
Mr. MEYER. Almost everything is involved.
Senator BLAINE. HOW are we going to recover from the present
situation with an indebtedness that probably is equal to the assets
of the country, public and private?
Mr. MEYER. When prices are depressed and business is contracted
indebtedness, of course, is tremendously burdensome. "We did not
hear anything about the impossibility of carrying these debts two
years and a half ago. All we heard was, everybody ought to borrow
more money.
Senator BLAINE. I am not speaking of that; I am speaking of the
reality. Now, just one more question. Is there anyThe CHAIRMAN (interposing). May I state here just a minuteSenator BLAINE (interposing). Mr. Chairman, I have not been
interrupting this morning.
The CHAIRMAN. I am not trying to interrupt you in your question
at all. I just want to make a statement here.
Senator BLAINE. I want to carry out nry statement.
The CHAIRMAN. YOU will be given a chance. When Governor
Meyer came on this morning he told me that he wanted to leave on
the 12 o'clock train and he asked me whether I thought he could
complete his statement by that time and I told him that I was sure
he could get away. I just want to make that statement now in order
to determine whether lie should complete it now or come back some
other time. That is all.
Senator BROOKHART. I am willing to let him go, but I would lik*>
to have him come back.
Mr. MEYER. Mr. Miller is here, a member of the board.
The CHAIRMAN. Yes; another member of the Federal Reserve
Board is here.
Mr. MEYER. He has not testified before the House committee and
will give you some illuminating and helpful remarks. Mr. Miller
has been a member of the Federal Reserve Board from the first day
of its existence and is well qualified to discuss the resolution and
other matters. I just wanted to say in connection with commodity
prices, if I may
Senator BLAINE (interposing). Mr. Chairman, I would like to
pursue my inquiry. I have not taken any undue time.
The CHAIRMAN. Certainly, you may ask your questions. I just
wanted to make a statement. Certainly you may ask a question.
Senator Blaine.
Senator BLAINE. Yes. Now, in view of this debt situation, this
$200,000,000,000 are the prospects somewhat immediate for going off
the gold standard by force of circumstances, regardless of action
of Congress or the Federal Reserve Board or any other public
agency ?
Mr. MEYER. Decidedly not.
Senator BLAINE. HOW are you going to stay on the gold standard ?
Mr. MEYER. YOU might just as welt ask a man how lie is going to
play a piece on the piano. The fact is, there are various methods
and measures. The law of the United States prescribes the gold
standard in the first place. It is set by law. by act of Congress, of




which you are a Member. There is not the slightest doubt in the
mind of any responsible official about either the ability or the intention of the United States to stay on the gold standard. No conn-,
try lias gotten oif the gold standard except because it had to. No
country has gotten oil' the gold standard willingly. Every country
that has gotten oil: the gold standard wants to get back to a stable,
currency at the earliest possible moment. Neville Chamberlain,
Chancellor of the Exchequer in England, stated the other day that
" we must ^vi back to a metallic currency basis."
Senator BLAIXE. 1 am not speaking of that.
llr. MEYER. There is no country that ever experienced the vicissitudes and hardships of fluctuating currencies that wants it again.
Germany, which has had more difficulties than any other country in
the world, is making a desperate struggle to maintain the mark on
a stable basis because it knows what unstable and demoralized currencies mean to the people of the country.
Senator BROOKHART. Are we not unstable and demoralized? Isn't
that what knocked our prices down?
Senator BLAINE. I am not controverting that, Mr. Meyer.
Mr. MEYER. YOU asked me a question and I gave you tha answer.
Senator BLAIXE. "Well, thank you. I am not controverting it. Now,
with $200,000,000,000 of indebtedness, how do you propose to pay that
indebtedness, by repudiation or by actual retirement of the debt?
Mr. MKYKR. Mr. Chairman. I do not think the question is pertinent
to the discussion of the resolution. I like to answer all questions
with great
The CHAIRMAN. The governor will be allowed plenty of time to
answer questions that come up in this way.
Mr. ili:YEK. But, may I ask

Senator BLAIXE (interposingj. I think it is embarrassing. Mr.
Chairman, if the governor does net want to answer, 1 shall not
pursue the inquiry further.
The CHAIRMAN. He may be willing to answer at some other time
in the future.
Senator BLATNE. I, observing his unwillingness to answer demonstrated now, am not pressing for an answer.
Senator BROOKIIART. 1 want to ask one question.
The CrrAruMAN. This matter should be determined whether lie is
going to let him get away on this train or have him come back.
Senator BROOK HART. I want to let him go and have him come
back. 1 can not tinisli in this time. But there is one question, he
has mentioned the instability of money and the fluctuations. I
want to ask if we have not had in our so-called gold standard
just as big instability and fluctuation as many of the other countries?
Mr. MEYER. XO. I should say that while we have had instability
through fluctuations of the price level, we have not had as great
an instability as countries which have currency instability in addition to commodity-price instability to contend with.
Senator BROOKIIART. France stabilized her franc at about one-fifth
its value and that dispensed with the gold standard that existed
prior to that.



Mr. MEYER. It restored it on another basis. That simply was a
repudiation of debts to the extent of 80 per cent which they could
not pay.
Senator BROOKHART. Haven't we been ofF the gold standard substantially since the Federal reserve system was established and been
on a managed standard instead of gold?
Mr. MEYER. Decidedly not.
Senator BROOKHART. And there has been pretty bad management a
good deal of the time ?
Mr. MEYER. I think the management of affairs in this country is
subject to some criticism. I think there is not anybody who has
been in a responsible position either in business or industry, and
I would even include some agricultural leaders, who has not been mistaken; bankers and Government officials, and even Congressmen,
have made mistakes.
Senator BROOKHART. But the governor of the Federal Reserve
Board never made one ?
Mr. MEYER. I deny that. I disagree with you. I recall to your
mind, though, the Senate of the United States passing a resolution
in May, ID20. calling on the Federal Reserve Board to do something about reducing prices, just about the time when we were ready
to go into a
Senator BROOKHART. 'i'es, and I remember that the passers of that
resolution were defeated at the very next primary.
Mr. MEYER. Xot on that account.
Senator FLETCHER. Mr. Meyer, you mention the fact that under
the Glass-Steagaii bill you have the powers referred to in section 3.
Mr. MEYER. For a limited period.
Senator FLETCHER. Yes, I know; I am getting to that if you will
just allow me. You called attention to the fact that that extends
for one year. You advocated two years.
Mr. MEYER. At the time.
Senator FLETCHER, is it not a fact that the Secretary of the Treasury wanted to make that permanent? Didn't he so state to the
committee in the House?
Mr. MEYER. I don't remember. I did not happen to be there when
he testified. I could not say what he did say.
Senator FLETCHER. That is the record.
Mr. MEYER. I understand that that is the fact.
Senator FLETCHER. Yes; that is what we are trying to do here.
Mr. MEYER. Mr. Miller is here, Mr. Chairman.
The CHAIRMAN. And Mr. Miller can speak for the Federal Reserve
Board policies, can he not?
Mr. MFATK. He can, on any matter on which the board has a policy.
The CiTAiinrAx. All right. Thank you. When will you be able
to come back, Mr. Meyer?
Mr. MEYER. I will be able to appear again perhaps on Monday
The CHAIRMAN. XOW, we have one man here who wants to make a
brief statement first. It will take only a few minutes. He represents Mr. Green, President of the Amarican Federation of Labor,
and I think it will take him less than live mintues, and then Mr.
Miller can <?o on as the next witness.



D. C.
The CHAIRMAN. Take the seat and give your full name and address
and your employment to the secretary.
Mr. HUSHING. My name is W. C. Hushing, legislative representative of the American Federation of Labor.
Mr. Chairman, for the past 10 or 12 years, bills containing proposals
of this character have been before the different congressional committees, and invariably we have appeared in behalf of those proposals. We have done so realizing that any increase in commodity
prices would result in increased expenditures to our members, who,
of course, are in the metropolitan areas principally. We want to
again indorse the principle contained in the proposal as now before
you. Thank you for the courtesy.
Senator WALCOTT. That is the Goldsborough bill that you are
speaking of?
Mr. HUSHING. The principles involved; yes, sir.
Senator ELAINE. I understand the witness was not limiting it to
any bill, but the principle involved.
Senator WALCOTT. He said the bill. There are two bills here.
Mr. HUSHING. Yes; I understand that. The same principle is in
both bills, as I understand.
Senator BLAINE. I AY anted to be sure of it.
The CHAIRMAN. YOU may go ahead, Mr. Miller. Just give your
name and official connection.
Mr. MILLER. A. C. Miller, member of the Federal Keserve Board.
The CHAIRMAN. And your home address would be what ?
Mr. MILLER. Washington. Or do you mean my residence outside
The CHAIRMAN. Outside.
Mr. MILLER. California.
Senator COUZENS. HOW long have you been a member of the Fed*
era! Reserve Board, Mr. Miller?
Mr. MILLER. Since its organization in 1914.
Senator COXJZENS. When does your term expire?
Mr. MILLER. My present term expires in 1034.
Senator COUZENS. 1934?
Mr. MILLER. 1934.

you have a pretty complete mental picture
of all the operations of the Federal Reserve Board since the system
was established?
Mr. MILLER, Well, my memory is pretty long. Some things haA^e
it, doubtless, but for the most part I think the important
eArents have registered.
Senator COUZENS. If this question is embarrassing you do not need
to answer it: Would Ave have gotten along if Ave had just had the 12
reserve banks without the Federal Reserve Board just as well?



Mr. MILLER. We would be in a better position if we had had a
better reserve board.
Senator COUZENS, But you do believe the board is necessary outside of the 12 banks ?
Mr. MILLER. A competent board is indispensable. Without it
the system can not operate. There must be coordinated action for
the attainment of objectives that are national in their scope.
Senator COUZENS. I understand, but
Mr. MILLER (interposing). And without a board to help inaugurate and support policies that are national in scope, the system
would be similar to an army in time of war where the individual
division commanders are without any chief of staff or any general
plan of strategy for the unification of operations.
Senator COUZENS. AS a matter of fact, the governors of the 12
Federal reserve banks meet and determine most of the policies of
their banks, obviously. Do you believe that it is necessary to have
a supreme court such as the Federal Reserve Board pass upon the
decisions of the governors of those 12 Federal reserve banks {i
Mr. MILLER. Yes: I do. There is no question about it. The
theory underlying the administrative organization of the Federal
reserve system is that judgment has got to be composite in character,,
and that has to come about through the process of deliberation and
the exchange of opinion. Many a man comes to a meeting as governor or as a member of the board, and after a day's discussion, or
two days, or sometimes three days, modifies his opinion. Very frequently the action finally agreed upon represents the composite
thought of the group, or at any rate of the most active and influential men in. the group. These meetings are attended by scientific
technicians and judgment is arrived at after a presentation of conditions in different parts of the country, and perhaps even beyond
the country, when they are pertinent to the problem of policy that at
that time confronts the Federal reserve system.
Senator COUZENS. DO you keep a minute book of all of your activities ?
Mr. MILLER. We keep, of course, a minute book of our meetings.
Senator COUZENS. HOW often do you meet?
Mr. MILLER. Not regularly. Sometimes two or three times a day,
sometimes at night; sometimes perhaps not more than two or three
times a week. We meet as occasion requires action. When things
are going along in a rather humdrum way there may be periods of
two or three months with little except more or less routine problems
to come before the board. In times of stress and tension, such as
we have had during the past four years, speaking rather moderately,
we meet very, very frequently and on very sudden call.
Senator COUZENS. Were you going to make a statement to the committee or were you to be asked questions?
Mr. MILLER. I had no prepared statement, gentlemen. Perhaps I
can be most useful to you by answering such questions as occur. I
want to say, however, without specific reference to the particular
form in which a policy for the stabilization of prices through credit
control is advocated, as for example it is advocated in the Fletcher
bill and in the Goldsborough bill, that I have been in full sympathy



with the position the Board has taken on previous occasions against
the advisability of any instruction to the Federal reserve banks or
to the FederarEeserve Board or to the Federal reserve system as a
unity which is based upon the assumption that any such guide to
credit control is going to result in a better situation than we can
have without it. Li has been my belief that such instructions will
result in a very much worse situation and will eventually produce a
disaster, a breakdown.
Senator Cur/Kiss. Do you believe it could be worse than it is?
Mr. MILLER. At the present (
Senator COIVZEN*. Yes.
Mr. MILLER. I think it might have been worse, though, if we had
had a price stabilization provision in the Federal reserve act. In
Senator COI'ZENS (interposing). You do not believe that anything
could have happened that could be worse than it is to-day, do you?
Mr. MILLER. XO, but I do not think for one minute, Senator—of
course, it could be worse, but it is bad enough.
Senator COUZENS. I understood you to say it could not be worse;
Mi*. MILLER. Well, I was talking in a rather relative and practical
Senator COUZENS. Of course. I am trying to get the opinion of ac
very powerful factor of the Federal Government.
Mr. MILLER. Yes. I will be frank; I think my position has been
developed at previous hearings, both in this room and elsewhere,
that if Hie Federal reserve system had been, we will say, 100 per
cent in its competency, the situation to-day might be materially
better than it is. I will say also that it is my opinion that if the
Federal reserve system had had such an instruction to experiment
with credit as is proposed in this bill, back in 1926, 1927, and 19285
the situation might have been and probably would have been materially worse to-day than it is.
Senator COUZENS. I asked Governor Meyer what lie thought of the
suggestion made by Mr. Wallace. You were sitting by and I assume
you heard it. Have you any opinion?
Mr. MILLER. Let me see: the suggestion of Mr. Wallace was to
increase the reserve balances of thk". member banks back to the 1927
Senator COTJZENS. 1927-28 level.
Mr. MILLER. I think it is meaningless.
Senator COUZENS. YOU think it is meaningless?
Mr. MILLER. Yes; there is nothing to it.
Senator COUZEKS. Assuming that it was, but
Mr. MILLER (interposing). The reserve balances will be up there
again within a month and you will see how meaningless the suggestion is. The Federal reserve banks are now buying securities at a
rapid rate. When they pay for these securities the proceeds find
their way into the member banks and increase their reserve balances
unless they are offset by retirements of bills and discounts at the reserve banks or by withdrawals of currency or gold. I will have a
chart inserted in the record showing the extent to which recent purchases of United States securities have increased the reserve balances
of member banks, which will soon be back to the 1927-28 level.



Senator COUZENS. YOU say they will?
Mr. MILLER. Yes.
Senator COTJZENS. Will they be maintainerl
Mr. MILLER. I am afraid they will.
Senator COUZENS. YOU are afraid?

tliere ?






Member BanK
Reserve Balances












U. S. Securities
Held b v F. R.BanKs














Mr. MILLER. I am afraid that they will; yes. That is, I am afraid
they will not be used.
Senator COUZENS. Why won't they be used, because there is no
demand for them?



Mr. MILLER. Well, ask the country. Ask the world what is the
trouble. We have had a breakdown in the economic organization of
the world that is the most colossal and stupendous in at least 100
years. The world has probably never been in such economic disorganization as it is to-day.
Senator COUZEN;>. What can we do to repair it, anybody do to
repair it?
Mr. MILLER. I would say exercise a little patience, a little forbearance. Have a little more faith in our recovery from this through
normal processes, and where we can, expedite those processes through
some sort of intervention.
Senator GOUZENS. Of course, that is a perfectly lovely theory for
those of us who are all well fed and housed and clothed. That is a
very comfortable feeling. But how about the rest that are not so
well olf ?
Mr. MILLER. They must be fed and clothed and even cheered by
those of us who still have a surplus. And they will be.
Senator COUZENS. Who can.
Mr. MILLER. And those of us who still have that have got to evidence a little more faith in the recovery of the country and also a
determination that when we once have recovered we will on the
whole behave somewhat better than we have in the not very remote
past. This is a bill to enforce a certain type of behavior on the
American economic system. If the system behaves we do not need it.
My belief is that this bill will not secure wise behavior. I think
there may be other methods by which we can secure a result approximating what I think lies back of the desire for this price stability
Senator COUZENS. YOU said the behavior was bad. What can we do
in a legislative way to make the behavior good?
Mi*. MILLER. I say for the time being keep hands off of the sick
patient and stay out of the sick room except to feed, and bathe and
keep the patient warm.
Senator BROOKHART. Let him die?
Mr. MILLER. He will not die.
Senator BLAINE. Who is the doctor that you will leave in charge
of the sick patient?
Mr. MILLER. Nature is doing her work. She must be our main
reliance. Let us not underestimate our recuperative powers. You
can interfere and meddle, but in my judgment with very little good
result. We are simply repeating our own history over again. We
have never had a breakdown that"has not surprised us, and our resort
inevitably is to what I call baby psychology. We take resort particularly to cheap money devices in the hope and even in the belief
that they will somehow or other wipe out mistakes, forgive debts,
and set us all in good shape for a forward movement.
Senator BLAINE. But, Mr. Miller, where are you going to find the
human power and the human energy and the labor to discharge
$203,000,000,000 of public and private debts?
Mr. MILLER. YOU will get the power to some extent when you get
recovery in this country, and you will get recovery in this country
the moment we begin to stop worrying about conditions and feeding
our imaginations and our minds with fear, anxiety, doubt, and de-



spair. That is the trouble to-day. I wish the debts were less, but
I know that our best chance of paying those debts is by resuming
activity in this country rather than by assuming a defeatist attitude,
saying that we can not pay them olf and that therefore we have got
to set the printing presses to work in order to pay these debts off
through the manufacture of dishonest dollars. That is no Tsolution.
Senator BLAINE. And doesn't your solution mean the slow process
of an agonizing bankruptcy over a long number of years ?
Mr. MILLER. I think not, Senator. I may be the last optimist that
is left in the United States to-day. I was the first pessimist in 1925,
1926, 1927. 1928, and 1929.
Senator BROOKHART. HOW about 1920 and 1921?
Mr. MILLER. 1920 and 1921, Senator, is to mjr mind an episode that
does not particularly explain anything.
Senator BROOKHART. That followed the deflation policy, did it
Mr. MILLER. NO; it did not. 1 say that, even though I myself
•in a conference that I think you have frequently alluded to, spoke
of the aburdity of using the word " deflation '- or talking about
•.deflation in that situation.
Senator BROOKITART. The Federal Reserve Board in its meeting
on May 18 certainly talked about it. It did not talk about anything
Mr. MILLER. The error that the Federal Reserve Board made at
that tinie. Senator, was in not keeping out of the situation and letting
nature take its course.
Senator BROOKHART. YOU talk about the dishonest dollar. I want
to ask you a little about that. Is it not true that the man who contracted a debt four or five years ago, if lie would come to pay it
now he would have to use two or three times as much of most any
commodity to pay his debt as he would when it was contracted?
Mr. MILLER. He might.
Senator BROOKHART. Isn't that a fact?
Mr. MILLER. Yes, sir.
Senator BROOKHART. Well,

isn't the dollar that measures his contract when lie makes it different from the dollar that measures it
when ho comes to pay it, and is that a dishonest dollar?
Mr. MILLER. If it is a dishonest dollar it has become so with no
bad intention on anybody's part. When I use the word u dishonest "
I mean that there is an intention. When the dollar depreciates as
a, result of a great concert of conditions, some of which are controllable perhaps, but most of which are noncontrollable, is not in my
judgment dishonest. It may be a very injurious dollar. It may
be one that has very fatal repercussions in the economic system.
Senator COUZENS" The effect is the same, is it not, though?
Mr. MILLER. NO ; I think not.
Senator OOUZEXS. Well, the effect is the same
Mr. MILLER (interposing). No.
Senator COTTZEXS. But there may be variations of the same effect?
Mr. MILLER. NO, no. I should say there is no more reason for
calling the effect the same than there is for saying it is the same
thing for a man to be killed by a stroke of lightning or to be murdered by the gun of some dishonest person.



Senator COUZENS. The effect on him would be practically the
same ?
Mr. MILLER. SO far as he is concerned the injury is the same.
So far as society is concerned there is a great difference.
Senator COUZENS. Yes; but he is dead just the same. So is the
debtor just as dead, whether he has a dishonest dollar
Mr. MILLER. Yes, yes.
Senator COUZENS. Or some unseen power
Mr. MILLER. Yes.
Senator COUZENS. Takes his ability away?
Mr. MILLER. Yes.
Senator FLETCHER. Where is there anything

of bad faith or injustice or improper conduct when the farmer, for instance, contracted
his debt with 1 bushel of wheat at a dollar, and now when he comes
to pay it he has to take -i bushels of wheat? Is there any reason
why the dollar should not be stabilized somewhere near where the
dollar was when he made his contract?
Mr. MILLER. The only way I know of improving prices is through
a restoration of markets, oif consumption. That would indicate a
more useful and healthy situation in the world at large. This device
can not improve conditions.
Senator FLETCHER. Why not take the average of commodity prices?
Mr. MILLER. It does not mean anything.
Senator FLETCHER. From 1922 to 1932?
Mr. MILLER. The average of commodity prices does not mean anything.
It. is merely a metaphysical concept, something that has been
iiiATented by economists. It has no counterpart in actuality—it can
not be traded in, bought, or sold. It is purely a figment of the mind.
Senator BROOKIIART. DO you think it is imaginary altogether and
not real?
Mr. MILLER. The price level concept is wholly metaphysical. It is
a statistical summation of the movements of an infinite variety of
commodities in a vast number of markets scattered over the face of
the world.
Senator BROOKIIART. Isn't that what gives it its soundness and its
value, the fact that it averages up everything?
Mr. MILLER. Not as a method of insuring that the price of cotton
or the price of wheat or of hogs or of ingots or copper will be satisfactory to the producers of those commodities or help them pay
their debts.
Senator BROOKIIART. Supposing under this third section of Senator Fletcher's bill that a billion dollars of Treasury notes were
issued to the Farm Board, the Farm Board required to bid the
cost of production price for those, to where you would say it would
give it $1.35 a bushel value for wheat and* 18 cents a pound for
cotton. Would that price rise to that level?
Mr. MILLER. Why, obviously.
Senator BROOKHART. Yes.
Mr. MILLER. Obviously, if somebody goes and buys.
Senator BROOKIIART. And wouldn't the issue of a billion dollars
of Treasury notes to buy them help to keep the price up ?
Mr. MILLER. I doubt whether it would.



Senator BROOKHART. If we would issue enough more to pay the
soldiers' bonus and relieve unemployed labor, it would raise these
prices, would it not?
Mr. MILLER. Senator, did it ever occur to you that it takes two to
issue currency? The Federal Reserve alone can not increase the
currency of the country.
Senator BROOKHAKT. I am talking about giving authority.
Mr. MILLER. Then who is going to take the currency when it is
issued ?
Senator BROOKIIART. The soldiers would take it if we pay the
Mr. MILLER. Ah, yes. If you want to give it away, then well and
Senator BROOKHART. Of course, we by law have already declared
we owe it to them.
Mr. MILLER. All right; if that is what this proposition means then
it is a different measure from what I have assumed. It lias not been
my understanding that this measure authorizes a free distribution
of currency or that the Federal reserve system is to be turned into
a town pump.
Senator BROOKHART. NOW, the national income, as a witness said
before this committee, I believe, was $60,000,000,000 last year in the
United States.
Mr. MirLER. I did not get that.
Senator BROOKHART. The national income was $00,000,000,000.
That would be $2,500 for each average family, about that. It was
$71,000,000,000 in 1930, and it ran $85,000,000,000 or more in the
prosperous years. Isn't that enough national income now to end thi*
depression if we had it distributed out to all the people?
Mr. MTLLER. Well, I think most people who have not got very
much income would feel so, yes.
Senator BROOKHART. That is most of the people of the United
Mr. MILLER. Yes.
Senator BLAINE, Mr.

Miller, wherein is there dishonesty or villainy in paying a debt with a dollar of the same purchasing value as
the dollar received when the debt was incurred? Is there any dishonesty or villainy in that?
Mr. MILLER. I do not say there is villainy in it, no.
Senator BLAINE. NO ; certainly not.
Mr. MILLER. N O ; but I say that it is mischievous in its probable
Senator BLAINE. That implies villainy and dishonesty.
Mr. MILLER. Well, I say frankly that in the discussion of questions
of this character I am much concerned with the quality of the motive.
I think one of the primary mistakes that is made in most economic
thinking of a practical character is that too much attention is paid
to.the equity aspects of our problem and too little to the general
economic consequences, possible injuries or benefits which may result
from policies we adopt. A resumption of economic activity that
would increase our national production income by an amount equal
to $10,000,000,000 or $15,000,000,000. as it easily might, would change
the whole aspect of the balance sheets of thousands of distressed busi-



ness concerns and debtors. The way to pay debts is to resume
business and production.
Senator BLAINE. Well, then, Mr. Miller, you ought not to characterize the dollar I have described as a dishonest dollar.
Mr. MILLER. What dollar did I describe as dishonest?
Senator BROOKHART. The one proposed in this bill, I understood.
Senator BLAINE. Yes; you said that it would be a dishonest dollar.
Mr. MILLER. Well, I would like to see the record to know in what
connection I used it. If you think it embarasses the inquiry, I withdraw the description.
Senator BLAINE. DO you think that the Goldsborough or Fletcher
bill involves dishonest dollars or the creation of them?
Mr. MILLER. N O ; I do not.

one other question. Doctor: Don't you
think a countrv like the United States, that has a national income
of $60,000,000,000 to $1)0,000,000,000, owes a job to every may who
wants to work at a living wage?
Mr. MILLER. YOU are going beyond this bill. If you want to
ask me that in my private
Senator BROOKIIART (interposing). No: I am not going into your
conception of the question.
Mr. MILLER. In my capacity as a private citizen, I would say, no.
But I do think that a social system that fails to provide such apportunity under most conditions requires some attention and improvement.
Senator BROOKIIART. But it is really not under any obligation to
these men ?
Mr. MILLER. I do not feel that, because we are in difficulties and
have a large volume of unemployed in this country, it is necessary
to turn to socialism or paternalism. I say there are other far more
effective solutions.
Senator BROOKIIART. We have something what you would call
very socialistic elements in our Government anyway, haven't we?
Take the public school system: Would you not call that a socialistic
institution ?
Mr. MILLER. NO ; I would not.
Senator BROOKHART. It is run by the Government altogether,
government of the States mainly?
Mr. MILLER. Yes.
Senator BROOKHART. Take the post-office system.
Mr. MILLER. Yes.
Senator BROOKHART. That is socialistic completely,
Mr. MILLER. Yes.
Senator BROOKIIART. And the public road system?
Mr. MILLER. Yes.
Senator BROOKIIART. It is entirely socialistic ?
Mr. MILLER. Yes.
Senator BROOKHART. SO calling a thing socialistic

isn't it?

does not disgrace it in the United States?
Mr. MILLER. It does not disturb me to have a thing called or miscalled by any name. I think the important thing is that our American svstem of free enterprises has on the whole



Senator BROOKHART (interposing). You said if this money were
issued and it were distributed out to the people, why. then it would
restore these price levels.
Mr. MILLER. NO; I have not said that. No; I have not said it
would restore price levels.
Senator BROOKHART. Well, you said it would restore prosperity or
Mr. MILLER. I think

What was it you said?
I said the only proper way to get money out
was to put it out to somebody who will set it to work. It takes two
to issue currency from the Federal reserve. The Federal reserve
alone can not do it.
Senator BROOKTIART. But here are 7,000,000 men unemployed
in the United States, and I feel we owe them a job. Now you don't
quite go that far, but yet almost that far, too. Is it not a matter of
getting them out to use this money to provide public work so they can
have employment?
Mr. MILLER. Well, that is beside the point of this bill and of this
inquiry, I think.
Senator BROOKTIART. Would that not put this money in circulation
in a way that would make this bill effective?
Mr. MILLER. I think on the whole it would be a procedure that
would be prejudicial in the course of six months or a year to the best
interests of the classes which are intended to be the beneficiaries of
the measure.
Senator BROOKHART. Supposing we keep it up year after year and
make it a permanent policy?
Mr. MILLER. YOU will get to where Germany was in 1923.
Senator BROOKHART. YOU do not think, then, that $60,000,000,000
of national income would sustain these people?
Mr. MILLER. Yes; I do. I do, Senator. I do. I do.
Senator BROOKHART. Then how could we get to where Germany
was when she had almost no income at all?
Mr. MILLER. She also had her productive resources, her industrious people, and her plant facilities.
Senator BROOKHART. Very slight compared to our 60 billion.
Mr. MILLER. Her needs were much slighter, her standard of living
much lower. It is a dangerous thing to tamper with an economic
and business system that is a going concern and that on the whole
has the sanction of experience and history. When you begin to
tinker with one aspect of it you set up repercussions that you may
not discover until you have gone some considerable distance.
Senator BROOKHART. Well, now, look at this system that you say
it would be dangerous to fool with. Didn't we have inflation under
this system in 1928 and 1929 that was beyond all human reason, and
didn't we have then the panic that was the greatest in the history
of the world?
Mr. MILLER. Yes.



Senator BROOKHART. And haven't we had eight major depressions
in the United States in the last 50 years ?
Mr. MILLER. Yes; I think so.
Senator BROOKHART. And according to Colonel Ayers's chart wTe
have not spent 30 minutes in a normal line in the whole 50 years ?



Mr. MILLER. There is no normal. That is one of the concepts I
complain of. It is a fiction.
Senator Brookhart. I agree that there is none and there ought
to be one.
Mr. MILLER. The idea of normal is a mere assumption of what
ought to he.
Senator ELAINE. Mr. Miller, getting back to this bill: The purpose
of this bill is to restore the purchasing power of the American
to what is assumed to be—I am not going to use the word u normal "—
but average. Now, the American people and the- American (lovemmeiit contracted debts upon that average basis.
Mr. MILLER. Yes.
Senator BLAINE. Mr.

Meyer described our country's relationshipto the world respecting; our production and respecting world markets.
I appreciate that description. But this question of debts is not a
question of world debt with us. Comparatively speaking, the debt
owing America is small in relation to the 203 billion, as I suggested,
that is the debt obligation of the governments and of the people of
America. Now. that is something domestic. That has no relation
except in a very small decree to world affairs. How do you propose
to have, this $203,000,000,000 obligation discharged ?
Mr. MILLER. I told you by a restoration of the good functioning
of our economic system where people, outside of certain very hard-hit
areas of industry, notably certain raw material and agricultural
areas in 1024. 1925, 1926, and 1927 functioned effectively.
Senator BLATNE. Your rural properties were affected the same;
your urban properties were affected the same.
Mr. MILLER. Yes; all right.
Senator BLAINE. I am not speaking of agriculture alone.
Mr. MILLER. Let me interrupt. Senator. To my mind, if we were
really going to go into a methodical inquiry here
Senator BLAINE. Exactly.
Mr. MILLER. The primary question I would ask is: Why are prices
down ? Why are they down ? Why were they up ? Why were they
higher four or five years ago than they are to-day? Has there been
anything to account for the changes in Federal reserve policy? Have
they been due to a lack of Federal reserve credit? What are the
causes ? I expect to see these prices eventually find their levels. Mr.
Goldenweisei\ I would like to show that large chart of wholesale
prices. I don't know now what that future level will bo. I don't
know what it will be. It may be the 1926 level. It may be below:
it may be above.
Senator BLAINE. But. Mr. Miller, pardon the interruption, but the
price level ought to be restored to that price level that existed when
these debts were contracted, so that the debtor class could pay the
creditor class in identically the same character of dollar as to purchasing value?
Mr. MILLER. Of course
Senator BLAINE. That is the price level we should approach, is it
Mr. MILLER. Well, of course, at that point
Senator BLAINE (interposing). Theoretically that is the level?
Mr. MILLER. N O : I do not



Senator BLATXE (interposing). And in practice we ought to attain
it if possible?
Mr. MILLER. NO ; I would take fundamental issue with you there.
And let me say at this point, parenthetically for the record that I
reject the whoie theory of money and prices upon which these particular measures for central or reserve bank operation are based.
I think the quantity theory of money proceeds from a faulty, unduly
simplified reading of known economic history in relation to the
known functioning of credit, of economic conditions and of the relation of credit to prices, of business activity to prices, and of prices
to business activity.
Senator ELAINE. That might all be true if we did not have this
enormous debt, but this debt has to be discharged. It can be discharged in one of two ways, by restoring the purchasing power of
the people to that which it was at the time, or substantially the time,
when the debt was incurred. That would involve what you characterize as an honest dollar, I assume. That is one method by which
we can discharge these debts. The other method would be by a slow,
agonizing process of gradual bankruptcy.
Mr. MILLER. YOU are a defeatist.
Senator ELAINE. NO.
Mr. MILLER. YOU are a defeatist, Senator.
Senator ELAINE. NOW, is there any other method?
Mr. MILLER. Why, I maintain that no one on God's earth can tell
at this time. Until we get back into a condition of more usual
activities or at least get sufficiently far out of the present muck and
mire that we are wallowing in, no one can say what price level
we may expect.
Senator ELAINE. YOU are making me a pessimist. I have been an
Mr. MILLER. Yes.
Senator ELAINE. But

isn't there human ingenuity, isn't there sufficient brains in the public of the United States, to work out the
solution of how we are going to pay these debts ?
Mr. MILLER. Well, I should say that if these debts are going to
be paid—and I think most of them not only can be paid but will
be paid—it will be through the gradual restoration of a more normal, healthy, active condition of production and distribution, of
sales, of consumption, and of purchases in this country.
Senator BLATNE. And that involves the restoration of the purchasing power, doesn't it?
Mr. MILLER. NO, sir.
Senator ELAINE. In

order to be equivalent to the purchasing

power of the dollar
Senator BLAINE.

When the debt was incurred or approximately
Mr. MILLER. Whether the 1926 price level will be restored or not,
or how far it will be restored, I do not know. Nature will have more
to say about that than the Congress of the United States or the
Federal Reserve Board. In the long run the play of economic
forces acting in this country and over the face of the whole world
determines these things.



Senator ELAINE. That would be the equitable thing to do if possible, would it not?
Mr. MILLER. I am not concerned about equities. I feel it is a
foolish waste of time to be talking about them.
Senator ELAINE. Well, I have heard
Mr. MILLER (interposing). I have had losses, Senator, in the last
two or three years, in vestments that were wiped out. I am not dreaming and repining and paralyzing myself through thinking of those
losses. Bather I am looking forward to conditions under which the
country will function again and where we will individually know,
each and all of us, where we are at.
Senator ELAINE. Mr. Miller, I did not mean to use a personal
illustration, but you having used it—you are not in hunger?

are not without clothes?
are not without shelter?

are not burdened with an obligation that is
so tremendous that you can never discharge it ?
Mr. MILLER. NO ; but I happen——
Senator ELAINE (interposing). Then your illustration is not a
very apt one.
Mr. MILLER. I happen, Senator, to be in the very unpleasant position of being a holder of obligations of farmers that are long since
overdue. So far as I am concerned, if, when we come out of this
situation, it is pretty clearly evident that these farmers can not pay
their debts, I do not expect to collect them, or collect more than can
reasonably be paid. That form of readjustment of debts is going
on now.
Senator BROOKI-IART. That is bankruptcy.
Senator ELAINE. Who is going to operate those forms when they
can not pay ?
Mr. MILLER. They will be operated by the very same men that
are on them, that is, if they are worth operating. If they are not
worth operating, there is no reason why they should be "operated.
Senator ELAINE. They will be operated by the tenants ?
Mr. MILLER. Perhaps so.
Senator ELAINE. Yes. The owners will be the tenants. Now that
is the patriotic thing and that is the main thing that we ought to
avoid in this country if possible, and we ought to relieve this tremendous distress of hunger and lack of shelter and food for the
millions of people.
Mr. MILLER. I think you overlook the fact that in the majority
of cases no one particularly likes to be a creditor, particularly a
personal creditor of an embarrassed producer, the farmer particularly.
Senator ELAINE. Oh, if it is an industrial institution it is. the same
Mr. MILLER. All right,
Senator ELAINE. The railroads are identically the same.
Mr. MILLER. All right.



Senator ELAINE. The railroads if they were sold to-day and if
there were a purchaser willing, able and anxious to buy, would not
bring the amount of bonded indebtedness against them,
Mr. MILLER. That is true.
Senator BLALNE. Isn't that true?
Mr. MILLER. That is true in cases.
Senator ELAINE. That is true of agriculture, as a whole I am
speaking of.
Mr. MILLER. Yes. But you lake the conditions to-day as representative of what is to be expected of America. I do not.
Senator BROOKHART. It is what we got as a result of all this.
Mr. MILLER. It is what we got, but I say again that that is a
defeatist attitude,
Senator BROOKHART. Defeatist—that is the attitude of the administration of the Federal reserve system and the Federal banking
Mi*. MILLER. I beg your pardon.
Senator BROOKHART. That is what we got out of the whole thing.
Mr. MILLER. I can't speak as to the Federal reserve system, but as
to the rest I do not
Senator BROOKIIART (interposing). In 1920 the Federal reserve
system, and 1910, put on an inflation policy. I have seen many letters from the Federal reserve banks all the way from Cleveland to
California encouraging the bankers to come in and rediscount paper
and borrow more money, and then in the fall of 1919 and May 18,
1920, they turned around and were going to contract those loans and
did. Out in Iowa I heard the representative of the Federal reserve
bank in Chicago call up for $55,000,000.
Mr. MILLER. Let us assume that that is all true. Senator
Senator BROOKHART. And following that we had the biggest panic
of farm prices we have had in all the history of agriculture.

And I think the Federal reserve administration had more to do with it than all other causes combined, and agriculture has never as a whole revived or anything like it since 1920.
Mr. MILLER. Well, of course, I differ from you there in toto. Let
us assume that all that you say about the Federal reserve banks and
board is true except your concluding statement that the Federal reserve system had more to do with the break in prices than any other
one thing. I would say it had less to do with it than any one other
Senator BROOKHART. There is one Iowa Congressman whose bank
called him in, and he was feeding ten or twelve hundred head of cattle, most prosperous man in his county, and said to him, " The Federal reserve is demanding a reduction in your lines "—and they demanded it. I heard them make it at Ottumwa, Iowa, myself. And
he said," My stuff is not ready to go." " Well," they said, " you have
16.000 of.Liberty bonds." "Well," he said, " I did not buy those to
sell. I bought them for my family." "Well, but," they said, "the
Federal reserve is demanding this reduction." And he was forced to
sell those Liberty bonds at 87 cents on the dollar.
Now, a lot of farmers did not have bonds to meet that demand, and
they forced them to dump their livestock and their grain and everything into the market.



Mr. MILLER. Into what kind of a market did they dump them?
Senator BROOKHART. Into the worst kind of a market that we
ever had.
Mr. MILLER. Exactly; there was no market.
Senator BROOKHART. The fall of the year, when the market is always oversold, all this killing occurred.
Mr. MILLER. Yes.

And it would produce a imnic this year or
any year if it were done; the same action of the Federal reserve
system would produce a panic any year in the farmers.
Mr. MILLER. I am afraid not. I am afraid that 1920 is a peculiarly bad illustration. The world was broken. It could not consume. It could not buy.
Senator BROOKHART. The United States had at the beginning of
the war paid over $5,000,000,000 of debts that it owed to foreign
countries. It collected enough other Avar profits to lend $11,000,000,000 of Government money, and private parties had collected
enough war profits to lend about five or six billions more, and the
national debt cut no figure in taxes before of war profits. Colonel
Avers himself figures out the United States a heavy profiteer out of
the war, and therefore there was no occasion for the United States
being in this world depression, and with $60,000,000,000 to $90,000,000,000 national income there is no occasion for it now but bad management.
Mr. MILLER. I think so, too. I agree with you on the fact that
we have had bad management and abuse of the economic system.
Senator ELAINE. But specifically, what is the objective of the Federal Reserve Board in going into the open market and purchasing
the Government securities? I do not mean the board does it. I
mean the system. What is the objective, specifically?
Mr. MILLER. Well, of course, Senator, probably every member of
the board and every governor of the reserve banks would answer that
question a little bit differently.
Senator BLAINE. I would like to have your specific answer.
Mr. MILLER. I would say from my point of view the objective is to
see whether, through providing an ampler cushion of surplus reserves
in the hands of member banks, we may not contribute to altering
the attitude of these banks toward customers or whether we may not
produce a change in psychology and possibly lead business men to
take a more expectant attitude toward the future, so that where there
is good credit they will borrow and begin to increase their production
schedule and reemploy their labor. Now I go further in that statement than probably some of my colleagues would, possibly not further than they might in thought, but further than they would think
it was prudent to say. You see, I am not afraid to
Senator BLAINE (interposing). Yes. Now you have elaborated,
Mr. Miller, I would assume that specifically the objective is to provide for an expanded credit and thus
Mr. MILLER (interposing). Provide a basis for it.
Senator BLAISE. Yes; and thus an expanded currency. I do not
mean in national bank notes, but substituted currency such as checks,
bills of acceptance, and all those substituted forms of credit.




Senator BLAINE. That are used in industrial and commercial transactions.
Mr. MILLER. Yes. When I used the term " credit"
Senator BLAIXE (interposing). The objective is, then, more expansion. I will not say " inflation," because you object to that, or Mr.
Meyer did.
Mr. MILLER. NO ; I do not object to it.
Senator BLAINE. Well, I am glad to hear that.
Mr. MILLER. Let me interrupt there, Senator. The trouble is you
can not get any inflation at the present time. It takes two to inflate.
You might as well talk of heating up a room by putting a scuttle
of coal into a coal stove. It does nothing. You have got to ignite
it. The fire has got to burn. You have a perfectly frozen attitude
of mind on the part of the people of this country to-day. They
will not adventure. They are holding back. They are pulling into
their holes.
Senator FLETCHER. Suppose you put that money to use by going
on with this construction work that lias been offered them by Congress? Wouldn't that help?
Mr. MILLER. If any committee of Congress wants to hear me on
that subject any time I will be very glad to come, Senator, but
if that is the purpose of this bill it has not been disclosed.
Senator FLETCHER. Jfo; but here you say that this does not go
far enough; provides
for currency, but you can not have any speculation unless 3Tou nse_ that currency. Now, suppose we provide a
method for using it. We are considering that; putting it to use.
Mr. MILLER. Yes.

By going on with this construction that has
been authorized.
Mr. MILLER. Yes. Well, the Federal reserve is considering an
alternative method, and it bases its position upon this: There is
pretty fair evidence in our previous experience that sooner or later
the accumulation of surplus money in the hands of banks makes
them less resistant to the forces of anxiety and fear than they are
when they are sailing pretty close to the reef with reserves at or
very close to a minimum. In brief, that sooner or later the reduction of open-market interest rates will lead bankers to look around
and say, Well, here; maybe this bond is not so bad after all. You
see ? That it will provide a
Senator BLAINE (interposing). A new industry possibly or an
expanded industry ?
Mr. MILLER. Well, yes. We are not short, Senator, of capital in
this country. God bless us, we have got too much. That is one
of our troubles. We have got capital equipment, plant and distributing facilities here for a country of one hundred and fifty or one
hundred and sixty million consumers without the consumers. You
may find that, after these reserve-bank operations, municipalities
will be able to borrow on better terms. There has been some indication of that already. And, while I have no desire to divert attention to what might be called the incidental aspects of this bill, it
is true that if Congress should pass the Goldsborough bill you would
at once begin to hear. " Well, what of it? " What is the American
dollar going to do ? What are the things that might possibly happen
under a jriece of legislation of this kind? Ordinarily the' investor



is pretty cautious, except in times of piping inflation, when he ought
to be prudent. He tries to be cautious at any rate. In a time like
this he is in the grip of complete despair, complete.
Senator BLAINE. Well, then your specilic objective is to ignite this
scuttle full of coal in the furnace through a process of
Mr. MILLER (interposing). If we throw some fuel and kindling
in the furnace we may find in time, as the country returns to a more
normal condition of mind, that it will be easier for the banks to
ignite the fire and set it going.
Senator BLAINE. What are the factors that you take into consideration in determining the amount of fuel and kindling that is
required ?
Mr. MILLER. We are guided by effects. We do not want to overfeed. This is in the nature of a process of—you can describe it as
you want. I happen to use the figure of a coal stove.
Senator BLAINE. Yes.
Mr.. MILLER. YOU do not want to overload your firebox with coal.
Others describe it as a process of forced feeding. You don't want
to feed until your patient begins to spit up his food. You don't
in oilier words, what is sometimes technically described as
sloppy " money conditions. That in itself is disturbing. Our position is like that of the doctor who is alimenting a patient who, he
feels, may not be far removed, from the point of convalescence. He
will give him so many grains of this, that, or the other tonic to-day
and watch its effect: perhaps to-morrow he will hold off for two or
three days. I think it is a well established principle in therapeutics
that in all forms of artificial feeding, whether it is accomplished
through chemical injection into the veinous system or otherwise, it
is necessary to lay off from time to time. Even wise practitioners
in administering cod-liver oil through the stomach will lay off at
the end of the month.
Senator FLETCHER. IS then? any objection to making this power
that you are exercising permanent?
Mr. MILLER. Well, it is permanent. We have got it.
Senator FLETCHER. YOU have sot it for one year under the GlassSteagall bill.
Mr. MILLER. Oh, that is what you refer to. Well, I would say
that that consideration is premature, Senator. A year is sometimes a very short period, sometimes a very long one. I do not
know what the situation will be at the end of this year, but I feel
reasonably certain that if we still have a condition that needs, let us
say, the infusion of Federal reserve credit by continuing the enlarged
facilities of section 3 of the Glass-Stegall Act, the provision will be
Senator FLETCHER. Instead of leaving the power entirely in the
discretion of the Federal Reserve Board why not put it in the law
and make it permanent?
Mr. MILLER. My answer to that is that " Those who dance 'must
pay the fiddler." That is what we are doing in the United
in a measure to-day—in a measure. Usually the surest wray to insure
that there will be periods of crises, liquidation, and what we nowadays call deflation, is to provide a large basis for an antecedent



Senator BROOKHART. YOU think up and down gamble is inevitable %
Mr. MILLER. N O ; I do not. No; I do not, Senator. If I did, I
would vacate my seat on the Federal Reserve Board to-morrow. I
would have done it long ago. If I thought
it was inevitable, I should
certainly not want to fiddle away 11137 time.
Senator BROOKHART. I t has been worse since we have had Federal
reserve banking system than it ever was before.
Mr. MILLER. Well, you have had the Federal reserve banking system established since 1914.
Senator BROOKHART. And had two panics.
Mr. MILLER. In the midst of what I think the historian of the
future, and the not distant future, will properly describe as one of
the epochal crises of the world. I do not think we know in this
country as yet what has happened. 1 certainly know that Europe
does not know what has happened to it. and what is more, what is
going to happen to it.
Senator BROOKHART. We know the war happened to Europe, but
we were profiteers out of the war and it did not happen to us in the
same way.
Mr. MILLER. Yes; I know. Before long we will begin to see that
the war itself, the very outbreak of the war, was symptomatic of a
breakdown of an unstable economic and political equilibrium, and
that Germany was the first one that thought she could fight her
way out of an impossible situation. Europe for a generation has
been in a Aery delicately pivoted position. America has been crowding her more and more and more. It would take a wise and farsighted man to project the horoscope of Europe for the next 10
years. My own belief is that one could hardly overpaint the drab
picture, tlie drab realities, that Europe will be confronted with before
it becomes possible to work out some sort of a situation under which,
with their overcrowded lands, they can support their increasing
population with at least a modicum of decency and comfort.
Senator BROOKHART. With $60,000,000,000 of national income we
ought to be in comfortable condition regardless of what happened to
Mr. MILLER. NO doubt we could if that was our resolution.
The CHAIRMAN. There are just a couple of matters I would like
to have you clear up here. I am not so sure that I get the line you
draw between nature taking its course and Government agencies stepping in.
For instance, a good deal has been said about the bad market condition, and that it is inevitable and that neither the cause nor the
remedy is Government, as I deduct it from your statement. But I
have in mind especially when the War Finance Corporation was reestablished for the purpose of extending credit, we had a very bad
market situation, and I conferred with Mr. Meyer at that time and
our Governor of the Federal Reserve Board. He told me that he felt
that our market was especially bad owing to the crowding of collections by the banks, and he assured us if we could extend some credit
through that section that it would immediately be reflected in the
markets, and Congress proceeded on that theory. Certain credits
were extended and the market reflected it. So since that, it has been
increasingly difficult for me to determine where nature takes its
course and where some one interferes with the law of nature.



Mr. MILLER. It can not be predetermined. Senator. When yon can
intervene so us to assist nature where she is working in your direction, the wise man will intervene. Sometimes he ha.s got to intervene
on a chance. The Federal reserve is not acting now on a certainty.
If it were acting on a certainty, the action would not be needed.
The results we desire would como -about of themselves. For the
most part credit makes itself. For the most part prices make themselves. Business makes credit far more than credit makes business.
All of these el oments are constantly interacting upon one another
and thus govern the activity of business, the volume of credit, and
the movement of prices. But when you have disorganized conditions
such as you have at present, where nature is not fully functioning,
credit and prices do not jveees^u'ily make themselves. After all,
the nature with which we. deal in economics is human nature, and
a part of human nature is the emotional background, sometimes
overstimuJated by the hope and expectation of gain: and at other
times frightened and paralyzed to the point of despair by fear of
loss and ruin.
Senator BROOK HART, Weil, I take it that you are not putting so
much emphasis on that nature will remedy this system unaided as
I thought you did from your remarks.
Mr. MILLER. I still maintain. Senator, that, in what we economists
call the " long run," nature is the most powerful factor.
The CHAIRMAN. The most powerful, yes.
Mr. MILLER, Just as she is in human nature.
The CHAIRMAN. But a generation may go by before the full force
and effect of it is felt.
Mr. MILLER. I do not think we have had that experience. A generation is pretty long, even from the point of view of nature.
The CHAIRMAN. When you spoke about nature taking its
Mr. MILLER (interposing). Oh. no.
The CHAIRMAN. I was really wondering why you were borrowing
this $100,000,000 a week.
Mr. MILLER. NO, no.
The CHAIRMAN. Whether

you were letting nature take its course
or where you wore interfering with nature.
Mr. MILLER, On the contrary. I hope you do not misunderstand
my position there. We are trying to assist nature but I do not think
that this assistance alone will accomplish results any more than I
think it is possible to make the weather change by manipulating the
The CHAIRMAN. Then you would feel that what you are doing is
entirely futile?
Mr. MILLER. N O ; I do not.

feel that manipulating the barometer
would not have any effect on the weather, would you not?
Mr. MILLER. It might lead to certain impressions on somebody
who looks at the barometer.
The CHAIRMAN. In other words, you think prosperity can be restored by fooling them, by making them think that the barometer is
something other than what it is?
Mr. MILLER. NO. I think our present operations are based on
more substantial grounds than that. I do think, however, that per-



liaps you a re attempting to do something' like that in your bill when
you try to make prices register something other than real conditions.
This bill assumes a fooFs paradise. Conditions are not as subject
to simple manipulation as this bill assumes.
The CHAIRMAN. YOU mean by that the bill before this committee ?
Mr. MILLER. Yes. I am speaking of that bill and other proposals
framed in the same general philosophy.
The CHAIRMAN. I have not made any deep study of this matter,
Mr. Millor. We are trying to get information here.


The CHAIRMAX. And get the views of experts on the bill. Senators have asked questions, and Congressman Goklsborough is here, a
member of the Banking Committee of the House of Representatives,
and I desire to ask him whether he desires to ask any questions.
Representative GOLDSBOROUGTI. There are two or three inquiries I
would like to make, Mr. Chairman.
The CHAIRMAN. If there are no objections, you may proceed.
Representative GOLDSBOROUGI-I. Mr. Miller, you agree that under
this bill the powers of the Federal reserve system would be curtailed rather than expanded, do you not?
Mr. MILLER. NO. YOU are talking of which bill?
Rej>resentative GOLDSBOROUGH. They are both the same so far as
the present inquiry is concerned.
Mr. MILLER. Then I assume you are speaking without regard to
section 3, which I think is included in Senator Fletcher's bill.
Representative GOLDSBOROUGH. Section o is in the Glass-Steagall
bill for one. year, and of course if section o is not adopted at present
the Glass-Steagall bill will have to be extended, but the purpose of
the two bills and the language of the two bills in so far as their
declaration is concerned and imposition of duty, are identical.


Representative GOLDSBOROUGH. NOW, you would have under these
bills your activities directed toward a certain focal point, would you
Mr. MILLED. Yes.
Representative GOLDSBOROUGH.

And now they are directed only
in accordance with the judgment and discretion of the Federal Reserve Board. Therefore, these bills would act as a limitation of
power rather than as an extension of power?
Mr. MILLER. I would say a limitation of discretion. When I use
the term u power " I mean the term " legal power."
Representative GOLDSBOROUGTI. "Well, both Governor Meyer and
yourself have testified this morning that the purchases of Government securities would depend altogether on varying conditions from
time to time.
Mr. MILLER. Much.
Representative GOLDSBOBOUGH. Much—and that, therefore, the
banks, the commercial banks and the public, could have no advance
information under the present law as to where you were going before
you stopped?
Mr. MILLER. Before we knew where we were going to stop.
Representative GOLDSBOROUGH. Correct.
Mr. MILLER. In other words



Representative GoLnsr.ououGH (interposing). Now I want to call
your attention to this, that I have not received word from any commercial banker in the United States who is not also engaged in the
purchase and sale of securities who was not in favor of this legislation.
Mr. MILLER. I think that is true. I think that is unfortunately
too true,
Representative (J-OLDSBOROUGI-I. Now they say their reason is this,
that at present the Federal reserve system may buy a hundred million
this week, but they do not know what the Federal reserve system is
going to do the next week or the week after; but if this legislation
is passed all they would have to do would be to watch the index
number of the Bureau of Labor Statistics and they would know that
the Federal reserve system had to pursue this policy until a certain
definite point is reached and that that would steadily and completely
reassure them that they would resume business immediately. That
is what they say.
Mr. MILLER. All I can say is that there is something pathetic about
that attitude, and I don't wonder that you get that response from
traders of the kind we have produced in great numbers in this country in recent years. That is just about, I should say, a fair measure
of their intelligence and public interest. They want everything
nailed down and certain except themselves.
Representative GoLnsBORorGi-i. Now, Mr. Miller, in the hearings
before the Banking and Currency Committee of the House in 1928
you pleaded very definitely, as I remember it, that you had not always been in accord with the policy of the Federal Reserve Board, a
majority of the Federal Reserve Board, and you also said that one
difficulty the board had was the fact that the Secretary of the Treasury had an undue influence in your judgment upon its actions. Do
you remember that statement?
Mr. MILLER. Yes; I think I do. I think that was in reply to a
question from Mr. Steagall.
Representative GOLDSBOROTTGH. Are you still of the same opinion?
Mr. MILLER. I think the Glass bill contains what I shall say is a
wise provision with respect to that situation. I say that, let me say,
because people are very sensitive about the relation of the Treasury
to the Federal reserve system.
Representative GOLDSBOROTTGH. I do not want to embarrass you
with any questions.
Mr. MILLER. I just want to say that in making that statement I
have not in mind even in the slightest degree the present Secretary
of the Treasury. I would add that his relation with the Federal Reserve Board has been exemplary, and if we counted upon his future
as judged by the past, there would be little or nothing to criticize.
Representative GOLDSBOROTTGH. Of course, the present Secretary of
the Treasury was not Secretary at the time that this depression
Now, I have listened with a great deal of interest to what you said
this morning, and I have here a speech made by the Secretary of the
Treasury on April 25, 1932, delivered before the Associated Press at
the Waldorf-Astoria Hotel in New York. He is speaking in defense



of the board's policy of buying a hundred million dollars a week of
Government securities, and he says this [reading]:
I believe that there is more, to he saUl in favor of such a policy. With the
collapse of OUT banking system definitely halted, and with our commercial and
industrial organizations still in a state of extreme strain, "what would appear
to be required now is the stimulus of credit expansion supported by a liberal
policy of the Federal reserve system such as it is pursuing at present and
regulated, in its development by the system. With a gradual restoration of
confidence at home, with greater stability abroad, with a new banking law
increasing the amount of disposable gold—

That is the Glass-Steagall bill—
the situation is auspicious for carrying through an easy-money policy as long
as it remains controlled and does not develop into uncontrolled inflation. The
means of control lie in our official banking organization, and the machinery
of that organization provides the methods of solving such difficulties and dangers
as may arise. Controlled credit expansion is only possible through the operation of that system.

Do you agree with Secretary Mills that you can control the credit
of the country?
Mr. MILLER. I think that is perhaps a more extreme statement
than I myself would make.
Representatives GOLDSBOROUGII. Yes.
Mr. MILLER. But I would say that I think future conditions as far
as I can foresee them are more likely to be amenable to control, if it
is really a wisely and farsightediy exercised control, than they have
been during the past 10 years. Those years contained a great many
uncontrollable adventitious factors. I think a body of ultrawise
men undertaking to exercise the influence and powers of the Federal
reserve system toward control, whatever the objects or tests of control
might be, may have on the whole a far simpler condition to deal with
in the next 10 years than the past 10. That is merely a guess.
Representative GoLnsBORoron. Did not the operations of the open
market committee in the years li)'2'2 to 192S assist the Federal Reserve
Board very greatly in reducing the other problems that confronted
it? Did not the stabilization of the price level through that period,
due to the operations of the open market committee, greatly reduce
the other problems which confronted the system ?
Mr. MILLER. "\Vell, I should say that, in part, at least, those operations unintentially contributed to the problem that we have been
confronted with during the last three years.
Representative GOLDSBOROVGII. YOU do not approve of that policy?
Mr. MILLER. I think that the policy was of very dubious permanent value.
Representative GOLDSBOROUGJI. I see.
Mr. MILLER. If I were speaking or writing as an economist I
would state that our present condition is one of the things that might
be expected to follow from such attempts at stabilization. In other
words, stabilization may be—not in anybody's intention—but it may
work out to be a formula for inflation.
Senator FLETCHER. May I ask you right there. Do you not believe that it is worth while to achieve the stability of the price level?
Mr. MILLER. I do not, Senator. I think it is a futile aim. Now,
in saying that, I do not want to be misunderstood. I have the
greatest respect for stable economic conditions, and I would take
as one of the tests of the good functioning of any central banking



system, of the Federal reserve system, I would say as one of the
tests of a good govern mental attitude on matters of economic concern and policy, that it always had foremost in its mind the preservation of the forces that make for economic stability.
Representative GOLDSBOROFGJI. And when you have economic stability, don't you have a stable general commodity price level?
Mr. MILLER. NO : not necessarily.
Representative GOLDSBOROVGH. I do not mean cotton.
Representative GOLDKBOROUGH.

I want to call your attention to
the fact that Governor Meyer, both in his testimony before the subcommittee of the House and before this committee, has accented
nothing but cotton. He apparently has not visualized the fact that
the purpose of this bill is to stabilize the general commodity price
level and not to fix the price of any one commodity.
Mr. MILLER. I do not want to let you go by there.
Representative GOLDSBOROXXMI. All right, sir.
Mr. MILLER. When you have a condition of economic stability,
it means that the industrial organization is in fair balance. It
means that the economic balance of the world is on the whole a
pretty stable balance. You may have that on a price level that
is gradually rising. We have had it over considerable periods of
time on a price level that was gradually declining. The important
thing from the point of view of the good functioning of the economic system either of this country or of the world is that there
shall be stability in the price structure, in the relationships of
prices to one another. Whether the average of prices goes up
or goes down is of little consequence to the good function in g of
an economic structure and the maintenance of economic stability.
That is something that concerns long-term creditor and debtor.
Representative GOLDSBOROUGH. Just one or two more questions.
Mr. Chairman, with your permission. I think you spoke a while
ago of allowing nature to sort of take its course.
Mr. MILLER. I have got to intervene there.
Representative GOLDSBOKOUGI-I. All right, then; if you did not say
that I do not want to question you on that.
Mr. MILLER. Well, question me if you want to, but if you think I
am a pessimist
Representative GOLDSBOROUGH (interposing). From 1873 until
1896 we had a constantly declining commodity price level in the
United States which'all other economists, as far as I know, say was
was due to a scarcity of gold.
Mr. MILLER. Yes.
Representative GOLDSBOROFGH. IS that your conception?
Mr. MILLER. NO, sir.
Representative GOLDSBOROUGII. That is not your conception?
Mr. MTLLER. NO. sir.
Representative GOLDSBOROUGH. All right; I want to ask you

another question and then you can answer them both, because they
both come together.


Representative GOLDSBOROUGH. From 189G or thereabouts gold was
discovered in the Klondike and in South Africa and then we had
an accumulation of gold, and from there to the war we had a rise



in the price level. All economists, so far as I know, say that that
rise in price level was due to the purely artificial factor that we
had more gold mined and brought into circulation. Do you agree
or disagree?
Mr. MILLER. I think that gold was a factor in it—a factor.
Representative GOLDSBOROUGH. Well, that is not what you call
letting nature take its course, is it? Do you think digging gold out
of the ground is what you may say is allowing psychology factors
to take their course?
Mr. MILLER. NO. Where were we at in these years that vou speak
Representative GOLDSBOROUGH. Sir ?
Mr. MILLER. Where were we at in the economic cycle in these years
when the flow of gold came in?
Representative GOLDSBOROUOI-I. We bad a constantly rising commodity price level, but do you think the gold alone did that ?
Mr. MILLER. What were the years?
Representative GOLDSBOROUGII. The gold began to operate about
1899 and continued to act in a normal way until the war started.
Mr. MILLER. Yes. When did prices begin to rise?
Mr. MILLER. 1896 or 1897.
Representative GOLDSBOROUGH. It may
Mr. MILLER. XO : it was not the gold.

have acted that quickly.
I beg your pardon. That
is just where I want to say that good monetary factors may be of
great influence in certain situations where the situation is favorable
for the response. The stage was set for resumption after the campaign of 1896 and the depression of 189?) to 1897. We are going to
have it set for resumption again.
Representative GOLDSBOROUGK. It lasted for 18 years. It lasted
until the war started.
Mr. MILLER. Oh, no.
Representative GOLDSBOROUGII. Oh,
Mr. MILLER. I beg your pardon.
Representative GOLDSBOROUGXT. Oh,
Mr. MILLER. I beg your pardon.
Representative GOLDSBOROUGIT. The


commodity price level and the
price of land rose constantly until 1914.
Mr. MILLER. What was the production of gold during that period?
Mr. GOLDENWEISER. I haven't the figures.
Mr. MILLER. YOU had an enormous growth of credit, one of the
most rapid growths of credit in history, until we get down to oui
Representative GOLDSBOROUGII. All right: credit acts just like gold,
I admit that.
Mr. MILLER. But it apparently did notRepresentative GOLDSBOROUGH. That is not one of the natural
things that you are speaking about; that is an artificial thing. That
is a thing we have created.
Mr. MILLER. Yes.
Mr. GOLDSBOROUGH. Credit circulation?
Mr. MILLER. That is it, exactly. That is

what I mean by saying
that credit creates itself, and prices make themselves, far more than
they are made through intervention.



Senator BROOKHAET. And protective tariff might make the prices?
Mr. MILLER. The protective tariff we have with us, like the poor
and the rascals.
Senator BROOKHART. But it does not make prices and it is not
Mr. MILLER. Well, I hope we will not get into a discussion of
tariff policy.
Now, I want to say just a word about the period following 1873
until, I think you said, 18137.
Representative GOLDSBOROUGH. 1896.
Mr. MILLER. YOU are aware that in those years there were some
periods of distinctly good times, to use the conventional business
Representative GOLDSBOROUGII. Not long periods, though.
Mr. MILLER. Well, they were there. The country was generally
prosperous from 1879 to 1882 and again from 1886 to 1892. We also
know that, barring this recent period and one apparently about
1910, and barring the industrial revolution of the into eighteenth
century, there never had been a period of technological expansion
like that which followed the Civil War. In other words, productive
efficiency was being stepped up, stepped up, stepped up. It is hard
to find parallels to it. It had the inevitable result that goods were
kept crowding into the market more rapidly than markets could
absorb the goods. Many of the writers of that day, among them men
of foremost standing, considered this the most important factor of
the period. David A. Wells, for instance, in Recent Economic
Changes, written, I think about 1889 or 1890, devoted his book to
showing that the main influence that brought down prices and
caused the price fluctuations and disturbances that characterized this
period was the rapidity of improvement in the technique of production and distribution. He traced the expansion of this country, the
extension of railroads, the crowding of goods onto the markets of
the world, and gave us the one definition of overproduction that
has any meaning, the one definition of overproduction that is worth
while using—production in excess of what can be marketed at a
remunerative price.
Representative GOLDSBOROUGH. Of course, we all realize that there
are correlated factors, but are not the monetary factors and the credit
factors the prime factors?
Mr. MILLET;. iNfo, sir. There is where I take issue.
Representative GOLDSBOROUGH. NOW, Mr. Miller, I have here a
speech made by Prof. Gustof Cassell last Saturday. He was before
the Banking and Currency Committee of the House in 1928 at the
same hearing at which you appeared. At that time he disagreed
with me that- the activities of the Federal reserve system should
be controlled. He took the position that then they were able to
handle the situation without any direction, and this is what he says
in his recent speech, and then I want to base a question on it
The task of maintaining a certain gold standard was for other countries
practically reduced to the task of keeping the currency's dollar exchange at a
fixed parity. Thus, the world's monetary system had arrived at the rather
peculiar situation that it was built on a common unit of vali\e, the dollar,
which within wide limits was determined arbitrarily by the American monetary
authorities. This situation was rendered only the more peculiar by the fact



that the United States itself there was no unanimity on what ought to be the
aim of American monetary policy, and that the Federal reserve system denied
the very possibility of a conscious regulation of the value of the dollar and
refused any possibility for the development of that value.

Now, then, I want to just follow that on with another quotation.
The CHAIRMAN. I want to suggest that in view of the fact that
you are reading from a newspaper clipping you give what the economist said or give the full authority for the statement.
Representative GOLDSBOROUGII. This is from the New York Times
of May 15, 1932, special correspondent for the New York Times,
dated London, May 7.
Mr. MILLER. One of his Rhodes lectures.
Representative GOLDSBOEOUGII. NOW, then, he goes on to discuss
what he said before our committee in 1928 [reading] :
I formulated a program thus : The first purpose of the Federal reserve system
is ro keep up the gold standard; that is to say, to keep the dollar on a purchasing parity with gold.

That is the purpose- of this legislation.
Then the system should use the influence they have upon the value of gold
in cooperation with other central banks to prevent unnecessary fluctuations in
that value.
This simple and perfectly clear recommendation, which in fact embraces
everything that is to be said about the objective of monetary policies, never
led to any result. The United States went to meet the disastrous development
of the following years without any definite idea whatever of what should be?
the aim of its monetary policy.

You do not agree with Professor Casse-U?
Mr. MILLER. NO ; I do not. Professor Cassell is a leading economist, but he is not familiar with American conditions and psychology. I also disagree with Professor Cassell's view of the causal
relation of credit to prices.
The CHAIRMAN. We will have to close soon. I t is after 1 o'clock.
Senator FLETCHER. Here is a statement of Governor Meyer on
page 522 of Part I I of the hearings, to this effect [reading] :
I regard the efficiency of the banking structure as an important element in
achieving stability in the price level, and in using for that purpose, to the
extent it can be used, the regulation of the volume of currency and credit.

Do you think that is sound?
Mr. MILLER. Well, I think probably in the sense in which he uses
it it is. It would not be exactly my form of expression. I will say
frankly that I think part of the trouble we have been in is that most
of us have never had occasion to test our thinking about our fundamental economic position upon matters of economic theory. The
quantity theory of prices upon which this bill is based has always
enjoyed great currency. It has a certain charm and beauty of balance and simplicity about it. It suggests as one of its corollaries that
since changes in general prices are " caused ?) by changes in the
volume of credit, therefore it is possible to issue a mandate to your
agency of central credit control and command it to use its power
over credit to cause .stability of prices by restoring them always to a
constant level. When prices get down below that level it suggests
that all that is necessary is to order that they be brought back.
Unfortunately, credit and prices do not work that way. I hope
you will hear from some of the modern theorists who are far more
realistic. It took me a long time to purge my mind of the cobwebs



an<l the metaphysics and the beautiful lyric presented by the quantity
theory of money. It has taken some hard knocks and experience.
My views—and I want this included in the record—are those that
were stated by the Federal Reserve Board as a board in its report
for 1923. Mr. (joldenweiser, will you please see to it that that part of
the 1923 report iroes into the record $ I do not want to bother you
with reading it. but I regard that statement as bearing directly to the
point of this bill.
The CHAIRMAN. That is a statement in there, not a very long one?
Mr. MILLER. Not a very long one.
The CHAIRMAN. If there is no objection, it will be entered in the
Mr. MILLER. Yes: a few pages, not very long. It reads as follows
[reading] :
The anomalous situation thus confronting central banking' administration in
all countries has led to much discussion in the United States and elsewhere
as to workable substitutes for reserve ratios as guides to credit and currency
administration. Particular prominence has been given in discussions of new
proposals to the suggestion frequently made that the credit issuing from the
Federal reserve banks should be regulated with immediate reference to the
price level, particularly in such manner as to avoid lluctuations of general
prices. Entirely apart from the difficult, administrative problems that would
arise in connection with the adoption oil the pviee index as a guide and entirely
apart from the serious political difficulties which would attend a system of
credit administration based on prices, there is no reason for believing that the
results attained would be as satisfactory as can be reached by other moans
economically valid and administratively practicable. In saying this the board
is nci unmindful of the abundant evidence recent years have given of the
economic and business disturbance occasioned by violent fluctuations of prices.
But it must not be overlooked that price iluctuations proceed from a great
variety of causes, most of which lie outside the range of influence of the credit
system. No credit system could undertake to perform the function of regulating credit by reference to prices without failing in the endeavor.
The price situation and the credit situation are no doubt frequently involved
in one another, but. the interrelationship of prices and credit, is too complex
to admit of any simple statement, still less of a formula of invariable application. An oversimplified statement of complex problems contributes nothing
toward the development of an effective administrative procedure. It is the
view of the Federal Ileserve Board that the price situation and the credit
situation, while sometimes closely related, are nevertheless not related to
one another as simple cause and effect; they are rather both to be regarded as
the outcome of common causes that work in the economic and business situation. The asme conditions which predispose to a rise of prices also predisposes
to an increased demand for credit. The demand for credit is conditioned upon
the business outlook. Credit is created in increasing volume only as the community wishes to use more credit—when the opportunity for the employment
of credit appears more profitable. Sometimes borrowers want to borrow more
and sometimes they are content with less. Sometimes lenders are ready to
lend more and at other times less. Why this should be so depends on all those
multifarious conditions and circumstances that affect the temper of the business
community. For the most part these conditions lie beyond the radius of action
of the Federal reserve banks. When the business outlook is inviting business
men are apt to adventure and new business commitments are made in increasing volume. P.ut only later will these commitments be reflected in the possible
rise of prices and an increase in the volume of credit provided by the commercial banks of the country. The Federal reserve banks will not to any
considerable extent feel the impact of the increased demand for credit, until
the whole train of antecedent circumstances which has occasioned it is well
advanced on its course; that is, until a forward movement of business, no matter
from what impulse it is proceeding, has gained momentum.
Credit administration must be cognizant of what is under way or in process
in the movement of business before it is registered in the price index. The
price index records an accomplished fact. Good credit administration in times



of active business expansion should not encourage or assist the excessive accumulation of forward commitments in business and banking which only later on
will definitely reflect the rate at which they have been taking place in resulting
changes of credit, volume and changes, in price levels; and in times of business
reaction should discourage enforced liquidation of past commitments which
also will only later or reflect the rate at which it has been taking place in
altered credit volume and price levels. The problem of efficient credit administration is, therefore, largely a question of timeliness of action.
No statistical mechanism alone, however carefully contrived, can furnish an
adequate guide to credit administration. Credit is an intensely human institution and as such reflects the moods and impulses of the conmiunivy—its
hopes, its fears, its expectations. The business and credit situation at any
particular time is weighted and charged with these invisible factors. They
are elusive and can not be fitted into any mechanical formula, but the fact that
they are refractory to methods of the statistical laboratory makes them neither
nonexistent nor nonimportant. They are factors which must always patiently
and skillfully be evaluated as best they may and dealt with in any bunking
administration that is animated by a desire to secure to tho community the
results of an efficient credit system. In its ultimate analysis credit administration is not a matter of mechanical rules, but is and must be a matter of judgment—of judgment concerning each specific credit situation at the particular
moment of time when it has arisen or is developing.
There are among these factors a sufficient number which are determinable
in their character, and also measurable, to relieve the problem of credit administration of much of its indefiniteness, and therefore give to it a substantial
foundation of ascertainable fact. In large part these factors are recognized
in the Federal reserve act. The act, therefore, itself goes far toward indicating
standards by which the adequacy or inadequacy of the amount of credit provided by the Federal reserve, banks may be tested.
Tho Federal reserve act has laid down as the broad principle for the guidance
of the Federal reserve banks and of the Federal Reserve Hoard in the discharge of their functions with respect to the administration of the credit
facilities of the Federal reserve banks the principle of '' accommodating commerce and business." (Sec. 14 of the Federal reserve act. par. (<!).') The act
goes further. It gives a further indication of the meaning of the broad principle
of accommodating commerce and business. These further guides are to be
found in section 13 of the Federal reserve act. where the purposes for which
Federal reserve credit may be provided are described as "agricultural, industrial, or commercial purposes." It is clear that the accommodation of commerce
and business contemplated as providing the proper occasion for the use
of the credit facilities of the Federal reserve banks means the accommodation
of agriculture, industry, and trade. The extension of credit for purposes
"covering merely investments or issued or drawn for the purpose of carrying
or trading in stocks, bonds, or other investment securities, except bonds and
notes of the Government of the United States," is not permitted by the Federal
reserve act. The Federal reserve system is a system of productive credit.
It is not a system of credit for either investment or speculative purposes.
Credit in the service of agriculture, industry, and trade may be described
comprehensively as credit for productive use. The exclusion of the use of
Federal reserve credit for speculative and investment purposes and its limitation to agricultural, industrial, or commercial purposes thus clearly indicates the nature, of the tests which are appropriate as guides in the extension
of Federal reserve credit. They clearly describe the nature or character of the
purposes for which such credit and currency mav bo extended. The qualitative
tests appropriate in Federal reserve bank credit administration laid down by
the act are, therefore, definite and ample.
But the problem of credit and currency administration implies the use not
only of qualitative tests but also of quantitative Vests. By what means may
it be known whether the volume of credit provided by the Federal resei've
banks is in any given set of circumstances adequate, excessive, or deficient"?
The problem in good administration under the Federal reserve system is not
only that of limiting tho field of uses of Federal reserve credit to productive
purposes, but also of limiting the volume of credit within the field of its
appropriate uses to such amount as may be economically .-justified—that is,
justified by a commensurate increase in ihe Nation's aggregal;.' productivity.
The board is fully aware of the fact that the problem of credit extension
involves the question of amount, or volume as well as the question of kind.



or character; otherwise stated, involves a quantitative as well as a qualitative
determination. But it is the view of the board that it is not necessary to go
outside of the Federal reserve act to find suitable methods of estimating
the adjustment of the volume of credit provided by the Federal reserve banks
to the volume of credit needs. The Federal reserve act itself suggests the
nature of the tests, guides, or indicators—whatever they may be called—to
be used in gaging the need for and the adequacy of Federal reserve credit.
The provisions of the act already quoted indicate that the needs for credit
which are recognized by the act as appropriate are those derived from agriculture, industry, and trade. It is the belief of the board that there will be
little danger that the credit created and contributed by the Federal reserve
banks will be in excessive volume if restricted to productive uses.
A characteristic of good functioning of the economic system is to be liound
in the smooth unobstructed movement of goods from, the producer through
the channels of distribution to their several ultimate uses. The characteristic
of the good functioning of the credit system is to be found in thv promptness
and in the degree with which the flow of credit adapts itself to the orderly
flow of goods iii industry and trade. So long as this flow is not interrupted
by speculative interference there is little likelihood of the abuse of credit
supplied by the Federal reserve banks and consequently little danger of the
undue creation of new credit. Tfie volume of credit will seldom bo at variance
with Urn volume of credit needs as they are reflected in the demands of productive industry as long as (1) the volume of trade, production, and employment, and (2) the volume of consumption arc in equilibrium. Credit for
short-term operations in agriculture, industry, and trade, when those operation into consumption, is a productive use of credit. But when the effect of
lions are genuinely productive and nonspeeulalive in character, that is
to say, credit provided for the purpose of financing the movement of
goods through any one of the successive stage* of production and distribucredit used is to impede or delay the forward movement of goods from producer to consumer, unless such delay is made necessary by some unavoidable
cause, e. g., the interruption of transportation facilities, credit is not productively used. The withholding of goods from sale when there is a market or
the accumulation of goods for an anticipated rise of price is not a productive
use. It is the nonproductive use of credit that breeds unwarranted increase
in the volume of credit; it also gives rise to unnecessary maladjustment between
the volume of production and 1he volume of consumption, and is followed
by price and other economic disturbances. Administratively, therefore, the
solution of the economic problem of keeping the volume, of credit issuing from
the Federal reserve banks from becoming either excessive or deficient: is found
in maintaining it in due relation to the volume of credit needs as these needs
are derived from the operating requirements of agriculture, industry, and trade,
and the prevention of the uses of Federal reserve credit for purposes not
warranted by the terms or spirit of the Federal reserve act.
There are no automatic devices or detectors for determining, when credit is
granted by n Federal reserve bank in response to a rediscount demand, whether
the occasion of the rediscount was an extension of credit by the member bank
for nonproductive use. Paper offered by a member bank when it rediscounts
with a Federal reserve bank may disclose the purpose for which the loan evidenced by that paper was made, but it does not disclose what use is to be made
of the proceeds of the rediscount. A farmer's note may be offered for rediscount
by a member bank when in fact the need for rediscounting has arisen because
of extensions of credit by the member bank for speculative use. Similarly, the
note of a member bank collateraled by United States Government securities
may be offered for discount to a Federal reserve bank when in fact the proceeds
are to be used in supporting the extension of credit for " agricultural, industrial,
or commercial purposes." Protection of their credit against speculative uses
requires that the Federal reserve banks should be acquainted with the loan
policies and credit extensions of their member banks—such acquaintance as can
be obtained by examination of their member banks or by other forms of contact
with them. In brief, the technical administrative problem presented to each
reserve bank is that of finding the ways and means best suited to the circumstances in which it operates of informing itself of when and to what extent the
extension of credit for speculative uses is the real occasion of member bank



Senator FLETCHER. I want to say that if that statement of Governor Meyer anywhere approximates a sound proposition this bill
would not be a '" fool's paradise/' That is all.
Mr. MILLER. Well, I do not want to speak for Governor Meyer any
more than I would wish to have him speak for me. Men very frequently use the same words with difference in the thought back of
Senator FLETCHER. I understand that. I did not mean to argue it
with you.
Mr. MILLER. Just what he may have had in mind I do not know.
But there are at times conditions where it is possible for the Federal
reserve system to intervene with a great deal of effect, either to
accelerate a forward movement or to retard it by putting on brakes.
But to talk of restoration and maintenance of a predetermined price
level in ail circumstances, to talk of creating motion in the body
economic when it is in a perfectly inert condition, is—well, it is talk
out of Alice in Wonderland.
Congressman Goldsborough has been good enough to remember
that I appeared before House committees on two or three previous
occasions when these bills were under discussion. You remember
the grave concern that I expressed both in 1920 and 1928 as to the
credit situation of the country at those times ?
Representative GOLDSBOROUGH. AS I remember it, Mr. Miller, if
you mean that for a question to me. I think at that time your position was that you were out of harmony with what the Federal reserve
system was doing.
Mr. MILLER. I was, because I felt we were headed toward disaster.
That is why.
Representative GOLDSBOROUGH. AS I understand it this morning,
you have been defending the Federal reserve system.
Mr. MILLER. The speculative outbreak of 1929 did not quite catch
me mentally unaware. It was on the slate of the gods that there
should be that outbreak from 1927 onward, and it would have taken
a remarkably courageous and remarkably farsighted board to have
operated the brakes with the vigor that would have been required in
order to have neutralized the perfectly terrific impact of that force.
I am not surprised at the depression.
Senator FLETCHER. They did not try to do itMr. MILLER. HOW?
Senator FLETCHER. The board
Mr. MILLER. Xot in time, and

did not try to stop it.
I think in"part because some of the
powerful shaping influences in the same reserve system were so
thoroughly infected at that time with the idea of a stable commodity
price level. They believed that as long as prices of commodities
were behaving all right things must be all right. As a matter of
fact, the commodity price level, with the stability that it showed during those years, was a cover for one of the most vicious and costly,
disastrous and destructive inflations that this country or any country
in a state of solvency has ever experienced. In general, I would say,
Senator, that the thing to be expected in this country if we operated
under a stabilization philosophy would be inflations. Just now you
gentlemen are thinking of restoring a price level. I think the actual
and more serious results of such a policy would show up later.



Senator BROOKHART. If it came back to normal it would not be a
danger ?
Mr. MILLER. Oh, yes. A stable price level in a progressive society
may frequently result in a profit inflation. Progress in technical
organization, more efficient production methods, and so forth, such as
we usually have, all mean that costs of production keep going down.
Senator BROOKHART. In this 1928-20 inflation that was not farm
products or commodities generally; that was stock speculation, paper
manipulation, and credit inflation.
Mr. MILLER. There was also inflated production, over expansion of
productive capacity and of instruments for the creation of productive
Senator BROOKHART.. The production was not much different from
any other years.
Mr. MILLER. Yes; it was.
Senator BROOKHART. Except in printing of stocks and bonds.
Mr. MILLER. Oh, yes; it was.
Senator FLETCHER. Commodity prices were considerably higher.
Mr. MILLER. Our per capita productivity attained extraordinary

heights. But just vision this thing. Let me try to illustrate by
drawing a crude diagram. • Here is your stable price level. How do
production costs ordinarily run in a progressive society ? They run
down, do they not ? That is what we mean by progress—technological improvement; more efficient production. Unless wage payments
increase enough to absorb all of the savings made possible by more
efficient methods, the proceeds of the sale of goods of stable prices
are going to go somewhere else. Where do they go? Into profits.
And what do profits do? When conditions favor a profit inflation,
the stage is set for a speculative boom. And most of the stabilization] sts in this country, I believe—I am not referring to you gentlemen here—but I think that most of the stabilizationists on the outside, the investment bankers and so on, most of them, are really
unconscious inflationists. What they want is rising profits insured
by a stable price level. I would say that in the long run a piece of
legislation of this kind might be expected to insure that the country
from time to time will have profit inflation, speculative booms and
speculative collapses.
Senator FLETCHER. YOU have the power to fluctuate as well as to
Mr. MILLER. But under this you are giving an instruction that your
expansion and your contraction is to be first toward the maintenance
of a price level.
Senator FLETCHER. Precisely.
Mr. MILLER. Arbitrarily chosen.
Senator FLETCHER. Not arbitrarily chosen; fixed by the index.
Mr. MILLER. Fixed by the index.
Senator FLETCHER. Of 790 commodities.
Mr. MILLER. Let us take up this chart here and just look at this
proposition against the background of history. Here is a chart of
the price index prepared by the' Bureau of Labor covering the past
century and more [exhibiting chart]. Look at these enormous
secular swings, great secular trends. This decline followed the War
of 1812 [indicating on chart]. This followed the Civil War. This
followed the World War. Who at this time can say what is a proper



level? What do we know about the forces that have disrupted the
economic structure of the world, the price structure, and how far they
are going to go before the faults that have occurred in the world
economic system will again result in a new position of economic
equilibrium I I speak of faults because I come from an earthquake
country, and we build with the knowledge and expectation that there
will be si locks in California. Just as there are geological faults,
there are economic faults. I think there is an enormous economic
fault right now that runs from the Bosphorus straight through this
country to the Orient, and that a global readjustment is going on.
Countries that are going to be dominant in the future are now finding
their positions in a new world.
The CHAIKMAJST. I think you are the worst pessimist of all.
Mr. MILLER. NO ; I am not.
Senator BKOOKIIART. DO you

think we are at the bottom of the
depression }Tet?
Mr. MILLER. I don't know.
Senator BKOOKHART. HOW long will it take us to get out?
Mr. MILLER. Nobody knows. If we did we would knowT what to
do. Nobody knows.
The CHAIRMAN. Would you like to have this printed in the hearings, Mr. Miller?
Mr. MILLER. I think it would be an interesting chart.
The CHAIRMAN. We are going to leave here inside of two or three
Mr. MILLER. This chart shows a period of a couple of years
The CHAIRMAN (interposing). Explain for the record what the
chart is.
Mr. MILLER. Doctor Goldenweiser will fix that up in the record.
The CHAIRMAN. All right.
(The chart presented b}T Mr. Miller is here printed in the record
in full, as follows:)




Mr. MILLER. There occurred in this period from 1921 to 1929 an
interval of a few years, when the price level, the average wholesale
commodity price level, showed a gratifying degree of stability as
compared with what went before and what has come after. And so
it is assumed apparently that that is the level toward which to work.
Now, I say this, Senator, that whatever may be the scientific background of that idea, it is one that I describe as having " blinders."
It is necessary to put on blinders so as to shut out of view all earlier
periods. It is assumed that the period from 1921 to 1929 constituted
a typical and normal period. In other words it is assumed that



those years were representative of conditions that ought to have prevailed and might have prevailed during the whole of our history if
the Federal reserve system had had an instruction to establish them.
I regard this period from 1921 to 1929 as a highly abnormal period,
in the sense in which I use that word.
The CHAIRMAN. But that chart covers 130 years.
Mr. MILLER. Yes.
The CHAIRMAN. What do you consider the normal period?
Mr. MILLER. Well, of course, I dislike the word " normal,"

and I
am only using it because it has been used here. I believe that normal
could be applied more suitably to these intervening periods between
the three great peaks of price changes that, accompanied and followed
our wars. I believe that it might eventually be found that a " normal " level would run nearer to the 1914 level than to the 1926 level.
I would say that the latter level is probably in a superzone, according
to this chart, and that the 1896 level was probably in a subzone
[indicating on chart]. How far this present price change will go,
and whether if it goes down below the present point it will stay
down long, frankly I have no idea. But it is only through a process
of trial and error that we are going to find the price level at which
we can carry on effectively during the coming years.
The CHAIRMAN. The remarkable thing to me is that the period of
1926 corresponds almost exactly to the period of 130 years before.
Mr. MILLER. Yes; it happens 'that it does.
The CHAIRMAN. Yes. The committee will be in recess until 3
o'clock and reconvene in the room of the Interstate Commerce Committee, Senator Couzens\s room in the- Capitol off the gallery floor,
and the first witness will be Professor Mills of Columbia University.
(Accordingly, at 1.15 o'clock p. m., the committee was in recess
until 3 o'clock p. m. of the same day.)

The committee resumed at 3 o'clock p. m. on the expiration of the
The CHAIRMAN. The committee will resume its hearing. The first
witness will be Mr. Mills. Please state your full name, address,
whom you represent, if anyone, and your experience.

The CHAIRMAN. YOU may proceed in your own way until some
one asks you some questions.
Mr. MILLS. I should say first that I am addressing myself primarily to the price aspects of this bill.
The CHAIRMAN. YOU are speaking now of the Goldsborough bill
or of Senator Fletcher's bill?
Mr. MILLS. I am speaking of the Goldsborough bill. I refer only
incidentally to the banking aspects. I should say furthermore that
I am not speaking against a policy of inflation; I am speaking in
regard to the particular proposal to restore and maintain the price
Jevel of 1921-1929.



The CHAIRMAN. DO you make any particular distinction between
expansion and inflation? Or do the terms generally mean the same
thing i
Mr. MILLS. Yes; I would use them interchangeably.
The CHAIRMAN. GO ahead with your statement.
Mr. MILLS. One can not but be sympathetic with the objectives of
this bill, having witnessed the price deflation during the last three
years. I am sympathetic with the objectives, but I feel that the bill
is based upon an oversimplified view of the problems involved and
upon a faulty conception of what is and what is not within the
powers of the banking authorities.
It is based upon an oversimplified conception of the problem because it deals with the general level of wholesale prices. What affects
business is not the movement of the general price level. If all
prices went upward or downward by the same amount we would
all be just as well off in regard to our current transactions.
The CILURMAN (interposing). There is plenty of room up at this
end of the table, gentlemen of the committee. Come right up here.
Now, go ahead, Mr. Mills.
Mr. MILLS. It is not a change in the general price level which disturbs business, but inequalities of price movements during periods
of rising or declining prices.
Now, gentlemen of the committee, I have brought with me some
charts which bear upon that proposition. I have ten copies of this
chart if the}' will serve your purpose.
The CHAIRMAN. Will you please explain them ?
Mr. MILLS. Yes.

have made reference to a chart. Would
you like to have this printed in our hearings ?
Mr. MILLS. I think it might be desirable although not absolutely
The CHAIRMAN. We Avill try to get that done. Will you please
explain this chart for the record, and any other charts that you may
subsequently present?
(The chart bearing the title " Inequalities of Movements among
Prices and Belated Elements During the Current Recession " is here
inserted in the stenographic transcript, and will, if authority is
forthcoming, be printed in the record.)
Mr. MILLS. This chart shows the inequalities of movements among
prices and related elements during the current recession, or from
July of 1929 to March or April of 1932. There are 10 entries here.
Prices received by farmers are shown to have declined approximately 58 per cent between July of 1929 and April of 1932. Wholesale commodity prices have declined approximately 35 per cent during the same period. The chart shows the average for each of the
entries. These include, besides the two I have mentioned: Food
prices, retail; earnings of factory workers per capita; prices paid
by farmers; cost of living; building material prices; average hourly
earnings of factory workers; construction costs; coal prices at retail.
It is obvious that the movements are widely different. Here at the
bottom are the prices received by farmers.
The CHAIRMAN. May I ask you a question right there ?
Mr. MILLS. Certainly.
The CHAIRMAN. YOU start out by assuming that they were on the
same level in July of 1929.



Mr. MILLS. I took that as a reference point because that was the
high point of prices immediately preceding the recession.
The CHAIRMAN. And I am finding no fault with you on that, but
that is not equivalent to stating that the prices of farm products
were on a parity with other prices at that time.


MILLS. NO, sir.

The CHAIRMAN. In other words, the 58 per cent decline you mentioned represented the addition to the previous decline, did it not?




The CHAIRMAN. G O ahead.
Mr. MILLS. These entries, then (indicating on chart), represent
various elements of the price structure.
Senator BLAINE. For what year?
Mr. MILLS. From July of 1929, to March or April of 1932.
Senator BLAINE. Oh, I beg your pardon. I see it is so stated on
the chart.
Mr. MILLS. I t is the period of the present price recession that is
covered by this exhibit, which shows the inequalities that have developed in the price structure in general. The same sort of inequalities, but less marked, developed within the system of wholesale
prices. Here are certain other exhibits, of which I have 10 cowries,
showing the inequalities of movements among wholesale prices during the current recession.
The CHAIRMAN. And you would like to have them printed in the
Mr. MILLS. Yes, sir.

right. I t is so ordered unless there is objection.
(The chart headed " Inequalities of Movements Among Wholesale
Prices During the Current Recession—A" is here made a part of
the stenographic transcript, and will, if hereafter authorized, be
included as a part of the printed record:)

All Other Than
""•—-• Farm Products & foods
Finished Products
Semi Manufactured Article
u^ Material*


'V... Farm Product*

(Index numbers of the United States Bureau of Labor Statistics.)
S e n a t o r BKOOKIIAKT. W h a t do you m e a n b y wholesale prices of

farm products ?
Mr. MILLS. I mean prices of farm products in the wholesale markets, as those quotations are compiled by the Bureau of Labor Statistics. They are not prices received by farmers.



Senator BROOKHART. And what markets are they ?
Mr. MILLS. Various markets. Wheat is quoted at Chicago and
Minneapolis. I n generol, the central marketing cities. They are
not at the farm or the r< tail store.
Senator BROOKIIARI They are at the most important marketing
points ?
Mr. MILLS. Yes. sir. This chart shows the movements over the
same period. I t covers farm products, foods, and all commodities
other than farm products and foods at wholesale; finished products,
semimanufactured articles, and raw materials.
Senator BROOKHART (interposing). F a r m products include foods,
do they not %
Mr.'MILLS. Yes, sir. But this is the classification of the Bureau
of Labor Statistics. Foods are in general at a later stage. F o r
instance, flour would be put with foods, whereas wheat would go
with farm products. But it is the classification of that bureau which
I follow.
I merely refer now to the fact that inequalities have developed
during this period within the field of wholesale prices, just as they
did in the broader field covered by the first exhibit.
And here are certain additional measurements relating to other
classifications of wholesale prices.
The CHAIRMAN. And you wish that made a part of the record?
Mr. MILLS. I think it might be well.
The CHAIRMAN. All right, unless there is objection it will be so
(The chart headed " Inequalities of Movements Among Wholesale
Prices During the Current Recession—B " is here made a part of the
stenographic transcript and will, when authority therefor is given,
be made a part of the printed record.)

..--- Processed Consumers'
^ ^ \
~"-v.N j: ^ _ - Producers' Goods PciUncd
(or Capital Equipment
Manufactured Goods
' — - Processed Consumers'Goods
Prodiiccrs'Goods Ocsliueci for
Muim ti ton>'i;mp£i'«?» •.. Non-fccils
- Producers'Goods Poi»u"tl
Ibr Htim.*n Consumption

_j of
American Farms







(index numbers of the National Bureau of Economic Research.)



Senator BROOKHART. Taking up your last chart, supposing we had
inflated money enough to raise all other than farm products and
foods up to that point of 100, wouldn't that have carried farm products up relatively with them?
Mr. MILLS. That is a point to which I should like to return later,
if I may.
Senator BROOKHART. Very well.
Mr. MILLS. I shall touch on that point later. This chart shows
another classification of commodities at wholesale. The single point
I would make now is: Here again we have the same inequalities that
we observed on the other charts. Now, it is the effect of those inequalities on economic processes which is important. For instance,
the prices of the tilings that the farmer buys, as shown on the first
exhibit I handed around, declined far less than did the prices received by farmers. That means of course that the aggregate amount
received hj farmers will buy far less, and the physical volume of
goods that can be sold to farmers is reduced correspondingly.
To cite one or two figures here: Between 1929 and 1031 the gross
income of farmers declined approximately ¥2 per cent. That is an
estimated figure, an estimate made by the Bureau of Agricultural
The CHAIRMAN (interposing). That is the average for the United
States? '
Mr. MILLS. Yes; for the year.
The CHAIRMAN. And was it worse in some sections than in others?
Mr. MILLS. Without any question. The prices of goods bought by
farmers declined from 1029 to 1031 by 17 per cent.' That discrepancy, of course, represents depleted purchasing power on the part
of the farmer. It means that the aggregate purchasing power of
farmers in 1031 would be 80 per eeniTless than in 1020 because of
the fact that the prices of goods they sell declined far more than
• iid the prices of the things they buy.
Similarly may I cite what happened in regard to factory payrolls
and cost of living. Between September of 1929 and March of 1032
t lie aggregate disbursements to wage earners as measured by factory
payrolls declined 58 per cent. That is shown here on this chart I
now exhibit: I have only one copy of it. The lower line represents
the decline in factory payrolls. Over the same period the cost of
living for industrial wage earners declined 21 per cent
Senator BROOKHART (interposing). That decline in payrolls was
due to unemployment?
Mr. MILLS. TO unemployment, part-time employment, and reduction in wages. The cost of living declined over the same period by
21 per cent.
chart may be made a part of the record.
(The chart headed ;i Income and Purchasing Power of Fanners
and Manufacturing Employees, 1020-1031 ** is here made a part of
the stenographic transcript and will when properly authorized be
made a part of the printed record.)
Mr. MILLS. I will say that there is a slight discrepancy in the
figures on that chart, which I should like the opportunity to correct
if it is to be made a part of the record.
The CHAIRMAN. YOU may do that when you look over the transcript of your statement.



Mr. MILLS. I thank you.
Senator BROOKHART. Have you any chart to show the wages paid
to those that are employed?
Mr. MILLS. That first exhibit that I gave you showed two figures
which bear on that point: One is the average hourly earnings, the
third from the top. That declined approximately l i per cent over
this period. Lower down you will find per capita earnings, which
declined much more. Now, the effect of the disparity between factory pay rolls and cost of living is to reduce substantially the aggregate purchasing power of factory workers. I n March of 1932 that
purchasing power was 40 per cent lower than it was in September
of 1929.
The CHAIRMAN. Was that due mainly to unemployment or to
wage reductions?

>urcfusin£ Power of farmers


A&K&te P»rchj5in.g' Power
of Manufacturing Employees

V&yroUsTcdcral Reserve board Index


Mr. MILLS. It was due to the three in combination, unemployment, partial employment, and reduction in wages.
The CHAIRMAN. And which was the major factor?
Mr. MILLS. Unemployment was the major factor. That means
that the discrepancy between those two movements has reduced the
volume of goods that can be sold to wage earners by 40 per cent,
while the corresponding discrepancy has reduced the volume of
goods that can be sold to farmers by 30 per cent. That 30 per cent
figure relates to the year 1931; a later entry would show a greater
The CHAIRMAN. And much greater.
Mr. MILLS. Well, I have not the figures because no gross income
figures for farmers are available except by years.
The CHAIRMAN. But the prices of their commodities show that
it is greater.



Mr. MILLS. Yes; they have declined substantially since then. I
will say that it is these figures which constitute, I think, the heart
of the problem. Our difficulties are not due to the fact that the
price level has declined, but to the fact that the declines have been
The CHAIRMAN. Well, isn't it both?
Mr. MILLS. A declining process as such would not affect our
current purchasing power if everything declined by the same amount
at the same time.
The CHAIRMAN. But it would affect our ability to pay interest
on our indebtedness.
Mr. MILLS. Yes; it would affect debts, but the debt question is
not covered by what I am saying here. At the same time you are
quite right about that. I am dealing with current purchasing
power; that has diminished because of the discrepancies in prices.
Senator BROOKHART. The important thing in the matter of debts
is, that if commodity prices are raised then everybody growing commodities can pay their debts easier.
Mr. MILLS. I expect to touch on the question of debts, but if I may
I should like to do it later on.
Senator BROOKHART. All right.
Mr. MULLS. The major problem that we now face is this: Is it to be
expected that if the price level were raised to that of 1921-1929, as
proposed by the Goldsborough bill, those inequalities would be ironed
out so that purchasing power would be restored to what it was before the break? That is the central problem. Would it correct
those inequalities or not?
Now, on the face of the figures that is to be doubted. That price
structure of 1929 has been completely shattered. All relations that
then prevailed have been broken down. It is doubtful on the face of
the figures that a general rise would carry them precisely up to the
1929 level or that many of them would ever go up exactly to that
point. It is practically certain that it would not restore the relations
that then prevailed.
We have some evidence on this point. In November of 1931
wholesale prices stood approximately where they stood in 1913.
The wholesale price level was back to the 1913 base. But all other
elements were not back to the 1913 base. Some were below and some
were above that average. I may cite figures bearing on this point.
When wholesale prices were at the 1913 level, in November of 1931,
living costs were 46 per cent above that level, and farm prices were
29 per cent below that level. Average hourly earnings in factories
were 119 per cent above the 1913 level. Although the price level was
back to where it was in 1913 yet the various elements in the 1913
price structure had not been restored.
I have here another set of figures that I will pass around to the
members of the committee. These have a bearing on that same point.
The CHAIRMAN. That may be made a part of the record.
(A chart headed " Changes in the Real Value, Per Unit, of Commodities in Selected Groups, 1913-1931 " is made a part of the
stenographic transcript, and will, when properly authorized, be
printed in the record of the hearing.)







Mmuiadurai Product
Raw Material







All Other than Industrial
Raw Materials
Industrial Raw Materials

30 •
10 •

o •

1 B






20 •

m 1



0 •


AUIVoductsothtTtlun Raw
Anocrican farm Products
Rau> Amman Tarm Producte

Producers' Goods

Processed Non-foods
Producers Goods Destined
lor Human Consumption.






£ £ £

(Based on index numbers of the
National Bureau of Economic Research.)



Mr. MILLS. This shows for the various elements of the price structure the degree of departure from the level of general prices at these
various dates; these are percentage deviations from the general level
of prices. There are two points I would make: One is that after
the decline from 1920 to 1921, the decline that carried wholesale
prices back toward the 1913 level, the inequalities were more pronounced than in 1920.
Senator BROOKIIART. Where is 1913?
Mr. MILLS. The relations of 1913 are represented by the zero line.
Senator BROOKHART. When it gets below that on the chart it is
below the price level?
Mr. MILLS. Yes, sir; and those shown above are above the level of
general prices.
The CHAIRMAN. YOU may proceed with your statement.
Mr. MILLS. Recurring again to this barred chart, which shows the
changes in the values of commodities in selected groups, I should
like to discuss that with reference to this exhibit. (Showing a chart
of an index of wholesale prices from 1913 to 1932.) Perhaps this
need not be entered upon the record. It is simply a chart of the
movement of wholesale prices from 1913 to 1932.
I should now like to repeat the point I was making just before
your recess; that is, that in 1920 there was a sharp movement back
toward the 1913 level. Had there then been a law in effect requiring
prices to be restored to the 1913 level, conscious action might presumably have brought about just such a decline as occurred. But
would it have corrected these inequalities we have talked about and
which constitute the crux of the situation? This chart shows that it
does not. The inequalities in 1921, after the break, after the movement back to the 1913 level, were greater than the inequalities in
1920. at the peak; that is, a' forced "return to the 1913 level at that
time would not have restored the 1913 relations between farm prices
and other prices, between raw materials and manufactured goods.
The CHAIRMAN. DO I understand it to be your opinion that there
are so many other things entering into the price level that it is difficult to control it with the currency ?
Mr. MILLS. It is impossible to control the movements of all elements of the price structure; on all these elements and their interrelations depends the working of our economic system.
Senator BROOKIIART. When the currency is very greatly inflated,
then, all prices rise?
Mr. MILLS. But some rise very much more than others.
Senator BROOKHART. Yes; but they all rise.
Mr. MILLS. Well, during this period
The CHAIRMAN (interposing). Do you hold to the theory that it
is true of all commodities, as suggested by the question propounded
by Senator Brookhart?
Mr. MILLS. WO ; they do not all rise.
The CHAIRMAN. But does the average level rise ?
Mr. MILLS. The average level rises: yes.
Senator BROOKIIART. IS there any commodity sold in America
generally that failed to rise?
Mr. MILLS. May I in answer to that question point to retail coal
during the last three years as quoted by the Bureau of Labor Sta-



tistics? It has not declined, while these other prices have been
declining anywhere from 10 to 50 per cent.
Senator BROOKHART. Coal is the one single exception to prove the
rule, isn't it?
Mr. MILLS. Most commodities would rise or fall with the general
level of prices, but they would not all rise or fall to the same degree.
To come again to this barred chart: When in 1931 we returned
finally to the 1913 level the inequalities were still further accentuated. That is, raw materials and manufactured products stood, in
December of 1931, further apart with reference to their 1913 ratio
than at any earlier time. The conclusion from that argument is
this, that if we should now take action to restore the general level
of wholesale prices to the 1921-1929 price, there is absolutely no
assurance that we would thereby correct the inequalities which have
been illustrated on the charts I have presented.
Senator BROOKHART. What is the 1913 comparison on this chart?
Mr. MILLS. This is derived by dividing
The CHAIRMAN (interposing). You are now speaking of what
Senator BROOKHART. Take the straight line of 1913 there.
Mr. MILLS. This is the last chart presented to the committee.
The CHAIRMAN. I understand. But in speaking of it, in order that
the record may be clear, just give us the title of the chart.
Mr. MILLS. This chart shows " Changes in the Real Values of
Commodities in Selected Groups/'
Senator BROOKHART. And the straight line through the middle
represents 1913.
Mr. MILLS. Yes. Now, to repeat my statement that there is no
assurance that a return to the general level of 1921-29 j>riees would
correct those inequalities; in fact one may say with confidence that
the 1929 structure of prices would not be restored. An upward
movement of prices at this time might diminish some of these inequalities, and I take it that would be the objective of the proposed
monetary policies.
The CHAIRMAN. Might I ask, you are speaking about the general
price level now?
Mr. MILLS. Yes, sir; the general level of wholesale prices.
The CHAIRMAN. Oh. You refer to the wholesale-price level.
Mr. MILLS. Yes. I say that an upward movement of the general
level of wholesale prices brought about by conscious inflationary
action, or otherwise, might correct many of these inequalities that
are so grievous to-day.
Senator BROOKIIART. IS there any law or rule to govern that \
Mr. MILLS. I do not think so.
Senator BROOHART. It depends upon the individual circumstances.
Mr. MILLS. In general it is to he expected that commodities that
have fallen farthest would rise most promptly. That is in general to
be expected. But it may well be that after a rise of 25 per cent the
effect of further inflation might be to intensify the inequalities.
That is, we would have to have a rise of approximately 50 per cent
of the present price level to get it back to the 1929 level; it may be
that after a 25 per cent upward movement further inflation would
be vicious, in the sense of creating new inequalities, rather than



My objection to this present bill is that it is quite wrong to set
any arbitrary standard. If we could inflate, and could control the
inflation, it.ought to be intelligently controlled at every stage. If
you set an arbitrary standard and say: This must be attained at all
costs, you might create a situation that would cause more difficulties
than helpful corrections.
Senator BROOKHAUT. HOW could the bill be amended to meet your
ideas ?
Mr. MILLS. Assuming the possibility of conscious inflation, the
power ought to be vested in the monetary authorities to begin and
end this conscious inflation on their own responsibility. A definite
mandate, one which requires them to reach a certain standard and
stay there, ought not to be written into the law.
The CHAIRMAN. I think the trouble is that they have lacked the
courage to deal with the situation.
Mr. MILLS. I am not speaking on that point. I am saying merely
that inflation ought not to be defined in terms of any arbitrary
standard. It might turn out in the last analysis to be vicious and
destructive, rather than helpful.
Senator BROOKHART. But you must have some definition. You
can not turn a body of men loose to do as they please.
Mr. MILLS. I am going to show at a later point in my testimony,
if I have the time, that the banking authorities can not say what
the given effect of an inflationary movement may be. But let me
develop that point when I reach it.
Senator FLETCHER. The idea is that if the Federal Reserve Board
were given some discretion in the matter it would not be expected
to plunge in or out to accomplish any drastic changes, but that they
would gradually work up to it.
Mr. MILLS. I understand that, if this bill were to become a law,
it would be mandatory upon them to restore the 1921-29 level of
Senator FLETCHER. Not immediately. Possibly within a month
or two or six months. But that would be the point they would work
up to.
Mr. MILLS. Well, I should say that persons whose products had
not risen with the others, which perhaps had lagged behind for
specific reasons, would call upon them under the law to inflate further, and that that might create difficulties, rather than corrective
influences. But perhaps I have not read the bill properly.
Senator BROOKHART. Take the case of the French. When they
inflated the franc about one-fifth, didn't it increase all levels of
values ?
Mr. MILLS. Not by the same amount. Of course, they accepted
an existing situation when they stabilized the franc. That had already been brought about. That did not require a drastic movement upward or downward thereafter. They stabilized it at a level
that had already been attained.
Senator BROOKHART. The franc had reached that level and they
made it correspond to the facts.
Mr. MILLS. Yes,


Mr. MILLS. Yes,


But it had this effect, of scaling down their debts
80 per cent, didn't it?



The CHAIRMAN. And it had the effect of putting them on a low
production cost level so far as goods are concerned.
Mr. MILLS. Yes, sir.

reflected in part by the wage scale as

measured by the new unit.
Mr. MILLS. Yes, sir.

whereas the French working man got as
many francs as before, he got much less in the way of wages.
Mr. MILLS. Yes, sir.

his standard of living and house rent and
everything else had taken a corresponding cut, so he was not conscious of any great change so far as his purchasing power was concerned, is that it?
Mr. MILLS. That is true.
The CHAIRMAN. And the French nation was not affected very much
except in its ability to buy gold with it- products?
Mr. MILLS. Well, of course, the lessening of the domestic debt
burden was tremendous.
The CHAIRMAN. And the only handicap was in dealing with
foreign countries that were on a different standard, is that it'(
Mr. MILLS. Yes, sir.

There was one pent of that explanation that
I did not quite get. If a man got the same number of francs but
he would get less in value, that would be because commodity prices
had gone up, wouldn't it?
Mr. MILLS. If lie got the same number of francs after the change
as before, do you mean?
Senator BROOKHART. Yes. If they did not change the number of
francs it would be less, wouldn't it ?
Mr. MILLS. They changed the gold content of the franc; that was
Senator BROOKHART. Yes.
Mr. MILLS. If wages and cost of living were not readjusted to the
same degree the worker would get less in value, as you suggest.
Senator BROOKHART. Weren't they adjusted to just the opposite?
Mr. MILLS. Necessarily; if not he would gain or lose depending
upon the direction in which the balance lay.
I have been talking of the current situation, the purchasing
power of different economic groups, as affected by these inequalities of price movements, and I have said that the restoration of the
1921-1929 level would not necessarily correct the inequalities that
I do not wish to embark upon an extended discussion of the debt
burden, but I think something should be said on that point in connection with the present proposal. The purchasing power of the
dollar at wholesale has gone up approximately 50 per cent in the
last ?>Z months. That does not mean, I take it, that the burden of
debt has gone up 50 per cent. The burden of debt can not be measured in terms of the purchasing power of the dollar at wholesale.
The change in the burden of debt to an individual is measured by
the change that takes place between the time the debt was contracted
and the later time, in the cost of the commodities or the services he
has to sell. The burden of debt to the farmer has more than doubled, because the prices of the commodities lie has to sell have been



cut in half. The burden of debt to the salaried man whose salary
has not been cut at all has not increased at all, even though the level
of prices has fallen from 33 to 35 per cent. The burden of debt to
a wage earner fully employed, whose hourly wage has been cut 10
per cent, has not been doubled. It has been increased by approximately 11 per cent.
We speak of inflating prices, and carrying them back to the
1921-1929 level, in order to wipe out the additional debt burden
which the recent fall in prices has caused, but the additional debt
burden must not be measured in terms of wholesale prices.
An elevation of wholesale prices designed to correct for that
additional debt burden, would not necessarily achieve that end.
Senator BKOOKHART. Each man that owes a debt will measure
the debt in terms of the commodity lie must sell to pay that debt.
Mr. MILLS. That is right.
Senator BKOOKILYRT. YOU will concede that most of these commodities are way down below
Mr. MILLS. Not most; farm products; yes. The farmer's debt has
more than doubled.
Senator BROOKHAKT. Has not everything else pretty well doubled. (
Mr. MILLS. NO. Some articles have fallen much less in price than
otliors. You have- a very widely scattered field.
I make that sole reference to the debt burden, merely for the sake
of the record, because I think it is important to see the debt burden
in terms of the actual prices and costs in terms of which debt should
be measured, and not in terms of wholesale prices.
Another point: I think that the price level of 1921-1929 is a very
questionable standard of reference. This bill sets that up as a
standard which is to be restored and maintained. That price level
was not a stable price level, I think. For one tiling, it was supported by a number of important nonrecurring elements in our
total purchasing power—that is, the buying of this period by consumers and by corporations was not all based upon current income,
which tends to recur. Some of it was based upon a new volume
of installment credit, or consumer credit. Much of it was based
upon speculative profits realized, or upon the sense of greater
wealth, due to the fact that the price of securities or of real estate was
going up. Profits derived from such sources were nonrecurring in
character. In part, the purchasing power of that period was based,
too, upon a heavy export of our capital, the making of heavy loans
These three important elements of purchasing power tended to
maintain prices, during that period. They were elements which,
in their nature, were nonrecurring. That price level was not kept
up by elements which would be expected to recur constantly.
Secondly, there was a steady decline of world prices after 1925. I
have figures for some 29 countries here. All but one show an appreciable, and in some cases a considerable, decline in prices before
the current depression set in. That is, the world drift of prices
was definitely downward.
The CHAIRMAN. YOU speak of the depression setting in. What
period do you refer to ?
Mr. MILLS. I mean the depression that would date from 1929.



Finally, I would say that the general price structure of the period
1921 to 1929 was a weak price structure. It was based in part upon
these nonrecurring elements, and on other rather fortuitous conditions which could not be assumed to be permanent. The situation
of the farmer during that period, we hope, was ont one which was
permanent. That standard of reference is a faulty one for these
Senator BROOKHART. It was not permanent, because it got worse
Mr. MILLS. Yes.

Commodity prices began to decline in 1920.
They reached their peak in 1920.


Senator FLETCHER. Then, in 1921, they went pretty low, and they
kept about the same as 1921, up to
Mr. MILLS. They rose to 1925, and then even during the boom
from 1925 to 1929 (with the interruption of 1927) prices declined.
It was almost the first time in our experience that a business boom
was not accompanied by rising prices. There was a general decline
during that period of greatest activity. That chart shows it.
So. I say, there is nothing particularly sacred about the price
level of that period. It did not have the elements of permanence
that a standard which we are going to accept from this time forward should have.
Senator BROOKHART. A noticeable thing in this history, from
my chart of stocks here, is that in 1928 and 1929, when stocks went
up, commodities were going down.
Senator FLETCHER. Commodities began to rise in 1916 and continued to rise through 1920. Then in 1921 they began to drop,
and continued dropping pretty well ever since.
Mr. MILLS. Yes; with some slight recovery up to 1925.
Another point, which I think is important, is this: If we are going
to place a mandate upon our banking authorities to restore and
maintain a certain level of prieiv. wo should recognize that our
banking authorities are unable to tell what the precise effect of a
given expansion of credit is going to be. The effect of a given expansion of credit depends upon two things. It depends, in the first
place, upon the channel of dissemination of that credit, or the point
at which that new credit is injected into the price system. Secondly,
it depends on the character and the direction of consumer demand.
The banking authorities have very little latitude as to the point
at which they might inject new credit into the price structure. They
can increase the reserves of member banks somewhat. They can
strengthen the bond market. They can not go directly to the commodity markets. They can not strengthen the buying power of consumers directly. Their ability to interject credit for the purpose of
securing higher prices is severely restricted. There are only one or
two channels through which they can work.
The second point is quite beyond their control. Whether new
credit is going to be used to buy stocks, or to buy automobiles, or to
buy radios, or to finance long-term capital investments (for which it
should not ordinarily be used) depends upon what the consumers
want, what the people want—the speculators or consumers or business men into whose hands that new purchasing power is placed.



Between 1925 and 1929, the volume of bank credit increased 20
per cent. That is the total loans and investments of all banks in the
United States increased by 20 per cent between 1925 and 1929.
What happened to wholesale prices during that period? They
declined 7 per cent. Where did this new credit break out? Commodity stocks increased 112 per cent in price. The new credit was
there, but where was it used ? It was used in the securities market.
Suppose there had been a law requiring the Federal Reserve Board,
or the banking authorities, to maintain the level of 1925 prices.
During the four following years that level sagged 7 per cent. They
injected 20 per cent of new credit, or at least 20 per cent of new credit
was created. Suppose they had injected more. It was not being
used to hold up wholesale prices. It was being used to inflate security prices. A law which made it mandatory upon them to extend
further credit at such a time as that, in order to support wholesale
prices, would have rendered a bad situation intolerable. It would
have forced stock prices, presumably, up to .still higher levels.
Senator BROOKHART. That is, assuming a standard that nobody
considers normal, is it not?
Mr. MILLS. YOU are taking that standard. The 1925 level is only
slightly different from the 1921-1929 level which the law proposes.
I say, if such a law had then been on the books, and our Federal
Reserve Board had to push new credit into use, it would have been
terribly destructive.
Senator CAREY. DO you think we would have had more speculation
than we had ?
Mr. MILLS. Indeed you would have.
Senator CAREY. IS there anything in this law that would get this
money to the people, or to the borrower? Would it not be a fact
that if this extra credit were provided, it would be of no use unless
the banks would let the people have it under this act? The money
would go to the banks.
Mr. MILLS. It would go to the banks. There was a demand then.
Who wanted it? The speculators.
Senator CAREY. But now we have provided credit for the banks,
and they are not lending money.
Mr. MILLS. Yes.
Senator CAKEY. If

this law went into effect, would there be any
likelihood of their lending money?
Mr. MILLS. YOU can not make people use credit. The banking
authorities can not interject credit where it might be the most useful.
That is one of the limitations of the board. If we had the power of
selective inflation, if we had a system so well organized and so well
understood that we could have selective inflation, that would be
Senator BROOKHART. Suppose we take care of these stock speculators in some other way, and make them move over to Canada, as
they threaten to do, and get rid of them. Then we would not be
bother with them.
Mr. MILLS. It does not follow that credit would have an outlet
solely in wholesale markets.
The CHAIRMAN. DO you think we could pass some legislation similar to this that should make an exception, or some reference that
would go more into detail than this bill does—as, for instance, ignoring, to a greater or lesser degree, the rise in the security markets ?



Mr. MILLS. I do not know. If you define your standard in terms
of wholesale prices, you would have to write a great many exceptions
into the law in detail. If you start, in general, to keep wholesale
prices at a certain level, and provide that if certain prices rise too
much the backing authorities need not obey the law, and if certain
other prices rise too much they need not obey the law, you would
have to write an infinite number of exceptions into the law. But I
ask, with reference to the period 1925 to 1929, what would have been
the result if it had been mandatory upon the board to maintain
wholesale prices ? I do not know.
The CHAIRMAN. IS the general-price level a more reliable guide,
in your opinion, than the wholesale-price level ?
Mr. MILLS. When I spoke of the general-price level, I meant the
wholesale-price level.
The CHAIRMAN. YOU do not consider the general-price level any
more reliable?
Mr. MILLS. Doctor Miller said this morning that the wholesaleprice level was a metaphysical concept. To a certain degree, it is.
If that term applies to the wholesale-price level, it applies even more
accurately to the concept of the general-price level, which includes
such diverse things as wages, security prices, rents, and wholesale
prices. You are combining incominensurabies when you lump them
into an index of the general-price level. I do not think you could
stabilize in terms of any such general index.
There is one other point I would like to make in regard to the
direction in which new credit may be exerted. From 1901 to 1913,
the volume of credit was increasing more rapidly than the volume
of production. The result was higher prices, or at least, a concurrent development was rising prices.
The CHAIRMAN. I noticed you modified that after you said it.
Mr. MILLS. Yes. I do not want to assume necessarily that one
was the result of the other, at this point. I say the two were concurrent changes.
The CHAIRMAN. But, if they are frequently concurrent, it might
be a case of cause and effect.
Mr. MILLS. I am reasonably sure that there is some connection,
but it was not necessary to make the pointBetween 1922 and 1929 the same conditions prevailed. That is,
the volume of credit increased more rapidly than the volume of production, but wholesale prices declined. The new credit was not getting into wholesale markets. It was being used in other directions.
The CHAIRMAN. If I understand you correctly—and perhaps I do
now—your idea is this. The new credit is a necessary thing, and
what the Federal Reserve Board is doing now is a wise thing, hopeful of good results, and, after all, the undecided question is, should
it be discretionary with somebody or should it be fixed by law? That
is the question.
Mr. MILLS. Yes. My answer would be that it ought to be discretionary, not subject to such a definite standard as this.
The CHAIRMAN. But if you proceed along, giving somebody discretionary powers and they are never exercised, then what can you
do—simply argue that it should be discretionary?





Mr. MILLS. That question, I think, I shall not answer, Senator.
Senator FLETCHER. DO you believe in the idea of stability of commodity prices at all ?
Mr. MILLS. Yes; I think it is a desirable thing. I do not believe
that it can be attained in just the way this bill proposes.
Senator FLETCHER. HOW would you suggest attaining that end?
How would you go about achieving that? Do you think it is a desirable thing? That is one point. Plow would you go to work to
achieve it?
Mr. MILLS. I can not answer that question now. In a typically
academic way, I would have to write a treatise with a good many
reservations and qualifications. I do not think we want stability,
in the sense of no change at all. I have suggested that if we were
able to effect selective inflation and selective deflation, if we had the
wit and the power and the knowledge to do that, that might be
preferable; but I do not think you can attack the thing on the broad
level basis this bill proposes.
The point I have just been making, in summary, is that the banking authorities can not control the direction in which new credit is
expended, so that the extension of new credit under certain conditions, in order to maintain a level of wholesale prices, might have a
bad effect on other elements of the price structure.
Senator BROOKHART. YOU think a bank can not inquire for what
purpose money will be used, and deny the loan?
Mr. MILLS. I am not sure that that would do it. Credit, I suppose,
is free to flow from market to market in our present economic system.
Senator BROOKHART. DO they not always inquire what the purpose
is when they make loans?
Mr. MILLS. It might be possible, Senator. As I say, I am not appearing here as an expert on the banking side of this, and I would
rather not try to answer that particular question.
Senator FLETCHER. We plan to prohibit the use of the Federal
reserve system for the purpose of speculation, going into the stock
market. So, if these people have funds, and they are not allowed
to use them in the securities market, would not that be likely to have
a favorable effect?
Mr. MILLS. If that could bo done, and if that rule could be enforced, it would, I would say, facilitate the problem of stabilization.
Another point regarding the international aspects of this problem:
We have a world economic structure to-day. During the nineteenth
and early twentieth centuries we developed a method of securing
international coordination of economic processes. We did it through
the gold standard. We have developed no substitute for that standard. It may be that in time we shall, but we have not any now.
It is one of the cardinal principles of the gold standard that new
gold going into a country should be allowed to exert its full effect on
prices, and that an outflow of gold should be allowed to exert its
full effect on prices. If that principle be not observed we simply
do not have a functioning international economic system.
The CHAIRMAN. If I understand correctly, then, a large importation of gold will materially increase the prices of our commodities
in a comparatively short time ?
Mr. MILLS. If it is allowed to express itself, to exert its effect.



The CHAIRMAN. Would that be true also of those commodities
that are in world commerce, such as cotton ?
Mr. MILLS. Yes; but to a lesser degree, perhaps, since the forces
bearing upon them are wider in their scope; but it would have that
effect. It would tend to raise the general level of all prices, to a
greater or less degree, to a higher point.
The CHAIRMAN. Does it necessarily follow, then, that if we had
increased our production of gold very materially in the last 10 years,
we would not be on this present level?
Mr. MILLS. Yes. I say, then, that a law such as this, which would
require a certain constant level to be maintained, would mean that
new gold coming in, if that new gold tended to raise the level of
prices above the mandatory level, would have to be sterilized. If
that were done
Senator BROOKIIART. HOW much gold is there behind the Treasury
notes we have now? Is there any gold reserve?
Mr. MILLS. Gold behind the Treasury notes?
Senator BROOKIIART. Yes; $346,000,000?
Mr. MILLS. I assume so.
Senator BROOKIIART. There is nothing earmarked as reserve for
the Treasury notes?
Mr. MILLS. I take it that all our currency now may be exchanged
for gold. We are on a gold basis.
Senator BROOKIIART. It is redeemable in gold, but is there any reserve, such as there is for Federal reserve notes?
Mr. MILLS. I could not tell you that offhand.
There is one final point I would make, and that concerns the problem of equity in the creation of new purchasing power. When new
purchasing power is put into the market, its effect is to raise certain
prices first. It does not raise all prices together.
Senator BROOKHART. It would raise agricultural products most.
Mr. MILLS. I am not sure that that follows.
Senator BROOKHART. Because they are the lowest.
Mr. MILLS. I say, in general, that is likely to be the case, that
those that are the most depressed feel it first,* but it does not necessarily follow. The expansion, or the rise, from 1921 to 1923, did
not raise agricultural prices as much as it raised many other prices.
It does not necessarily follow.
The point I am now making is that when new credit is created, or
pushed into use, it does not affect all prices at once. Its effect is
felt in certain quarters first. Those economic agents whose prices
first rise gain in purchasing power. The other persons, who are
making commodities which do not rise, which lag behind in the
advance, lose.
Senator BROOKHART. It can be made to affect them pretty much
at once.
Mr. MILLS. I do not think it can.
Senator BROOKHART. I bought 57,000 marks for a dollar in Berlin
the first day I was there, and I bought 80,000 three or four days
Mr. MILLS. If you had been buying commodities all over Germany
:at the same time, I do not think you would find that they all rose
to the same extent.



Senator BROOKHART. I bought commodities, but they did not cost
much in American money. They cost a lot in German money. Iii
Russia, when I came to settle my hotel bill, when they finally figured it up and translated it into rubles, I paid 4,500,000 rubles for
five days.
Senator CAREY. YOU do not want that kind of currency here.
Senator BROOKHART. I know you can raise the prices of things by
inflating the currency.
Mr. MILLS. My final point, Mr. Chairman, is this, that you are
placing in the hands of your banking authorities a tremendous responsibility. You are giving them the power to inject
The CHAIRMAN. They do not object to the responsibility. They
want to exercise it on their own motion.
Mr. MILLS. The injection of new purchasing power means that
some persons gain and others lose. Those gain whose prices rise
first, and those lose whose prices lag behind. Correspondingly, when
credit is withdrawn, those lose whose prices fall first, and those
gain whose prices lag behind on the decline. That ethical problem
has not, I think, been considered. It seems to me to be among the
most important. If we are going to raise prices by 50 per cent
now, where is the new credit going to be injected into the system?
The point at which it goes in will affect the fortunes of a great
many people.
Senator BROOKHART. We could pay the soldiers' bonus. That
would be one way.
Mr. MILLS. That would be one waj^, and presumably the sellers
of consumer goods
Senator BROOKHART. YOU could give the Farm Board $1,000,000,000 to handle the exportable surplus of agriculture and correct this
Mr. MILLS. Let us say we did it in the form of a soldiers' bonus.
Consumers' goods would presumably feel the effect of the new
buying power first. They would rise first. It happens that consumer goods are now one of the favored classes of commodities.
Their prices are relatively high, as compared with other classes.
If the argument be correct, you would be enriching persons who
are already advantageously situated. It is merely an example of
the point I make, of the ethical problem involved in allocating purchasing power.
The CHAIRMAN. IS it not a fact, doctor, that the failure to respond
to the ordinary rules in certain prices, is due to the fact that the
market is controlled, and that in the cases of certain lines of goods,
the prices are fixed before the goods are made, and maintained from
year to year?
Mr. MILLS. Quite right, sir.
The CHAIRMAN. Would you care to express an opinion as to what
per cent of consumer goods are under price-fixing influences at the
present time?
Mr. MILLS. Any opinion would be a very wild guess. I think it
is considerable.
Mr. MILLS. I doubt if it would be half.
The CHAIRMAN. But it would be a very substantial amount?



Mr. MILLS. It would be a very substantial amount, and possibly
an amount that has been increased.
The CHAIRMAN. And it is on the increase all the time.
Mr. MILLS. I am inclined to think that has been true.
The CHAIRMAN. And is interfering with the law of supply and
Mr. MILLS. There is no question about that.
The CHAIRMAN. And it does not respond to the ordinary rules.
Mr. MILLS. That is one of the reasons, I think, for our present
difficulties—so many rigid elements now exist within the price system which do not respond promptly to changes.
The CHAIRMAN. When we talk about changing the price level, we
are compelled to admit thai there is a very large element in there
that is not influenced by the ordinary measures taken.
Mr. MILLS. They might be resistant on the downward movement of
The CHAIRMAN. But they might be willing to go along on the upward movement.
Mr. MILLS. That is one reason a general rise in prices might create
great inequalities. Those who resisted the downward pull, would
acquiesce and go along with the upward movements.
Senator BROOKHART. A general rise would correct the inequality
in paying debts to some extent.
The CHAIRMAN. AS to the average.
Mr. MILLS. It probably would; but, as I said some time ago, you
can not measure that debt burden in terms of wholesale prices, and I
am not sure that if you restore the wholesale price level to the
1921-1020 average
Senator BROOKHART, If we have $203,000,000,000 in the United
States of debts, that is the biggest item, and the most important
thing in our country, is it not?
Mr. MILLS. A very important item.
Senator BROOKHART. More than half of the wealth value of the
Mr. MILLS. Yes.

The CHAIRMAN. We have a greater surplus of that than of any
other commodity.
Mr. MILLS. And the problem of handling that debt structure during the period of deflation and of falling prices is a very acute
one, indeed.
Senator CAREY. Just a minute before you proceed, Doctor. We
talk about relieving these people who have debts by raising prices.
Take the case of the farmer, and the case of agricultural products.
The farmer has been suffering more than anyone else. Would it not
be possible, with this inflation, to raise the prices of other commodities, or things that the farmer buys, so that he would be worse off
in paying his debts than he is now ?
Mr. MILLS. It is possible, indeed, that these prices [indicating
on chart the prices of things farmers buy] would go up, while these
[indicating prices received by farmers] would not.
Senator CAREY. And it might be harder for him to pay his debts.
Mr. MILLS. If that happened, he would be in a worse situation
than he is in now.



Senator BROOKHART. I understood you to say that prices were
more likely to rise in proportion.
Mr. MILLS. I say this is possible: In general, in the cyclical swings
of prices, those that fall furthest in the depression are likely to pick
up and rise more rapidly during the rebound, but it is not an ironclad rule, and certainly it does not always lead to correction. The
farmer's prices suffered far more in the drop of 1920-21 than they
had gained in the preceding rise.
Senator BROOKHART. We know why that was. We know what the
Federal Reserve Board did to us.
Senator CAREY. Would there be any tendency for prices to rise
where there was a surplus of a product ?
Mr. MILLS. If there was a real surplus, that would constitute a
barrier to recovery.
Senator CAREY. Take the situation we have had with wheat and
cotton in the past few years.
Mr. MILLS. A general inflation would perhaps lighten the burden
of such surplus, but, as compared with the prices of other commodities, those commodities of which there existed a surplus would be
weak, and would remain weak after inflation, as well as before.
My general conclusion would be this, Mr. Chairman, that one
of the really important things we must learn is how to control and
preA'ent extreme fluctuations in the purchasing power of the dollar.
I agree that there is not any more important problem before you.
I think it is something which must be learned through trial and
error, and through experience. I think we should have banking
authorities who are willing to try, and to learn through experience.
However, I do not think we can benefit ourselves by setting up an
arbitrary .standard and requiring that standard to be maintained.
The CHAIRMAN. We are faced now with this situation, that unless
there can be a restoration of prices, then the debts can not be paid.
Mi*. MILLS. I think that is probably so; yes, sir.
The CHAIRMAN. And we have to have either the one remedy, or
the other.
Mr. MILLS. Here is a chart which bears on the point you are making, sir. This contrasts the recession of prices during three periods
of recession and depression: 1907-08; 1920-21; and the present. The
fact that bears upon your present point is this, that the deflation of
1920-21., shown by these sharply falling prices, was quickly accomplished. That is, the major part of the price decline took place over
a period of 11 months, when prices declined at the rate of over 5 per
cent a month. We have already declined 33 months, and the average
rate of decline per month has been slightly over 1 per cent.
The CHAIRMAN. In the present recession?
Mr. MILLS. Yes. There have been resistances to liquidation. We
have been fighting a rear-guard battle all the time against scaling
down our prices and our debts. I see three choices before us—perhaps this is not relevant to the Goldsborough bill, but it bears on
the point you have in mind. One is to continue this rear-guard action against deflation, to fight it off and resist it, and maintain all
the prices that can be maintained. That means a long drawn-out
process, extending over perhaps a decade, before we finally and reluctantly scale down to a low price level.



The second choice is a recognition of the fact that we have to
scale down all along, do it promptly and vigorously, take the full
loss of scaled-down debts and scaled-down prices, and from then on
seek to reestablish a working concern at the lower level.
Senator BROOKHART. We have no constitutional power to scale
down debts.
Mr. MILLS. That would be difficult. At least it would get us
through the agony sooner.
The third choice is real inflation, not necessarily aiming at this
level, but aiming to raise these lower prices. How to secure that
third result, I do not attempt to say.
Senator BROOKHART. YOU said a moment ago that we would have
to have experience. We have had 18 years' experience at this, and
this is the mess we are in now. How long is it going to take by that
method to get out ?
Mr. MILLS. Eighteen years is a long time in our lifetime. It is a
short time in the history of our economic system.
Senator BROOKHART. Your idea is that we want to correct it for
the ages to come ?
Mr. MILLS. NO. I would like to correct it to-morrow, just as much
as you would. I do not think you would accomplish the correction
by making this bill a law, particularly as regards that arbitrary
Senator BROOKHART. I do not think it will accomplish all of it
myself, but I do think that it will raise the general price level, and
then I think we are going to have to have some special treatment
for labor and for agriculture. I think that will level it up.
Mr. MILLS. It might conceivably intensify our difficulty to have
a mandatory raising to a certain level. It is possible, as you suggested, Senator Carey, that the effect would be to raise the prices
of things the farmers buy. Would you then, Senator Brookhart,
if you were on the Federal Reserve Board, continue to inflate, if you
were making the farmer's position progressively worse with every
new million put out {
Senator BROOK HART. If I were on the Farm Board I know what
I would do with farm products. I would soon find a way to get the
cost of production, the same as Ford does for his jitneys.
Mr. MILLS. It is the mandatory feature which I think is unwise,
because we <lo not know what the eif'ect of a credit expansion would
be or just where it would express itself in our price system.
Senator CAKEY. The Federal Reserve Board can' do this thing
without law, can it not? It is doing it to-day, is it not?
Mr. MILLS. They are attempting to do it.
Senator CAREY. IS there any other method by which they could do
it than the method they are pursuing now ?
Mr. MILLS. I suppose none that the Federal Reserve Board could
The CHAIRMAN. IS it not conceivable that the Federal Reserve
Board might get enthusiastic and go altogether too far in this matter,
so that it is a matter for Congress to tell them where to stop?
Senator CAREY. There is no other way they can do it that I can
Mr. MILLS. None with the Federal Reserve Board.
Senator CAREY. Unless they print money.



Mr. MILLS. That, I take it, is not within their power to-day.
Senator CAKEY. It is not under the present law.
Senator FLETCHER. They think the situation has been benefited by
proceeding as they have.
Mr. MILLS. Commodity prices have fallen more swiftly in the last
two weeks than they have in the last two months.
Senator BROOKHART. I think that is true of agriculture.
The CHAIRMAN. Does that conclude your statement, Doctor?
Mr. MILLS. That concludes my statement.

The CHAIRMAN. Give the reporter your name, address, and occupation.
Mr. ELBERT. Robert G. Elbert; 599 Madison Avenue, New York.
I shall make my statement brief.
Our major problem to-day is debts. This applies not only to governments, municipalities, and corporations, but to every individual.
To my mind, there is no difference between the farmer in Texas or
South Dakota, who is unable to pay his mortgage, and England who
can not pay us what she owes. Neither can pay their debts (at existing commodity prices) with the 1932 dollar.
There is but one solution—the 1926 dollar must be restored by
raising commodity prices, or defaults, with wholesale bankruptcies,
will continue to a greater degree, just as surely as night follows day.
I have for the past year and a half been urging the Federal reserve
officials to expand the credit base, to remedy this condition.
If the Goldsborough bill becomes a law, and is properly operated,
it will be the greatest distributor of wealth our country has ever seen.
As I understand the bill, it refers primarily to wholesale commodity price levels; but I believe that if put through it should refer to
general prices.
I have a chart showing, from 1896 to 1931, inclusive, (a) bank
credit outstanding; (b) the general price level; and (c) wholesale
commodity prices.
The CHAIRMAN. I think it is a very significant chart that he has.
Senator CAREY. That is your chart, is it not, Senator Brookhart ?
Senator BROOKHART. Mine was a chart of stocks.
(The chart referred to faces this page.)
Mr. ELBERT. This chart embodies "A," Index of Bank Credit Outstanding (total loans and investments of banks) ; " B," Index of the
General Price Level; the different factors comprising it have been
weighted as follows:
Per cent

Industrial commodity prices at wholesale
Farm prices at the farm
Retail food prices
Other cost of living items
Transportation cost
Realty values
Security prices
Equipment and machinery prices
Hardware prices
Automobile prices
Composite wages




This index was compiled by Carl Snyder, who published the details of compilation in the Harvard Economic Review of February,
1928; " C," Index of Wholesale Commodity Prices (B. L. S., Department of Labor).
The chart runs from 189G to 1932, and if you will study it you
will see it shows that the normal annual growth of this country was
about 3 to 4 per cent.
Senator CAREY. What do you mean by " normal growth "—business growth—financial growth?
Mr. ELBERT. Production of farm produce, commercial and industrial output, wealth and all therein embodied—all these increased
on a basis of about 3 or 4 per cent. This growth is very easily seen
by the figures of the census.
Senator CAREY. They ran pretty evenly, did they not ?
Mr. ELBERT. YOU will note they ran evenly from 1896 to 1914, just
before we entered the World War; then credit expansion began and
the general price level followed up, whereas wholesale commodity
prices lagged behind for a couple of months. Of course, it is possible
and probable that the shooting up of wholesale commodity prices in
the manner in which they did, was the result of the war. There is
really no doubt about it, for such has been the case throughout every
war. But when they broke apart here [indicating] and credit was
restricted in 1919 and 1920, you can see that the general price level
stayed along with that line more than with the other, and the wholesale commodity prices went off.
If this bill could be based on a general price level, which includes
more factors than just wholesale commodity prices, the buying
power of the dollar could probably be better controlled.
Senator BROOKHART. While that is true, the general price level here
has stayed much higher than the index of wholesale commodities,
yet the relative position is not much different. Supposing we should
change this law and say that we go back to the 1926 level of general
prices. You would only go from the point where that price level is,
up to 1926, and there would not be as much of a rise as there would
be if you took the wholesale prices of commodities.
Mr. ELBERT. Senator, would you not infer from this chart that
it is a question of open-market operations and credit expansion by
the Federal Reserve Board that would affect this one way or the
other? This is running along with the credit outstanding, the
credit put out by the Federal Reserve Board.
Senator BROOKHART. They are going to do it, of course, by credit
control; but, we are directing them how much to raise this price
level: and if we put it on the general price level, it would not start
down here [indicating]. It would start up with the general price
terminal there [indicating], and all it would rise would be from that
point up to 1926, or whatever we want to. On the other hand, we
start lower, and I think we raise it more, but by the same means.
Mr. ELBERT. I agree with your theory on that, Senator. The
thought I want to convey is this: The curse of our situation to-day
is the changing purchasing value of the dollar. Regardless, in my
opinion, of where we start to-day, or how we start, if we permit any
man to manipulate the dollar, he can constantly change its value and
determine how much it will buy. That man can own the world in



time, because he can loan out his money on a certain valuation, then
change the value of the dollar and pauperize the people.
The thing I should like to see done more than anything else is
this—stabilize the buying power of the dollar in some way. How
this can be done is the question. It seems to me that this would be
a first step from which we could work, keeping pace with the normal
growth of the country, allowing an expansion of, say, 3 per cent per
annum. In that way we would advance and not <*o backward, one
or the other of which we must do—there is no standing still.
Senator CAKEY. According to your chart, the best way would be
to abolish the Federal Reserve Board, because everything ran pretty
smoothly until then.
Mr. ELBERT. The Federal Reserve Board lias power to expand it.
Senator CAREY. YOU never had this condition until you had the
Federal reserve bank.
Mr. ELBERT. YOU had panics.
Senator CAREY. YOU never had the great spread between the
various lines of your charts.
Mr. ELBERT. NO ; and this chart also shows what managing the
gold does to the country, when we are on a gold standard.
Senator CAREY. It shows how well the}' have done.
Mr. ELBERT. It shows what we could do.
Senator CAREY. It shows what they have done.
Mr. ELBERT. Yes; it shows what they have done. Before we had
a Federal Reserve board, the gold that came into the country went
to commercial banks, and they could expand their credit in proportion to the amount of gold they had. Now, when you have Federal reserve banks, with all the gold, then can—through open market
operations—expand the credit base, which in turn expands the credit
The Federal reserve banks have been claiming that they have been
buying $25,000,000 worth of bonds a week, since back in February,
and that is true; it is confirmed by the Federal reserve reports; but
what they really have been doing is this: While they were doing
that they—until five weeks ago—were also letting bills run out, which
more than offset the good that buying bonds was doing. They did
not explain it to anyone; they just kept quiet and let the people
interpret these things. The newspapers interpreted it that wray,
and the public thought they were inflating. The result was that
they were restricting credit, while the public believed that credit was
being expanded.
Senator CAREY. YOU mean they have not been inflating the currency ?
Mr. ELBERT. They have not been inflating; and you may look at the
statements of the Federal reserve banks, until five wreeks ago, when
they began buying. I think the first time it was $93,000,000, and
then they jumped it up. We have had it for five weeks now. Nearly
everyone will agree that it takes anywhere from three to nine months
for open-market operations of the Federal reserve banks to become
effective in business. Mr. Meyer said as much this morning. " There
is a lag there."
We have only begun to inflate here in the last five weeks. It has
been done at a very fast rate. The result is that a great many member banks are getting out of debt to the Federal reserve banks; and



as they accumulate surpluses and increase their reserves, it is naturally to be presumed that in time they will begin to buy good bonds
and stocks, and so forth: then this new credit gets into business and
new bond issues can be brought out, and that will create employment.
That is the way credit expansion is supposed to work.
Senator CAREY. There is no tendency that way yet.
Mr. ELBERT. There is some tendency; there is some finning up in
things, and they are going ahead. Sugar, for instance, is showing
the effect of it, and wheat is showing a tendency that way,
Senator CAREY. Does the short crop predicted for wheat have an
Air. ELBERT. It has a big effect; there is no doubt about that. Possible war between Japan and Russia might have something to do
with that.
One of the worst things the member banks are doing, as I see it,
is reducing security and commercial loans. As long as anyone having funds to invest sees that the member banks are still forcing a
reduction in collateral loans, he knows that means real selling; and
while that continues, no one, in my opinion, is going to buy stocks
and bonds. When it stops, I think we shall see security prices begin
to go up. and people will begin to buy them; and that will change
the whole aspect of the economic situation.
Senator BROOKHART. The other chart here shows
Mr. ELBERT. I know; there are so many charts.
Senator BROOK HART. This is commodity prices. Look where they
were in 1020. Your stocks were way out here somewhere [indicating on chart].
Mr. ELBKKT. Yes.

They do not run together with commodity
values at all.
Mr. ELBERT. That is one of the dangers. I do not know whether
this bill is going to be more harmful
Senator BROOKHART. Those stock values are still above the 1014
Mr. ELBERT. Some of them are.
Senator BROOKHART. I have a chart showing that the average of
the whole outfit
The CHAIRMAN. I think the chart is dated back a good while,
and there have been a good many changes.
Senator BROOKHART. It is dated March 15. There has been some
drop, but they are still above the 101 i level. The 11)14 level was 33
per cent above 1904, which comes nearer the general level.
Mr. ELBERT. I hope I have made myself clear, because I believe
this is a good bill: but you should realize that when it is passed and
executed there will still remain the discrepancy between different
I want to stabilize the dollar, but I realize—and this is the point I
have tried to make clear—that even after you get a stabilized dollar
there may still remain differences between farm products and farm
implements or security prices.
For example, the prices of farm products have fallen approximately 53 per cent since July, 1921), but the prices of farm implements have fallen only l$y2 per cent. The abundance of Federal
reserve credit from 102(> to 1020 did not put up wholesale commodity



prices, but it did put up security prices. It follows then that the
responsibility for the discrepancy in prices caused by the use of this
credit is up to the commercial bankers. For example, this credit
was used from 1925 to 1929 through loans abroad by these bankers,
therefore accentuating the problem that will confront the Federal
reserve bank officials of controlling this credit after they have manufactured it, and I doubt if they can do it.
Don't let us overlook the importance of this bill, because, to my
mind, it ranks only second with the passing of the Constitution ot
the United States, for it mandates the Federal reserve banks, not
only to increase credit, but how it is to be used; and it may create
an invisible government or power equal to our constitutional government.
Therefore, in submitting this chart, I believe the simplest means
to accomplish a stabilized purchasing power or honest dollar would
be to take a much broader base which we could call a general price
level; and also, inasmuch as our country is a growing one, we should,
add an amendment that, after stabilizing the dollar around the 1926
general price level for, say, two years, we should allow for the
normal growth of the country and let this credit expand at a rate
of between 2 and 3 per cent per annum.
Finally, let us not forget that, even though we have such a competent man now as Mr. Meyer at the head of the Federal Reserve
Board, there are the other members of the board with their opinions
and decisions. There are also the 12 regional Federal reserve banks;
and, finally, Mr. Meyer has to persuade the member banks to act*
There are a great many commercial banks who are not members of
the Federal reserve system. Therefore, don't expect too much from
Mr. Meyer; he has his difficulties. He " leads the band," but remember there is always a French horn-player who might ruin the
Is there anything else?
The CHAIRMAN. NO ; thank you very much.
Senator FLETCHER. I was going to suggest, inasmuch as we have
finished with these witnesses now, that Professor Fisher has been
here all morning. He has heard the statements of Governor Meyer,
Mr. Miller, Doctor Mills, and these parties who raise objections as
to the practicability of this system, saying that it is impossible to
carry it out, and all that. I know Professor Fisher has some views
on that subject, and I would like to have him express them to the
committee for a feiv minutes. It will not take long.
The CHAIRMAN. NO one objects to that. Doctor Fisher, we will
be glad to hear from you again.

Mr. FISHER. I have listened with a great deal of interest to Governor Meyer and Mr. Miller this morning and Professor Mills this
afternoon. Professor Mills is an expert in his line—the price structure—and he has told you, on the basis of his specialty, some of the
points and difficulties as he sees them.
I suppose he intended that his testimony should be, on the whole,
against this bill, although he said he was in sympathy with the pur



poses of it. It seemed to me that his testimony was very strongly in
favor of the bill.
He said that if all prices rose in the same relation or fell in the
same relation, there would be no harm from this inflation or deflation. That would be true, if you include debts in your prices.
Afterwards, he said he did not mean to include debts, and therefore
that invalidated his statement.
The CHAIRMAN. Let me ask a question. Would you not also have
to go one step further and include all fixed charges, such as taxes?
Mr. FISHER. Yes; you would have to include them as prices.
The CHAIRMAN. YOU would have to include those commodities that
are fixed by trust agreements or otherwise.
Mr. FISHER. Yes. You would include bonds, which, of course, are
debts, and wages, and customary fees, taxes, postage stamps, and so
forth. It is perfectly true that if we could get a perfect adjustment
and make everything go up or go down in proportion, including
debts, no harm would be done. In other words, one price level is
just as good as another, and a changing price level is just as good as
a stable one if you can make the changes all around.
The harm comes primarily from the fact that debts do not change,
while other things do; and additional harm comes when you disrupt
the price structure in other ways, as Professor Mills showed in detail.
But the divergencies that he showed in his charts, which are extremely interesting, are largely due to the deflation itself.
I have made studies along the same line. You will find, in my
book on index numbers, that I took, as the period for studying the
widest divergencies of prices, a period of great inflation. If you
have a period of great inflation or a period of great deflation, you
have these divergencies at their maximum; and it is, as Mr. Mills
said, one of the terrible consequences.
To my mind, we want stability in order to avoid a destruction of
the price structure, as he calls it; and if you have a stable price level,
or if you have the wholesale commodity index there stabilized, the
divergencies or dispersion of prices that he has exhibited would not
exist to anything like the degree to which they exist now. This
dispersion is a by-product of the deflation or the inflation, and one
of the worst. In a general sense, it is the only injury—the fact that
debts and everything do get out of line.
Senator CAREY. Why should there be a greater shrinkage in one
kind of product than in another? For instance, why should farm
products fall so much more rapidly than others, when you have a
period of deflation?
Mr. FISHER. Each price has a kind of coefficient of adaptability.
When you had this enormous rise in prices, the 5-cent fare in New
York City remained a 5-cent fare. In Boston it jumped to 10 cents.
It did not go through the various stages, from 5 to 5*4, 6, 6 ^ , and
so forth, as on the stock exchange, because there is little adaptability
in that sort of price. Everything is adjusted to have it constant;
and so the 5 cents you drop in the telephone box is not going to
change overnight with inflation or deflation. It is more or less
fixed. So with your postage stamp, and so with all contractual
prices or legalized prices or customary prices, including salaries and
wages, and certain retail commodities such as typewriters. They will
stay, year after year, at the same figure.



Senator CAREY. Because they fix the price.
Mr. FISHER. Even when there is competition, certain prices stay
by custom. It is largely because competitors do not like to break
ttie prices, but it is not necessarily because of any price agreement.
If you have, in other words, a stable price level, the evils to which
Mr. Mills referred are reduced to a minimum.
He said that if you tried to get back to a normal level from where
you are now, on the general level of prices, these divergencies would
not be made up. They would not entirely. Why should they ? In
a dynamic world, everything is constantly changing. It would be
entirelv wrong if you could all get back to the price relationships of
1013, or 102(3, or an average of 1021 and 1020. All you can expect
is an average. Nor can you help debtors so that ideal justice is done,
by any such act as this. Some will be helped more than they deserve,
and some less. People who have gone broke and gone through the
bankruptcy courts can not be helped at all. Men who have committed suicide can not be resurrected. There are lots of things that
you can not correct, but that is no argument against stabilization.
Which, in an average way, will accomplish so much.
Senator FLETCHER. His objection, as I understand, and the point
of the others this morning, was to the effect that we can not fix any
standard or guide or specify any. requirement as to what they must
do or must not do. It may work to our advantage, and it may work
to our disadvantage, to have any standard fixed. They do not seem
to object to stabilization, but they do not want any control or any
power to expand or contract. What have you to say about that?
Mr. FISHER. I think, myself, it would be quite possible to make
the requirement a little less rigid. You could say, " so far as possible." They object that they are compelled to do a certain thing
absolutely, or be regarded as defaulting. You certainly do not want
to be unreasonable and require them to do something that they can
not do. It would seem to me perfectly reasonable to say " so far as
they can," or something of that sort, so that they would not have
any excuse.
Senator BROOKHAUT. Doctor Miller said this morning that a pricelevel index was an imaginary thing, that it had no mility.
Mr. FISHER. He spoke of it as a metaphysical existence. I was,
I confess, very much surprised to "near that statement. I had supposed that he was very familiar with index numbers. That statement used to be made when I began my studies of economics, and
it was a very common opinion; but to-day practically nobody holds
that view, because our actual practical studies in index numbers
have shown that they have a tremendous meaning, and a tremendous degree of accuracy.
I am sorry I have not brought my book on index numbers with
me, but I have there assembled a great many costly calculations,
which show that you ^et substantially the some result whether you
use one method or another, provided it is a reasonable method, with
one group of commodities or another. If you take 20 commodities.
200 commodities, or 2,000 commodities, and do not " stack the cards ";
if you take them at random, or in any fair way, or try to be fair
about it, you will get remarkably close results between your different



Senator BROOKHART. Then, you feel that, if we use this wholesale
commodity index, we will get about the same result as if we used the
index of general prices ?
Mr. FISHER. NO. I am glad you asked that question. I would
like to modify my answer to make it clearer. What I meant to
say was in reference to wholesale commodity prices reckoned in one
way or another. You get very much the same result. But if you
take wholesale commodity prices and stock prices, you will not get
the same results. If you take wholesale commodity prices and retail
prices, you will not get the same results. If you take wholesale
commodity prices and wages, you will not get the same results. If
you take Carl Snyders index of general prices, including all these
things—a very interesting index which has a great deal of value,
but which I do not think has yet been developed so that you can
put it into law—you will get a still ditferent result, but the divergencies between these ditferent indexes, wholesale, retail, stock prices,
wages, debts, and a general inclusive index of all the divergencies
between those indexes will be very much less if you have any one of
them stabilized. The divergencies, as Ave find them, are great in a
period of inflation or deiiation, but are not so great if you have any
one of the indexes stabilized. In oilier words, stabilization of any one
means a certain stabilization of all.
Senator BROOKHART. This bill, or this chart, uses line C.
The CHAIRMAN. YOU are referring to the chart Mr. Elbert introduced ?
Senator BROOKHART. The relationship between bank credit and
Mr. FISHER. Yes.

Supposing, instead of C, the index of wholesale commodity prices, we struck that out of the bill, and substituted B. Would the operations of the Federal Reserve Board be
much different to get the result prescribed by the law i
Mr. FISHER. Sometimes they would. The period that was mentioned, between 1920 and 11)30, would be a case in point. Ordinarily
they would not differ so very much.
Senator BROOKHART. They would start to raise these prices, we
will say, at this point on B, over to the letter B. It is not so much
ditferent from C going over to the letter C.
Mr. FISHER. Not very much.
Senator BROOKHART. That is the way to figure it*
Mr. FISHER. Yes. There has been a great deal of discussion as to
what is the ideal index number for stabilization, and the question
has never been ideally solved. There is much to be said in favor of
Carl Snyders index, but in passing a law, you want to have something that is understood by the people, and to use methods that have
been well tried. With all due respect to Carl Snyder—and there is
no one who admires his work more than I ; I think it is of the very
first order—I think his index is something that is still in the process
of being perfected, whereas the index numbers of the United States
Bureau of Labor Statistics have been tried out for many decades,
and they are also more easily understood by the people.
The CHAIRMAN. He includes a great deal more.
Mr. FISHER. Stocks, rent, wages, and everything under the sun.
Personaly, I do not think it is ridiculous. Personaly, I would just



as soon have it as this. In fact, I would a little rather, academically
speaking; but when you come to practical legislation, you men have
to face a practical question, and if you were to try to explain such an
index as that, they would say, " What is a dollar, then? " Now, you
can say, "A dollar is a composite of commodities in certain proportions, as shown to this committee, or the committee in the House,
by Ethelbert Stewart, Commissioner of Labor Statistics." It shows
you definitely what a dollar will be under this law.
Senator BROOKHART. Carl Snyder uses stock values.
Mr. FISHER. Yes.

I would object quite seriously to that, myself,
because I think there is more fiction in them than in anything else.
Mr. FISHER. YOU would find a great deal of objection to it from
a practical point of view. From the practical standpoint, I think
it would be better to stick to what you have in the bill.
The CHAIRMAN. IS there anything further you want to touch on,
Mr. FISHER. I think it should be pointed out that this bill does
not confer any powers that do not already exist. It seemed to be
implied by some of the testimony that it was a dangerous power
that you were giving; but if it is a dangerous power, it already exists,
and you are taking away from the danger by limiting the exercise
of it. I quite agree that it is extremely dangerous—and that is one
tiling I did most emphatically agree with Governor Meyer about
this morning—to leave to the discretion of any group the determination of what your dollar or mine is. It seems to me that it ought
to be clearly pointed out that that dangerous power already exists,
and you are trying to make sure that it is not abused.
Senator FLETCHER. They have been exercising that power to some
extent since February. They did not do it before, and now they
are beginning. They claim to have it granted under the GlassSteagall bill. I think they always did have that power under the
Federal reserve act, but they did not begin to do this thing until
last February, and now they are pursuing this course, apparently
with satisfactory results, although I was going to ask whether you
observed any effect of this extension of credit and expansion idea
on commodity prices, and if not, whether you think time enough
has elapsed so as to indicate that.
Mr. FISHER. I do not think time enough has elapsed. I know that
Governor Strong always said that several months lag existed between
the open market operations and the effect on price levels. The first
effect is to telescope the debts. As you put the money in circulation, whether you call it money or credit—new purchasing power in
the hands of the banks—it goes right out again in paying debts to
the Federal reserve. It is destroyed almost as fast as it is created,
until they are entirely out of debt and " unhooked," as he expressed
it, from the Federal reserve system. Then the more credit it dumped
into theTmember banks, the more it embarrasses them to know what
to do w ith it, and finally they have to extend credit and pass it on
to the customer, and it raises prices. It all takes time.
Senator CAREY. That is exactly what they are trying to do now.
Mr. FISHER. Yes. Governor Strong used that with great success.
He was the first one to see how this could be utilized, and he formed
an informal open market committee himself. It had no official



standing, but it mount cooperation between the banks, and for several
years it worked extremely well.
Senator FLETCHER. Mr. Miller seemed to think that was of doubtful benefit.
Mr. FISHER. There was a great difference of opinion between him
and Governor Strong. It reached an acute stage sometimes. That
is one reason why it seems to me you should have a mandate. There
have always been disagreements and bickerings in the Federal reserve system over the open market operations. They did not know
themselves which way they were going, whether they were going to
raise or lower prices, or stabilize prices; whether the price level
was the primary consideration, or, as they said, in a vague way, the
general credit situation, or what it was. In that way, you never get
any real stabilization, and you get a different policy according to
successive attendance at the different meetings. Sometimes a dominant man will be present, and he will guide the policy of that meeting. The next time he will be absent, and somebody else will be
present, and you will get a vascillation there.
Senator FLETCHER. I suppose the actual experience that resulted
from Governor Strong's course there showed that it was a wise
course, and it demonstrated itself.
Mr. FISHER. It seems to me it did; the trouble has come since he
Senator BROOKHART. What is the added advantage of section 3 of
Senator Fletcher's bill, over the Goldsborough bill?
Mr. FISHER. That, as I understand it, makes permanent the GlassSteagall bill. I think it would be good. I should like to see it done.
Something was said, I think by Mr. Miller, in regard to prices
fixing themselves, and the price levels fixing themselves. As I have
already said before this committee, according to my understanding,
a price level and a price are two distinct things, just as distinct
as velocity and momentum. There is a factor in one not in the other.
If you try to express a price level you will find yourself using entirely different words Tfrom those used in expressing a price. The
price of wheat is how much? So many cents a bushel. But the
price level is not so many cents a bushel. It is not so man}7 cents a
pound. It is 110 per cent, or 68 per cent. It is a percentage. It is
a ratio. You get a price level, not by averaging prices, but by
averaging " price relatives." You take the price of wheat, at so
many cents a bushel this year, and the price of wheat in 1926, at
so many cents a bushel, and divide one by the other, and you get a
ratio, say, of 56 per cent, or whatever it may be. You do the same
thing for some other commodity, and instead of 56 per cent, you
get 62 per cent, or whatever it may be, and then you average those
price relatives. The process is entirely different from averaging the
Anyone who has studied index numbers knows that you get a
very foolish result when you try to average the prices of things that
are entirely unlike. You must first reduce them to percentages,
which are homogeneous. Price level and price are two entirely distinct things, and the laws for determining price and the laws for
determining price level are entirely distinct.





I am not one of those who believes in interfering with supply and
demand very much. It is with great reluctance that I can consent
to any price-fixing bill, or anything that interferes with the natural
play of supply and demand. But what do supply and demand do?
They fix the price of one commodity relatively to money, which
means relatively to other commodities.
Senator BROOKHART. The tariff laws upset the law of supply and
demand, and act as price-fixing agencies, do they not ?
Mr. FISHER. Yes; but the fixing of a price level is an entirely
different thing. As I have often said, it is easier to fix the general
level of prices than it is to fix any individual price, because it is an
entirely different thing. You can raise the general level of prices by
inflation, to make it a thousand times what it is now.
Senator BROOKHART. It is easier to figure the average cost of
production than any particular cost.
Mr. FISHER. YOU could not fix the price of sugar 50 per cent higher
than it is now—that is, out of line with other commodities.
Senator BROOKHART. Because of the world supply ?
Mr. FISHER. NO ; because it is an entirely different problem to fix
the price of sugar, than to fix the general price level.
Take a somewhat different simile—not a very accurate one. It is
the difference between fixing the level of a lake, and fixing the height
of a wave. If you should try to fix the height of a wave in a lake,
or in the ocean, you simply could not do it. The forces are so tremendous that it stays there only a second, and then it will elude you;
but fixing the general level of the lake is merely a matter of pouring
in or draining out the right amount of water.
Senator CARET. YOU speak of fixing the price of sugar. If we
inflated our currency enough, could we not bring a lot of sugar into
this country?
Mr. FISHER. If you inflate the currency, you can raise the prices
of everything, including sugar, but it would not be fixing the price
of sugar relative to wheat, for example.
This is perhaps a little different from your bill, but since the question was raised, I mention the fact that I believe it is possible to
control the direction of credit to a certain extent by means of a device which was never used, but which was suggested by Luther
Blake, the head of the Standard Statistics Co. He told me in conversation not very long ago of this idea, and it appeals to me.
The banks could have a different reserve requirement for each
class of loans. Brokers' loans would have a higher reserve than
some other kind of loans. In that way, you would have selective
control. However, that is not in your bill here, but I believe after
this bill is passed, which I think is fundamental, there will be a lot
of legislation that can then be built on it to help carry it out. I
think the Federal reserve people will help then, rather than hinder.
The CHAIRMAN. YOU suggest. Doctor, that it be modified and be
less rigid than in the present form, still serving the same purpose?
Mr. FISHER. I said that I would not object, if it would help the
feelings of the Federal reserve system.
The CHAIRMAN. SO long as it would serve the same purpose.
Mr. FISHER. TO put in " so far as possible " or something like



Senator BROOK HART. If you put the word *v substantially " in
there, would not that serve the same purpose'(
Mr. FISHER. Something* of that sort.
The CHAIRMAN. YOU mean so that it would serve the same purpose, and be less objectionable (
Mr. FISHER. Yes. On the other hand, I wanted the third section,
not in the Senate bill, but in the original Goldsborough bill, for
changing the price of gold. If you had that, giving the power to
change, either raising or lowering the price of gold, either for selling or buying, it would give the power, among other things, if we
ever did need it, 10 years from now, or in any time of emergency,
for any reason to get oil' the gold standard, to do so without having
a long debate in the Senate or House, which would, in the meantime,
embarrass us by withdrawals of gold. I really wish that could be
put in, if not in this bill, then in a separate bill.
There are several things I would like if I were drawing this bill,
that are different from its present provisions, and I have gone on
record in the House hearings with regard to those points. If any
of you are interested in going into them, they are fully covered in the
House hearings.
The CHAIRMAN. Would you care to make brief reference to the
changes you suggested in the bill?
Mr. FISHER. That was one of the things that I would like. That
was in the bill, but it was taken out.
Senator FLETCHER. That is the thing we ought to keep in mind.
Mr. Goldsborough left that out, because he apprehended difficulty ingetting his bill through.
Mr. FISHER. Yes.

If we make a lot of amendments here, we may
block the whole thing.
Mr. FISHER. Exactly. I was going to say that, Senator. I was
just saying that you can not get a bill that, will satisfy everybody.
This bill is not exactly as I would draw it. It is not exactly as Mr.
Goldsborough would draw it, but it has passed, now, and if you try to
perfect it so as to suit Mr. Miller, Mr. Meyer, or myself, or any of you
people, here, I am afraid you are going to have a Jong time getting it
through, and it is such an emergency measure that my suggestion
would be to put it in such shape as will insure its passage. 1 on men
know more about that than 1 do. You know, in the give and take
around the table here, what is necessary to get it out of the committee. You may know what is necessary to get it through the White
House. My advice would be, if you can get it as it is, to get it
through. If you have to modify it to get it through, some "other
way, modify it and get it through, and then I believe there will be
a lot of legislation that will come out of it and stand on it, which
will be necessary to perfect it, and that will take years. It will
take a long time, anyway, before this bill will attain its objective.
Senator FLETCHER." The main objection seems to be that they am
not do this thing that they are told to do; that it is not practicable,
and probably not possible. But if they find they can not, then they
can come back and ask for a change of the law.
Mr. FISHER. Yes.

We think they can make headway, at any rate,
and that they can really do what we tell them. I have not any



doubt in my own mind that they can do it, but they seem to think
they might'not be able to. If they do not go all the way they can
go part way and make some progress.
Senator CAREY. They are trying to do that very thing right now.
Senator FLETCHER. Absolutely.
Mr. FISHER. Much has been said about it being impossible to do it
because of other countries; that you have to raise the price level in
all countries. But I went into that when I spoke before. It is true
that all countries having the same standard, the gold standard, have
to have their prices go up and down together, so far as international
commodities are concerned. That will more or less take care of
The CHAIRMAN. Therefore, you feel that the inflationary effect of
this bill would
apply only to those commodities that are marketed
domesticalhT ?
Mr. FISHER. NO. I think all other gold-standard countries would
be affected by our own action, but I also think you want to get international cooperation. One of the things that should be done as soon
as this bill is passed is to have an international conference to try to
bring about cooperation, and ultimately this money problem is never
going to be solved until it is internationally solved; but if you wait
to get that first you are not going to help.
The CHAIRMAN. IS there gold enough in the world with which to
stabilize the situation ?
Mr. FISHER. I think there probably is in the countries that have it.
There are only two important countries that have gold to-day.
The CHAIRMAN. But the others have their markets. If we are
trying to stabilize it all, I am wondering whether it can be done with
the quantity of gold available.
Mr. FISHER. The nongold-standard countries would be quite out of
it. China is out of it.
The CHAIRMAN. Or would an international agreement have to be
on a bimetallic basis ?
Mr. FISHER. I think one of the things that can and should be done
later would be to have a broader metallic base—not through bimetallism, because that is a very unstable method, but by some other plans
that I might mention if I had time.
The CHAIRMAN. I may be mistaken, but I think there would be
two ways to get a broader base. One would be to produce more gold.
The other would be to use some other metal, or some additional
Mr. FISHER. If there were time, I would go into that in some
detail. I think there is a very specific method. The best method
for that purpose was worked out by Mr. Rand, who is here. It
would take some little time to explain it, and it does not really
belong to this bill.
When you have this bill passed, as I say, it is merely a declaration
of purpose, that it is the policy of the United States to reflate and
stabilize. It does not matter so much where the level is that you are
going to. It will take a long time to get there, anyway. But you
are going to do those two things. After that is done, you can have
modification in the means of doing it worked out separately.
The CHAIRMAN. Briefly, what are the causes of the present situation? Is the cause largely monetary?



Mr. FISHER. I think the cause is nine-tenths monetary.
The CHAIRMAN. If you were to go further and try to point out
the causes, what would they be?
Mr. FISHER. The thing started with too much debt; partly speculation in the stock market; partly the debt of the farmer; and partly
the intergovernmental debts, and the reparations debts; partly the
installment buying debts, and a great many others.
As you have been told, there "was an estimate of $203,000,000,000
of debt in 1929. As I have gone over that I find it is really considerably more than that.
Senator CAREY. DO not all deflation periods start from overexpansion of credit?
Mr. FISHER. I think that is the chief cause. I would not say it
was invariably the cause, but it is usually, in the big deflations, the
chief cause.
The CHAIRMAN. In the agricultural States we had 9 or 10 years of
deflation before this collapse in 1929.
Mr. FISHER. Yes.
Senator CAREY. We

had over expansion of credit before, during,
and after the war.
The CHAIRMAN. But we were on a lower level, both of earnings
and prices, for many years while the rest of the country enjoyed
what we called national prosperity.
Mr. FISHER. If we had kept the price level at any stage, we would
not have had the trouble. The debts merely started it oil. The
trouble is not debts so much as it is deflation, and the deflation has
aggravated the debt burden. It is deflation, and you want reflation
to correct that.
Senator BROOKIIART. What do you think of the theory of a fraction of the national wealth as the dollar standard?
Mr. FISHER. I think that is on a par with Carl Snyders idea. It
is good—extremely good—but we have not the statistics as well
worked out.
Senator BROOKIIART. It would take further stud}7 to get at that.
Mr. FISHER. Yes.

One trouble about it is the fact that those
prices are not stabilized, so as to be available as a money standard;
is not that true? If we got a general stabilization, it would become
pretty easy then, would it not?
Mr. FISHER. Yes; exactly so.
If I may, Mr. Chairman, I would like to read some extracts from
Sir Arthur Salters book, because it will show how the 'views that
have been expressed here by me and by Professor Warron, and by
other witnesses, are held by other economists across the sea.
The CHAIRMAN. HOW many pages would that be?
Mr. FISHER. It will take only a few minutes.
The CHAIRMAN. YOU would like to read them into the record ?


The CHAIRMAN. Proceed.
Mr. Fisiif!!. Sir .Arthur Salter. as many of you doubtless know,
was for years the- head of the economics section of the Secretariat
of the League of Nations. He has been very close to the economists
of the world and the statesmen of the world, the banks of the
world—the Bank of England, and all the rest—and is very highly




respected as one of the great authorities in the world on this subject. His book, which has only come out in the last few weeks, is
called Recovery, the Second Effort, and it has had a great deal of
attention already.
He proposes exactly what this bill proposes as a remedy—reflation and stabilization. I have marked a few pages here that I would
just like to quote.
On page 80, he says [reading] :
What the world needs now is an increase in the general world level of
gold prices, preferably till it reaches the level of 1029. What it needs
afterward is reasonable stability of the world price level.

You con Id not have a better statement of what the Goldsborough
bill states than that.
On page 87, he says, in reference to individual countries [reading] : '•"
Those countries, however, which have a gold surplus—

Meaning, of course, America—
could create new money so as to increase first their own and then the world
gold prices, and at the same time set in operation forces which would correct
the present economic and financial disequilibria.

Showing that one country can do something by itself.
Then, on page 100, he again says [reading] :
The world needs, in order to escape from the present depression, and then
to have a basis for orderly progress thereafter, first, an increase in gold prices,
and then stability.

Then, on page ?>%ti—this, perhaps, is not quite as pertinent as I
thought it was. I had it quoted for something else, but so long as I
have mentioned it, I might as well read it, [Reading:]
A. managed world currency, without the support, or the cost, of gold, should
doubtless be the ultimate ideal. But such a currency needs a degree of international trust which does not now exist and would best be controlled through
tin institution which had acquired confidence and a reputation in many years
of humbler work.

Sena-tor BKOOKHART. Suppose we do that for the. TTnitcd States
alone. Would not that work all right, except in matters of international exchange ?
Mr. FJSHWJ. If it were scientifically done. [Continuing reading:]
A concerted world monetary policy, with an international bank ;;s an instrument to help in applying it, would be of inestimable value to world trade.

You will find the same things in the writings of a great many
other economists, so this is not simply the idea of a few people who
have appeared <:•:? heh.df of the Goldsboroiigh bill. It is almost the
universal opinion of economists.
The only difference between Doctor Mills nnd myself is that, he
has emphasized the shortcomings. I might do the same tiling. I
refer you to my testimony to find criticisms of this, made in the
House. Bur in order to ix^t something done quickly it seems to mo
that we am not do better than go right on with what you are doing
and then make corrections later.
Senator FLETniEL*. The committee has before it the Goldsborough
bill and the King resolution calling for this international conference. We have that resolution before us now.



Mr. FISTIER. I hope YOU will pass it. It seems to me this Goldsborough and Fletcher proposal is the most fundamental thing you
have. Simply as it is, it is the basis for everything else.
The CHAIRMAN. That concludes the hearings on this bill.
(Whereupon, at 5.20 o'clock p. in., the committee adjourned.)
(Thereafter, at the request of Senator Fletcher, a letter from
Srinivas Ram lYagel and a statement by George Shibiey, were made
a part of the record, as follows:)
NKW YORK, Man 13,



United states Hen ale, WaxJiinfrlon, D. C.
MY DEAR SENATOR : I thank you very much for your letter, and appreciate
your having read my concluding article with interest.
It is, indeed. \^vj kind of you to ask for my views on the House bill of
Mr. Goldsborough now before the Senate "Banking and Currency Committee,
and which enjoins upon the Federal Reserve Board, the Federal reserve banks,
and the Secretary of the Treasury to make effective the policy " t h a t the average purchasing power of the dollar as ascertained by the Department of Labor
in the wholesale commodity markets for the period covering the years 1021
to 1020, inclusive, shall be restored and maintained by the control of the volume
of credit and currency."
The Federal Reserve Board is doing it now in a fairly large way, i. e.,
trying to control the volume of credit and currency, with a view to raising
prices. In fact, they have started inflation, under the provisions of the ClassSteagall bill. But. prices are still going down. Whether similar operations o?i
a larger scale will be productive* of results is a matter for inquiry.
Under present conditions the Goldsborough bill or something else like your
own proposal is the only possible avenue of escape from depression. I still
believe that devaluation of the dollar will be more effective and productive of
more permanent results than inflation. But, the idea of devaluation is sort
of terrifying; there is little chance of such a proposal being accepted. The
situation is urgent, and something has to bo done very soon.
Under the provisions of the (loldsborough bill the needed currency, whether
four billions or nine billions, can be issued easily. There is little doubt also
that, such currency will be added to the deposit of the banks. There is still
no plan by which the new money can reach the avenues, where it will do
the most good. If Congress supplement* the* Goldsborough bill with legislation which will effect this, it will then be a worth while accomplishment.
Permit me to explain the situation briefly, as T understand it. In th-ory
the banks, whose deposits will bulge with the new money, will be forced to
make loans freely, or buy securities, particularly industrial bonds: in either
case, the money should reach the people, who are supposedly inactive because
of the lack of credit. The truth is that the banks can do neither under prevailing conditions. The reasons are. as follows:
1. There is very little demand for credit., from responsible individuals or institutions. The large corporations have a large volume of current assets, including cash; if there is demand for goods, they can work full blast, almost
immediately. Their inactivity is :m indication that demand for goods is not
enough to justify the granting of credit to the small industrialist and retailor—
who lacks funds to keep operating. These latter have little collateral to
offer—in view of the heavy depreciation of securities and real estate.
2. The banks themselves are none too good a position. The bulk of them
have taken full advantage of the instructions of the Comptroller of Currency
to show values of their security holdings—either as investments or collateral
for loans—at values, as of June ,'->0, 1931. At date, security values have declined 50 per cent for stocks, and 22 per cent for bonds, between June, 1931,
and May. 1.082, Other collateral, like real estate and commodities, like copper
on which the banks have made loans, have depreciated immeasurably. So the
banks can no longer take the normal chances which they otherwise would.
o. The banks themselves hold approximately 50 per cent more securities
than in 1020 in collateral and investments—in addition to their holdings of
Government bonds. In fact, they are saturated with them. The bulk of their
deposits are demand deposits; they have to liquidate to meet deposit" withdrawals, which are h<avy at this lime, when those that can have to live on
their savings and resources. The insurance companies have to meet increas-



ing policy loan demands. The banks can not load up on securities without
endangering themselves.
As the banks can not help, and no nongovernmental agency can either, there
is no other course open but that the Government should devise a method by
which the new money issued reaches the users of such. Money, on the other
hand, can not be given away. Therefore the Federal Government must arrange to purchase goods and services with the new money.
Salvation or relief from depression can not arise from borrowing. People
in the United States must be accorded opportunity to earn, to work, sell, and
buy. The only other way they can find relief is by the cutting down of their
Therefore, inflation or the issue of large sums of new money must be simultaneous with Government expenditure on a large scale; only then will there
be benefit. The United States can now spend on permanent national improvements like roads, housing for the poor, canals, water-power installations and
such—some of which might be revenue producing in the future. This may
be objected to as unsound economically; it may be such under normal conditions, but to-day it is unavoidable. All large issues of currency at all
times and in all countries have been used for government expenditure. Prices
will not raise until somebody buys and employs labor; no other agency but
the Federal Government can do that in any worth-while scale in the United
States at present. The Government can not any longer aiXord to let things
drift, without very serious consequences to the body politic.
In my opinion the Wagner bill for public works affords a basis for supplementing the Goldsborough bill. However, no bonds or interest-bearing obligations should be added to the present total. We have already a Federal
deficit of $3,000,000,000. Bond issues may be necessary to cover deficit.
Therefore, if the bill of Senator Wagner, or something similar, to authorize
Federal expenditure of, say $5,000,000,000 for national public works, is, in
some manner, combined with the Goldsborough bill, which should only give
power to the Federal Reserve Board to issue currency to pay for such public
works, we are bound to have a rise in prices, and a solution, although temporary, of the depression.
I have endeavored to express as briefly as possible the salient points in
connection with the Goldsborough bill. My article with full details and
supporting facts and figures will appear shortly, and I will take the liberty
of sending you a copy of it. With best regards, I remain,
Very truly yours,


Mr. Chairman and members of the committee, I am submitting this statement in writing. My name is George Shibley, of Washington, I). C. I am
an independent economist, aiming to help end the depression by telling Congress
of the imperative need that it instruct the Federal reserve system to take the
necessary steps to end the deflation in the quantity of the people's medium of
In other words, the Senate should join with the House in enacting the
Goldsborough-Fletcher bill to instruct the reserve system to restore to normal
the quantity of the people's money and bank credit, and then to stabilize the
height of the price level.
This is preliminary to pointing out, first, the dreadful extent that deflation
is being continued by the organized bankers' control; and. second, that the
only practical way out is the passage of the Goldsborough-Fletcher bill.

Since the assembling of Congress the first week in last December the Congress
and the President have enacted nine relief laws for the ending of the depression,
but the depression continues to grow and now the depression is galloping on.
That is, from October 21. 19M1, the deflation in loans in member banks in the
reserve system has been 18 per cent; and the deflation in monetary circulation
has been 2 per cent. (Weekly Reports by Federal Reserve Board.)
Since the date of the passage of the Glass-Steagall currency law, February
27, this year, the deflation in loans in member banks has been 7 per cent in
two and 'one-half months; and the deflation in circulation has been 3 per cent.



During tlie past week the deflation in loans at member banks has increased
to a shortage of $125,000,000, and the fall in the price level has increased
in speed, to 65.1 on May 7, the index of the Department of Labor.

The explanation is the organized bankers' control operating through the
open-market committee of the 12 reserve banks, the banks of issue. The Government's commission, the Federal Reserve Board, has relinquished control over
the quantity of the people's medium of exchange except to approve or disapprove the open-market policy of the organized bankers. In other words,
the Federal reserve law places in the Federal Reserve Board a Government
regulation of the banks of issue. Section 11 and paragraph (j) says:
"The Federal Reserve Board shall be authorized and empowered * * *
(j) to exercise general supervision over said Federal reserve banks."
Yet with this statutory law the Governor of the Federal Reserve Board,
Eugene Meyer, in his statement disapproving the Goldsborough bill said:
" The Federal Reserve Board can only approve or disapprove the open-market
policies and operations proposed by the reserve banks " (page 558 of House
committee hearings).
The explanation is that the Federal Reserve Board by its own edict repealed
the supervision by itself of the quantity of the people's medium of exchange;
and the open-market policies of the organized bankers' control has continued
the deflation by refusing to reflate sufficiently. Therefore the member banks
in self-defense are calling their loans. The only practical remedy in behalf
of the producing groups is for the Senators to pass the House bill instructing
the reserve banks, the Federal Reserve Board, and Secretary of the Treasury
to restore the height of the price level to the average for the years 1921 to
1929, inclusive " by the control of the volume of credit and currency."
After the passage of that instruction by more than two-thirds vote in the
Senate, then if the officials in the reserve system shall still balk, quickly enact
a law giving specific instructions as to the details of the reflation.
The banks of issue can lawfully purchase in the open market $2,000,000,000
of bills of acceptances and Government securities in a week, with an equitable
distribution of the bills of acceptance in the various communities, and pay by
the issuance of Federal reserve notes. Such a policy of reflation if accompanied
by a declaration by the law-making department that the price level is to be
quickly restored to the 1921-1929 level would result in a bull panic—a struggle
to own property to get the rise in prices.
Gentlemen. I have told you of things which have been concealed for policy
sake. But the increasing disorganization of private enterprise has become
so dreadful that no longer is concealment practicable. I also quote from Senators Reed and Borah.

On May 5 just passed, Senator Reed, of Pennsylvania, a major in the World
War, said:
" Mr. President, I do not often envy other countries their governments, but
I say that if this country ever needed a Mussolini it needs one now. I am not
proposing that we make Mr. Hoover our Mussolini, I am not proposing that
we should abdicate the authority that is in us. but if we are to get economies
made they have to be made by some one who has the power to make the order
and stand by it. Leave it to Congress and we shall fiddle around here all
summer trying to satisfy every lobbyist, and we will get nowhere. The country does not want that. The country wants stern action, and action taken
quickly, ami that is what the President's message appeals for."
Senator Borah rose and said, ''Mr. President, will the Senator from Pennsylvania yMd to me?*'
Senator Reed said, " I yield." And Senator Borah said, " Having the great
respect that I entertain for the Senator, I wonder whether he wants the statement to stand which lie made, that if ever this country needs a Mussolini
it needs or-v* now? "
Senator Heed answered, "This country needs courage in public office, and it
3ias not been getting it. I do not think that we have given the country as good
service as it is entitled to expect from w><. I do not think we have shown
either the energy or the courage the country had a right to expect from us.
Tlmt is what I mean" (p. 9943, Cong. l l e c ) .



This appeal to end representative government was by a representative of
the ruling few who had deliberately secured the deflation in the quantity of the
people's medium of exchange, and Senator Reed on the preceding page of the
Record said that the price level is not to be restored; and he ignorantly argued, " It can not be done, and we will not embark upon the incredible folly
of trying to do it."
This leadership and that of President Hoover with his nine relief laws in
the wrong direction are responsible tor the depression, and Senator Reed now
appeals for a dictator.
Contrast Senator Borah and more than a majority in the Senate who will
vote for the Goldsborough-Fleteher bill to reflate and stabilice the price level.
On May 16, 11 days after Senator Borah asked Reed, of Pennsylvania, if
he desired his statement for a Mussolini to stand, Borah, in support of the
proposition by Senator Couzens for a more drastic taxation of the large incomes, said:
" We have been advised by the Commander in Chief of the Army, and we
all recognize it to be more or less true, that the situation which now confronts
us is really that of war. All the powers of the Government are to be organized
and enlisted for the purpose of controlling and directing the situation in the
interest of the public" (pp. KMil-2).
Then Senator Borah quoted the following to show how a revolution might
be started in the railway system, similar to the indirect strike of the spring
and summer of 1920:
The railroad brotherhoods called on President Hoover and said:
"Within a short time the Congress of the United States will adjourn in
order to have time to deal with political matters. Mr. President, we have
come here to tell you that unless something is done to provide employment
and relieve distress among the families of the unemployed we can not be
responsible for the orderly operation of the railroads of the country—that we
will refuse to take the responsibility for the disorder which is sure to arise
if conditions continue'' (p. 10662, Cong. R e c ) . And the conditions have been
rapidly becoming worse, as the increased rate of loan shrinkage shows.
Pence and an unprecedented prosperity are in the direction of reflation and
stabilization of the price level, provided the needed next steps shall be taken
for regulated private enterprise, the liberal program, the program for the
restoration of liberty, civil liberty.
In contrast is the creditor-class program that is being perpetrated on mankind ; and a third program is that in Russia, where there is no unemployment.
Senators, take your choice of the 3-cornered programs!

(Thereafter Senator Gore secured the permission of the committee
to have inserted in the record of this hearing the statements of Prof.
Morris A. Copeland, of the University of Michigan, and* of Prof.
Benjamin M. Anderson, economist of the Chase National Bank, New
York City, relative to the subject under consideration, as follows:)

In considering the advantages and disadvantages of the proposed commodity
price stabilization act. H. It. 11400, it will be well to begin by examining its
meaning. H. R. 11400, in its present form, is not entirely free from ambiguity,
and it will promote clarity if we make explicit the interpretation upon which
the analysis to follow is based. The proposed act appears to mean that the
Federal Reserve Board, the Federal reserve banks, and the Secretary of the
Treasury are to be directed to exercise all their existing powers which may,
in their opinions, affect the volume of credit and/or currency, in such a way as
to raise the Bureau of Labor Statistics wholesale price index to, and to keep
this index stable at a figure equal to the average of that index for the years
1021 to 1020'. inclusive. Section ?> of the proposed act seems to imply that,
where any previously authorized policy or procedure conflicts with this exercise
of existing powers, this exercise of powers shall have priority, regardless of
the nature or importance of the policy or procedure displaced.
It is further to be presumed that the phrase. " volume of credit and currency "
means "volume of credit and currency in the United States," and that in the
absence of a more specific definition of the terms "credit" and "currency" the
Federal Reserve Board, the Federal reserve banks, and the Secretary of the



Treasury are to have reasonable discretion in construing them, subject to court
review. * Further, the phrase " average purchasing power of the doiiar as ascertained by the Department
oil Labor in the wholesale commodity markets'' presumably means 4i the index of such purchasing power published by the Bureau
of Labor Statistics in the form in which it may at any time be currently
compiled, subject to revisions of this index by the bureau subsequent: to the
enactment of the proposed stabilization act/' Finally, it would seem that the
proposed act does not authorize the Secretary of the Treasury to make additional expenditures for public works construction or other purposes as a means
of putting additional currency or credit into circulation, nor does it authorize
him to alter the existing mint price of gold, or the existing methods of
maintaining that price.
If this interpretation of the intent of the proposed stabilization act is correct,
we may proceed to consider the advisability of the proposal. If !he proposal is
advisable in the public interest, it is clear that the proposed stabilization must
be possible without causing more trouble than it cures. Assuming that changes
in the volume of currency and credit under the control of the Federal reserve
system and the Treasury have as their chief effect changes in the level of
commodity wholesale prices included in the Bureau of Labor Statistics index,
and that changes in this price level are chielly due to changes in the volume of
such currency and credit, the proposed act should function well in the public
interest, provided that it is wise to stabilize at the 1021-1021) average as a
norm, and that our existing technique of measuring the wholesale [trice level
is fairly satisfactory. But if the exercise of our existing credit controls should
have other important effects, the remedy might be worse than the malady it
aims to cure. And if this group of commodity prices should turn out to be
more responsive to factors other than such credit controls,
the remedy might
prove largely ineffective. Again, if the IDill-lOiU average1 is not wisely chosen
or if there are important defects in our existing technique of measuring price
movement, stabilization ot! the Bureau <>f Labor Statistics index at this figure
might prove to be unfortunate, although in general stabilization may be a
desirable policy.
In considering the advisability of the proposed act, then, I believe we should
try to answer the following questions:
(1) What are the relations between changes in the volume of currency and
credit and changes in the Bureau of Labor Statistics wholesale price index?
(2) What are the existing types of monetary and credit policy which might
be interfered with by the proposed commodity price stabilization policy*'
($) What are the principal causes of changes in the commodity price level?
(4) What are the merits of the 1921-11)21) average as a stabilization norm?
Lot us consider these questions in order.
(1) What are the relations between changes in the volume of currency and
credit and the changes in the Bureau of Labor Statistics wholesale price hidex?
The term "volume of currency" may for the purpose in hand 1K-» identified
with the otfieial Federal Keserve Board compilation of "money in circulation/'
The effectiveness of money in circulation upon prices depends not only on its
volume but also on how much circulating it does, upon what is called its
"velocity of circulation/' or the number of times the average dollar changes
hands per year. Thus hoarding may diminish the effectiveness of money. The
bulk of money payments made to-day is not made by "money in ciivulation **
but by check, and the amount of this ''money work" done depends partly on
the volume of checking accounts outstanding and partly on the velocity of circulation of these deposits. Hence the proposed stabilization act docs well toinclude "credit." as well as "currency." We may summarize the situation
Total money work done= (volume of money in circulation) X (its velocity)
+ (volume of checking accounts or ''deposit currency ") X (the velocity of "deposit currency " ) .
Due of the principal purposes of the Federal reserve act is " to furnish an
elastic currency." In pursuit of this object the Federal reserve system permits th<^volume of "money in circulation" and the volume of "member bank
reserves" employed to support their checking and other deposit accounts to
expand or contract according as member banks find needs among their cusiouters for a largei* or smaller amount of currency and deposits. This makes the
volumes of currency and of checking accounts or deposit currency elastic. To
attempt to restrict the volumes of currency and deposit currency to p'-vwnt a
rise in commodity prices, or to attempt to force currency and deposit currency



into circulation to stop a commodity price decline, would be to abolish the
elasticity of the currency except when the commodity price level shows no upward or downward tendency. If we may judge by past experience, the policy
of elasticity would be in abeyance most of the time.
Furthermore, we must distinguish between the degree to which the policy
of expansion elasticity and that to which the policy of contraction elasticity
can be abandoned. The Federal reserve system might abandon its policy of
elasticity during a period of expansion, and closely restrict the amount of currency and reserve deposits <»f member banks directly, instead of relying chiefly
on its indirect controls of money rates through its participation in the money
market and of credit terms to member banks. Thus a maximum limit can be
closely fixed for currency and probably also for deposit currency., although,
•such fixation may be open to serious objections. But in attempting to prevent
contraction it would still have to rely largely on the indirect methods of easier
money rates and less stringent credit terms. It is easy to say " force currency
into circulation "—it is not so easy to find ways and means to do this under
existing mechanisms. The Federal reserve system can offer liberal terms of
credit, but. it can not well compel the acceptance of its offer, and it can not
afford to make its terms so liberal as to be lax. Lax terms clearly spell disaster. And if the system could "force currency into circulation" in the sense
of increasing the ••Volume in circulation," the system has no direct way of
making it circulate. The proposed stabilization gives instructions as to 3iow
to exercise existing partial"controls over the volume of "money work" clone;
it does nothing to improve those controls. The experience of 1029 lias led many
students of the problem to question the adequacy of existing monetary and
credit controls for the restriction of expansion. Existing controls are certainly even less adequate for preventing or undoing a contraction of the volume
of money work.
Let us look for a moment at the other side of the picture. On what is
"money work" done? Even if we assume that the Bureau of Labor Statistics
index- is representative of all wholesale commodity price transactions and of
retail price'transactions to boot (and this is a doubtful assumption), we must
recognize that these transactions account for only a fraction of " money
W ork "—less than 25 per cent in 1929. Between 1925 and 1929 the Bureau of
Labor Statistics wholesale index fell from 103.5 to 95.3 (yearly averages).
Most of this decline took place between 1925 and 1927—a period when credit
terms were favorable to the expansion of money work. During the years
li)'2~t-M)'2V/ wage rates were rising and a runaway slock market developed, while
some other important prices moved up and others down. Clearly more than
control of the total volume of money work is necessary to stabilization of the
commodity price level. It is necessary also to control the channels through
which money payments flow. Existing monetary and credit controls have very
lit lie influence when it comes to diverting the flow of money payments into or
out of one of these channels.
Existing monetary and credit controls, then, exert some influence on the total
volume of money work. That influence is less complete than is necessary to
the successful operation of the proposed stabilization act. When we consider
that to the successful operation of the proposed act it is also necessary to
control the channels through which money expenditure flows, if an attempted
contraction or expansion is to take effect on commodity prices, it is clear that
existing monetary and credit controls are far from adequate to a stabilization
of the commodity price index. Anything approaching the necessary control of
the channels through which money expenditure flows would involve a radical
change of existing mechanisms of control.
Even if it were feasible to control specifically the fraction of the total volume
of money work which is done on commodity prices, the problem would not be
solved. Tliis trnelion of the total money work fluctuates partly because of
changes in the level of prices and partly because of changes in the number of
uniis sold—tens of cord, barrels of oil, yards of cloth, bushels of wheat, etc.—
changes in what is called the "physical volume of transactions." There are
important, seasonal fluctuations in the physical volumes of transactions, which
have little or no relation to price movements, and the accommodation of which
requires important changes in the volume of currency and credit outstanding.
The # secular growth of these physical volumes over a period of years also
requires a secular growth in the volumes of credit and currency outstanding.
The hnpovtance of I Laving an elastic currency and credit system is accounted
for in part by the necessity of accommodating these seasonal fluctuations and



this secular growth of the physical volume of transactions. Existing monetary
and credit controls can do little to concentrate the effect of an attempted expansion or contraction upon prices rather than physical volume.
To recapitulate, existing monetary and credit controls affect but can not fully
determine the total volume of money work done. They could be used to set
a maximum to the total volume of currency and deposit currency in circulation.
They are less effective in compelling an expansion than a contraction of the
volume of currency and deposit currency in circulation. Their influence upon
the rate of circulation is indirect and incomplete. They can do little to direct
the channels through which money expenditure Hows or to separate the influence of credit controls upon prices from their influence upon physical volumes,
in such a way as to concentrate action upon commodity price level changes.
(2) What are the- existing types of monetary and credit policy which might
be interfered with by the proposed commodity price stabilization policy?
I shall attempt only a partial enumeration of such policies, (a) The aim of
the Federal reserve act " to furnish an elastic currency" and some oil the
reasons for this policy have already been noted. It should be added that f«»v
full effectiveness this policy needs to include elasticity of credit as well as
currency. It is clear that an attempt to " control * * * the volume of
credit and currency" would conflict with the policy of elasticity most of the
time and might in so far undo one of the most (instructive features of the
original Federal reserve act.
(b) The Federal Reserve Board in its tenth annual report offered as an
objective of credit policy that it should promote " the smooth unobstructed
movement of goods from the producer through the channels of distribution to
their several ultimate uses."(p. 34.) This presumably means stabilization of
business activity rather than move stabilization of commodity prices. The commodity price level alone is far from an entirely satisfactory indicator of what
is needed for business stability. During the expansion of business in 1026
which preceded the recession of 1.027, the operation of the proposed act would
have required a much easier credit policy than actually obtained, if the Bureau
of Labor Statistics index which was declining had fallen below the 1921—li:>29
average selected as a norm. It is clear that a policy of commodity price stabilization may conflict with the policy of stabilizing business activity.
ic) During the two years begilining August, 11)27, the Bureau of Labor Statistics index showed minor month-to-month fluctuations about a very stable level.
Yet. most students of the problem would agree that the Federal Reserve Board
was rightly concerned during this period to try to check the wild orgy of stock
speculation—would criticise the board, if anything, for not pursuing a more
vigorous policy of checking credit expansion. It is clear that the operation
of the proposed act would have prevented any efforts to check stock speculation
whatever, unless the commodity price level had chanced to be above the
average of the Bureau of Labor Statistics index which the proposed act has
selected as a norm.
(d) The use of credit controls to influence gold movements has come to be
a proverbial function of central bunk policy in all important countries. In
recent years, as the Federal Reserve Board notes in its annual re-port for 1027,
this problem has been complicated by the need for restoring stability of foreign
Gold may flow out of the country during a period of falling prices as it did
at the outbreak of the war, or it may flow in during a period of rising prices
as it did iu 1922. A policy of tightening credit to check the outflow of gold
might easily be prevented by the proposed stabilization act, if the Bureau of
Labor Statistics index were below the established normal. So also a policy of
easy credit to stabilize foreign exchanges might easily be prevented by the
proposed act, if the Bureau of Labor Statistics index were above the 10211020 average at the time, although such a contingency seems unlikely in the
near future.
These instances of other credit policies which might conflict with commodityprice stabilization are not intended to be exhaustive. They should illustrate
the proposition that credit control has a great many different types of effect
and that a wise credit policy will necessarily take these various lines of inihience into account and select that course which combines a minimum of undesirable effects with a maximum of desirable effects. I*rice stabilization, even if
there were no question that it could be fully achieved by credit controls, would
necessarily not be the only objective nor even in every case the most important
objective, of a wise credit policy. It may often be advisable, as it has been



in the past, to give chief consideration to other objectives that more emphatically demand attention.
(3) What are the principal causes oli changes in the commodity-price level?
The commodity-price level has sometimes been thought to have an existence
which is independent of the prices of individual commodities, so that a rise or
fall may be caused in it without disturbing the relationships between individual
prices. If: this view is correct, the problem of stabilizing the level of commodity
prices is a fairly simple one. According to this view, if the forces of supply
and demand iu a single commodity market lead to a price increase for that
commodity, other commodity prices will fall just enough so that the price level
will remain undisturbed. The price level, according to this view, is thus conceived to be like the sea level, and the individual prices like the levels of
wave-crests or wave-troughs. The general level of prices, if this theory is
correct, can be controlled independently of controls of individual prices.
The actual facts do not conform to this theory. A general influence upon
prices which may lead to changes in the price level (e. g., a tightening or
easing of credit), acts only through the supply and demand conditions in
individual markets, and it puts pressure more promptly and more directly, and
puts more pressure, on some prices than on others. Thus, the tight money
of 1921) had an especially depressing effect upon the demand for building
materials-and for export, goods purchased on credit, and helped to precipitate
a collapse of the valorization program in coffee. But individual prices respond
differently to a general inlluence, such as a tightening of credit, not only
because it exerts pressure unevenly, but also because there are important
differences in the abilities of different market organizations to resist the forces
making for a itrice change. The combined result of a marked decline in demand
and a strong resistance to price change may appear chiefly as a drop in
physical volume of sales and only to a slight extent as a price decline. The
recent history of steel is a striking illustration.
There is a further conflict, between the facts and the view that the commodity price level has an existence which is independent of the prices of individual commodities. When the forces of supply and demand bring about
a price decline in one market, the chief identifiable influences on other prices
are sympathetic and not opposite: (1) A depressing influence is exerted on
competing commodities. (2) If the decline resulted from a decreased demand,
a depressing inlluence is exerted on demand for raw materials and labor and
on earnings. (3) If the decline resulted from an increased supply of basic
materials there is a depressing influence on the prices of the products made
from thorn. A similar set of statements applies to the sympathetic influence
of price increases.
This sympathetic character of price movements has an important corollary.
When any considerable group of prices moves downward, the downward movement tends to spread to other prices and to become general. Such a general
decline acquires momentum, and tends to continue. Decreased prices of commodities mean decreased cost of living and decreased demand for labor and
decreased Government budgets. Decreased payrolls and taxes mean decreased
purchases—hence, decreased demand which mean further price decreases. Such
a movement of the " price level" or average of prices involves a vicious circle
of declining prices or a cumulative movement. The declines of 1920-21, and
1020-11)32 are examples. During the war we witnesed the converse process—
a vicious circle of rising prices producing still further price increases. This
rise of the price level was inaugurated by the widespread increased demand
for munitions and war supplies and for labor to produce them and to conduct
the war. As a partial explanation of the inauguration of the general price
decline we are now experimenting, two factors may be noted: (1) The new
phase of the industrial revolution that has been going on for a number of
years and (2) the high interest rates accompanying the stock market boom.
(1) The new phase of the industrial revolution has brought improved processes of production and the tapping of new areas as sources of the world's
raw materials—hence, we have had decreased costs and increased supplies
for many commodities, c. g. wheat, sugar, coffee, copper, tin, petroleum, rubber,
paper, silk, and rayon. Changes of technique have decreaed the demand for
other commodities through more economical use and through the use of substitutes, e. g. coal, leather, lumber, wool, and hay. (2) The high interest rates
during the stock-market boom decreased the demand for good, the purchase
of which required extensive borrowing. Thus Europe's demand for our goods
declined in 1020 and domestic building construction was curtailed.



Such cumulative movements as the war-time rise and the 1020-21 and
1929-1932 declines account for some of the prolonged major swings of t he price
level. But during the period beginning in the latter part of 1923 and ending
in the latter part of 1929 there were considerable fluctuations in the Bureau
of Labor Statistics wholesale price index which were not clearly of a cumulative
character, and which did not agree with what might J.H* expected on the basis of
credit conditions. The movement of the wholesale price index in this period
appears as the resultant of the somewhat independent movement of various
groups of prices. In a study of this period, I concluded:
"(1) The wholesale price level since 1924 has moved chiefly in response to
changes in supply conditions and the prices of raw materials. (2) The price
movements largely responsible for changes in the wholesale level are in industries where the output of raw materials is not closely or quickly adjusted
to demand: bituminous coal, petroleum, and domestic; agriculture; also certain
crude imports. Corollary: If the wholesale price level moves chiefly in response
to supply conditions in extractive industries, the road to stabilizing it is not,
at least, for the most part, a quick and easy one via credit mechanisms; under
present, conditions it is the far more arduous one of stabilizing cotton, wheat, and
corn farming, hog production and marketing, and the bituminous coal and
petroleum industries. So long as these industries remain unstabilized it will be
difficult to avoid those fluctuations in the wholesale price level which have
dominated its movements in recent years." x
Movements of the price level, then, may be (1) of the vicious circle type of
(2) of the type that is merely a resultant of largely independent movements
of somewhat separate groups of prices. In either case the price level moves
because of the changed supply and demand conditions for individual commodities. The credit situation is only one of a large number of factors influencing these supplies and demands. Its action is neither prompt nor sure.
The adequacy of credit controls to offset liuctualions of tiie price level like
those of 1924-1929 is extremely problematical. It can do little lo prevent the
cumulative character or momentum of general price movements of the " vicious
circle" type. That our credit controls could have been so administered in
1928-29 as to have prevented the inauguration of the present decline is problematical in the extreme. Although the violent cumulative decline began in the
latter part of 1929, there has been a general downward tendency not only in
our own commodity price level but in the commodity price levels of other important countries, at least since 1925, largely as a result of recent technological
changes and geographic shifts of industry. Probably the most that, can safely
be said for credit controls regarding this downward movement of commodity
prices is that possibly a much more vigorous credit check on the stock market
applied earlier might have permitted the downward price readjustments of the
new phase of the industrial revolution to take place more gently. The necessity
for such downward price readjustments is certainly not a new phenomenon.
This necessity characterized the progress of the industrial revolution throughout
most of the nineteenth century.
One important factor which the proposed stabilization act fails to reckon
with is that for many important commodities included in the Bureau of Labor
Statistics wholesale price index the supply and/or demand conditions are of a
world character. Assuming for the moment that we could by existing credit
controls raise the average <>f American wholesale commodity prices back to
the 1921-1929 level, could we expect to raise the prices of wheat and cotton,
which are determined in world markets? There is no reason whatever to
suppose that anything like the average percentage increase would be possible
for these commodities without abandoning the stability of our foreign exchanges, unless the price levels of foreign countries were raised at the same
time. If the United States were to undertake the stabilization program of the
proposed act single-handed, and were to succeed in raising its price level, far
from improving the plight of wheat and cotton farmers, it would make that
plight distinctly worse. The prices of their products could rise but little; the
prices of the goods they buy would rise by more than the average increase.
(4) What are the merits of the 1921-1929 average as a stabilization norm?
While stabilization of our commodity wholesale price level by existing credit
controls would have many advantages, if we could achieve it, there is no
peculiar virtue in the 1921-1929 average as the level for such stabilization.
Quite apart from international complications, such as those involved in wheat
Journal of the American Statistical Association, March, 1930, supplement, p. 169.
This paper was presonted in December, 1929.



and cotton, there are important relationships between domestic commodity
prices and oilier domestic market adjustments which ought to be considered
in selecting a norm. Stock prices, wage rates, rents, important types oi: taxes,,
and to some extent the capital structure of industry and trade have been in
process of readjustment to the changes that have been in process during the
past several years. The selection of the level to be used as a stabilization
norm should be based upon a careful study of all the factors in the situation
so that the level selected would require a minimum of: further readjustments.
It is doubtful whether a satisfactory level could be selected under present disturbed conditions. If, in spite of all the difficulties and the dangers enumerated
above, it seems wise to try an experiment along the lines of the proposed act,,
it would be far better to name no norm in the act but to delegate the determination of the norm to the executives intrusted with is administration, leaving them a period of two or three years in which to reach a decision. Furthermore, in view of the fact, that necessity for price readjustments involved in
technological changes and the opening up of new areas and new resources is
likely to be with us for a considerable period, it would seem wise to provide
for the necessity of changing the stabilization norm if and when the Federal
Reserve Board and the Secretary of the Treasury find that in the interests of
minimizing the troubles incident to such readjustments it seems wise to do so.
In this connection it is well to remember that downward readjustments of
commodity prices accompanied the progress of the industrial revolution
throughout most of the nineteenth century.

We may summarize our conclusions as follows:
I. Assuming that stabilization of the Bureau of Labor Statistics wholesale
index at the 1021-1920 level through existing credit controls is possible, it
would have important undesirable effects:
(1) If the United States accomplished this type of stabilization independently
of other countries, the prices of commodities largely dependent on an export
market (e. g. wheat and cotton) would rise loss than the index. Certain other
prices would therefore have to rise more. Industries and trades dependent
on the export market, as is a large part of agriculture, would be adversely
affected. (See pp. 14, 15.)
(2) In view of the adjustments already made in wages, rents, security prices,,
taxes, and the capital structure of industry and trade, the raising of our
wholesale commodity price level back to the 1921-1929 average would probably
involve more serious further readjustments than would be necessary if some
other figures than the 1021-1020 average were chosen as a norm. (See pp.
15, 16.)"
II. In any case the continuing variations of the price level would involve the
use of existing credit controls most of the time exclusively for purposes of price
stabilization. Other important effects of credit controls could receive little or
no consideration and other types of established credit policy would have to
be abandoned, wherever they conflicted with commodity price stabilization..
These policies include:
(1) The elasticity of the currency,
(2) Facilitating the smooth movement of goods from producer to consumer,
(3) Curtailing a speculative mania like that of 1928-29, and
(4) The control of gold movements and the stabilization of foreign exchanges. (See pp. 7ff.)
III. The proposed act adds nothing to existing credit controls. Stabilization
of the price level by existing credit controls is impossible, for
(1) While the Federal reserve system and the Treasury can, by abandoning
the policy of elasticity fix a maximum for the volume of currency and probably
deposit currency, it can not fix a minimum; the Federal reserve system can
offer liberal terms to member banks for putting currency and deposit currency
into circulation but it can not compel member banks to accept. Further, liberality of terms would be disastrous if it included inadequate standards of credit
standing for member borrowing. (See pp. 4, 5.)
(2) Existing controls (through the Federal Reserve system's participation
in the money market) have some influence on the rate of circulation of currency and deposit currency, but they can not determine it. Nor can they more
than very partially affect the channels through which money payments flow,
so as to concentrate the effect upon commodity prices, and avoid unfortunate
influences upon other economic conditions such as the physical volume of pro-



'duction, trade, and consumption; the stock market; gold movements and
foreign exchanges. (See pp. 4, 7.)
(3) Credit conditions are only one of: many factors affecting the average
of commodity prices. We can not through our credit controls prevent, the
important influence of special conditions in specific industries which dominated
the price index from 1024 to late in 1929. Our credit controls can do little to
prevent the cumulative character or the momentum of a widespread continued
price rise like that during the war, or the cumulative character of a decline like
that we are now experiencing. We can not through our credit controls avoid
the necessity for general price readjustments due to world-wide changes in
techniques and areas of production such as those that have been in progress
at least, since 1925. (See pp. 10-15.)

University of Michigan,
[The Chase Economic Bulletin, May 16, 1932 J

(By Benjamin M. Anderson, jr., Ph. D., economist of the Chase National Bank
of the city of New York)
The Golds!>orough bill brings home to us sharply the question of what should
and what should not be asked of the Federal reserve banks. The bill proposes
that Federal reserve bank credit policy should be guided by commodity prices.
It directs the Federal reserve authorities to raise the general average of commodity prices at wholesale as measured by the Bureau of Labor Statistics to
the average levels of 1921-1929, and to keep them there. The theory is that
this can be accomplished by a great expansion of Federal reserve bank credit.
After this level has been reached, Federal reserve bank credit is to be expanded
or contracted depending on whether commodity prices are falling or rising.
I do not believe that the Goldsborough bill, with its absurd proposal to
restore the price level of 1021-1029, has any chance at all legislatively. It is
opposed by the Federal reserve authorities, it is opposed by the President of4
the United States, who would undoubtedly veto it if it were presented to him,
and there is evidence enough that the Senate does not take it seriously. But
the doctrine behind the bill, that the Federal reserve banks, and central banks
in general, can and should stabilize commodity prices, has many adherents.
There are many who believe that Federal reserve credit can work miracles,
that Federal reserve policy can make prosperity by expanding credit, and
adversity by contracting credit, and that it is the business of the Federal reserve authorities to us prosperous all the time. There are many who
believe that it is in the power of the Federal reserve system, and, consequently,
the duty of the Federal reserve system, to regulate the whole fabric of commodity prices ami inmistrial activity.
In opposition to this new doctrine, I offer the old-fashioned doctrine, rarely
questioned in pre-war days, well understood and well tested in experience, that
central bank policy should be guided by the banking position of the country
and the state of the money market, with heavy emphasis placed on the domestic banking position and the domestic money market, but with occasional
cooperation with other central banks in international emergencies.
Whereas the new theory asks central banks to stabilize the commodities
market, I main tain that, they have a great enouuh task in steadying the money

The traditional pre-war view oC the duties of a central bank is doiinite, clean
cut, and simple.
(1) it is the business of a central bank to protect the paper DOIK\V of Hie
country by converting it into golu on demand. This is its first and most
essential function, and everything else must be subordinated
to this.
(2) It is the business of a central bank to ease oil5 monetary stringencies and
to prevent business crises from degenerating into money panics, in a crisis,



the centrnl bank supplies whatever nionoy is necessary, at a steep discount
rale. It enables solvent men to protect their solvency, but it does not regard
it as its duty t ovalidate the unsound assets of really insolvent men, or to help
defer tlie liquidation of stale positions.
(3) In times of great speculative excesses, whether in commodities or in
securities, central banks should act to prevent the extension of unsound credits,,
to protect the liquidity of the banks of the country, and to check speculative
excesses, by tightening the money market.
(4) It is not the business of a central bank to finance a boom—least of all—
a stock-market boom.

What can central banks do with respect to commodity prices? First, they
can influence commodity prices only through their influence on the money and
capital markets. Second, central-bank policy is only one of many factors governing money rates and governing the volume of money and capital available
in the money and capital markets.
There are five main sources of capital: (1) Consumers' thrift, (2) The
turning back of business profits, including corporate profits, to industry and
trade. (3) Taxation, when the proceeds of the taxes are used for capital
purposes and very especially for the purpose of reducing public debt. (4) Direct capitalization, as when a fanner spends his spare time in building barns
and fences, or putting in subsoil drainage, or when a farmer allows his herds
and Hocks to grow instead of selling off the annual increase. (5) New bank
credit, the product of bank expansion, based on excess bank reserves, which1
may grow out of (a) inflowing gold, or (b) increased central-bank credit.
It is the abuse of this source of capital which is responsible for our present
financia 1 problems.
The money market proper is the market where bank deposits are exchanged
for highly liquid loans, namely acceptances, call loans in the stock exchange,,
open market commercial paper, prime customers' commercial paper of short
maturity, and so on. The capital market is the market where liquid funds
are exchanged for bonds, for real-estate mortgages, for corporate shares, for
real estate itself, and for other slow, less liquid, and more risky investments.
Kales of interest in the capital market and in the money market depend upon
both supply and demand. There are many subdivisions in each of these markets, each with its own special supply and demand, and each with its own
special rate or rates.
Normally, rates will be lower for the most liquid loans. Normally, rates
in the money market will be lower than rates in the capital market, and,
normally, there will be gradations and differentials in each of these markets
favoring the shorter, safer, and more liquid loan or investment.
When funds grow superabundant in the money market proper, they tend,
however, to overflow into the capital market, making rates lower on longterm loans, and making yields lower on fixed investments. Conversely, when
funds grow scarce in the money market, the effort is made to turn fixed investments into cash, and, if the pressure is extreme, this can mean violent increases
in the yield on fixed investments, as we have recently been seeing in the bond
We saw, in 1020. open market commercial paper above 6 per cent, with time
money on the stock exchange at 8% per cent, and call money even as high as
20 per cent. At the same time, we saw many common stocks yielding only
2 per cent, and in some cases very much less than that. This was an appalling distortion, and we are seeing precisely the opposite to-day, in violent
reaction from the distortion of 1020. To-day we are seeing call money at the
stock exchange at 2% per cent, time1 money at the stock exchange at 1% to.
2 per cent, acceptances at ~l\'\. to I * per cent, short Government bills at onehalf of 1 per cent, while the yield on ninny admirable common stocks is 10
Many old-fashioned writers would deny that expanding bank credit is a source of
capital. They would say that it is absurd to contend that the mere creation of two
liabilities', namely, the- liability of the borrower to the bank and the bank's deposit
liability to the borrower, creates new capital. But, held within limits, it must be
recognized that this is a real source of capital. The great trouble in recent years is that
this souvee of capital has been overworked to an extent which passes far beyond the
limits whk-h any theory of credit can justify. See the Chase Economic Bulletin, Vol. VI,
No. r>, November, 11)26, pp. 24 to 27, and the Chase (November, U>20, pp. 318-826).



per cent, and the yield on many bonds, which by all credit standards should be
dollar good, are fantastic.
What is the power of central-bank policy with respect to money and the
capital market V
First, its direct influence is only on the money market. It can influence
the capital market only indirectly as it first affects the money market. {Second,
in its influence on the money market, it can affect only the supply side. Demand it can not control. Taking money market and capital market together,
it can affect the supply side of only one of the main sources of capital, our
number five above, namely bank credit. Investors' savings, corporate savings,
Government policy with reference to the paying off of public debt, and direct
capitalization are all beyond the control of the central bank.
Even in the regulation of commercial bank expansion or contraction, central
bank credit is only one 1 of five major influences, the other four being (a) international movements of gold, (h) the confidence of the people as manifested in
their willingness to deposit their cash in the banks or their preference for hoarding cash, (c) the confidence of the bankers, as manifested in their willingness
to lend or to invest, and (<1) the confidence of the clients of the banks, as manifested in their willingness to borrow and use borrowed money.
The power of a central bank, therefore, to regulate even the money and the
capital markets is limited, and we must not ask too much of it. We may properly expect it to prevent extreme variations, to moderate the movements in
money rates and interest rates, to take up slack at times when rates are unduly low, to meet seasonal needs for increased hand-to-hand currency and seasonal variations in the commercial demands for credit, and, above all, to prevent fantastically high interest rates in times of crisis and emergency. But,
under anything like normal conditions, it is quite unreasonable to ask more
than this of a central bank.
Artificial manipulation of interest rates by a central bank seeking to overcome all the other factors in the money market and the capital market, generates troubles which lead to excessive rates in the other direction at a later
This proposition holds true for all markets. An artificially low price for
coal would check coal mining, on the one hand, and lead to wasteful use of coal
on the other, with the result that sooner or later a great scarcity of coal would
come, which could only be corrected by extremely high coal prices, checking the
use of coal, and increasing its production.
The main cause for the appalling state of the capital market in the United.
States to-day, with the fantastic yields on bonds, the scarcity of mortgage
money, and the unprecedented yields on good stocks, is the excess of money
market funds which flowed over into the capital market from 1921 to 1921).

If it is unreasonable to ask a central bank to fix money rates and interest
rates, far more unreasonable is it to ask a central bank to fix the level of
commodity prices. Central bank policy is only one factor in the money and
capital markets, and the state of the money and capital markets is only one
of many factors affecting commodity prices. In no way, except through the
regulation of the money and capital markets, can the central banks influence
commodity prices, and this influence is an influence at second or third remove
and the indeterminate degree.
The general average of commodity prices is governed by a multitude of forces..
In 3924, for example, in the United States we had a moderate rise in commodity prices beginning in the middle of the year. It started in a sharp rise
in whent growing out of a world shortage, with positive disaster in the Canadian
crop, accompanied by an abundant wheat harvest in the United States. American agriculture, which had been very depressed, found its position greatly improved, and agricultural buying of manufactured goods increased sharply. SiniiUtaneousiy, the Uawes plan restored confidence in Europe among American
investors. We had placed only $2(57,000,000 or foreign securities <.rt»i"a;:•
excluded) in our market in ij)l!H. But in 11)24 we took nearly a billiou dollars
worth of such securities, mostly in the scour] half <>< lt'24. Comcideiifly. oiir
Federal reserve authorities carried through the purchase of a great volume of
*Cf. Chase Economic Bulletin, Vol. VIII, No. 1, for an analysis of all the factors
affecting commercial bank reserves and bank expansions in the United States.



Government securities, flooding our markets with money, leading* to very
excessive commercial bank reserves, and to a great credit expansion. This
facilitated the enormous placement of foreign securities, which the second half
of the year 'Drought. Our export balance of commodities had dropped to
about $375,000,000 in 1923, and rose to a billion dollars in 1924. Commodity
prices increased from an average of 148.8 in the first half of 1924 to an average
of 15S.4 in the first half of 1925. In the absence of any of these three factors,
the rise in commodity prices would have been less than it was.
In general, central bank policy lias a very limited control of the general
average of commodity prices in a gold standard country. The relation between
goods and gold is an international matter. Long-time variations in the production and consumption of gold, taking the world as a whole, have a great deal to
do with commodity prices. Changes in the production and consumption of
goods of various kinds have a great influence.
Changes in the proportions in which various goods are produced may make
radical changes both in particular prices and in the general average of prices.
If, for example, agricultural goods are produced in great excess, while manufactured goods are produced inadequately, the resultant break in agricultural
prices may so reduce the buying power of the farmers that they are unable
to take even the relatively scant product of the manufacturers at prevailing
prices, and a break in the prices of manufactured goods comes also. Prices
are interrelated. We saw precisely this situation as one of the major factors
in the break in commodity prices in the United States and in the world in

Adherents of the view that central banks can and should stabilize commodity prices may be divided into two classes. The one holds simply to the
old quantity theory of money. This theory holds that, allowing for changes
in the volume of trade, the average of commodity prices will go up or down
in precise proportion to the quantity of money and bank deposits. The more
scientific adherents of this theory make allowance also for " velocity of circulation " of money and deposits, but usually contend that " velocity " is guided
by more or less fixed habits and customs. This doctrine is false even in theory,
but I need do little more than present recent history to confute it.
In the middle of 1919 the quantity theorists told us that we were on a
permanently higher level of commodity prices as a result of the great expansion
of bank credit, and we were assured that while prices might fall or rise
moderately 5 or 6 per cent above or below the existing level, with the business
cycle, the existing level was permanent and safe. In the year and a half that
followed commodity prices first rose 15 per cent and then dropped precipitately
49 per cent, with the volume of bank credit higher at the end of the drop than
it had been at the beginning of the rise.
Following the great drop, the quantity theorists told us that prices would
have to rise again to very high levels, because of the great flow of gold that
Avas coming in to us, a flow which continued year after year on a colossal scale,
reaching its climax in 1927. -The gold came, but the rise in commodity prices
did not materialize. The average of commodity prices stood in 1928 precisely
where it stood in 1921.
Facts do not ordinarily make a great impression upon the quantity theory
school, as John Stuart Mill observed long ago.2
In this case, however, the facts have been so startling and so disappointing
that a myth arose among certain European quantity theorists to explain the

Cf. The Chase Economic Bulletin, Vol. I, No. 3.
" Not only has this iixort idea of the currency as tho prime agent in Ihe fluctuations
•pi price made thorn shut their eyes to the multitude of circumstances whi^h, by influencing the expectations of supply, are the true causes of almost all speculations and of
almost all fluctuations of prieo : but in order to bring about the chronological agreement
required by their theory, between the variations of bank issues and those of prices, they
have played such fantastic tricks with facts and dates as would be thought incredible, if
an eminent practical authority had not taken the trouble of meeting them, on the ground
of mere history, with an elaborate exposure. I refer, as all conversant with the subject
must be aware, to Mr. Tooke's History of Prices. The result of Mr. Tooke's investigations
was thus stated by himself, in his examination1 before the commons committee "on the
bank charter question in 1832 ; and the evidences of. it stand recorded in his book: 'In
point of fact, and historically, as far as my researches have gone, in every signal instance
of a rise or fall of prices, the rise or fall has preceded, and therefore could not be the
effect of, an enlargement or contraction of the bank circulation.' " Principles of Political
Economy, Book III, ch. 24, par. 1.



facts away. The myth was that our Federal reserve authorities sterilized the
gold which came to us, and prevented it from expanding credit and raising commodity prices.
The table on the opposite page demonstrates the absurdity of this myth.
In the course of this expansion, the ratio of monetary gold stock to commercial bank deposits declined from 12.33 per cent in 1922 to 9.73 per cent in 1023.
Credit expanded, running far beyond the growth of trade, but commodity
prices did not rise. Commodity prices would have had to be 83 per cent higher
in 1028 than they were if the quantity theory of money were to be justified.
Commodity prices would have had to be 123 per cent higher in 1031 than they
were, if the quantity theory of money were to be justified. I present the details of this computation in an appendix.
Deposits of commercial banks * :
Apr. 11, 1928
June 30, 1010
Apr. 11, 1028
June SO, 1021

$44, 234,100, 000
27, 72S, 241, 000
per cent—

10, 505,850,000
50. 5
44, 234,100, 000

14, 403,085,000
per cent—
4S. 2
Loans, discounts, and investments of commercial banks*:
Apr. 11, 102S
47, G07, 000, 000
June 30, 1010
Apr. 11, 1028
June 30, 1021

per cent—

15, 882, 477, 000
47, 007, 000, 000

13, 307, 718,000
per cent—
The expenditure of ammunition in the form of credit expansion was tremendous. The effect on commodity prices was nil. Instead, we financed a
great real-estate speculation and a stupendous stock-exchange speculation.
Some defenders of the quantity theory have objected to figures of the sort
I have presented here on the ground that they do not take into account all
prices but only commodity prices at wholesale, and urge that if account were
taken of all other prices, including stocks and bonds and real estate, the
picture would look better.
Let me say, first, that for the purpose in hand this point is quite irrelevant.
We are discussing commodity prices at wholesale, and we are discussing the
theory that proportioning the volume of money and credit to the volume of
trade will stabilize commodity prices at wholesale. This is the doctrine that
lies behind the Goldsborough bill.
Let me say, second, however, that if. in the price index, we included stocks,
bonds, and real estate, while it might improve the picture for the theory down
to 1020, it would make the picture look very much worse from 1020 to date,
since the decline in the prices of stocks, bonds, and real estate has been
far more rapid than the decline in commodity prices at wholesale, and very
much more rapid than the decline in the volume of money and credit. Bank
credit, in fact, reached its peak in the autumn of 1030, long after the decline
in stocks, bonds, and real estate began.2
The figure for Apr. 11, 1928, is estimated. See the Cliase Economic Bulletin, Vol.
1, Appendix A.

- Th <r<.' wns a temporary peak in the panic week at I he end of Oolober, 1J)2J), du^ to
the emergency expansion of credit, but with this one exception the autumn of 1930 shows
the real highs in bank deposits and in bank loans and investments combined for the
reporting member banks of the Federal reserve system. All member banks show their
hiidi point in deposits in June of 1930 and practically their high point for combined
loans and investments in the same month.



Disappointed in the behavior of! the iigures. or ignoring the figures, certain of
the stabilizers have devised a simpler formula. They do not try to relate the
volume of money and credit to the volume of trade. Instead, they look simply
and solely at commodity prices at wholesale, and call upon the Federal reserve
authorities or the central banks to regulate commodity prices without reference
to anything else. If commodity prices are falling, keep expanding credit, until
they stop falling. If commodity prices are to be raised, keep expanding credit
until they are raised to the desired point. If, in the course of this, you generate a wild stock market speculation,
pay no attention to it, and do not let
it influence your credit policy.1

The great expansion of bank credit, running far beyond any need for credit,
left commodity prices in 1028 precisely where they stood in IDlil. But the price
level would have gone down between 1021 and 1028 if that great expansion had
not taken place. The expansion had its influence not in raising commodity
X>rices but in maintaining them. It worked, however, not as the quantity
theorists expected, by a mechanical equilibration of the quantity of money, on
the one hand, and the quantity of goods in the process of exchange, on the
other hand. It worked, rather, in indirect ways, the most important of which
are the following:
(1) The great expansion of bank credit made it possible for us, a creditor
nation with very high tariffs, to maintain a great export, trade, and even a
great export surplus. The outside world was unable to sell goods, within our
borders, in sufficient quantity to obtain earned dollars with which to pay
interest on its debts in our country and to buy goods from us. But the great
•expansion of bank credit, made possible the flotation of a tremendous volume
of foreign securities, giving the outside world borrowed dollars, with which to
pay interest on past borrowings and to continue to buy our goods.
(2) There was immense activity in our building trade and in other longtime construction, including the building of roads and highways, which would
not have gone so far had the volume of bank expansion been less.
(3) The financing of installment buying with bank credit went much further than would have been possible under ordinary circumstances.
(4) Consumer demand was swollen on a great scale by profits in stocks,
bonds, and real estate which accrued with the speculative developments in
these fields. The Federal Treasury reported in 1028 that almost 11 per cent
of the income reported for taxation in that year represented either profits on
stocks., bonds, and real estate or capital net gains on assets held over two
years. This percentage represents only the case of realized profits on transactions actually completed. In addition, we know very well that the successful speculator, who had large paper profits, increased his expenditures through
drawing on his balance with the brokers, when the balance greatly exceeded
margin requirements. Brokers' loans increased to offset these withdrawals,
and thus in part represented consumers' expenditures, including trips to
Europe and automobiles!


The prices of 102G and the years immediately preceding and following, which
the Goldsborough bill wishes to regain, were thus dangerously insecure prices.
They were dependent (a) on export trade done on credit, (7>) on building trade
and State and municipal construction financed by bond and mortgage issues,
based on bank expansion, (c) on rapidly expanding installment finance, and
(d) on the spending of speculative profits. Such a price level can not be
regained, and should not be desired. We should prefer a tougher and more
tenacious price level, self-sustaining, resting on the expenditure of normal
income. We should prefer an export trade soundly based on the balancing of
goods and services against goods and services. We should prefer to have our
building trade and our State and municipal construction financed with investors'
savings, and, for (hat matter, in the case of State and municipal construction,
paid for in much greater degree, out of current taxes.
The commodity price level does not need to be as low as it is to-day. We
have to-day a panic price level. If we can restore our foreign trade—and
This view w.'i.x maintained vigorously by Professor Cassol and others in 1028-29.
Chase Economic Bulletin (Vol. IX, No. 3, pp. 13-16).




we can if wo will—we can bring about a radical revival in the prices of agricultural commodities, and in the ability of the fanners to buy manufactured goods.
With the restoration of activity in the manufacturing field, raw materials will
enjoy a radical rally. Win increasing volume of activity, the prices of manufactures will not need to rise in order to make manufacturing profitable. With
the restoration of the balance between the prices of manufactured goods and
the prices of foods and raw materials, we shall have a price level safe, dependable, and adequate. But the way to accomplish this is not to create another
groat credit expansion, but, rather, to deal directly with our foreign trade,
through the reduction of our tariffs, and through settling interallied debts and

I have usually, not always, been critical i;f the large purchases of Government securities made in the open market by the Federal reserve system. I
opposed these operations in 1924, in 11>27, in 10.'><». and in the summer of 1031.
I opposed them when their effect was to create an excess of funds beyond the
needs of trade. I approved thoroughly - of the purchases of 150 millions of
Government securities which the Federal reserve authorities carried through
in the panic week of October 23 to 30 of 1921). I approve what the Federal
reserve authorities have done in the purchase of Government securities in 1932,
and I am convinced that they have not overdone it.
There was no shortage of money in the United States in 1930. The open
market operations in Government securities in early 1930 in fact led to an
excess which generated a false stock-market boom and a new tlood 3of bond
issues in the first few months of the year. The peak of bank credit for all
time was readied in the summer and autumn of 1930. There was substantial
hoarding of money following the Bank of United States failure in the winter
of 1930-31, but the general volume, of bank credit was maintained well, and
high above the needs of ordinary commerce, until the summer of 1931. The
following table shows the figures:
Deposits, loans, and investment}* of bank a of tlie Federal reserve
Weekly reporting member
• banks

! Total
I de: posits




All member banks


Total |
! Invest- loans
de- i Loans • ments
investposits I

Feb. 1G
July 6
Feb. 2!)
July 3
Feb. 27
Oct. 30
Feb. 20
June 25
Sept. 24
Oct. 29
L->b. 25
June 2i
July 29
.Sept. 30
Dee. 30
Mar. 30
Apr. 27
May 4

Mar. 23
June 30

9, 022
33, 750 : 22, 327
35, 398 | 22, 938 ; 9, 818

31, 949
32, 756

_ 20,344 I 15,22J
.. 20,001 j 10,143

5, 228 I 19,538
5, 659 | 20, 584
0,107 ; 21, 328
0,170 , 22, 314

Feb. 28
June 30

35, 375 ' 23, 099 • 10. 590
30, 000 ! 24, 303 i 10, 758


J 20,302 | 16,306
.' 22, 105 18,934

5. 972 i 22, 338
5, 490 24, 431

Mar. 27
Oct. 4

30, 799 ! 24, 945 • 10, 448
30, 094 20,105 , 9, 749

35, 393
35, 914
35, 056
35, 056

.: 18,908 j 14,309
. 19, 700 ! 14, 925

! 19,822
21, 213
'."- 21,540 |

10,704 I

5, 575
0, 081
0, 385
0,731 j

23, 297
23, 495

Mar. 27
June 30
Sept. 2i

35,830 | 25,110 • 9, 937
38, 139 i 25, 214 ' 10,442
30, 304 j 24, 738 | 10. 734


15.464 i
1-1,540 •
14,480 '•
14,191 '
13,104 :

7,183 I
7,803 I
7,810 !
7,910 I
7, 428 •'
7,143 ;
7,151 j
7,435 i

22, 047 Mar. 25
22, 343 June 30
22, 29(5
22, 107 I Sept. 29
20. 532 j Dec. 31

30,000 j 22,840 ' 11,889
j 30,208 j 21,816 ; 12,100

18,127 |

. . ' 17,073 | 12,211 ;
. . . ' 17.000 ! 11.882
.._, 17.272 , 11,8-12

19.354 j



. ) , 20,874
30, 7-16 | 19, 261


12,199 ! 33,073
11,314 i 30,575


From an mMrvss befmv the Banker* lAn-urn of the New York Chapter of the
.Tn:-.-iit<i1x- of r.ankinjc. Mnv 1-. 10:52.
- Chase P>omunie Bulletin, Vol. IX, No. <>, pp. 10 and 1 1 .
- E x c e p t tin* t e m p o r a r y bulge in I lie panic week, Oct. 23 to 30, 1029.

33, 922




Beginning with the summer of 1981, however, when a new hoarding movement started, real pressure began to manifest itself in various parts of the
country, and, with the foreign run on our gold in the autumn of 1931, an
immense and very rapid liquidation of bank credit got under way. For the
600 weekly reporting member banks, alone, this amounted to approximately
$4,000,000,000 in deposits from July of 1031 to March of 1932, while their loans
and investments declined #3,000.000,000 in the same period. For all the banks
in the Federal reserve system there was a decline of $5,500,000,000 in deposits
from June of 1981 to December of 1981 and a decline 1in loans and investments
of three and one-half billions between the same dates.
The very rapid liquidation was accentuated by the inability of the Federal
reserve authorities to make much use of the resource of buying Government,
securities as the process went on. They had already gone so far in buying
Government securities that they had reduced their " free gold " to a relatively
low level. As they had bought Government securities the banks had used the
funds in reducing rediscounts, and, consequently, the; supply of eligible paper
which could be used as collateral for Federal reserve notes was very low..
It was, therefore, necessary to use gold instead as collateral for Federal
reserve notes. There was no increase in Government securities purchased
during the foreign raid on our gold, the Federal reserve credit needed being
supplied entirely by rediscounts or by purchases of bills. Government securities were purchased in the usual manner in connection with the December 15
Government transactions, and also at the year end, but these purchases receded
again to approximately the early September levels. The liquidation was,
therefore, more violent than it would have been had it not been for the preceding bond buying policy of the Federal reserve system.
With the emergency legislation of the Glass-Steagall bill, allowing the Federal reserve banks, with the approval of the Federal Reserve Board, to make
use of Government securities purchased as collateral for Federal reserve notes
for a period of one year, it became safe for the Federal reserve banks to allow
their " free gold " to sink to much lower figures, since, with the approval of the
Federal Reserve Board, Government securities could be used to replenish it..
With the great liquidation of bank credit, with the adverse developments in
the stock market and the bond market, which political developments, both at
home and abroad, intensified, and with numerous bank failures which the late
autumn of 1931 and the early part of the winter witnessed, the hoarding was
intensified. Many banks under pressure from depositors were forced to obtain
money from whatever source they could, and liquidated good merchants and
withheld credit from other good merchants and manufacturers. Other banks,,
not themselves under acute pressure, but frightened, also adopted a very unduly
rigid credit policy. I am glad to say that in New York City, almost without
exception, the great banks have continued throughout the whole of this trouble
to make good commercial loans as a matter of course, and have taken care
of customers with respect to all sorts of credit requirements in an adequate way.
But there have been important parts of the country of which this can not be said.
The successful meeting of the foreign drain on our gold, and the successive
emergency credit measures of the National Credit Corporation, the GlassSteagall bill, and the Reconstruction Finance Corporation, did succeed in arresting bank failures and in reversing the hoarding movement. But they did not
stop the liquidation of bank credit, as shown in the table above. No