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H. R. 11806
( Superseding H. R. 7895, Sixty-Ninth Congress )


MARCH 19, 20, 21; APRIL 30; MAY 1, 2, 3, 4, 8, 9, 15
16, 17, 18, 23, 24, 28, 29, 1928




EDWARD J. RING, Illinois.
ROBERT LUCE, Massachusetts.
E HART FENN, Connecticut.
GUY E. CAMPBELL, Pennsylvania.
JOHN C. ALLEN, Illinois.
F. D. LETTS, Iowa.

Pennsylvania, Chairman.
OTIS WINGO, Arkansas.




The Strong bill______________________________________________________
Proposed amendments________________________________________
6, 384, 434
(See also Index, title Strong bill.)
Representative James G. Strong_______________________________ 3-11, 444-446
Owen D. Young, of Federal Reserve Bank of New York City_____________
Roy A. Young, governor of Federal Reserve Board______________________
62, 65, 93, 99, 237, 410-422
Benjamin Strong, governor Federal Reserve Bank of New York
E. A. Goldenweiser, director of research and statistics, Federal reserve
Board_______________________ 22-55, 60, 81, 85, 86, 87, 88, 101, 283-297, 298-311
Prof. John R. Commons, Wisconsin University_________ 5,56-104,423-444,445
Dr. Adolph C. Miller, vice governor Federal Reserve Board__________ 105-129,
160-193, 211-366
Prof. O. M. W. Sprague_____________________________________________
Henry A. Wallace, editor Wallace's Farmer, president Stable Money
League __________________________________________________________
Andrew Shearer, vice president Kansas State Farm Bureau and representing Farmers' Union of Kansas, and Kansas Grange____________ 201-210
Prof. Gustav Cassel, of Sweden_______________________________ 366-384,434
E. H. Cunningham, member of Federal Reserve Board________________
Charles S. Hamlin, member of Federal Reserve Board_______________ 389-408
W. C. Hushing, legislative representative of the American Federation
of Labor_________________________________________________________
Edmund Platt, member of Federal Reserve Board______________________



Monday, March 19, 1928.
The committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden
(chairman) presiding.
The CHAIRMAN. The committee Will come to order.
This is a hearing on H . R. 11806, a b i l l introduced by RepresentatiVe Strong of Kansas, under date of March 6, 1928, proposing to
amend the act approved December 23, 1913, known as the Federal
reserve act; to define certain policies toward which the powers of the
Federal reserve system shall be directed ; to promote the maintenance
of a stable gold standard; to promote the stability of commerce,
industry, agriculture, and employment; to assist i n realizing a more
stable purchasing power of the dollar, and for other purposes.
This is really a continuance of the hearings that were consummated

in the spring of 1927 on H. R. 7895.
(The bill under consideration is as follows:)
A BILL To amend the act approved December 23, 1913, known as the Federal reserve
act ; to define certain policies toward which the powers of 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 Senate 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,' as 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,
relation 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 policies.
" 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."

The CHAIRMAN. I may say at the Opening of these hearings that,
at the request of Representative Strong, the chairman of this committee called this meeting this morning, and prior to the calling Of
the meeting he sent invitations to certain people whom we desired to
have heard at this hearing. Among them were governor Benjamin
Strong, of the Federal Reserve Bank, Of New York; Prof. O. M. W.
Sprague, of HarvardUniversity—
by the way, has not yet
been located, he being out On a trip through the Middle West; but
as soon as the invitation can be gotten to him he w i l l be invited to
appear before the committee On this subject matter; Prof. John R.
commons, Of the University Of Wisconsin, at Madison; and Mr.
Owen D. Young, a director of the Federal Reserve Bank Of New
York, were also invited. A n invitation was also extended to the
governor of the Federal Reserve Board and members Of the board
to appear before the committee.
I understand that at the meeting this morning there are present
Governor Strong, of the Federal Reserve Bank of New York ; Governor Young, Of the Federal Reserve Board; Mr. Goldenweiser,
director Of research, Of the Federal Reserve Board ; Doctor Burgess,
Of the Federal Reserve Bank Of New York ; Mr. Platt, Of the Federal
Reserve Board; and Prof. John R. Commons, of the University Of
Wisconsin. I n Order that we may have a record Of those that are
appearing, is there anyone else here that I have missed?
(There was no response.)
The CHAIRMAN. A t this point I would like to read the reply which
I have received to the invitation extended to Mr. Owen D. Young to
be present at this hearing.
New York, March 16, 1928.

Chairman Committee on Banking and Currency,
House of Representatives, Washington, D. C.
DEAR MR. MCFADDEN: I regret that I am leaving New York to-night and
will be absent for about five weeks, and so I can not without great personal



inconvenience appear before the Committee on Banking and Currency at its
hearings on the Strong bill next Week. I f this were a matter in which I had
primary responsibility or had any special qualification to testify, I would
not, of course, permit any question of personal convenience or business expediency to interfere with my appearance before your committee. I t seems to
me, however, that I am confirmed in this by an examination of your questionnaire that the matters With which you are dealing call for cooperation from
the Federal Reserve Board and the executive officers of the Federal reserve
banks, who are especially informed on the questions you submit and who
have the direct responsibility to aid you in every Way possible. Compared With
them I would be only a very mediocre and incompetent witness.
In general I may say that I have read the bill carefully and see no specific
objection to it as drawn except as hereinafter indicated. In so far as i t
directly authorizes investigation and study, it makes certain the propriety of
the expenditure of money for that purpose, and is, therefore, helpful.
As to your proposed paragraph h, if I understand it correctly, it expressly
imposes on the system the obligation to do that Which, as a director, I have
always assumed Was inferentially its duty under the existing law.
In so far as paragraph (i) is concerned, I have no objection to the object
which is sought of a specific statement of reasons for any action taken, but
I do not quite see how the paragraph will Work. One has to remember after
all that the Federal reserve system is composed of a coordinating board at
Washington, With specific limited powers granted to it under the law, and independent boards of directors acting for the individual banks.
Any action taken by the system to accomplish the purpose of paragraph (h)
requires action by these independent groups, and I should think it Would be
difficult for the governor of the Federal Reserve Board to do more than state
the reasons which actuated his board in its action within its own field. I f the
paragraph means that the Federal Reserve Board at Washington is to exercise
whatever powers are necessary to accomplish paragraph (h), then you have
fundamentally changed the Whole theory of the system and created a central
bank with headquarters in Washington governed by the Federal Reserve Board
With the boards of directors of the several banks simply as advisory groups With
out duties or responsibilities except possibly in the detailed field of administration. If it be the purpose of paragraph (i) inferentially to strengthen the centralized control of the Federal Reserve Board, then I am opposed to it, because
I believe in the independence of the several regional banks.
Yours very truly,
The CHAIRMAN. Mr. Strong, do you care to make a preliminary
statement ?
Mr.STRONG.I think I should perhaps make some statement at the
opening of the hearing.
I became very much interested in the proposition of the stability
Of the purchasing power Of money from the fact of the great loss
that comes to the Nation at large, to all business, to all labor, to all
those engaged in agriculture, in fact, to all groups of citizens of this
country, by reason of the inflation or deflation i n the purchasing
power of money; and after considerable study of the subject I introduced, on January 18, 1926, H . R. 7895, simply directing that all
the powers of the Federal Reserve Board should be used to that end,
using the Words at that time, " the promotion of the stability of the
price level,'' meaning, of course, by " price level '' the average prices
of commodities Which measure the value of money.
Both in an address on the floor of the House on February 20, 1926.
and at the opening and close of the hearings had upon the bill before
this committee I tried to make plain that I was not seeking immediate



action by the Congress or by the committee, but was seeking, through
the introduction of the bill and the study that might follow, that the
best legislation possible on the subject might be enacted into law.
The hearings on that bill continued for many Weeks. They have
been translated into three languages. I t has been said by men Who
have deeply studied our financial system that they comprise the best
textbook on the Federal reserve system that has been published.
During the progress of the hearings I sent out three form letters
to financiers and economists throughout the United States. The first
letter, I think, went only to 250, the second letter to about 2,500,
and the third letter to 5,000.
A t the close of those hearings I did not ask that the bill, even as
amended and perfected at that time, should be reported, but stated
that I would continue the study Of the proposed legislation and the
As the result Of the study Of the replies to those form letters and
Of the hearings, I have continued, by every effort that I could make,
to get all the information I could upon this subject, and I have
become convinced that the great powers given by this nation to the
Federal reserve system should be used toward the stability Of the
purchasing power Of money. Those powers embrace the regulation
(through the purchase and sale of Government securities) of the
amount of money in circulation. To a certain extent the price of
money (through the regulation of discount rates) and to a large
extent the influence they may exercise upon the extension and contraction of credits by banking institutions throughout the entire
Nation. I t is a tremendous power. No greater power was ever
given by any government in the history of the world than these
powers, except perhaps the power of life and death and liberty.
The Constitution directed Congress " to coin money '' and to " regulate the value thereof,'' and while we have complied with the direction so far as " the coinage of money '' is concerned, we have so far
Only complied with the direction to " regulate the value of money ''
by defining the number of grains of gold that shall constitute the
dollar, without making any effort to determine and fix the value Of
the gold. So that direction Of the constitution has not been very
well carried Out, and I doubt i f we ever had an Opportunity to carry
i t Out until the creation Of the Federal reserve system with the great
powers that have been placed in its hands. I feel, therefore, that
there should be a direction that the powers of the system should be
used for the promotion of the stability of the purchasing power of
money, which is the purpose of the proposed legislation.
I n the preparation of this bill I have proceeded carefully, as noted,
because of my loyalty to the Federal reserve system. My service
upon this committee during the past nine years has convinced me
that the creation Of the Federal reserve system, and the position it
has taken in Our financial system, has made for America the best
financial system in the world, and I would be the last man to do anything that would injure that system. Therefore I have continued
to seek every cooperation from financiers and economists, both inside
and Outside the Federal reserve system, to try to get every possible
information that would lead to the preparation Of a proper bill that
would direct the powers Of the Federal reserve system to be used for



stabilization Of Our monetary unit and that would not interfere with
Or injure that great System in any way.
During the summer I made a trip to the Orient, requiring 51 days
On a boat. I took with me the hearings and a great many Of the
letters that I had received, and tried to make a careful study
Of the proposition. On my return I found that Dr. J . R. Commons,
of the University of Wisconsin, who had been granted a leave of
absence by his university, was willing to use that vacation, or leave
Of absence, for the study of this subject, and that he was willing
to come to Washington and make an intensive a study Of the subject.
I got in communication with Doctor Commons, and he expressed his
willingness to come to Washington and help in every way he could.
I have had the advantage Of close association with him, and he
and I have had many conferences with officials Of the Federal reserve system, and economists both inside and Outside the Federal
reserve system; and as a result H . R. 11806 was prepared and introduced On March 6.
Following the introduction Of the bill, with the assistance Of
Doctor Commons and Others, I prepared a questionnaire and submitted the same to the members of the Federal reserve system who are
to appear at these hearings. Not that we expect or desire them to
answer the questions in detail, consecutively, but in order that they
might be advised of the nature Of questions we would desire them
to discuss before the committee; and I should like to introduce at
this time, to be placed in the record, that list of questions.
The CHAIRMAN. Without objection, that will be inserted in the
record at this point.
(The questionnaire referred to is as follows :)

I f there should occur a change in the membership of the Federal Reserve
Board such that a majority wished to carry through a policy of inflation of
commodity prices and if the board should change the Federal reserve agents
and the class C directors of the Federal reserve banks accordingly, could the reserve system produce an inflation of the average price level of commodities in
What means could be used ?
1. Retire gold certificates and substitute Federal reserve notes.
2. Buy securities.
3. Reduce the rates of rediscount to, say, 3 per cent or less.
4. Other methods; publicity, etc.
How high could the average price level be raised in terms of index numbers?
How rapidly could this inflation be produced?
What forces would set the limit of rapidity at which inflation could proceed?
Exports of gold till the legal minimum is reached, etc.
If, on the contrary, the membership of the Federal Reserve Board. Federal
reserve agents, and class C directors, wished to carry through a policy of deflation of commodity prices, what means could be used?
1. Retire Federal reserve notes and substitute gold certificates.
2. Sell securities.
3. Raise rate of discount
Other methods ; publicity, etc.
How long could the average price level be reduced in terms of index numbers?
How rapidly could the deflation be produced?
What forces would set the limit on deflation? Gold imports. To What extent could these be prevented from getting into circulation ?
I f the United States has about 40 per cent of the world's monetary gold, and
other nations are paying us about $1,000,000,000 in gold or equivalent gold exchange per year, do these facts indicate to you any greater power of the Fed-



eral reserve system over world prices or domestic prices than would have been
the case Without this control over the world's supply of and America's import of
In the aid given by the reserve system to enable other countries to return to
the gold Standard, Wou1d the following clause in the proposed act seriously
restrict your efforts, namely, "Relations and transactions With foreign banks
of issue Shall not be inconsistent with this amendment? ''
Would the placing of responsibility for publicity of policies upon the Governor of the Federal Reserve Board interfere With or place undue limitations
on the freedom of action of the Federal reserve system?
Would such responsibility enable the system to avoid misleading forecasts
and thus benefit the public?
Would such publicity tend to win and hold the confidence of the public?
What is your idea of what is intended in the clauses referring to investigation (sec. 28A), and how should such investigation be conducted as to persons
to be employed in statistical, economic, and advisory capacities?
What distinctions do you make between the several purposes of the bill as
stated in the preamble and section b?
Stable gold standard.
Stability of commerce, industry, agriculture, and employment, and a more
stable purchasing power of the dollar.
What are your objections, in general or particular, to the enactment of the
bill into law at the present time?
Suggest any changes in the wording, purposes, or provisions of the bill.

Mr. STRONG. Before the final drafts of the bill Was prepared, I did
everything that I knew how to meet the objections of the men inside
of the Federal reserve system who are making a study of this question
and devoting their lives to the working Out and the development
Of the Federal reserve System, and I thought I had met their
objections. I do not say that the bill had their approval, but I
thought I had met their objections. I Only sought to retain in the
bill that direction by the government to the Federal reserve System
that the great powers they have should be used to promote stability
Of the purchasing power Of our dollar ; not that they could make an
absolutely Straight line that was not to be deviated from in the rise
Or fall Of average commodity prices, but that the great powers they
have should be used for the purpose of stability, to the end that
violent inflations and deflations should be minimized and the country
saved the great disaster that comes through violent inflations and
deflations in Our monetary system, and which affects SO disastrously
all classes Of Our nation.
On last Saturday the chairman, Doctor Commons, and myself had
two conference with the members Of the Federal Reserve Board
and system, lasting several hours. As the result Of those conferences
I have amendments which were suggested to the bill. They are as
follows :
I n the preamble Of the bill, i n the fourth line, Strike Out the word
On page 2, line 5, paragraph (h), after the word "system,''
add the words " in addition to the purposes expressed in the title
Of the Federal reserve act Of 1913'' and Strike Out the word " a l l ' '
i n that line.
On page 2, line 7, at the beginning Of the line, add the words
" promote the '' and change the word " maintain '' to " maintenance,''
adding the word " of,'' SO that it w i l l read : " Promote the maintenance
Of a Stable gold standard."



On page 2, line 9, after the word " stable,'' add the word " average,'' so that i t w i l l read: "More Stable average purchasing power
Of the dollar.''
On page 4, line 8, after the word " Of,'' add " the average of.''
Mr. LUCE. The second " Of,'' you mean ?
Mr. STRONG. Yes; the second "Of.'' That is, before the word
" prices,'' in line 8, add the words " the average Of,'' SO that i t w i l l
read : " Of existing Or proposed index numbers Of the average Of
On page 4, line 9, at the beginning Of the line, add the words " Of
commodities '' and change the word " measures '' to " measurements,''
and after the word " t h e ' ' add the word "average,'' so that those
two lines will read : " Of existing Or proposed index numbers Of the
average Of prices Of commodities Or Other measurements Of the average purchasing power Of money.''
After the word " combination,'' on page 4, line 10, place a comma.
A t the end of line 11 of page 4 change the word "policies' to
"policy,'' strike Out the period, and add "Of stabilization,'' with a
period, so that the line w i l l read : " Federal reserve system as a guide
in executing its policy Of Stabilization.''
A t the end Of the bill, Section 28C, add the words " except that the
purposes Of the act Of 1913 shall remain,'' so that that section w i l l
SEC. 28C. Acts and parts of acts inconsistent with the terms of this act are
hereby repealed, except that the purposes of the act of 1913 shall remain.

Mr. KING. What is the meaning of that?
Mr. STRONG. That amendment was suggested because some Of
those with whom we were in conference On Saturday felt that that
clause might repeal some Of the powers Or authorizations that they
had in the act Of 1913.
Mr. MACGREGOR. Well, what does it repeal, as you leave it?
Mr. STRONG. I t repeals anything inconsistent with this act Only.
Mr.MACGREGOR.What is inconsistent with it?
Mr. WINGO. That is always the rule, without any definition.
Mr.STRONG.I know.
Now, gentlemen, I want to say that this present revision is now
the twelfth revision of the sixth revision of this bill. I only mention this for the purpose of showing to the committee that I have
made every effort that I knew how to try to meet the objections and
suggestions that were made by the men who are conducting this
great financial system; my purpose being to direct in the bill that
the powers that they have now shall be used for the purpose of promoting the stability of the purchasing power of money, and further
to direct that when they shall have made a change of policy they
shall, as soon as they shall believe safe and proper, and at such time
and place as they shall believe desirable, advise the American public
why they made such change of policy. I believe i t is necessary that
the people who own and run this great Nation should be taken into
the confidence of the great system of finance that they have set up in
this country.
Then there is directed a Study by the Federal Reserve Board and
the Federal reserve banks Of the questions Set up in the bill.



There is one question that I want to point Out, so that you w i l l
know the reason that I have for urging this investigation. The question Of an index number. I was urged by various groups in the
United States to adopt different index numbers to be used in measuring the purchasing power of money. Some had one index number
that they thought was preferable, and others had other index numbers. Realizing that an index number is perhaps not now or never
will be perfect, and realizing that my study was rather limited, I
finally decided to specify that as One of the subjects that the Federal
Reserve Board and governors should study and report to Congress,
Out Of which we might be assured that we would have the information that would lead to the adoption Of the best possible index number in measuring the purchasing power of money. Other questions
set up in the bill are to be studied, which I think w i l l result in a
better understanding by the American people of the system of
financing that we have set up, and a better solution of the problems
that confront us.
Now, gentlemen, there is but one principal objection that I have
received from those who are so vitally iterested in the administration of the Federal reserve system that I could not meet in this bill,
and that is : They fear that the American people w i l l not understand
what is meant by the use of the powers they have given to the Federal reserve system for promotion of the stability of the purchasing
power of money. To mymind— while I do not want to go into it at
length —
is not to be compared with the danger that may resu
from a failure to use these powers for the stabilization of the purchasing power of that which the people must use in exchange among
themselves for everything that they buy and sell and use, because of
the doubt that may exist in the minds of the people as to whether
or not the great powers that they have given this system are being
properly used. I do not think that they will fail to understand a
direction to be used in their interest half as much as they fear that
the powers they have given the Federal reserve system may not be
used in their interest.
Mr. KING. Mr. Chairman, w i l l the gentleman yield ?
Mr. KING. I just wanted to know how the Federal Reserve Board,
or those who are administering the Federal reserve act, are going to
proceed under this bill with this last section that you have put in it.
Mr.STRONG.Well, that w i l l come up i n a discussion of the bill.
I am willing to admit, Brother King, that perhaps much of the language, as I was just going to state, may have to be rewritten. That
was put in there because on last Saturday i t was suggested that perhaps the authorization of the repeal of all acts inconsistent with the
terms of this act might repeal some of the act of 1913 that was necessary to the proper performance of the duties in administering the
Federal reserve system. So I made thesug estion—
has not been
given a great deal of consideration. I expect i t w i l l be discussed
before the committee in executive session after the hearings have
been concluded.
Mr. KING. You know the K i n g of France marched up the h i l l
with 10,000 men, and then he marched down again.
Mr. STRONG. I know ; but we want to go up cautiously, in order that
we may not march down again.



I Want to state to the members Of this committee that after two
years Of study and work On this subject, and the efforts that I have
made to meet the Objections Of the principal financiers and economists,
both inside and outside the Federal reserve system, I realize that the
various amendments that have been made to this bill w l l l have to be
rewritten ; but this represents finally the result of the effort to cooperate with those men who are devoting their lives to the study Of
this question, and I ask the assistance of my colleagues, after these
hearings, in the final preparation of this bill, to the end that the
purpose of directing the uses of the powers of the Federal reserve
system toward the stability Of money may be properly carried in the
bill, and also the clauses regarding publicity and investigation of the
various questions set up in the bill may be retained. And after we
have done that I hope that the bill may be favorably reported.
Mr.STEVENSON.W i l l the gentleman permit just one question?
Mr. STRONG. Yes, sir.
Mr.STEVENSON.As I understand, the gentleman says that probably a great deal of it w i l l have to be rewritten. Is not the very
heart of this bill subdivisions (h) and (i) of the first section?
Mr.STRONG.Yes, sir.
Mr. STEVENSON. There might be a difference in phraseology there,
but that is what you mean to do ?
Mr.STRONG.Yes, sir.
Mr.STEVENSON.The other things are all means to that end, as I
understand it?
Mr. STRONG. Yes, sir.
Mr.STEVENSON.And you expect a great deal Of the Other to be
rewritten ?
Mr. STRONG. Yes, sir. As a result of these hearings, i t is thought
desirable to do so.
Mr.STEVENSON.But i f the bill passes, according to your ideas, it
should contain the meat of subdivisions (h) and (i) ?
Mr.STRONG.Yes, sir.
Mr. WINGO. I n Order that I may follow the discussion, I would
like to ask the gentleman from Kansas about the first proposed
amendment in line 5, page 2. What is that amendment that you
are proposing there ?
Mr.STEVENSON.Mr. Wingo was not here when you were reading
those amendments.
Mr.STRONG.I t is, after the word " system '' on line 5, to add the
the words " in addition to the purposes expressed i n the title of the
Federal reserve act of 1913.''
Mr. WINGO. You propose, then, to amend the title of that act.
Mr. WINGO. You are going to add to i t ?
Mr. WINGO. Why use the words " in addition '' ?
Mr. STRONG. The Federal reserve system shall, in addition to those
purposes, do the following
Mr. WINGO. So you are going to amend i t by adding other purposes ?
Mr.STRONG.I t amends the law, of course. I t adds other purposes; yes.



Mr. WINGO. Now, you propose to amend the title. What about
the act? What about the purposes expressed i n the act?
Mr. STRONG. I have explained, Mr. Wingo, that I am Only making
these suggestions as the result of the conference had with the members Of the Federal reserve system On last Saturday, and for the
purpose Of meeting objections that were urged at that time. I realize
that when we get into executive session you and Other members Of
the committee who are familiar with this Subject w i l l help i n perfecting the language.
Mr. WINGO. I want to follow you. I am not interested i n the
source of this amendment. I am interested i n the character of it. I
do not care anything about the wording of it. Do you propose
simply to add to the purpose expressed In the title Of the Federal
reserve act and leave unchanged the purpose i n the Federal reserve
act, Or do you propose to add Some purposes to the Federal reserve
Mr. STRONG. I am proposing to add, certainly, to the present
the powers that they now have, or may hereafter be possessed of, to
promote the maintenance of a Stable gold Standard, to promote the
Stability of commerce, industry, agriculture, and employment, and
a more Stable average purchasing power of the dollar, So far as
Such purposes may be accomplished by monetary and credit policy.
That is really what I am trying to do.
Mr. WINGO. I understand that. B u t you do not understand my
question. I did not ask you about that. I am asking you about
the mechanics of the bill. Do you propose by this bill to add to or
take from any of the powers of the Federal reserve system as expressed i n the act; not simply i n the title?
Mr.STRONG.I do not. I only give a direction as to the use of
the powers they now have.
Mr. WINGO. We are talking about purposes, not powers. Do you
propose to amend any of the purposes expressed i n the Federal
reserve act, or do you propose to confine your additions to the purposes expressed i n the title of the Federal reserve act?
Mr.STRONG.I propose to add nothing to the purposes of the
they now have.
Mr. WINGO. Well, that is an addition, is i t not?
Mr.STRONG.Yes, sir; a very important addition. But I hold that
the first duty of a monetary system is to maintain the stability of
the purchasing power of its monetary unit.
Mr. WINGO. Because the whole Struggle over the Federal reserve
act, the question of the distribution of powers and checks and balances is just exactly like all the powers of our Federal Government.
I t is a question of the use and abuse of powers or the lack of exercise
of powers. That is the whole story of the Federal reserve system.
Mr. KING. I suppose the gentleman is going on the theory that
they have a power which is equivalent to life and death,ashe stated
in his original Statement; and therefore I was wondering What the
purpose of extending those powers was.



Mr. STRONG. I am not extending them.
Mr. WINGO. I want to follow you. Take the last amendment. You
propose to repeal acts inconsistent with the terms of this act, except
that the purposes Of the act Shall remain. I n other words, you repeal
every provision of the Federal reserve act that is inconsistent with
this act except the inconsistencies that go With the purposes of the
act; is that it?
Mr. STRONG. Of course, that may be your interpretation.
Mr. WINGO. I am asking this, my dear sir -Mr. STRONG. I have said, Mr. Wingo -- I do not know whether
you Were here Or not -- that that was a Suggestion made last Saturday
at a conference with members of the Federal reserve System, and i t
will be discussed i n these hearings ; and then, after we go into executive Session, as the result Of the information we get i n these hearings,
We Will have to change that phraseology.
Mr. WINGO. I want to follow you, but I can not find Out What you
propose to do.
Mr. STRONG. Well, I am trying to tell you.
Mr. WINGO. You do not understand my question. DO you propose
to repeal all Of the provisions Of the Federal reserve act that are
inconsistent With this act except that provision Which is inconsistent
With the purposes Of the act?
Mr. STRONG. Why, I certainly want to repeal anything that would
interfere With carrying out the direction set up i n the bill I have
introduced and Which these hearings are to consider.
Mr. WINGO. A l l right; I have got it, then.
Mr. CANFIELD. Mr. Chairman, I notice that Representative Strong
Said that he Sent Out a questionnaire to the witnesses.
Mr. STRONG. Yes, Sir.
Mr. CANFIELD. I would like to Suggest that he send a copy Of that
questionnaire to each One Of the members, so that We may go over i t as
We go along.
Mr. STRONG. I have two copies here. I can furnish One for each
side Of the table.
The CHAIRMAN. GOV. Roy A. Young, Of the Federal Reserve
Board, is here. We would be Very glad to hear Governor Young's
Statement at this time.
Mr. YOUNG. Mr. Chairman and gentlemen Of the committee, the
board, Of course, has considered this bill and discussed it, and the
board would like to be represented by Doctor Goldenweiser, Doctor
Miller, and Mr. Wyatt i f necessary. Doctor Miller is sick at the
moment, but expects to be able to appear before the committee On
Wednesday. I have been informed that there are some Witnesses
here Who Would like to catch a train this afternoon, and the Federal
Reserve Board is quite Willing that they should appear first, so that
they can catch their trains.
Mr. WINGO. Governor, does the board approve this bill ?
Mr. YOUNG. No ; the board is opposed to the bill.
Mr. WINGO. That is What I Wanted to know. I had heard many
rumors that they Were in favor of it.



The CHAIRMAN. I am goingtocall Governor Strong, Of the Federal
Reserve Bank of New York. I would like to State to the committee
in that connection that Governor Strong hastomake a train early this
afternoon, and he has an important statement to make, and I am
going to suggest that he be not interrupted until he has completed
his preliminary statement, and then, i f desired, that questions be propounded to him. I w i l l say, further, that Governor Strong has come
here at some personal risk, because he has just recentlygottenoutofa
Sick bed, with a slight attack Of pneumonia, and wedonotcaretotax
him beyond his strength to-day or to cause him any harm. We are
always glad to have Governor Strong before this committee, because
he always has something of importance to say to us, and I am sure
that in whatever he may say to-day will be Of interest On this particular piece of legislation.
Mr. WINGO. I suggest, Mr. Chairman, in addition to the ordinary
corrections that the gentleman is permitted to make i n his remarks
when they are submitted to him, that he be given authority to elaborate and add anything to them that he wants to.
The CHAIRMAN. Yes. That courtesy is usually extended, and i t
w i l l be i n this case.
Governor Strong, the committee will be glad to hear you now.
Governor STRONG. Mr. Chairman, I should say first, and especially
in view of what Governor Young has stated, that obviously I have
no authority to speak for anyone but myself. That is, I have no
authorization from the Federal Reserve Board or the Federal reserve
system to express views other than those that I hold myself about
this bill.
Certain technical questions have been raised as to the drafting of
the language of the bill, and there may be some legal questions involved in the construction of this bill. I do not feel competent to
discuss those, Mr. Chairman. So I hope that you will understand
that I am merely discussing the language of the bill as i t has been
changed by the suggestions just made by Congressman Strong, without regard to questions of legality or technique.
I n the hearings i n 1926, when I was before the committee, you
w i l l find a rather elaborate discussion of the way I did feel about
the bill then proposed, H. R. 7895, and I would like to avoid repeating, i f I may, all that was stated at that time, and simply summarize
to this extent that I do not believe, and have never believed, that any
method of fixing the general level of commodity prices can be devised which would enable a monetary and credit policy by a bank of
issue to accomplish that object. That is, the theory that the volume
of credit and money i n circulation alone controls the price level, I
think is not altogether to be accepted. There are other theories of
price changes which obviously can not be dealt with by legislation at
all. You w i l l recall that I also expressed the view that there was
some danger in legislation of this character, in misinterpretation by
the public, which might be led to believe that this was an effort to
fix the prices of some individual commodity or group of commodities.
W i t h that brief summary of some of the statements at the previous hearing I want to call attention to the language of this bill



Where Congressman Strong has sought to meet that objection,
namely, in paragraph ( h ) , On page 2, the bill provides that the system shall use its powers to promote stability, and so on, So far as such
purposes may be accomplished by monetary and credit policy.
I personally interpret that language to be a recognition of at least
one of the objections which I made to the bill in its original form,
but i t still leaves a certain possibility of misunderstanding by the
public that this bill, instead of being a direction as to the effect of a
monetary credit policy upon prices, extends far beyond that and is
really an attempt to fix some stability in prices, which can not be
accomplished by monetary policy alone. I t does provide an explanation to those Who are managing the Federal reserve system that
they are not expected to do the impossible; I admit that, but I am
not yet sure it will entirely obviate or avoid the possibility of some
public misunderstanding of the purpose of the bill.
A t the time of the hearing in 1926, you w i l l recall that I did state
that a very brief addition to the title of the bill, or the preamble, or
a slight amendment to the Federal reserve act in the nature of a
declaration as to the gold standard in its operation might accomplish
all of the purposes as to prices which are capable of being accomplished by monetary policy and thereby avoid the difficulty of construction of language to which no one can give exact definition ; that
is, the meaning of the words " inflation '' and " deflation '' and what
is a stable price level, and so on.
Apparently, that Suggestion has been incorporated in the title to
this act, but it is coupled with the other provision as to efforts to
bring about stability by monetary policy. I would like to refer to
that later, if I may, in connection with the questionnaire, but, in
general, I still feel that everything important Which is sought to be
accomplished by this direction of the Congress, or by this definition
of policy by Congress, could be well accomplished, possibly with
avoiding some misuderstanding, through a scientific application of
the well-known principles of the gold standard.
That is about all I had in mind to say about that specific provision
of the bill.
I would like to refer to paragraph ( i ) , an important one, as to
publicity. I t is a subject Which has engrossed and puzzled the
responsible officers of the Federal reserve banks from the Very organization of the Federal reserve system.
To express exactly the way I feel about it, I Would like to divide
the possibilities of publicity as to policy into three methods or
Species of publicity. One is a statement in advance of the intention
of the system as to What i t shall do in the future. The second is an
explanation simultaneous With the adoption of any policy of the
reasons for the adoption of the policy. And the third is a subsequent
exposition of why something had been done in the past.
The language of the proposed act, I think, very clearly lodges the
discretion as to what shall be stated and when i t shall be stated i n
the governor of the Federal Reserve Board, who is the responsible
head of the system. The language employed, which seems to me
conservative, makes feasible a procedure under which I feel that
much good can be accomplished in educating the public and the Con15029--28----2



gress as to why the Federal reserve system undertakes certain policies, and at the same time escapes the danger of publicity in advance
or simultaneous with the adoption of policies.
May I explain by illustration, if you please? Let us suppose that
conditions arose which indicated the necessity for an advance in the
discount rate of the Federal reserve banks and the procedure of the
Federal Reserve Bank in New York was elaborately explained at
the previous hearings—and in preparation for such an advance in
the discount rate it was desirable, in order to make that rate effective
when it was made, that the system should sell some of its securities.
Now, if Governor Young at the time that that action was decided
upon should state to the public that the Federal reserve system
proposed to sell some securities and one, two, or three months hence
expected to advance the discount rate, I think it is almost inevitable
that the public reaction and the effect upon public sentiment by any
such announcement might make it necessary to reduce the discount
rate when that time arrived, and a t once the system would be charged
with being disingenuous and deceiving the public; and there is
great danger, not in what we do, which is known to everybody, but
in the effort to explain specifically and in detail all of the reasons.
I can express that in a different way to show the practical difficulties by explaining the method by which a change of policy is
decided upon in our bank. At a meeting of the directors, which
occurs every week, I am asked if I have any recommendation to
make as to the rate of discount.
Mr. WINGO. YOU make that recommendation where ?
Governor STRONG. TO the directors at weekly meetings.
Mr. WINGO. That is, at your own directors' meetings?
Governor STRONG. At our own directors' meetings in New York.
If I recommend a change, it comes up for discussion and is very
exhaustively discussed always. There are nine directors and usually
five or six of the executive officers of the bank at the meeting.
Now, it well may be that there will be four, five, or six specific
reasons in the minds of the directors or groups of directors or
officers for making the change, and the majority of directors will
vote to make a change, whereupon a report is made to the Federal
Reserve Board at once of the action of the directors, and in order
that this act of the bank may not be held in suspense for a long
time it has usually been possible to have approval by the Federal
Reserve Board the same day our directors act.
Now, if the Federal Reserve Bank of New York is to convey every
shade of view of every director to the governor of the Federal
Reserve Board, every motive for a change in the discount rate, as
well as the objections to the change entertained by some of the
directors, and then Governor Young is called upon to submit that
to the eight members of the Federal Reserve Board and listen to their
views in support of or in opposition to it, and finally express a
composition of all these views, of all the reasons, the pros and cons,
I can see it is quite impractical, quite impossible to make an honest,
complete statement that will be incapable of misinterpretation by the
In fact, the views which we may ultimately express as to this
important act may be so contrary to the views of some of the col-



leagues in the system that they might feel called upon to express
their own views for their own protection, especially at a time when
a change in the discount rate is of great importance to the country.
Now, this argument applies to every effort to advise the country
in advance of what the system proposes to do and, to a very slightly
less degree, to any effort to advise the country simultaneously with
the action, because no action by the Federal reserve system has
instant effect. Any statement made at the time is a statement made
in anticipation of the effect of the action anyway,
So I frankly believe that the language in this section (i) is conservative, and, if not too much is expected in the way of explanation,
I believe it may be helpful in educating the public as to the policies
of the Federal reserve system.
I want to point out, however, in order that you may not by the
slightest degree misunderstand what I mean, a very slight change
that I understand Congressman Strong has made in the language.
In line 17 it reads.
Such decision or action, and reasons therefor, shall be thereafter published.

Now, originally it had the definite article (the) in front of the
word " reasons," and to leave that out makes a very material alteration of the meaning of that phrase. It permits of a certain latitude
in making both a comprehensive and concise statement, which would
not be permitted if he was required to give all the reasons.
Mr. WINGO. In other words, you would swear the witness to tell
the truth but not the whole truth ?
Governor STRONG. Well, Congressman, that is one way of expressing it. I think there are occasions when a man is unable to tell the
whole truth.
Mr. WINGO. I am not quarreling with you.
Governor STRONG. It is the difference between stating facts and
motives. When you come to expressing motives you have difficulty
enough in expressing your own, but when you engage yourself honestly and exactly to express other people's motives you are in no end
of difficulty, and that is the difficulty I apprehended about a definite
All of section 28 (a) is addressed to a direction, or an authorization, for the Federal reserve system to conduct certain inquiries and
to report the results. It is my belief that, in the main, in the general
authorizations of the Federal reserve act there is probably ample
authority now to conduct very extensive inquiries as to all monetary
matters of that sort; but as to those matters in which we are especially interested in the Federal Reserve Bank of New York, I think
some authorization of this character would give us all a sense of
assurance that what we were doing in those respects is affirmatively
understood by Congress and approved.
Of course, we have to recognize that the world is gradually emerging from a period of the most extraordinary disorder ever known in
the history of monetary affairs. I t presents many novel problems,
and too much study can not be given to the subject. Certainly a
voluntary expression of the desire of Congress that we should do
whatever is necessary to get an adequate understanding of these problems is to our great advantage, and I believe that it would be to the



advantage of the system if more elaborate reports were made of the
result of investigations and studies of these matters.
Personally I would like to see this part of the proposed act a little
bit shorter. Making it as long as it is might be a little confusing
and later lead to some complaint by Congress that what was desired
had not been accomplished sufficiently or promptly enough.
Mr. WINGO. Has your attorney passed upon this question? In
other words, under the law now you have authority to make any
investigation you think is necessary to guide you in the formulation
of a policy. Now, this restricts that by undertaking to enumerate
the purposes.
Governor STRONG. I do not think it does.
Mr. WINGO. SO that if you have not enumerated all the purposes
you want, the inclusion of these excludes all others under the familiar
rule of interpretation.
Governor STRONG. The language on page 3 says "and to such
further extent as they," the Federal reserve banks, " may deem to be
Mr. WINGO. But the courts have passed upon that kind of language, saying that it does not mean anything. Where you make
general terms and then you follow it up with specific terms, the
specific controls and nullifies the general.
Governor STRONG. I am afraid I must refer you to the alibi that I
stated at first about technical and legal questions that are raised in
drafting legislation. I have had no experience there.
Mr. WINGO. YOU started out with the idea that you thought possibly you had this power but you did not think it would hurt, and
your namesake is restricting your present powers by undertaking to
enumerate them.
Governor STRONG. He is doing it in very kind language.
Mr. WINGO. He is. He will bury you with flowers. [Laughter.]
Governor STRONG. I do not feel competent, therefore, to make any
comment on section 28 (c) on the question raised by Mr. Wingo.
The CHAIRMAN. DO you care to say anything about section (b) ?
Governor STRONG. Section 28 (b) ?
Governor STRONG. Well,

in passing, as to section 28(a), I merely
said I thought it would be to the advantage of the system and or
Congress to have a better understanding of the work we are doing
in that particular line, or the best possible understanding, and that
these reports would be enlightening and helpful. I base that partly,
Mr. Chairman, upon my belief that these hearings have been most
helpful to the Federal reserve system. I think they have led to a
better understanding of what we are driving at.
Mr. STEVENSON. I think your statement before this committee on a
former bill has been a very educational one. I have had a tremendous number of applications for it, and there have been a great
many bankers and others interested who have expressed the idea that
they knew a lot more about it after reading your statement here
last year.
Governor STRONG. I enjoyed it, Congressman. I warned you that
I would talk at great length if you ever got me started on the Federal
reserve system.



I hope there is no impropriety in my saying one thing about legislation of this character, which was suggested by something that one
of our directors said—-I think Mr. Young. This is the kind of a
bill where a very slight change would alter the fundamentals of the
bill to such an extent that I might alter my views very materially
as to what the bill would accomplish. I do not know very much
about methods of legislation, but enough to realize that a bill as
introduced does not always emerge in exactly the form in which it is
I think I might summarize my general feeling about the bill by
saying that the principal objections which I personally entertain are
those which I first described, as to the effort toward bringing about
stability by this particular mandate of Congress, and the possibilities that this bill may not be in substantially the form which it now
is when it is approved.
Those are the two points on which possibly I feel justified in
laying some emphasis, but I do not know whether it is proper to
make that suggestion to a committee of Congress.
The CHAIRMAN. Inasmuch as I am assuming that those remarks
are largely directed to the possible changes that might be made in
the United States Senate, I think it is quite all right. [Laughter.]
Governor STRONG. I had not thought of that.
Now, I think it is only fair—and I am trying to give a judicial
opinion, if that is possible, on such a matter—to say this: That I
very firmly believe that everything sought to be accomplished by
this amendment to the Federal reserve act can be accomplished, and,
in fact, will be accomplished, provided you have two things. First,
good management in the system, honest, intelligent management;
and, second, a general restoration of the full gold standard in the
Mr. STRONG. DO you mean a full coverage of gold ?
Governor STRONG. NO ; I mean the full and free payment of gold
in redemption of notes circulated in the nations.
Mr. WINGO. Do I understand that that means an unrestricted
flow of the free gold of the world ?
Governor STRONG. Between the nations.
Mr. WINGO. I say, between the nations.
Governor STRONG. Yes.
One other thing which I think it is not fair to omit is this: That
you will find, on page 183 of the hearings, Part I, 1926, a chart
of prices extending from the year 1800 down to the year 1924. If
you will observe, the great price distortions that occurred grew out
of war in every instance; that is to say, the Napoleonic wars, the
American Civil War, and this last war, were the occasions for price
disturbances which in every instance gave rise to efforts to legislate
exactly as Congressman Strong is now attempting; and I do not
believe, and I can not think that Congressman Strong believes,
that any legislation of this character, no matter how strongly it
may be framed, will protect the monetary system against the strain
imposed by financing a great war, and therefore I feel that there
is a little exaggeration of the importance of this question because
of the bitter experiences growing out of the recent war, and that if
you gradually get back to the old method by redeeming our obligations in gold we shall accomplish pretty much what he wants.



Now, Mr. Chairman, would you like to have some comments on
this question
Mr. STRONG (interposing). I was going to suggest, Governor, that
owing to your limited time and our desire not to tax your strength
to-day, there are many questions pertaining to this same subject,
some of which you have touched upon at these previous hearings,
which the committee would like some time or other to discuss with
you, but at this time we are not proposing to do that, but simply
want to give the members an opportunity to ask any questions of
you on this particular subject.
Mr. WINGO. Would it not be better, Mr. Chairman, after we have
heard from these other gentlemen, to have the governor back here
some weeks later, at a time suitable to the governor, and then we
will be better prepared to get his advice?
The CHAIRMAN. If that will be agreeable to the governor
Governor STRONG (interposing). That will suit me perfectly.
The CHAIRMAN. Some time in May or June. The governor, in
other words, is so engrossed in the management of this system, and
particularly in connection with the banks of issue of the world, that
it would be enlightening to this committee to have the benefit of his
experience from the time he appeared before us last up to date; and,
if it is agreeable to him, we will at some convenient time invite him
to come before the committee again.
Governor STRONG. I shall be delighted.
I can, in a few words possibly, answer the first two groups of questions generally, which I believe are the ones to which Congressman
Strong attaches the most importance.
Mr. STRONG. Yes. I have said to you, and to many others, that
I was pretty well satisfied with the stabilization that had been made
possible by the management of the Federal reserve system in the
last three or four years. One thing has always worried me, and that
is this: If through a political upheaval in this country the membership of the Federal Reserve Board should be so changed, and the
members of that board conscientiously believe that the price level
should be reduced or the price of gold raised, and the purchasing
power of money raised, or vice versa, that such a board might undo
all that is being now done, and a contrary policy adopted. Hence
I desire that language should be written into the law to direct that
the powers placed in their hands shall continue to be used toward
promoting the stability of the purchasing power of our dollar.
That was the purpose of those first two questions.
Governor STRONG. On that subject the great inflation of credit
which occurred in this country, and the subsequent contraction of
credit, undoubtedly are attributable to the war financing. Since
the system has now reached a stage of development where its operations are more normal, I do not think anyone, even the most violent
critic of the system, can charge any deliberate attempt to bring about
an undue expansion or contraction of the currency or credit of the
country; but as to the change of management, and that is the first
paragraph in the questionnaire, let me call attention to the provision
of the Federal reserve act as it is now. The members of the Federal
Reserve Board are appointed for terms of 10 years.



Mr. BRAND. Would you mind if I interrupted you for a moment to
ask the chairman a question ? The House is meeting now; how long
are you going on with this ?
The CHAIRMAN. Just until Governor Strong finishes this statement.
Mr. BRAND. But Congressman Strong wants him to answer all these
Mr. STRONG. NO. The governor suggested that he could in a few
words answer these particular questions and I made a few remarks
so that he would understand what the main purpose of them was.
Governor STRONG. We were discussing the question of the change
of management of the Federal reserve system. The members of the
board are appointed for terms of 10 years, and unless some catastrophe happened the change of management of the system, as far as
the Federal Reserve Board is concerned, would take place very
slowly. With respect to the suggestion that the complexion and
character of the board might be changed by appointment, and that
the new board would appoint class C directors who were avowed
inflationists, if you please, even that would not bring about, necessarily, any period of deliberate inflation of the currency, because
there are only three class C directors in each bank, and the other six
directors are elected by the member banks, three of whom are experienced bankers and three experienced business men. So that, in the
12 reserve banks, you have 36 directors appointed by the Federal
Reserve Board, 36 bankers and 36 business men, and my belief is
that changes of that character could be brought about only so slowly
that there is very little if any danger to be apprehended on that
If the whole country were bent upon having some inflation of the
currency, no doubt, in the face of public pressure and pressure by
Congress, the system—and the Government as a whole of the Federal
reserve system is not a supergovernment—might put up a fight
against the country, but probably in the end it would get licked;
so that, after all, the reliance against such an extraordinary occurrence has got to be public opinion.
Now, as to the internal management of the system itself and what
might be done to check either an inflation or a deflation, I go back
again to the operation of the gold standard. The creation of a great
volume of credit, in excess of what the business of the country
requires, immediately has certain reactions. Interest rates go down.
You have an exodus of capital from the country and, if such a policy
is so deliberate as to be generally recognized, there would be a flight
of capital, and if it was a gradual policy of inflation, insidious and
not readily perceived by the public, it would undoubtedly in time
have some effect upon prices.
But in every case the consequence is the same; gold would leave
the country, Gresham's law would operate at once, and it would be
an apparently short time, particularly if the public were aware of
the situation, before the reserves of the country would become so
impaired that we would be facing a suspension of specie payments.
I do not know of anything that would bring the country to its senses
any quicker.



The reverse of that is equally true in a period of deflation of the
credit and currency of the country, if it could be brought about.
There is a limitation upon what is possible, but the method would
obviously be to sell all the investments of the system, and the banks
would thereby be heavily in debt to the reserve banks, and then the
only method would be to raise the discount rate, possibly to perilous
heights, and the response to that would be an influx of gold. Reserves of member banks would build up very rapidly and the
automatic check on contraction would begin to operate.
I describe this very roughly. It is not possible to mention all the
circumstances that would arise under those conditions, but in either
event a very large gold movement that appeared to be excessive in
its effect would bring an instant response from public opinion, and
I can not conceive of such a situation arising as is hypothetically
indicated by these two groups of questions.
So my conclusion is that these questions are not inspired by the
ordinary experience of times of peace, when these things work
smoothly and naturally and, I hope, are managed by capable people,
but they are really the outgrowth of experiences caused by war.
These opinions are naturally based upon the extraordinary occurrences of the war and the immediately subsequent developments, and
I have not the fears that would be indicated by this type of inquiry.
Mr. STRONG. DO you think it would be necessary to have a change
in the majority of the 36 men managing this system in order to have
a change of policy? Do you not think that perhaps a change in the
dominating men in control of the system might bring about a
change ?
Governor STRONG. I do not think so. I think that is one of the
great advantages of the regional system of banking, that it provides
that democratic balance of power, where one branch is checking
against the other.
My friends on the Federal Reserve Board sometimes think that
the men managing the reserve banks are pretty independent in
expressing their views and resisting the views of the board, and we
sometimes think that the board is pretty arbitrary in dealing with
us; but that is not necessarily an element of weakness in the system.
That is one of its elements of strength.
Mr. WINGO. Suppose that it were an element of weakness ? Where
in our experience as a nation or in the experience of anybody else
have we brought out a wisdom superior to that of the man experienced in the business that is affected by the controversy? What is
there in our experience as a people to say that a political board sitting at Washington can tell anyone in this country how more
efficienly to conduct his business?
Governor STRONG. That question is really applicable to the last
few questions in this questionnaire. Again getting back to the gold
standard, the gold standard is a much more automatic check upon
excesses in credit and currency than is a system where gold payment, if you please, is suspended and it is left to the human judgment
of men to determine how much currency shall be issued which they
do not need to redeem in gold—do you see the distinction? And
when you speak of a gold standard, you are speaking of something



where the limitation upon judgment is very exact and precise and
the penalty for bad judgment is immediate.
Where you are speaking of efforts simply to stabilize commerce,
industry, agriculture, employment, and so on, without regard to the
penalties of violation of the gold standard, you are talking about
human judgment and the management of prices which I do not believe in at all. I do not think anybody should be given the power to
say what the price of anything should be.
Mr. WINGO. Price fixing indirectly is just as vicious as price fixing
Governor STRONG. But if your system of price fixing is that which
has been tested, so far as human society goes, by operation of the
automatic system of gold payment and redemption of the notes of
banks of issue, I think you minimize the possibilities of bad judgment or abuse of power by a better method than any that has yet
been devised.
Mr. WINGO. Here is another factor: You can not foresee all of the
picture. There are never two sets of circumstances exactly alike in
the handling of the credit machinery. You might have a different
commodity situation and a different gold situation each time and,
in the last analysis, there has got to be a judgment based upon the
wisdom of experience in handling these affairs which must control,
and, in addition to that, the old fact still obtains that there are certain laws of economics that are far superior to any wisdom or stupidity of Congress. There are certain economic laws that you will
run up against. You may check them here and say, " You can not
come in the front door," but you divert the stream around to the
back door, and that is the thing that is in my mind and I was very
much relieved to find that the author of the bill does not intend to
change any law at all but still wants to make a stump speech more
elaborate than the one in the last session.
Governor STRONG. Unless there is something you wish me to deal
with, that covers what I had to say.
The CHAIRMAN. In reference to Judge Brand's desire to submit
questions, he just informs me that he will submit those for the
record to-morrow and they will be forwarded to you so that, as an
extension of your remarks, you may submit your answers to his
Governor STRONG. If the committee desires me to return later, I
shall be very glad to at any time. I rather enjoy being here.
The CHAIRMAN. We enjoy having you here.
Governor STRONG. Before leaving, Mr. Chairman, I want to express to the committee and to you personally, my appreciation of the
consideration you have shown me during my appearance here, as well
as my gratification at the opportunity which you are giving to the
members of the Federal reserve system to come here to exchange
views with you on these important matters.
The CHAIRMAN. The committee will adjourn until 10.30 o'clock
to-morrow morning.
(Whereupon, at 12.17 o'clock p. m., an adjournment was taken
until Tuesday, March 20,1928, at 10.30 o'clock a. m.)



Tuesday, March 20, 1928.
The committee met at 10.30 o'clock a. m., pursuant to adjournment, Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order. The committee
is continuing hearings on H. R. 11806.
We will hear Mr. Goldenweiser, of the Federal Reserve Board, at
this time.
Mr. GOLDENWEISER. Mr. Chairman and gentlemen of the committee,
Governor Young said yesterday that the board would be represented
by Doctor Miller and myself, and I should like to say at the outset
that this is a matter in which it is very difficult for anyone to represent anyone else. It is so much a matter of judgment and there are
so many different lines of approach to the problem that he can only
speak for himself. The only thing I can do for the committee is
to give them the kind of information and opinions that I would give
the Federal Reserve Board if they requested them, as they have, and
as I have given them.
My feeling about this bill is that, as Congressman Strong will be
the first to admit, its primary object is the stabilization of the price
level or of the purchasing power of the dollar, and back of that, no
doubt, is his feeling of the distress and trouble that violent fluctuations of prices have caused, and more particularly to producers of
raw materials. I feel that the rest of the bill, as Congressman
Strong, I believe, says himself, is made up of various suggestions
and ideas to meet objections; but the fundamental purpose of it
remains in the stabilization of prices.
Mr. STRONG. Average prices.
Mr. GOLDENWEISER. Average prices, of course. I understand you
are not speaking of individual prices.
The thing that I should like to do briefly is to analyze somewhat the various kinds of price movements that enter into the
fluctuations of prices during different periods. I have had a chart
prepared, one that Governor Strong referred to in his testimony.
I t is a chart that gives the price fluctuations from 1800 to 1927.
The CHAIRMAN. Let me ask, Mr. Goldenweiser, when did Governor
Strong refer to this chart? Is it already in the hearings ?
Mr. GOLDENWEISER. There is a similar chart in the hearings.
The CHAIRMAN. I S it brought up to this point?
Mr. GOLDENWEISER. I think not. I should be glad, if agreeable, to
have this chart put in at this place.
The CHAIRMAN. That is the reason I was making the inquiry.
Mr. GOLDENWEISER. I will have one made that will fit into the testimony and put it in.
The CHAIRMAN. Without objection, then, this chart will be inserted, as prepared by Mr. Goldenweiser, at this point in the hearings, being a shart showing wholesale prices in the United States from
1800 to 1927.



Mr. LUCE. Mr. Goldenweiser, what month does it end with ?
Mr. GOLDENWEISER. This is an annual chart. I t ends with the
average for 1927. It is not a monthly chart. It covers a long period.
(The chart referred to is as follows:)















Mr. GOLDENWEISER. This chart is primarily made for the purpose
of bringing out the different kinds of price fluctuations. You see the
three big peaks, those three tremendous advances in prices about
1812, 1865, and 1920. Those are all war peaks. They are all the results of war inflation. It is these very violent convulsions of prices
that cause most of the great distress which underlies the sentiment in
favor of this bill. As to the more recent one, in 1920, while the war
was over in 1918 as a matter of fighting, financially it was not over
for a year or more afterwards, because some of the war financing had
to continue.
The CHAIRMAN. Mr. Goldenweiser, this covers, as you say, a long
period of time, from 1800 to 1927. This is the general wholesale
price level?
The CHAIRMAN. Were the same

commodities used as component
parts of it in 1880 that were used in 1927?
Mr. GOLDENWEISER. NO, sir. The earlier figures, of course, are on a
much smaller base. The figures are not as good for earlier years as
they are for later years. They are the best that have been found.
The CHAIRMAN. They are the best index that you have?
Mr. GOLDENWEISER. The best index for the whole period.
Mr. STRONG. Why was it necessary, after the war was over, in
order to complete the war financing, to have continued inflation ?
Mr. GOLDENWEISER. Congressman, that is a point that I can not
discuss in great detail. It has been discussed here. It was first the
flotation of the Victory loan, and then later the issue of Treasury
certificates in connection with the very heavy expenses that continued a long while after the armistice. I am not saying that it was



necessary, and I am not in a position here to give any judgment
as to what could have been done to change the Treasury program.
Mr. KING. DO you know what could have been done?
Mr. GOLDENWEISER. What could have been done to prevent it?


Mr. GOLDENWEISER. On that point I have nothing more than purely
personal opinion, which would not be worth the committee's while.
Mr. STRONG. Well, that is all we are getting from you, anyway.
Mr. KING. I do not know about that. I think it would be worth
Mr. STRONG. All we are getting is your personal opinion, anyway,
is it not?
Mr. GOLDENWEISER. That is all I can give you; yes, sir.
Mr. STRONG. That is what I think is valuable.
Mr. GOLDENWEISER. I think that it would have been possible, in
1919, to have issued Government securities at higher rates, and
probably to have reduced some of the credit expansion that followed.
Mr. STRONG. If that had been done, they could have stopped the
inflation before it went to the peak of 251 in 1920, could they not ?
Mr. GOLDENWEISER. I think that some slight modification of that
peak could have been accomplished.
Mr. STRONG. If we had stopped it before it got to the peak of
inflation, then we would have prevented a good deal of the damage
from deflation that followed, would we not ?
Mr. GOLDENWEISER. I think this, Congressman: I think that instead of this peak you would have had a peak like this [indicating].
It would still have been an outstanding peak.
Mr. STRONG. I know it would have been an outstanding peak, but
it would not have had so far to deflate ?
Mr. GOLDENWEISER. It would have been more moderate in either
direction, probably.
Mr. STRONG. Would not that have been better for the country generally ?
Mr. GOLDENWEISER. I am inclined to think that it would; yes, sir.
Mr. STRONG. Then that tends to confirm the theory of using these
powers for stabilization, does it not ?
Mr. STRONG. That is what I am trying to
Mr. GOLDENWEISER. Mr. Strong, I should

like to discuss this chart
somewhat in perspective for the century, and, if you will permit me,
we will discuss more recent changes a little later.
Mr. STRONG. All right.
Mr. LUCE. May I ask that in the course of your discussion, while
very properly emphasizing the effect of the war, you do not overlook
the desirability of addressing yourself also to the rise that your
chart shows from 1896 to 1910Mr. GOLDENWEISER (interposing). I am going to speak of that in
just a minute, Mr. Luce.
Mr. LUCE. Where there was, by your chart, an apparent increase
of nearly 50 per cent in prices, and when the disturbance of business
and the suffering by the debtor class was so great that there were costof-living commissions, National and State, and very widespread uneasiness—in fact, reaching proportions almost as great as those that



accompanied the depression from 1873 to 1896. I do not think we
should address ourselves entirely to temporary and accidental conditions of war while this palpable change in 14 years was so serious.
Mr. GOLDENWEISER. No, sir. That is the very next thing I want
to take up.
Mr. LUCE. Very well.
Mr. GOLDENWEISER. TO what extent these war peaks can be modified is a matter largely of fiscal policy and of taxation, and it is something that is outside of the province of my discussion now. The
largest peaks are war peaks, and no statute would prevent them, I
think; because, no matter what statute was on the statute books, in
time of war it probably would be repealed or ignored in view of a
national emergency. All the countries of the world had violent
inflation, and the reason that ours was less violent was that we were
less involved in the war financially than the other countries.
The other kind of fluctuations that I want to speak about are the
ones that Congressman Luce just referred to; that is, the fluctuations
from the seventies to the nineties and from the nineties to 1913—a
long decline during a period of 30 years, which caused distress and
made it very hard for the debtor class—and then the advance after
Those are technically called secular movements of prices—longtime movements of prices. They are periods in which prices are
moving so slowly on the whole—a matter of 30 or 40 points over a
period of 30 or 40 years—that the movement from month to month
is slight and hard to notice, although the cumulative effect is very
serious. The causes of these movements are still extremely obscure;
there are great differences of opinion among the best informed as to
the reasons for this big decline and this big advance. Perhaps the
best opinion, so far as I can judge, is that the period of declining
prices from 1870 to 1896 was due to a large increase in production,
and that the period of advance from 1896 to 1913 was due both to
the increase in the gold supply, by reason of the cyanide process and
other things, and to the fact that population growth was rapidly
catching up with the growth of raw materials and there was a
pressure on the raw materials.
The CHAIRMAN. Then it is a fact, Mr. Goldenweiser, that the influx
of gold raises the wholesale price levels ?
Mr. GOLDENWEISER. It tends to.
The CHAIRMAN. In any situation such as we have now, a great
influx of gold does not affect the wholesale prices because that gold
has been managed by the Federal reserve system; is that correct ?
Mr. GOLDENWEISER. I should hesitate to say that it was because it
was managed, Mr. Chairman. What I would say is that because of
the existence of the Federal reserve system it was at certain times
absorbed in the repayment of discounts.
The CHAIRMAN. That might be construed as management.
Mr. GOLDENWEISER. Yes, sir. But the real reason that the gold
imported during 1920 and 1921 had little effect on prices—and that
period stopped about 1922—was that the member banks were so
heavily in debt at the reserve banks that the gold was used to repay
the debt and therefore did not become incorporated into memberbank reserves.



The CHAIRMAN. But at the present time, if I understood Governor
Strong correctly yesterday, he stated that the United States and the
world are not back on a gold basis. The statement has frequently
been made in recent days that we are on a managed gold basis,
because of the impounding of the vast amount of the world's gold in
our country, which was the reason why that gold did not cause
The CHAIRMAN. In other

words, if this gold had not been impounded in some manner by the Federal reserve system, would it
have resulted in a continuing increase of the average price level ?
Mr. GOLDENWEISER. I think, Mr. Chairman, that that statement
applies to the period from 1920 to 1921. At that time, if there had
been no Federal reserve system and the member banks had not been
so heavily in debt as they actually were, the gold might have become
a basis of credit expansion. As it was it reduced the earning assets
of the reserve banks and had no effect on the volume of outstanding
credit. But I think that since 1922 the gold has had as much effect,
and more, than it could have had before the Federal reserve system.
The reason I say more is that the reverse requirements had been
reduced by the Federal reserve act, and as a consequence member
banks could expand their credit more largely than they could before
the Federal reserve act, when the reserve requirements were up to
25 per cent.
Mr. WINGO. So that I may follow you, by " effect" do you mean
inflation ?
Mr. GOLDENWEISER. Growth of credit.
Mr. WINGO. A S I gather from what you said, you do not concur in
what the chairman has said, that it was managed, and for that reason there was no inflation because of this surplus gold coming in.
You contend that there was an inflationary effect ?
Mr. GOLDENWEISER. I would not call it inflationary, Mr. Wingo.
I would call it a very rapid growth of credit.
Mr. WINGO. Well, expansion?
Mr. GOLDENWEISER. Expansion; yes.
Mr. WINGO. Some people have called it inflation and others expansion. But there was a swelling of the volume and a resultant decrease in the purchasing power of gold. I think the chairman and
you and I could agree upon that definition, possibly.
Mr. WINGO (interposing). Am I to understand that that is true;
that you differ with the chairman about the effect of it?
Mr. GOLDENWEISER. I am inclined, to think that our opinions on
the matter are not exactly alike. I think that between 1922 and
1927—quoting from memory—there was about $750,000,000 in gold
added to the stock of gold in the United States. Of that $750,000,000
about $450,000,000 went into member bank reserves, and about $300,000,000 went into meeting the additional demand for circulation. On
the basis of the $450,000,000 added to the reserves, there was a growth
in member bank credit of eight and one-half billion dollars. That
is a growth at the rate of about 18 or 20 to 1—unless I have my
figures wrong, and I will correct it if my memory is not right. Anyway, it was an exceptionally large increase, and the reason that it



was so large on the basis of the reserves was that much of the growth
in the member bank liabilities was in time deposits rather than in
demand deposits, and only 3 per cent reserves were required against
the time deposits, so that the average reserves of member banks compared with the total volume of credit were much smaller at the end of
the period than at the beginning.
Under these circumstances, Mr. Chairman, it is difficult to say
that the Federal reserve system impounded gold, or sterilized it, as
it has sometimes been called, or had any other influence of that sort;
because the gold has had, I should say, a larger effect on the total
volume of credit than any gold at any time anywhere.
The CHAIRMAN. I S it a fact, then, Mr. Goldenweiser, in that connection, that the management of the Federal reserve system was used
in the control of the gold, in view of the possible expansion which
might inflate prices, in such a manner that there was no amount of
inflation that took place?
Mr. GOLDENWEISER. If I should say yes to that question, it would
imply that the Federal reserve system has practically complete control of prices, which is the very thing that I have very serious doubts
Mr. STRONG. Be careful about saying that.
Mr. WINGO. Mr. Chairman, let me ask a question right in that connection, which will possibly elucidate what you have in mind. As I
understood you, Mr. Goldenweiser, you said that there was an increase in the member-bank credit of eight and one-half billion
Mr. WINGO. Based upon the

$450,000,000 increase in our gold

reserve ?
Mr. WINGO. If this increased

volume of gold that came into the
United States had not come in, would there have been that eight
and one-half billion increase in that time, in your judgment?
Mr. GOLDENWEISER. In my judgment, no, sir.
Mr. WINGO. Then it did have an effect to the extent of an eight
and one-half billion increase—whether you call it expansion, inflation, or what not—in the credits created and sold by the member
banks ?
Mr. GOLDENWEISER. The only modification I would make to that
statement is that when I said " no " I did not mean there would not
have been any. I mean there would not have been eight and onehalf billion.
Mr. WINGO. That is the next question I am coming to. How much
of that eight and one-half billion represented the normal and natural
increase that would have come if this surplus gold had not come in ?
Have you any way of estimating that, or have you attempted to
estimate it arbitrarily ?
Mr. GOLDENWEISER. In a country that is as young as ours, and is
developing as rapidly as ours, and in which conditions are changing
as rapidly, I hesitate to call anything normal, and I do not know
what would have been a normal growth. There are so many new
developments, the use of bank credit increases, and the number or
size of banks increases, and the financial habits of corporations



change as well as the financial habits of individuals, so that I feel
that we have not sufficient factual data to speak of a normal growth
of credit.
Mr. WINGO. Can you do this? Possibly I can arrive at it in this
way: I have about the same idea that the chairman has, and I am
trying to arrive at your judgment on the same thing that he is. Assume that the very same activities in business would have taken
place had this gold not come in; then what would be your estimate
as to how much of that eight and one-half billion increase would
have taken place?
Mr. GOLDENWEISER. I am not able to make that estimate.
Mr. WINGO. YOU are of the opinion, though, that that increase,
whether you call it normal or whatever you may call it, was
Mr. WINGO. In other words,

you are of the opinion that this surplus gold pouring in did have an effect upon swelling the increasing
volume of credits in this Nation ?
Mr. GOLDENWEISER. Decidedly.
Mr. WINGO. And whatever the Federal reserve system could have
done in advance toward managing, sterilizing, or whatever you may
call it; whatever they may have done or tried to do, it is your conviction that there was an increase in the volume of credits directly
traceable to the increase in the volume of gold ?
The CHAIRMAN. Mr. Goldenweiser,

did I understand you correctly
to say that we are on a gold basis now ?
Mr. GOLDENWEISER. The United States is on a gold basis, absolutely.
The CHAIRMAN. SO far as the United States is concerned?
The CHAIRMAN. But the world
Mr. LUCE. In this connection,

is not on a gold basis as yet?

Mr. Goldenweiser, the Federal
reserve system introduced the possibility of a large expansion of
credit through its various features. Do you take it that what I may
call the full normal effect of the Federal reserve system had been
reached before war conditions brought in an abnormal factor ?
Mr. GOLDENWEISER. If I gather the purport of your question correctly, Mr. Luce, I may answer it in this way: The Federal reserve
system has never functioned without war conditions. From 1914 to
April, 1917, the United States was not in the war, but the world
was in the war, and that was affecting the situation here from the
very beginning; and when the United States entered the war, of
course, that introduced still another factor, so that I think that there
had been no test of the Federal reserve system. There really has
not been a test of the Federal reserve system functioning under
more usual peace-time conditions up to the present. I think it is
only with the gradual return of the world to the gold standard that
the Federal reserve system is beginning to function under more
nearly normal business and financial conditions, and it is still a
pretty good way from that.
Mr. LUCE. I had the impression that not sufficient weight has been
given to the effect on the price situation of the expansion of credit



produced by the creation of the Federal reserve system, and I wondered if any attempt at all had been made to measure that effect; I
mean the normal effect of it.
Mr. GOLDENWEISER. The possibilities of it, you mean ?
Mr. LUCE. Yes.

Mr. GOLDENWEISER. In view of the fact that the whole relation between the volume of credit and the level of prices is still very
largely undetermined, and that those of us in the Federal reserve
system who have been working on it have a great deal of doubt of
the directness and constancy of that relation, it would be impossible
for me to say what the effect of the Federal reserve system on the
price level might or would have been, or whether the full effect had
been exercised or not.
Mr. LUCE. Have you any doubt that an expansion of credit by increasing the use of bank checks is a direct addition to the volume of
Mr. GOLDENWEISER. NO, sir; I have no doubt of that.
Mr. LUCE. And does not that have a considerable bearing upon the
quantitative theory ?
Mr. GOLDENWEISER. It certainly has a bearing, Mr. Luce; but
there are times when the volume of deposits is increasing very
rapidly and prices are going down. For instance, take the period
from 1925 to 1927. During that period member bank credit and deposits throughout the United States increased at a very rapid rate,
and prices declined about 10 per cent.
Mr. LUCE. Have you any explanation of that yourself, in your own


Mr. LUCE. May we have it?
Mr. GOLDENWEISER. Surely. I think that the decline in prices during that period was due to the increased efficiency of production,
transportation and distribution, and the keen competition among the
producing and marketing agencies.
Mr. WINGO. You would not say, though, that the cause to which
Mr. Luce referred did not have its effect? What you mean to say is
that the counterbalancing effect of the causes to which you direct
attention were so much larger than the effect of the things that Mr.
Luce referred to that there was a net falling instead of an increase.
If this increased efficiency that you refer to had not taken place,
then the natural effect to which Mr. Luce refers would have taken
place; would it not?
The CHAIRMAN. YOU are referring now, Mr. Goldenweiser, to
those commodities that enter into domestic transactions ?


that have the same effect on production
which enters into the international market?
Mr. GOLDENWEISER. I think that the commodities that enter into
the international market respond to changes in conditions in different countries more promptly than those that do not.
The CHAIRMAN. What conditions; the gold conditions ?
Mr. GOLDENWEISER. The general conditions of demand and supply,
in which bank credit and gold reserves are a factor.




May I go on and finish the general sketch of the price fluctuations
that 1 wanted to bring out ?

Mr. GOLDENWEISER. The price movements that I was talking about
are the long-time price movements such as took place between 1870
and 1896 and between 1896 and 1913—movements which were very
gradual and very difficult to determine at a given time, because, as
you notice, there were fluctuations all the time. In 1880, for instance,
prices were rising, and that is all that was known at the time, and
whether this rise indicated that the general decline had stopped and
a rather rapid rise had begun, it was impossible to determine until
after the next few years had elapsed. In other words, the long-time
trend of prices is something that becomes identified only after it is
over. After this upward movement had started and continued for
some time, it became clear that this was a continuous movement of
about 30 years, with fluctuations.
The CHAIRMAN. The low price being reached in 1895 ?
Mr. GOLDENWEISER. Yes, sir. Prior to that it was difficult, from
month to month and from year to year, to determine which way prices
were moving except on the shorter-term fluctuations. It would be
difficult for a credit policy to influence the long-time movements,
partly because they are obscure while they are happening, and become
clear only after they are over, and partly because there are underlying trends that might very easily be misleading; because a situation
might develop in a period of this sort when all the guides to credit
policy would indicate tighter money, and yet the general trend was
downward. In other words, it would be a very difficult proposition
to regulate credit policy in any way with a view to those long-time
The real question before this committee, as I see it, deals with one
class of price fluctuations, namely, the relatively short-time fluctuations like those that have occurred between 1922 and the present time.
The big peaks are war-time peaks, and require a special kind of
approach. The long-time trends, for reasons that I have attempted
to enumerate, are both elusive and misleading.
Mr. WINGO. Is there any contention among the experts over the
conclusion that you have just arrived at? Do you all agree? Let
me see if I understand you. First, in the passing moment, you can
detect the force that you refer to as causing upward or downward
movements in the price level ?
Mr. WINGO. But whether the

current movement is a mere temporary movement or whether it is a part of a long-time movement is
something that can not be detected at the passing moment; is that
your conclusion ?
Mr. WINGO. The point


I want to get at is
agree upon that conclusion that you have just
a contention as to that theory ?
Mr. GOLDENWEISER. I t is a little difficult at
subject on which experts agree.
Mr. WINGO. I realize that. I have practiced

this: Do the experts
expressed or is there
any time to find any
law for a great many



Mr. GOLDENWEISER. But I should be inclined to think that this
comes as close to one that they would agree on as any.
Mr. WINGO. Are there any major or sharp conflicts between them?
Let me put it this way: Is there any outstanding economist in the
United States who contends that at the present moment there are
signs that are obvious to those who are teamed in reading those
signs, from which they can determine whether 10 years from now
they can look back to the year 1928 and that their present contention will be verified that it was a long-term downward movement;
or, if there should be a sharp upturn in the price movement, say,
during the month of April, can they say whether or not it was
simply a temporary upturn and that the general trend was still
downward ? Is there any outstanding economic writer or student in
the United States who contends otherwise than that which you have
expressed ?
Mr. GOLDENWEISER. By limiting it to the United States you are
facilitating my answer. I think there is not.
Mr. WINGO. Is there any in any European country?
Mr. GOLDENWEISER. I think that Prof. Gustav Cassel, of Sweden,
thinks he knows.
The CHAIRMAN. May I interject one thing at this point?
Mr. WINGO. Certainly. You see what I am driving at, Mr. Chairman.
The CHAIRMAN. That is a very interesting question. I have heard
many of these economists and prognosticators to which the gentleman
is referring express themselves as quite at sea in regard to these
movements because of the introduction of a new element, namely, the
management of the Federal reserve system and its influence on the
credit policy and gold movements in its work in connection with the
central banks of issue in different countries of the world.
Mr. WINGO. They do take the same position, do they not, as has
just been expressed; that while they can observe, of course, the temporary month-to-month fluctuations, they are not and have not been
able to determine whether the passing movement is part of a longterm fall or a long-term rise, and that the things which you mention,
the habits and practices that have grown up with reference to management of gold, have only added to the confusion and the uncertainty? Is not that true?

Mr. WINGO. In other words, my understanding has been that the
conclusion that he has expressed is a correct one, and Cassel is the
only man that I have heard suggested who disagrees. In other
words, the expert who says " I can tell right at the passing moment
whether we are going east or west, or up or down," is uncertain
whether it is a temporary or a permanent swing of the price level.
Now, the confusion, as I understand, has been added to recently by
the manipulation or sterilization or management of gold, or whatever you may call it, and instead of clarifying it and making it easier
for the experts to say at the passing moment whether it is a permanent upward or downward trend, it has added to their uncertainty.
The CHAIRMAN. The policy adopted recently of earmarking gold
is another source of confusion.



Mr. WINGO. I included that in managing gold and all those different devices that have been adopted.
Mr. KING. Mr. Goldenweiser tells us that this line which he has
on his chart, representing the price level, can not be drawn until the
events have taken place, and then he can commence to see which way
they are going. That would indicate that there is no living man that
can draw that in advance.
Mr. LUCE. HOW do you reconcile, Mr. Goldenweiser, the inability
of the experts, who give their lives to these things, to form judgments, while the masses of the people seem to reach rather definite
conclusions ? I may say that 50 years ago at this time the people of
this country had such a clear idea upon this subject that in my native
State cannons were placed about the statehouse and the armed forces
of the State were brought up to insure the change of administration
which had been brought about, or was threatened by the action of the
voters who knew what was going on. Now, you may say that your
experts can not tell whether it is a rising scale of prices or not; but
throughout the history of this country, in 1837 as well as other
periods, the masses of the people have known that they were suffering
great hardships and that there was widespread misery; and yet you
come here and tell us that your experts do not know that fact. What
we are after, I take it, is to prevent the miseries of the people and
not to satisfy the uncertainties of the experts.
Mr. GOLDENWEISER. Yes, sir; there is no question about the misery.
The question is about the cause of the misery.
Mr. LUCE. I do not understand that at the moment.
I understood you to give the committee the impression, if I may
jump to a conclusion, that attempt to meet this situation is sought
because as American people we do not know what the situation is.
A large number of the American people have known what the
situation was.
Mr. GOLDENWEISER. I should like to answer that in this way, that
the only fluctuations that the people feel are the short-time fluctuations. They do not feel the long-time fluctuations.
Mr. LUCE. I beg your pardon; I put a preface in there that I know
the people do not understand the long-time fluctuations. I have
seen the populists arise and I have been part and parcel of that rise
in 1906 and 1910.
Mr. GOLDENWEISER. Did they know in 1880 that prices were going
up, or that the trend was downward?
Mr. LUCE, They knew they were suffering from the deflation of
currency, and in several States in this country they became a formidable political factor, and again in 1910 the same thing was
threatened, and it was for that reason that the various States and
Congress itself attempted to find out what the trouble was, and again
in 1921, when Congress created the Commission on Agricultural
I am pointing out to you that I will put in a caveat against the
suggestion that because you can not tell from day to day, or can not
forecast, that, therefore, there is to be no recognition of what conditions are, that prices are either rising gradually or falling gradually.



Mr. GOLDENWEISER. I can understand this position; I certainly
recognize that the long-time decline in prices causes a great many
hardships. The only question I raise is whether it is at any time
possible to determine whether the long-time decline has come to an
end or not.
When prices turned up in 1880 there was not a man living who
knew that the long downward trend of prices still continued and that
the rise was only a temporary fluctuation; that is something that
neither the people nor the experts could tell, and in so far as credit
policy may have any bearing on the price situation, its bearing
would be on the relatively short-time movements. I t is the question
of those short-time declines and advances of prices that I should like
to discuss for a few moments in completing my testimony.
The CHAIRMAN. Before you do that, might I ask you whether, in
your judgment, the only effect that the operation of the Federal
reserve system has on these rising and declining prices is through
their management of the credit policy ?
Mr. GOLDENWEISER. I am not quite sure I understand your question.
The CHAIRMAN. In other words, is the sole influence of the Federal
Reserve Board on the general price level through their management
of the credit policy of the banks? Are there any other influences
which are exercised by the bank ?
Mr. GOLDENWEISER. By " credit policy " you mean discount rate and
open market policy?

Mr. GOLDENWEISER. I should say that in so far as they may have
any effect on prices that would be the only channels through which
it can be exercised. The only other thing is that the system may
have a certain influence on the conduct of individual member banks,
which is perhaps what you had reference to, and I think that that
has no broad general effect except in improving the soundness of
banking conditions.
Mr. LUCE. HOW do you tie up with that the factor of the increase
or decrease of the volume of Federal reserve notes outstanding ?
Mr. GOLDENWEISER. The volume of Federal reserve notes under the
Federal reserve system is influenced entirely by the general demand
of the people for currency, and that demand is in turn influenced
by the volume of business.
Mr. KING. Right at that point, what do you mean by the general
demand of the people for currency ?
Mr. GOLDENWEISER. I mean that a certain amount, and rather a
small proportion, of all the payments made by the people in the
course of a year are made in cash, and the amount of cash that a
person has to carry in his pocket depends on the level of retail prices
and his own personal habits. In the aggregate there is a certain
amount of cash that will do the business, and that business includes
what we all carry in our pockets to pay for our lunches, car fares, etc.,
and the amount that the retail stores have to carry in their tills to
make change, the amounts that the commercial banks have to carry in
their tills to meet the demands of their customers, that experience
has taught is apt to be needed in the course of a day, and the amounts
that corporations and other industrial concerns have to carry to meet



their pay rolls when they are in the habit of meeting those pay rolls
in cash.
That is the demand of the people for currency.
Mr. KING. I S that the demand that arises for Federal reserve
money ?
Mr. GOLDENWEISER. That is the demand that arises for currency,
and it makes no difference to the recipients whether the currency
that is received is in the form of gold certificates, Federal reserve
notes, national bank notes, greenbacks, or silver certificates.
Mr. KING. I S it necessary to supply them with, or do they demand,
the Federal reserve notes?
Mr. GOLDENWEISER. I have never heard of any case where anyone
asked for a specific kind of money.
The CHAIRMAN. Take the case of the United States Treasury in
paying out a billion dollars of gold certificates: Did that operation
result in a lessening of the amount in circulation of Federal reserve
notes, or an increase in the total circulation outstanding ?
Mr. GOLDENWEISER. I t resulted in no change in the total. It substituted gold certificates for the Federal reserve notes.
The CHAIRMAN. In other words, if that transaction had not taken
place, the additional Federal reserve notes outstanding would be
practically the amount of the outstanding gold certificates at this
Mr. WINGO. Will you develop

that further? What option was
there upon the part of the Treasury in issuing this billion ?
Mr. GOLDENWEISER. May I answer that, Mr. Wingo ?
I think the chairman probably did not intend to convey the impression that it was issued by the Treasury. Those certificates were
paid out by the Federal reserve banks. The Federal reserve banks
adopted the policy in meeting their constant demand for currency of
paying out a certain amount of gold certificates instead of Federal
reserve notes, and that is where that policy originated.
The CHAIRMAN. They had been previously issued to the Federal reserve banks on the deposit of gold by the Federal reserve banks
with the Treasury ?
Mr. WINGO. SO then it is

not true that the demand of the people,
as you have just stated, is the sole factor in determining the amount
of Federal reserve notes, because the arbitrary distinction of any
one of the Federal reserve banks would determine whether they
will issue gold certificates or national bank notes. Say my bank
wants $10,000 in currency, and if they do not ask for any particular
currency it is then up to the Federal reserve bank to determine
whether they will send Federal reserve notes or national bank notes.
Mr. GOLDENWEISER. That is true.
The CHAIRMAN. In addition to that the determination on the part
of the Federal reserve to issue credit or Federal reserve notes or
gold certificates lies entirely within themselves ?
Mr. GOLDENWEISER. I t lies with themselves, within the limits of
their reserve.
The CHAIRMAN. In other words, the Federal reserve could, if
they saw fit to do so, go into the open market and buy paper and



take surplus paper and deposit the gold and the paper with the
Federal reserve agent and issue Federal reserve notes, could they
Mr. GOLDENWEISER. They could issue Federal reserve notes against
acceptances, yes; not against Government securities.
The CHAIRMAN. I was not speaking of Government securities.
Of course, in the open market their policy is to buy Government
securities and acceptances.
Mr. GOLDENWEISER. They do not buy acceptances of their own
initiative; they buy acceptances when they are offered to them by
member banks and by dealers in acceptances. The only thing the
Federal reserve banks buy on their own initiative
The CHAIRMAN. They could take their acceptances which they
hold in their investment account and place them with the Federal
agent, together with gold reserves, and make the determination
within the banks themselves.
Mr. GOLDENWEISER. They not only could do it, but the fact is that
practically all the eligible paper the banks have is pledged for Federal
reserve notes.
I might repeat in the record here, although I think it has been
mentioned in the previous hearings several times, that none of these
transactions that you have been discussing now affect the total
volume of money in circulation, and they do not affect prices, and
they do not affect the credit position. They have no effect on anything except the balance sheet of the Federal reserve banks. To
give you an illustration: If you have in your pocket $20, and you
are going somewhere, it would make no difference to you whether
it was a gold certificate or a Federal reserve note.
Mr. KING. Unless you wanted to offer it as legal tender.
Mr. GOLDENWEISER. Yes, theoretically; but it rarely happens that
the technicality of legal tender comes up.
Mr. KING. If I were practicing law now, I think I would know
enough about legal-tender money to refuse a tender on behalf of my
client in Federal reserve money.
Mr. GOLDENWEISER. That would not affect the general situation.
It would be a very rare case.
Mr. KING. Of course not.
Mr. GOLDENWEISER. NOW, when the Federal reserve banks pay out
gold into circulation it diminishes the volume of Federal reserve
notes outstanding and it has no effect on the volume of currency outstanding to meet the demands that I described to you.
As a result of this transaction, none of you gentlemen, nor anyone
else, kept more money in his pocket; no stores kept more change; no
pay rolls were enlarged. The whole situation remained exactly as
it was before, and the only consequence was that the Federal reserve
banks had a somewhat smaller gold reserve. Even the reserve
ratio of the Federal reserve banks changed little, because their liability was diminished by the same amount that their reserve was
diminished. While there was a slight decline, it was slight, because
both sides of the equation were diminished by the same amount.
I think it is a current misconception and one that has caused a
good deal of criticism of the Federal reserve system at times, that
the policy of paying out gold had an effect on the credit situation



or on the volume of purchasing power of the people, or on any
other really pertinent condition. It is purely a matter of what kind
of pictures are printed on the money you pay out; that is all, and
had the effect in the Federal reserve system of somewhat reducing
their reserve ratio.
The CHAIRMAN. Then an instrument that will pay a bill—such,
for instance, as a check—in the discharge of that duty is no different
than a gold certificate or a Federal reserve note ?
Mr. GOLDENWEISER. A check has certain different qualities in connection with the ability to pass it along, and there are other differences between a check and money.
Mr. KING. This money is guaranteed by the Government.
Mr. GOLDENWEISER. But there is no difference in the general effect
on the situation, if any of the kinds of money we have outstanding
now, any kind of cash is substituted for another kind; no difference
from the point of view of credit policy, of purchasing power, or of
the position of member banks.
Mr. KING. Before we leave this, I would like to ask one simple
question, and that is this: When the issuance of this Federal reserve
money is based upon acceptances, is that issued upon the amount
specified in the acceptances or the value of the commodity which
those acceptances are supposed to cover?
Mr. GOLDENWEISER. When an acceptance becomes cover for Federal reserve notes, it is the face amount of the acceptance.
Mr. KING. And who fixes the amount of the acceptance ?
Mr. GOLDENWEISER. That is an arrangement between the buyer
and seller of the goods at the time that they arranged for the credit.
Mr. KING. And if they fix them too high, why that is a matter of
inflation, is it not, by individuals?
Mr. GOLDENWEISER. That is a matter that the bank which accepts
would have to look into, and, when it gets into the Federal reserve
bank, of course it has been scrutinized, both by the accepting bank
and by the Federal reserve bank, and the Federal reserve bank has
the indorsement of the member bank.
Mr. KING. Does that practice have anything to do with the fact
that on your chart, beginning with 1913, at the time of the adoption
of the Federal reserve system as the law in this country, the line
there seeks high mountain tops—you might say peaks—applying to
wholesale business, whereas the farmers' prices run along on a sort
of a level, or even lower ?
Mr. GOLDENWEISER. If your question, Congressman, is whether the
creation of the Federal reserve system had anything to do with it,
my answer is no; this practice had no bearing whatever on the
Mr. KING. YOU do not think the aid furnished to industry has
caused the separation of those lines ?
Mr. GOLDENWEISER. In the first place, those lines are not as widely
separated as you imply, because during the peak advance in prices,
agricultural prices advanced even higher than industrial prices.
In the second place, the face value of the acceptance and the prices
fixed for the underlying commodities would not have the slightest influence on the price level. Incidentally, I might mention that
acceptances are in very large proportion drawn to finance agricultural movements.


Mr. KING. Those who handle the agricultural end of
Mr. KING. And not the farmer.
Mr. STRONG. If the price of commodities in general


it ?

trend downward month after month and month after month and the Federal
Reserve Board would send for you and ask you what could be
done about it, what advice would you give them?
Mr. GOLDENWEISER. That would depend on a large number of
Mr. STRONG. What could you do? What could the Federal Reserve Board do to change conditions if the trend of prices month
after month would gradually be downward ?
Mr. GOLDENWEISER. That would depend on a large number of
other considerations. If that decline in prices were occurring at a
time when bank credit was growing rapidly, when money rates were
low, and there was no evidence of a decline in prices being related
to a shortage of credit or tightness of credit or a high price of
credit, as was the case from 1926 to 1927,1 should have to say to the
Federal Reserve Board that in my judgment there is nothing that
the Federal reserve system can do to arrest the decline.
Mr. STRONG. YOU do not think, if the prices were going down in
this country, that increasing the volume of money among the people
and lessening the cost of it and the expanding credits would be of
advantage ?
Mr. GOLDENWEISER. I think that you can not make people use
credit when they do not wish to, and that the price of credit determines the volume used only at certain times.
Mr. STRONG. YOU might not make them do it, but you could induce them to do it by giving them cheap money and plenty of it.
Mr. GOLDENWEISER. I t is difficult to keep my own position straight
because there are so many angles to this question, and this is just
one corner of it.
The Federal reserve system can, if it sets its mind to it, influence
the price level, especially in the direction of an advance.
To do that it would have to make that its sole object for the time
being, continue to buy Government securities, say, and the proceeds
of those funds would be used by the member banks to reduce discounts; keep on buying after all the discounts were paid off, until
the funds thus released would begin to accumulate as reserves in the
member banks and would induce those member banks to revise their
credit policies and to increase their loans, and finally it would find
its way into those channels of business that offered the greatest
opportunity. That might be speculation in commodities; it might be
speculation in stock exchange securities or in real estate. If the Federal reserve system made its one purpose to cheapen money, it could
cheapen it, and the chances are that in the long run it would raise
commodity prices, but in the meantime there would be no way of
preventing it from doing a lot of other things, nor would there be
any way, after that price advance created by deliberate and unconscionable inflation got under way, in which the Federal reserve system could arrest it, because inflation feeds on itself and it would
inevitably in the long run lead to
Mr. WINGO (interposing). You want to qualify what you just said,
that they could do it, do you not ?



Mr. WINGO. Here is a qualification: Suppose at the time they
wanted to affect the discount rate the banks were in such condition
that they did not have to rediscount? Suppose that my bank did not
have to rediscount any paper, what effect would it have on me ? So
the effect, then, is always circumscribed by the limit and the volume
of the instruments they can add.
Mr. GOLDENWEISER. I was saying that they could inflate, and if the
banks were not in debt to the reserve bank that would make the
process easier.
Mr. WINGO. I think it might be fair to assume that recently conservative bankers, and even the members of the Federal Reserve
Board, came to the conclusion that brokers' loans were too high.
What happened? When we had a decrease in brokers' loans by the
banks themselves, that was matched to the extent of $500,000,000 in
a certain period of time, and the directors of industrial concerns,
corporations, said, "All right; if the Federal reserve bank says that
our banks have got to get out of the call-loan market on brokers'
loans, that is all right; we will take the deposits of our corporations
that are in our banks, in which we are directors, and we will put
them on the call-loan market." I think you know that that took
place to the extent of about $500,000,000 in a short length of time.
In other words, the efforts of the Federal Reserve Board and Federal
reserve banks and the conservative banks of the country, especially
in New York, to check that inflation of brokers' loans in New York
was counterbalanced by the gentlemen whom they call on and who
said, "All right; as directors of commercial enterprises we will take
our surplus funds and go in and substitute our commercial deposits
or surpluses for our bank surpluses," and the effect was nullified. Is
not that true? Have you not always got that to face whenever the
Federal Reserve Board or bank starts out on such a policy ?
The CHAIRMAN. DO you mean to say that brokers' loans are inflated?
Mr. WINGO. NO ; I do not know. I just know this much, that what
I said took place without any dispute, that every time, up to the extent of $500,000,000, they reduced the banks' volume of brokers' loans,
they had these corporate surpluses used to take their place, so that
to the extent of $500,000,000 there was not a bit of change in the
volume of brokers' loans; just a change of bookkeeping, whether for
the banks or for others, and the effect on the banks of the world was
just the same, because it was taking it out of the same banks. So,
whenever you go to saying what the Federal reserve banks can do, my
point is that you must limit what they can do to its instruments.
Mr. GOLDENWEISER. What I meant to say is that, particularly with
its present high reserves, the Federal reserve system could, if it determined to, bring about a certain inflation in credit which ultimately would probably result in an inflation of prices, and I think
that that is unquestionably true so long as we have 75 per cent of gold
reserve and $1,500,000,000 of excess gold.
The CHAIRMAN. In other words, the fact that it is not done is due
to the management of the Federal reserve ?
Mr. GOLDENWEISER. Due to the fact that the Federal reserve system
does not set out to do that. The Federal reserve system is there to



meet the demands of the public for credit, and it does not force
credit on the public, is conscious of its responsibility in the matter,
and would not set out to accomplish a purpose that would be obviously
The CHAIRMAN. In other words, you are answering my previous
question that the management of the surplus gold which is impounded
in the Federal reserve system is the reason why prices have not advanced ?
Mr. GOLDENWEISER. I t is in a way true. I would have to agree
with you to the extent that I might say it was a matter of common
decency rather than of management. It is not a matter of real management to refrain from undertaking a course that would be dangerous to the interests of the country.
Mr. KING. What prices do you refer to, Mr. McFadden, when you
say " prices " ?
The CHAIRMAN. The average prices.
Mr. STRONG. YOU have said in answer to my question that when a
long period of gradual deflation came the Federal reserve system
could check it and bring about inflation by what you think would
be an unconscionable extension of credit or purchase of Government
securities. Well, now, could they not also check inflation, if it was a
continued, positive, aggressive inflation?
Mr. GOLDENWEISER. I think so; yes, sir.
Mr. STRONG. Then, do I understand that the reason they did not
take that action after the armistice, when the price level kept going
up, was because of the necessity making it possible for the Treasury
to carry on its operation ?
Mr. GOLDENWEISER. This question has been asked in this committee
many times. It dates back to the period before I came to the Federal reserve system; it was a policy matter at the time when I was not
connected with the Federal reserve system.
Mr. STRONG. YOU mean that it is a delicate thing to inquire about ?
Mr. GOLDENWEISER. It is a matter that is rather awkward for me
to discuss, particularly because I do not know much about it.
The CHAIRMAN. It was a Treasury policy, was it not?
Mr. GOLDENWEISER. Yes; and it has been discussed both before the
Commission of Agricultural Inquiry and before your committee, and
Governor Strong discussed it two years ago when he was before
you, so you have the information on the subject.
Mr. STRONG. Has the Federal Reserve Board the power now to
attract gold to this country ?
Mr. GOLDENWEISER. The Federal reserve system could attract gold
to this country by making money rates higher here; yes.
I should like, if I may, to continue to discuss those short-time price
fluctuations, because
Mr. STRONG. I want to ask you some questions before you are
Mr. GOLDENWEISER. I will be very glad to try to answer them.
I wanted to speak about these short-time fluctuations, because it
seems that they are the ones with which you are primarily concerned,
and it is somewhat technical stuff that I want to say in this



The level of prices is something that probably exists, but it is
very difficult to measure. The wholesale price index of the Bureau
of Labor Statistics, which is the best available index of wholesale
prices, includes 550 commodities; in getting up the index, they
weight these in accordance with the amount that is used, and the
index, I have no doubt, is an excellent index. Nevertheless, that
index is an index that reflects the result of the movements of those
550 commodities and no others.
The CHAIRMAN. I S that price index affected by a practical movement of stocks, bonds, and securities up or down?
Mr. GOLDENWEISER. No, sir. I want to point out to you on this
chart the points that I want to make here. This is a chart of wholesale prices for the period from 1924 to 1928, and it shows certain
groups of prices: Cotton, grains, and livestock.
The CHAIRMAN. Without objection, this chart, which the witness
is now referring to, will be placed in the record at this point, being
a chart showing the wholesale prices from the year 1924 to the year
(The chart referred to is as follows:)

Mr. GOLDENWEISER. The purpose of this chart is to bring out the
elements that sometimes cause the advance in the wholesale price
index. In 1924 there was a relatively sharp advance in prices. That
sharp advance in prices was brought about by the rise of this yellow
line [indicating], and this green line [indicating]. It was the year
during which the wheat crop was short in the world, and that caused
an advance in the price of wheat and a sympathetic advance in the
price of other grain, and also there was an advance in livestock,
particularly hogs.
Those things were the ones that caused the index to advance. This
advance was one that reflected these things, and the only way that



any credit policy at that time could have stopped this rise in the
index would have been by exerting its influence on the whole business
situation, and in so far as that would be reflected in the price trends
it would depress the prices of other commodities than those that
advanced, because the world shortage of wheat was such that its
price could not be affected by credit. The effect of any influence
exerted by any banking organization at that time would have been
to make the person who sells boots and shoes or steel rails get less
for his product because the farmer got more for his wheat, a situation that, if it were entirely within the power of the system to bring
about, would neither be desirable nor equitable.
The CHAIRMAN. In other words, the changed policy in regard to
credit control only affects the general price level ?

The CHAIRMAN. And not of any individual commodity ?
Mr. GOLDENWEISER. I t does not affect any individual commodity,
but the general price level reflects the movements of those groups.
The CHAIRMAN. For instance, in the case of cotton, if it was at a
very high price, the tendency would be this, that if the credit policy
was working, then the change would be to affect the price of all
other commodities, to bring them down to an average level.
Mr. GOLDENWEISER. That is right; that is just the point I want to
Mr. STRONG. But the rise of the price in wheat and livestock did
not affect the average price of commodities to any great extent, did it?
Mr. STRONG. What does your chart show on
Mr. GOLDENWEISER. This does not look like

that ?
it, but this chart is on
a scale that had to be made smaller to allow room for the wide
fluctuations of group prices. Though the rise in the average is relatively smaller, it was a rise from 97 to 106.
The CHAIRMAN. Which corresponds to the high peak in cotton.
Mr. STRONG. It is only a change above and below the line of 9 per
cent total.
Mr. GOLDENWEISER. That is right.
Mr. STRONG. YOU would not consider that a very violent fluctuation?
Mr. GOLDENWEISER. It is a more violent flucti
ation than we had
ever seen before the war. A change in the price level of 6, 8, or 10
per cent in the course of three or four months is a violent change of
prices, and it is one that does not occur in ordinary times.
This cotton starts up here [indicating on chart] in 1923. I had to
have it cut off.
The CHAIRMAN. It reaches its highest point in the middle of 1924.
Mr. GOLDENWEISER. It was in 1923. I t had dropped quite a bit by
This last year we had some advance in prices, between June and
November, and that advance in prices was largely due to cotton and
Mr. STRONG. But as to those violent fluctuations in individual
prices, as shown on your chart, your average price shows pretty fair
stability, does it not?
Mr. GOLDENWEISER. The average price shows much smaller fluctuations, but fluctuations that are for a price level pretty violent fluctua



tions. They are wider fluctuations than are at all likely to occur
under any normal conditions with the functioning of the gold standard.
Mr. WINGO. I t is nothing unusual for the representative averages
to be less than some of its component factors. The law of averages
is that which runs through and equalizes all.
Mr. GOLDENWEISER. That is always the case.
Mr. STRONG. But the fact that they have gone along about five
above and five below is not comparable to what would have happened
if they had had a continued downward trend month after month
until they dropped 15 or 20 per cent.
Mr. GOLDENWEISER. No. Your question is that it would not have
as bad an effect ?
Mr. STRONG. Yes.
Mr. STRONG. I t is the continued

inflation or depression until trouble
comes that I am talking about. I am not talking about a moderate
fluctuation. I realize that that has got to come according to the law
of supply and demand on individual prices of commodities.
Mr. LUCE. May I bring out also that those irregularities are
flattened out still more when they are translated into retail prices,
and it is the retail prices that led from 1,000 to 2,000 people to
gather in the House Office Building yesterday and demand a change
in their salary level, and what this committee is primarily concerned
with is to meet those facts—the retail prices—and there the fluctuations are by no means as unstable as are the wholesale prices ?
Mr. KING. Have you any charts showing the retail prices?
Mr. GOLDENWEISER. I have charts of retail prices, but we have
not as good material on retail prices, because the market for them
is much more scattered, and as Congressman Luce says, retail prices
are much more stable than wholesale prices; they move much more
The CHAIRMAN. If the credit policy is used for the purpose of
stabilization, for the maintenance of a steady average price level of
all commodities, then when there is a drastic inflation of cotton, grain,
or any other commodity
Mr. GOLDENWEISER (interposing). By "inflation" do you mean
rise in price ?

Mr. GOLDENWEISER. Because it may not be inflation.
The CHAIRMAN. I t affects all commodities that are below the
general price level.
Mr. GOLDENWEISER. I t affects all commodities, whether below or
The CHAIRMAN. Yes; but to a greater extent those which are
below, does it not?
Mr. GOLDENWEISER. I should say not. I should think that if there
were pressure on prices, from whatever source it might come, it would
affect all the commodities that would be capable of responding to it,
whatever their level, and, probably, if their level is somewhat higher
they would feel it more.
The CHAIRMAN. An intensive rise in the price of cotton would
have a tendency to increase the price of all other commodities?



Mr. GOLDENWEISER. No; I should think not. I do not see how you
reach that conclusion.
The CHAIRMAN. I reached that from what you just said.
Mr. GOLDENWEISER. Perhaps we misunderstood each other. I did
not mean to say that.
The CHAIRMAN. I meant to say that those commodities that were
below the average price level would, under the management of the
stabilization powers and the management of the credit policy, start
an inflation. For instance, a very drastic high-price inflation of
cotton would have a tendency to increase the price level on all commodities that were below the fixed price level.
Mr. GOLDENWEISER. I think what would happen if the price of
cotton advanced, beyond control, and that carried the index up above
where it had been, and by some power the index was kept where it
was, it would result in a decline in all prices other than on cotton.
Mr. WINGO. The truth of it is that you and the chairman both
must not overlook the fact that, in the chart you have before you
at one time you had just the reverse of his illustration. Instead of
having a high price of cotton, you had a declining price of cotton,
and yet at the same time you had livestock and grain both going up.
If you were to assume that, say, cotton and wheat—we will pick
those two commodities—each only has the same weight in your price
level, and that there was an equal difference—in other words, that
cotton was going up, as the chairman suggested, and yet to the same
extent and to the same value and to the same weight wheat was going
down, then the effect upon all the other prices would remain unchanged, would it not?
Mr. GOLDENWEISER. Yes; they would offset each other.
Mr. WINGO. SO you can not always pick out one particular commodity, because its effect on the general price level may be counterbalanced by just the opposite condition in some other commodity
of equal value and equal weight in your price scale.
The CHAIRMAN. In a case like that, those who are charged with
the operation of the credit policy which was being used for the purpose of stabilization would not find it necessary to do anything to
affect the general price level by the change in the credit policy.
Mr. WINGO. It might not be necessary economically, but it would
be politically under some conditions. If the price of cotton were
going down and if my cotton farmers believed that Governor Young
was such a wizard that he could bring it up, they would be determined to have it go up, and at the same time if wheat were climbing
up, the consumers of wheat products would come around to him and
say, " You have been invested with this extreme authority; try to get
us relief "; and he would be between the devil and the deep blue sea
and, after all, they would all be against it.
Mr. STRONG. Just like it is when one man wants to borrow money
and the other says, "Don't lend it; we have too much now."
The CHAIRMAN. If the gentleman's theory is correct, any attempt
to stabilize the price level by the management of the Federal reserve
people who are in control of the credit policy, would be affected by
the price of individual commodities?
Mr. WINGO. I think it would.



The CHAIRMAN. HOW are you going to administer an instruction
to the Federal Reserve Board, as contemplated in this bill, without
taking into consideration individual prices of commodities?
Mr. WINGO. I think possibly they may have to do it unless Congress undertakes to do what I think it can not—repeal both the law
of supply and demand and the law of gravity.
Mr. LUCE. The trend of your testimony really disturbs me somewhat.
Mr. GOLDENWEISER. I am sorry.
Mr. LUCE. There has been a growing use of index figures in the
last 15 or 20 years. Until now there has not been a day go by
that they are not referred to in all the financial publications and the
general discussion of financial matters, and they are repeatedly being
brought into the committees of Congress. Yesterday the chief witness used them as a proper basis of his argument on a very important
matter, the wage scale of the Government employees, and what you
have been saying tends, I fear, to deprive index figures of any value.
Mr. GOLDENWEISER. I should hate to have that impression created.
I think it should be realized that the index number can be nothing
more than the average of the things that enter into it, and I think
that the thing I am trying particularly to bring out is that there is a
mistake in the contention that, by some means or other, the price level
is compensatory so that if one thing goes up the other thing goes
I feel that, in the first place, no price index, no matter how comprehensive, can include all the things for which money is paid, and
therefore there may be a number of things that can go down that
may not be reflected in the index. The index may go up because
cotton went up, and if there was no change in the purchasing power
of the people the corresponding decline may show up in the number
of servants somebody has or in the number of automobiles they
Mr. KING (interposing). Or theater tickets.
Mr. GOLDENWEISER (continuing). Or other things that do not enter
into the price index.
Another thing is that I feel that the price index could go down
entirely as the result of the increased efficiency and economy of production and distribution, and could be reflected in larger consumption
rather than in a compensating rise in some other price. For instance,
automobiles have become much cheaper so that people buy two automobiles instead of buying one, and there is nothing in that development that would cause prices of other commodities to go up in order
to compensate it, because the purchasing power released by the decline
in the price of automobiles has been absorbed by the buying of an
additional automobile. There may be a release in a person's income
during a decline in the price of meat and he may use it to buy a radio,
and so the decline in the price of one commodity or group of commodities may result in larger consumption rather than in an advance
of the price of some other commodity, and that is the point which
I think that the theorists of the price level frequently overlook.
The one other thing I would like to say on prices, and then I am
through with that phase of it, is that certain fluctuations in groups
of commodities and individual commodities are distinctly desirable



and are a part of our economic mechanism, and the reason that I
bring it in here is not because I do not realize that Congressman
Strong is aiming his bill at the general price level, but because, in the
first place, that is not as widely understood as it might be, and, in the
second place, because I have just pointed out that frequently the
general price index—not the price level, but the price index—reflects
movements of groups of commodities.
Now, the function of price in that connection is a perfectly wellknown function. The advance in price in one group of commodities
makes a larger group of individuals go into that particular industry,
with the consequence that there is a boom in it and ultimately the
price declines somewhat; and the low price of another commodity
makes industry move out of the production of that commodity, with
the consequence that there ultimately is a shortage and a rise in that
In other words, price movements are to a certain extent business
stabilizers, and price stability and business stability are in that sense
not entirely consistent.
Mr. LUCE. I want to say something more about that, because I
think you have got down to the core of the matter. Now, I understand you to impugn the value of the price index, pointing out its
inadequacies and warranting the conclusion that it would not be a
prudent guide for the Federal reserve system in its financial
If that be the case, can it be a guide to committees of Congress
in passing judgment upon the questions with which they deal? If
it is of no value to the Federal reserve system, can it be of any value
to anybody else? What is the good of it, if it is to be vitiated by
the authorities which you have pointed out?
Mr. GOLDENWEISER. I am glad you raised that question, because
your statement goes further than I intended it to go. I had not intended to give the impression that the price index is of no consequence. It is one of the indicators of the business situation.
In presenting material to the Federal Reserve Board along the
lines of business statistics I bring to their attention whatever lines
of information we have, and prices are one of these lines.
I think nothing that I have said was intended to mean that the
price index is no good. I merely meant to point out its limitations
at times as a sole guide to credit policy or as the determining guide
to credit policy.
For instance, in determining the wages or the salary level of Government employees the retail price index or the cost of living index
would be a perfectly valid index to go on. It has limitations even
there. It is rough; it may not absolutely represent the exact condition, but the movements of it would be reasonably fair, and there
is no reason why it could not be used for that purpose.
Index numbers, like any tools, must be used with discretion, and
to have that one index picked out as the thing that could determine
credit policy is made more difficult by some of those considerations
Mr. BLACK (interposing). May I ask this one question, to see if
I understand the purport of your testimony? It is that if the




Federal reserve system did exert any influence on the price level
it would have to be an arbitrary action on its part? If it wanted
to depress prices it would have arbitrarily to restrict credit, and if
it wanted to inflate prices it would have to willfully and arbitrarily
inflate credit; but that if it observed its normal functions, to wit,
to supply the needs of credit, as the act intended, then it would not
have any appreciable effect on the price level ?
Mr. GOLDENWEISER. In general, I should say that that is correct.
Mr. STRONG. DO you think it would be fair if, when these Government employees come to us with an index of general prices that have
gradually gone up for things they must use their money to purchase, we should begin quoting special prices to them?
Mr. STRONG. That would be

just as unfair as it is now, when we
are talking about an index number of average prices to continually
keep referring to individual prices, would it not?
Mr. GOLDENWEISER. The only purpose I had in referring to individual prices was to bring out the point that it is the individual prices
and the fluctuations in individual prices that are reflected in the
price index. The price index is not a self-determining entity that
is created by the Federal Reserve Board.
Mr. STRONG. Why, certainly.
Mr. GOLDENWEISER. I t is the average of 550 commodities.
Mr. STRONG. Absolutely.
Mr. GOLDENWEISER. And can be affected only by changes in the
prices of these commodities.
Mr. STRONG. Certainly; and it is affected, of course, by the general
trend of the average of prices, and individual prices are not taken
into consideration except as they might reflect a slight change.
Mr. GOLDENWEISER. Take, for instance, the period from 1925 to
date. Industrial prices are not individual prices but the price of a
large group of commodities, and the price of that group has changed
very little and the big movements in prices in the last five years
have been in agricultural commodities.
Mr. STRONG. Changed individual prices are matters that those
groups that are affected by those prices must solve if they are to be
solved at all, and that is what labor or agriculture or any other
body must pay its attention to, but what concerns the Nation in its
prosperity is the rise and fall of average prices.
Mr. GOLDENWEISER. I think that is probably true to the extent that
you have your eye on the very big fluctuations in prices.
Mr. STRONG. Big fluctuations generally grow out of little ones.
Mr. WINGO. I am sure neither one of you gentlemen means that;
I know my friend from Kansas does not. Here you have had a rise
in the general price level, and yet the farmers have not had it. They
are interested in their general price level.
Mr. STRONG. That is the reason the farmers are down here trying
to get the McNary-Haugen bill.
Mr. WINGO. The point I wanted to get at is this, that you do not
mean that people are not interested in specific prices.
Mr. STRONG. N O ; I am talking about the Nation's prosperity,
which has to be gauged or figured upon the stability or the rise or
fall of general prices.



Mr. WINGO. I do not know. Suppose that you went out and talked
to the farmers. They would not say that there is general prosperity
in the country.
Mr. STRONG. I just said that individual groups, of course, would
come back on any deflation or change to them by the falling of their
own prices, but I am talking about the whole; I am trying to quiet
this continual harping on individual prices when we are only talking
about general prices.
Mr. WINGO. Well, take your position, if the witness will rest for a
while. The two general classes are the credit and the debit classes.
Is it the part of the Government to say which one of those they are
going to have ?
Mr. STRONG. NO ; but I think it is very necessary to the success of
both classes that they shall have a policy that they shall use in
loaning and borrowing between themselves, to have as near a stable
purchasing power as possible. I think it is an outrage to ask a man
who borrows, when the time for payment comes, to pay back with a
dollar of half the purchasing power if it can be avoided.
Mr. WINGO. I agree with you on that, but you are off on something
The CHAIRMAN. Before you proceed, it is now 12.30. What is the
pleasure of the committee ?
Mr. KING. I move that we adjourn.
The CHAIRMAN. I should like to finish with Mr. Goldenweiser if
Mr. STRONG. I would like to ask Mr. Goldenweiser some questions.
You have said that you thought, in a large decline of average prices,
the Federal Reserve Board could, by directing its efforts, check the
deflation, or vice versa. Why should they not use their powers to
that end?
Mr. GOLDENWEISER. They should, and they would.
Mr. STRONG. Then there is no direction of that kind in the law now.
is there?
Mr. STRONG. What objection

could there be to writing such a
direction in the law ?
Mr. GOLDENWEISER. The only objection that I have to writing that
in the law is that I feel that the powers of the system in the matter
are applicable only at times when the rise or decline is extremely
violent. That is the only time when the system could be pretty certain to exert an influence, and those times occur rarely. The fluctuations in prices ordinarily are very much milder and are not directly
Mr. STRONG. But it is those periods of inflation or deflation that
bring the greatest disasters to the country.
Mr. GOLDENWEISER. Yes; and those are brought about by war conditions in every case, and no law could prevent it.
Mr. STRONG. But you could have lessened the inflation in 1918,
after the armistice, if you had had these powers to that end.
Mr. GOLDENWEISER. I think, as you are going back to that point,
that I ought to say that the Federal reserve system at that time did
its level best to do so, but was not able to do it.



Mr. STRONG. I t could have softened the deflation after 1920, could
it not, if it had had all these powers?
Mr. GOLDENWEISER. I think not.
Mr. STRONG. YOU do not think it could be done?
Mr. GOLDENWEISER. That is a matter of opinion, but I believe that
after the prices had gone up to the levels they had, there was practically nothing that the Federal reserve system could do to prevent
that deflation.
Mr. STRONG. Then you think that these powers that we have given
in periods of violent inflation and deflation can not be of much avail
to change the situation ?
Mr. GOLDENWEISER. That is, the violent deflations and inflations
of that sort do not occur in ordinary times, but at times when they
do occur there are questions of national safety that would prevent
any central bank from exercising its powers and which have prevented them so far in the history of the world from keeping from
Mr.. STRONG. One of the present works in which the Federal
reserve system is engaged is to bring about a world stability as to
gold, is it not?


Mr. STRONG. And in doing that, will we have to part with a good
deal of our gold ?
Mr. GOLDENWEISER. That is a difficult question. I am not sure.
If you just want an opinion that is not worth anything more thanmy present state of mind——
Mr. STRONG (interposing). You would not have to part with the
gold in order to put the other nations on a gold basis?
Mr. GOLDENWEISER. My opinion is that we would not have to lose
much of it, but that opinion is not worth much. When you talk about
the future, there are so many incalculable things. I am not a
prophet, but my judgment, on the basis of the amount of gold that is
produced in the course of a year and the estimate of the available
reserves of those countries that are not yet on a gold standard, and
of those that are, is that there is not likely to be a very large demand
for our gold. Another reason for my belief in that respect is that
we are a creditor nation now in a very large way. There is always
going to be such pressure for American exchange to pay the interest
on those debts that we would have to have a tremendous excess of
imports over exports or of foreign lending before we could lose
much gold.
Mr. STRONG. Then you feel that the going upon an absolute gold
standard, both in this country, as you say we are, and in other
countries who trade with us, is not going to bring about a necessary
decrease in our price level ?
Mr. GOLDENWEISER. NO ; I think not.
Mr. STRONG. YOU do not think we will gradually go back to a prewar level ?
Mr. WINGO. Do you not

think that we will lose a large amount
of gold in the next 10 years?
Mr. GOLDENWEISER. When it comes to 10 years, that is a guess.
My guess is no.



Mr. WINGO. In the light of the policies that you know are in existence in the different countries, is it not the general opinion that there
will be a gradual depletion of our gold to the extent of $1,000,000,000
in the next 5 or 10 years ?
Mr. GOLDENWEISER. I have heard of the suggestion. I have not
recently heard it so much as some years ago.
Mr. WINGO. What steps are they taking, then, to change what
they expected to be a general movement? You are the first one I
have heard suggest that may be there has been a change in that
Mr. GOLDENWEISER. It is a question of analyzing the situation. The
world produces about $400,000,000 in gold in the course of a year.
Industry consumes between $150,000,000 and $200,000,000 for jewelry
and other purposes and the remaining $200,000,000 goes into reserves,
but a reasonably large amount of that goes into India and stays
there. India has been for generations the sink for gold, and they
have absorbed a couple of billion dollars's worth of gold in 50 or
60 years. The remainder is distributed among the other nations that
require additional gold reserves, and it is only after that is absorbed,
so to speak, that the demand would come to us.
Mr. WINGO. Instead of their being a probable increase in the production of gold there is a probable decrease, is there not ?
Mr. GOLDENWEISER. Well, I do not know.
Mr. WINGO. I S not that the general trend? Take the trend for
the last few years; there has been a downward trend in the production
of gold.
Mr. GOLDENWEISER. NO, sir; I think not. I think the last year was
the largest year since 1915.
Mr. WINGO. I believe you are right; but is it not expected that if
you put these nations back on the gold standard, the management
you are going to have of the gold and the expedients that are going
to be resorted to are to be temporary so as to gradually ease it back
to a free flow of gold which will cause us to lose a billion dollars in
the next 10 years ?
Mr. GOLDENWEISER. I will follow you right up to the last point. 1
think that the intention is to return to the full gold standard and to
restore the free flow of gold, but I have doubts whether or not that
will result in our losing gold.
Mr. WINGO. If we do not lose gold, what we will have to do, if
these nations get back to the gold standard, will be to raise the rates
as high as a cat's back and hold them.
Mr. GOLDENWEISER. Not necessarily. If our price level and our
money rates are on a fairly even keel, that is not necessarily so.
The CHAIRMAN. There are some students of this subject who are of
the opinion that the increase in the demand for credit facilities in
this country will require the retention of all of our surplus gold within a period of 10 years in this country or else it will slow up our
credit facilities.
Mr. GOLDENWEISER. I am inclined to think that that is essentially
correct. The thing you have to recognize is that gold is an expensive
commodity for a Government, that they would rather buy our cotton
and our grain and our automobiles and sewing machines than our



gold. They will not buy our gold unless they find that their reserve
position, the stability of their currency and their credit structure, require it. It is the least attractive thing to buy; no one contemplates
giving our gold away and those countries are not going to pay for it
unless they find that they have to and that they have the means to.
Mr. WINGO. That is the very point. Take the situation the chairman called attention to. It is contemplated that there will be an
increased demand, accelerated to a geometrical ratio in the United
States, on our gold. To that extent we will need to hold this gold.
If that is true, it will be because of world-wide evidence of growth
in business, a revival of industrial activity which will be world-wide.
You would not have that great demand in the United States if all
the rest of the world, instead of getting back upon the gold standard,,
upon a stable, economic basis, slipped back, and if they slipped back
it will be bound to affect us and reduce the demands we have for currency ; but, if that goes on, and it spreads all over the world, and when
we stabilize these other nations we serve our selfish interest, because
their prosperity affects ours—if we do get them upon a stable basis,
we increase their demand for currency. That increases the demand
for gold by those nations, and so one evens up the other. You have
relatively the same agument, and when you restore the free flow of
gold it will go where the price is the highest, and in order to hold it
we will have to increase the discount rate in this country.
Mr. GOLDENWEISER. Not necessarily.
Mr. WINGO. Or else they will have to reduce it in Europe.
Mr. GOLDENWEISER. There has been nothing in what you said that
would indicate that the price abroad would be better than the price
here, even if our discount rates are no higher here than they are
abroad. If we should here continuously maintain a very low discount rate and have extremely easy money, I think that then a considerable amount of our gold would move out, but if our rate structure was going to be in a relationship to the rate structure abroad,
approximately such as it is now, there is not likely to be that condition, I think, and I say I am not sure of that and I can not give you
any expert opinion on it. I have been asked about it, and I say that
it is a question of judgment; but I think—and I do not attach too
much significance to it—that it is not very likely that any very large
movement of gold is going to move out, for the reason that there
are so many other things that the world would rather have, and there
are two hundred millions or so of gold available every year outside of
the gold of this country.
Mr. WINGO. I arrive at the conclusion that you think that these
gentlemen who are controlling the central banks of the world have
concluded that the gold standard has lost its real value, that you do
not have to have a free flow of gold, that you could simply buy and
sell upon a dollar basis or sterling basis, and that your gold standard
has lost its basic virtue. That is the only conclusion I can arrive at
if your judgment is correct—that you do not need the gold standard
and you do not need the gold.
The CHAIRMAN. If that is the conclusion it is quite in contrast with
the statement of Governor Strong yesterday.
Mr. WINGO. Certainly. You are assuming a position here that is
so contrary to all my reading in the last 12 months that I am rather
surprised at your conclusions.



Mr. GOLDENWEISER. I may be wrong; but I want to say this, that
I feel myself in entire agreement with Governor Strong's statement.
I do not know what he thinks about the movement of gold, and I do
not know whether he would agree with my statement that the gold
would not move out, but I believe that the tendency is toward the
reestablishment of an absolutely free gold standard everywhere, and
there has been great progress made in that direction in the last year.
The CHAIRMAN. I S it not pertinent that in this period in which
we are accumulating this vast amount of gold, for the major portion
of which we have no immediate use, that in the constitution of the
Federal reserve system we have the ability now, because of the fact
that the Federal reserve system is not organized as a money-making
institution, to impound that gold ? In other words, if that gold had
come in to a system here that had been differently constituted and
which had to earn money, had to earn interest, it would result in an
inflation in this country which would be beyond the control of
anyone ?
Mr. GOLDENWEISER. Yes, sir; no question about that.
Mr. STRONG. I fear, from your testimony here, that you believe
that, rather than have Congress direct the Federal reserve system
to use its powers toward stabilizing the purchasing power of money,
it should be left just to use its powers as directed by the present law
to the accommodation of commerce and industry ?
Mr. GOLDENWEISER. To use its powers primarily for the purpose
of having elastic currency and sound banking conditions and the
gold standard.
Mr. KING. Then the conclusion of the whole matter, in the words
of Saint Paul, is this, that, taking advantage of the suggestion of
the gentleman from Arkansas that a certain condition would place
the governor of the Federal Reserve Board betwee[betwe n]the devil and the
deep blue sea, the passage of this bill would place the whole Federal
reserve system in a similar position, would it not ?
You need not answer that.
Mr. GOLDENWEISER. I will avail myself of that privilege.
Mr. STRONG. What have you to say regarding the matter of publicity set out in the bill.
Mr. GOLDENWEISER. I would like to say a few words on that.
The thing I would like to say about publicity is this, that as the
bill now reads, the publicity is so regulated and there is so much
discretion given to the governor of the Federal Reserve Board that
I do not believe it would create any serious embarrassment. I
would like to point out to the committee, however, that a certain
amount of publicity is being continuously given by the Federal Reserve Board in its bulletins. If I may, Mr. Chairman, I would like
to introduce into the record the last paragraph in the review of the
month that appeared in September, which summarizes the circumstances under which the easy money policy last summer was adopted.
Mr. CHAIRMAN. Without objection, that will be inserted.
(The paragraph referred to is as follows:)

This advance of sterling and of other European exchanges will assist foreign
buyers in making their autumn purchases of grain, cotton, and other American
farm products. At the same time the decline in rates charged on bankers' acceptances in New York will have a tendency to attract a larger volume of the
of exports to the banks of this country, and consequently to red



the demand for credit for this purpose abroad. Thus the establishment of
lower rates for money in the United States at this season of the year is facilitating the marketing of American crops and at the same time, by relieving the
pressure for funds on foreign banks, is exerting a favorable influence on the
international financial situation.

Mr. GOLDENWEISER. Then, later in the year, there was a change in
policy in connection with different developments, and the circumstances under which this change occurred were summarized in the
bulletins for February, on page 111. I shall give these passages to
the secretary or insert them at the given points in my testimony.
(The passage referred to was as follows:)
The system's policy in not offsetting the gold exports in the last weeks of
the year was due largely to the fact that, in the absence of demand for additional credit from trade and industry, there was a continued and rapid growth
in the volume of member bank credit used for investments and loans on securities. Thus, notwithstanding the drain on member bank reserves through gold
exports, reserve balances of these banks with the reserve banks increased in
the autumn and early winter as a consequence of the growth of the member
banks' deposit liabilities.

Then, when the annual report of the Federal Reserve Board for
1927 was written, which will be presented to Congress in a few days—
it is now in page proof—the whole thing was summarized here on
pages 11 and 12, which I can pass on to you now if you like.
(The passages referred to were as follows:)
During the period from June to September, while changes in gold stock were
small, the reserve banks purchased about $80,000,000 of Government securities
in furtherance of a policy of easing the credit situation. This policy was
adopted by the system in consideration of the recession in business in the
United States, of the relatively heavy indebtedness of member banks, and of
the tendency toward firmer conditions in the money market, During this
period it also became evident that there was a serious credit stringency in
European countries generally, and it was felt that easy money in this country
would help foreign countries to meet their autumn demand for credit and
exchange without unduly depressing their exchanges or increasing the cost of
credit to trade and industry. Easier credit conditions abroad would also
facilitate the financing of our exports and would thus be of benefit to American
producers. By purchasing securities at that time the Federal reserve banks
were in fact successful in easing the condition of the money market and in
exerting a favorable influence on the international financial situation. The
purchase of securities in the open market during th.e summer months was
accompanied by reduction of the discount rate at all of the Federal reserve
banks from 4 to31/2per cent.
At first the reserve banks pursued the policy of offsetting the effects of these
decreases on the money market through purchases of securities, but after the
beginning of November such purchases were both absolutely and relatively in
much smaller volume. The larger part of the gold withdrawal toward the end
of the year, therefore, exerted its usual influence upon credit conditions in this
country, contributing to an increase of member bank indebtedness at the reserve
banks and to a somewhat firmer situation in the money market. The system's
policy in not offsetting the gold exports in the last months of the year was
formulated in consideration largely of the fact that in the absence of demand
for additional credit from trade and industry there was a continued rapid
growth in the volume of member bank credit used in investments and in loans
on securities. There was a corresponding growth in member bank deposit
liabilities, and notwithstanding the drain on member bank reserves through
gold exports, reserve balances of member banks with the reserve banks
increased in autumn and early winter.
Mr. LUCE. HOW long was that explanation in that monthly Bulletin

from the time when the thing took place ?



The CHAIRMAN. This is a part of the annual report which I understand will be released about the 26th of March ?
The CHAIRMAN. Inasmuch

as this is an official publication for
release at that time, I wonder if this can not be held in abeyance until
the report is issued ?
Mr. Goldenweiser. It will be out in a few days, and I will be
glad to insert this in my testimony. I asked Governor Young yesterday whether there would be any objection and he said there
would not.
The CHAIRMAN. The thing that I had in mind was that it should
not be taken account of by the newspaper men.
Mr. WINGO. He is simply embalming it in the record.
The CHAIRMAN. It will hardly be fair to give it out in advance,
and if any newspaper men are here they should not take notice of it.
Mr. KING. I doubt very much whether this will be of any benefit
to the committee. It bears the same relation to this matter as George
Creel's official bulletins used to bear to the war. I have them all
bound on my shelves, and also the Federal reserve bulletins.
Mr. STRONG. HOW often are these Bulletins issued ?
Mr. STRONG. TO whom ?
Mr. GOLDENWEISER. They are sent free of charge to all the member banks of the Federal reserve system and for $2 a year to any
other subscriber.
Mr. LUCE. Take that first Bulletin; how long was that explanation
made after the thing happened ?
Mr. GOLDENWEISER. The purchases of securities and reductions of
rates last summer occurred during August, and this came out in the
September Bulletin, which was released to the press on September 1.
The Bulletin actually did not appear until the 10th or 12th, but the
review which was to appear in it was mimeographed and released to
the press on September 1. That was pretty prompt.
Mr. LUCE. Would you say that ordinarily less than a month
follows ?
Mr. GOLDENWEISER. I think that, as the bill contemplates, that is
in the discretion of the governor of the board. There are times when
it is considered desirable to have a very prompt explanation. At
other times it is desirable to have the explanation take its regular
course and come out later.
Mr. WINGO. It is all a question of when the necessity for secrecy
ends and the necessity for publicity begins. A good many people
think that the President's Cabinet ought to have open meetings and
the juries open sessions and the Supreme Court consider its decisions
in public. There is a difference of opinion about that.
Mr. KING. They have to be careful about publishing this material.
Mr. STRONG. What have you to say with regard to the direction for
a study of these various subjects?
Mr. GOLDENWEISER. I feel about the same as Governor Strong felt
yesterday, namely, that to have a specific authorization for the studies
which we make would be a desirable thing. It would give us a
feeling that Congress is back of us in this work. On the other
hand, I do feel, in connection with this long list of questions enumer-



ated, that the system's and the public's purposes would be better
served if that list were not so elaborate, because a long list carries
with it the idea of excluding other topics, and the list is made up
from the point of view of price stabilization. That is only one and
a relatively small part of the material that the Federal reserve
system needs to have. Our investigations are continuous. We try to
present to the board all the data that are available that bear on
credit policy. Our work has been for a number of years quietly
and unobtrusively done there, and we have, with the assistance of
many Federal reserve banks and many private agencies, built up a
large body of information that we are constantly giving to the board
to use as a basis for credit policy.
In that there are some of the problems that are included in your
list, but most of it deals with other problems. Giving these problems by enumeration would, by the prominence they will have, center
attention on them, and would lead to a large expenditure both of
funds and energy on those problems and might result in less funds
and energy being available for a large number of other things which
we feel we ought to be doing in order to keep the board and the
system properly informed.
I would feel, therefore, that it would be desirable to have this
section, if it is passed, framed in a general authorization for the
Federal reserve system to make investigations of all those matters
that come before it as a basis of credit policy. Then, if the other
part of your bill passes, of course, the price level becomes a part of
it, but this is apt to be interpreted as exclusive.
Mr. STRONG. Of course, the questions are based upon the main purpose of the bill, if Congress directs, in addition to your present use
of the Federal reserve system for accommodation of business and
commerce, that you should use this power to try to stabilize the purchasing power of money. I have guarded that direction so carefully
by the various suggestions I have got from members of the Federal
reserve system that I have been led to put in the final clause directing
a study of those questions.
Mr. GOLDENWEISER. The study of those things, in a way, is continuously being made and will continue to be made. I would not say
that I am opposed to that section of the bill, Mr. Congressman, but
I simply pointed out certain things about it that seemed to me as
possibly undesirable, that it would be preferable if they were
Mr. STRONG (interposing). You would like to have those things
regarding stabilization quite different and some other things included?
Mr. GOLDENWEISER. I would like to have it done.
Mr. STRONG. Will you furnish me with a statement of what you
think should be included ?
Mr. WINGO. Has he not already done that ?
Mr. STRONG. I would like to have the language he suggests; I want
the benefit of his ability.
Mr. GOLDENWEISER. On that section of investigation ?
Mr. STRONG. Yes, sir.
Mr. STRONG. I would appreciate it.
Mr. GOLDENWEISER. AS an indication

of the kind of things we
do, I might in closing say that this is a set of charts that presents



most of the information that we currently present to the board, and
we have just decided to print it. This is a page proof of it, and I
will be glad to present a copy of it to the chairman now and to any
member of this committee as soon as it is out in print.
Mr. STRONG. What is the purpose of presenting these charts to
the board?
Mr. GOLDENWEISER. It is to point out to them the various developments that have a bearing on credit policies.
Mr. STRONG. For what purpose ?
Mr. GOLDENWEISER. For the purpose of deciding those questions
that it is up to them to decide, whether it is open-market policy or
any other policy.
Mr. STRONG. IS that for the purpose of advising them as to whether
or not they should extend credit to commerce and industry; whether
or not they should accommodate commerce and industry?
Mr. GOLDENWEISER. AS to whether they should do so at a higher
or a lower rate.
Mr. STRONG. I see. Well, if they did it at a higher rate, it would
not be so nice an accommodation as if they did it at a low rate.
Let me ask you one more question. Is not the real purpose of those
charts to enable them to use the powers of the Federal reserve system toward stabilization ?
Mr. GOLDENWEISER. If I have to answer that in one word, I would
say no.
Mr. STRONG. Then they are not using the information they have
for that purpose ?
Mr. GOLDENWEISER. Only incidentally.
Mr. STRONG. Incidental to what ?
Mr. GOLDENWEISER. Incidental to those things that are more directly the duties of the Federal reserve system.
Mr. STRONG. That is, to accommodate business and industry ?
Mr. GOLDENWEISER. TO maintain sound banking conditions.
(Thereupon, at 1 o'clock p. m., the committee adjourned to meet
to-morrow, Wednesday, March 21, 1928, at 10.30 o'clock a. m.)

Wednesday, March 21, 1928.
The committee met at 10.30 o'clock a. m., pursuant to adjournment, Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order. We will proceed with the hearing on H. B. 11806, and will be glad to hear
Prof. John E. Commons, of the University of Wisconsin.
I would suggest, inasmuch as the doctor has a considerable statement to make, that he be permitted to proceed and make his connected statement without interruption, after which we will be glad
to answer any questions that may be propounded.
I might say also, before we start, that Dr. Adolph C. Miller, a
member of the Federal Reserve Board, phoned this morning that he
would not be able to be present this morning on account of illness.
Doctor Miller is very anxious to be heard, and I gave him the assurance that at a subsequent date, these meetings being held open,



we would give him the opportunity to be heard at the convenience
of himself and the committee.
Doctor Commons, the committee will be glad to hear you at this
Professor COMMONS. Mr. Chairman, I testified, as you know, before
this committee a year ago in February, and I do not wish to cover the
ground again, except as it may be drawn out in the questions.
I have had certain criticisms made on that testimony. Governor
Strong recently said to me that he had read it all through, and
while he thought it was very interesting he said it was somewhat
exaggerated. I have studied "the testimony of the others and listened
to those that have appeared, representing the Federal reserve system,
including Mr. Stewart, who was the predecessor of Mr. Goldenweiser, and I find that they take the extreme opposite to mine;
they minimize or belittle the power of the Federal reserve system,
going almost as far as to say that it has no economic power. I distinguish the economic power from the phrase used in the bill, which
is " powers and authority," which I understand to mean legal power.
But I shall speak only or the economic power.
Among economists there are these two different points of view:
Some will say that the Federal reserve system has great economic
power to determine commodity price levels; others say that it has
very little power. I think, myself, that that is a matter of investigation. The hearing on this bill practically resolves itself into one
question: What are the economic powers of the Federal reserve system? Not whether anybody was mistaken or guilty of misusing
those powers. That question does not arise. The question simply is,
as I understand it, If it uses the economic power which it now has,
could it control the price level ?
The first thing to which I would like to call your attention is the
difference between the bill upon which testimony was taken a year
ago and the present bill.
The former bill attempted to make only one change in the Federal
reserve act. That one change came under the head of the rate of
discount. You will find this on page 1 of the hearings on that bill.
The original act said that the rate of discount " shall be made with a
view to accommodating commerce and business." Congressman
Strong's bill of that date struck out the word " business " and added
the words: "And promoting a stable price level for commodities in
general. All of the powers "—that is, including others that extend
beyond the rate of discount—"all of the powers of the Federal reserve system shall be used for promoting stability in the price level."
As I examine the purposes of the Federal reserve act, not only those
stated in the title of the original act but also those which can be read
into the act creating the Federal reserve system, I would say that
they can be summarized as about four or five. The first was to furnish an elastic currency; second, to afford a means of rediscounting
commercial paper; third, to establish a more effective supervision of
banking in the United States, and, under the rediscount clause, ac-



commodation of commerce and business; and, lastly, there can be
read into it, and undoubtedly is implied in it—it is really the substance of the whole act—the centralization of the reserves of the
member banks. We may call those the purposes of the act as enacted
into law in 1913.
I would say that this bill now before us, H. R. 11806, adds four
purposes: First, the idea of stabilization; second, the relations between the American reserve system and foreign banks of issue; third,
publicity; and fourth, investigation.
Also, it should be observed that this bill has been worked over at
great length in order to meet all of the objections which could be
obtained from individuals on the Federal Reserve Board or individuals in the Federal reserve bank at New York, or others.
It must be evident to all persons that any administrative authority—and here I can speak from my own experience, if you will
allow me, for I was for two years on the Industrial Commission of
Wisconsin, and also served on the Federal Industrial Commission—
every person upon whom is placed responsibility for carrying out
legislation may be looked upon as having two different psychologies.
The first is his opinions and thinking as an individual; the second
is his opinions and thinking as a member of the system which he
is trying to maintain and continue. Consequently no administrative
commission follows out exactly the law as laid down mathematically
in a congressional enactment. It necessarily changes the meaning
of the law somewhat in its administration. I t either enlarges its
meaning or contracts its meaning, and that enlargement or contraction of the meaning of the words used in the act is a change
actually in the act itself. I t is an administrative change in the act
Consequently we can not always tell from the wording of an act
just what will follow when that act is interpreted by the administrative authority. We can not tell what is going to be done under
that act. The same is true of the judicial authority. The same
process appears in the courts in interpreting an act. The court
endeavors to interpret the act as applying to an individual case.
Consequently the courts for several hundred years have always
added the word " reasonableness " to any legislation which they have
interpreted. For example, in our public utility legislation, which
says, " This commission shall ascertain the value," when it comes to
the courts, and even the commissions themselves, they endeavor to
ascertain the "reasonable value." So when we have the words
"stable gold standard" or "stable purchasing power" the word
" stable " must always be interpreted as " reasonably stable."
We have the decision in the famous public utility case of Smythe v.
Ames, which has defined this word "reasonableness" in the case
of railroads. It says that in ascertaining the value of railroad property the commission shall take into account all the factors—cost of
production, earning power, etc., enumerating a large number of
factors—and then goes on to say that in taking into account all
of the factors it shall give "due weight" to each—that is, proper
weight or reasonable weight.
That is attempted to be cared for in this bill by enumerating
various things besides the stability of the purchasing power. There



are enumerated commerce, industry, agriculture, and employment, as
well as an international gold standard and a domestic standard of
the purchasing power of the dollar. All of these factors are to be
taken into account by any administrative body, and they must be
given their due weight.
I am going on the assumption that this bill, if enacted, makes the
primary purpose of the Federal reserve system the stabilization of
the purchasing power. My arguments will be directed to that interpretation. Mr. Goldenweiser yesterday very correctly interpreted
that as the meaning of this proposed enactment.
I will say, then, that what is intended by this bill is a reasonable
stability of the purchasing power of money, whether it be gold or
credit or any other thing which might come under the head of purchasing power.
I confess that I have, in my former testimony, shown a good deal
of confidence in my theory, if you can call it such, that the Federal
reserve system does have these great economic powers over the price
I think I ought to qualify as a witness right here, Mr. Chairman.
It happened that in the years 1922 and 1923 I was made president
of an association called the National Monetary Association. It was
composed mostly of eastern men, eastern bankers and economists,
but they seemed to have some reason in their minds why they ought
to have a western professor to head them. I found as I worked with
that committee in New York and Washington for six or eight months,
possibly longer, that one of the most important things in the minds
of the bankers and eastern people in this National Monetary Association was the question, What is Henry Ford going to do? Henry
Ford had come out with an inflationists proposition that the Government should buy Muscle Shoals by issuing paper money, and
one of my commissions as president of the National Monetary Association was to call upon Henry Ford and Thomas Edison, who did
the statistical work for Henry Ford, and explain to each of them
the error of their ways. I had quite a long talk with Henry Ford,
and I took with me very much the same chart which I presented to
this committee a year ago and which you will find on page 1077 of
the hearings. It did not contain all of the curves, but it contained
the essential curves.
I feel that by taking a chart like that to Henry Ford, who is an
engineer and who thinks out things by seeing them charted on paper,
I had some influence on him. He explained to me all of his views;
excused himself for advocating a paper-money inflation; and I think
I had some influence, because about three or four months afterwards
Henry Ford declared for Mr. Coolidge for President. As soon as
Henry Ford declared for Coolidge the National Monetary Association dropped out of existence. There was no more financial support
for it, and I was left in the air as the president of a paper organization.
During that process the people in the Federal Reserve Bank of
New York, and to a lesser extent in Washington, were quite eager
and willing to explain to me all of their inside operations, and the
most interesting event to me was this: Some representative in New
York in the Federal reserve bank received a letter from a high per-



sonage in Washington in about February, 1923—when by the chart
you will note prices were rising very rapidly, more rapidly even than
they did in 1919. This personage in Washington wrote to the other
in New York to the effect that there was a great inflation sentiment
in Washington, and wanted to know what could be done about it.
Thereupon, when the letter was shown to me—a letter of introduction
was given to me to this personage in Washington, whom I had
already known—I called upon him. I might have been called a sort
of voluntary liaison officer. He took me over to the Federal Reserve
Board about the 1st of February, and I learned there that they were
perfectly aware of the inflation, that they knew their powers, and
that they were just waiting the opportune moment for acting.
Mr. WINGO. February of what year ?
Professor COMMONS. February, 1923.
I learned also, through this sort of semiparticipation in the Federal
reserve system, what those powers were. It was explained to me
what was the power of the open-market operations. Prior to November, 1922—I think I can give that as the proper date—the 12
banks had been buying and selling securities without any concerted
action, and it had been deemed necessary that they should all act
together. So about November, 1922, they created the open-market
investment committee, centralizing all of the buying and selling of
securities on the open market in the hands of a committee of three
to five governors of the various banks. We had here a new phenomenon that had never occurred before in monetary history, and
the Federal reserve people did not themselves know what that
instrument could do. Prior thereto they had scattering and conflicting buying and selling of securities by the reserve banks, so they
could not have any particular effect. But in November, 1922, they
concentrated it all, for all the 12 banks, in the hands of one committee. There was now concerted action. Thereafter, instead of
each reserve bank throwing its own ball, all of them together threw
all of their weight at one time in one direction.
This was a new power which had never been known before, and
it could not have been known before the large issues of Government
securities during and after the war. Of course, those acquainted
with banking history would know to what extent the Bank of
England had used it, but I will not go into that.
Anyway, here was a new power. So they began selling those
securities and continued the sale for some time in 1922, until they
got down to the minimum in 1923. The idea of that, of course, is
quite familiar to you all. I have simply stated the historical setting
of it in order to show you why I have confidence in my so-called
Then, in the middle of February, about a week after I happened
to be interviewing the people at Washington, they raised the discount rate in two districts very slightly. Prices of commodities kept
on rising until about the middle of April, for about two months;
but from the beginning of that operation, which was November,
1922, until April, 1923, we had about five months of operation of,
first, the open market, and, second, the discount rate, as an instrument
to check the further inflation of prices.



After the thing was all over, and statisticians began to study it—
and possibly within the Federal reserve system itself there were
differences of opinion about this open-market matter and the discount rate, because it was all new to them; they were just experimenting with it—after it was all over, and the statisticians came
along and tried to explain what had happened, what was cause and
what was effect, that that was a post-mortem investigation. All
statistics are post mortem. They do not take into account what the
administrative authorities had been doing previously.
Let me illustrate this doctrine of cause and effect. We have two
movements going along in more or less parallel lines. We will say
that one is price and we will say that the other is volume of money.
Now, nobody can tell from which side the cause arose. It may have
arisen from the commodity side, more demand for money, or it may
have arisen from the money side, a greater supply or restriction.
Nobody can tell from statistics which was cause and which was effect;
and that is the reason why it seems to me that this investigation
that is proposed here should be made by the Federal reserve people
themselves, because it must take into account the ideas and principles
on which the responsible authorities were themselves working, and
not merely what a statistician might find afterwards. I will speak
about that later.
I will now take up, if you will allow me, the testimony of one of
the witnesses in the former hearing—Mr. Walter W. Stewart. Mr.
Stewart was the predecessor of Mr. Goldenweiser as the head of the
research department and was with the board in 1922 and 1923.
He takes the view in that testimony, beginning at page 735 of the
hearings, that the price movements in 1922 and 1923 would have been
practically just the same as they were if there had been no Federal
reserve system in existence; in other words, that all of the rise of
prices from the middle of November to April, 1923, and then the fall
in prices in April, 1923, and down to 1924 would have happened
substantially just as they did happen if there had been no Federal
reserve system existent.
That is the other extreme theory. It is the theory of those who
belittle the power of the Federal reserve system. I ought to say, of
course, that Mr. Stewart did make modifications, but they were very
slight. He made hardly any modification different from what Mr.
Goldenweiser made yesterday. Mr. Goldenweiser simply had the
same idea as Mr. Stewart in his testimony.
So that is the other end of the theory—the theory that the reserve
system has little or no power whatever; that all of these movements
are caused by circumstances which arise outside of the monetary and
credit policy of the concentrated reserve system, and that the system
has no influence.
I want to make one or two points about that line of argument, and
it applies not only to Mr. Stewart but to the various representatives
whom I happen to have talked with in the Federal reserve system
who take similar views and is generally applied to the testimony
presented by the Federal reserve system in these hearings.
There are two points which I think they omit in the criticism which
they make against those who propose to use the powers for stabilization. For the sake of brevity, I will give names to those two and try
to demonstrate them.



They omit the factor of velocity, and they omit the factor of what
I would call futurity or expectation, which is sometimes called
psychology. I will just call it futurity.
Mr. WINGO. Will you explain just what you mean by those terms,
Doctor ? I want to follow you.
Professor COMMONS. We are going to have hard trouble getting
there. I am going to explain what I mean by velocity.
Mr. WINGO. Take " futurity " and " psychology." You used them
as synonymous?
Professor COMMONS. They are the same thing.
Mr. WINGO. All right; maybe I will catch up with you.
Professor COMMONS. I am giving an academic term; a comprehensive term which will cover everything. I t depends upon how a
human being acts. He acts in the present, in view of what he expects
Will happen in the future; so that the theory of causation which
should be applied in economics is a theory of expectation. That is,
his present act is caused by what he expects in the future. In other
words, in all these affairs that we are dealing with, the causation is
not in the past; the causation is in the future. I t is in their expectations; and I find that the power of the Federal reserve system has,
to control the demands of business for money or credit, lies in its
power to modify the expectations of business men throughout the
As to the question of velocity, Mr. Stewart made the inference in
Jus criticism of those who advocate stabilization that we have a
theory that if we can change the volume of money, the volume of
credit, we can thereby change prices. I am quite surprised that an
economist of such great ability as Mr. Stewart should ever have put
himself on record as saying that any economist holds that a mere
change in the volume will change prices. Every economist who has
ever given any study to the subject always includes, not merely the
volume but the velocity of circulation.
Let me explain the two ideas, first by an analogy. If you have an
automobile with a 3-foot wheel, and you are going along the road,
the top of your tire is always 3 feet above the level of the road.
We will call that the volume. That volume is constant. I t does not
change; it does not go up and down. But suppose that you are
operating that automobile at the rate of 5 miles an hour. You have
a certain rate of turnover, a certain velocity, or, in other words, a
certain amount of work which your engine is doing. I t is turning it
over. I t is not enlarging the diameter of the wheel at all, but it is
turning it over slowly. Then, if that automobile is pushed up to 50
miles an hour, you do not change the diameter of the wheel but you
change the velocity by putting more punch, more power into it, and
if it is going at 50 miles an hour, with the same height of wheel, you
will be getting ten times as much work, ten times as much power out
of that machine, as if it were going 5 miles an hour. That is the
difference between volume and velocity.
Let me apply it to the banking system. We have in the figures
of demand deposits what we might call the volume of money. I
will, attend to the credit end of it, and call them demand deposits.
We will say, for illustration, that there are $50,000,000,000 of demand
deposits—bank credit—in existence. Now, it has been calculated




that those deposits turn over every 15 days; that is, they turn over
26 times a year. The amount of work they are doing in one year,
in buying and selling commodities, is twenty-six times $50,000,000,000, which is a pretty big figure, of course.
Now, suppose we change the velocity of the circulation of that
money; not changing the quantity of money—$50,000,000,000—but
changing its velocity. Suppose we double its velocity. Then you
would have to multiply the amount of work it does, and the amount
of power which the system has, by fifty-two times fifty billion—
fifty billion being the constant volume, and 52 being the number
of times each dollar, on the average, does a piece of work in buying
and selling. Or, if you reduce the velocity so that it would turn over
once a month, instead of twice a month, so that the whole volume
would turn over only every 30 days, you will evidently reduce the
amount of work that that monetary system can do by one-half. That
is, it turns over only 12 times a year, and it is doing just half the
amount of work if its velocity slows down.
Let me apply that to Mr. Stewart's testimony and to the various
publications of the Federal reserve system in justifying itself after
the depression of 1920.
Mr. Stewart says in his testimony that there was actually more
bank money in circulation—bank credit—while prices were falling
in 1923 than there was before, and my figures show that also, in the
chart which I presented formerly; during 1922 and 1923 the demand
deposits were increasing. But we will suppose that there was
about the same amount of demand deposits. Prices fell then, not
because of anything having to do with the volume of credit, but
because its velocity slowed up. So it was said in the reports of
the Federal reserve system and in testimony given by various members of the Federal reserve system before other committees, that the
volume of money in circulation after 1920 was not reduced; in fact,
the Federal reserve system actually increased the volume after 1920,
and yet prices were falling tremendously in the latter part of 1920,
with a larger volume of credit. Well, the explanation that I would
make is that much of that credit was frozen credit; it did not turn
over; it was not doing business; it was just being renewed on the
bank books and showed up as a constant or increasing volume of
credit in the country. But what happened was that the velocity
or rate of turnover enormously decreased; that is, the size and
number of transactions decreased.
So I attach much more importance at times to velocity than I do
to volume.
I will give you another illustration. Governor Young, you remember the testimony you gave before the Senate committee the other
day, in which you gently intimated that you thought the loans on
stocks were sound, safe loans. The stock market in New York took
from Governor Young's statement the idea that the Federal reserve
system was not going to put any brakes upon the stock market. The
next day there were about 3,000,000 shares sold. Perhaps you can
give me the exact figures, but I do not care what the figures are.
Mr. YOUNG. Doctor, that was an unfair assumption from my



Professor COMMONS. YOU are right. I say they jumped at their
conclusion. I am going to bring that out on the question of publicity.
I think the responsibility of an officer for publicity is tremendous
in this whole question.
For illustration we will say that on 'the preceding day the volume
of sales was 2,000,000 shares. The next day, after his testimony, the
volume of sales was, say, 3,000,000 shares. Now, was there any
increase in the volume of credit on the stock exchange ? Very little.
The first thing that happened was that there was an enormous increase in the velocity of transactions of buying and selling, and it
was that increased velocity, say, from 2,000,000 shares up to 3,000,000
shares, that caused prices to rise.
I have not the figures, but as a result of that velocity, and as a
result of the increase in prices, there may have been an increase in
the quantity of credit necessary to sustain those stocks at that higher
level of prices; but the primary cause, and the one that is taken into
account by all advocates of stabilization—that is the reason we attach
so much importance to this section on publicity—is that you can
speed up the velocity by an announcement in advance of what you are
going to do or what you are not going to do. The velocity in that
case may have resulted from misinterpretation. It undoubtedly was,
as I know from Governor Young's position and explanation of the
matter, because I heard the testimony and the way in which it came
up. I myself never would have guessed that the amount of sales on
the stock exchange the next day would double. But the point I want
to bring out now is simply this difference between volume and velocity. It is in part the speeding up of the velocity or the slowing
down of the velocity that causes prices to rise or fall, and also increases or decreases the quantity of products that are going to be
Let me give another illustration from Governor Strong's testimony
day before yesterday on the publicity clause of this act.
He said that it would be very dangerous for the Federal reserve
system if it should announce, say, two weeks in advance, that it was
going to raise the discount rate 1 or 2 per cent. What would happen ?
He said, in effect, that everybody would get scared; the quantity of
business would fall off; prices would fall, and at the end of the two
weeks they might find that instead of raising the discount rate they
must reduce it in order to save the country from the publicity which
they had previously given. What he actually meant there was, of
course, interpreting it in terms of velocity, that the velocity of business, the amount of transactions, the amount of money that would
be called for to support those transactions, would fall off, which means
also that the prices would fall.
So this publicity feature is perhaps the most important part of it;
and I am sure the Federal reserve authorities themselves recognize
the tremendous responsibility of publicity. That accounts, perhaps,
for their reticence in giving out any information, and thus keeping
the public in the dark as to what they are going to do. I appreciate
that thoroughly. But let me show you what happens if the Federal
reserve system does not give out publicity in advance.
In my former testimony, at page 1092, I give a record of the
publicity which was given out from different sources during this



same period which I happened to be observing, 1922 and 1923. While
the Federal Reserve Board was beginning in November, 1922, to
tighten the money market by its sales of securities and to raise its
discount rate in February, in nearly all of the publicity that was
given out, not only during that period but until a month or two
after February—up until April, indeed—we have a repetition of
forecasts of rising prices and increased prosperity. Then, on April
20, 1923, the first definite warning was given by a person who might
have been supposed to be familiar with the members of the Federal
Reserve Board, but evidently was not familiar with their purposes,
namely, Mr. Hoover. On April 20 he gave a warning against inflation. But the inflation had already stopped. I t stopped in April,
1923, and prices started down.
Going through the record, I find that during the preceding months,
January, February, and March, the general publicity given out by
Mr. Hoover and others indicated great prosperity; no danger to
future prosperity; there was going to be a boom year, and everything.
Well, it was starting to be a boom year faster than the year 1919.
What I say happened there is this: If the Federal reserve system
does not give out publicity in advance as to what it is going to do,
or might do, there is going to be misleading publicity given out by
those who are very near to the Federal reserve system. We have seen
recently two cases of misleading publicity. I think we can say that
President Coolidge's statement was misleading publicity. I think
Mr. Mellon's statement was definitely misleading publicity—that
there would be no change in the discount rates.
Now, this kind of publicity, coming from parties who are supposed
to be close to the system, misleads people and leads them to make
commitments which are not justified. So, in this bill it is proposed
to concentrate the responsibility for publicity upon the governor of
the Federal reserve system.
Mr. WINGO. Doctor, if you will pardon me, I do not recall that
President Coolidge ever said that they would not raise the discount
Professor COMMONS. He was not talking about the discount rate.
I forget just what he said.
Mr. WINGO. That was the inference that I got, and which I think
anyone reading your testimony would get. I understood you to say—
and that was the only positive statement you made—that they said
there would be no increase in the rediscount rate.
Professor COMMONS. That was Secretary Mellon.
Mr. WINGO. Both of them discussed the brokers' loans, and the
President confined himself to stating that he thought that the increase
in volume of brokers' loans was a normal development justified by
the increased wealth and increased volume, and I do not think that
he gave any intimation as to any changes in policy. I direct your
attention to it because I know that you do not want to misquote him.
Professor COMMONS. I am glad you directed my attention to it. I
am only speaking from memory. I have not looked this up. I ought
to say, however, that I talked it over with various members of the
reserve system, and I know that they have difficulty in explaining
how these misleading statements got out in advance.



Mr. BLACK. I do not think, Doctor. that the President's statement
or Secretary Mellon's statement, either one, referred in any way to
the rate of rediscounts.
Mr. WINGO. I t might have been unwise, but I am sure, certainly
so far as the President is concerned, that he was simply responding
to an inquiry and gave it as his personal opinion—a very natural
explanation from a man who is not a financial expert—that it was a
normal development justified by the increased wealth and volume of
business. I know I read it at the time, and while it occurred to me
that possibly it was not a very wise thing to say and might mislead,
it never occurred to me that he was trying to mislead anybody.
Professor COMMONS. N O ; if I gave the impression that they were
consciously trying to mislead people, of course I was entirely misunderstood.
Mr. WINGO. That was the impression that I got from your statement, Doctor, and I did not think it was fair, because I do not believe
either one of them intended that.
Professor COMMONS. Oh, I did not say that they intended it. T
say that it was misleading in the sense that the public generally
interpreted it in that way; and it would apply in the same way to
the misinterpretation by the public of Governor Young's statement.
The essential point is that we should have an authoritative source of
publicity, which would be a man canvassing all the methods which
are used in the reserve system, and such a man is evidently the
governor of the Federal Reserve Board. He is in direct longdistance or telegraphic communication with all the reserve banks.
He could give out the publicity. Now, that does not mean anything
like centralization of control, as Mr. Owen D. Young seemed to think
it might. It would not concentrate control. I t would simply mean
that he would be the responsible one for giving out information.
Another point on that publicity: There has not been understood,
apparently, the great discretion which is placed in the hands of the
governor by the clauses of this bill. On page 2 of the bill there are
prescribed three fields of discretion. He may choose the time when
he will give out the publicity; he may choose the place where it is to
be given out; that is, it may be given out in New York or in Washington ; and—this is the most important one, which has so far been
overlooked by witnesses—he mav give it out " in such detail as may
be deemed by him to be most effective in furthering such purposes."
The detail is the whole thing. Of course, if the governor of the
reserve board should give out a very foolish statement, such as
Governor Strong used in his illustration, namely, " We are going to
raise the discount rate in two weeks," the thing is all off. But I am
assuming that he would give out a considered statement. Suppose,
for example, that the governor of the reserve board in January, 1922,
had given out a general statement like this: " We have a law which
says that we shall maintain stability of prices. We find that prices
are rising very rapidly, as rapidly as they were in 1919. I t may be
necessary in the future for the Federal reserve system to take account of this rise in prices." I am assuming that the statement would
be something like that; not a foolish or wild statement, but a wellconsidered statement, based on the experience that they had gained.
Mr. BLACK. On that point will you permit just one inquiry?
Professor COMMONS. Yes, sir.



Mr. BLACK. I recall that in 1919, when the price level was so high,
the Senate passed a resolution declaring it the opinion of the Senate
that the inflation ought to be stopped.
Professor COMMONS. Yes.
Mr. BLACK. And there is a very widespread impression, and a
very unfavorable one, among many farmers that in response to that
resolution the Federal reserve system did set about deliberately to
bring about deflation and that the whole collapse in prices was due
to an action taken by the Federal Reserve Board and the Federal
reserve system. Would not the whole system be getting on dangerous
ground if it should undertake to make a pronouncement of that
Professor COMMONS. Here is where the question of timeliness comes
in, and also the use of their powers. It is quite plain that, since
they waited, as they did in 1920, up until March or May, 1920, to
take effective action, the inflation had gone too far for anything
except a drastic reduction. But suppose they had used those powers
much earlier; and I am not saying who is responsible for using them
or not using them. Here was the rediscount rate, 3 1/2 per cent in
1919. I t rose, on commercial paper, to 7 per cent in July, 1920—
a very rapid increase. Supposing that increase had been made in
March, 1919, when business had only just started to increase, then
it seems to me that that inflation could have been headed off; that
it would not have gone to that high point. They raised the rate one
year too late; and if they had watched the rise of prices which
started in March, 1919, they could, as I see it, by raising the discount
rate at that time—which then on Government collateral was about
3 1/2 cent—if they could have raised it then, they could have given
a warning to the public.
I think that that inflation after the war, in 1919, is the only one
known in history. Such certainly did not occur in 1865. There
was then a continuous deflation for three or four years. But a postwar inflation was a new thing, and the explanation, I think, is quite
evident to everyone. The rate of discount was kept down until it
was too late for any effective influence on the market.
I will come back to that if it is not clear.
Mr. WINGO. Just on that point, you seem to agree with one conclusion of that so-called joint agricultural commission. They did
not say so in so many words, but I understand that their position
was that they thought the mistake was made in not deflating earlier;
that it ought to have been done a year earlier. It would not have
hurt quite so bad, so they seemed to think.
Professor COMMONS. I do not intimate that they should have deflated. If they had raised the rate to 7 per cent in March, 1919, that
would have caused deflation, no doubt; but if they had raised it from
31/4per cent to 4 or 5 per cent in March and April, 1919, they
would have slowed down this velocity. The velocity of business had
gotten too much for them when they got into May, 1920, and then
they had to make most drastic and sudden increases in the discount
rates. But if they had taken it gradually, beforehand—as I conceive they later learned to do in 1922 and 1923—anticipating and
looking ahead, it would have been a different matter. As it was,
they began to use their powers very gradually six months—November and December, 1922—before they took effect on prices in July,



Mr. LUCE. In connection with what Mr. Wingo has said the record
might well show my own recollection, that the commission divided, a
majority thinking the board acted too soon, and the minority, with
Mr. Ogden Mills as the spokesman—and I am not sure whether there
was anybody besides him—thought that they acted too late, but they
agreed that that factor of the Treasury operations was an important
Mr. WINGO. I only took what the report indicated, and got myself
in trouble once on the floor of the House by paraphrasing that report.
I have a good recollection of what was intended to have the commission report. I was barred from that commission because they said
I was not conservative enough and would not agree in advance what
my findings would be.
The CHAIRMAN. May I suggest to the committee here that when
Doctor Commons started I suggested that he be not interrupted until
he had completed his statement, in order that he might make his
statement connected to the members of the committee.
Professor COMMONS. Mr. Chairman, I have finished three of the
five points I wanted to talk on. Publicity was the third.
I want to bring in this matter of futurity now. The reserve
system, so far as its powers over credit are concerned, and over
the velocity of circulation, operates through the expectations of business. They can act without publicity through their statistical service
and their clues as to what is going to come relative to all kinds of
considerations. They can act long before the public is aware of what
they are doing, but as soon as the public begins to get the idea that
prices are going to rise, then you are going greatly to increase the
velocity of business transactions and consequently the line of credit
needed to support the new high prices and the new quantities of
production is increased.
So that those two items which I consolidated in the two terms—
velocity and futurity—are really the important instruments in the
power of the reserve system, and I think I have given illustrations
to point that out.
Let me take up the investigation. I t is quite true that the investigation called for in this bill has as its basis the idea of stabilization.
I do not think that the investigations of the Federal Reserve Board
have been based primarily on the idea of stabilization. They would
have to collect and combine different kinds of figures, or additional,
or make new combinations.
They have also abandoned the idea of continuing the investigation
and publication of their own average of prices of commodities, leaving that to the Bureau of Labor, and these other things which are
itemized here all turn on the question of their power to control the
price level. That is additional, I should say, and is a necessary
addition to the powers of the Federal reserve act as originally
passed, which did not include the idea of stabilization.
How would such an investigation naturally be conducted? I will
give my idea of what such an investigation should be. I think it
would be the kind of an investigation that the Federal Reserve Board,
on consideration, would probably adopt.
It is an investigation similar to that which Mr. Hoover is now
conducting through the agency of the National Bureau of Economic
Research in New York. I understand he has raised $150,000 on the



outside by private subscription and placed one of his representatives
in association with the national bureau. I also understand that Mr.
Miller, of the Federal Reserve Board, is already a member of that
advisory committee of the National Bureau of Economic Research.
This bureau has published 10 volumes, and the last one is on
Business Cycles, by Professor Mitchell.
The bureau spends about $80,000 a year normally. This year they
have $150,000 additional, which is spent under the direction of Mr.
Hoover along with the bureau.
That bureau is a representative bureau, which has on its board of
directors representatives of opposing interests and different lines of
thought in the country. I have here—I will pass it around and if you
care for it, it might be put into the record—a page indicating what
the National Bureau of Economic Research is, including the directors
and the research staff.
The CHAIRMAN. Without objection, that will be placed in the
record at this point.
(The page referred to is as follows:)
[Incorporated under the Membership Corporation of the State of New York, January 29,

The National Bureau of Economic Research was organized in 1920 in response to a growing demand for exact and impartial determinations of facts
bearing on economic, social, and industrial problems.
It seeks not only to find facts and make them known but to determine them
in such manner and under such supervision as to make its findings carry conviction to liberal and conservative alike.
Entire control of the bureau is vested in a board of 21 directors, representing
universities, learned and scientific societies, financial, industrial, agricultural,
commercial, labor, and technical organizations.
Rigid provisions in the charter and by-laws guard the bureau from becoming a
source of profit to its members, directors, or officers and from becoming an
agency for propaganda. No report of the research staff may be published without the approval of the directors, and any director who dissents from any finding approved by a majority of the board may have such dissent published with
the majority report.
The members of the board of directors are as follows:

John P. Frey, editor International Molders' Journal, Cincinnati, Ohio, chairman of the board; Harry W. Laidler, director, the League for Industrial Democracy; George O. May, senior partner Price, Waterhouse & Co., New York,
president; Elwood Mead, Commissioner of Reclamation, Washington, D. C.;
Dwight W. Morrow, member of the firm of J. P. Morgan & Co., New York;
George Soule, director, the Labor Bureau (Inc.) ; N. I. Stone, industrial consultant, New York; Allyn A. Young, professor of economics, Harvard University.

T. S. Adams, professor of political economy, Yale University, president;
John R. Commons, professor of political economy, University of Wisconsin;
Edwin F. Gay, professor of economic history, Harvard University, director
of research; Wesley C. Mitchell, professor of economics, Columbia University,
director of research; L. C. Marshall, dean of college of commerce, University of
Chicago; Joseph H. Willits, professor of economics, Wharton School of
Finance, University of Pennsylvania.




Hugh Frayne, American Federation of Labor; David Friday, American
Economic Association; Lee Galloway, American Management Association;
George E. Roberts, American Bankers' Association, treasurer; Malcolm C.
Rorty, American Statistical Association; A. W. Shaw, National Publishers'
Association; Gray Silver, American Farm Bureau Federation; Oswald W.
Knauth, recording secretary; Gustav R. Stahl, executive secretary.

Edwin F. Gray, director; Wesley C. Mitchell, director; Willford I. King;
Frederick C. Mills; Frederick R. Macaulay; Leo Wolman; Willard L. Thorp;
Walter F. Wilcox; Harry Jerome; Simon Kuznets.

Professor COMMONS. YOU will notice that there are directors at
large, there are directors selected by university appointment, and
there are directors by appointment of other representative organizations. Among the latter are the American Federation of Labor, the
American Economic Association, the American Management Association, the American Bankers' Association, the American Statistical
Association, the National Publishers' Association, and the American
Farm Bureau Federation. There are five universities represented.
In other words, the kind of an investigation which they make
includes supervision not simply by one interest, but by all interests,
and among theprivisions[provisions]of the constitution of this bureau is the
provision that any member of the board of directors who disagrees
with the findings of the staff of investigators may send in his disagreement. If it is taken account of by the investigators adequately,
then nothing more need be done, but if it is not taken account of
by the investigators he has the right to publish it as a dissenting
opinion in the findings.
I am not saying that the Federal Reserve Board would join in with
the National Bureau of Economic Research, but I do say that it will
take a good deal more money for expenses than they are now paying;
that it would involve the whole question of the power of the Federal
reserve system over prices of different kinds and one of the most
complex problems in the whole field of economics.
One other thing about the gold standard: As I understand it,
there are three types of gold standards. First is the one described
by Governor Strong the other day, which means that each central
bank of the world shall have a separate reserve in its own vaults to
pay its liabilities on demand so that its money is immediately convertible into gold; and, furthermore, that there is a world free market of gold, no obstructions placed in the way of gold passing from
the country where its purchasing power is low—that is, where prices
are high—to another country where its purchasing power is high—
that is, where prices are low. That is the free pre-war gold standard.
Now, there has, along with this, been growing up in the last 30
years the gold-exchange standard. This is familiar to you, but the
only question I want to bring out is what the differences are and the
effect on the world demand for gold.
The gold-exchange standard is a standard in which the country
need take no gold at all, like Bolivia or Austria and many of the
countries that have come on the gold standard, so called. I t is called
with them a gold standard, but it is really a gold-exchange standard,
because they require only their own paper money, and they have a
running account through bills of exchange on New York or Lon



don, which are the two strictly gold-standard countries of the world
at the present time, and by means of which the gold does not move
at all in international trade. It is simply a change in the foreign
balance account which they must keep up sufficiently, and the exporters and importers of their own country, instead of importing
gold or exporting gold, simply call upon the government for foreign
I need not go into that; it is doubtless understood. The point of
it is that other countries, other than England, are on a partial goldexchange standard, like Germany, and they have a quantity of gold,
but they have also changed their laws since the war to the effect
that they may count as part of their resources, foreign balances, practically always in New York and London. The only two nations that
are on a strictly gold standard, where they have enough gold to redeem their demand liabilities, are the United States and England.
Now, the difference between this gold-exchange standard and the
gold standard is in the quantity of gold which will be needed to
satisfy the world's demand for gold to carry on its business. The
gold-exchange standard is not an automatic gold standard. It is a
managed standard, a managed gold standard.
The third system is a strictly managed gold standard. There is
always some management in a gold standard. The Bank of England, we may say, first learned the management principle about 1860,
when they learned that in the rate of discount was their power to
prevent an outgo of gold or to attract an inflow of gold. The year
1860 was the first time that they learned that their discount rate was
enough to do that. They paid no attention to the effect on prices of
that change in the discount rate. That is partly a managed gold
standard, because evidently the central banks are attracting gold
or are allowing it to leave the country.
Now, the managed gold standard, it seems to me, is what we have
in this country, and it grows out of the fact that we have over half
or nearly one-half of the world's monetary gold supply, and that
other countries are owing us a billion dollars in gold each year,
which gives us not only a control of the total quantity, or a large
share of the total quantity, but it also gives us a continuously increasing and continually incoming supply of gold or of gold exchange without selling our commodities abroad; that gold exchange
can be obtained by other countries only by selling their commodities
in foreign countries and buying American exchange.
So that I would say that our country is on a managed gold standard, and that the gold in this country, coming in in such quantities,
has not been allowed since 1922 to increase the price level materially.
It has rather been counteracted by these activities of the Federal
reserve system.
So that the whole question of stabilization—well, we may say, the
whole question of future long-run stabilization—is going to depend
on two things, whether the world is going to return to a complete
full gold standard with full gold reserves, as Governor Strong apparently is contemplating, in which case there would be a tremendously increased demand for gold and, secondly, it is going to turn
on the question of what is the probable increase in production from
the mines.



This bill, instead of being merely a bill designed to correct business cycles, is designed also to maintain a stable gold standard, and
that is particularly cared for on lines 11 to 13, on page 2, where it
Relations and transactions with foreign banks shall not be inconsistent with
the purposes expressed in this amendment.

In other words, to give a concrete illustration, arrangements were
made with England about 1925 which enabled England to come to
the gold standard. In order that she might do that she had to have
a loan or, rather a promise of a loan if needed, which was partly
arranged for in this country. Her price level was about 10 per
cent above the gold price level. She had to retire enough of her
paper money and place gold in its stead in order to bring her
general price level down about 10 per cent, as was estimated by the
Manufacturers' Association in England about that time.
No consideration was given either by those in the Bank of England
or by those of our representatives in the reserve bank who took care
of this resumption—no attention was paid, or no practical attention
was paid, to a resulting or a following fall in the prices of commodities, or, in other words, a rise in the value of gold.
Since England went onto the gold standard in 1925 the price
level of England, as well as the price level of America, has gone
down something like 10 per cent. Two countries on the same gold
standards will have a similar movement in their price level.
Mr. Goldenweiser, you have a chart on that, showing the different price levels.
Mr. GOLDENWEISER. Would you like to have it?
Professor COMMONS. I would like to have that put in as an
The CHAIRMAN. Without objection, the chart to be furnished by
Mr. Goldenweiser will be placed in the record at this point. I t is
identified as Wholesale Prices in United States and England from
1923 to January or February, 1928.

(1) Bureau of Labor Statistics.

(2) Board of Trade.



Professor COMMONS. Taking the English price levels, 1925 is this
red line, the price level was there about, say, 106, on the pre-war
basis. It was at that point [indicating on chart] that England
came onto the gold standard.
Mr. KING. These charts will not be printed in colors, so that whenever you refer to a color it will not give us any information so far
as the record is concerned.
Professor COMMONS. I mean the price level for England which
runs from about 106 in the middle of 1925 down to about 95 in the
beginning of 1928.
What the percentage of fall is I can not figure quickly, but you
see that there has been a very rapid decline and an increase and
then another decline. These are cyclical changes, which are not so
much on account of gold as they are on banks' operations, credit
operations; but the trend has been, since 1925, down to 95 from 106.
Mr. GOLDENWEISER. About 10 per cent.
Professor COMMONS. About 10 per cent. So that, in order to get
down to that price level, England had previously to retire her paper
money and substitute gold. She had previously, in 1925, brought her
prices down from 115 to 106. That would be another 10 per cent,
So she nad two causes of deflation, one the retirement of her paper
money when she went onto a gold international level with the United
States and the second a decline in the price level of the two countries
on the gold standard.
Now, let us take the United States. At that time the United
States price level was about 104, and it has come down, with certain
cycles, so that at the present time it is 97, from about 98 or 97.
Mr. Goldenweiser, that does not quite work out with your commodity price level, which shows about a 10 per cent drop.
Mr. GOLDENWEISER. Ten per cent is to the low point.
Professor COMMONS. Since that time there has been an increase.
Mr. WINGO. You had better identify the low point for the record.
Professor COMMONS. The low point is about 94 in the middle of
1927. There has been since that time an increase in prices, in the
price level, to about 96 in the beginning of 1928.
You will notice also that England is recovering, a rather belated
As to all these other countries, I do not know any of the special
causes operating—Sweden, Switzerland, Germany, and the Netherlands. It will be sufficient for my purpose if this chart were drafted
to include simply the United States and England.
Mr. GOLDENWEISER. We would be glad to draft it to cover the
United States and England, to insert in your testimony.
Professor COMMONS. Thank you.
Now, the gold standard, then, may itself increase in value, so there
will be two reasons for a decline of prices, one the retirement of paper
money and the other the increased world value or, at least in this



case, the free gold value of prices, which would indicate the price
If you will allow me to refer to this other chart
The CHAIRMAN. That represents the wholesale price level covering
a range from 1800 to 1928.
Professor COMMONS. This is already in Mr. Goldenweiser's testimony. I have a little different interpretation, Mr. Goldenweiser.
This is the American price level. I do not know why it went up so
high at that point.
The CHAIRMAN. What year?
Professor COMMONS. 1816 was the high point of our price level.
The figures were very defective in those early days.
There are two things to notice, that in France there was no paper
money. France remained on a silver basis; England went onto a
paper-money basis, silver being the standard at that time. So we
have the English price level here [indicating on chart], and you can
see what the French situation was.
There was a relative scarcity of gold from that time down to
the gold discoveries of 1849. We had here in 1836 a paper-money
inflation, wild-cat banks in this country, which caused that cycle,
but we have a continued trend of a falling price level, owing to the
main fact that the mines were not keeping up in their production
with the demands of business.
Then began the gold discoveries in 1849, and by the time of 1854,
1855, and 1856 we have a rise of gold prices.
There is no paper money involved in that. Then we have, as a
result of the rapidly increasing gold prices, a world-wide depression,
and the panic of 1857. Then we went into the war and the greenbacks jumped that level up in America, but if you had the German
and British price level you would not it running along something
like this [indicating on chart] down to 1879, when we got back to
the gold basis. There was the gold basis, so you would have England running along something like this [indicating on chart].
Mr. KING. All that does not mean much in the record.
Professor COMMONS. From the low point in 1860 to the low point
in 1896, omitting the American inflation of 1862 to 1879, would be
the gold deflation in England and Germany.
Now, notice that there are three circumstances that happened in that
decline in America: First, the rapid retirement of our greenbacks,
which brought us down to this point, which is 1867. Congress stopped
the retirement of greenbacks and has left that heritage of $346,000,000 in greenbacks. That caused an inflation, as I interpret it,
which ended in the panic of 1873.
Then we have the continuous decline until we reached the gold
standard in 1879, and that is the low point indicated. Having
reached that standard, we have an expansion, which I would say was
a credit expansion, an optimistic expansion of business, owing to
this velocity idea, owing to the fact that business was optimistic,



expectations were good. Then we had the decline. You will notice
at this time what happened, the demonetization of silver.
The CHAIRMAN. Between what periods?
Professor COMMONS. It did not begin to show itself until 1879, and
then up to 1896. Silver was taken out of the currency, so that we
had then a strictly gold standard extending through here [indicating
on chart 1879 to 1897]; that is, an abandonment of the bimetallic
In 1896 there was discovered the cyanide process, by which lowgrade ores could be made profitable, and consequently we have an
increase in the quantity of gold, faster than the increase in the demands of business throughout the world, which, I take it, accounts
for that upward trend from 1896 until the war, up until 1914. We
were having then an increase in the gold owing to the cyanide
The CHAIRMAN. Which resulted in that increase in the price level.
Professor COMMONS. Yes; from about 68 in 1896-97 to about 100
in 1913—that is, about 45 per cent increase.
Mr. KING. I notice in about 1913 an immense rise, like a mountain
peak, in the price level Was not that the time of the adoption of
the Federal reserve act?
Professor COMMONS. That peak starts in 1915; the Federal reserve
act in 1913 and the war in 1915 started that.
This [indicating on chart 1896 to 1914] is the period that Mr. Luce
spoke about of great unrest amongst consumers.
The CHAIRMAN. Between what dates?
Professor COMMONS. Between 1896 and 1914. This [indicating on
chart 1879 to 1897] was the period of great unrest amongst the producers. Wholesale prices were falling
The CHAIRMAN. Between what dates, Doctor?
Professor COMMONS. If we omit the cycles, it is this period from,
say, 1879 to 1897, a general fall of about 20 per cent purely on the
gold standard; if I had taken the paper standard, it would have
brought me back to 1865, but purely on the gold standard it fell 20
per cent in the neighborhood of about 18 or 19 years, with some
cycles intervening.
Now we have reached this period [indicating on chart], and our
price level, after going through this index
The CHAIRMAN. DO you mean the period of 1913?
Professor COMMONS. From 1913 to 1928. We have had an inflation which need not be explained. We have discussed that. We
have now reached the point where the price level is running 150,
50 per cent above the pre-war level—that is, this [indicating on
chart] being the pre-war level, 100. This point in 1913 is usually
given as the pre-war level.
We are now on a price level of 150; that is, about 50 per cent
higher than the pre-war level.
Mr. STRONG. Doctor, the bell is calling us to school now. I wonder
if we could not adjourn until, say, 2 o'clock?
The CHAIRMAN. Without objection, I am going to suggest that we
adjourn until 2 o'clock.



Mr. KING. AS I will be unable to be here this afternoon, I would
like to ask just one question. Taking that indication of where the
price level was in 1913, at the time of the adoption of the Federal
reserve act, where would the line go so far as agricultural prices are
concerned? Where would it run on your chart?
Professor COMMONS. The farmer was getting more than anybody
else during that period [indicating on chart].
Mr. KING. I do not mean that period. I mean during the period
where the line starts up.
Professor COMMONS. I mean this period from 1896 to 1914.
Mr. KING. I mean from 1914 on.
Mr. GOLDENWEISER. Agricultural prices went up higher than the
Mr. KING. Would you indicate it there with a pencil?
Professor COMMONS. There is another chart which Mr. Goldenweiser has here of agricultural prices.
Mr. GOLDENWEISER. I have it, but not that far back. I t begins
with 1922, so it would not cover the period that you had in mind; but
agricultural prices went up about 10 per cent higher than the others.
Professor COMMONS. Mr. Chairman, if I might close at the point
that I started with, the question for the future, then are our prices
going to fall again because of a limitation of the future gold supply?
Is the price level going to fall from 150 down to 100? Or will there
be such an abundance of gold that the price level may start up again?
That is the question of prophesy as to the future gold supply.
My notion is—and I am just like Mr. Goldenweiser or anybody in
this—that the gold production is not going to keep up with the new
needs of the population if we go to a full gold standard. If we
maintain a managed or gold exchange standard, we can keep prices
from falling.
The CHAIRMAN. The committee will adjourn until 2 o'clock this
(Whereupon, at 12.20 o'clock p. m., a recess was taken until 2
o'clock p. m.)

The committee reassembled at 2 o'clock p. m., pursuant to recess.
The CHAIRMAN. The committee will come to order. Doctor Commons, you may proceed now.
Professor COMMONS. Mr. Chairman, I want to clear up something
that I was speaking about from memory this morning, about the
rates of discount from 1917 to 1921. I was intending to give not the
rates on commercial paper but the rates on Government collateral.
There were two rates in operation during that period from 1917
to some time in 1921, a low rate on Government collateral and a
higher rate on commercial paper. Usually we have been taking the
commercial rate, and in my exhibit last year, page 1077, I used the
commercial rate. Properly considered, one should use the rate on
Government collateral, because I find that during that period of 1919,
when we had the greatest inflation, 90 per cent of all the borrowings



by member banks, the total holdings of the Federal reserve system,
were on Government collateral, and only 10 per cent were commercial
paper. I have drawn a chart which shows the change in proportions,
showing that the Government collateral had a lower rate, one-half
of 1 per cent, and that whenever the rate was changed on commercial
paper the rate on Government collateral was changed so as to keep
the same differential. However, in 1920, when the commercial rate
in New York went up to 7 per cent, the rates secured by Government
collateral went up only to 6 per cent, a differential of 1 per cent.
That distinction or discrimination of one-half of 1 per cent in favor
of Government collateral continued until about June, 1921, when the
two rates were combined into the one rate on both classes of paper.
So that since 1921 the two rates have been combined and no distinction is made.
Mr. WINGO. You had better give them some kind of legend.
Professor COMMONS. This is headed " Federal Reserve Bank Holdings at the End of the Month, 1917 to 1928."
The CHAIRMAN. Doctor, this morning you referred to a discount
rate of 33/4per cent. Is that correct?
Mr. WINGO. Three and one-half.
Professor COMMONS. I will introduce this other exhibit
Mr. WINGO. If you will pardon me right there. I think it was 3 1/2
per cent in 1919, wasn't it, that you said this morning?
The CHAIRMAN. I think you mentioned the rate of 31/2when you
meant 4 1/4.
Professor COMMONS. I t should have been 41/4.That was an error
of memory which I have corrected by introducing this chart.
Mr. WINGO. YOU said 31/2.I take it you really meant 41/2?
Professor COMMONS. I meant 41/4.The commercial rate is 43/4during 1919, but rate on Government collateral is 4 1/4.
I will introduce this chart, which shows it differently from my
morning statement. This exhibit is, "Money rates at New York,
showing the differential rediscount rates May, 1917, to July, 1921,
and the dates are from 1917 to 1928.
Now, the point is simply this: My argument of the inflation of
prices is based on a continuously low rediscount rate of 4 1/4. Take
the usual statement; it would have been 43/4during the year 1919,
but it should be put at 41/4,and so on, because 90 per cent of the borrowings were secured by Government collateral and only 10 per cent
by commercial paper. (See Chart III.) I introduce that as an effort
to correct what I said this morning from memory—that the rate
on Government collateral was 31/2per cent.
Mr. WINGO. DO you want to introduce these in the record—these
charts ?
Professor COMMONS. I thought may be Mr. Goldenweiser could furnish you that. I will introduce this one as an exhibit.
The CHAIRMAN. Without objection, it will be placed in the record
at this point.



(The chart referred to is as follows:)

(1) First Liberty loan, 3 1/2s.
(2) Second Liberty loans, 4s, and first Liberty loan, converted, 4s.
(3) First Liberty loan, converted, 4 1/4s; third Liberty loan, 4 1/4s.
(4) First Liberty loan, second converted, 41/4s;fourth Liberty loan, 4 1/4s.
(5) Victory loan, 43/4s;Victory loan, 3 3/4s.
X From May, 1917, to June, 1921, a differential rate was charged for bills discounted
secured by Government obligations and for bills discounted secured] by commercial paper
and rediscounted paper.

The CHAIRMAN. We will number these charts No. 2 and No. 3.
Without objection, they will be inserted at this point. We will begin
with the charts that were inserted this morning and number them
1, 2, and 3. The last two are the ones that Doctor Commons just
placed in the record at this point.
(The charts referred to are as follows:)

(1) End of month figures from the Federal Reserve Board.
(2) Includes bills discounted and member banks collateral notes.



Professor COMMONS. While I am on that point, I should have a
chart to show how low a rate that was [producing another chart].
To determine whether that was a low rate or not, we should compare
it with the bond yield. If we do that, we find that the bond yield
along in 1919 and 1920 ranged from 5 per cent to 6 per cent. So
that any discount rate below the bond yield rate would be a low
rate of commercial discount, and would tend to have an inflationary
The CHAIRMAN. Without objection, this chart will be inserted in
the record at this point, and will be properly numbered.
(The chart referred to is as follows:)

(1) Yield on 45 high-grade bonds from Carl Snyder's "Business Cycles and Measurements," p. 205, from 1917 to 1925, and brought to date by the same method.
(2) Standard Index of Industrial Common Stock Yield from the Standard Trade and
Securities Service.
(3) From the Federal Reserve Board.
X From May, 1917, to June, 1921, a differential rate was charged for bills discounted
secured by Government obligations and for bills discounted secured by commercial paper
and rediscounted paper.

The CHAIRMAN. The rates that you just referred to were of the
Government bond yield?
Professor COMMONS. NO. That is the rate which I took from the
Standard Statistics Corporation, showing the average bond yield on
certain selected bonds.
The CHAIRMAN. Stocks, not Government securities ?
Professor COMMONS. Not Government securities. No; they are
not Governments. If you can see this chart at that distance, you will
see that running along there is a dark line. That is the bond yield.
I might say that the bond yield is what we may call the point of
transit. If the commercial rate goes above the bond yield, then I
would say it would be a high rate. If it goes below the bond yield,
it would be a low rate. So I have traced the commercial rates with
reference to the bond yield, showing whether they are above or below.
Mr. WINGO. When you speak about the bonds, I understand that
you mean corporate bonds and not Government bonds ?



Professor COMMONS. Corporate bonds, not Government bonds.
Mr. WINGO. When you speak about the bond yield, you mean the
corporate bond yield, not the Government bond yield ?
Professor COMMONS. It means the yield which investors expect on
corporate bonds. Whenever the commercial rate is higher than the
yield that investors expect, I would expect it to cause a deflation of
commodity prices. This really goes back to the theory of Wicksel in
1898, and I have tried to apply it. I could go into the reasons for it
a little later to show the correlation between the bond yields and the
stock yield.
This is also the method used by Colonel Ayres, of the Cleveland
Trust Co., with its bearing on the prices of stocks.
The CHAIRMAN. Well, Doctor, in view of what you have said now
it would seem to indicate that the present Federal reserve rate is
Professor COMMONS. The Federal reserve rate is below the bond
yield rate; yes, sir. The rediscount rate at New York, is 4 per cent,
and the bond yield has gotten down to a little above 4. So the rediscount rate now is low but the commercial rate is the one I measure
by. That indicates easy money, which is just exactly what the situation is—a situation of easy money.
Then I have a curve here of the stock yield, which I will go into
later when I compare one other point, the stock market and the
commodity market.
To complete my remarks this morning—I am not certain whether
I got at this point with this chart
The CHAIRMAN. Being the chart of wholesale prices from 1800 to
1928 which was placed in the record yesterday by Mr. Goldenweiser,
now being referred to by you ?
Professor COMMONS. Yes. Now, the gold prices have reached 150,
where the pre-war level was 100.
Really the practical question before the banking system of the
world is whether we are going to have a repetition of what happened during these two long trends, 1816 to 1849 and 1865 to 1897,
or whether we can for the future stabilize it at 150. If we don't
stabilize it at 150, then the price level will come down in the future
owing to the scarcity of gold until—what level it will reach nobody
knows—but the tendency would be, barring these credit cycles, the
tendency would be to continue the depression until the whole world
is on a tree-gold basis.
The CHAIRMAN. I was going to ask you right there, Doctor, in connection with the remarks made by Governor Strong the other day,
in which he advocated, of course, a return to the free gold basis
throughout the world: Now, suppose that that takes place. What
effect would that be apt to have on this wholesale price level?
Would it have a tendency to lower it or hold it stable or a tendency
to raise prices ?
Professor COMMONS. I would say that over a period of 10 years or
more it would cause it to fall continuously, because the gold production is not keeping up with the increased demands of the world
for gold for monetary purposes, that increased demand being due
partly to the high prices and partly to increased production and



The CHAIRMAN. If we maintain our present situation with a
surplus of gold and the management of the Federal reserve is applied
to stabilize it, it would have a tendency to hold the price level at its
present point, would it not?
Professor COMMONS. At its present point.
The CHAIRMAN. Approximately 150?
Professor COMMONS. 150.
Now, I say that if we go to a gold standard, as Governor Strong
described it, we will have a continuously falling price level, as we
did in this period [indicating on chart]; I refer to the period of
1879 to 1896 and 1820 to 1849.
Mr. STRONG. YOU mean 1899?
Professor COMMONS. NO ; 1879 to 1896. Or from the period about
1820, when England resumed the gold standard, down to the discovery of California gold in 1849. There was thereafter an increase
of gold, of course, as I was saying this morning.
Now, my idea about that is this: If we should have a managed
currency, with the United States controlling it, it would have to
be by cooperation with foreign banks of issue. Those arrangements
would have to be made. I t could be so arranged that the price
level need not go below a reasonable fluctuation around the 150
level. Nobody knows anything about the future gold discoveries,
but look at the alternative
The CHAIRMAN. Right there, Doctor, may I ask you this: As the
price level has fallen during this period, giving gold a greater value,
would not the production of gold tend to increase?
Professor COMMONS. That is quite likely, and it has increased. I
think that you were told yesterday that in the last year it has increased over the previous year. There will be a tendency to increase
the gold production.
Mr. STRONG. Doctor, you were speaking about the alternative.
Professor COMMONS. The alternative is this: Suppose we have
some other new discovery, some great discovery of gold. It would
have the effect again of raising prices, as the cyanide process did from
1896 to 1914, in which case this bill would come in operation to prevent that inflation from gold mining from inflating the world price
level. If, on the other hand, there is, as I predict, a diminishing
quantity of gold—that is, a greater scarcity of gold relative to business—it should tend to bring the prices down. But the purport of
this bill, requiring a stable gold standard when international arrangements are made, would tend to prevent that deflation and maintain
In either case, whether the prophets of a gold increase are right;
that is, whether there is a production of gold increasing faster than
the needs of business, or the prophets of a gold decrease are right;
that is a production of gold increasing less than the needs of business—either one of them would be cared for by the present bill,
which recognizes the agreements and understandings of foreign
banks. That, I say, would be necessarily a managed currency, with
all of the difficulties, which I do not underrate, which were mentioned by Governor Strong; that is, a great distrust of the ability of
mankind to manage anything. He prefers to get back to an automatic level, where the free flow of gold will



The CHAIRMAN. Does that mean this, Doctor, that we might return
to the basis of 1913, where the price level
Professor COMMONS. That is my idea of what the present tendency is.
The CHAIRMAN. And then the only thing that would obstruct that
from going back to normalcy which would be influenced by the return
to the gold standard would be the management of the operation of the
central banks ?
Professor COMMONS. The central banks, of which the United
States is now the controlling factor.
Mr. WINGO. Don't both you gentlemen overlook the fact that you
are living in an entirely different industrial world now ? Take one
factor, the multiplication of machine power and the comparison of
machine power to man power relatively, which has been accelerated
or, rather, pyramided so rapidly since the war that you know now
that you can not have anything like as low a level of production
relatively to world population that you had in 1913.
Professor COMMONS. What is your inference from that ?
Mr. WINGO. My inference is that you will not have the same conditions existing, and therefore you need not look for the same level,
because—you take one big factor. One big factor is the operation
of the increased man power as translated in machine power. It will
give you such a great production to the same man power that the
volume of production is bound to have some effect on the price level.
Professor COMMONS. And to cause the price level to fall?
Mr. WINGO. You think it is more apt to accentuate it?
Professor COMMONS. Whose inference is that ?
Mr. WINGO. I don't know. I am just calling attention to conditions
not being the same as in 1913, and that your idea was going to affect
the probability of returning to the 1913 price level.
Professor COMMONS. DO you think that with increased efficiency
of industry prices will fall ? That is what your theory amounts to.
Mr. WINGO. Well, I don't know; I'm not doing the theorizing.
Professor COMMONS. Mr. Goldenweiser thinks prices would fall.
It is the argument of the Federal Reserve Bulletin that with an
increase in efficiency prices will fall, and they put that forth as justification for the fall of prices since 1925 of about 10 per cent. They
make an estimate that the increased efficiency of man power in this
country owing to machinery and the rapidity of communication,
and so on, has increased output 10 per cent, just about equal to the
fall in prices.
The question then arises, Is a fall of prices necessary along with
increased efficiency ? I say no; because you have to take into account
that on the one side is money and credit and on the other side is
the output of this increased efficiency. Now, if money and credit
keep up relatively to the output, there is no reason why prices should
fall on account of increased efficiency.
Mr. WINGO. Whether that is desirable or not depends upon whether
you belong to the debtor or creditor class?
Professor COMMONS. That is not the sole question.
The CHAIRMAN. YOU have increased by that development of efficiency the consumption and larger percentage of profits to the manufacturers and producers, and you have also increased the wage level ?
It has had a tendency to do that, has it not ?



Professor COMMONS. Those who advocate this reduction of prices
to correspond with the increase of efficiency, looking at it from the
consumer's standpoint, think that in that way we salaried people
would get more. The creditors will get more, because our money
will buy more.
Now, suppose you look at it from the standpoint of the producers.
The producer is the business man who borrows, and the producer
is the wage earner who works for him. If you take the increase
of production and of employment and the decrease of production
with unemployment, you will find that they coincide quite closely with
the rise and fall of prices. That is, as prices rise profits increase and
employment increases, not necessarily wages; but employment increases, and that means that it resolves itself into this question: Is
the laborer gaining more by an increase of wages per day or by an
increased amount of employment per year ? He and the employer are
partners in that.
On the other hand, when prices fall you will nearly always find
that, on the whole, profits are decreasing and the business men are
laying off their employees. The rate of wages has not fallen, but
the amount of employment has fallen; so that while the employee
may maintain the higher rate of wages per day or per hour, yet he
may lose two or three months of work on the average.
Mr. WINGO. As to the volume ?
Professor COMMONS. AS to the volume of the amount of work he
does. And furthermore, he can never be a consumer unless he has
earned something as a producer.
So, I say from all standpoints that the public interest should be
directed toward the stability of prices for the business man which
enables him to look forward to his production, not to overproduction
or underproduction, but to get a steady line of production. And as
to that standpoint I would include under that, of course, the farmer
as both an employer and an employee, performing both functions.
On the other hand, all employees whose rate of annual earnings
The CHAIRMAN. Doctor Commons, in connection with Mr. Goldenweiser's talk he referred to the result of increased efficiency in the
production of automobiles; and he said that because of that increased
efficiency the prices of automobiles had been reduced; and if I understood him correctly he stated that where one person had one automobile prior to that time he now had two. Now, is it to be inferred
that the farmer would suffer from the decline in the price of
automobiles ?
Professor COMMONS. Not at all. Efficiency should be encouraged.
And I think that the stability of prices will be the greatest encouragement that can be given to business, because there would no longer
be gambling with a rise and fall of prices that they have no control
over, but they will make their profits out of their own efficiency.
The CHAIRMAN. Does this increased efficiency, as in the development of electric energy and all these new appliances, mean, as some
people suggest, that instead of working six days a week it will mean
four or five days a week?
Professor COMMONS. I t might be very likely.
The CHAIRMAN. And that the people of this country will enjoy
more leisure than heretofore?
Professor COMMONS. It might be.



The CHAIRMAN. That is a possibility, isn't it?
Professor COMMONS. It is a possibility. There is a possibility of
shorter hours and a shorter week.
The CHAIRMAN. With a reduced production?
Professor COMMONS. NO ; an increased production, if the efficiency
of the country increases faster than the reduction of hours.
The CHAIRMAN. But there would be a corresponding lowering of
the hours spent in production ?
Professor COMMONS. Yes, sir; on condition that the price level does
not fall. Look at the employer who has increased his efficiency; look
at the employers as a class. Say they, as a class, increase their
efficiency 10 per cent. At the same time the price level falls 10 per
cent. What reward is there for their efficiency as a class? It has
all been taken away from them. There is no premium on efficiency
for them as a class if the price level falls. They are in just as severe
competition with each other as they were before.
But, if, on the other hand, the price level remains stable, then they
get the difference as a class between this price level, this constant
price level, and the reduction of the cost which they have made.
That is their efficiency earnings; that is a real earning, or income, to
which they are entitled. It benefits the community. Furthermore,
it benefits the wage earner, because his employer is more likely to be
willing to advance his wages if he is making more profits.
But if all these prices fall, as happens to be the case for the last
two years, he inevitably must lay off his men, and he has more severe
competition, and the inferior ones will be wiped out. The question
really resolves itself into a big social question as to who you think
ought to be benefited by the stabilization or rise or fall of prices.
Mr. WINGO. Wouldn't that be an argument in favor of stabilization—that if you stabilize and maintain prices on a stable level, then
in the long run over a long course of years both the creditor and
debtor classes will adjust their business to that level and you will
avoid a penalty upon one and a premium to the other that always
comes from fluctuation ?
Professor COMMONS. Yes; and I apply it not only to the creditor
and debtor, but I apply it to employer and employee. The laborers
will benefit by having more steady employment and the business men
by getting their profits out of efficiency instead of speculation.
Mr. WINGO. And it is axiomatic also that if you reduce the risk
you decrease the margin in doing business ?
Professor COMMONS. Well, generally the fall of prices is something
that the employer can not control. He has no control over that.
Mr. WINGO. None at all ?
Professor COMMONS. I contend that it is the banking system of the
world that controls that.
The CHAIRMAN. This question has suggested itself, Doctor: Does
the individual producer who has been able to increase efficiency and
more production because he always seeks higher sales by lowering
the selling price—how could stabilization offset this kind of situation ?
Professor COMMONS. That gets back of the whole question of the
difference between a particular price and an average of all prices.
We are not going to increase credit to help just one man or one class
of people, or we are not going to restrict it because one class of



people are getting higher profits, and so on. We are going to have
our eyes on the average of all. That is, money and credit stand over
against the average of all prices.
Remember that these prices that are set out in this index do not
include automobiles and highly manufactured or processed commodities; they include staple commodities which have a standard
quality. That would make it possible, even if they should rise at all,
as Mr. Goldenweiser explained yesterday, it would make it possible
for this greatly increased processing which goes along in this unstandardized commodity like automobiles, and so on, to increase their
sales and profits through more steady employment in all industries.
But they do not enter into the index number or could not in a
workable index number
Mr. GOLDENWEISER. The Department of Labor has automobiles in
its index number.
Professor COMMONS. In the index which you put in now ?
Mr. GOLDENWEISER. In the index.
Professor COMMONS. That is one reason why I want to have that
index number investigated.
Mr. STRONG. DO you mean investigated by
Professor COMMONS. By the Federal reserve system.
Mr. STRONG. That is set up in this bill ?
Professor COMMONS. Yes.
The CHAIRMAN. Reverting to the return to the world-wide gold
standard, which I think we can reasonably assume is the tendency
and is being encouraged by the management of the Federal reserve
system here as a proper thing to do. That movement is proceeding. Supposing such a measure as is now under consideration
should be enacted at this time, it would divert, would it not, a return
to a world-wide gold basis; or, at least, if this law was applied to the
direction of the Federal Reserve Board, it would be applied in the
direction of holding up the general price level ?
Professor COMMONS. The world-wide price level.
The CHAIRMAN. TO that extent, then, it would be in conflict with
the natural law which would be in operation by a normal return to
a world-wide gold basis, would it not ?
Professor COMMONS. I t would not interfere at all with any natural
law. All the countries that care to keep their gold-exchange standard could do so, which includes, you must remember, a very large
part of the world—India, all of South America practically, all of the
minor countries of Europe, and partially includes Germany on a
partial gold-exchange standard, and I think all the continental banks
have provided for either complete or partial gold-exchange standards. Now, considering that in connection with the proposition that
all of these countries have central banks that manage these goldexchange standards, my idea is that the supply of gold will go much
farther and would not necessarily cause this reduction of prices. It
would still be a gold standard, but there would be also many varieties
of a gold-exchange standard.
I notice in reading recently the law providing the gold-exchange
standard for Bolivia, as worked out for them by Professor Kemmerer—he doesn't call it an exchange standard; he calls it a gold
standard—Bolivia is on a gold standard, and yet they haven't a
cent of gold in the country for monetary purposes.



The CHAIRMAN. The same thing is true of Poland, is it not?
Professor COMMONS. Yes; I think Poland and Austria certainly
are the same.
Mr. WINGO. Let me ask you why they haven't any gold in Bolivia.
For all practical purposes, measured from the standpoint of the
" pull" of the demand upon supply, there is to a slight degree that
" pull" of the demand on the gold there is in the United States?
It would just simply lessen or make it relatively not quite so great
a " pull " on the supply ? Isn't that true ?
Professor COMMONS. AS I understand it, they can carry a balance
in the New York banks, say, of $15,000,000. That is like any other
deposit. The New York bank has its reserves in the Federal reserve
system in whatever form it may be. Now, if Mr. Goldenweiser's
statement is correct, that there can be eighteen times as much credit
outstanding in the American banking system, eighteen times as much
bank deposits as there is gold reserve—I think I understood him to
mention it that way—then you can see that the demand on gold is
only one-eighteenth of the total needs of business. Bolivia is on a
gold-exchange standard, equivalent to a gold standard, even though
they have no gold down there. The $15,000,000 that they have in
the New York bank can go down there at any time as their reserve,
if they can afford it.
Mr. WINGO. While it is true that it is less, still there is a certain
pull on the supply of gold ?
Professor COMMONS. Oh, yes.
Mr. WINGO. Assume that they carry out the plans that they have
in view to put the world back on a gold standard, either actual or
managed or otherwise, in spite of that management won't there ultimately, unless there are some artificial checks, some ingenuities of
management, won't there ultimately flow from the United States
in the next 5 or 10 years some of this gold that we have ?
Professor COMMONS. I think that I should have to disagree with
Mr. Goldenweiser on that point. It all depends on whether he had
in mind a gold managed or gold actual standard; that is, Mr.
Strong's full gold reserve in each country.
Mr. WINGO. Will you give your views on that ?
Professor COMMONS. My views are that unless we have a worldmanaged gold standard, with many countries on a gold-exchange
standard, we shall have a continuous fall in the world prices. Does
that answer your question ?
Mr. WINGO. Yes; only it doesn't go quite far enough.
I think it is assumed that we intend to have a managed gold standard or an exchange-gold standard in most of these countries. My
contention is, 6r, rather, I got the idea—not my contention, because
I don't know enough about it—but I got the idea that notwithstanding the fact that we put in this managed gold standard, that while
you may not take quite as much gold from us as you would if you
had a free gold standard, yet there will ultimately be compelled a
certain amount of gold to go out even under a managed goldexchange standard. Is that not so ?
Professor COMMONS. It is not necessary if those countries are willing to trust New York and London. If they thought that the bankers there would confiscate their property, they would not do it. But



I see no reason why they could not remain on a gold-exchange
Mr. WINGO. Under that managed gold-exchange agreement they
could, if they insisted on it, demand actual gold, couldn't they ?
Professor COMMONS. I presume that the banks in New York, if
they were drawn on for gold—I am not certain about it, and as to
the terms of those gold-exchange agreements I would have to
Mr. WINGO. Let me give you this suggestion: While we did not
send out the two hundred million in gold under the agreement that
we had with the Bank of England—my recollection is that we did not
send that out at all
Professor COMMONS. NO.
Mr. WINGO. Yet, they had a right to demand that two hundred
millions in gold at any time that their conditions or necessities required it ?
Professor COMMONS. Yes.
Mr. WINGO. My understanding on these other agreements is that
they are on practically the same basis; and I assume that they took
that as the standard in making the same arrangement with other
Professor COMMONS. Presumably you are correct.
Governor YOUNG. That is true, Mr. Wingo.
Mr. WINGO. These countries have practically the same kind of
arrangement with the several banks of Europe.
Governor YOUNG. Mr. Goldenweiser explained that. He says that
it is a little different from the English agreement.
Mr. GOLDENWEISER. They are distinctly different for this reason:
All the other agreements are purely agreements to buy bills of exchange for the account of those banks if they so desire. The English
agreement was one to sell gold to them on credit. All the other
agreements are agreements to buy acceptances from those banks if
they choose to sell them.
Mr. WINGO. Yes; and we not only agreed to sell them gold on
credit, but that carried with it that the credit should be put off by
our maintaining an average amount of their bills purchased.
Mr. GOLDENWEISER. I t had an alternative, though. It had that
alternative to which I called Governor Strong's attention. The
other agreements are different in that they do not directly call for
gold, but they call for an agreement to buy acceptances from the
Bank of Belgium and the Bank of Poland as those banks may desire.
Mr. WINGO. I can reach the same thing a little differently. Suppose that under those agreements they should find their necessities
such that they should demand actual gold. They could get it under
those agreements, couldn't they?
Mr. GOLDENWEISER. They could buy those bills with gold if they
choose; yes.
Mr. WINGO. If they bought those bills and they were gold bills
they could demand gold, couldn't they?
Mr. GOLDENWEISER. Well, now, I think they could get gold. Not
just the way you say, but they could sell the bills and ask gold in
Mr. WINGO. Anyway, whatever may be the details by which they
get it—and as I understand it, it would probably be to their interest



not to do it—but I am speaking about the possibility. There is all
the time a possibility that changed conditions in anyone of those
countries might make them feel like it was their duty to themselves,
whatever might be the machinery, to bring actual gold there and
take it away from us?
Mr. WINGO. And if that

happened, I think we would all agree
that it would reduce our supply of gold approximately a billion
dollars if all of them should do it in the next few years to maintain
their standard over there. Did you get that proposition ?
Professor COMMONS. I say that this bill contemplates, and it must
necessarily contemplate, agreements with foreign banks of issue
regarding the policy of gold.
Mr. WINGO. May not that also be necessary not only with the gold
standard—maybe I am pointing out an effect and describing it as a
cause—I notice on the chart that we had before us this morning,
entitled " Wholesale Prices in the Principal Countries from 1925 to
1928, Inclusive," I notice quite a strong similarity in the wholesale
prices of the principal countries. It seems to be practically the same
with the exception of temporary contradictions. That is true,
isn't it?
Professor COMMONS. It looks that way.
Mr. WINGO. I don't know whether that is the effect of the management of those or whether the effect of other things brought about
this wholesale price level. But, anyway, there is an interlocking of
business the same as there is an interlocking of our use of gold,
which would make it necessary to manage from our own standpoint
these standards of those countries.
Now, getting back to this same chart here, I notice that in the year
1927 the line which indicates the wholesale prices in the United
States starts at the beginning of the year at about 98 and goes down
to a point somewhere in May about 93. Then it runs along until
along about November, October of November, it gets up to about 97.
Then it starts going down. Did you realize that from January to
about May, when that drop was going on, did you realize that that
was a permanent downward trend, or did you think it was just a
temporary recession?
Professor COMMONS. I could not guess.
Mr. WINGO. YOU did not?
Professor COMMONS. I agree with Mr. Goldenweiser entirely on
Mr. WINGO. I understand that you agree that at the time, at the
passing moment, it is impossible to determine whether it is a temporary increase or decrease in price or whether it is a permanent
swing one way or the other? You can not tell on that?
Professor COMMONS. May I explain?
Mr. WINGO. Yes.
Professor COMMONS.

If you straighten out that cycle, you necessarily straighten out the trend.
Mr. WINGO. I noticed, from what you said a moment ago, that if
we do not have this bill or some other device by which to stabilize
prices, in your opinion there is a tendency or an expectation of a
continued downward trend of the price level ?



Professor COMMONS. That is my idea of it.
Mr. WINGO. Is that contemplated by the other economists? Do
they think that the general trend is downward ?
Professor COMMONS. I think that probably we might divide the
economists somewhat into two classes; that is, those who are in favor
of a stabilization, like Ohlin and Cassel, foreign economists, and
similar economists in this country, like myself, who are expecting
a scarcity of gold, in that gold is not going to keep up with the demands of modern business; and those who are not afraid of the situation, like Mr. Goldenweiser and Governor Strong. They must have
in their minds that there is going to be an abundance in the future
supply of gold.
The CHAIRMAN. I S that confidence inspired by the fact that they
have discovered that countries can go back under the gold basis by
going back under a gold-exchange basis, and therefore will not take
as much of the metal as they otherwise would?
Professor COMMONS. Well, no. My idea is something like this:
We can make a contemplated return of all countries to a full gold
reserve, the gold being in each country separately, which would
necessarily reduce the supply of gold relative to the demands of
business, and thus reduce prices. They can contemplate that situation without a fall in prices, providing they have some confidence
back of them that there is going to be an increased quantity of gold
to offset that accumulation of gold reserves in the central banks.
The CHAIRMAN. But if they haven't got that it means that in the
final analysis we will have to have management, does it not, of the
Professor COMMONS. My interpretation is that in either case it
means management, whether the gold increased or not. If the gold increases, we have got to manage it to keep it from inflating the currency.
For example, if we want to get rid of the thing that happened in
this period here, from 1897 to 1914, if we want to get rid of gold
inflation, or if we want to get rid of gold deflation, which is a relative scarcity of gold compared with the demands of business, if we
want to get rid of either of them, we shall have to have a managed
The CHAIRMAN. YOU spoke a moment ago about this general movement to get back on the gold basis or gold-exchange basis; that is,
some countries; and you said that the confidence that these countries
might have in the management of the central banks of New York
or London was a considerable factor. Just what did you mean by
Professor COMMONS. Considerable factor in what ? In their agreements ?
The Chairman. In their agreements.
Professor COMMONS. In their readiness to make agreements?
The CHAIRMAN. Their confidence; yes.
Professor COMMONS. TO get back to the gold standard ?

Professor COMMONS. Well, I think that was pressed upon them by
the necessities of the world. They must get back to a gold standard.
The CHAIRMAN. Well, of course, there is a large amount of gold
that we have now, New York being the world's money center; and
leadership is bound to be exercised there ?


Professor COMMONS. In this country?
Professor COMMONS. Yes; I think so.
The CHAIRMAN. Therefore, the management


that is exercised by
the Federal reserve system, if it would prevail on the other banks of
issue of these different countries of the world, they are going to acquiesce largely in that leadership. If, on the other hand, the Federal
reserve system were poorly managed, lacking confidence in the system, what would be the natural consequence of that ?
Professor COMMONS. If we can not establish confidence, of course
we can not do anything. You have got to have international confidence. There is no question about that.
But I think in this way: It would be easier to bring these countries to a gold standard if they knew that the Federal reserve system
was going to prevent a fall in prices, that it was going to prevent a
rise in the value of gold.
England did not pay attention to that when she came under the
gold standard. She did not consider whether through the influence
of the Federal reserve system or other influences the value of gold
was going to be increased. So she doubled her burden of getting back
under the gold standard. She got under a rising gold standard and
a falling price level, instead of a stable-price level.
Mr. WINGO. Did she really have any choice, or was she compelled
to do it?
Professor COMMONS. I was talking with an English investor in this
country who belongs to the Liberal Party. He said to me that a
great mistake was made by England when she made that gold settlement, that debt settlement with us, in that she did not attach an
index number of prices to it.
The CHAIRMAN. I know that when I was in London last December
discussing the Senate amendment, there were two theories or lines of
thought on that subject. On one side, as you say, there was the same
line as the Liberal Party and the Labor Party, criticising the Baldwin regime, what you can term the Bank of England viewpoint.
That included a large part of the industrial interests of England.
Their expression, as I termed it, was to the effect that England had
been forced back under the gold basis prior to the time in which they
thought they were ready. The industrialists and liberals felt that if
they were forced to stabilize at that time, they should have stabilized
on a $4 basis instead of $4.86 basis.
Professor COMMONS. Then they would not have had falling prices.
The CHAIRMAN. They would not have had falling prices, and it
would help to rehabilitate more rapidly without the hardships that
exist to industry in England. On the other hand, the theory of the
class supporting the Bank of England is the opposite to that.
Mr. WINGO. I have had that contention made to me. I remember
it was made by one gentleman. I asked him, " If you were to be
stabilized on a $4 basis instead of a $4.86, you would not have been
on a gold standard; you would still have been at a discount? "
The CHAIRMAN. There is a certain school over there that feels that
the amount of inflation which would have been permitted under that
would have given them just the impetus that was necessary to have
rehabilitated their industrial situation quicker than they have been
permitted to do.



Professor COMMONS. Italy is going now to a gold standard. But
its lire is not worth 19 cents; it is worth 5 cents. Belgium has gone
under a gold standard, but it is not a franc that is worth 20 cents; it
is a franc that is worth 4 cents, isn't it?
Mr. GOLDENWEISER. Two and half cents.
Professor COMMONS. TWO and a half cents. Still, they are on a
gold standard. They have greatly defrauded their creditors. All
right. But still they are on a gold standard.
Mr. WINGO. I don't want to interject my opinion, but I can not conceive of how they are ever going to get back on a gold standard until
they can get to par.
Professor COMMONS. That is the way Mr. Baldwin thought and
others thought.
Mr. WINGO. The lire down there ought to be worth 19 cents, ought
it not?
Professor COMMONS. That is what Mussolini attempted to do,
Mussolini attempted to reduce the excess of paper money until they
could get the lire back until it was worth 19 cents in gold. He kept
that up and brought the lire up from about21/2cents to 5 cents. By
that time the whole industrial population, including all the business
men, you might say, of Italy, poured in upon him, and he changed
his mind overnight and said, " We will stop at this point and we will
not go any further." The lire was then up to 5 cents. There are some
things which even a dictator can not do, you know.
Mr. WINGO. I don't think that a dictator can do any more toward
stemming the operation of natural laws than Congress can do. Congress frequently tries to do it. They may divert the channel of the
law, but they won't really change the permanent effect. That is,
they can only make or alter the conditions under which natural laws
Professor COMMONS. DO you think it is a natural law that the lire
should be worth 19 cents in gold ?
Mr. WINGO. I got the impression somehow that that was the standard. That was my impression.
Professor COMMONS. There is nothing natural about it.
Mr. WINGO. Was it an arbitrary standard to start with ?
Professor COMMONS. Arbitrary; yes.
Mr. WINGO. Did the law provide for so many grains of gold ?
Professor COMMONS. They arbitrarily said that 19 cents gold shall
be a lire. Now they say that 5 cents of gold shall be a lire. Both are
arbitrary. There is no natural law about it. But both are on the
gold standard.
Mr. WINGO. Well, to get back to this proposition: As I understand
it, the school of economists to which you belong contend that this bill
will not only eliminate temporary fluctuations in the price level but
will check what you fear to be a disastrous downward trend in the
long-term swing of the price level ?
Professor COMMONS. I don't say that it absolutely will. It depends
upon the management.
Mr. WINGO. YOU hope that it will?
Professor COMMONS. I hope that it will. It gives a direction to the
Federal reserve system to use all of its powers to do that very thing.



Mr. WINGO. And the school to which you belong believes that
unless something of that kind is adopted, the downward trend will
be a bad thing ?
Professor COMMONS. It will be a bad thing.
The CHAIRMAN. Doctor, in that connection are you speaking of the
price level in the United States?
Professor COMMONS. I am speaking now of the world price level.
The CHAIRMAN. YOU believe that a bill similar to this would, of
course, enter into the world stabilization?
Professor COMMONS. Yes.
The CHAIRMAN. Wouldn't it?
Professor COMMONS. Yes.
Mr. STRONG. YOU think that the power is there? It is simply to
have it directed to such a use ?
Professor COMMONS. I think they have full legal power. There is
no question about that. They have power to make these agreements
with foreign banks. That is one great power. They have power to
make arrangements with those banks if necessary to determine the
rates of discount, so that there will be a certain ratio between the
rates of discount. If gold starts to go to one country, they by agreement about changing the rates can almost stop the movement of gold,
providing they have an agreement or a mere understanding.
Mr. WINGO. Still, there is a distinction between the power and the
exercise of the power. A blind man may have the power to walk
out of this window, but it would be criminal for me, if I had charge
of him, to allow him to do so.
Professor COMMONS. What is your application of that?
Mr. WINGO. My application is that there is quite a distinction between the Federal reserve banks having the power to buy and sell
gold to foreign countries and to pay all of the countries' foreign
bills, and telling them to bend their energies to detracting from their
inherent duty to serve commerce and agriculture and the needs of
the country as represented by the pressure upon them by the member banks, and going out in the world and trying to stabilize the
world currency and put the world central banks back on a gold
basis and furnish the world central banks with a basis for a gold
Mr. STRONG. That is what they are doing now.
Mr. WINGO. The reason I say that is that I feel that there is quite
a distinction between the two propositions. There is quite a distinction between my recognizing that in the past I have given somebody
power to do something, and then for me to come along and not only
give him power to do that, but for me to direct him to do it. That
calls for determination of whether I think that policy has been wise.
It may be right in some instances.
Take this English case, for example. I thought we might all
agree that that was proper from a selfish standpoint at the time.
But I notice that sooner or later we start on this course, and I fear
that we will reach that point where there will be a very decided and
sharp division of opinion among the people of the United States
as to whether some other arrangement will be made, some unwise
one; and I am afraid, knowing the tendency of the American people,



measured by their actions in the House, that regardless of their
wisdom or their conclusions, if they act upon that conclusion, it will
have a very serious effect upon the management of our domestic
credit system, because they can bring pressure to bear upon this
Federal reserve system through political action; and I am afraid
you will provoke political action.
Professor COMMONS. First, there is a distinction in this bill, which
might be said to be fallacious, between the stable purchasing power
of the dollar and the stable gold standard. There is no such distinction. If we stabilize the purchasing power of the dollar in
America, that is going to be stabilizing other countries through these
agreements which they have already made. It is going to bring other
countries, just as this chart shows, to somewhat the same price level,
relative price level, as our American price level. So that the direction to the bill to stabilize the purchasing power of the dollar, when
it comes to these negotiations which they have already been making
since 1925 with foreign countries to get them on the gold standard,
means to get them to something like the stable purchasing power of
the dollar.
Mr. WINGO. Before you get away from that I want to call your
attention to what is in my mind. You are proceeding upon the theory
and the assumption that the conditions which are facing you now
will in the main obtain in the future permanently. I remember
very well some of the arguments that were made right at this very
table in 1913, when we sat writing the Federal reserve act.
But I know that we put some things in that act, and there are
some things in that act that would not have been put in there, and
there are some things that we wanted to have put in there that would
have been put in there if we had anticipated anything like the World
War. In other words, we had certain theories about what demands
would be made and the extent of the inflation that would result from
reducing the reserve. And look what happened. Before we could
fully install this system the world turned topsy-turvy, and you have
never had a test of the Federal reserve system, and that is the thing
that makes me so cautious now.
I am one of those who believes that from the standpoint of economic activities we are so interwoven with the activities of the world
that we can not escape it, whether we want to or not; but will that
condition obtain in the long run of years? I believe it will not,
because as I view political conditions in foreign countries as well as
the economic conditions I think there are two peoples that are deliberately intending to come to grips with us on the battle field inside of
10 years' time. If that is true, why should we assume now the burden
of placing them back on the gold standard %
That is the thing that makes me cautious. I want to avoid not
only entangling alliances, foreign alliances in a political way, but
I want to avoid them in economic and banking ways, so that we will
have at all times freedom of action.
Professor COMMONS. In the first place, this is 15 years after that
act. Since that time you have had a world revolution, the greatest
the world ever knew. That has brought new conditions and new
responsibilities and has discovered new powers, namely, the open
market operations, which the Federal reserve system never had
before. Now we are proposing to regulate these new powers.



Mr. WINGO. When did we give them that power?
Professor COMMONS. In 1913, open market operations.
Mr. WINGO. We knew it, and contemplated that.
Professor COMMONS. What was the quantity of Government bonds
at that time?
Mr. WINGO. Less than a billion dollars, but under the open market
operation they might deal with something else besides bonds.
Professor COMMONS. We do not propose to let them deal in private
Mr. WINGO. Under the statute they could buy bills that were eligible for discount in the open market.
Governor YOUNG. They could buy bills of exchange, acceptances,
warrants of political subdivisions.
Professor COMMONS. But can they buy United States Steel stocks
and bonds?
Governor YOUNG. NO.
Mr. WINGO. Not United States Steel stock and bonds; they can buy
acceptances and bills of exchange, any paper in the open market that
is eligible for rediscount, unless they have changed the statute.
Governor YOUNG. I do not think they can buy promissory notes
under the act.
Mr. WINGO. They can buy acceptances. I do not mean the ordinary promissory note, but they can buy any acceptance, which, for all
practical purposes, as to the effect of it, is the same thing; it is
another form of indebtedness, and there are some of us that will
remember that they used to laugh at me because I insisted from
the very beginning that the open market operation was the most
powerful leverage they had. I always contended that our experience
with the discount rate would be far different than the experience of
the Bank of England. The open market operation is not something
we did not anticipate. I anticipated it, and so did Mr. Paul Warburg,
and many others.
Professor COMMONS.. YOU are quite correct, but did you then have
the quantity of Government securities?
Mr. WINGO. Oh, no; and never anticipated the extent, though we
recognized the power, and it is strange the board did not earlier
recognize it.
Professor COMMONS. That gives them more power than they ever
had before, and they did not discover that until 1922, that they had
that tremendous power. They now have now powers.
Now, would you not say that, as a general rule, new powers that
developed unbeknownst to the original legislators might perhaps
require 15 years later some corrective treatment?
Mr. WINGO. Certainly. You misunderstood entirely what I said.
It not only requires it, but I say that nothing can be permanent; we
can not figure out a policy that will entangle us with foreign banks
of issue. I am perfectly willing to promote our trade, or, as the
original act says, to accommodate the commerce and agriculture and
industry of our country to enter into these arrangements that will
help our foreign trade, our cotton export, and everything else. I am
willing to do that at all times. But I want us to be in such a position that we can withdraw when changed conditions make it no longer
to our selfish interest to continue.




Professor COMMONS. Suppose that I call your attention to page 2,
to the lines which relate to foreign banks, and you will notice it was
put in the negative and not positive:
Relations and transactions with foreign banks shall not be inconsistent with
the purposes expressed in this amendment.

That does not authorize them to deal with foreign banks; that is
accepting an existing state of fact.
Mr. WINGO. I am glad to have your advice on it, because I pointed
that out to the author of the bill, that that is what I call one of these
"negative authorizations." In other words, they are dealing now
under the authority to buy and sell gold. Now you have an authorization by way of negative, and what is that? That means the same
thing as if you had it read this way:
Relations and transactions with foreign banks shall be consistent with the
carrying out of the purposes above expressed.

And then you add to it a new authorization for these foreign
That is what I contend, that that is a negative authorization—what
we legislators call a negative authorization—and every time we sit
around a committee table we are constantly on the lookout for the
negative authorization, an authorization put in the shape of a limitation when no authorization ever existed before.
Professor COMMONS. We started off by showing the terror and
suspicion that the American people would entertain if we made
these foreign agreements, trying to put Europe on a gold standard.
That is the way you started. Now we switched it to saying that
we should require and command that they should do these things.
Mr. WINGO. You misunderstood me entirely.
Professor COMMONS. A S I understand it, what that amounts to is
the thing that is already accomplished. They have been making
these transactions with foreign banks. They report them every
month, or at least in their annual reports of what they have done,
and this bill does not take any position upon that one way or
another. It simply sticks to an accomplished fact.
I do not see any difficulty in changing it in the way in which you
would put it—" shall be consistent with the purposes of this act,"
because this act has introduced a new purpose, namely, the purpose of
stabilization, and, we might say, those relations and transactions
with foreign countries shall be consistent with this stabilization
Mr. WINGO. YOU do not conceive what I have in mind. My agent
may go out and he may abuse his agency and do things that I do
not think he should have done, but there may be reasons of expediency that restrain me from discharging him; but simply because
I do not condemn by an express declaration what is done, but simply
keep quiet, that is not an affirmative authorization to him to commit
the same thing again.
I am so convinced that at all times the ingenuity of those who are
in charge of the Federal reserve bank at New York City will enable
them to find perfectly lawful means under existing law to meet the
necessities of our foreign trade from the standpoint of our own
selfish interests that I do not want to give them an absolute leeway,
by a negative authorization, to change and make one of their major



purposes the doing of certain things abroad that may be perfectly
all right now; and, however much I might approve it in the future,
I anticipate a condition that might arise when the majority of the
American people would not approve, and it would bring such political pressure to bear upon the Federal reserve system that it would
cripple its efficiency in handling our domestic affairs.
I am proceeding with caution in directing them to inject themselves into something that may very well bring us trouble sooner or
later. That is my fear about that feature of it.
Professor COMMONS. That is to say, if this bill starts out with the
idea of stabilizing the American price level—and, incidentally, you
know our dependence upon the world at large—and if we give them
instructions in order that we may stabilize our own domestic price
level, then we also say they shall not make any agreement with any
other country inconsistent with stabilizing our domestic price level.
The CHAIRMAN. This thought was occurring to me in that connection: Suppose that this law were enacted and the management of
the Federal reserve system should proceed to operate under it and
it would result in holding the price level where it is now, or, maybe,
drop to a much lower figure. Suppose, too, that in that case that
operation affected the price level in otner countres, as it would to
some extent. Take, for instance, England. Suppose England prefered to have prices recede to the 1913 level; would we not be in
rather a complicated position to proceed with the opeartion[operation]of that
stabilization law here ? Might that not bring us into a complication
with England or any other country that might have a different idea
of price level than we have ?
Mr. STRONG. That is the object of that clause.
Professor COMMONS. Supposing that they wanted a different idea.
We are now supposing that they want to get off the gold standard ?
Professor COMMONS.

Well, I do not know how to answer that,
because I can not think of anything like that.
Mr. WINGO. You can anticipate a condition whereby Italy and
Japan would have a price-level interest contrary to ours.
Professor COMMONS. They might be on a silver basis; they might
be on any other basis, but if they are on a gold basis or managed
gold basis the price level would run pretty close in its rise and fall to
The CHAIRMAN. Such a condition might prevail that the drainage
from some country might force that country to go from a gold basis
to some other basis.
Professor COMMONS. That would be because they were not wealthy
enough to command the gold. A poverty-stricken country might be
compelled to do that. They would then have paper inflation.
The CHAIRMAN. SO you do not think there would be any embarrassment coming to us as managers of this gold situation ?
Professor COMMONS. I can not see any.
The CHAIRMAN. During the operation of a bill of this nature?
Professor COMMONS. I can not see any.
The CHAIRMAN. YOU can not see any international complications
coming as the result of our assuming that responsibility of leadership
which would result in the enactment of this bill ?



Professor COMMONS. I do not see any.
Mr. STRONG. But even if there were this is an "America-first"
Mr. WINGO; Suppose that we go ahead and make these arrangements, and suppose that in response to the demand of these countries
for our gold we then do the obvious thing that we think our interests
require, we put up the discount rate so as to try to hold the gold
here. That would have an economic effect the world over, would
it not?
Professor COMMONS. It would tend to bring gold to this country.
Mr. WINGO. In other words, if we got into that situation, say, that
Italy and France and Germany should all about the same time find
it to be to their interests to command the actual gold, and that we
conceived that it was to our interest to hold that gold. Then the
first step we would take would be raise the rediscount rate, or the
discount rate, the price of gold, and put it so high above theirs that
it would compel the pull toward the United States instead of away
from it, and that would have an immediate economic effect not only
in our own country but in Europe, would it not?
Professor COMMONS. If we contemplate a situation like that, where
all of Europe is arrayed against us, that might be done, but I think
we have other instruments besides the discount rate; we have many
retaliatory measures.
Mr. WINGO. Suppose we would use that or any other retaliatory
measure. Then you would have a state of war existing, not by conflict of arms, but you would have a state of economic war that will
tend to produce friction and it would have a psychological effect and
destroy confidence somewhere.
Professor COMMONS. From all the evidence I can get—and Mr.
McFadden would know much better than I, because he has been in
Europe recently—for the present and for as long as we can see in
the future, they are our debtors. They are going to be afraid to take
any hostile action toward us on the money question. That would be
my way of saying it. We are so much more powerful than any of
them economically, not only in our industries and population and
fighting ability, but also in our control of the money of the world,
that I doubt whether it would be necessary to take that into account
in drafting a bill for that purpose.
Mr. WINGO. We thought in 1913 that the world could not afford
the enormous expenditure of billions of dollars and the loss of millions of men in the World War, but yet we went through it, and
.somebody said, though not I, that the world is better off economically
than before.
The CHAIRMAN. I think we have to realize that we are in a new
era so far as international finance is concerned, brought about by the
war and the changed conditions since that time and the fact that we
have been made the reservoir for 50 per cent or more of the world's
gold, and that is a leadership that implies a great responsibility.
My observation is, from my study of the situation abroad, that a
spirit of cooperation is being manifested in, as well as a keen observation of, the management of this responsibility that we have here, in
which they have a vital interest. In other words, they feel that the
responsibility, for instance in London, has been changed to New
York, and while they feel that they were the money center of the



world and managed it quite capably, as was demonstrated at the outbreak of the World War in 1914, they are anxious to see this system
so managed to-day that it can cope with any emergency similar to
that, and to my mind that is one of the vital things in our whole
situation to-day, that we keep this Federal reserve system in a position where it can discharge to the fullest extent the responsibility
as the world's banker to-day.
Mr. WINGO. The gentleman knows there is quite a difference, not
only in the economic condition but in the psychological condition,
between both Italy and Japan on the one hand and England on the
Professor COMMONS. I would like to state my idea. We know of
this feeling of the foreign nations' dependence upon us, and this bill,
if adopted, would not only not interfere with those cooperative
arrangements but would greatly encourage them, because then they
could feel that they have a stable American dollar, that we are not
going to let politics or any other influence change that dollar, so
that they will have at least one country controlling half of the gold
of the world that has pledged itself, we might say, to the world
that we are going to stabilize our own dollar and that therefore they
can trust us and make any arrangement with us, and that we will
carry out the contract, in any creditor or debtor arrangement, that
we are not going to get them in debt to us and are not going to
increase the value of gold after they have agreed to pay so many
dollars in gold, that we are going to keep it where it was.
I think that it would greatly facilitate all of those things.
The CHAIRMAN. I think you are absolutely right. Of course, we
must recognize that this close relationship which has grown up
because of the conditions we have been discussing here has resulted
in the opportunity to work with these central banks of issue in the
world to an extent never dreamed of when we created the Federal
reserve act, and that in that lies an opportunity for splendid leadership ; and if that confidence can be maintained, which apparently is
growing now, it will help us to help the world. Of course, we have
to recognize that with this world responsibility of financial leadership which is now lodged in New York, hundreds of millions of
dollars are now subject to call in New York, which call demands
must be met in gold. As we continue to occupy that position more
and more, the world's money is bound to come to New York, because
dollar exchange must be had.
Professor COMMONS. YOU fear that maybe they will suddenly
The CHAIRMAN. N O ; I do not. I can not imagine how they can
call unless we should have a complete turnover in the balance of
trade, where the trade should be against us and where we would
become a borrowing Nation instead of a lending Nation.
Mr. STRONG. They would be less apt to call if our dollar would
have a stable purchasing power all the time.
Mr. WINGO. I do not know how they will feel to-morrow; I know
how they feel to-day.
When the chairman was talking about the opportunities for world
leadership, I could almost see Woodrow Wilson at Versailles talking about the world leadership of the United States, and we all
thought at first that was fine, but things have shifted and so we do



not know. We are a little bit more cautious, at least I am, about
this entangling business abroad. We are not sure we want to get
into it even for our own selfish interests and burn our bridges behind
us. We want to have a way open to get out at any time.
The CHAIRMAN. We are in it financially.
Mr. WINGO. That is what Woodrow Wilson said; that is what the
League of Nations said, that we are part of the world and can not
escape it, that we ought to go over there and go in the front door
and hang up our hat and coat, instead of slipping in the back door,
as we are doing now, but the American people did not think so, and
I am afraid the American people would come to the same conclusion
about this entangling financial policy.
I am not criticizing it, but some of these days somebody is going
to ask why it is.
Mr. STRONG. YOU did say you could have us at all times close to
our hats and coats.
Mr. WINGO. Well, as my youth passes I get more cautious. I
want to save my coat even if I may lose my hat.
Professor COMMONS. We have started out to stabilize the purchasing power of the American dollar and not have domestic fluctuations; but we find ourselves in an entangling alliance with foreign
countries owing to the foreign exchange situation, and therefore,
incidental to that, these Federal reserve people have been compelled
to have some understandings or relations about it growing out of
our existing power, in order that we might protect our own American dollar.
Mr. WINGO. That is the obvious answer, and I made that in
nineteen something or other when I was out defending the League of
Nations. I pointed out how we were interwoven with them, how my
cotton farmers had to sell 65 bales of cotton out of every 100 we produce in Europe, and that we had a cold-blooded pocketbook interest in
maintaining world conditions, and that we ought to have some such
arrangement, but my constituents looked suspicious and said, " That
may be all right; we will vote for you, but we do not know about
that." My people were against it and the American people were
against it, when we made the same argument then.
I do not want to get into a financial League of Nations. But if we
must go in, I do not want to go into the back door of the League of
Nations. If we are going in, let us go in the front door and say that
we are the largest stockholder and must be chairman of the meeting.
But pardon me for diverting you from an economic discussion.
Professor COMMONS. I agree with you. I am from the West.
We are dead against the League of Nations and all that sort of thing.
Mr. WINGO. Maybe I am wrong, but I am just expressing our fears.
Professor COMMONS. We vote for America first, the same as your
constituents, and the object of this bill, as I understand it, is to pay
attention to America first, and, incidentally, as part of that proposition to permit the reserve system to go on and have relations which
we have authorized in 1913.
Mr. STRONG. But not to the detriment of the stabilization of the
American dollar.
Professor COMMONS. I had another thing that I thought might be
brought up, the relation to the stock market and the commodity
market. I do not know whether you care to have that.



The CHAIRMAN. Suppose you proceed with your statement on that.
Professor COMMONS. On the speculation in stock and the leakage
of Federal reserve credit I should agree with the witnesses who
appeared before the Senate committee the other day, including, I
think, Professor Sprague, from Harvard, and Governor Young. I
may be wrong about that, but I would agree that we should not pay
attention to the stock market; that we should direct our attention to
the commodity market. The stock market is entirely different from
the commodity market. In the stock market stocks and bonds are
always of present value for future expected income running far into
the future, and they carry their own correction.
I have compiled the latest figures which I can find on the earnings,
the yield of stocks. The yield of bonds is now 41/4per cent. The yield
of common stocks, as I figured it out from the Statistics Corporation
figures, is 4.63 per cent.
Now, look what is going to happen to common stocks if they have
got their yield down to such a point that they can earn little more
than you can earn on bonds. The rediscount rate has risen from 3 1/4
to 4 per cent; commercial paper is from 41/4to 41/2per cent, and it is
likely that already the stock market has reached the point where it
must bring about a deflation, because the earnings will not support
the high stock prices. Whether that will come soon or late one can
not tell.
The stock market is speculation on future earnings. Those future
earnings consist of two things, the expected prices and quantities of
products and the expected costs of operation; that is, the net earnings
are what those stock speculations depend upon.
If they could see an expected rise of commodity prices, the stocks
might go up; if they could see an expected fall of commodity prices,
the stocks might go down. They are influenced by considerations
which look to the future of the commodity markets and not to the
So I would say that if people want to speculate in the stock market
upon these future expectations, and if the money does leak out
so that they can get possession of it for that purpose—and the recent
figures show that the banks are withdrawing that money from the
stock market and it is coming in from independent investors—if so,
we can expect that the stock market should be left to itself just as
under this bill we would leave every commodity market to itself.
The CHAIRMAN. DO you mean there that the money is being withdrawn by the Federal reserve member banks ?
Professor COMMONS. That is what I understand.
The CHAIRMAN. And it is coming in from other banks and other
Professor COMMONS. From other banks and corporations.
Now, if they wanted to put their money into boosting stocks, why
should that affect the general commodity market? Why should it
be allowed to divert the Federal reserve system from a proposition
of stabilizing commodity prices?
Only about 6 or 7 per cent of the total credit goes into the stock
market. That would be slight compared with the great bulk that
goes into the commodity market. That is the great and important
thing on which the prosperity of the country depends.



The stock market is a speculation on what that future prosperity
is going to be, and we have enough of this situation to make it rather
a consistent statement that in any period of rise and fall of prices
the first market to be affected is that most elastic market, which
is the stock-exchange market. I t is going to hit there first; it is
going to raise their prices first or cause them to decline first. They
are kind of a forecaster of what is to follow.
Then come along the most sensitive of the wholesale prices, like
scrap iron or pig iron, those whose supply can not be increased
rapidly. They will be affected next. Then other commodities.
Then you would have affected wages and rents and, last of all, I
think, retail prices.
Now, in the process of stabilization, we have to pick out which
one of those indices is to be used for stabilization purposes. Are we
going to use the index of stock prices or the index of retail prices
or the index of land values? Are we going to use the wholesale
price index ?
My notion is that the wholesale price index is the key one, because
that is an index of the prices that employers get for their output,
that producers get for their output, out of which they pay their wages
and pay their interest, and so on.
So that I should think that this investigation proposed here would
come to the conclusion that a properly constructed and weighted
wholesale commodity index is the key to the regulation of stability,
and that other fluctuations like retail prices and movements of stocks
should be disregarded except in so far as they tend to modify this
commodity index.
So that I will classify stock-market prices along with rents and
wages and retail prices as things that we do not need to pay attention to when we are looking forward to keeping the business of the
country continuing in prosperity, keeping employment as stable as
possible, and thus having the productive energies rather than the
consuming energies of the country, or the speculative energies of the
country, stabilized. You can not stabilize everything; that is true.
Now, this bill leaves that matter open. It says that the board
shall investigate the different price levels. I should hope that a very
thorough investigation of the relative claims of these different indexes should remain, and this I want to state as my opinion on a
subject matter which I should want to see submitted to that investigating body.
This is the chart of average wholesale prices, with individual commodity fluctuation, introduced by Mr. Goldenweiser yesterday, and
the average is the figure for the all-commodity index, which I presume is the Department of Labor chart, showing the average movements and some of the particular movements.
Mr. GOLDENWEISER. YOU should also point out the fact that it is
on the 1926 basis, and that the all-time chart is on the 1913 basis.
Professor COMMONS. Yes.
Mr. GOLDENWEISER. The Bureau of Labor Statistics now publishes
its index on the 1926 basis as 100, and that is why this chart ends
in 97 at present instead of 150.
Mr. WINGO. Will the legend show in the record that 1926 is the



The CHAIRMAN. This chart has already been inserted into the
Professor COMMONS. That difference in the basis would greatly
reduce the apparent fluctuations of wholesale prices. If you used
1913 as the base, those wholesale prices would move up and down
somewhat differently than they appear, would they not ?
Mr. GOLDENWEISER. I think so; yes.
Professor COMMONS. This wholesale price average of all commodities, representing the great quantity of business transacted by employers, you may say, of the country, is set over against the total
money supply and credit supply. There go on, around that average,
many individual fluctuations. This [indicating] is cotton; this [indicating] is livestock; this [indicating] is grain, and so on. It is not
a price fixing of any of those individual commodities, but it is a
stabilization of this average.
Now, the serious question arises, the most serious one, regarding
the equity or ethics of an index number, and that is this: When the
cotton rises in price like that [indicating], and thus brings the
average like that [indicating]—I am pointing to the years 1924 and
1925—the question is, Should the influence of cotton be nullified by
a credit policy which would bring down the average of prices and
keep them stable ?
Mr. Goldenweiser took the ground that that would be unjust to
the cotton people, be unjust to the other people, possibly, if we are
going to lower their prices in order to keep that inflation from
That goes exactly to the essential nature of the difference between
the average and the particular prices. I agree that when the prices
go up by any influence whatever, whether it be shortage of cotton
or some other thing, and there is not a counterbalancing fall of prices
on some other commodity, then it is proper, under a theory of stabilization, that the price level as a whole should be reduced if monetary policy can do so. It all depends, you see, upon the general
drift of a few prices or upon the general drift of all prices. Ordinarily, if we plan to have a stable price level, we would find that
some prices are moving up and some down. That is evidence that
no action need be taken if they counterbalance each other. But if
enough of them start up and there are none or few that start down,
that indicates that the general price level is rising and that therefore
a stabilization program would require action.
As to the differences between individuals, that would work no
injustice between the cotton people and these other people. Their
quantity of cotton exchanged for a quantity of livestock would
remain the same, only it would be on a lower average price level; it
would not be on a high level like this [indicating on chart], but on
a lower level. The difference between the two prices, the high price
of cotton and the low price of livestock, would remain the same as it
was, because that difference does not depend on the quantity and
velocity of money but upon differences between the quantity of
cotton and the quantity of livestock. But, instead of measuring
the difference on a high level of prices in general the price of cotton
would not go quite as high and the price of livestock would go a
little lower. Conversely, if the average price level were raised, then



the price of cotton would rise more on account of the general rise,
and the price of livestock would not go quite as low for the same
reason. The same difference between cotton and livestock would
remain, but on a higher average level.
Mr. STRONG. And they will be greatly benefited.
Professor COMMONS. The relation between the cotton growers and
the livestock people would be the same as it is now, only it would
be on a lower or higher level of prices in general.
Mr. STRONG. And, as a general proposition, they would be greatly
benefited in their business if all other commodities were on a stable
value or close to it.
Professor COMMONS. I should say that that would follow. When
you consider that this average is made up of 550 commodities, all
of them moving in all directions, if there are many prices moving
upward and no compensating offset moving downward which keeps
the average stable, that indicates by its very nature that generally
the average level is rising, and if the theory of control by the Federal
reserve system is correct, then they should exercise their power.
But the spread between individual prices, owing to differences in
costs, efficiency, oversupply, or undersupply, and the like, would not
be changed, and no injustice would be done as between them by a
stabilization policy.
I want to say this: I do not know whether I emphasized it before;
that you can not wait. You have got to start early, and the Federal
reserve system has got to start two, three, and four months before
that peak is reached. I t has got to start five or six months often
before the effect of the Board's action can be reflected in the general
commodity markets. Its influence has got to pass through the stock
market, possibly through speculative markets, before it begins to
affect the commodity price level, and, consequently, unless they have—
and I think they now have—sufficient statistical data for their forecasting, unless they can have a forecasting system which tells them
what the prospects are several weeks and months ahead, they can
not operate the system. It requires a highly technical ability and
an enormous amount of good judgment in order to tell, and still it is
just experimental, as we know. But by experience they gain more
knowledge of just what to do, and when they have so many hundreds of factors to deal with their judgment has to be exercised.
Mr. CANFIELD. AS I understand your entire statement, you feel
that unless we have some plan whereby we can stabilize prices, deflation will continue until it reaches the pre-war level ?
Professor COMMONS. That is my idea; yes.
The CHAIRMAN. Doctor, there have been a few questions added to
the list during your testimony, and I will propound them and you
may make such answers to them as you see fit.
This is the first question:
As the price level fell, giving gold greater value, would not the
production of gold tend to increase ? Mining costs would certainly
be less.
Professor COMMONS. That certainly would be the effect. I recognize that. Notice this, that mining costs nowadays are mostly machinery costs; they are not labor costs so much as they were before.



You can go through a gold mine and see what is done and you will
see that nine-tenths of the work is done by machinery, and I can not
say that that cost will be very much affected.
Mr. STRONG. Will not the needs of the country, as we increase in
population and development, cause an increased consumption of gold ?
Professor COMMONS. The only question is whether the rate of
production of gold will increase as fast as the commercial business
in the world and as more people are going into the commercial end
of the world. I see a greater increase, far greater increase, in population and business than I do in the production of gold.
The CHAIRMAN. Under those circumstances, inasmuch as we are
using $200,000,000 worth a year commercially, would it not be well
perhaps to do something to discourage the use of that amount of
gold? That would be one factor that would be equal, of course,
to increasing production, by conservation.
The next question is:
How could credit be so managed as to increase with increased
efficiency in industry generally ? Why should industry ask for more
credit with lowered costs?
Professor COMMONS. YOU are pointing to my assertion that there
is no reason why the price level should fall when efficiency increases.
Efficiency comes individually—by individual firms. I t does not come
in all firms. One firm or another will be increasingly efficient, but
that does not necessarily mean that the total output of that industry,
measured against the total money and credit that is offered to furnish that industry or all industries their purchasing power—it does
not mean that the latter should necessarily decrease when output is
increasing. Furthermore, this efficiency argument is based upon
American efficiency. Other countries have not increased in efficiency
as we have, and the world price level would hardly be said to be
affected by American efficiency. It might be.
The CHAIRMAN. The next question is interesting because of what
you have just said:
England has to buy nearly all her raw materials and foodstuffs.
When she stabilized on a $4.86 basis, did she not buy all those things
at a proportionately lower price and at the same time, by the same
token, increase the real wages of labor?
Professor COMMONS. I can not answer about the price element. I
can answer about the quantity of business, the quantity of labor that
was employed in England. England has continually, owing to the
falling prices, mainly the falling prices, since 1920 and up to the
present time, had the largest number of unemployed working people
of any country in the world. She has had a terrific deflation, and
although she might have bought raw-material commodities cheaply,
yet she had to sell her commodities at such a diminished price that
the business men were simply up against it; they could not employ
anybody. So she has had to call upon her taxing power to feed
millions of people, more than any other country.
The CHAIRMAN. I was told in December that they have an unemployment there of 1,150,000 at the present time. Doles are still being
handed out. One problem is that they can not divert trained labor
from one vocation to another. They have tried to send some of



their unemployed men and women to some of the colonies, but as
some of the colonies have objected to taking care of England's
problems in that respect that has not worked out quite successfully.
The next question was:
The first, or one of the first, three-million-share days on the stock
market was in March, 1926, when the market had a big break. Was
there not a great increase of velocity then ?
Professor COMMONS. That is a pretty good question. There was a
big break when the velocity was increased at the same time.
The CHAIRMAN. SO that the velocity in a declining market might
be just as rapid as in an increasing market?
Professor COMMONS. In that particular case, that looks so. I would
like to look into that three-million-share day, when there was a
declining market. I should expect again, if the stock market should
start to fall, that we would have another big three-million-share day
and a tremendous velocity without any corresponding decline in the
quantity of money. In that case I would say that I would have to
bring in my principle of futurity. I would simply say that everybody expected prices to fall and they hurried to sell before anybody
else sold.
I can not figure how much effect that is going to have on the volume
of credit.
Mr. CANFIELD. AS I understood you, you do not feel that the increased supply of gold will take care of the increased demand for
Professor COMMONS. I do not think so; that is, on a full gold standard where each country has all of the gold necessary as reserve to
meet its demand liabilities.
Mr. STRONG. That is, the fear of a full gold standard and the need
of a managed gold standard.
Professor COMMONS. But I do not have the fear in the case of a
managed gold standard, which includes along with it a considerable
amount of gold exchange standard which is also equivalent to gold.
Any other questions?
The CHAIRMAN. I think that is all. The meeting will now adjourn.
(Whereupon, at 4.20 o'clock p. m., the committee adjourned.)


Monday, April 30,1928.
The committee met at 10 o'clock a. m., Hon. Louis T. McFadden
(chairman) presiding.
The CHAIRMAN. The committee will come to order.
This is a resumption of the hearings on H. R. 11806, the Strong
bill on stabilization. We have here this morning Dr. Adolph C.
Miller, a member of the Federal Reserve Board. We shall be very
glad to hear your, Doctor Miller, on this subject. You may make a
statement first, if you desire, then we will question you, perhaps,




Mr. MILLER. I have looked over this bill mainly with the thought
of addressing myself not to the detail and phraseology of the bill
but to the fundamental ideas that are embodied in it and the changes
that would be involved, if the bill should be enacted into law, in the
whole conception of the Federal reserve act and the procedure of the
Federal reserve banks with regard to their more important functions
in relation to credit and currency.
The bill falls into three broad divisions. The last of these (providing for an amendment to section 28 of the Federal reserve act)
makes extensive provision for certain investigations to be undertaken
and carried on by the authorities of the Federal reserve system. Let
me say immediately that with reference to this I am sympathetic.
I do not mean that I approve of all the details of the paragraph, but
favor investigations by the Federal reserve system for the purpose
of getting a fuller understanding of the economics of credit, currency, and prices, their relation to movements of industry, commerce,
and so on, I am altogether sympathetic.
The next division is what is denominated here paragraph (i).
That might be called the publicity section of this proposed amendment. I do not like this particular publicity proposal, but I can
readily see that a clause providing for publicity might be drawn that
probably, in time, would be productive of distinct improvement in
the administration of the Federal reserve system and increased
appreciation of its workings and its limitations by the public. If
the committee desires, when I am through with what I have to say
on paragraph (h), I will be very glad to give my ideas in detail,
as well as point out some of the difficulties that I think will be
encountered under any attempt at organized publicity in connection
with the credit policies of the Federal reserve system.
The CHAIRMAN. I would like to say here that the committee will
be very glad, Doctor Miller, to have that suggestion from you in
detail, giving us the benefit of your judgment covering that subject.
Mr. MILLER. Shall I go on with that now or come back to it later ?
The CHAIRMAN. YOU may come back to it later.
Mr. MILLER. Then we come to the major proposal contained in
the Strong stabilization bill, to wit, paragraph (h).
I think legislation of the character contemplated in paragraph (h)
is inadvisable. When I say that I am putting it rather more mildly
than I feel it. I would say that it was perhaps objectionable, and
mainly objectionable because it is premature and not founded on any
solid basis.
Now, in saying that, and particularly with my good friend, Mr.
Strong, the author of this bill, opposite me, I do not want for a
moment to leave the impression that I think the last word has been
said or written in the science or the practice of reserve banking:.
I am. not against innovation simply because it is innovation. I am
not a banker, either, by profession—that you know—but what you
may not know is that I am not even a banker by instinct. I believe
that experimentation is the law of life. The Federal reserve act, at
the time of its passage, was opposed by many who now acclaim it as
perhaps the greatest piece or constructive legislation that our Con-



gress has ever enacted. They regarded it as a dangerous innovation,
put through by men who were ignorant of the subject matter on
which they were undertaking to legislate.
Mr. KING. Have you stated for the record what your business is?
Mr. MILLER. I was in university work before I came into the
Federal reserve.
Mr. KING. Professor of economics.
Mr. MILLER. Professor of economics; yes. I ought perhaps to add
that my general situation in life was such that I had a very considerable burden and variety of other contacts and responsibilities,
so that I was obliged always to keep my feet right on the ground.
Mr. KING. I can see that.
Mr. MILLER. My experience was one that extended far beyond the
walls of the university.
I repeat, therefore, that in opposing this paragraph it is not
because I am constitutionally averse to innovation in legislation,
even in legislation where perhaps there is more than the ordinary
justification and warrant for making haste slowly; for being, in
other words, conservative, if for no other reason than that the public
is naturally apprehensive about anything that touches the monetary
unit or the credit machinery.
On the other hand, I am not one of those who think that because
of the poor performance that many of the central banks of Europe
gave (possibly pardonably during the war, but probably not so after
the war) that therefore we should regard the traditional working
principles of note issue and reserve banking as outworn and to be
scrapped and thrown into the discard. I think the experience of the
war and the years immediately following—that is, until the period
of financial reconstruction and monetary restoration was fairly under
way in 1925 (when England restored the gold standard)—is not a
fair illustration of what is to be expected in the future from the old
principles of operation. The trouble has been not the principles
but the atmosphere left by the war, and perhaps also the deterioration
of the state of mind of those who were in charge of the great central
banking institutions. They allowed themselves to be diverted from
what their instinct and perhaps their judgment told them, on the
whole, was the appropriate course to follow by governmental pressure
of one kind and another.
Where are we at the present time ? We are pretty close to seeing
a condition in the monetary and currency affairs of the world that
can be described perhaps best and most briefly as a restoration of the
gold standard and all that it implies with regard to central banking
policy and operation. We are not quite there, but we are close to it;
and perhaps the most interesting and significant thing in the financial
atmosphere of the past year or two has been a noticeable growth in
the conviction (at least on the part of responsible authorities in the
larger commercial countries of Europe) that in this matter of monetary standards no expediency compromises are likely to give satisfactory results. They are, therefore, moving pretty rapidly away
from the so-called gold-exchange standard, which represented something of a compromise arrangement, to a fully restored gold standard, with all that it implies in the way of the free movement of gold
and provision for the redemption of bank notes in gold.



I state this thus briefly merely to indicate that we are very close
now in the western world to a position where the beneficial results
of the gold standard as a kind of banking and credit regulator in
gold-standard countries are likely to be realized. My disposition,
therefore, is to wait and see what the results of the operation of the
restored gold standard are before entering upon any such striking
innovations in reserve banking as are contemplated in paragraph (h)
of this bill.
I say this with all the more emphasis because I think we are, in
this country, in danger of overlooking the fact that under the pressure
of necessity in the absence of the full operation of the gold standard
the Federal reserve system has been developing a procedure of its
own—notably, we will say, in the years 1922 to 1925—for handling
credit problems which has great merit. When I appeared before
this committee two years ago, I stated my belief that no country
taken by itself alone can operate the gold standard. The gold standard assumes that gold flows freely from country to country, and in
the process of its redistribution exercises a moderating, or, to use a
favorite term, something of a stabilizing influence on credit conditions.
Now, it was not until 1925, and then only partially, that we again
began to experience gold flows in something like their natural form.
It was necessary, therefore, for the Federal reserve system in the
interim—and more particularly as we had emerged from one of the
most serious crises in commodity prices and one of the most devastating depressions, particularly in agriculture—to devise ways and
means for adjusting the operation of its credit and currency mechanism to conditions as they were, with a view to achieving as good
an economic result as possible.
What the reserve system then did is a matter of record. I content
myself simply with saying that out of its own experience, applying
its best judgment to circumstances and conditions and problems as
they arose—practical problems that called for the exercise of an
informed discretion—there was gradually developed something that,
looking back, one might now very well describe as in the nature of a
new procedure in reserve-bank management. My belief is that this
suggests the kind of development that in the long run is most likely
to result in a, system of banking practice, whether in America or
Europe, which will be, on the whole, most serviceable.
Experience in these matters is, in the long run, the best teacher, and
whenever you have an agency of government like the Federal Reserve Board, or a system of institutions like the Federal reserve
banks, that are capable of learning from their experience, it is, on
the whole, best not to undertake to put blinders on them and say,
" Henceforth we want you to see only this object, or look only in this
I repeat my conviction that in banking growth and development
based on experience are, on the whole, the best teachers and the best
guaranty that you are likely to get that in the end a scheme of practices or " principles "—working principles, if you please—creditpolicy procedure, and technique, as it is sometimes called, will be
arrived at by the Federal reserve system superior to anything that
can be accomplished through undertaking to draw up legislatively



prescribed formulae. Personally I am skeptical of formalae in most
matters of large human concern. I think, on the whole, there is
nothing that is more certain to deaden the creative instinct in any
public body than to put its mind into the hobbles of a formula. And
it should not be overlooked that public bodies are too frequently ready
to accept a formula if it is sufficiently explicit in its meaning and
intent, because it relieves them of the necessity of exercising constantly, vigilantly, and responsibly, their own good judgment on
actual conditions and circumstances as they may arise from time to
Mr. STEAGALL. I was not here when the gentleman began his statement, and I have been so unfortunate as to miss nearly all of the
hearings on this proposed legislation. Would the gentleman object
to a question now?
Mr. MILLER. I am entirely at your service.
Mr. STEAGALL. I am interested in the line of thought being presented, which I am sure has a degree of merit that everybody would
readily recognize. But I have observed considerable complaint on
the part of the member banks of the Federal reserve system on account of the practice of the very thing that you seem to regard as
unwise when applied to the Federal Reserve Board itself, or to the
members of the Federal Reserve Board themselves. When I go out
among the smaller banks that are members of the Federal reserve
system and get to picturing in my way what I regard as the great
benefits of the Federal reserve system, I am nearly always confronted
with the most severe arraignment of the management of the Federal
reserve system on account of the multiplicity of rules and regulations and red tape—and I am using the language that these gentlemen employ in describing the situation to me—which you call
Mr. STRONG. "Blinders."
Mr. STEAGALL. Well, whatever it is. Anyhow, the meanest things
are said to me. I am a friend of the Federal reserve system, and I
always put in a good word for it when I can, because I think I know
it has been of great benefit to the whole country, and especially to
the people of my immediate section. I have never changed my mind
about that at all; but whenever the subject is broached the bankers
turn loose a storm of complaints about unnecessary red tape; " This
rule requires something that we never had to do before," and " This
other regulation interferes with our operations in this particular,"
and on and on they go. The whole truth is, I believe, that a large
amount of the faultfinding with the Federal reserve system on the
part of the member banks and the country banks grows out of this
very thing of which I am speaking and which you seem to dislike
when it is applied to the Federal Reserve Board, regulating the
enactment of the judgment and the will of the American people in
respect to a system set up by law and which you regard as an evil;
and I see the reason for your view. But I am saying what I am
to call to your attention things that I dare say the Federal Reserve
Board does not always understand, namely, the resentments and the
complaints that have sprung up among the member banks on account
of this very matter of red tape and regulation. If you were to call
upon me to particularize and select the particular rule or regulation
and point out the defect and tell you what to do to cure it, I am not



sure I could do it. It is like a great many criticisms. But the fact
remains, and I fear justly so in some instances, that member banks
are very resentful—they might not always express it to everybody,
but they will express it to their Member of Congress—about the
rules and regulations and red tape imposed upon them by the Federal
Reserve Board.
Mr. MILLER. Yes. Well, I think that kind of resentment would be
multiplied several fold if paragraph (h) of this bill were enacted
into law.
Mr. LETTS. If the hobbles were put in the law ?
Mr. MILLER. Yes, sir; and I think the resentment would not be
limited to the member banks, but would be pretty widespread
throughout the whole community. Resentment against bureaucratic
meddlesomeness and tyranny. It is, on the whole, a healthy symptom. It does not trouble me that Americans, whether bankers, business men, or farmers, show on occasion a disposition to challenge the
wisdom or decision of an administrative body. That is sometimes
my own disposition.
Mr. STRONG. Would you mind saying why you think this would
increase that difficulty ?
Mr. MILLER. I think that will be implied in what I say very shortly.
Mr. STRONG. All right.
Mr. GOODWIN. What is there in paragraph (h) that is injurious or
would be harmful to the Federal reserve system?
Mr. MILLER. Let me say, first and foremost, that it uses language
that really means nothing definite or tangible.
Mr. LETTS. Then it does not put any hobbles into the law ?
Mr. MILLER. Yes; it does, because it awakens expectations as to a
general improvement in the operation of our whole social and economic system that will be pressed home upon the Federal Reserve
Board for attainment. In other words, the whole conception in paragraph (h) is built upon the theory that whoever or whatever controls credit in the United States—and it assumes that such a control
of credit resides in the Federal reserve system—has it within its
power to do what ?—to stabilize commerce, industry, agriculture, and
employment, as well as prices and the gold standard. The theory is
intenable[untenable];the thing can not be done. Let me say right here—and
let me say it dogmatically, in order to be brief—that I think the
whole of this paragraph (h) proceeds upon two assumptions; and I
use the word " assumptions " advisedly. One of those assumptions is
that changes in the level of prices are caused by changes in the volume
of credit and currency; the other is that changes in the volume of
credit and currency are caused by Federal reserve policy. Neither
one of those assumptions is true to the facts or the realities. They
are both in some degree figments—figments of scholastic invention—
that have never found any very substantial foundation in economic
reality, and less to-day in the United States than in other times.
The more we penetrate into the mysteries of price movements the
more complicated does the whole price system disclose itself to be.
I have been reading in the last couple of days a recent book of substantial merit on prices. The title of the book is " The Behavior of
Prices." The very title of the book is noteworthy. It indicates a
point of approach




Mr. KING (interposing). Who is the author?
Mr. MILLER. I t is written by Frederick C. Mills, of the staff of the
National Bureau of Economic Research.
Mr. KING. IS he a member of the society of the learned which had
a convention here in Washington a while ago?
Mr. WINGO. Which society of the learned?
Mr. MILLER. I do not know which one you mean.
Mr. KING. I could give you a list of the names. It was reported
in the papers here.
Mr. STRONG. During the holidays.
Mr. MILLER. YOU mean the Economic Association ?


Mr. MILLER. That is very likely.
Now, I was brought up as a student in the economics of 25 or 30
years ago; and as an instructor in economics at Harvard and Chicago
and Cornell, I taught the economics that I think is at the basis of
this provision (h) of the Strong bill. But even before I came into
Federal reserve banking I had my grave doubts as to its tenability
of the older price economics, and the closer attention to realities that
has been forced upon me by having to deal with credit and related
matters in a responsible way has added very much to those doubts.
They have also been added to by reading the recent literature of the
I would like to read a paragraph from this book. The Behavior
of Prices. I think, Mr. Chairman, that it is worth putting into the
record. I quote from page 34:
It is certain that the main problems to be faced in an analysis of the price
system are essentially problems of stability and instability. It is the instability
of this system and the economic effects of this instability which render so
imperative a fuller understanding of it, and make so necessary an increase in
our power to control it. This necessity of understanding holds no matter what
the cause or causes of price instability may be. Whether price instability be
traceable to specific money and price conditions, whether price instability be
merely a reflection of general economic instability, or whether price instability
and economic instability react upon each other, this subject is a matter of
crucial importance.
The nature of price instability is itself a matter for investigation before
methods of measuring instability may be considered. Our primary interest
here is not in the instability of prices of individual commodities, though this
is involved in the problem, but in conditions of general price instability where
large numbers of commodities are concerned. But the term " price instability "
in this general sense is often used ambiguously. What is meant by a condition of price instability ? What kinds of instability may be present in the price
structure? How shall price instability be measured? Are the currently compiled index numbers of prices adequate measures of all the disruptions and
distortions which may develop within the system of prices? These are some
of the questions which will receive consideration.

Mr. LETTS. Has the author expressed his opinion on protective
tariff in that book ?
Mr. MILLER. Not as I am aware. This, I believe, is the first of two
or three volumes by this author on the subject of prices, and what
is said in this first installment of his work clearly indicates that my
reason for stating, as I did a moment ago, that paragraph (h) of
this proposed legislation is built upon an as yet unproved assumption was correct. That assumption may later on be proved to be
true, or it may later on be proved to be so far from the truth that
as an adequate guide to banking policy or as a basis for stabilization



it is useless. I am not opposed to banking innovations, but I am
opposed to innovations unless there is a high degree of probability
that they will prove a success. The proposal contained in paragraph (h) of this bill rests on no secure economic foundation. It
must be regarded as a notion, an academic proposal.
Mr. LETTS. Does he speak about immigration restriction as having
a bearing upon that subject?
Mr. MILLER. Well, I have had this book in my hands only a couple
of days, so I can not tell you all that is contained in the volume.
Mr. WINGO. I think you will find when you read it clear through
that he says that the behavior of prices is largely like the behavior
of individuals. That is his theme.
Mr. MILLER. Yes. The title of the book indicates that it is conceived in the spirit of modern research and modern economics
Mr. LETTS. YOU do regulate in a degree the behavior of individuals, don't you ?
Mr. MILLER. Well, sometimes we think we do and find out that we
Mr. LETTS. I mean, we try to do it by law.
Mr. STRONG. Shouldn't we do it ?
Mr. MILLER. Not where we have not got a strong reason for doing
so. Not where we don't yet understand what nature's methods and
processes are in order that such laws as we may make may work along
natural lines—the lines of " behavior "—instead of working against
Mr. STRONG. But we do try to regulate them. That is the theory
of government.
Mr. MILLER. Well, do you want more theoretical regulation?
Mr. STRONG. If necessary, I do.
Mr. MILLER. I would say, Mr. Congressman, that it is a sufficiently
serious thing to undertake to regulate conditions outside of matters
that come so near to the heart of our whole economic system as does
the credit mechanism. It may be a disastrous thing if it is done
unintelligently, where it touches the very heart of the whole economic
apparatus. My belief is that if this bill were enacted in its present
form, nothing would be accomplished different from what is now the
case in the Federal reserve system. But it is conceivable, so far as
" stabilization " is concerned, that some highly mischievous consequences and administration misadventures might result.
Mr. STRONG. I am asking you why
Mr. MILLER. After all, men can only do what they can do:, and
anyone who is charged with as large a responsibility as are Federal reserve bank directors or the Federal Reserve Board will, in the
face of an actual situation, no matter what vague phrases or formulas
there may be in the law, use their best judgment.
Mr. STRONG. I think you have heard me say before that I am not
trying to change the present policy. I want to continue it.
Mr. MILLER. If you think that is a fact, why change the law unless
improvement is certain to result?
Mr. STRONG. That is the reason I put in the investigation clause.
Mr. MILLER. I think you are much more likely to get a good result
if you leave the law alone or address your attention to the correction
of specific weaknesses or inefficiencies in the present credit operation
of the Federal reserve system.



Mr. WINGO. Mr. Chairman, may I ask a question there ?

Mr. WINGO. I assume that you are referring to paragraph 8, on the
very question that you discussed with the gentleman from Kansas on
the changes in the law that it makes. You stated that it had one
assumption which was false, that it had to do with control of prices.
Isn't there another assumption which you have possibly overlooked
when you say that this makes a change in the law? That is, that
the courts when they come to interpret an act of Congress start with
this proposition: That they assume Congress intended to do something, to change the law, when it enacted a bill. That is true, isn't it,
Doctor, in your understanding of the rules of interpretation ?
Mr. MILLER. Yes.

Mr. WINGO. All right. They start by assuming that we do something. Then the courts will have to find that there is a change in
the law.
Now, there is another thing that it does which may have been overlooked. The courts recognize that there can be a repeal or a change
of law by implication as well as by direct declaration. Now, if this
paragraph (h) means anything it means that there is a change of the
existing law, certainly by implication if not by direct declaration.
You can not escape that conclusion, can you, Doctor, with the two
fundamental and elemental rules of construction of legislative enactments?
Mr. MILLER. I am not a lawyer, Mr. Congressman. But the position as you have just stated it is, according to my understanding,
correct. I have been addressing my observations more particularly
to the economic ideas that were involved in the proposal rather than
to the problems of legal construction.
Mr. WINGO. If you will permit, that is the next question that I will
come to.
This idea of a central Federal Reserve Board, sitting at Washington, who dominate and control the credit policy of the entire system
for a specific purpose named—that is a declaration, isn't it ?
Doctor MILLER. Yes. It does assume
Mr. WINGO. Doesn't that answer that question? There are two
schools, as I understand it, in your board. One school is that Congress did not intend anything when it permitted a diversity of the
rediscount rates at the different banks. That school insists that there
ought to be a uniform rate throughout the system. Another school
insists that Congress intended, and that it was recognized at the time
the act was passed, that there was a difference in Chicago, Kansas
City, New York, and Dallas, that should be recognized and would
be recognized by practical, experienced bankers in the conduct of
those banks which would cause a difference, probably, certainly at
times, in the rediscount rate.
Now, if you enact this, the courts will say, will they not, that
there was a dispute at the time, and Congress undertook to settle that
dispute and to say that we would give to those who insisted upon
a centralized banking system that which we refused to give in
1913; and that by subsequent enactment and declaration of policy
we gave them in 1928 a centralized system; that is, we made one
bank out of 12 units. That is what one of the chief advocates of this
measure has in mind.



Mr. MILLER. I would say that it would present a problem of
legal construction which might involve us in great administrative
difficulties. But if the general objects and the general objectives
defined in paragraph (h) here were desirable in the general economic
interest of the country, I would say that ways and means of meeting
the administrative difficulties might be found.
I think it is worth while remarking that in the modern economic
situation a great many of the difficulties of a credit character; those,
for instance, that give rise to a condition usually described as "inflation," are not born full fledged. They do not arise over night
in the country as a whole. They begin insidiously in some particular area of the country or some particular section of the business
community, and by degrees develop into a situation of credit excess
and spread over the country and attain the character and dimension
of "inflation" unless quickly recognized and arrested as involving
a national as well as a local menace.
Such a situation in its inception is perhaps best dealt with as a
local problem of regional discount policy or by other methods that
may be found effective and appropriate. So I don't think that it
follows of necessity that this provision of the contemplated amendment would carry with it the destruction of the regional quality of
the reserve system.
I don't like the phrase that you have used about two schools of
thought. I object to being obliged to take a permanent seat in one
group or the other. I want to be free to adopt the attitude that
seems to me most useful in the face of an existing difficulty or one
that can perhaps be anticipated. That may sometimes mean regional
action, or it may sometimes mean system action or sometimes regional
action perhaps that sooner or later will show itself to have been part
of perhaps a program of system policy.
Mr. WINGO. In other words, you recognize possibly the stupidity
of trying to standardize men and conditions either by legislative
enactment of bureaucratic decree?
Mr. MILLER. I think I do.
Mr. LETTS.. IS there any reason why we should not attempt that
with respect to interest rates and credits when we do it as to freight
rates and other matters, such as controlling the price that public
utilities may charge ?
Mr. MILLER. I think, Mr. Congressman, that that is a relatively
simple matter compared with undertaking to lay down a rate of
charge for Federal reserve credit when that rate has got to be fixed,
so to speak, for the purpose of stabilizing employment, industry,
prices, etc.
Mr. LETTS. Well, the whole thing is a matter of policy, isn't it?
Mr. MILLER. It is a matter of policy; yes. It is a matter of policy.
I suppose that the whole question involved is what will make for
better Federal reserve credit policy.
The framers of this bill conceive, I take it, that if you set before
the Federal reserve system certain objectives such as they defined in
the bill, and then issue to the Federal reserve system a mandate to
use their powers to attain those objectives, the country will get, on
the whole, a better dispensation of credit than it has at the present
time, or at any rate that the future will be protected against a credit



dispensation that might be inferior to what we have been enjoying
the last few years.
I don't think they are proceeding in the right way. If I did, I
should be for this bill. To be frank—but I hope not offensive—these
phrases in paragraph (h) are very magnificent phrases. They will do
in oratory, they are suitable in chamber of commerce resolutions,
etc., but they are vague and do not translate themselves into anything sufficiently concrete for handling the problems of credit administration. For instance, not infrequently a condition of price instability might be concomitant with stability of industry and instability
of employment.
Mr. WINGO. In that connection, have you ever heard of Congress
or the Interstate Commerce Commission devising a rate structure to
meet that situation? Do you remember a case of that kind?
Mr. MILLER. I don't recall any case.
Mr. WINGO. Isn't that the cause of the row in the Senate now?
They contend almost over night that that was the basis of Mr. Esch's
decision—that he undertook to abandon the reasonableness of the
rate—a question of trying to help the economic condition in one group
of States as against another. Isn't that the charge against Mr.
Esch ? That is denied by all the States, that it is not the basis of any
rate structure; that is, that the economic conditions in any State will
not determine it. The reason I said that was that my friend, Mr.
Letts, has suggested that possibly there is an analogy between interest rates fixed by any Federal reserve bank, or, rather, the rediscount
rates, and freight rates. I don't follow the analogy.
Mr. MILLER. Yes; very much more. There is a definite assumption
that when you change the discount rate of the Federal reserve
system, you will have changed a condition of, we will say, instability
to one of stability. I would say that it would be worth while to examine what is going on in the economic history of the country in this
regard, because I think that it will give us some idea of the results
that we must expect to get from legislation of this kind.
Mr. KING. Can you direct my attention to some illustration of the
point that you are making?
Mr. MILLER. Yes. I will do so very briefly.
In midsummer of last year the Federal reserve system set as its
objective, partly because of its desire to be of assistance in the international credit situation, and in the belief also, that a mitigation of the
fairly severe credit conditions that obtained in Europe at the time
would be indirectly of benefit to American trade (making possibly a
broader demand for American farm products), and partly because
it anticipated that economic conditions in the United States during
the autumn months did not look promising, and that a moderation
of money rates might be of some help in that situation, set about to
create an easier condition of money by favoring a policy of low discount rates, which were lowered in the course of some four or five
weeks to31/2per cent at all the Federal reserve banks, and by purchases of securities in the open market, otherwise stated by putting
reserve money into the market.
Now, it is a debatable question whether or not in a period of business recession, business recession can be arrested by making money
cheap. My opinion is that it can't be done to any appreciable extent,
if at all.



Mr. WINGO. What is that, Doctor?
Mr. MILLER. My opinion is that you can't arrest a recession in business by a reduction of the official discount rate, the Federal reserve
discount rate.
Mr. WINGO. YOU can postpone it, can't you?
Mr. MILLER. YOU can postpone it? In my judgment there is nothing to warrant that view; and I think it is a waste of a valuable
instrumentality when you undertake to do it. It doesn't accomplish
anything that is substantial.
Well, now, what have we seen taking place under this policy of
cheap money? We have seen, looking purely at the domestic situation, that easy and cheap money, coming at a time when the speculative temper of the community needed no stimulant, but rather a
deterrent, has contributed to the creation of a situation in the stockexchange loan account that we are concerned about in the Federal
reserve, that is the subject of comment in the press, and that latterly
has been responsible for a policy of tightening money rates by an
increase in the rediscount rates at the very time when, business being
in a state of some recovery, a low discount rate might assist the
Mr. STRONG. DO I understand that the efforts of the Federal
reserve system to encourage foreign trade by furnishing cheap money
resulted in creating an increase of stock-exchange loans ?
Mr. MILLER. YOU can take that as an indirect consequence. That
was not, of course, its purpose.
The CHAIRMAN. DO I understand you to say, Doctor Miller, that
we had a fictitious money rate ?
Mr. MILLER. NO ; we didn't have a fictitious discount rate; we had
a discount rate that was adjusted to the trend of market rates. But
a most important factor in that trend was the Federal reserve openmarket policy. It brought about cheap and easy money, and one of
its results has been the absorption of a large amount of credit in the
stock-exchange loan account.
The CHAIRMAN. YOU say that the result was that when there was
a creation of a surplus of money and credit which can not be used
in the industry and commerce of this country, it has resulted in a
speculative situation. If that is the case, is there anything to indicate other than a fictitious rate, when the rate varies from 4 per cent
to 41/2per cent in the face of a flutter of money ?
Mr. MILLER. Oh, yes. The rates have been flurrying, and we have
lost a considerable amount of gold, not only on the movement that
began last autumn but in the early part of this year. The banks
that have been obliged to provide gold for withdrawal have had to
obtain it from the reserve banks by borrowing, with the result that
the volume of reserve credit extended to the banks to-day is between
two and three hundred million larger than it was a year ago, and
this in spite of the fact that the total volume of business activity as
reflected in production and trade is considerably less, and notwithstanding the fact also that the amount of money, pocket money, in
circulation in the country is something over a hundred million—
perhaps 125,000,000—less than it was a year ago.
Mr. BEEDY. Doctor, you spoke of increasing the rediscount rate at
a time when business in on the upward trend. I believe you used the
words " emerging from a state of depression." Thus money is higher



at a time when it should be lower to assist in that stimulation of
business. What period of business depression do you refer to as
" emerging from a state of depression " ?
Mr. MILLER. I am not referring to any period of business depression. I used the term "recession" in characterizing the business
movement last autumn and in the early winter. That is quite
different from depression.
Mr. BEEDY. I thought you used the term " depression."
Mr. MILLER. NO. I used the word "recession." I think it is a
pretty well-established fact that we can not by monetary operations
arrest business recession. We can do something to stimulate the flow
of money into use when business is " picking up " and something to
check the flow when it is proceeding too rapidly, and thus exercise
an influence on the pace of business.
Mr. LETTS. What is the cause of recession ordinarily ?
Mr. MILLER. That can not be authoritatively answered, either with
regard to this recent recession or with regard to recessions generally.
Determination of the cause or causes of these fluctuations in the
movement of trade is still involved in a good deal of obscurity.
Mr. LETTS. HOW much a part of that do our foreign trade and
our foreign transactions play? That is the particular thing I had
in mind.
Mr. MILLER. We had a good foreign trade during the period when
business was in recession in this country last autumn and the early
winter. With regard to the recession I would suggest that 1926 having been a year of unprecedented economic activity, consumer demand had been pretty well saturated by the end of the year, and
that what occurred in the latter part of 1927 was in the nature of a
reaction, a mild reaction, but nevertheless a real reaction from the
pronounced and rather remarkable activity of the previous year.
Mr. LETTS. What caused that recovery ?
Mr. MILLER. YOU are asking me questions now that I can't answer.
These are matters of opinion. I don't believe anybody can answer
them with finality. They are subjects of considerable scientific
Mr. LETTS. The thing I am particularly interested in is the last
suggestion in this paragraph, which, according to the author of this
bill, would indicate that our relations and transactions with foreign
banks—and I assume that our foreign business generally is very
decidedly dependent upon our conditions in this country
Mr. MILLER. It may or may not


Mr. LETTS. The author seems to think that something ought to be
done which would protect us against conditions of that kind which
would depress business and finance in this country.
Mr. MILLER. Well, I don't believe that any group of persons, no
matter how much they might know about the nature of the modern
economic process, would be capable of effectively determining what
could and should be done by way of credit policy with a view, for
example, of avoiding a recession of business, even if they could
quickly anticipate it. But generally you don't know what is going
to happen until it is already under way.
Whenever men are charged with administrative responsibilities of
the kind contemplated by this bill their intentions, attitude, and
usual state of mind are the things that will determine the results.



As a rule, unless a man is a very much more consciously controlled
individual in his decisions than is usual or is very much abler than
is apt to be the case with members of administrative boards, he will
see conditions mainly in the light of his intentions and desires. If
he happens to be a man who is intrigued with the idea of " stabilization," he would feel that this bill warranted him to go out and see
what could be done by credit policy to "stabilize employment" at
the present moment, when there is a complaint of a considerable
shrinkage in the volume of employment. Unemployment would be
on his mind, and he would find in this bill an incentive to experimentation with discount rates and open-market operations as social
As a rule, administrative policies developed or adopted in that kind
of atmosphere seldom get anywhere. They usually get their main
importance later from things they brought to pass which were never
in anybody's mind and which nobody foresaw at the time of their
I think, in order to make this specific, Mr. Chairman, that I might
well invite the attention of the committee to a brief review of the
last six months. In the subject under consideration here a chapter
of experience is worth a whole library of theory. We are surprised
in the Federal reserve system at the state of things which has developed in the credit and speculative situation. Nobody is more concerned. My feeling is that it may feel too much concerned, and that
there is danger that
The CHAIRMAN. Apropos of what you said there: When you
spoke about the lower rate of last summer of 31/2per cent, which
was produced by the purchase of Government securities, you meant
that that was used for stimulation, I suppose ?
Mr. MILLER. Either or both, I would say, resulted in stimulation.
The CHAIRMAN. I suppose the board took into consideration the
two angles of that situation in the desire that you refer to to help
the international situation, not merely the danger that the lowering
of the rate might have on the speculative activities in this country ?
Mr. MILLER. I think probably some foresaw that element. But
when an administrative board sets out to accomplish what it believes
to be a good and beneficent object it is very apt to underestimate or
forget the shadow side of the picture.
The CHAIRMAN. YOU felt that the international situation should
have more bearing than the effect on the speculative activities %
Mr. MILLER. I think that is what the board felt; I felt the reverse.
Mr. CAMPBELL. YOU deduce from that situation that when the Federal Reserve Board last summer furnished cheap money for the
encouragement of foreign trade it resulted in an increase of stockexchange loans for speculation ?
Mr. MILLER. I should say that that was one of the by-products of
it; yes.
Mr. CAMPBELL. Does that mean that we ought to confine our activities to trying to take care of our own conditions at home rather
than to try to take care of European conditions ?
Mr. MILLER. That is a very broad question. I think that if the
credit policy of the Federal reserve system is properly adjusted to
American conditions, that is on the whole the best thing that can



be done by the Federal reserve for the benefit of America and broadly
viewed, also, for the rest of the world.
Mr. CAMPBELL. Charity commences at home ?
Mr. MILLER. It is not a matter of charity. It is a matter of prudence and wisdom in our economic management.
Mr. WINGO. Isn't this the major question that governs your board
in deciding such questions? Don't you consider what your policy
should be in regard to meeting the needs of legitimate business in the
country, and not the effect on the stock market? If the needs of
legitimate business require easy money, then you will meet that need,
not be scared off because perchance there is an attendant evil that
there may be a lot of speculation in the stock market ?
Mr. MILLER. HOW do you propose to reconcile those two purposes ?
We have a securities market in this country that generally is ready
to take advantage of easy and cheap credit.
Mr. WINGO. I don't think you caught my point. My point is this:
The factor that should control in fixing the rediscount rates and in
determining whether or not you will put more money in the market
or take money out is not what is going on in the stock market, that
is not the prime consideration, but what are the necessities of legitimate business ?


Mr. WINGO. And the fact that in meeting the necessities of legitimate business you happen to stimulate a little bit the amount of
speculation in the stock market should not deter you from meeting
the major needs of business?
Mr. MILLER. What I would like to say on that is this: That it
would be an excellent thing if Congress would clarify the intent of
the Federal reserve act. I think the banking committee at the other
end of the Capitol is occupying itself with seeking to devise some
way by which Federal reserve credit can be made available to borrowers at times at cheap rates without constantly exposing it to diversion into stock-exchange loans.
The CHAIRMAN. Have they suggested a classification of credit ?
Mr. MILLER. Well, that might perhaps remedy it. But I am not
now trying to suggest a remedy for the difficulty in question.
Mr. WINGO. YOU still don't get my question. What they are doing
on the Senate end has nothing to do with it. I think that is the
trouble. The law is clear and specific now that you shall do what
you can for the purpose of accommodating commerce and industry.
My point was this: That the policy of the board should not be wholly
controlled by what may happen in the stock market, but that it should
be controlled by what the needs of legitimate business are. If legitimate business requires an easy money market, you should not deny
that relief to legitimate business because, forsooth, there are stock
gamblers who will take advantage of the easy money condition to
bring about some little increase in speculation.
The reverse is also true. If the needs of legitimate business require
you to put the bit on the money market, you should not hesitate to
do that simply because, forsooth, someone says that it may create
a panic on the stock market. My point is that the major thing to be
considered by the board is the need of business.



Mr. MILLER. I agree with you, Mr. Congressman, when you use the
words "stock market." My view is that the Federal reserve has
nothing to do with the stock market as such; that the stock market
is no concern to the Federal reserve.
It is, however, a matter of great concern to the Federal reserve
what becomes of the credit that it creates. When as a result of policies adopted for other considerations, it develops that a part, and
more particularly when it is a considerable part, of the credit released by it goes into the stock exchange loan account, the resulting
situation becomes its responsibility.
Mr. WINGO. I agree with you that that is a diversion that might
defeat your efforts to meet the needs of legitimate business. You
should try to see that your effort to accommodate commerce and industry is not defeated by diverting the funds that you intend shall
be easy in order to go into commerce and industry, into the stock


Well, now, it is part of a well-recognized principle of reserve banking that you can not have your Federal reserve rate too far out of
line with the actual going rates for money either in the open market
or over the country of member banks.
Mr. STRONG. DO you know
Mr. MILLER. Will you let me answer one question at a time, Mr.
Congressman ?
Mr. STRONG. Yes.

when a large volume of credit is being absorbed
into the stock exchange loan account, the call rate is very apt to rise.
It is very much more apt to rise if the Federal reserve bank is at the
same time pursuing a policy of withdrawing from the open market
money which it previously put into the market. The result is a rise
in the call rate and particularly if it occurs, as it usually does, at a
time when the stock market is very active and not easily (discouraged
by an increase of the call rate. The call rate thus becomes, momentarily at least, a very strong competitive factor in the general money
rate situation. A banker, whether in New York or elsewhere, will
then be confronted with an opportunity to lend his money on call at
an attractive rate or lend it for business uses at home at a less attractive rate. He will not infrequently meet the situation by marking up
his rates at home. In other words, there comes a point where the rate
for money determines the direction in which money will go—whether
to the call-loan market or to meet local demands.
Mr. WINGO. Right in that connection, isn't this true? Last fall,
when you started this tightening up, or when it was just the same as
the money last year, and you commenced raising the rate at a time
when there was a general flow of money, as the Chairman has
pointed out, every time you took a million dollars out of the stock
market of New York, didn't another million come in from the country ? In other words, when you had this so-called reduction of three
hundred million in a period beginning over three or four months ago,
when you had a reduction in the money put on the call market in
your bank of three hundred million, you had a corresponding increase in the money that was sent to New York by country banks, so



that the amount remained the same, or as a matter of fact, increased;
and the increase came from the country banks? In other words,
when you sought to check the diversion of these funds into the callmoney market, that was effective so far as the New York banks were
concerned; but the cold-blooded statistics that are a part of the
reports of your banks show that the recent rise of that rate made it
all the more attractive for country banks; and they shot it into New
York City ? Isn't that true ?
Mr. MILLER. I wouldn't say " Yes " to that question without qualification ; but if you will let me say " Yes " without going into all the
qualifications, I think I would be satisfied.
Mr. WINGO. That, according to statistics, the fact is that for every
decrease in your bank in the call-money market of three hundred
million, there was a corresponding increase that flows from the
country banks?
Mr. MILLER. Yes. There was a big flow from the interior.
The CHAIRMAN. Doesn't that also stimulate foreign money coming
into New York ?
Mr. MILLER. There isn't, as yet, any direct evidence of that. I
don't know what may be taking place in that regard. There is, however, some evidence of the bringing back of American balances from
foreign countries.
Mr. BEEDY. But, Doctor, when this money does .come in from the
country banks as the result of a rise in your rediscount rate, for
instance, isn't that one of your most helpful indexes as to the need
of legitimate industries throughout the country generally for money ?
Mr. MILLER. I don't think I follow you in your position, Mr.
Mr. BEEDY. For instance, it doesn't always obtain that the moment
you put a check on a situation in your big industrial centers and take
money out of the market, that it immediately flows in from the country banks? That doesn't follow, does it, when industry generally
back in the localities concerned needs it legitimately? Now, when
it does flow in, particularly from country banks, isn't that a very
helpful index to you that legitimate industry in general does not
need it ?
Mr. MILLER. Not necessarily. It may be that there is such a considerable spread between the call rate in New York and the Federal
reserve discount rate, say, at an interior reserve bank, as to put a
temptation before the interior member bank, if it has any money
loaned on call in New York, to leave it there and meet the demands
of its local customers by rediscounting with its reserve bank. Such
has undoubtedly been the case at times.
There is some evidence, though it is not of a very conclusive character, that this may be going on at the present time, not, perhaps,
to a very large extent, but going on nevertheless, just as there was
evidence of a similar situation in the autumn of 1925.
There was a remarkable increase in commercial loans in the early
months of this year. If I remember rightly, it was between three
hundred and fifty and four hundred millions, as deduced from the
weekly reports. That is a startling increase for so short a period.
There has taken place at the same time a very considerable increase
of loans on securities. Borrowings from Federal reserve banks have



There is no method, of course, by which we can tell how much of
that increased borrowing occurred because of growth of commercial
loans and how much because of growth in security loans. Some of
it was due to exportation of gold. These demands for credit by
member banks from their reserve banks do not come marked
" wanted for this purpose or that purpose."
But when, as in recent weeks, with the call rate averaging 5 per
cent of above, there is a flow of money from the interior to New
York, and when at the same time there is evidence of increased
industrial activity in some of the very districts from which money
is coming into the call-loan market, and also of increased borrowing
from their reserve banks, we think it shows that some banks, at least,
have money in the call market which they ought to be using for the
purpose of meeting their commercial needs at home, and which they
do not withdraw probably because of the attractive return the high
call rate enables them to get on it in New York. They prefer to
leave their call loans alone and meet their seasonal commercial demands by borrowing from the reserve banks. The effect is to tie in
reserve bank funds indirectly, at least, as a sustaining factor in the
volume of money in the call market.
Mr. WINGO. Isn't there a possibility of misunderstanding by this
illustration, Doctor ? That is, you can not always determine when a
broker's loan or a stock loan is one for speculative purposes. For
instance, take this illustration: We all know that a great number
of the safe and conservative corporations have in what they call
their secondary reserve a lot of sound, seasonal investment stocks.
Now, take, for instance, that here is a corporation that needs some
funds temporarily; say, $100,000. The call-money rate is low for
its temporary needs, so they will take from their portfolio, their secondary reserve, say, 1,000 shares of General Motors or American Tin
Can, and they will go and borrow $100,000 that they need for legitimate business purposes; and as soon as the pressing need for capital
passes the loan is retired, and this General Motors stock comes back
into the portfolio, or the secondary reserve. Yet this would look like
speculative purposes and would add to the increase in stock loans.
Mr. MILLER. That is largely a matter of definition—of what constitutes a speculative purpose and what is " legitimate business " for
this corporation. There would be difference of opinion on that matter. I am of the opinion that for the purposes of good administration
in the Federal reserve system a tight control over the diverting of its
credit into any kind of speculative loans is necessary.
Mr. BEEDY. AS a matter of practical banking, you would know
where that money went to, wouldn't you?
Mr. MILLER. It is not always easy to know it. But it can be sensed
sufficiently soon to give an indication of what direction Federal reserve credit policy should take. If that direction is sensed soon
enough and proper measures are taken, the development, practically
speaking, can be controlled. As a matter of fact, we have had two
episodes in the recent history of the Federal reserve system that do
not reflect great credit on the system. In each case the difficulty has
been occasioned, as I view it, by what might be called a paternalistic
open-market policy. These periods of security-loan inflation have
frequently been fed and accelerated because of the desire of the Fed-



eral reserve, for one reason or another, to be helpful through openmarket operations to the general money situation.
Mr. STRONG. Helpful to whom?
Mr. MILLER. TO the general credit situation, for the benefit of
the agriculture and commerce, or whatnot.
Mr. STRONG. In this country?
Mr. MILLER. Primarily in this country. In autumn of last year
this country by way, so to speak, of Europe was, perhaps unconsciously, in the mind of the Federal reserve system. But it was this
country, nevertheless, and its interests that were in the minds of those
who were responsible for the policy of cheap and easy money then
Mr. BEEDY. What were the two episodes to which you referred
that you said did not reflect great credit on the Federal reserve
system ?
Mr. MILLER. I had in mind mainly what has happened in the last
eight or nine months and an earlier occasion, when there was a
spread of some 2 per cent between the call-loan rate and the Federal
reserve discount rate.
Mr. KING. That is where you were 20 years ago, when the law was
Mr. WINGO. I didn't catch the answer to Mr. Beedy's question.
Doctor Miller was interrupted and didn't finish his answer.
Doctor Miller, what was your answer to Mr. Beedy's question?
What were those two episodes ?
Mr. MILLER. Mr. Beedy, will you state your question again ?
Mr. BEEDY. YOU referred to two episodes which reflected no credit
on the Federal reserve system.
Mr. MILLER. The other was the autumn of 1925, when there was a
wide spread between prevailing call rates of 5 to 6 per cent and the
discount rate of the New York Reserve Bank of31/2per cent.
The CHAIRMAN. Are you referring to the Boston rise of rates ?
Mr. MILLER. I am not referring to that increase, but to the ebullient condition of the stock market and the rapid growth of the stock;
exchange loan account, in part consequent on the liberal credit policy
pursued by the Federal reserve system and the hesitation and the
reluctance shown by it in advancing the discount rates to attempt to
control the situation. As a result o,f that policy in New York for a
period of several months there was a spread of 1 1/2 to 2 per cent
between the existing discount rate and the rate for money in the
stock market. And there occurred a rapid growth of the stock
exchange loan account.
Mr. WINGO. Let us go back over a period of eight years, back in
December, 1920, when you had a Federal reserve issue of 3,700,000,000.
To-day you have cut that down to one billion and a half, and your
loans on the stock exchange now are about 4,000,000,000. Is that
money or credit which is represented in that increase ?
Mr. MILLER. That is largely a matter of which word you prefer
to use.
Mr. WINGO. Isn't it obvious that it is credit ?
Mr. MILLER. Well, money is credit. What we call " money " is
for the most part " credit" in this country.
Mr. WINGO. But credit is not always money?



Mr. MILLER. Well, as I said before
Mr. WINGO. I don't recall ever getting any money on credit. All I
got was credit.
Mr. MILLER. YOU are thinking of money in what form—gold certificates, greenbacks?
Mr. WINGO. My question was directed at the Federal reserve note
issue. In other words, there were $3,700,000,000 in December, 1920.
To-day that has declined to $1,500,000,000.
Mr. MILLER. Yes.
Mr. WINGO. And your brokers' loans have gone up to 4,000,000,000.
Mr. MILLER. Yes.
Mr. WINGO. I t is obviously a difference in credit ?•
Mr. MILLER. Well, the Federal reserve note is credit. The only

difference between it and the ordinary form of bank credit is that
you have a piece of engraved paper in the one instance as evidence of
credit and in the other case you have an entry on the books of a bank
carrying a reserve account with the Federal reserve bank.
Mr. WINGO. In other words, one is a gold certificate and the other
is credit at a bank?
Mr. MILLER. They are both obligations to pay on demand. You
can make your purchases equally with the one or the other. There
is no difference in substance. If you are going to use the term
" money " in its strict sense, in the sense of money of account for the
settlement of obligations international in character, then there would
be a difference.
Mr. WINGO. But there is a different thought, Doctor, in what is
back of the two things, isn't there ? There is a difference in what is
back of the Federal note or back of the deposit slip in the bank
where I have gone and borrowed a thousand dollars and they have
given me credit on the books to my checking account? There is a
difference in what is back of it? There is a difference, I mean, in
Mr. MILLER. If the bank is well managed, there is no difference in
their value.
Mr. WINGO. I am talking about in gold. There is a difference,
isn't there?
Mr. MILLER. The Federal reserve note is an obligation redeemable
in gold coin at the Treasury of the United States and in gold coin
or legal tender at a reserve bank at its option.
Mr. WINGO. I know it, but the condition of a few banks does not
affect the volume of the gold reserve in its vaults. The point that I
am making is this: You say that it doesn't make any difference
whether it was money or credit. But the credit at the bank has far
less reserve back of it than a Federal reserve note outstanding,
hasn't it ?
Mr. MILLER. YOU mean far less gold back of it?
Mr. WINGO. Yes. I am talking about the only recognized legal
reserve; that is, gold.
Mr. MILLER. If you are thinking of the gold that is held by the
Federal reserve system against its liabilities in the form of notes and
that which is held as ultimate reserve against the deposit liabilities
of member banks, the ratio of one to these two classes of liabilities,
the Federal reserve holds an amount of gold equal to about 6 to 8



per cent of the deposit liabilities of its member banks, as compared
with a legal obligation to maintain a minimum reserve of at least 40
per cent against its own liabilities that are outstanding in the form
of Federal reserve notes—that is true. But to my mind this is not
a matter that in and of itself is important. The important consideration in good banking is not the relative reserves held against
deposits and notes. It is not the amount of gold available against
the deposit liabilities of the member banks on a show down, which
probably never will arise, that is so important, but the amount and
character of these liabilities.
If member-bank deposit liabilities are soundly invested, if they
have arisen out of business transactions in the course " of accommodating commerce and business," if they have contributed to maintain
the productive apparatus of the country in a state of healthy and
not hyperactivity, in short, if they are genuinely of a self-liquidating
character, we don't need to be concerned particularly with the ratio
of gold held to them. I am not greatly worried about that ratio if
it declines because of loss of gold. I think we need to be more
solicitous about the character of the liabilities that the member banks
are* creating against themselves, even if at times when the ratio
probably would be regarded as fairly sizable. You may have a high
reserve percentage when the banking situation is not altogether good,
and you may have a low one when it is good. It depends on the
character of the transactions which have caused the change.
The CHAIRMAN. It is not important now in the attitude of the
world's bankers?
Mr. MILLER. Yes; it is.
The CHAIRMAN. In world-wide obligations as a class ?
Mr. MILLER. Yes.
The CHAIRMAN. The use of this money is important?
Mr. MILLER. Yes.
The CHAIRMAN. I want to direct your attention back

to the six
months' period a year ago, when the interest rates were lower and
the purchasing of Government securities took place for the purpose
of stimulation, which has resulted in improved conditions. It could
be cited as a period of increase in stock prices or a speculative period.
In that connection we had a tremendous increase in the price of
almost every stock. I would like to ask in that connection whether
you believe that the increase in the price of stocks is due to the fact
that we are going on a lower interest-return basis, or is it pure
speculation ? In other words, are we registering ourselves on a lower
income-return basis; and is that the reason that certain stocks have
gone up, or is it pure speculation ?
Mr. MILLER. I think it would still be "speculation," even if that
assumption were true. But I do not think that there is warrant for
believing that we are going into a long period of appreciably reduced
investment yields. This is, however, a matter on which opinions
differ and may well differ. Those individuals who believe the rate
of investment yield is due for a long decline and who are quickest
to anticipate it will adopt a speculative attitude toward the securities
market and buy on this belief.
For instance, if there was anything to warrant some of us or
any one of us to-day thinking that within three years the net yield



upon high-class securities—bonds, and even common stocks of exceptional character—would drop to 2 per cent under the pressure of new
capital accumulations, certainly there would be an opportunity to
anticipate the market. Now, by anticipating the future market you
help to make the present market and the course of market values. By
buying in anticipation of a decline in the interest yield or net-investment yield we would be gradually raising the prices of securities.
That is one factor in the present market, I think. There is a
good deal in the behavior of the securities market in the last few
years that is based upon belief that for a considerable term of years
capital funds will be so abundant that the net investment yields will
be appreciably low as compared with what were thought usual yields
to be expected from the same or similar classes of investments before
the war. I don't, however, think that that is the only factor. I
think there are others, and perhaps of equal or even greater weight.
Mr. STRONG. I started to ask you some questions a minute ago,
but I was diverted. I would like to get some information now, if I
I asked you if we were to deduce from the fact that the Federal
reserve banks brought about cheap money in order to encourage our
foreign trade; that it had resulted in increasing the loans upon the
stock exchange. I understood you to say that influence might be
used to prevent that. Then why have you now raised the rate ? Have
you abandoned your theory of stabilization?
Doctor MILLER. I am not in a position to answer when you term
it an " abandonment." It is a pretty broad question.
Mr. STRONG. Well, let me get my thought over to you. I am not
trying to lead you into a trap.
Doctor MILLER. N O ; I am not worrying about that. I don't object
to your questioning.
Mr. STRONG. All right. Go ahead.
Doctor MILLER. I think we are very close to the point where any
further solicitude on our part for the monetary concerns of Europe
can be altered
Mr. WINGO. What was that last that you said ?
Doctor MILLER. Can be altered. I am inclined to think that on
the whole it will be better for Europe and better for us if the Federal
reserve shows a less active and eager concern for them.
Mr. STRONG. And attend to our own affairs ?
Doctor MILLER. Europe is pretty nearly in a position to take care
of herself in a monetary way, and I think she will get into that
position very much more quickly and on the whole more securely, if
we keep in the background of the picture instead of in the foreground;
in other words, leave more to natural forces in the national and international money situations.
Mr. STRONG. Then
Mr. MILLER. Let me add, Mr. Congressman, because it is a part
of what I was saying, that in my opinion the importance of discount
policy as an instrument of credit regulation shall be emphasized by
the Federal reserve henceforth and an abridgement of open-market
operations as a primary instrument of credit policy. I am of the
opinion that open-market operations have been the cause of almost




as much mischief in credit and economic situations as of good. I am
inclined to think that as we get far enough away to review the history of the past four or five years in fuller perspective that conclusion will be justified.
Mr. STRONG. DO you think that raising the rates in the last few
months has tended to throw money to New York?
Doctor MILLER. DO you mean from abroad ?
Mr. STRONG. NO ; in this country. Do you think that it has tended
to increase the brokers' loans?
Doctor MILLER. Yes; undoubtedly.
Mr. STRONG. Well, do you think that the fact that the committee
controlling the open-market operations are composed largely of
eastern men has any effect on the brokers' loans ?
Mr. MILLER. I don't think so.
Mr. STRONG. YOU don't think it is a factor ?
Mr. MILLER. I don't think so.
The CHAIRMAN. Does the fact that he referred to have any effect
upon open-market transactions?
Mr. STRONG. That is what I mean.
The CHAIRMAN. YOU said " brokers' loans."
Mr. STRONG. Well, I beg your pardon. I meant to ask whether it
would have an effect of raising or lowering the open-market operations. In other words, do you think that the fact that the committee
that controls open-market operations is composed mostly of eastern
men associated with eastern banks has any effect upon open-market
operations ?
Mr. MILLER. DO you mean by " open market operations "
Mr. STRONG. I mean the purchase and sale of securities. Does it
affect in the way of increasing or decreasing brokers' loans?
Mr. MILLER. Well, I think those two questions have got to be
answered separately.
Mr. STRONG. I would like you to answer both of them.
Mr. MILLER. I believe you asked, first, the question about the influence of the geography of committee on the open-market policy of
the system.
Mr. STRONG. Yes.
Mr. MILLER. I would

not say that it made any appreciable difference. In any event, the most important influence in that committee
is exercised by the representative of the Reserve Bank of New York.
New York is the money market of the country. It is the one definitely large open money market that we have. So that the attitude
of the New York Reserve Bank will carry it with great weight if
ably presented. It will be the most important influence in determining the views and recommendations of the committee, no matter
what its geographical representation.
Mr. STRONG. New York, of course, is just as interested in the money
market as in our foreign loans, the stabilization of foreign nations?
Mr. MILLER. Yes.
Mr. STRONG. Then

is it the best thing for the country to have the
committee that controls open-market operations, the buying and
selling of Government securities, the increase and reduction of the
currency and of the volume of money in circulation—is it the best
thing for the country to have that committee composed altogether
of eastern men?



Mr. MILLER. Well, Chicago is represented on the committee; it is
not an eastern city.
Mr. STRONG. IS that a very large factor in the operations of the
committee ?
Mr. MILLER. NO ; but it would not be even if Kansas City or San
Francisco or Minneapolis were on the committee.
Mr. STRONG. Suppose it were composed of representatives of San
Francisco, Kansas City, New Orleans, Chicago, and New York. Do
you think that the New York situation would control them, anyway?
Mr. MILLER. Well, as a rule, it is only the men who are close to
the money market who have very definite convictions as to what the
situation of the market is and what is required. You know in New
York banking is a primary industry. In most other places it is an
auxiliary. New York is banking center not only for the country
but for the world. The result is that men who come to the front in
New York as bankers are men who, so to speak, belong to the master
class in banking, and they usually put their ideas over upon those of
less prestige and experience.
Mr. STRONG. Well, the Federal reserve system was created for the
benefit of the whole country, wasn't it ?
Mr. MILLER. I know that.
The CHAIRMAN. Let me ask you, Doctor Miller: These conclusions
and recommendations of this open-market committee are referred to
the Federal Reserve Board, are they not ?
Mr. MILLER. Yes.
The CHAIRMAN. And approved or disapproved by the board ?
Mr. MILLER. Yes.
The CHAIRMAN. Before they are put into operation ?
Mr. MILLER. Yes; or modified.
Mr. WINGO. Doctor, the price level in Kansas City for money


credit is higher than the price level in New York City, isn't it?


And that is true of Chicago not quite so much ?

I think it would be safe to say that the price level
in Kansas City is a little bit higher than in Chicago ?


At times, especially ?
One moment. You have always got to except, of
course, in any statement of that kind, the rate paid by borrowers who,
so to speak, have access to the money market of the whole country.
There are borrowers in Kansas City who can borrow in New York
or Chicago. If the rate in New York City is lower than in Kansas
City, banks in the latter place have got to meet the New York rate
to hold the account, or at any rate, to get the current business of
the customer. In other words, commercial rates are competitive for
the best class of customers.
Mr. WINGO. That refers only to loans, I suppose ?
Mr. MILLER. New York maintains a considerable competitive market for loans from other sections of the country.
Mr. WINGO. I am talking about the mass of banking credit. Perhaps there may be some exceptional eases in which people in New
York City and in Pittsburgh in recent months have financed themselves in Chicago banks. But I am talking about the mass of bank-



ing credits in Kansas City. The rates out there on individual loans
are higher. Everything is higher from a banking credit standpoint.
So that a rate in Kansas City as compared to New York is a relatively
lower one if it is identical. In other words, a 5 per cent rate in Kansas
City is a great deal lower in its effect in Kansas City than a 5 per
cent rate is in New York City.
Mr. MILLER. YOU are now speaking of the discount rate ?
Mr. WINGO. Yes; the discount rate.
Mr. MILLER. That is correct.
Mr. WINGO. The banking rate.
Mr. MILLER. That is correct.
Mr. WINGO. That is the real effect of these changes, because the
local rate very rarely changes at Kansas City or Chicago, except
to preferred customers.



Mr. WINGO. If that be true. Doctor, if you have the same identical
rate in Chicago and Kansas City that you have in New York, a well
recognized law will cause a flow of the surplus credit to New York
City; and the only way that Chicago can hold that credit would be to
raise her rates to a comparative level with New York, which would be
higher in percentage?


Mr. WINGO. Isn't that true?
Mr. MILLER. It depends on what you mean by " law," and what the
conditions at the moment are. The thing that attracts out-of-town
money to New York is principally the call-loan market. Secondly,
it is the commercial paper market, though that is a less important
Now, you may have a call rate in New York through a period of
weeks of 5 or51/2per cent, with the discount rate in New York at the
reserve bank of 4 per cent or of 41/4per cent. In either case it would
be the call rate that would bring money there, whether the discount
rate happened to be proximately abreast of the call rate, or whether
it happened to be lower, except in the contingency that the lower
discount rate in the New York bank would act to draw money of the
Federal reserve bank into the call market in competition with the flow
of out-of-town money, and thus check the influx of out-of-town money
by weakening call rates.
Mr. WINGO. This is true, isn't it, Doctor; and it is responsible for
one provision of the Federal reserve law? It is true by actual experience as well as by theory that you may have a tightening of local
money in Kansas City, and after the conditions have disappeared,
you have freer money in New York City? Isn't that true?
Mr. MILLER. I think so. There would, however, be a certain tempering influence, I think. The New York banks go out and seek
business where money is tight, if they can not get all the kind of business they want at home. The New York banks are competitors for
good business all over the country, and have accounts from large
borrowers in every section of the country. When they are under
pressure to find an outlet for surplus funds, they are very much more
likely to be keen competitors to get new customers from the interior
than they are at times when they have no difficulty in investing their
moneys to good advantage right in the New York market.



Mr. WINGO. It is true that in the last few years there has been a
great tendency on the part of banks in Chicago and St. Louis and
Kansas City to invade the territory of New York and to invade the
territory of each other on these large loans ?


I happen to know by hearsay of several instances of
that kind in the last several months whereby one big concern in western New York was financed by money in Kansas City.
Mr. MILLER. Yes. Take the recent situation in New York and the
advance of the discount rates in Boston and, say, St. Louis. The New
York banks were reducing their funds in the call market, and the
money market in New York was under a certain pressure because gold
was being withdrawn for export, and also because of sales by the Federal reserve system of securities in the open market. The effect of
open-market sales and purchase is, of course, always most immediately and keenly felt in the New York market, because that is in a
special sense the national money market. The result of the recent
pressure in New York was that those who were looking for money
against collateral loans there had to get it somewhere else than from
the New York banks; had, indeed, to get funds from the outside for
use in New York banks. The demand for money in New York was
spilling over into other districts. There was some evidence that such
was the case with regard to Boston, and the Boston bank had to take
some measure to protect itself against the diversion of its funds into
uses that were not obviously local and commercial in character. The
discount rate was their method of doing that, which bears out what
Mr. Wingo said, that under a situation such as we particularly had
recently a uniform rate as between New York and other districts
means actually and effectively that the New York rate is the higher
Now, the movement of loose money is toward New York when there
is no adequate home demand; and that movement is stimulated by
anything that puts up or works up the rate in New York. So that
sometimes an interior district has got to, as it were, make a counterdemonstration against the movements that are going on in the New
York money market by making the discount rate at the Federal
reserve bank a little higher by making money a little less easy in the
interior banks.
The CHAIRMAN. It is time to adjourn now. We will adjourn until
10.30 o'clock to-morrow morning.
(Whereupon, at 12.20 o'clock p. m., the committee adjourned until
Tuesday, May 1, 1928, at 10.30 o'clock a. m.)

Tuesday', May 1, 1928.
The committee met at 10.30 o'clock a. m., pursuant to adjournment,
Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order.
Dr. Oliver M. W. Sprague, of Harvard, is here this morning, and
we will be very glad to hear you, Doctor Sprague, on the subject of
this bill. Mr. Miller, of the Federal Reserve Board, will continue



his testimony before the committee to-morrow, providing the committee adjourns until that time. He has very kindly given way to
Doctor Sprague this morning, who has to leave this afternoon.

Doctor SPRAGUE. I appeared before the committee two years ago
and discussed the bill in its then form, and much that might be
pertinent was said then.
The bill in its present form seems to me more satisfactory than
the earlier draft. The changes that have been made serve in some
measure, at all events, to meet criticisms that were made against
the measure—criticisms largely founded upon the fear that the bill
would be misleading, suggesting to the public accomplishments by
the reserve system which were beyond its powers.
I am not sure, however, that the modifications that have been made,
or other modifications that might be suggested, would serve entirely
to meet the objections that are raised against a measure of this sort.
The purpose of the measure being to stabilize the price level, the
question must necessarily present itself, How far is it possible to
stabilize the level of prices through reserve bank policy, and the
further and even more difficult question, Is it desirable to attempt
such stabilization?
There are difficulties, as I see the matter, both practical and general. In the first place, the business community is not as yet converted to the proposition; and, after all, in executing this policy
through the reserve system, the system must act upon and affect the
business community. I am not sure but that there should be some
years of further successful missionary work before it would be
advisable to amend the Federal reserve act along the lines suggested
by this measure.
In the second place, I am impressed by the conspicuous lack of
belief in this measure on the part of those intrusted with the management of the Federal reserve system. It seems to me that it is a
little as if a missionary society were to engage a number of agnostics
to go out to China to convert the people of that country to Christianity. After all, the policy expressed in this measure must be
executed by the officers of the reserve system; it is not a measure
which provides automatic means for its execution. There is a provision in the reserve act to the effect that the banks must maintain
a reserve ratio of 40 per cent against Federal reserve notes and 35
per cent against deposit liabilities. Even though officers of reserve
banks might not believe that that was a necessary or desirable provision in the act, it is a perfectly clear-cut provision which can be
readily obeyed and followed, regardless of beliefs as to its wisdom
or desirability. When, however, you come to a provision directing
the promotion of a stable value of the dollar, you are requiring the
management of the reserve banks to do something that can not be
done except by the exercise of judgment in a succession of situations.
I should, therefore, have very much more hope of successful results
from this measure if there were a more general consensus of opinion
of the public outside and in the management of the reserve banks



both as to the desirability and the feasibility of the policy embodied
in the measure,
I now come to a general examination of the possibilities of executing
this policy through the Federal reserve banks, including the related
subject as to whether the passage of this measure will in practice
make any particular difference in the determination of Federal reserve
I ask myself what I would do if I were a responsible officer of a
Federal reserve bank, after the passage of this measure, other than
what I would presumably do if the measure were not passed; and
I am not able to say that I should do anything very different following the passage of this measure from what I would be disposed to do
in any event.
If there were clear evidence of a rapid upward movement of prices
and speculative purchases of commodities, accompanied by a growing demand for credit, manifested, among other ways, by an increased
demand for rediscounts at Federal reserve banks, I should favor an
advance in the discount rate, as well as, perhaps, other measures designed to check such undesirable developments. I would not measure
the situation exactly by an index number, by the movement of prices,
but I should consider the movement of prices as one of the factors
leading to the action suggested, namely, an advance in the discount
rate. But no particular advance in prices of 3 points or 6 points
or some other number of points in an index number would determine the decision at which I think I should probably arrive. The
upward movement of prices would be simply one factor in the situation, sometimes significant and at other times probably of minor
If, for example, I had been concerned with the Federal reserve
system during the last three years, I do not believe that the movement of prices would have been a large factor, in my judgment, as
to what it was desirable to do. The movement of prices has not been
sufficient to suggest that price movements have been a large factor
in the situation. Other considerations would have been, in my judgment, controlling as guides of action.
Now, I wish to indicate certain situations in which an attempt to
offset or counteract a given price tendency might be positively
Let us suppose, for example, that certain important lines of business activity should be overdeveloped—let us say automobiles and the
building industry—so that a desirable readjustment presumably
would involve some shrinkage in the amount of labor and capital
employed in those industries; certainly not a further expansion.
An adjustment or readjustment of that sort would probably involve
a slackening in trade activity for the time being, and presumably
would be reflected in some decline in the general level of prices.
Mr. KING. DO you object to an interruption ?
Doctor SPRAGUE. NO ; I welcome interruptions.
Mr. KING. I S this all based upon theory, or have you some actual
demonstration of what you are testifying about?
Doctor SPRAGUE. I am going to give you one in a moment. That
would be my judgment as to the development of prices in that event;
that prices would decline somewhat, and that an attempt to offset



that decline might very readily defer that necessary adjustment and
make it more serious.
I will now take the particular case of agriculture. Agriculture, in
my judgment, throughout the world has been overdeveloped. I see
no possibility of the speedy development of a largely increased demand for agricultural products. The adjustment that has been
taking place in the last few years has been one which has been
marked by some shrinkage in the acreage under cultivation. Agricultural prices in these circumstances have exhibited some downward
tendency, and I do not believe that it would have been of advantage
to agriculture at any time during the last few years, on the basis of
average prices, to have injected additional credit into the situation.
I should expect that that additional credit would in the main have
stimulated other prices than agricultural prices. It may be that
additional credit at various times during the last five years has been
desirable, but I do not believe that the test of its desirability has
been in the movement of prices during these last four or five years.
Now, let us take another situation.
Mr. WINGO. Before you leave that, may I ask a question ?
Doctor SPRAGUE. Yes.
Mr. WINGO. Would you mind stating upon what you base your
conclusion that, notwithstanding the probable continued increase in
the growth of population of the world and a steady improvement in
the standard of living the world over, you still think there will not
be any corresponding increase in the consumption of agricultural
Doctor SPRAGUE. If you take the western world, I should say that
most people have nearly all or quite as much to eat as they really
want; that urban populations and machine-tending populations do
not eat as much as a population that is working mainly out in the
open air, doing heavy work. It is for this reason that I do not
believe that an increase in the consumption of food can be brought
about by a decline in its price. The demand for those products
appears to me rather an inelastic demand; increasing, of course, with
the growth of population, but with additional supplies to meet the
requirements of the growing population available from a great many
different sources in addition to the area under cultivation in the
United States. I do not know of any agricultural product for which
profitable prices could probably be secured in the event of an increase
of, say, 10 to 20 per cent in the amount produced. For that reason I
see very little advantage or hope of a complete readjustment in agriculture merely through diversification or a lowering in the cost of
Mr. STRONG. In response to Mr. Wingo's question you gave your
opinion. Have you any statistics or figures upon which to base your
opinion ?
Doctor SPRAGUE. The Department of Agriculture and the Bureau
of Food Research in California have developed a certain amount of
data regarding the amount of food being consumed upon a per capita
basis, and it has declined somewhat. I have not that data here.
Mr. STRONG. They hold that there is less food consumed in the
United States than formerly ?



Doctor SPRAGUE. Per capita; yes. I think we all know that in our
own experience; that the thick steaks that people used to eat are not
apparently in demand any more.
Mr. STRONG. Not for us, Doctor, but for the young man and the
workingman. Do not they consume just as much?
Doctor Sprague. No; a man who is sitting before a machine does
not eat as much month after month as a man who is engaged in
active, arduous outdoor work.
Mr. KING. Would it not take his whole pay for one day to pay for
a decent steak nowadays? Is not that one of the reasons why he is
not eating them?
Doctor SPRAGUE. I might say that there are some possibilities of a
refinement in the quality of the food consumed.
Mr. KING. IS it not due to the cases of diabetes and to food advice
by the doctors?
Doctor SPRAGUE. Very likely that is a factor. But I take the feet
as I find it, and I believe that it is exceedingly difficult, through any
probable reduction in costs and any probable reduction in price, to
bring into the market a very large increase in demand.
Mr. STRONG. Then it is your idea that farmers can not look for
much success in this country in their industry?
Doctor SPRAGUE. They can look for the same sort of success which
has been experienced by my friends in Vermont. We have lived
under conditions since 1870 in which no one has anticipated that the
price of land was going to improve. A large acreage of the less
fertile land is not now in cultivation that was in cultivation in 1870.
A comfortable living is derived from the better lands, and only from
them; and I believe that that will be the case throughout a widening
area in the United States.
Mr. STRONG. Then those who engage in extensive farming as a
business must fail?
Doctor SPRAGUE. I would not wish to make that statement.
Mr. STRONG. That would be the conclusion. If there is a living to
be had only from the better farms, and if a man who goes into farming extensively can not get more than a living, he can not possibly
hope to get a fair return on his investment.
Doctor SPRAGUE. N O ; and no one is getting a fair return on his
investment in Vermont if he reckons his investment at the price at
which land was selling in 1870.
This is rather aside from the discussion of this bill, except that I
do not see any particular relief for any particular overdeveloped industry in this measure. At most it will have a generally ameliorating effect upon all industries; it will be of as great advantage to the
successful industries and the growing industries as to the others.
But the contribution that it will make, at most, will not be sufficient
to render the declining industries profitable or to render unnecessary
from time to time a readjustment of the capital and labor force of the
community, withdrawing it in some directions and increasing it in
Mr. STRONG. DO you not think the stable purchasing power of the
dollar, if it could be brought about, would be of great benefit to all
classes of the Nation ?
Doctor SPRAGUE. It would, depending upon what you mean by the
stable purchasing power of the dollar.



Mr. STRONG. I mean as measured by what it will buy of commodities in general, of course.
Doctor SPRAGUE. Yes. But, the problem that will confront the
management of the reserve system is to know when to act; what
degree or amount of variation in the purchasing power of the dollar
should be regarded as the basis for action on its part; and then a
further inquiry as to whether action will be desirable. When prices
are advancing by leaps and bounds, and there are speculative commitments in many commodities, that is a clear case for action; but
I hold that there may be declines in prices which reflect a necessity
for some readjustments in the capital and labor force of the community, and that in those circumstances the decline in prices will not
be at the outset a reason for taking action on the part of the reserve
Mr. STRONG. YOU are speaking of general prices?
Doctor SPRAGUE. Yes. And again I hold that a moderate upward
movement of prices, beginning, let us say, now, may be at some date
in the future a significant factor in the determination of reserve
bank policy. Just when it will be is very uncertain. Let us suppose
that the price level is now 96, measured by the 1926 level, and that
prices begin to move upward, and they go to 97, 98, and 99. When is
it desirable that the reserve bank management make an effort to
restrain the upward movement of prices? Sometimes it might be
desirable so to do when prices had moved to 99; at other times it
might not be advisable to take any action until prices had moved,
say, to 102. It will depend upon all the other factors in the situation
as regards these slight fluctuations. Judgment must be exercised in
any event as to when it is desirable to do something.
Mr. STRONG. But you feel that there should be a time when that
judgment should cause the management of the Federal Reserve Board
to act?
Doctor SPRAGUE. Oh, yes.
Mr. STRONG. Well, that is the purpose of the bill.
Doctor SPRAGUE. But I am inquiring whether the bill adds anything or compels the management of .the reserve banks to do anything different from what sensible men would in any event do as
regards short-time fluctuations. If this bill should compel or influence the management to make frequent changes in policy following
slight changes in prices, I should be afraid of the bill. If the bill
contained the words "extreme changes in prices in short periods of
time," I should say that there would be less danger of misconception
from the bill.
Mr. STRONG. The word used in the bill is " promote "—to promote
Doctor SPRAGUE. Yes.
Mr. STRONG. Not to indicate that every little change should call
for a change in policy, but that they should promote stability. Of
course the price level will tend upward and then it will tend downward. If it tends to a violent ascension of prices, then they are to
use their powers to promote stability; not for exact stability.
Doctor SPRAGUE. If that is the certain meaning of the measure;
if the measure will not tend to magnify unduly the significance of
price changes, I see no positive harm from the measure; and in so
far as it may serve in the public mind to emphasize the desirability



of general stabilization of prices or of the price level, it might do
no harm and might not inconvenience the management of the Federal
reserve banks. What I am afraid of is that in the process of converting the public to this measure overemphasis has been placed upon
the importance of the price level over short periods of time. Much
has been said, for example, before this committee regarding the
influence which the Federal reserve banks have exerted upon prices
during the last six years, and the impression has been created that
prices have been the major objective of Federal reserve bank policy
during the last six years. I question whether that has been the case.
All sorts of considerations have had a bearing upon reserve bank
Mr. STRONG. But you do agree that, as a policy, the Federal reserve system should aim for stability ?
Doctor SPRAGUE. Yes; I think that I could agree to that.
Mr. STRONG. Then you do not think that, acting under this bill, a
reasonable man of experience, such as we have and are apt to have
in the Federal reserve system, would attempt to use his powers with
every fractional increase or decrease in the price level ?
Doctor SPRAGUE. I should hope not.
Mr. KING. Why are you afraid of the public ?
Doctor SPRAGUE. I am not so much afraid of the public as I am
of the sort of propaganda that has been used for the passage of this
Mr. KING. IS not the public, as a matter of fact, keeping up with
you professors on all these things, and following you very closely ?
Doctor SPRAGUE. Well, the professors are not by any means in
agreement about the possibilities of the determination of credit policy
by price changes. They still feel that there is much to be learned
from additional experience, and some of us wish to be quite certain
that the movement of prices within moderate limits will not, either in
the management of the reserve system or in the judgment or expectation of the public, be made the invariable controlling factor in
reserve-bank policy.
Mr. STRONG. Doctor, to what propaganda do you refer as having
been used in favor of this bill ?
Doctor SPRAGUE. Not of this particular bill, but of priced stabilization as a possible gain to the community. For example, I noticed a
statement by one professor a short time ago
Mr. KING (interposing). What professor?
Doctor SPRAGUE. Prof. Irving Fisher—to the effect that the decline
in prices of 1926 and the first part of 1927, when business was very
active, was the prime cause of the subsequent recession in business in
the latter part of 1927. Now, I am not prepared to accept that for a
moment. In my judgment, in that period of 1926 and the first half of
1927, of very active business, had the Federal reserve banks, because
prices were declining somewhat, injected more credit into the situation, it would have developed at many points unsound conditions in
business which would have been followed by a more serious amount
of recession in the latter part of 1927, or possibly at the present time.
It is that sort of contention that, in all circumstances the movement
of prices should be a signal for taking immediate action, that I fear.
If restraint in judgment and in expectation accompanies this bill, as
to its possibilities, well and good.



Mr. STRONG. YOU know, Doctor, that the plan proposed in this bill
for stabilization, the using of the powers of the Federal Reserve System, is not the Fisher plan of stabilization.
Doctor SPRAGUE. Quite true; but if Mr. Fisher had been operating
the Federal reserve system I take it that he would have injected a lot
more credit into the situation in 1926 and the first half of 1927 merely
because prices were going down, although business was exceedingly
active and money rates were moderate,
Mr. STRONG. Because Doctor Fisher advanced an opinion with
which you do not agree, you do not propose to believe that that is
propaganda for this bill, do you ?
Mr. BEEDY. He has not said that. Mr. Chairman, I would like to
ask at this point, is the doctor making a statement, or has he finished
and is he now being questioned by the committee ?
Mr. STRONG. The doctor said he would welcome questions.
Mr. BEEDY. Then I want to make a motion that we hear the doctor.
Mr. KING. We have heard him, before you came in.
Mr. STRONG. YOU came in late.
Mr. BEEDY. That is why I am asking the question. If I had been
here I would not have asked it.
Mr. STRONG. Mr. Chairman, I rather think, when the doctor makes
the statement that there has been so much propaganda for the passage of the bill that, as the author of the bill, especially as I have sent
out no propaganda, I have a right to ask what he refers to.
Mr. KING. He would be justified in saying that about any legislation.
Doctor SPRAGUE. It is propaganda for stabilization. What de we
mean by stabilization? I am simply emphasizing the point that,
both in the management of the reserve system and in the expectations of the public, it would appear to me that a restrained attitude
as to expectations from the reserve system is proper.
Mr. STRONG. Let me suggest this, Doctor. Section (h) is practically the language of some of the officers of the Federal reserve
Doctor SPRAGUE. Yes.
Mr. STRONG. And it was drawn to avoid the very thought you are
suggesting; not of a change of policy on each small change in the
price level, but to promote stability in general by the use of the
powers of the Federal reserve system. The language of section (h)
was drawn and suggested by officers of the Federal reserve system
and not by myself.
Doctor SPRAGUE. It was with that in view that I stated at the outset that the bill seems to me to be in much more satisfactory form
than it was two years ago; and what I have said up to the present
point may be regarded as in the nature of support for the bill in that
I have indicated the desirability, in the event of the passage of this
legislation, that the conservative and moderate qualifying expressions used should be very clearly in the mind of the public and in the
minds of the management of the Federal reserve system.
Mr. STRONG. Would you suggest any change in the language of
section (h) to make more clear the thought that you and I both have
and agree on?



Doctor SPRAGUE. I t is probably impossible to express any view
except in negative language, such as to avoid extreme changes; and
possibly your positive expression, " to promote stability," serves the
Mr. STRONG. Let me suggest, Doctor, that there is one other change
suggested in line 7; to add the word " promote " and change " maintain " to " maintenance," so that it would read:
To promote the maintenance of the gold standard; to promote the stability
of commerce, industry, agriculture, and employment; and, after the word
" stable " in line 9, insert the word " average," so that it will read " and a more
stable average purchasing power of the dollar."

Doctor SPRAGUE. Yes; I have that in the draft that I have received.
I wish to turn from the situations presented by minor fluctuations
in prices, of somewhat uncertain significance, to problems presented
by prolonged trends upward or downward in the level of prices, and
inquire whether this bill is calculated to lessen the likelihood of such
pronounced or prolonged trends.
The trend of prices throughout the world over long periods of time
will depend in large part upon the monetary supply of gold and
methods of its use. If the world returns to the use of gold coin as an
essential part of a full gold standard, it is my judgment that there
will not be sufficient gold available to support prices at the present
level over the years to come. On the other hand, if gold is conserved
for bank-reserve use by its practical exclusion from use in hand-tohand payments, then I am inclined to think that the gold supply will
be adequate, and, at all events, that it will be a considerable number
of years before a possible inadequacy in supply will manifest itself
in a downward trend of prices.
Mr. WINGO. In other words, the management of the gold supply,
you think, is going to affect the future trend of prices ?
Doctor SPRAGUE. Yes. I should expect an immediate downward
trend of prices if all of the gold-standard countries, present and prospective, endeavored to use gold coin. Even if they do not use gold
coin, it is possible that there may be a downward trend in prices, but
it certainly would not come as soon. It might be manifest in 5 or
10 years or more, but it would not be an urgent question. The question that is urgent in connection with this matter at the present time
is the policy which may be adopted in different countries as to the use
of gold coin.
The CHAIRMAN. In that connection, are you familiar with the statement of Dr. John R. Commons before this committee on this same
Doctor SPRAGUE. Yes.
The CHAIRMAN. DO you agree with him as to his position on the
possible decline of the general price level; if there is a fulfillment of
the present tendency of the various countries of the world to go back
to a full gold basis, that the price level may go back to the 1913
normal of 100, declining from the present level of approximately 150?
Doctor SPRAGUE. I would not agree to that; certainly, if gold is
not introduced as coin. There is a statement which I handed Professor Commons, and which might be put into the record, by Professor Kemmerer, of Princeton, which presents a view with which I
am in agreement, with supporting figures. I would suggest that
that be placed in the record.



The CHAIRMAN. Have you a copy of that?
Doctor SPRAGUE. Professor Commons has a copy.
The danger of such a trend of prices does not seem to me to be
extreme, for the reason that a declining tendency in prices is disagreeable to almost all influential people in any community. The
damaging effect which a prolonged downward movement of prices
may have upon industry is such that I do not think we need fear
that policies calculated to bring that about will be adopted, or, if
adopted, will be persisted in.
The CHAIRMAN. Doctor Commons, who is present, has just handed
toe a copy of the American Economic Review of December, 1927, in
which the article " Postwar Movements Discussion," by E. W.' Kemmerer, on page 67, is recorded. Is that the one to which you refer?
Doctor SPRAGUE. That is the one; yes, sir.
Mr. STRONG. D O you want that placed in the record at this point?
Doctor SPRAGUE. I think it might well go in the record.
The CHAIRMAN. Without objection, then, this article appearing on
page 67, and including the first paragraph on page 70, will be inserted
in the record at this point.
(The article is as follows:)

[Discussion by Prof. E. W. Kemmerer, of Princeton University, at the Fortieth Annual
Meeting of the American Economic Association, December, 1927. (Proceedings, American Economic Association, 1927, American Economic Review Supplement, March, 1928,
pp. 67-70)]

I have read Professor Edie's paper with much interest and find myself in
agreement with much of what he says. There are many points in the paper,
however, concerning which I have serious doubts and, inasmuch as we profit
more by discussing our differences than our agreements, I shall devote the
few minutes at my disposal to one of these points, namely, to Professor Edie's
apparent belief that the world's gold production will soon be so inadequate
as to force upon gold-standard countries of the world a long period of falling
prices. He says, "Barring some wholly fortuitous event, the outlook for a
sustained increase in gold production is thoroughly discouraging," and his
discussion concerning increased economies in the use of gold in the future
yields an equally pessimistic conclusion. In such conclusions he has good
support in the opinions of no less authorities on this subject than Mr. Joseph
Kitchen and Prof. Gustav Cassel. And yet I have my doubts, and my reasons
for them I will suggest briefly: First, those relating to the supply of gold,
and second, those relating to the demand.
When, as a result of the war and particularly of the war-time depreciation
in the value of gold, the world's annual gold production fell off from approximately 22,000,000 fine ounces in 1913 to 15,500,000 in 1922, and the South
African gold production declined from 8,008,000 fine ounces in 1913 to 7,000,000
in 1922, we heard on every side pessimistic opinions as to the future production
of gold and prophesies that it would be many years before pre-war figures
of gold production would be restored, and that, at any rate, the return to
these earlier high figures was highly improbable at best before the pre-war
value of gold should be pretty well restored through a heavy decline in price
levels. Well, gold is to-day worth only about two-thirds what it was worth
in 1913, production costs in the best mines are actually lower than they were
before the war, and the world's total gold production which by 1922 had
dropped to 69 per cent of the 1913 production had risen by 1926 to 87 per cent
of the 1913 figure. South African production exceeded the 1913 figure by 4
per cent in the year 1923, jumping in that one year from the lowest figure in
20 years, which marked the year 1922, to the highest figure but one in the
history of the Rand, and every year since 1923 has registered a new high figure
for the Union of South Africa, which to-day produces over half of the world's
gold. A news item in the New York Times for December 18 says that the total
gold output of the Transvaal for the first 11 months of 1927 was "9,280,000



ounces, so that last year's total production of 9,962,852 ounces, which was a
new high record in the history of the Rand, will certainly be exceeded this
The London Times of November 30, quoting a report for the year 1926 of the
largest gold-producing company in South Africa, said: "The quantity of ore
crushed, gold produced, and profits obtained show large increases over previous years." A couple of years ago I visited one of the largest gold mines
on the Rand, where I saw gold mined at a depth of considerably over a mile,
a thing which would have branded a man as a mad man if he had prophesied
it a generation ago, while most of the gold was being produced from ores of
grades so low that they would have been discarded in the nineties of the last
century. Of the total world's gold production since 1492, about half has taken
place since 1901. New gold-producing areas are continually being discovered,
and it does not seem at all improbable that new methods may be discovered
in the future that will materially reduce the costs of production and bring
into use lower-grade ores than are to-day being worked, and of such ores there
are enormous quantities available.
Furthermore, as in the past, any appreciation of gold by reducing the price
level and, therefore, production costs, will tend to check itself by stimulating
increased gold production.
Passing from the subject of the supply of gold to that of the demand for
gold, the following brief observations may be made:
First, the evils of monetary instability are appreciated by the intelligent
public much more than they were a few years ago; likewise the possibility
and desirability of exerting strong stabilizing forces through cooperative action
among the world's leading central banks and among governments. The frequent conferences we have seen mentioned in the press in recent years among
the governors of the New York Federal Reserve Bank, the Bank of England,
the Bank of France, the Reichsbank, and other central banks are hopeful
signs. International conferences, like the Genoa conference, dealing with this
subject are likely to occur more frequently in the future under like conditions
than in the past because of the existence of the League of Nations. This sort
of international cooperation would probably become more powerful and effective in the future if need should arise to combat any strong tendencies toward
gold appreciation.
A possible form of international cooperation in the direction of stabilizing
the value of gold which has not yet been resorted to but which could probably
be used in case of great need in the future is the regulation of the flow of
gold into the arts. One can imagine few things that are affected with a greater
international public interest than the value of gold for monetary purposes,
and, on the other hand, one can imagine few things affected with a less international public interest than the principal uses for gold in the arts. Roughly
speaking, something like a half of the worlds' gold production normally flows
into nonmonetary uses. Certainly the flow of gold into these uses could be
materially restricted by taxes and other governmental measures, thus leaving
the monetary uses a larger proportion of the total annual production than
those uses now obtain under conditions of competition with industrial uses.
Second, we may expect, I believe, contrary to the opinion of professor Edie,
a much greater development of the gold-exchange standard in the future than
we have had in the past. There was a considerable development of the goldexchange standard before the war, as, for example, in India, Java, the Philip
pines, and the Straits Settlements, and it exists to-day in many more countries
than it did in 1913. In some of these countries, at least, it is not looked upon
as a half-way house on the way to the more customary form of the gold
standard. In the future the gold-exchange standard is likely to be adopted
particularly by smaller states and by colonies and other dependencies of larger
Third, there is an enormous possibility for the development of the check
system in most countries of the world, aside from Anglo-Saxon countries, and
the use of checks in place of bank notes is a large economizer of gold.
Fourth, and closely related to the above, in fact, another phase of it, is
the great economy in the use of gold that will result from increases in the
rate of monetary and deposit currency's turnover or, as it is often called, in
the velocity of circulation. The efficiency of monetary gold varies with the
rate of turnover of the gold coin itself, when it is used in hand-to-hand circulation, and of the notes and deposit currencies based upon gold when the gold
coin is withdrawn from active circulation and held as reserve against notes



and deposits. As population becomes more dense, business more efficient, and
transportation more rapid, we may reasonably expect increasing rates of monetary and deposit turnover. A gold coin that turns over, for example, twenty-four
times a year in hand-to-hand circulation when placed in a 40 per cent gold
reserve against bank notes of a central bank serves as the metallic basis of
two and one-half times its value in notes, and as each dollar in notes will do
as much money work as a gold dollar in hand-to-hand circulation the gold
dollar thus withdrawn and used as the basis of note issues has its efficiency
increased in the proportion of 60 to 24, or two and a half times. If the
same dollar in turn is taken out of the note-issue reserve and put into a 35
per cent gold reserve in a central bank against deposits, and if these deposits
in turn constitute on the average a 10 per cent reserve for the deposit of
commercial banks, and if these commercial bank deposits in their turn have an
average rate of turnover of thirty-six times a year, we have multiplied the
monetary efficiency of our original hand-to-hand circulating gold coins about
forty-threefold. The gold dollar in reserve against deposits is, roughly speaking, seventeen times as efficient as it was when held in reserve against bank
notes. These figures are, of course, hypothetical, but they are based roughly
upon estimates of monetary and deposit currency rates of turnover in the
United States and our present legal reserve requirements for the Federal reserve
system. The tendency of the world is likely to be strongly in the direction of
using the more economical media of exchange and the rates of monetary and
deposit turnover are likely to increase. The increasing influence of American
banking methods, particularly with reference to the use of checks, on other
countries of the world is likely to lead to more rapid development in the use
of deposit currency in other countries of the world in the near future than it
has in the recent past
All things considered, I am inclined to think that our anxiety concerning the
future of gold might better be directed less to the danger of currency appreciation
through gold scarcity, although such a contingency is, of course, possible, and
more to the question of what would happen to our financial structure, to the
distribution of wealth, and to the welfare of our educational, benevolent, and
other social welfare institutions if history should again repeat itself and modern
science should, despite all the wise prophesies to the contrary, perform another
miracle by devising a method for making synthetic gold cheaply. When the
ordinary layman is told that synthetic gold is already produced, but only at
extravagantly high cost, he is inclined to say, " If modern science can perform
the miracle of producing synthetic gold at all, the world would do well to
consider seriously ways and means for meeting the great problems that would
arise if some wizard should suddenly announce to the world that he had devised
a method of producing synthetic gold cheaply."
Mr. LUCE. Professor, for the 15 or 20 years prior to 1896 there
was such a downward trend. Why do you think that the same force
may not be repeated?
Professor SPRAGUE. Possibly because currency and credit are better
understood and the administration of currency and credit is more
highly centralized in central banks of different countries. We have
the agencies now developed in the different commercial countries
which are calculated both to recognize the presence of such a sitution[situation]and to take appropriate action in order to counteract its effects.
Mr. LUCE. Would that not seem, then, to prove that the manipulation of the price level is a possibility ?
Doctor SPRAGUE. The price level over long periods of time when
the basic question is the supply of reserves is subject to management
and control through structural arrangements rather than by policies
in banking operation, and will require, I believe, management and
control unless it happens that the gold supply is such as to maintain
prices at a desired level.
Mr. LUCE. Then, would it follow that this bill is not unreasonable
in its basic proposition ?
Doctor SPRAGUE. That has to do with the long-distance course of

Mr. LUCE. Yes.


Why, yes and no. The power of the Federal reserve banks in this matter is in some degree limited; they can not act
alone. If the situation which I have indicated as a possibility should
manifest itself of an inadequate supply of gold for monetary use, it
would hardly be possible for the Federal reserve banks alone to maintain by their own action within this country either stable world
prices or stable prices within this country. I t would be necessary
that cooperative action be taken among the various countries or
between the various central banks, and, in so far as the last sentence
of section (h) would appear to support or strengthen the authority
of the Federal reserve banks to engage in cooperative undertakings
with other banks, designed to meet an inadequacy in the supply of
gold, I think that the provision might prove serviceable.
Mr. WINGO. Do I understand, Doctor, that you think that it is
possible, by proper management of the world supply of gold, to
prevent a long period of gradual decline ?
Doctor SPRAGUE. Yes; to defer it certainly by the introduction of
many economies in the use of gold.
Let me illustrate by another possibility. Assuming that the central banks of the world should eschew a policy of pulling and hauling
in order to get gold, that they all recognized the desirability of free
gold markets susceptible to influence through changes in lending
rates, then it becomes less necessary for any particular bank to hold
as high a gold reserve as would be needed if all the various central
banks were working at loggerheads with each other, each scrambling
to get all of the gold and each placing obstacles in the way of its
going out.
Mr. WINGO. In other "words, if there is a proper cooperation in the
management of the world supply of gold you feel that a deficiency
of gold would not be realized?
Doctor SPRAGUE, I t would be certainly long deferred, in my judgment.
Mr. WINGO. Then do I understand you to take this position, that
there is a period of decline facing us, and its velocity is going to
be determined by how the gold supply is managed?
Doctor SPRAGUE. If you are thinking of periods of years and not
of the shorter time fluctuations, I do not believe that there is necessarily a period of decline in prices facing us, for the reason that we
have at least $1,000,000,000 in gold available to support either additional credit in this country or to export. That additional billion
furnishes a very satisfactory margin for additional credit expansion
here and in other countries.
The CHAIRMAN. YOU speak now of the cooperation with other
central banks. Of course, we all know that the Federal reserve
system here is cooperating with the central banks of issue of the
important countries of the world now. In other words, there is a
managed gold situation. Do you agree with that ?
Doctor SPRAGUE. Yes.
The CHAIRMAN. Take? for instance, the present exports of gold.
That is due to the carrying out of that cooperation in which we are
engaged, is it not? It is not a free movement of gold; it is a managed movement of export gold, is it not?




Doctor SPRAGUE. In part. It is managed in this sense, that we
regard it on the whole with satisfaction and are not disposed to take
measures directed toward checking it.
The CHAIRMAN. In other words, the present export of gold is benefiting the rehabilitation to a gold basis of some of these countries
Doctor SPRAGUE. Yes.
Mr. STRONG. And the system is permitting it?
Doctor SPRAGUE. Certainly. That is for the purpose, in large part,
of replenishing what are regarded as inadequate gold reserves in
various countries, in order to place them solidly upon the gold standard, but you come subsequently to a second stage, with most countries
fairly solidly upon the gold standard, and then the question may
present itself whether in the following years the supply of gold
will prove adequate to support sufficient credit to maintain prices,
or whether it will be inadequate with a consequent tendency of
prices over the years to decline, and I contend that with a reasonable
amount of cooperation among the central banks, and the establishment of free gold markets, and the practical elimination or continued exclusion of gold coin from circulation, that there does not
seem to me to be evidence of a probable inadequacy in the supply
of gold so far as, let us say, the next 10 years are concerned.
Mr. WINGO. Necessity will compel that management which will
prevent the hand-to-hand payment of gold, will it not?
Doctor SPRAGUE. Yes.
Mr. WINGO. And confine its use to reserve purposes ?
Doctor SPRAGUE. Yes.
Mr. WINGO. But the question of cooperation between the different
countries is a different proposition from confining the use of gold
within each particular country for reserve purposes, and your opinion
is that the supply of gold, whether or not it will be adequate to
maintain the price level over a long period, will depend upon
whether or not there is that cooperation?
Doctor SPRAGUE. Yes.
Mr. STRONG. TO permit that cooperation is the purpose of the
language in lines 11 and 12 of section (h) of the bill.
Doctor SPRAGUE. That seems to me to be a desirable feature in the
bill. The power may be implied now, but it is so important that it
may very well be desirable to have it definitely embodied in the
Mr. STRONG. DO you think the language of lines 11 and 12 in the
bill, in section (h), is proper?
Doctor SPRAGUE. The provision as stated excludes any other relationships. I should prefer a positive grant of power which might
leave open relations for other reasons which we can not now well
perhaps foresee. A positive grant of power which does not exclude
anything else seems to me to be preferable.
Mr. STRONG. I think I ought to say that that language is not my
own but was suggested to me by officers of the Federal reserve system.
Doctor SPRAGUE. Well, that is a mere suggestion. I do not regard
it as of vital consequence whether it is framed in this way which
seems to exclude other relations or not. The main thing is that it
certainly permits and authorizes those relations with central banks,



which all experience shows to be the most important of the relations
among the central banks of the different countries.
The CHAIRMAN. Right there, Professor, what you have said in
connection with this gold situation and the cooperation of our Federal reserve system with the other banks of issue indicates to me the
necessity for a continuance of these close working arrangements, at
least over a period of the next 10 years.
Doctor SPRAGUE. I think so.
The CHAIRMAN. Else there will be chaos.
Doctor SPRAGUE. Yes.
The CHAIRMAN. And if gold is permitted to flow without any
management, because of the important part it occupies in the world's
banking and stabilization, gold might go to a premium and there
might be a wild scramble for the accumulation of gold.
Doctor SPRAGUE. Yes; and that makes it necessary to hold more
gold in any particular country than would be the case if the scrambling was not going on.
Mr. STEVENSON. AS at present constituted, is it not pretty well
conceded that the banks have the powers which are being expressly
conferred in this bill ?
Doctor SPRAGUE, Yes; I think so.
Mr. STEVENSON. I S it desirable to declare everything in explicit
terms that the banks may do ? In other words, is it desirable for the
legislative department to step in and tie up and control absolutely
the administration of the financial affairs of this country ?
Doctor SPRAGUE. When you take into account all of the qualifications inserted in the measure, and also implied by Congressman
Strong, I confess I do not see that the situation, so far as the reserve
bank management is concerned, is essentially changed, and, as I said
before, if I were an officer of a bank, on the passage of this bill I
should feel that I could do practically what I was doing before, and
exercise my judgment as to when it was desirable and how far it was
desirable to take account of certain price movements.
Mr. STEVENSON. I notice in this morning's paper that on account
of the peculiar loaning conditions in which somebody has probably
short sold and somebody has probably long bought in New York, the
Senate committee is now undertaking to take steps to administer
the policy of the Federal reserve bank. What business have they
got to do that, and what effect is it liable to have upon the independence of the executive branch of this Government?
Mr. KING. They merely passed a resolution, if you noticed the
record, requesting a desistance and rescission of that practice. They
did not pass any law.
Mr. STEVENSON. They have not passed a law, but they are interfering with the executive arm of the Government.
Mr. KING. Not at all.
Mr. WINGO. Of course,

they intended to give the executive officers
the benefit of their wisdom.
Mr. GOODWIN. DO I understand that the Federal Reserve Board
now has the authority which Congressman Strong seeks to obtain
through the provisions of his bill ?
Doctor SPRAGUE. I think that they have. I believe they have a
legal opinion to the effect that their various arrangements in connection with stabilization are entirely within the implied powers of



the reserve banks and central banks, since they are the sort of things
central banks have done for generations.
Mr. GOODWIN. Has the board failed in the exercise of that prerogative or power ?
Doctor SPRAGUE. I do not think so. The board and the banks did
not in 1919 and 1920 restrain the upward movement of prices, I do
not think that there would then have been any difference if these
provisions had been originally in the Federal reserve act, because
the credit policy of the system was determined by the Treasury at
that time, and it is only in the event that the presence of these provisions would have modified Treasury policy that it would have had
any effect upon the volume of credit and the price movement in 1919.
I regard this as a measure for times of peace, and I see no great
harm in it and I see no great change involved from its passage in
the probable policies which the reserve banks will follow in the
future. I t is an expression of a pious wish that the reserve banks
should give a good deal of attention to the movement of prices in
the determination of policy, and I presume they do give a fair
amount of attention to the movement of prices now, as well as to
much else.
The CHAIRMAN. Your statement before the committee in relation
to these powers this morning presupposes that the Federal Reserve
Board, in the exercise of these various powers, has such influence, if
exercised by them, either singly or totally, as to affect the general
price level; is that correct?
Doctor SPRAGUE. Yes. Then the question that really presents itself
in any situation is whether it is desirable to affect the price level,
and I might further add that I am uncertain as to the possibility
of smoothing out by reserve-bank action the slighter fluctuations in
prices. I am convinced that at any time the reserve banks, by taking
the bit in their teeth, could either engineer a decided upward movement of prices or a decided decline in prices, but no one supposes
they will do that.
Mr. STRONG. NOW, suppose that they will do that. Suppose that
the membership of the Federal Reserve Board should so change that
the men in charge might conscientiously believe that it was for the
best interests of this country to have rising prices or falling prices;
would not such legislation as this be very helpful at that time?
Doctor SPRAGUE. That seems to be an exceedingly improbable situation with the existing organization of the Federal reserve system.
I should suppose, for example, that a decided movement of that sort,
initiated by the Federal Reserve Board under, we will say, political
impulse, would be promptly checked by, let us say, the resignation of
the six selected members of the directorate of the Federal Reserve
Bank of New York, and similar action on the part of the directors
of other banks. If we are in a situation of public opinion of such a
nature that the directors of all of these various banks do not oppose
a policy of that sort, I should expect that, if necessary, this provision
of the Federal reserve act would be repealed.
It is an improbable sort of a situation, in my judgment.
Mr. STRONG. But not an impossible one ?
Doctor SPRAGUE. Perhaps not.



Mr. STRONG. Well, in that case, this kind of legislation would be
preferable to the remedy you suggest might follow, that of the resignation of the directors of the banks.
Doctor SPRAGUE. Well, I much prefer personally to legislate for
positive, present needs rather than so improbable a situation.
At all events, that possibility does not, in my judgment, materially
strengthen the case for the bill. I rather prefer to consider it in its
bearing upon the every-day operation of the system and its bearing
upon large general problems, such as the adequacy of the gold supply.
The CHAIRMAN. Doctor, yesterday, before the committee, Doctor
Miller, of the Federal Reserve Board, referred to the last six months'
period of the operations of the Federal reserve in which he dealt with
the lowering of the discount rate in the early fall, and he referred to
its effect and spoke of the speculative situation or the increase in the
rise of stock values, etc., and in that connection he dealt with the openmarket transactions of the Federal reserve, rather expressing an
opinion that, in his judgment, open-market transactions as conducted
by the Federal reserve should be discontinued.
The committee would be very glad, I think, to hear you on that
matter. It is a rather broad suggestion, but I think I have made
it sufficiently clear so that perhaps you can give us a statement of
your views of that.
Doctor SPRAGUE. I am disposed to think that the Federal reserve
system can not function as an active influence in this country in the
absence of open-market operations. When the reserve act was passed,
I think most people presumed that the member banks would be
regular or frequent borrowers of the Federal reserve banks, and that
the demand for rediscounts would rise and fall with the varying
demands for credit on the part of the industry of the country and that
the supply of credit made available by the Federal reserve banks
would be very nicely adjusted to requirements by a wise policy in the
matter of the rediscount rate.
That, experience shows, is not the situation at all. The member
banks are not regular and eager borrowers at the Federal reserve
banks, and consequently the operations of many of the Federal reserve
banks often have but a slight bearing upon the credit situation in
their own locality. At the present time, for example, the Federal
Reserve Bank of Kansas City is discounting for member banks only
$19,000,000, and the reserve bank at Minneapolis is discounting some
$3,000,000 for member banks.
Obviously the operation of these banks is not a large factor in the
credit situation of those localities. If the Federal reserve banks
were to eliminate open-market operations, the immediate effect would
be to increase any rediscounts, but after a period of adjustment we
should find our member banks borrowing very infrequently at reserve
banks and the rediscount rate exerting a very slight influence upon the
credit situation.
If we wish to accomplish anything in particular through the Federal reserve banks, whether to influence prices, money rates, or whatever it may be, I am inclined to think that most of that influence must
be exerted and initiated through open-market operations, which will
inevitably in large part be centered in New York, because that is the



only market for large amounts of Government securities, whether for
purchase or sale.
Mr. WINGO. In that connection, the open-market operation is not
confined to Government securities but to bills and acceptances.
Doctor SPRAGUE. But the bills and acceptance in large part are
also marketed and located in New York. The different reserve banks
hold acceptances as well as Governments, but practically all of the
acceptances and the Governments held by, say, the Kansas City bank,
are purchased for their account in the New York market. The
purchase by the Kansas City bank of acceptances and Governments
does not directly affect the situation in the Kansas City district.
What happens is that additional purchases of Governments and lower
rates for acceptances initially place additional funds in the New York
market tending to a reduction of rates there, with a seepage of funds
out to the country, if there is a demand in the country, and a tendency
toward lower rates throughout the country than would be the case
in the absence of this open-market operation.
Now, the question presents itself whether in any particular situation it is desirable that there be an enlargement of open-market
operations, an easing tendency in rates, or the reverse.
Last summer it seems to me that it was altogether advisable that
there should have been some easing in rates and some addition to the
supply of credit, because of the indirect effect in supporting or assisting the maintenance of the gold standard in other countries and because to some extent it facilitated the marketing of foreign securities
here and the foreigners' ability to pay for a variety of our staple
On the other hand, there was a certain price to pay for these advantageous results. Incidentally, it supported a further upward movement in the securities market. It did not give rise to speculative
activities in the commodity markets. Had it done so, I would say
that we had paid too much for the incidental advantages which I
mentioned as arising out of easier money. It was confined to the
stock exchange in large part. I t is difficult to point out any other
direction in which the open-market operations of last summer have
had a possibly undesirable result.
Now, an advance in security prices on the stock exchange may go
too far and the market may ultimately fall from its own weight, but
that is a matter of secondary importance as contrasted with extreme
expansion prices of farm lands or urban real estate or commodities.
Mr. STEVENSON. YOU have stated that it had practically no effect
on the commodities market, although it did possibly stimulate the
price of stocks. Why is it not desirable, if it is desirable to stimulate
the price of stocks, to stimulate the price of commodities ?
Doctor SPRAGUE. It is not desirable.
Mr. STEVENSON. YOU consider it an evil, then?
Doctor SPRAGUE. If it goes too far.
Mr. STEVENSON. But why is it not a good thing occasionally to
stimulate the commodity markets?
The CHAIRMAN. AS a matter of fact, is it not a fact that this action
of the Federal reserve management did stimulate the price level of
agricultural commodities?
Doctor SPRAGUE. It stimulated it, but it did not result in anything
that anyone could style undue stimulation.



Mr. STEVENSON. It did not become a speculative matter at all. I t
did not go to the point where it made a hardship on the consumers,
but every stimulation that you give to commodities helps a man who
has commodities to sell, and there are a heap more of them that have
commodities to sell than there are of those who have stocks and bonds
to sell.
Doctor SPRAGUE. But stimulation of commodity prices to the extent of bringing about undue speculation is far more dangerous and
more serious in its repercussions upon the community than a similar
development in the securities market.
Mr. WINGO. Doctor Miller's suggestion was, as I gathered it, that
the open-market operations of the Federal reserve system are not so
important, as controlling, as some people thought. What is your
conclusion upon the statement you have just been making
Doctor SPRAGUE. On the statement I have made, I consider they
are vitally important in the conduct of the Federal reserve system,
but that they require energetic and farsighted handling.
Now, I wish to go on to the more recent situation. Having secured
the advantages that I have indicated from the open-market operations in the summer, with the incidental possible disadvantage of
undue speculation on the stock exchange, we reach the beginning of
the present year, when the advantages gained from increased openmarket operations had been secured. The time was ripe for reversing
the movement. By that time the position was such with regard to
foreign-exchange rates and other matters so that a fair amount of
pressure might be exerted upon the market, and this was initiated by
a slight advance in the discount rate and some contraction in openmarket operations, with apparently an expectation that the result
would be as in 1926, when similar operations were followed by some
decline on the stock exchange and the liquidation of 500,000,000 in
stock-exchange loans.
Events have not followed that course this year, for the market,
after a slight decline, began to rise once more and now presents the
earmarks of a boom, analogous to the boom in Miami, Fla., two or
three years ago. The more prices go up, the more active is the
Mr. WINGO. Then you say that Doctor Miller's theory is correct—
that the open-market operations as a controlling element failed ?
Doctor SPRAGUE. NO. The failure in this instance was not due to
defects in the device, but to a failure to use the device of open-market
operation adequately. At the beginning of March, the Federal reserve
banks had sold three hundred million of governments, and on evidence that the pressure exerted was not adequate, rapid sales of one
or two hundred millions more of governments would have served
the purpose, in my judgment, but not having served that purpose
what is happening? We are having rates advanced throughout
the country solely on account of undue activity on the stock
exchange. The rates have been advanced in St. Louis and Minneapolis and Chicago for no reason arising out of the local situation in those
districts, but solely because of an undue absorption of funds on the
stock exchange.
Mr. WINGO. May I point out, as I did yesterday, that, taking it
as of the first of the year, when you reversed the policy, it started
the tightening process for the purpose of checking these stock loans,



and the net result has been that while you decreased the volume in the
New York banks you increased the volume of the out-of-town banks,
and there was really a net increase of brokers' loans which is now
greater than it was at the beginning of the year.
Doctor SPRAGUE. Quite so. Now the question is the remedy, and I
think the remedy is a perfectly possible one. There are two remedies, the one remedy being desirable and the other, in my judgmet [jud
It will be possible to check the upward movement on brokers'
loans and the advance in security prices by a progressive advance in
rediscount rates by all of the Federal reserve banks to a high level.
It may be that a general advance to 41/2per cent will turn the trick;
possibly 5 per cent; maybe 6 per cent; but I think it is most unfortunate that the rediscount rate of the reserve banks should be merely
determined by what is going on in the securities market. That seems
to me to be too much like the tail wagging the dog.
Now, I wish to come to the other method which can be used in
order to meet this particular situation. The Federal reserve act
states that the purpose of the measure is to accommodate commerce,
industry, and agriculture. It is not to accommodate commerce, idustry[industry],and agriculture to move up discount rates at the reserve
banks merely because of a crazy stock market, and therefore I contend that it is entirely in accord with the spirit and purpose of the
Federal reserve act that the Federal reserve banks should indicate
their unwillingness to rediscount at any rate and for any appreciable
period of time in the present juncture for banks that have a large
line of call loans on their books. It is perfectly feasible to bring
about a reduction of call loans by informing the 100 largest banks of
the country that the reserve banks will be indisposed to lend as much
as they may ask when they have a large volume of call loans which
they can liquidate. It is perfectly possible to reduce the volume of
call loans without any further advance in discount rates by the
Federal reserve banks.
Mr. STRONG. Would not that be in violation of the present law
just as they usually use the powers of this system to accommodate
business ?
Doctor SPRAGUE. It does not accommodate business to have your
hand forced and be obliged to put up the rate at the Kansas City
bank to 5 or 6 per cent simply because of prices on the stock market.
Mr. STRONG. But at long as they come with eligible paper
Doctor SPRAGUE (interposing). Oh, no.
Mr. STRONG. IS not the language of the law " to accommodate business " ? If the increased activity of business requires more money,
and we have the eligible paper, and the wording of the law is that
you should accommodate business
Doctor SPRAGUE (interposing). A bank is a bank. It has a right
to refuse to lend when the indirect result of that operation is to add
to rather than to diminish the burdens of business.
Mr. STRONG. Then you think the powers of the Federal reserve
system, I take it, should be used for stabilization ?
Doctor SPRAGUE. I think that in this particular instance they
should be used to check a particularly undesirable development in a
certain direction which is having other reactions upon the business of
the country.



Mr. STRONG. That is the purpose of this bill.
Doctor SPRAGUE. Well, this particular situation has no particular
reference to prices. Possibly your phrase, " stabilization of industry
and commerce," might add force and support to my contention, but
if anyone holds that the reserve banks are bound to lend to a bank
simply because it offers eligible paper, then I think an additional provision should be put into the Federal reserve act to the effect that
the Federal reserve banks are not obliged to lend merely because
eligible paper is tendered.
Mr. STRONG. They should use their powers for stability and stabilization.
Doctor SPRAGUE. For a great variety of purposes.
Mr. WINGO. As I understand your suggestion, it is that the Federal
reserve officials, who have the power, should say to their member
banks that they shall not have loans for the purpose of doing indirectly what is now forbidden to be done directly; that is, stockmarket loans are not permitted to be rediscounted under the Federal
reserve act, and they are getting around that by bringing in eligible
paper for the purpose of procuring funds for stock-market operations.
Doctor SPRAGUE. I would not put it on that ground. Take a situation like this: Suppose that brokers' loans were far below what they
are now, and that the rate was below other lending rates, as was the
case some months ago, and a bank comes into the Federal reserve bank
to borrow and it has some call loans. I see no objection to granting
accommodations to that bank in that situation. It is because stockexchange expansion has gone to an undesirable extent, and even more
because it is tending to raise rates on other classes of loans, that I
contend that I would exert a little discrimination.
Mr. WINGO. But they now have the authority; that is the point
I am getting at. It does not require a resolution of the United States
Senate or an act of Congress to tell the responsible officials of the
Federal reserve system that they must not permit loans indirectly
that are barred directly.
Doctor SPRAGUE. If we regard it at the time being as undesirable,
but I do not want to have it generalized that you are never going to
lend to a bank that has call loans. It is because the demand for
call loans has become so insistent that the rate is high, and it is
drawing money from other sources and forcing up rates. Those are
the reasons in this particular juncture for discriminating a little in
the matter.
Mr. WINGO. But they have the authority to do that now. Suppose that we passed any bill that the Senate might send over here
that would undertake to do that? If they can now get around the
present provisions of the law and do it indirectly, is it not reasonable
to suppose that these gentlemen would exercise their ingenuity and
would still do just what is being done under the present law? So
does it not come down to the wisdom and courage of the administration of the general laws that we have now ?
Doctor SPRAGUE. There are two situations now in which the Federal reserve banks discriminate, or may discriminate. One is in the
event a bank is in an uncertain condition and yet has some good
paper and offers it for rediscount so that practically, if it then fails,



it will have enough that is good. The reserve banks have in some
instances discriminated in such a situation.
Again, where a bank is a continuous borrower for a period of
years, they have insisted in many instances that the bank either
reduce or entirely liquidate its borrowings at reserve banks.
The present situation is not of that type. The banks that are
heavy lenders on the exchange are in general in and out of the reserve
banks, it may be in to-day and out to-morrow, or in for two days and
then out for two or three, and that has been regarded as entirely
proper, and no one bank for a short time. But if 50 banks are borrowing, 20 of them to-day, 20 to-morrow, and 10 the third day, and
each 20 is out part of the time, you may have a larger continuous
aggregate amount of reserve-bank credits supporting the market,
just as would be the case if one bank even borrowing throughout the
Now, I would say under the present circumstances that it would
be reasonable to say to these banks that—
Our policy is going to be, during the next few weeks, to limit the amount
that you can borrow. You will probably be in here in two or three days, after
you have liquidated what you now have, for another loan. Maybe you will
want $20,000,000. Well, we think we will probably be disposed only to lend
you $10,000,000 the next time you come in.

Mr. WINGO. Do they have the authority under the existing law
to do that?
Doctor SPRAGUE. I believe they have.
Mr. WINGO. If the Federal reserve officials believe there is an
undue expansion of brokers' loans, they have a plentitude of power
now to put the screws on, have they not ?
Doctor SPRAGUE. I think so.
Mr. WINGO. They can make the farm banks liquidate, and why
can they not make these banks making the stock loans liquidate a
little bit over a period of a few weeks or months, as you state?
Doctor SPRAGUE. I prefer that method to a liquidation brought
rather than an indeterminate further advance in discount rates, for
which there seems to be absolutely no reason at the present moment
outside of the stock exchange.
Mr. WINGO. Would you please tell me wherein the law is deficient
now to give the Federal reserve officials the power to check any unsound condition in brokers' loans?
Doctor SPRAGUE. I do not think that there is a need of any further
legislation in that matter.
Mr. STEVENSON. And the method which you suggest would meet
the situation. I believe this is the fifth Federal reserve district.
This is the time of the year when a great number of the member
banks in this district are borrowing for their agricultural, manufacturing, and mercantile concerns. They have marketed their
crops last fall, and most of them have paid off their rediscounts.
The rates have been low ever since they did that, but when it comes
to the time for them to borrow, on account of this peculiar condition
in New York, they are raising the rates in all of these agricultural
districts as well as in New York, and the result is that the people
who really are the bona fide borrowers on the right kind of eligible
paper have to pay a higher rate for productive purposes.



The remedy you suggested a while ago would fit that. I can see
very readily that if they required these stock loan fellows in New
York to liquidate before they loaned them any more money they
could accommodate them without putting up the rate.
Mr. WINGO. The speculator never pays any attention to rates. He
pays high; he can pay beyond what the legitimate business man can.
Mr. STEAGALL. IS there in the present situation anything that demands that the Federal reserve may either curtail loans to banks that
are taking care of too many brokers' loans or raise the discount rate ?
Is there any situation that necessitates one or the other ?
Doctor SPRAGUE. That depends really upon something that is a
little indeterminate. I think the extent to which a collapse of considerable moment on the stock exchange is an independent force
exerting an unfavorable influence on business; an ordinary decline in
the stock exchange does not exert very much of an unfavorable influence upon business. If business is in sound condition it will go
forward notwithstanding some decline, but a severe decline on the
stock exchange might have a damaging effect throughout the community. The situation is strikingly like that which we had two or
three years ago in Florida, in that trading increased when prices
went up, and the market is not sensitive to changes in rates. I am
rather fearful that if we adopted a 31/2per cent rate throughout the
country because business warranted it we would have prices moving
up on the exchange to dizzy heights and falling of their own weight
to a level so catastrophic that it would have an independent unfavorable effect upon the whole business position. For that reason I favor
attempts to put some check upon the situation by the direct-action
method that I have indicated.
Mr. WINGO. We probably will get results with less injury to legitimate business than if you undertake to control it by a high speculative
rediscount rate which only the speculator could pay.
Doctor SPRAGUE. That I object to decidedly. Some people argued
that we should pay no attention to the stock exchange and perhaps
reduce the rate to 31/2per cent.
Mr. WINGO. I S not this the correct rule? The purpose of the act
is to accommodate business, industry, and agriculture, and when the
needs of legitimate business require you to put the rate up or down
should you not do it regardless of the nature of the business going on
in the stock market and undertake to control brokers' loans through
another method ?
Doctor SPRAGUE. I think it would be desirable to experiment with
this other method.
Mr. WINGO. I have before me an article in the Annalist of April 20
by you, Doctor. It has a heading, " Brokers' loans dangerous; reserve
banks largely responsible for inflation."
Doctor SPRAGUE. I wish to say that I am not responsible for this
heading and a careful reading of the article, I think, would indicate
that the headings were not justified by the article.
The CHAIRMAN. I suggest, without objection, that that article be
placed in the record at this time. I had intended to insert it later,
but now, since the question has been raised, it may go in here.
Doctor SPRAGUE. Without the headings ?
The CHAIRMAN. Without the headings.



(The article referred to is as follows:)
[The Annalist, Friday, April 20, 1928]


(By O. M. W. Sprague, Harvard Business School)

In articles which have been published in successive quarterly issues of the
Annalist during the last two years I have taken a definite position with regard
to the causes and significance of rising security quotations and the increase
in the outstanding volume of brokers' loans. It was insisted in these articles
that the fundamental influence at work was an abundance of current savings
seeking investment that was forcing down the rate of interest, and that rising
security prices in the main merely reflected and discounted this condition. It
was further held that in these circumstances brokers' loans could be readily
liquidated in considerable volume, involving no doubt some, but by no means
catastrophic, declines in the general level of security quotations.
These views were amplified as recently as March 7 of this year at hearings
on brokers' loans conducted by the Senate Committee on Banking and Currency, when it was also urged that, since rates on such loans are normally
below those on almost all other classes of bank loans, it was not reasonable
to believe that funds employed in the security markets were withheld from
other and possibly more desirable uses. And, finally, both in the articles and
before the Senate committee, though it may be with insufficient emphasis, it
was observed that in a period of abundant savings and declining interest rates
there was grave danger that speculative enthusiasm might carry the market
far beyond limits of safety, and that it was most desirable that the market be
tested from time to time by means of advancing rates on collateral loans, and
by some more than momentary contraction in the amount of credit employed
in the security markets.


On a number of occasions in recent years, notably in the late winter of 1926
when a speculative craze seemed in process of incubation, the danger was removed under the impact of rising call rates, contraction of brokers' loans, and
a fairly general decline in the level of security quotations. Developments so
far in 1928 present a strikingly different and far from satisfactory picture.
Even as late as the beginning of March it was still possible to anticipate that
the security market was by way of being subjected to a test of its real condition—a test which would also serve to restrain unhealthy tendencies. The
upward movement of brokers' loans had been reversed, money rates had advanced slightly, and a moderate general decline in security quotations had been
experienced. The market had behaved in customary fashion. But the test
was of short duration, and was far from thorough. In 1926, brokers' loans
were reduced by more than 15 per cent, in the course of a period of several
months, and the subsequent advance both in loans and in quotations rested upon
a solid foundation of easier money and rising business profits in many industries.
The course of events during the last six weeks is an amazing contrast. An
insignificant reduction in brokers' loans has been followed by a rapid increase
to a new record peak, and this in spite of sharply advancing rates; the volume
of dealings on the stock exchange and in other security markets have been of
unprecedented proportions; and quotations have generally advanced, often
abruptly to fantastic heights calculated to excite mirth as well as astonishment.

There has certainly been no change in the prospective earnings of business
to provide support for recent advances. And the market has unquestionably
much more than discounted any probable immediate decline in the long-term rate
of interest. It is indeed a proper function of security markets to discount the
future, but clearly a market is not accurately discounting the future when
values are being boosted upon the treacherous foundation of increasing supplies
of credit secured at advancing rates. It is a reasonable assumption that it is
never wise to depart very far on borrowed money from the safe haven of a



conservative capitalization of well assured earning power. A stock, shall we
say radio, may pay huge dividends some years hence. That does not make it a
good purchase on borrowed money at the current price.
The present security market exhibits all of the familiar earmarks of inflation
and the symptoms of a speculative craze. It presents a situation altogether analogous with that in commodity markets throughout the world during the 12
months preceding the debacle in the spring of 1920, and not unlike the Florida
land boom of more recent memory. In each instance is to be observed the same
growing eagerness to buy among widening circles, stimulated rather than checked
by advancing prices, and wholly oblivious to advances, in lending rates, always
provided that increasing supplies of credit are somehow made available.
A security market that is functioning within reasonably safe limits is sensitive
to changes in lending rates. When it is found to be absorbing constantly increasing amounts of bank credit at rising rates, the stock market is unquestionably
under the controlling influence of a demand that rests upon no solid foundation
of intelligent foresight. Were the consequences entirely confined to those who
are tempted into speculative excess the course of the market would not be a matter of general concern. This seems to be the case with ordinary or moderate
fluctuations in the security markets. The psychological influence unfavorable to
business activity of moderate declines in security prices is negligible. If business at the time is in good shape it goes ahead regardless. On the other hand,
an extreme decline of catastrophic proportions may well be believed to exert an
independent unfavorable influence upon the course of trade, even though it does
not involve serious loss to the lending banks, and must certainly have that effect
if it does go to that length.

A security market that is impervious to rising rates may also exert an undesirable influence on business for a time before the inevitable break. With some
qualifications, it may be said that brokers' loans ordinarily merely absor[absorb]funds
that the anks[banks]are unable at the moment to employ otherwise. But when security
markets begin to absorb increasing funds at 5 per cent and upwards they do
attract funds from other uses and tend to force up rates for those other uses.
In the good old days before the World War it used to be said in London that a
7 per cent Bank of England rate would draw gold from the ground. Similarly, it
may be said that a 5 to 6 per cent call rate in New York will attract funds from
hundreds of banks in every section of the country, tending to subject borrowers
everywhere to a higher range of rates. In sum, a crazy stock market is objectionable, both during its final stage of expansion as well as on account of the
consequences of its ultimate collapse.
Responsibility for the present situation in the security markets is widely diffused, but the reserve banks can not escape some considerable share in that
responsibility. Stability in the money market has been an avowed policy of the
reserve system, and the achievement of stability has been emphasized as one of
its notable accomplishments. But under some conditions the maintenance of
stability may breed a dangerous situation. There are indications that clever
speculators are relying upon the predilection for stability of the reserve authorities to protect the market from extreme strain. It is assumed that in no circumstances will liquidation be allowed to become sudden and violent. This is a
dangerous assumption, not because it may not be realized but because it removes
a restraining influence.

If now we venture upon a look into the future, we are confronted with two
contrasting possibilities in reserve bank policy. A passive, or at least relatively
quiescent position may be taken. Reliance may be placed upon the gradual
tightening of the money market in response to further gold exports and an
increased demand for commercial loans. This is a policy which, unless the stock
market speedily collapses from its own weight, may be expected to lead to a
further advance in discount rates of the reserve banks in all districts, an
advance for which local business requirements would be in no sense responsible.
The present situation in the security markets might, however, be subjected to
the corrective of sharp and drastic action. But is the patient now in condition
to warrant the adoption of a surgical operation? At the beginning of the
present movement the risk would certainly have been by no means as incal-



culable. If for example, in the latter part of February or early in March the
reserve banks had sold rapidly a hundred or even two hundred millions of
governments, an immediate advance in call money to 6 per cent might have
been brought about. An abrupt advance of this extent would have exerted a far
greater influence upon the speculative temper of the community than the gradual
advance that has been experienced. An advance of the discount rate to41/2
per cent might further have been advisable as a means of emphasizing a policy of
effective control.
Had measures along these lines been followed, it is reasonable to believe that
the situation would now be far more satisfactory from every standpoint. Brokers' loans would presumably be well below instead of far above the February
peak, speculation would be in a quiescent stage, and the community could anticipate a reduction rather than a prospective advance in discount rates.
Whether the adoption of drastic measures would now precipitate a spectacular
collapse in the security markets is by no means certain, but were it to have that
result, the consequences might well prove far less damaging than those which
may be anticipated if the market continues in its present mood until it collapses
from its own weakness and excess.

Mr. STRONG. I wanted to ask you one more question. Have you
any plan by which you think the use of the Federal reserve powers
could be used to regulate brokers' loans ?
Doctor SPRAGUE. There is one further possibility, the technical
effect of which I confess I am a bit uncertain.
In Bank of England practice, the minimum period for a loan is
seven days. If a bank borrows at the Bank of England, it is there
for seven days and it has to pay the rate.
Under our practice, a bank makes loans for a minimum period of
15 days, but it may repay them the very next day in full, so that in
practice a large proportion of the borrowing at the Federal reserve
banks is for day-to-day purposes.
Whether it would modify the condition in the New York market
appreciably with reference to brokers' loans by initiating, say, a
5-day period as a minimum period for borrowing without any repayment, I am not certain. It is a highly technical matter affected
by the practice of lending reserve-bank funds between banks, so that I
would only say now that it seems to me that it is something that
might be experimented with.
Mr. KING. Doctor, when the law is so amply meeting the situation
in New York and the duty of the Federal Reserve Board is so plain,
what is the influence that keeps them from acting, as you suggest, in
that New York situation ?
Doctor SPRAGUE. Why, long, and, I think, on the whole, satisfactory banking practice. It has been one of the recognized advantages
of the reserve system that it frees the money market from extreme
and often damaging short-time fluctuations. A stable money market
has been set out as one of the advantages, conspicuous advantages, of
the operation of the reserve banks; and, in my judgment, the predeliction of the reserve-bank people for stability in the money market has
been taken advantage of by the speculative element. They do not believe that the situation will be subjected to jolts and jars, that any
pressure that is put upon the market will be very gentle and gradual.
I think that the speculative community is banking upon that to such
an extent that stability as an objective, without exception, is perhaps
becoming a positive danger. That is my reason for thinking that
something that would suggest to the speculative element now and in
the future that there are some uncertainties and some shoals and
rocks might have a very good psychological effect.



Mr. BEEDY. HOW is it that they have come to this predeliction [predilection]?
Doctor SPRAGUE. Why, in general
Mr. BEEDY. Let me ask you this question: Is it true that the board
has at times pursued such hesitating policies that the speculative
world has concluded that it may well go on with a rising price tendency, knowing full well that the board will hesitate to apply the
checks ?
Doctor SPRAGUE. Well, perhaps so.
Mr. BEEDY. IS it not so ? Is it not a fact ? Can you not answer it
yes or no.
Doctor SPRAGUE. Many of these questions are difficult to answer
yes or not.
I think I can answer that yes, and to illustrate the ingenuity of
the speculative community let me take this point. It was quite generally believed about the street that no great amount of pressure
would be exerted in March of this year because of the Treasury
financing. The desire of the Treasury to market its securities so as
to save one-eighth of 1 per cent more or less is recognized on the
street as perhaps exerting quite a potent influence at certain periods.
Mr. BEEDY. NOW, Doctor, I am left in this state of mind. Here is
a situation at the present time demanding some action, some courageous action by the Federal Reserve Board if an ascent in rates is to
be checked so that it will not become highly disadvantageous to business in general. You say, and others think, that the existing law
needs no amendments, that the powers are already there, and we also
seem to admit quite generally that many times in crises the board has
pursued a hesitating course.
Now, I assume that the purpose of the men who are behind this
legislation is to meet that very situation and to make it mandatory
upon the board, which has been hesitating and feeble in times of
crises, to exercise the powers which they already have. Is that an
unreasonable demand?
Doctor SPRAGUE. NO, it is not; but the particular situations which
you say imply hesitation do not seem to me to be generally the situations that are of the type that are very definitely covered in this bill.
If they are, well and good; I should be delighted.
Mr. STRONG. What would you suggest, Doctor ?
Doctor SPRAGUE. I can not suggest anything. The only thing I
can suggest is that with experience the management of the Federal
reserve banks will take more definite action than it has at times
taken. The system is a cumbersome system, and the number of
people who must agree upon a particular course is rather large,
the officers of the banks, the directors of the banks, and the board.
Mr. BEEDY. I S that true as to open-market policy ?
Doctor SPRAGUE. The open-market policy has a committee of five.
It is necessarily in large part influenced by views in the New York
bank, because it is in the New York market that most of the openmarket operations must occur. But then there must be an agreement between the open-market committee and the Federal Reserve
Board, and, further, there must be consideration, I take it, of the
predilection of the Treasury for getting the best possible rate on
its certificates, so that you have got a diverse group that must reach
an agreement before any action can take place, and that inevitably



means hesitation unless the case is as plain as a pikestaff, and when it
is as plain as that probably action is a little belated and the consequences may appear to be so serious that there is still further delay.
Mr. BEEDY. I t seems to me that in my somewhat long and involved
question and your answer just made we have reached rather the
crucial situation here. Your answer was that if this bill were adopted
to meet such situations as have been characterized by hesitancy on the
part of the board and unwillingness to deflate at crucial periods, you
would be heartily in favor of it ?
Doctor SPRAGUE. I said if it does that.
Mr. BEEDY. Well, now, turning to page 2, under section (h)—and
I have just read it over now—I can not see how human language
would better cover it. [Reading.]
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.

What is there in that language that would not meet the situations
that I refer to in my question ?
Doctor SPRAGUE. Take the particular situation of brokers' loans,
and assuming that you generally assent with the statement just made,
with the provision " to promote the stability of commerce, industry,
agriculture, and employment," furnish additional ground for taking
the direct action that I urge in the matter of brokers' loans ?
Mr. BEEDY. Possibly not, but coupled with the phrase—
and a more stable purchasing power of the dollar, so far as such purposes may
be accomplished by monetary and credit policy—

it seems to me it would.
Doctor SPRAGUE. Well, if it would accomplish that result, make the
decision in matters of policy at times a little more immediate, and
the decision itself a little more definite, then there would be, I think,
an advantage from the passage of the bill. I probably agree with you
that the defects in the operation of the Federal reserve system are
not so much in positive errors of judgment that have been made
but rather in the hesitating manner in which at times policies have
been decided upon and then executed.
Mr. BEEDY. I want to state that this is my position: I feel that
there is law enough and power enough conferred by the law on the
Federal reserve system to meet any exigencies such as the present
or even more marked crises, and I am naturally averse to an attempt
by the legislative body to direct in detail the policy of a board such
as the Federal Reserve Board is; but if it is true that these hearings
have demonstrated a sufficiency of power in the board and that the
failure on the part of the board to act at the proper time was not
because of poor judgment but because—let us be blunt about it—of a
lack of courage, then I am getting to the point where I am ready to
vote for a law which will not give them the chance to hesitate but
which will read, in effect, that "you are not only authorized but
commanded to act."
Do you not think that something like that might be helpful to
stimulate their courage ?
Doctor SPRAGUE. If it serves that effect; yes.



Mr. BEEDY. What other tendency, Doctor, would such a law have
but to prick them a bit and stimulate their courage ?
Mr. KING. YOU do not need a declaration of Congress to do that.
Doctor SPRAGUE. It might do as you say, but inasmuch as the
management of the Federal reserve banks involves the exercise of
judgment in many somewhat confusing situations, I think it is the
character of the men and the experience that is developed by the
passage of time upon which we must mainly rely.
Mr. BEEDY. DO you not think it would be a good thing for these
men to be able to say, "Well, we no longer have to wait; we are
commanded to act" ?
Doctor SPRAGUE. It is possible.
Mr. BEEDY. Would you not say " probable " ?
Doctor SPRAGUE. Not until I had discussed the matter with quite
a number of people who are charged with the responsibility of
conducting the system.
Mr. STRONG. I can tell you what they will say. They will say,
" Leave us alone."
Mr. WINGO. Aside from the bill, I am inclined to doubt the possibility of any legislative declaration giving either wisdom or courage
to anybody.
Mr. BEEDY. It will not give them any courage, but it will serve as
an incentive.
Mr. WINGO. Moral support.
Mr. BEEDY. Moral support.
Mr. STRONG. I would like to have the doctor give his opinion on
the other clause of the bill, that of publicity, and the direction for
an intensive study of this question.
Doctor SPRAGUE. I can do that in a very few moments, I think.
Mr. KING. Can you make a man study by legislation ?
Doctor SPRAGUE. The provision about publicity is very much improved since it contains the word " thereafter," which will give the
governor of the board power to defer to a convenient and proper time
any statement of reasons for policies that have been pursued by the
board and by the banks. I think it will probably serve a useful
purpose and "would have served a useful purpose if somewhat more
detailed analyses of the purposes of the various policies and the
process of executing them and the results of those policies in execution had been set out, although the reserve banks already have done
much more than any other central banks, but I think they might do
somewhat more than has been done in the past, and this section
seems, therefore, to my mind, unobjectionable.
Now, with regard to these studies, they suggest various lines of
investigation, some of which probably have been followed and will
be followed in the absence of this legislation, and they indicate
some other lines of investigation which have not yet been developed.
I take it that this investigation paragraph does not limit the investigations in any way, that the sort of investigations that have been
made in the past, and other investigations not indicated here, could
properly be undertaken by the reserve banks. The difficulty that I
see about some of these investigations is rather in securing an adequate number of competent investigators, but that is a detail of
administration. Upon the whole, I see no objection whatever to




inserting these specific suggestions for investigations in the event
that it does not exclude by implication or otherwise such other
investigations as the board and the banks may deem desirable.
Mr. BEEDY. What would you say as to the desirability either of
coupling with this legislation or enacting apart from this legislation
a measure which would help to bring the very results which this
legislation aims at, namely, a flat prohibition upon the Federal
reserve system to permit the use of its credit for speculative purposes
and the enjoinment of a duty upon the system to ascertain at all
times the use to which credit which it was supplying was being put ?
Doctor SPRAGUE. I will frankly say that I would be violently
opposed to such a proposal and would feel that it was impossible of
execution. After all, the member banks must be allowed a reasonable
amount of latitude in their operations. The particular operations
of a given member bank seem to me to be a matter of no great
concern unless it threatened the solvency of that bank or unless so
many other banks are doing the same sort of thing that an unhealthy
situation may be created.
Now, at times the possibility of using funds in certain more or less
speculative directions is probably a safeguard for the depositors of
a given member bank. Let us suppose a local bank in Maine had
more funds than it can at the moment employ to advantage locally.
It puts some of those funds into the New York market. It is probably very much better that it should do that from the point of view
of its depositors, even though the use is speculative in New York,
than it would be to inhibit that bank from such use, directly or
indirectly, forcing it into making loans which may not be speculative
in the ordinary sense but which may involve uncertainties and
possibly serious loss.
Mr. BEEDY. Then the logic of the situation would force us to the
conclusion, would it not, that a more or less unrestrained use of credit
afforded by the system for speculative purposes is incidentally
helpful to the proper development of agriculture, industry, commerce, and employment?
Doctor SPRAGUE. Yes; but at times it may reach such proportions
as to become damaging or threaten damage, and then you have a
possible situation for demanding direct action.
Mr. STRONG. YOU think a little fire might help, but very much
would burn you.
The CHAIRMAN. Much has been said this morning about speculative loans. I have not been able to find anyone who is able to
tell with any degree of certainty how much of this $4,000,000,000
worth of brokers' loans is speculative and how much is legitimate;
nor have I been able to find out in this rise of the stock market how
much of it might be a legitimate rise and how much of it might be a
speculative rise. Do you care to say anything about either one of
these subjects?
Doctor SPRAGUE. I do not think it can be measured by the amount
of brokers' loans. That is one factor in the situation, the amount,
and the increase that has taken place. Those are the two things
that are significant as regards the statistics of the loans themselves.
Coupled with that, however, you have extreme activity on the
exchange, rising quotations, and apparently a market that is in-



sensitive to the usual normal extent to advances in rates actually
made and more or less threatened in the future.
When you take all those factors together you have, it seems to me,
the earmarks of a situation that is getting or may get out of hand.
Now, I do not believe that a contraction in brokers' loans, if it
should come in the near future, will involve an extreme decline in
quotations of catastrophic proportions. I believe that with the
abundance of savings currently made in this country there is a large
buying demand for securities at moderate concessions in price.
The CHAIRMAN. Some of this increase in price in the stock market
is due to anticipation that we are going on a lower net interest return
basis, is it not?
Doctor SPRAGUE. It is; and until recently I had held that that was
an adequate explanation for the general upward movement in quotations, but in a period of abundant savings and also in a period in
which the accumulation of capital is adequate to meet business requirements, from time to time, a slackening in the upward movement
is desirable in order that we may go forward perhaps on a more
healthy basis a little later.
Mr. BEEDY. Doctor, I am wondering if I made my question quite
clear or if you misunderstood it a bit as to the desirability of prohibiting the use of the credit of the the system for speculative purposes, etc.? You began your answer by what the member banks
might do. Of course, I did not refer to member banks, but my
question was directed to the thought that that inhibition and direction might be upon the Federal Reserve Board and the central banks.
Doctor SPRAGUE. Assume that a bank has made some of these loans
and then is temporarily deficient in its reserve. It wishes to rediscount. I should be inclined to think that unless there is clear evidence of an unsound and undesirable situation developing that satisfactory the operation of the credit machinery of the country renders
it advisable that the rediscount should be made almost as a matter
of course.
A certain amount of speculation is desirable and necessary in order
to create a market, both for commodities and for securities. Assuming an abundant cotton crop, the holding of that is facilitated by the
readiness of some people to speculate in cotton and borrow in order
to do so. It is only the excess of speculation that may be a serious
matter, such as seems now to be present, and
the general prohibition
would destroy elasticity in the functioning1 of the reserve banks in
their relations to the member banks to a most undesirable degree.
The CHAIRMAN. I suggest that it is 1 o'clock.
Mr. KING. I just want to ask him a question.
I was not here when you first went on the stand, and I very much
regret it, but I want to know whether you are a fellow in the society
of the learned who had their convention here in Washington during
the early part of this year ?
Doctor SPRAGUE. I did not attend that meeting, although I am a
member of the association in good standing, I hope.
Mr. KING. Thank you.
The CHAIRMAN. The committee will adjourn until to-morrow morning at 10.30.
Thank you very much, if you are through.
Doctor SPRAGUE. I think I have said enough.



Mr. BEEDY. The doctor is not going to be here another day, and as
one member of the committee I want to thank him for coming here.
(Whereupon, at 12.55 o'clock p. m., an adjournment was taken
until Wednesday, May 2,1928, at 10.30 o'clock a. m.)


Wednesday, May 2, 1928.
The committee met at 10.30 o'clock a. m., pursuant to adjournment,
Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order.
This is a resumption of the hearings on H. R. 11806. Doctor
Miller, we will be glad to have you proceed with your statement.

Doctor MILLER. I think it would be worth while to go back to one or
two points that were very briefly developed in my testimony last
Monday and point out certain conclusions that I draw from them as
to the practicability as well as the expediency of an instructed Federal
reserve policy with respect to credit, such as this bill contemplates.
I was very much impressed, as I sat here yesterday morning as a
listener to the questions of the committee that were addressed to
Professor Sprague, and his answers, with the thought that in a hearing of this kind an atmosphere is generated and a logic, so to speak,
develops itself, and that for the most part we are all apt to fall into
a certain frame of mind, except those who are, so to speak, obviously
in rebellion, and that we lose touch with not only fact, but what is
more serious, we also lose touch with reality; I shall be greatly interested when I come to read what Doctor Sprague had to say, to see
whether I am right in my recollection that in the latter part of the
hearing, when you were getting pretty near to the vitals of reserve
credit operations, nearly every sentence of his in answer to questions
propounded began with an "if." In my opinion, testimony that is
liberally sprinkled with " ifs " is for practical purposes of little value.
So my disposition is, in what I may have said here, to have little
concern with the academic potentialities of the Federal reserve system and keep close to the solid substance of fact and reality.
If you ask me as a member of the Federal Reserve Board what can
be done, my disposition is to go and see what has been done in a
situation that is most nearly similar to the one contemplated in your
question, and one which is of fairly recent date; because in all matters
of administrative control one of the important factors is—let us put
it in a broad way—the competency of the administrative body that
is concerned with the proposed legislative remedy. I think we are
all very apt to think—that is one of the besetting temptations, so to
speak, of Congress when it comes to legislate in matters of the kind
here under consideration—to feel that it has solved a problem when
it has said, " We will set up a body of capable and competent men;
we will invest them with broad discretionary powers; we will tell
them to go to it, and with that the job is done."



Mr. STRONG. Might I suggest to you right there that I think you
have a very wrong idea of Congress ? The majority of the men here
agree that it is fairly easy to prepare proper legislation; the trouble
is in getting it properly administered.
Doctor MILLER. Then, why does Congress go on creating more and
more commissions and adding more and more to the discretionary
authority of those that are already created ?
Mr. STRONG. TO try to get the thing done that the people of this
country want done.
Doctor MILLER. Well, I am tempted to
Mr. STRONG (interposing). For instance, I gather from your suggestion that you think the attitude here yesterday led us into fancies,
while you were the only man who sat back and analyzed the question
correctly and properly.
Doctor MILLER. I am not assuming any such arrogant attitude as
that, I hope. But I do think that the latter part of the discussion
yesterday developed this conclusion—that if you want to understand the Federal reserve system you must reckon with its human
limitations. That is what I have in mind; its human limitations.
Administration is nothing except what the men who do the administering make it.
Mr. STRONG. Certainly.
Doctor MILLER. If they are ordinary men, it does not matter what
you say to them; you will get an ordinary result.
Mr. STRONG. Certainly.
Doctor MILLER. If they are men of extraordinary ability, imagination, force, you will get an extraordinary result, no matter how
little you say to them.
Mr. STRONG. In other words, one man will make a corporation
and operate it under the law and make it a success, and another man
will make it a failure ?
Doctor MILLER. Well, whether he makes it a failure or not, it
becomes a failure in the one case and a success in the other, irrespective of what the law may or may not say.
Mr. STRONG. That is true.
Doctor MILLER. The most difficult think to exercise competently is
discretion. When you come to matters touching the operation of the
credit mechanism you have entered a field in which the exercise of
discretion is peculiarly difficult, and the more difficult the problems
that present themselves to a discretionary authority the less
Mr. STEVENSON (interposing). Doctor, if you will permit me, as
I understand, you are deprecating the tendency of Congress to commit matters more and more to the discretion of boards.
Doctor MILLER. I deprecate that personally, and I refer to it
merely as an illustration.
Mr. STEVENSON. If we bring this discussion right down to the bill
in hand, this bill rather tends to diminish that discretion and to
make a mandatory direction to you, does it not ?
Doctor MILLER. I think not.
Mr. STEVENSON. That was the idea that I got out of it; that it was
making mandatory what was merely implied in the present law, and
therefore is in the discretion of the board.



Doctor MILLER. I do not think so. I recognize that that is a
matter on which opinions might well differ. In fact, as I think I
stated here Monday—and I think Doctor Sprague said something of
similar purport yesterday—I think it would not make very much
Mr. STEVENSON. Well, I think so myself.
Doctor MILLER. YOU might just as well, from my point of view,
put in here that all the powers of the Federal Reserve Board shall
be used to promote prosperity or to promote social justice.
Mr. STEVENSON. Yes. As he put it yesterday, it was the expression
of a pious wish that they would increase the prosperity of the
Mr. STRONG. Then he followed it up by saying that a hostile board
probably would not operate it properly.
Doctor MILLER. Well, let us leave a hostile board out for the
Mr. Congressman, as I said here the other day, I am not temperamentally hostile to experimentation and innovation; but I have
made it an observance in my personal relations that whenever a surgical operation was to be performed I wanted it performed by the
most competent man whose services I could command. I would feel
more confident of the outcome where a competent surgeon undertook
a very delicate operation than where an unskilled surgeon undertook
a simple one.
You can accomplish almost anything if the men who are to do it
are masters of the technique and of themselves and know what they
are about. But it is not safe to go on the assumption that such will
be the case, and that is what I am disposed to remind you of. When
we are thinking under the active stimulus of the imagination and
are animated by a desire to make things better, we are very apt to
minimize practical difficulties; most of these difficulties, administratively speaking, resolve themselves into human limitations and
So my disposition usually is to estimate the attainable in the light
of the attained; to see the human factor in the problem. Possibly
I am more alive to that element in relation to problems of this kind
because I am a part of the human factor or administrative set-up. I
am a part of the problem. My state of mind, my capacity, my limitations are a part of it, and I am more and more impressed as I go
along how mysterious these credit matters are. I do not want to be
instructed where I know that the instruction is going to be an embarrassment to me and a source of confusion to others who are, perhaps, less prepared by training to deal with matters of this kind, or
else to lead to careless and ill-advised experimentation. I am not
opposed to experiments, but I want the experiment to carry with it a
probability of success.
The CHAIRMAN. Doctor, is it fair to assume that in the administrative duties that are upon the board, of which you are a member,
you are probably in one of the most trying situations now that the
board has experienced since its inception ?
Doctor MILLER. YOU ask that question; therefore I will answer it
as fairly as I can. It is my opinion that the Federal reserve mind
at the present time is more perplexed than it has been at any time



since the troublesome period of 1920-21; that it is in a state of mental
confusion largely because of surprise. " Surprise " usually comes, I
think, as the aftermath of an undue indulgence of desire and expectation. You stand back when you see the fruition of the devil's work
in your angelic plans; and, speaking personally, I have usually
Mr. STRONG (interposing). To do the angelic part of it?
Doctor MILLER. TO maintain an attitude of relative calm about
situations in which there is a danger of an unconscious hysteria
developing. I think one of the chief troubles with the Federal reserve
system in 1920 was hysteria—hysteria in part due to the interference of Congress through a Senate resolution, with the maintenance of
a well-balanced frame of mind in the Federal reserve system.
The CHAIRMAN . You liken that somewhat to the resolution that the
Senate passed the other day, known as the La Follette resolution ?
Doctor MILLER. Well, I think the part of the resolution which calls
for suggestions or proposals, if I remember correctly—you are referring to the resolution reported out by the Banking Committee?
The CHAIRMAN. Yes; the La Follette resolution on brokers' loans.
Doctor MILLER. The La Follette resolution itself I did not think
very much of; but I thought you were referring to the report of
the committee on the resolution.
The CHAIRMAN. I was.
Doctor MILLER. That, if

I am rightly informed, asks the Federal
Reserve Board to report to Congress what legislation, if any, is
needed in order to protect the system against abuse by loans for
speculative account, or something of that kind.
The CHAIRMAN. It infers that there is speculation existing, as evidenced by the large amount of brokers' loans outstanding, as a dangerous tendency, and refers the matter to the board for some report.
Doctor MILLER. Yes; for investigation and report.
The CHAIRMAN. And my question was whether you liken that
kind of legislation to the resolution of 1920.
Doctor MILLER. NO. Part of it, I think, is altogether desirable.
I think it is a good thing to ask the board to report what, in its
opinion, is necessary.
The CHAIRMAN. YOU do not consider that as an interference with
the operations of the Federal reserve system ?
Doctor MILLER. I do not. But there is a part of the resolution
which I think was referred to yesterday morning, which was the
first time I had heard of it, that asks the Federal Reserve Board
to direct the Federal reserve banks to admonish or advise member
banks against making speculative loans, or something of that kind.
I regard that as—I would rather not have this go into the record,
but if you feel it is an essential part, I have no objection
Mr. STRONG. I think it had better go in.
Doctor MILLER. I regard it as an unhappy interference at this
time. I do not think it will accomplish very much there. When you
have a stock-market movement of the dimensions that this present
market has attained, you either want to do nothing or you want to
do something that has substance to it. I think that provision of the
resolution will be construed as implying a temporizing attitude.



Mr. STEVENSON. I t would become another New Year's resolution ?
Doctor MILLER. Something of that kind. It does not amount to
anything substantial at this stage.
Mr. BEEDY. Would you mind stating to us what the factors in the
present situation are that have caused surprise to the Federal Reserve Board ?
Doctor MILLER. Yes; if I can do it briefly. It has been pointed out
in earlier hearings here that the Federal reserve system, in midsummer of last year, set out, by a policy of open-market purchases,
followed in course by a reduction of the discount rate at the reserve
banks, to ease the credit situation and to cheapen the cost of money.
The official reasons for that departure in credit policy were that it
would help to stabilize international exchange rates
The CHAIRMAN (interposing). Stimulate the exportation of gold?
Doctor MILLER. Stimulate the exportation of gold. The two
things really hung together. In other words, it would lead to a
shifting of balances from the American market to the London
market because of the difference in going rates for short money,
there always being a large amount of money—and that is particularly true at the present time, and especially true as regards our
country when you compare it with conditions 20 years ago—that is
international and migratory in its habits; that is, so to speak, loose
money, which will go where it commands the highest price. The
lowering of money rates in the central money market of this country
by Federal reserve action and policy would necessarily have the
tendency to transfer some money to London, where the rate was
On the other hand, it would also tend to keep the London rate
from going higher at a season of the year when normally it would
go higher, and, through keeping money easier in London, have a
tendency to facilitate the sale of American farm products abroad,
by reason of the fact that the exchange would be favorable to the
pound and some other continental currencies, and thus have some
repercussion in the total money receipts realized from the sale of
the crops.
The CHAIRMAN. May I ask you right there, Doctor, did this idea
originate on this side, or did it originate as a part of our close contact
with the banks of issue of the other countries?
Doctor MILLER. YOU are asking me an unpleasant question, even if
I could answer it. But I should say, stating the thing as well as I
can, that the circumstances, the general situation then existing, perhaps produced a state of mind, an outlook, among the men concerned
with the operation of these banks that made it, on the whole, rather
easy to come to an accord. It is always a matter upon which opinions
may well differ, whenever there are problems in which there is an
international interest, who is the more influential. I think there
may be some ground for the view—if that is what you have in your
mind, Mr. Chairman—that perhaps the Federal reserve ear is a little
too sensitively attuned to foreign viewpoints, and perhaps animated
by too sympathetic a spirit of cooperation. I say that from a personal point of view.
The CHAIRMAN. When you speak of the " Federal reserve ear," do
you mean the Federal Reserve Board or Federal reserve banks?



Doctor MILLER. I have in mind, vaguely, whatever happens to be
the dominant influence in the Federal reserve system, and that is expressing itself in the line of policy undertaken. I t may to-day be this
individual or group; to-morrow it may another. But wherever any
important line of action or policy is taken there always will be found
some one or some group whose judgment and whose will is the effective
thing in bringing about the result. Their's is the ear which does the
hearing for the system.
Personally, I feel a deep interest in the state of the European
world. I first saw Europe shortly after I was out of college, and I
have tramped hundreds of miles in Europe. I know it; I know the
people; I know the country, its lovely valleys, its impressive beauty;
and above all I have a very tender and warm feeling for the peasantry
of western Europe. But I also know something of European psychology. I have not traveled there simply for fun, but have observed
something of their mental and emotional traits; also of the state of
mind that the terrible war left behind it in Europe. I think I told
you, Mr. Chairman, when I was before your committee two years ago,
that I was about to go to Europe for the first time since the war to
find out how long it would be before they began to show anxiety about
the working gold standard, toward which they were then stretching
out their arms as a sort of sheet anchor.
Let me add parenthetically that I saw very little indication of any
concern or alarm at that time. A year later, however, it developed,
and the European central bankers about a year ago, I think, were in
a distinctly anxious frame of mind. I think they were in something
of the frame of mind then that can be compared to the Federal
reserve mind now. They were surprised. They thought that with
the nominal return to the gold standard all would be well, and they
found that that brought with it some new and difficult and very
anxious problems. So that constituted again, if you please, in the
general background of the situation in which Federal reserve policies
were taken last summer what might be phrased as a desire to be
helpful in, as I may put it, mediating the actual return to the gold
standard. They had it and they did not have it. They had it on
such a precarious tenure at the time that they might have found
difficulty, especially in England, in doing justice to the credit requirements of English trade and industry and at the same time maintaining an atmosphere in the British community that would not be apprehensive as to whether or not the gold standard was actually on a solid
and tenable foundation. So that was part of it.
Mr. BEEDY. YOU started out, Doctor, to give us the reasons assigned
for the operations in the open market and the lowering of the rediscount rate, and you started by saying that they were official reasons.
I inferred that there might be other reasons. If so, I would like to
have them, if you can give them.
Doctor MILLER. NO; I do not want to give that impression. I use
that term as against " personal," and largely because you asked me a
question upon which my own personal views did not fall in with the
board's. I was opposed to what was done last year.
Mr. BEEDY. I understand. And then you were going to lead up to
what there was in the present situation, having resulted from that
policy, that now causes surprise to the system ?
Doctor MILLER. Yes, sir.



Mr. STEVENSON. Doctor, as I understood you, you made the statement that the course was taken which affected the export of gold to
ease the exchange situation and stimulate the exporting of our products abroad?
Doctor MILLER. I did not use quite as strong language as that, and
I do not think it would be fair to
Mr. STEVENSON (interposing). What I wanted to ask you was:
Just what effect did the course have in stimulating the foreign trade
of the country. For instance, I always think in terms of cotton. We
are exporting an enormous amount of cotton. What effect did it
have, and why?
Doctor MILLER. I will be very happy to tell you what I can. At
the same time you must bear in mind that you are getting this from
a witness who was not in sympathy
Mr. STEVENSON (interposing). You were not sympathetic with the
course ?
Doctor MILLER. NO ; and possibly because I think a good deal of
what is called stimulating foreign trade by an operation of that kind
is largely scenery. I think there is not nearly enough substance to
it to warrant language of that kind. But to the extent that it is true,
I would say that anything—I will make it specific—anything that
enables the pound sterling to buy more dollars and cents in this country enables the pound sterling to get more cotton for the same price,
and thus have a tendency to stimulate the buying of more cotton.
You must remember that in England particularly, where the textile
trades are the most important in the whole world—approximately,
I suppose, one-half of the cotton produced in the world is spun in
Great Britain—and especially at a time when there is intense competition, a very little difference in the price at which you can buy raw
cotton may determine the attitude of the cotton buyer and the cotton
spinner. He may say, "At this price I will buy more, because I think
I can find a bigger market for my output."
The CHAIRMAN. Doctor, is it not probably a fact that if we had not
made that change in our rate here, the rate in London would have
gone up necessarily, and that as the result there might have been a
changed situation as regards foreign exchange and our ability to settle
with the world?
Doctor MILLER. Yes, sir.
The CHAIRMAN. It was helpful to that extent?
Doctor MILLER. Yes; it might have been. But the important
thing, as I see it, or as I saw it at that time—and such situations will
occur again; they will be of frequent occurrence—is not the absolute
level of the rate, but the relation of the several rates in the existing
structure of rates. In other words, it does not make very much difference from the point of view of your question, Mr. Chairman,
whether you have a31/2per cent rate in New York and a 41/2per
cent rate in London, or whether you have a 4 per cent rate in New
York and a 5 per cent rate in London. That is to say, you can maintain that relationship either by their putting their rate up or by our
putting ours down. Now, I think the method that actually was pursued, to wit, of not interfering with the London rate—the Bank of
England is keeping that rate where it was
The CHAIRMAN (interposing). The reason I asked that question
was that when I was in London in December I discovered a feeling



among the bankers there of gratification that we had lowered the
discount rate when we did
Doctor MILLER. Yes; no doubt.
The CHAIRMAN. Otherwise they would have been embarrassed,
they felt, by a high rate in London, and they felt that it was a splendid thing for the United States to have done in that matter.
Doctor MILLER. There is no doubt that they appreciated it and
that it was of substantial
The CHAIRMAN (interposing). And they look upon our action as
very helpful, and helped them to avoid a serious situation that was
Doctor MILLER. Yes.
Mr. BEEDY. I wish I could interject this suggestion: That if we
could restrain ourselves from breaking in upon witnesses so that they
can not complete their sentences, I think the record would read

Mr. BEEDY. YOU started to make a statement which I think was
quite important, and I want to bring it out. You said that it did
result in substantial
Doctor MILLER. May I have my answer read ?
(The reporter read as follows:)
There is no doubt that they appreciated it, and that it was of substantial

Doctor MILLER. Help in maintaining the London money rate at
a lower level.
Mr. BEEDY. It was substantial assistance rendered England in
a crucial time, was it not?
Doctor MILLER. Yes, sir.
Mr. STEVENSON. TO come back to the concrete subject, let me put
this question: Suppose the pound sterling was selling at $4.50; what
effect would that have upon our export trade ?
Doctor MILLER. I should say that if the pound sterling went to
$4.50 next autumn, we would have a devil of a time in this country
to get rid of our surplus produce.
Mr. STEVENSON. I am putting an extreme case now. In other
words, the pound would only buy $4.50 worth of cotton instead of
$4.85 worth, and, of course, it would tend to restrict the purchase of
our commodities here.
Doctor MILLER. Of course, when you put it as extreme as that,
I think you can eliminate the word " tend." It would.
Mr. STEVENSON. It would restrict it?
Doctor MILLER. Yes, sir.
The CHAIRMAN. I might interject something that I observed in
London in talking with men who were considering that situation
at that time, to give you their viewpoint.

are two classes of thought in England on
the question of stabilization—as to the time when they should have
stabilized and the basis on which they should have stabilized. The
industrialists of England felt that the stabilization was premature.
England is pretty well divided on that subject. The industrialists
felt that if they did stabilize they should stabilize on a $4 basis
rather than on the $4.86 basis; that that would thus have permitted



a sufficient amount of inflation to take place to permit the rehabilitation of industry in England, which would result in making England industrially more keen competitors with the United States.
Now, there is an extreme conflict, as I discovered, even among the
financial men of London on that question. I wanted to interject
that at this point because it had a bearing on the very thing that
you were suggesting.
Mr. STEVENSON. Yes. Now, if you will let me continue my interrogation, suppose it was up to $4.95; what effect would it have on their
purchase of our cotton ?
Doctor MILLER. Of course, it could not get up there.
Mr. STEVENSON. If it went to $4.90?
Doctor MILLER. It could not get to $4.90.
Mr. STEVENSON. Well, its maintenance at $4.85 is, of course, the
ideal situation.
Doctor MILLER. That is a matter of opinion. The opinion that prevailed last year was that it was desirable to get sterling exchange
up to whatever might be the new so-called gold shipping point, which
was a little over $4.88. Gold moved at $4.88, and sterling got up to
$4.88 in November. You see, sterling was rising, and as it rose,
especially with a higher discount rate in London—in fact, that was
the thing that gave the impulse; we have got to look at the money
rates all the time if we want to explain these things—as balances were
shifted, sterling rose. I mean, there was a movement of gold outward,
and that movement of gold outward not only kept the money market
of London easy, but it also brought up sterling. In other words, when
a banker in New York or Chicago wants to transfer $10,000,000 to
London, he is buying sterling. He wants to buy sterling currency,
sterling credits. Sterling is in demand, and sterling rises, and as it
rises it comes nearer and nearer what is called the export point; and
then gold begins to move, or gold credits begin to be transferred, and
perhaps be locked up as earmarked money in New York institutions.
Mr. STEVENSON. In other words, if it gets to a point where it is
cheaper to ship gold than it is to pay exchange, they ship gold or
earmark it for shipment?
Doctor MILLER. Yes.
Mr. STEVENSON. Of course, I understand that it can not; but I was
taking the extreme position of $4.50 and $4.90 in order to have
visualized the effect it has upon our commodities that they buy. All
this talk about the effect that exchange has, and all that, is fine for
the experts, but when we talk to a countryman we want to know
what effect it has in a specific instance. Then we understand it.
Doctor MILLER. I can say, Mr. Stevenson, putting it in a very
simple way
Mr. STEVENSON. That is what I like to get, because I am a very
simple-minded man.
Doctor MILLER. A British importer who is concerned with cotton
or wheat wants to know how much he can get for the pound sterling
in terms of dollars and how much he can get with his dollar in terms
of wheat, cotton, or whatever the commodity happens to be; so that
the price he pays for his dollar exchange, or that he gets for his
sterling exchange as a seller, is a factor in the actual cost of his



Mr. STEVENSON. A man wants to buy in New York a cargo of
cotton. He has his money in London. The question of how much he
can get for his draft on London in dollars and cents determines
really what his cotton costs him, does it ?
Doctor MILLER. Yes; that is part of it. In addition, in this particular situation that we are discussing there is this factor: The low
money rates obtaining in New York, especially for bills—so-called
bankers' acceptances—during the crop moving and the crop exportation period, made it very easy to finance those operations. That is
to say, a bill drawn against an exportation of cotton last autumn
could be discounted in the New York market at 3 per cent, or even
below 3 per cent, as compared with a London rate of 3% to 3%, or
somewhere along there. At any rate, there was a spread of one-half
to three-fourths of 1 per cent between the London and the New York
cost of financing bills drawn in connection with the outward movement of cotton. But—and this is a thing that is very frequently
Mr. BEEDY (interposing). Now, you are in the midst of a sentence;
but, to make it concrete, did that operation by our Federal reserve
system actually result in a more favorable price to the cotton producer
and the wheat producer?
Doctor MILLER. That is a matter of opinion; and especially is it a
debatable matter whether it resulted in a better price being realized
by the actual grower of the cotton or the grower of the wheat.
The CHAIRMAN. There was a little upturn in the price level of
agricultural commodities immediately thereafter, was there not?
Doctor MILLER. Yes, sir.
Mr. GOODWIN. Was that anticipated by the board at the time they
made that reduction?
Doctor MILLER. I do not feel competent to answer the question
stated in that way.
I think it was certainly in the minds of some members of the board
that it would strengthen the market for American farm products
and probably result in better prices being realized for them.
The CHAIRMAN. And also go a long way toward helping the international situation?
Doctor MILLER. Yes. But I don't think you can dissociate the
two. I think they were pretty much interwoven. You help the
international situation when you help the movement of American
products abroad and you help our domestic situation when you help
the foreign buyer.
The CHAIRMAN. I see.

started right there to discuss bankers' acceptances. Now, here is a man who wants to buy a hundred thousand
dollars' worth of products. Instead of paying cash, he pays in bankers' acceptances. Now, he has his money in bank in London, or he
has his credit there. He has his bank there accept a draft for a
hundred thousand dollars. Isn't that the procedure?
Doctor MILLER. It may be handled in London, but, as things were
last autumn, it is more likely that the credit would be provided in
New York.
Mr. STEVENSON. Well, he gets a bankers' acceptance for, say, 60



Now, is there usually a difference in rate on that in New York and
London ?
Doctor MILLER. Yes; there frequently is. Generally speaking,
there has been a difference. You are, doubtless, aware that in the
days before the Federal reserve system there was no acceptance banking practiced in the United States to speak of.
Doctor MILLER. And

the outward movement of American crops
was financed by drafts drawn on London.

Doctor MILLER. Since the Federal reserve has been in operation
the situation has changed materially. If we go back over the last
few years we find that there have been a few cases where the London
rate has been under the New York rate. In such cases a good deal
of the shipment of these American farm staples would be financed
through sterling credits. At other times—such was notably the case
in 1924, for instance, and again last autumn—the New York rate was
more attractive. This international banking business is very apt
to go to the market where it can get the best terms. And the increase
in the volume of acceptances carried on this side of the water during
the last year was some three hundred millions greater than what
was usual. This increase represents approximately the amount of
the load taken off the credit machinery of Europe, notably of
Mr. STEVENSON. NOW, the rate—that is, the charge on the bankers'
acceptances—of course, affects the amount of cotton which he can
buy for the hundred thousand dollars. So that a low rate on the
bankers' acceptances tends to help the export of our commodities ?
Doctor MILLER. Precisely.
Mr. STEVENSON. And the rate is usually lower, as you say, in New
York than it has been in London ?
Doctor MILLER. I t has been in these recent disturbed years. It has
not always been so, even since the war. As to the future, we do not
know. There is going to be keen competition to determine whether
New York or London is going to have the primacy in the market
for this kind of international short-term financing paper. That
remains for the future.
Mr. STEVENSON. What element tends to bring that rate down ?
Doctor MILLER. Competition.
Mr. STEVENSON. Competition?
Doctor MILLER. Competition for the business, and the factors influencing the competitive position of the two markets.
Mr. BEEDY. I understood a moment ago—am I interrupting you
Mr. Stevenson?
Mr. STEVENSON. I am through, Mr. Beedy. I wanted to sort of
visualize the process that he has indicated a while ago. It was entirely intelligible to him, but not entirely so to me. So I wanted his
Mr. BEEDY. I understood that you were about to speak about one
important factor that ought not to be disregarded.
Doctor MILLER. That was in connection with the exchange ?
Mr. BEEDY. Yes.
Doctor MILLER. I

was about to say that by the same token by
which an increase in, an improvement, let me say, rather than an in-



crease, in the exchange of any foreign country gives an advantage to
the importer over there, it puts the importer here under a disadvantage, because he gets less sterling for his dollars. Just as the
English importer gets more dollars and cents for his pound sterling,
the American importer gets fewer pounds and pence for his dollars.
So a rise in the foreign exchanges has a tendency to stimulate outward movement and to retard inward movement of merchandise.
And therefore, if the question is regarded in other than its transitory
aspects it may be a nice question to determine where balance of advantage will lie as between the two countries.
Let me go further, because one can not easily reach a limit in the
analysis. It can be extended further and further until it eventually
gets back to where it started. As the rise, we will say, in sterling
makes British goods, perhaps also, European goods, more expensive
to the American importer, it tends to diminish American purchases
of British or other European manufacturers, and thus to act as a
retarding influence on the growth of their export trade. So it is only
in a very limited view, that is to say, limited in point of duration,
that it can be said that its effect is to stimulate the export trade of the
country, because, while it is doing that, it may do a great many other
things that may not be immediately noticed, and the thing has got
to be handled with the utmost appreciation of all that may be involved, and yet with a full appreciation of the importance of the
time element.
Let me add this, for I think it is pertinent to this discussion, Mr.
Strong: In the psychology of " cheap and easy money policy " as a
rule even people who are pretty wise in money market matters are
apt to see only the things they have at heart as the objective of their
money policy, are apt to see only what they want, and are apt to lose
sight of the counteracting factors.
Mr. STRONG. May I suggest that we get back to this bill ?
Mr. MILLER. Have I finished your major question, Mr. Beedy?
Mr. BEEDY. NO. I thought you started out to say that there were
certain factors in the situation which caused surprise to the Federal
reserve system.
Doctor MILLER. Yes.
Mr. BEEDY. Who expected a beneficent result and found that the
devil had been at work. "Angelic," I believe, was the term you
Mr. STRONG. "Angelic desires."
Doctor MILLER. I have tried to describe the objectives that were
in mind in this policy of easing and cheapening money through the
summer and autumn and into the early winter of last year.
Now, as to what resulted in connection with this policy, that is a
further chapter in the story. When money rates went down in New
York last summer American business was, as we now know, in a state
of recession. I suppose it might be said that the recession extended
back even into the early summer or late spring of last year. The result
of slackened trade was that there was a light demand for commercial
credit. The actual volume of commercial credit in the latter months
of 1927 declined below that of 1926.
Doctor MILLER. That is to say, there was a slackened demand for
commercial credit, lower relatively than we have had for some time.



The money that was released by the Federal reserve banks to the
open market through its policy of open-market purchases had to go
The effect that was expected and intended was that it should bring
about a lowering of money rates. The one market that we have had
in this country during recent years that apparently has an insatiable
appetite for credit is the securities market. By the securities market
I mean, of course, something more than the market for stockexchange loans. I mean the market for all kinds of collateral loans
made for the purpose of floating domestic or foreign securities—
governmental and corporate. An easy-money market is always
Favorable to operations of that kind.
Now, the low money rates that resulted from Federal reserve
policy, in the light of subsequent developments, appear to have been
particularly effective in stimulating the absorption of credit in stock
speculation. As we look back the rise of security prices has been
more nearly perpendicular, I should say, in the last six months than
in any period since the Federal reserve system has been in existence.
So that, Mr. Beedy, answering your question quite frankly—I want
to be just as candid as I know how—I would say that cheap and easy
money in the New York market the last autumn must be recognized
to-day as having been a distinctly provocative factor in the remarkable speculative movement that has been in process now for several
The CHAIRMAN. Doctor Miller, in that connection: If that money
that was realized by the purchase of securities for the purpose of
easing the whole money-market situation had been absorbed by the
railroads and industries and commerce, it would have resulted in a
better business situation. But, as a matter of fact, it was not used
by business and industry and the railroads to improve and better
their conditions, but was largely used in the stock market?
Doctor MILLER. Yes. Well, it was used to a greatly increased
extent in the stock market.
Mr. BEEDY. I suppose it would be fair to those who determined
upon and finally consummated that policy of cheap money for the
Federal reserve system to say that they were not then advised of the
tendency towards recession in legitimate business at that time as
they now are?
Doctor MILLER. Well, of course
Mr. BEEDY. I nother[Inother]words, there might have been an honest hope
that a very appreciable portion of the money thus released upon the
market would be absorbed in legitimate business?
Doctor MILLER. Yes. Of course, we know now what happened.
At the time the policy was adopted the Federal reserve was confronted with the necessity of forming an estimate as to what might
happen, as to what the probablities[probailtes]were. In this particular instance
my fear was that cheap money would give an unhealthful stimulus to
activity. What has taken place has not particularly surprised me,
therefore. I was absent from Washington at the time action was
taken on the 27th of July, but I immediately wired in and urged
that action be held back at least until September and that action
of the kind in contemplation would prove an unhealthful stimulus.



Now, gentlemen, that may simply have been a lucky guess. I t is
quite conceivable that at least some of the officers of the Federal
reserve system who recommended the policies adopted, and who
believed in them, might also have entertained some apprehension
and have concluded that what the Federal reserve was after in this
case would more than compensate for possible harm from the stimulus
that cheap money might give to speculation.
There was an element that appeared later on that probably nobody
could have predicted would occur. Gold began to be withdrawn from
the United States in large amounts. The monetary reforms being
put through in South America had reached the stage where they
wanted the actual, physical gold in their custody. There was a considerable movement or gold, partly into " earmark " account, partly
into actual exportation. In either case the gold went out of the Federal reserve and the American banking picture.
When gold is wanted for " earmarking " it is physically locked up
in the strong box of some New York bank; it is just as much gone
as if it were put on board a ship and sent out of the country. I t is
no longer America's gold. The Federal reserve, therefore, in this
situation and still adhering to its policy of maintaining an easy
condition of the money market, decided to offset withdrawals of
gold for either " earmarking " or exportation by purchase of securities in the open market. Whenever gold is withdrawn for foreign
account it means that the member bank handling the account has got
to get the gold. And normally the place to get that gold is the reserve
bank. The member bank will therefore have to go to the reserve
bank and rediscount, unless at the time the reserve bank relieves it
of that necessity by pursuing a policy of open-market purchases.
The effect of offsetting open-market purchases is to put reserve
money into the market at the time when member banks want it in
order to get gold for shipment.
A purchase of securities in the market by the reserve bank, as far
as the member bank is concerned, is identical in its effect with an
importation of gold, just as a withdrawal is equivalent to an exportation of gold.
The CHAIRMAN. That is what gives it its power and influence ?
Doctor MILLER. That is it exactly. That is what gives the reserve
bank its power and influence. So that the reserve system in pursuing
its policy of easy money said, "As gold is withdrawn for export we
will make offsetting purchases in the market so as not to allow the
withdrawal of gold to firm money rates in New York and thus defeat
the policy we are operating on."
But as autumn wore on, and the absorption of funds into the stockexchange loan account grew to amazing dimensions, a feeling of misgiving arose with regard to what was taking place.
Well, now, I think it is a fair statement in .accounting for the extraordinary ease of money in the autumn of 1927 to say that in part
it also was due to the fact that there was then a real recession of
business, and therefore a relatively slack demand for commercial
credit, and, what was more important, a diminution in the volume of
currency required by the ordinary business of the country. The figure I have in mind is a reduction of a hundred millions or thereabouts
in the volume of money in circulation as compared with a year earlier.




We are lower in the actual amount of money in circulation in the
country than we have been since 1922.
Mr. BEEDY. YOU are referring now to all kinds of currency?
Doctor MILLER. All kinds of money; money in circulation, whether
greenbacks, gold certificates, Federal-reserve notes, etc.
The CHAIRMAN. YOU are not talking about Federal reserve credits ?
Doctor MILLER. I am talking about currency, total money in circulation, as the official statements call it.
The result of that diminution was practically equivalent, from
the point of view of the member banks of the country, to an importation of some 100,000,000 of gold, exactly the same. In brief, as currency became redundant and flowed back to the banks of the country,
the member banks turned it in to the Federal reserve banks and
got credit in their reserve accounts dollar for dollar, exactly as they
would if they had received an importation of gold.
So that at the very time—I am looking back, now—at the same
time that the Federal reserve bank was putting money into the
market in order to offset the restrictive effects of gold exports the
country, because of reduced requirements for monetary circulation,
was, so to speak, also putting money into the market, thus adding
to the supply of basic credit, and giving rise to what, I think, can
be very properly described as a plethora of money in the autumn and
early winter of the year under review.
Mr. BEEDY. I don't know—I may be dull, but I think I have lost
a step here somewhere. I understood you to say that our circulation
of currency per capita was to-day less than at any time since 1922.
Doctor MILLER. I said that the total amount is less; and inasmuch
as the population has increased in the meantime, the per capita is
even still less.
Mr. BEEDY. YOU are speaking not only of Federal rsserve[res rve]notes but
everything ?
Doctor MILLER. I am speaking of everything.
Mr. BEEDY. YOU are speaking of America?
Doctor MILLER. Yes.
Mr. BEEDY. NOW, then, I understood your next statement to be
that as through the open-market operations the member banks were
able to avail themselves of money made cheap by that operation,
they in turn instead of coming and rediscounting, reduced their indebtedness at the central banks, and also turned money back into
the central banks and thus retired it from circulation. Is that
correct ?
Doctor MILLER. That is correct.
Mr. BEEDY. I think your next statement was so that you have a
plethora of money ?
Doctor MILLER. Yes.
Mr. BEEDY. Where?
Doctor MILLER. Well, a plethora of credit.
Mr. BEEDY. Locked up in the Federal reserve system ?
Doctor MILLER. NO ; in the money market.
The CHAIRMAN. That made that money available for stock loans?
Mr. BEEDY. That is, this money that is tied up in stock loans is
withdrawn from the general money or currency in circulation and
caused to be reduced to this low level per capita ?



Doctor MILLER. If the committee is not advised on this fact of
present-day banking practice, perhaps it will be worth while to put
it into the record at this point.
The banks to-day carry no surplus reserves. Under our old banking system, there was a good deal of variety in the practice of banks
according to the different temper
The CHAIRMAN. YOU mean the member banks of the reserve
system ?
Doctor MILLER. Yes. Under the old regime, before we had the
Federal reserve system, there were conservative bankers and there
were bankers who sailed pretty close to the wind. There were country bankers who felt uncomfortable if their reserve ran below 40 per
cent, even though their required reserve was only 15 per cent. They
wanted a good reserve. There were others that would go just as far
the other way as the comptroller's office would permit.
As the banks look at the situation now there is no reason why any
bank should carry a surplus reserve. I think one of the things that
is overlooked in banking changes under the Federal reserve system,
with its safeguards, is that the banker has been released from that
constant sense of responsibility for his own good condition that was
characteristic—at least, more characteristic—of banking under our
old money system. This has introduced a new factor, the full influence of which on recent movements and conditions is just beginning
to be appreciated in the Federal reserve system. The result of the
habit of carrying no surplus reserves was that the hundred millions or
more of currency which flow into the banks, because trade did not
need as much pocket cash and pay roll requirements were diminished,
was deposited by the member banks with their respective reserve
banks and credited to their reserve accounts, giving them in first
instance surplus reserves.
Now, since the banks do not any longer carry surplus reserves they
would immediately look around and invest their surpluses; make the
money which flowed out of circulation and into the banks earn a
return without interruption. That is one of the noteworthy things in
the reserve system—the immediate and constant investment of bank
funds has been very much heightened by the smooth-working Federal
reserve machinery; its system of transfers and quick clearances.
There is no country in the world probably where the rapidity of
turnover of money is as great as it has become in the United States
under the reserve system.
The CHAIRMAN. Velocity, I think it is commonly referred to.
Doctor MILLER. Velocity, or, as I would prefer to call it, efficiency of performance of the monetary unit of value under the
operation of the Federal reserve system. The American dollar has
become an efficiency marvel. Currency, we will say, is retired from
circulation in San Francisco to-day. To-morrow it is loaned on call
in New York City. This means that the San Francisco member
bank gets credit in its reserve account with the Federal Reserve Bank
of San Francisco on the day it deposits redundant currency, immediately arranges for a transfer wire to New York, and it is out on
call to-morrow.
Mr. STEVENSON. It is money from banks all over the United States
that is being loaned on call in New York so much ?
Doctor MILLER. Yes.



Mr. STEVENSON. Have you any figures on that ?
Doctor MILLER. Let me explain. The disposition of the banks not
to carry surplus reserves, the disposition of the banks to invest the
last dollar they can up to the legally required reserves and the modicum of cash in till they have got to have at the beginning of the
banking day in order to meet the counter demands for cash is to a
large measure responsible for the increased importance that the callloan market has acquired in recent years.
The CHAIRMAN. That brings up an interesting question here, too,
Doctor. There has been some suggestion of going back and repealing
this change in the reserve requirements known as the war amendments, because now that the war is over and we have this plethora
of money and credits which you refer to here as available for perhaps
too much speculation, perhaps we should go back to the old methods
of reserves. Are you suggesting that that might be a possible correction of this great plethora of money which is now used in the
speculative market ?
Doctor MILLER. I think there are some things there worth considering. I think, however, that as a general proposition it is a very
difficult thing and a thing of very doubtful expediency to turn back
in banking legislation when it involves a stiffening of reserve requirements. It might be tantamount to deflation by legislation.
Mr. STEAGALL. What did you say, inflation or deflation ?
Doctor MILLER. Deflation.
Mr. STEAGALL. I thought that was what you said.
Doctor MILLER. I do think, however, that this is a very important
question, and if the committee is interested in it it might well be
made the subject of a separate hearing.
Doctor MILLER. I just want to
The CHAIRMAN. TWO or three

years ago I made a proposal in the
form of legislation, and the attitude of the board then was that it
should not be done, and the American Bankers' Association went on
record that it should not be done. But the situation is still with us ?
Doctor MILLER. It is still with us.
The CHAIRMAN. I was just wondering whether it would be feasible
to reconsider this.
Doctor MILLER. It might be well worth while for the committee
to consider what is practicable in the way of an increase in the reserves required against time deposits.
The CHAIRMAN. This whole question of reserves is an arbitrary
one that we set up supposedly to cover the situation. I think that
some of these days we are going to come, perhaps, to a readjustment
of the basis of these reserves as between the different classes of banks
and as between the different classes of deposits.
Doctor MILLER. Yes. I think that is quite true.
Mr. BEEDY. I think that Congressman Strong feels that because
we have not been talking about this bill that our time has been
Mr. STRONG. NO. I don't think that the time has been wasted this
morning, but I was going to suggest that to-morrow morning we
meet for the purpose of having Doctor Miller resume his testimony
with regard to this bill.



Mr. STEVENSON. Let me ask Doctor Miller one question first.
Mr. STRONG. GO ahead.
Mr. STEVENSON. YOU are speaking of the question of checking the
unusual investment in call loans, the unusual amount of brokers'
loans. What is your attitude as to the position taken by the witness
yesterday—that the most effective method would be for the Federal
reserve banks to be able to say or be instructed to say to a bank that
comes for rediscount, " You are carrying a very heavy amount of
brokers' loans. We deny you any further rediscounts while that condition exists." Now, that is a practical suggestion that he made yesterday, and it would no doubt be an effective method of dealing
with it. The question would be whether it is a judicious method or
Doctor MILLER. Well, I would be inclined to answer a bit cynically
by a quotation from a great man: " Thought is easy, action is difficult; and action in accordance with thought is the most difficult
thing in the world."
Theoretically the thing is perfectly conceivable; and if we were
dealing with a theory instead of a condition, I not only think it
could be done but would have been done long ago. The fact, however, that it has not been done is the thing to be explained when
talking about what is and what is not practicable. It might be
that a clarification of the law with regard to the borrowing status
of member banks could be brought about so as to leave the Federal
reserve banks and the member banks, so to speak, no loophole for
misuse of Federal reserve credit. I think one or two questions were
asked yesterday by Mr. Beedy on this subject of the witness. He
did not seem to think well of amending the Federal reserve act so as
to prohibit the use of Federal reserve money for so-called speculative
loans, if I remember correctly.
The CHAIRMAN. May I suggest this: The members are required on
the floor of the House, and I think we ought to adjourn very shortly.
Mr. STRONG. I move we adjourn until to-morrow at 10 o'clock.
Mr. STEAGALL. What would be the effect in the matter of feeling
created, and all that sort of thing, that would result from such
action as this on the part of the Federal Reserve Board to take over
the control of policies of all of the banks of the country ?
Doctor MILLER. Well, it can't be done, and should not be done.
That is not a function of government.
Mr. STEAGALL. In other words, the Federal Reserve Board, sitting
in Washington, should not assume responsibility and control and
management of a member bank of the Federal reserve system in a
distant city as to the details of its business ?
Doctor MILLER. NO. Of course not. But it can do a great deal, in
my judgment, that would be effective without any such invasion of
the field of management of the member banks.
Mr. STEAGALL. But suppose the Federal Reserve Board concludes
that here is a situation that has sprung up where we think there is
a certain character of loans that is being extended beyond the point
that we think is wise and healthful; and when banks that have
got into this practice apply to us for loans, even if it is in every sense
desirable and satisfactory otherwise, because of this particular situation we will arbitrarily refuse them loans. Would that not be a
direct interference with their management?



Doctor MILLER. Yes.
Mr. STRONG. I move we adjourn until to-morrow at 10 o'clock.
Mr. STEVENSON. I second the motion.
The CHAIRMAN. It is moved and seconded that we adjourn until
to-morrow at 10 o'clock. We had better make that 10.30. The
committee will now adjourn.
(Whereupon at 12 o'clock noon the committee adjourned until
Thursday, May 3, 1928, at 10.30 o'clock a. m.)

Thursday, May 3, 1928.
The committee met, pursuant to adjournment, at 10.30 o'clock
a. m., Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order.

Mr. STRONG. Mr. Chairman, Doctor Miller has indicated his wish
to go on where he left off yesterday, and at the conclusion I would
like to ask to have Doctor Commons, through questions, develop lines
of thought by the use of charts, which I think will be very enlightening to the committee, if there is no objection.
The CHAIRMAN. In the absence of any objection on the part of
members of the committee or Doctor Miller we will be very glad to
proceed in that matter.
Doctor MILLER. I would be perfectly happy to have it go on by
questions, but my thought when I spoke to you a moment ago, Mr.
Congressman, was that the episode that was being discussed yesterday morning—the operation of the Federal reserve system during the
last 8 or 10 months, say, since August of last year—had better be
concluded before new subjects were taken up. I will not say that the
best way would not be to have it done by questions. Mr. Beedy was
asking some very pointed questions yesterday morning.
The CHAIRMAN. Yes. Of course you appreciate as we do that a
review of the experiences of the last six months is very pertinent to
this subject of this investigation—to the subject of stability—because
it is a practical illustration of a part of the dilemma in which we all
find ourselves at this time.
Doctor MILLER. Precisely.
The CHAIRMAN. And it has a very great bearing on the operation
of this proposal if it was enacted into law; so that it seems to me that
it is all very pertinent, and I think your position is right, that you
should finish up what we had before us yesterday, and then that you
should submit to questioning to bring additional light on this particular subject that Mr. Strong has referred to.
Mr. STRONG. All right.
The CHAIRMAN. SO that, supposing then, Doctor Miller, you proceed with your statement on that matter.
Doctor MILLER. Toward the conclusion of the hearing yesterday
morning I had carried the account of banking developments of the



period under review to the close of the year 1927. Let me say here
that one difficulty I have in recollecting what has already been said
is that during the days these hearings have been in progress, the
spring conference of the Federal reserve bank governors has been
going on here in Washington, and while I have been here in the mornings I have been there in the afternoons, and a great many of these
same questions have been under discussion there; so that I am not
always sure as to what I may have said here and what I may have
said there. Toward the end of the year 1927 after the Federal reserve
system had been pursuing the policy, mainly through open-market
operations, but assisted by the lowered discount rate, of creating an
easy credit condition—a policy which manifested itself when an outward gold movement began in the autumn of 1927, in so-called offsetting purchases of securities in the open markets by the Federal reserve system; in other words, by the restoration to the open market
of the money which has been taken out of the market by gold withdrawn either for ear-marking or for foreign shipment—there was
evidence of steady and pretty rapid absorption of credit into security
loans, not only speculative loans of the kind that are reported in our
weekly statement as brokers' loans, but of other security loans also.
At the same time the best information obtainable by the board was
to the effect that the commercial loans were running at a lower level.
Is that right, Mr. Riefler?
Mr. RIEFLER. In comparison with the year before.
Doctor MILLER. That is what I mean; they were lower than the
year before.
The Federal reserve, I think, began to feel that somehow or other
its plan of easing money conditions was bringing about some unexpected consequences, and the first real result of that in policy was the
suspension of these so-called offsetting purchases of securities—these
purchases of securities in the open market—against gold exports.
I want to see whether that is clear, because to my mind it is a
rather important detail in the history of this policy.
The CHAIRMAN. YOU mean by that that exports of gold were made
and that the Federal Reserve Board changed its policy with regard
to purchases in the open market?
Doctor MILLER. Yes; instead of purchasing securities in the open
market—in other words, of putting back funds into the market equal
to the amount of gold taken out for export or earmarking—it pursued
a policy of allowing the gold so withdrawn to exert some pressure.
The CHAIRMAN. In other words, a tightening of the money market ?
Doctor MILLER. A tightening of the money market. But even that
did not register the effect that was expected and that might normally
be expected. It became fairly clear, therefore, that there must be
some mysterious forces in the situation of which the Federal reserve
was not cognizant.
The CHAIRMAN. And over which the board had no control ?
Doctor MILLER. And over which the board had no control, except
as it always has control over its action if it knows what conditions are.
You have no control over the rain, but you can protect yourself by
carrying your umbrella and gum shoes with you. A subsequent
study of that situation indicated what these influences were. I do
not know whether they are generally appreciated.
The CHAIRMAN. Would you care to express your views on that?



Doctor MILLER. Yes; if I have not already enumerated them in the
last hearing.
One is the great reduction in the amount of money in circulation.
My recollection is that by the last figures the reduction is approximately $125,000,000.
The CHAIRMAN. What caused that reduction? What brought it
Doctor MILLER. Presumably slacker trade and slacker general business activity in the year 1927.
The CHAIRMAN. YOU are talking now of a reduction in the Federal
ratio ?
Doctor MILLER. NO ; I am talking of reduction in the total amount
of money in circulation, irrespective of its issue.
Mr. GOODWIN. What is the total ?
Mr. RIEFLER. Four and seven-tenths billions.
Doctor MILLER. Yes; approximately five billions. I think probably that slow trade was the most important factor in the reduction.
Another factor, I think, is the increased use of checking accounts.
The checking habit has spread pretty rapidly in recent years among
sections of the population that were strangers to such devices and
practice only a few years ago. I think undoubtedly that
The CHAIRMAN. That might be termed an increase in velocity or
organization which is brought about by the Federal reserve system
of credits, and the tendency to settle by check increasingly ?
Doctor MILLER. Yes; it might be explained in that way. Fundamentally, I would say, it is a change in monetary usage that grows
out of a change of habit, and that change of habit is, I think, in
part explained by the growing intelligence of the public, especially
as the wage-receiving classes have an increasing familiarity with
banking customs.
The CHAIRMAN. And the influx here of foreign money had some
influence on that, did it not?
Doctor MILLER. It had an effect on the composition of the currency, but I think not upon the total volume.

Doctor MILLER. The total volume of money in circulation is determined by the community. The Federal reserve system has no
appreciable control over that and no disposition to interfere with it.
Mr. STEVENSON. The rather widespread tendency of labor to organize banking systems and to get the laborer who is paid by the
week or every two weeks into those systems has had a good deal to do
with it?
Doctor MILLER. I think a good many things have been great contributing forces. I think the automobile habit has a great deal to
do with it. In part, I suppose the frequency of burglary and robbery
has something to do with it now. A man is a little more hesitant
about carrying a wad of currency with him if he has means of identification, so that having a checking account he can check against it
here and there.
The CHAIRMAN. Modern influence as applied by banks to get business has had its effect also ?
Doctor MILLER. Yes.



The CHAIRMAN. And the organization of small community banks,
labor banks, and all kinds of financial institutions. Installment buying has been a stimulent[stimulant]?
Doctor MILLER. Yes; and I would say, on the reverse side, it has
stimulated installment buying. It has certainly stimulated, in my
judgment, mail-order purchases. The fact that a man can sit in a
tent or a log cabin in Idaho or in the mountains of California, and
if he has a banking account, order merchandise without the trouble
of going to the bank and getting the currency and buying a money
order or draft, without the trouble of doing anything except dropping his list and his check into a letter and then into the nearest
box on the mail route certainly has tended to increase the mail-order
business. Generally, making things easier makes them more used.
At any rate, the fact is that there has been this considerable reduction in the volume of money in circulation, not wholly explained, I
think, by diminished industrial activity nor by employment changes.
Mr. GOODWIN. Does the amount of money in circulation bear any
relation to the amount of bank loans ?
Doctor MILLER. Yes; but a varying relation. We used to assume,
and it was a fairly justified assumption, that the amount of money
in circulation was perhaps a sixth part of the volume of commercial
credit as indicated by demand deposits. A member of the board's
statistical staff is here, and I turn to him to sell me whether I am too
far off. There was formerly a ratio of one to six. The ratio is subject to change, as monetary practice and banking habits change; but
that is approximately a statement of a working ratio.
The reduction of money in circulation from the point of view of the
member banks of the Federal reserve system, is the same in effect as
though an equivalent amount of gold had come into the country from
foreign sources. It is the basis of reserve credit. So that, at the
time that the Federal reserve was losing gold and making offsetting
purchases of securities in the money market, the circulation of the
country was becoming redundant, and was being sent into the banks
and by them into the Federal reserve banks for virtual retirement.
This returned-currency flow acted exactly as though there had been
a counteracting gold import movement into the country at the very
time the gold export movement was on, and when there was solicitude on the part of the Federal reserve that the gold export movement
should not interfere with the maintenance of low and stable money
That redundant currency was an element not quickly detected
It was one of the mysteries at the time when the Federal reserve was
wondering why its policy was not working as anticipated.
The CHAIRMAN. There is no direction that caused that retirement
of circulating medium ?
Doctor MILLER. Not at all.
The CHAIRMAN. It was just natural conditions of supply and
demand ?
Doctor MILLER. Yes. Currency became redundant in comparison
to the volume of transactions that needed to be handled through



The CHAIRMAN. With the natural sequence of lessening the business, the perils of utilization of checking accounts for the payment
of bills?
Doctor MILLER. Yes; all of that is involved in it. Now, at the
same time, notably in the autumn, business was getting a bit slacker
month by month. I t was indicated, among other things, by the fact
that the volume of commercial loans in the latter part of the year
1927 was lower than it was in the year 1926, showing that there was
a certain amount of credit that was, so to speak, released from commercial use. So that at the time that the Federal reserve was pursuing a policy of maintaining an easy money market through openmarket purchases, combined with a lower discount rate, the commercial system of the country, so to speak, as indicated by reduced
requirements for actual money and commercial credit, was returning, so to speak, to the reserve banks a part of the currency, and
returning the facilities that it did not need, and thus was easing
the market at a time when the market did not need easing—when it
did not need, at any rate, additional commercial facilities—and was
content with less, as indicated by the fact that it took less, notwithstanding the fact that the funds were abundant and the rates were
Incidentally—I put this in parenthesis—as I have perhaps stated
here before, in a time of recession you can not stop the recession by
the lowering of the discount rate, the cheapening of the cost of credit,
or by making credit more abundant.
You have a good illustration of that in 1928. I may come to this
later on, when we get down to the real nub of the bill.
To the extent that the Federal reserve has that influence over credit
movement it can influence it only when the market itself is moving.
You can not, as it were, restrain a horse that is standing still. It is
no use. You can not, so to speak, make a horse go by slackening the
reins, standing still, if you do not give him some other impulse or
direction. There must be motion before you can very the motion.
Mr. STRONG. Does anything in this world stand still ?
Doctor MILLER. Of course, I am using that in a loose, practical
sense. You have got to have a demand for something before you can
either stimulate that demand or restrain it. And at a time when the
business community does not want to make any business commitments, when it wants to reduce commitments, when it is hesitant about
the business outlook, you can not do very much with your rate; and,
in my judgment, when you undertake to do it you are really wasting
your ammunition. You are putting yourself in worse position to do
what you might possibly do in the future. You put yourself in a
more awkward position.
Mr. LUCE. Once in my life I received a great compliment, undeserved. A banker friend of mine met me on the street and asked me
if I could not borrow some money of him. He had more money on
hand than he wanted to use, and he suggested to me the possibility of
doing something in the way of building, or something. Wisely, I
declined the temptation. But does not a plethora of money sometimes result in a bank trying to put out its funds, and inviting and
encouraging men to enter into enterprises ?
Doctor MILLER. Eventually the plethora of money will cure itself,
but it may take a year or more before that eventuality is reached.



We have not experienced this in recent years. But if you turn back
in our economic history you will find that we have had so-called
money plethoras and stagnant trade conditions, with discount rates
lower than any we have seen in the Federal reserve system in recent
years with the possible exception of the year 1924. After the revulsion of 1873 such was, I believe, the case.
There have been such times in the history of the Bank of England.
Perhaps that gives the most complete catalogue of episodes where
even a very low rate of interest will sometimes fail to stimulate the
use of money.
Of course, there is some foundation, I think, for believing that
these episodes are going to be less frequent and less severe than they
have been in the past, but we have had them in the past, and we had
in this country in 1924 a 2 per cent rate on bankers' acceptances and
on call-market loans that did not have very much stimulating effect
for some months. People were still under the influence of the
memory of 1920 and 1921, and the reaction that came in 1923, and
they were in no state of mind to borrow simply because money was
Mr. LUCE. Must we disabuse ourselves of the impression that the
discount rate is an indication of conditions?
Doctor MILLER. We must rid ourselves of the impression that
lowering the discount rate will stimulate business when business is
not in a mood to respond to stimulation. A part of the rare wisdom
and the rarer skill in the application of discount policy is the knowing or sensing when you may and when you may not expect to get a
response. It can not be done mechanically.
An economic rule in this matter is not possible of formulation.
At least that is my opinion, based upon observation and experience
in the Federal reserve system, and that is, I think, what is in large
measure responsible for some of the surprises and unexpected consequences that were involved in the development of the credit policy
that was followed by the Federal reserve system last autumn and
on into this year.
Mr. LUGE. I venture to push my interrogation, because it strikes
me you are getting right down to the core of this provision. If we
were to adopt Mr. Strong's proposal, and if it would be possible
either to stimulate or retard business activities, I should be glad to
know quite definitely whether it is your opinion that that is of no
great consequence ?
Doctor MILLER. It is my opinion that looking at the thing in its
practical and practicable aspects as well as its theoretical aspects,
there is not a sufficiently close relationship between the two things to
make it certain that any ordinary body of men—and by ordinary
I mean in point of, let us say, mental equipment for a highly delicate task; for, let me say, an act of economic statesmanship of,
perhaps, as delicate a character as has ever been conceived or
Therefore, I would say, it awakens exaggerated expectations and
probably will result in miscarriages—the disappointment that usually
comes where you have an unfulfilled expectation. And the criticism.
I think it would be a matter of very grave doubt whether, if it were
possible to put the control of the Federal reserve system or any other
great reserve banking system into the hands of, say, six or eight



of the ablest men that could be found in the world, it could be done—
I question whether it could be done.
Mr. STRONG. We have done it.
Doctor MILLER. What?
Mr. STRONG. They have the power.
Doctor MILLER. They have the power?
Mr. STRONG. We have given it to them.
Doctor MILLER. But I say I question whether it would accomplish
what Mr. Luce has in mind. We have had a very dramatic demonstration in this country in the last few months, in the field of the air.
Why are we celebrating Lindbergh more than we are any otherflyer?
And why are there so few? Why is there none other as yet?
There are reasons for those things, and until you get, so to speak,
a species of Lindberghs in the field of public administration, to my
mind you are not going to get Lindbergh results, no matter how
many Spirits of St. Louis are going to be legislatively constructed.
You can write whatever you want into the text of this bill, but you
will get out of it only what the men who are given the administration
of it can get out of it; and in respect to this particular bill, my opinion
is you will get less of what you want because the presumption is that
the Federal reserve has got to accomplish something by the use of
the immensely delicate and unusual instrumentalities that would
have to be developed for the purposes proposed.
Mr. STRONG. Then do you think men should be given these tremendous powers?
Doctor MILLER. I think they should not be given the powers.
Mr. STRONG. They have them now.
Doctor MILLER. They have them? I think you overestimate the
powers the Federal reserve system now has. I would like an account,
a statement, as to what your conception is of " a l l " these powers;
when they use all the powers that now exist.
Mr. STRONG. My conception is that when we give to a board of
men the right to control the volume of money in circulation among
the people, and largely to control the price of money, and the right
to control the expansion or contraction of credit, that is the greatest
power that has ever been given to any men by any government, except
the power of life and death and liberty.
Doctor MILLER. I would say that is all right for oratorical purposes.
Mr. STRONG. IS is not true ?
Doctor MILLER. NO ; it is not true.
Mr. STRONG. What other rights have we given to men greater than
Doctor MILLER. Let us not discuss
Mr. STRONG. I t is either true or not true.
Doctor MILLER. I deny that it even has these powers that you say
it has; that it can contract or expand, as you say. When has the
Federal Reserve Board contracted credit? Has it in this last year?
Mr. STRONG. I do not know whether it has or not; but do you not
think that it can ?
Doctor MILLER. I answer those questions realistically. I am not
concerned with what can be done in a vacuum. I am concerned as to
what actual, living men, sitting here in the shadow of the United
States Capitol, can do. No; it can not do it.



Mr. STRONG. It did not bring about a reduction or deflation in
Doctor MILLER. I think it would be unprofitable to go into that.
I am perfectly willing to, but I think that it would be an unprofitable
Mr. STRONG. Put it the other way; what power do you think that
you have not ?
Doctor MILLER. The mistake that the Federal reserve made then
(1920) was in not saying there was no use doing those things, and of
putting itself in the position of accepting responsibility for what
happened more or less under the impulse of fear of the investment
and banking community; and more or less the impulse of fear of the
Senate of the United States.
The CHAIRMAN. That includes the Treasury as well, in that ?
Doctor MILLER. I think that is a more complicated question.
Mr. STEVENSON. AS I understood you day before yesterday, I think
it was, your idea was that the open market operations were not particularly efficient in either stabilizing or reducing prices, or raising
As I understand you to say, the rates of discount being raised or
lowered, if business is in a static condition as my good friend from
Indiana used to say, does not have any particular effect. Those are
the two principal ways in which it is supposed that the Federal reserve system affects business.
Now, I want to ask you this. Suppose you have had a period of,
as I said a while ago, static condition in business; just marking time.
When is the time to begin to loosen it up; or is there a time when the
Federal Reserve Board could? And, in addition to that, is it not
necessary—I will put two questions in one because you comprehend
them both—is it not necessary to create the condition which may invite business to come out of its marking time and begin to march?
Does there not a time come when that should be done; and what
could be done to do that?
Doctor MILLER. Yes. I think I have said, perhaps, two or three
times that I think it is reasonable to believe—I hesitate to put that
more absolutely, because I think experience is the only real guide
in this matter, and the reserve system, though in some respects very
old, in other respects is still an infant; but without specifying a lot
of qualifications and details, I think that the discount policy of the
Federal reserve system, or of any central banking system, properly
timed in a period of what I would call business recovery following
after a period you have described as one of static conditions, is capable of having a stimulating effect. And I might add that on that
basis right now, in our own country, it would be far better if the
discount rate—I am now looking at the matter exclusively from the
point of view of the effectiveness and relationship of the discount
rate to the business activity of the country—it would be far better
right now if the discount rate were 3 1/2 per cent than when that
rate was established last autumn.
We know now—I am not saying this in any critical way, but we
know what has happened—that we have been in a period of business
recession during the last part of the year 1927. We know that the
average growth in economic activity was only21/2per cent.



The CHAIRMAN. In other words, to refer to the Lindbergh flight
which you mentioned a minute ago, that is pioneering. The Federal
Reserve Board and system have been pioneering in the last six
months? You had unusual conditions, and there was no chart to
show you. You had to gauge your own course.
Doctor MILLER. Yes.
Mr. STRONG. If, right now, you feel that business could be stimulated by the power of the Federal reserve system, do you also feel
that it could be deflated by the use of their power ?
Doctor MILLER. We are now just about reaching the culmination
of what is called the period of spring trade, and for the most part,
the commitments that were made by business men to finance them
through this interval were made two and three months ago.
Mr. STRONG. Say two or three months ago. If it could have stimulated it at that time, could a contrary action have deflated it?
Doctor MILLER. It could have restrained it somewhat.
Mr. STRONG. That is exactly what I want to use this bill to do.
Doctor MILLER. Then I would add, not in a technical sense, because I do not want to be trapped into admitting anything that will
embarrass me
Mr. STRONG. I understand that you will not admit anything. Even
though you admit it by implication, you will get around it. I appreciate that.
Doctor MILLER. I do not think the difference in your specified case
would be a very marked one; but I might as well, having said that,
say why; and I think why may have some considerable pertinence to your inquiry.
Mr. STEVENSON. NOW, you have practically answered my question.
I want to ask one there. You say now there is a beginning of recovery. Then the lowering of the discount rate would facilitate, in
your judgment, the recovery?
What indications does the board follow to determine the period
at which the lowering of the discount rate should be started, after
the stimulation has started or before it has started. In other words,
when a machine has been standing in the road for a good while, can
you crank it up by putting on the brakes, or do you wait until it gets
started and then add a little more gasoline? Which is the logical
Doctor MILLER. YOU are asking a question that I am afraid, honestly, I can not answer. I think it is always well to bear in mind
that the Federal reserve system is a very large organization. There
is not only the Federal Reserve Board but there are 12 banks and
their officers and directors, many of whom are very able men, and
they have their own ideas, and so forth; and I would say that if anyone would undertake to describe how an impulse, an action, generates
in the Federal reserve system or in the Congress of the United
States, that is one of those things.
Mr. STEVENSON. It is impossible to say the point at which and the
intentions upon which you would act ?
Doctor MILLER. It is difficult for a man to find out just what it is
that gives him a feeling of uneasiness that finally changes his attitude
and leads to action. You know that most men in matters of large
responsibility have not very much capacity to act. It is very easy to
imagine that all have, and so forth; but my observation is that the



men who have a combination of imagination and will, and what I
would call sound selective judgment, or, much more rare still, creative
judgment, are very, very rare; and that calling men by high-sounding
titles and putting them in high positions in the Federal reserve, or
anywhere else, does not do anything except, in some cases, paralyze
them a little bit in the exercise of the native ability they might have.
I have seen a lot of that, where men by reason of the fact that they
are expected to do the wonderful, can not even do efficiently the
things God intended them to do. I do not know that that should
stay in the record. I am talking here pretty frankly to you men.
Mr. STRONG. DO you think that these powers that have been given
to the Federal reserve system are too great and important to be
handled by men of human limitations?
Doctor MILLER. What do you refer to?
Mr. STRONG. TO the great powers we have given them.
Doctor MILLER. I would say that the two important powers the
Federal reserve system exercises are powers over discount policy and
over open-market policy and operations.
Mr. STRONG. DO you think those two powers should be taken away
from them?
Doctor MILLER. I do not, because you might as well shut up the
Federal reserve system; but I am inclined to think that the exercise
of the power of open-market operations, of the Federal reserve system, should be subjected to limitation rather than to be left as elastic
and in some respects uncertain as it is.
Mr. STRONG. HOW would you suggest doing that ?
Doctor MILLER. I would suggest that we clear up this episode that
has been under discussion here now for two or three days, particularly with Doctor Sprague (?), who preceded me on Tuesday, followed by myself on yesterday and continuing to-day. I think if we
get that episode and its difficulties out of the way, perhaps we will
be in a better position to see whether it does or does not suggest
The CHAIRMAN. YOU spoke of the two powers that it has, the
power over discount rates and the power over open-market transactions. You would also include the power of publicity, would
you not ?
Doctor MILLER. Yes; that can very well be included. I think of
that as perhaps something that is incidental to and involved in
these others.
Mr. KING. YOU mean the power of secrecy rather than that of publicity ?
Doctor MILLER. That depends on how you look at it.
Mr. STRONG. It strikes me, if we have given the Federal reserve
system, or a board, such great powers that men of ordinary human
intelligence can not operate them, if we can not direct them to use
those powers for certain policies but that they must be left by them
for experimental purposes in secrecy, we had better repeal them.
Mr. KING. If you had a committee of Gods, you could confer this
Doctor MILLER. Evidently.
(The question of Mr. Strong was here read aloud by the stenographer.)



Doctor MILLER. Let us leave the latter matter for future discussion.
I would say right without any hesitation that these things can not be
done by men of ordinary intelligence.
Mr. STRONG. I S it not pretty dangerous to leave such powers in the
hands of men who can not use them ?
Doctor MILLER. What is the danger?
Mr. STRONG. That they may misuse them.
Doctor MILLER. Have they been misused?
Mr. STRONG. I do not know. You say they have been trying to use
them and that they have brought about results contrary to what you
expected. Would we not be better off if they did not attempt to use
Doctor MILLER. I think we would be very much better off with
considerable abridgement of some of them.
Mr. STRONG. What would you suggest ?
Doctor MILLER. I would suggest some limitation of the openmarket powers, particularly in view of this last episode in which we
have the open-market policy, which is a species of direct action on
the part of the Federal reserve system, indirectly responsible for
what I would call, in the large, a misadventure in Federal reserve
policy. I call it a misadventure, because I regard the situation in
which we have found ourselves during the last two or three months,
if you please, as the outcome of it.
The CHAIRMAN. Would you term it inflation?
Doctor MILLER. NO ; I would not term it inflation. There is nothing in the field of ordinary business or price movements in the commodity field to indicate that there is anything that is unsound or
The CHAIRMAN. Would you say it was simply inflation of the
stock market?
Doctor MILLER. It is a question whether we ought to go that far.
We do know that it affected the stock market.
I think I stated here yesterday that I regarded the policy of the
Federal reserve system last autumn as having been a provocative
factor in the stock market; and inasmuch as, and mainly inasmuch
as, and mainly only inasmuch as—speaking now personally—the
Congress of the United States and the press of the country and the
people of the country have become so much concerned about the activities of the stock market, do I take that as constituting a fact that
has got to be reckoned with publicly in the operations of the Federal
reserve system during the past six or eight months.
Now, it is a matter upon which I think very able men may well
disagree, as to whether or not the excitement, with this unwarranted,
this extraordinary speculation in stocks that has gone on in the last
six or eight months, is the great national menace that many think it
is. It may be. It may not be. I usually try to maintain in myself
an attitude of mind that it is none of my business as a member of the
Federal Reserve Board. It becomes only a matter of concern to me
as a member of the Federal reserve system when there is evidence
that the Federal reserve banks through their policies have become, as
it were, tied into the situation.
The CHAIRMAN. YOU mean the 12 banks, or are you including the
member banks ?



Doctor MILLER. NO.
The CHAIRMAN. The five member banks?
Doctor MILLER. Yes; because we might as well recognize right
here, particularly in a period when the movement of gold has been
outward instead of inward, that the only method by which the banks
of the country can extend their business is by getting credit at the
Federal reserve banks; and during the last year, when we have had
trade and production of comparative slackness when set alongside of
the years 1926 and 1925, as indicated among other things by rates
of employment and by amount of money in circulation, the only
source of reserve money was the reserve banks, and therefore whatever went on in the way of expansion went on with money borrowed
from them. To that extent we were tied into the situation.
Doctor MILLER. And

the expectation, intent, the purpose and
policy, entirely apart from the Federal reserve system, has been a
contributing factor. It has resulted from the policy that money has
been made so abundant that, as stated, cheap and abundant money
became a provocative factor in the stock market; and to that exent [extent]
I feel that it is our concern. When they are doing these things with
Federal reserve money, then it is the business of the Federal reserve
banks to take heed and consider what action may be taken.
But there I think the whole episode illustrates that action in matters
of credit policy, as a rule, is either impotent action, or may be injurious action, unless it is action that is taken sufficiently well in advance
to protect against the consequences, rather than to undertake to undo
them. There is no use in closing the door after the cow has gone out
of the stable; and that is too frequently apt to be the case where you
have administrative bodies, where the fear of making a mistake may
lead to such delays or tardy action, that it really becomes mischievous action.
I think the mischievousness of the open-market policy of the Federal reserve system is, as it has been operated and as I believe it will
be operated, that it offers too great a temptation to some one who
feels the itch to do something, with the scalpel in his hand, to go in
and do something. Usually you find that men who have got creative
imagination, who have got force of will, who are animated by the
instinct of domination, and that is something you have got to reckon
with constantly where you are dealing with matters of money, finance,
and credit—right in the Federal reserve system itself this openmarket operation offers, to my mind, too big a temptation to use it
unnecessarily, and carries the danger, therefore, that it may result
in just these difficulties and impasses in which the Federal reserve
system has found itself in recent months. I think this shows about
what you may expect.
If the attitude of this committee or of the Congress or the public
at large is that the Federal reserve system on the whole has given a
satisfactory account of itself in the last eight months, leave it alone;
but I take it that there is a good deal of concern, and in going into
this matter if you are finding out just what it is that has given
rise to these conditions I undertake to say that the provocative factor
of the open-market operation in Federal reserve policy is an instru15029—28




ment so effective and so powerful that it has got to be used with the
greatest discretion.
Mr. BEEDY. And within what limitations of law, if any?
Doctor MILLER. NOW you are asking me, perhaps, a question upon
which current opinion ought not to be taken too seriously. My feeling is that the Federal reserve system, like any other central bank,
should have these powers—I mean the power to go in and relieve the
money market through a policy of purchase at certain times and at
certain other times the reverse; but I should say that the exercise of
those powers should be occasional, they should be resorted to only
under the pressure of an exigency so real or so important that prudence would advise against awaiting the slower action through discount rates. So, therefore, the problem, as I would phrase it, would
not be to destroy this power, not to take it away, but to make its
exercise subject to certain limitations.
Mr. STRONG. What limitations?
Doctor MILLER. YOU are asking me questions, Congressman, that
are pretty new questions, and I can not answer these things satisfactorily, perhaps. I will give you my best answer.
Mr. STRONG. All right.
Doctor MILLER. I would say that the Federal reserve act itself has
already set a pretty good precedent in making action on certain of
the unusual, extraordinary powers of the Federal reserve banks subject to the affirmative vote of five members of the Federal Reserve
Board. This is true as regards compulsory rediscounting among
Federal reserve banks, as regards the suspension of reserve requirements, as regards the reclassification of outlying districts for reserve
purposes or of reserve cities, and so on. My opinion is that it ought
not to be made too easy to run the risk of inflation either of the
security markets or the commodity markets of the country; and,
therefore, I would suggest for your consideration that the purchase of
securities by Federal reserve banks in the open market should be
made subject to the affirmative vote of at least five members of the
Federal Reserve Board.
Briefly, I view it this way: That the injection of money into the
market in this way is in the nature of the application of force majeure.
It is in the nature of a surgical intervention, and I think the consulant[consultant]board ought to be a clear majority as to its necessi
there is a serious doubt on the part of a substantial minority, I think
that is a good reason for not doing the thing.
The CHAIRMAN. DO you mean a majority of five, or that five should
vote ? There are seven members now.
Doctor MILLER. We are eight.
Mr. STRONG. YOU mean five of the seven?
Doctor MILLER. N O ; five members of the board.
Mr. STRONG. A majority?
Doctor MILLER. Yes. While you are not specifically asking the
question, I may add that the Federal Reserve Board ought to be
reduced in number.
Mr. BEEDY. YOU mean, now, that individual banks of the 12 indulge
in the open-market operations?
Doctor MILLER. NO.
Mr. BEEDY. By what authority do they take any steps ?



Doctor MILLER. They take action under the provisions of the
Federal act.
Mr. BEEDY. Under a vote of the Federal Reserve Board ?
Doctor MILLER. The language is ambiguous.
Mr. BEEDY. DO they not vote on it?
Doctor MILLER. YOU know, there is a so-called open-market committee for handling
Mr. BEEDY. Yes.
Doctor MILLER. That

committee consists of five banks which are
represented on the committee through their governors.
Mr. BEEDY. A majority of those five determines ?
Doctor MILLER. Well, it may be sometimes a majority of one. I t
may be one that is the majority.
The CHAIRMAN. I would like to ask you a few questions regarding
that. As between the open-market transactions and the discount
rate, which do you regard as the most essential ?
Doctor MILLER. I regard the discount policy as the most potential
from the point of view of good operation.
The CHAIRMAN. The use of the discount rate is confined to openmarket operations ?
Doctor MILLER. Yes.
The CHAIRMAN. I have understood that open-market transactions
were used frequently to prepare the market for money, and when it
is once prepared, frequently the discount rate follows naturally.
Doctor MILLER. Yes.
The CHAIRMAN. In that connection, also, you agree with the
thought that has been expressed before the committee that we are
on a gold basis at present?
Doctor MILLER. I should think that language might have some
pertinence to what took place in the autumn of last year; as a description of the attitude of the Federal reserve system over a term
of years, I think it is too strong.
The CHAIRMAN. YOU recognize that the Federal reserve movement
has a great responsibility, due to the fact that we have this vast
amount of gold here, which is largely under the supervision of the
system ?
Doctor MILLER. Yes.
The CHAIRMAN. TO what extent would the changes in the openmarket operations affect the discharge of that responsibility that
rests on them in the management of this gold ?
Doctor MILLER. I think the effect would be good.
The CHAIRMAN. YOU think it would improve it?
Doctor MILLER. Yes. If you will permit me, I think that openmarket operation is an instrument of direct intervention or interference with the money market. I t is lying there on a shelf and
there is a constant temptation to use it. It is like a magnificent
automobile standing there constantly. " Let us use it."
The CHAIRMAN. NOW it is a brake on administrative operation?
Doctor MILLER. Yes. But I think wisdom on the part of the Federal reserve system will be shown in making the exercise of that
power occasional rather than regular and frequent. That is the
conclusion to which I have come; and for that reason I would suggest that any amendment that might be made to the law should be
not by changing the power but by making the indications on which



the power is exercised more definite. As I view it, the open-market
policy of the Federal reserve system, reading it together with the
credit policy of the last three or four years, has given two situations
that might be called inflation, using that word in a loose, conventional sense. One was in the autumn of 1925 and the early part of the
year 1926, and the other is this recent period, the autumn of 1927
and going into the year 1928. In each of those cases I regard the
open-market policy as having prepared the ground for what
Doctor MILLER. Not simply

prepared the ground for the discount
policy, but actually resulted in certain conditions. Perhaps " prepared " carries with it too much the impression that some one intended the result. I think these results were all more or less
The CHAIRMAN. DO you think the open-market transactions affect
the international-exchange situation ?
Doctor MILLER. Very greatly; but I have about come to the conclusion that you can not affect the international-exchange situation
without affecting the stock market and stock exchange loan situation.
The greatest open money market in the country to-day is the call
loan market. It is more important than it ever was, and vastly more
important than anyone ever thought it could become after the enactment of the Federal reserve act. It is the most available market,
the most attractive market, that exists for idle money.
The CHAIRMAN. The installation of the Federal reserve system did
away with the so-called loan money market of the stock exchange in
New York, and transferred those functions largely into the Federal
reserve, with the discount rate, did it not?
Doctor MILLER. HOW is that?
The CHAIRMAN. I say, what was known as the money-loaning post
which had been maintained by the stock exchane[exchange]in New York was
transferred into the Federal reserve system, really ? In other words,
there is no open money market in New York to-day—call loan money
market—like there was before the establishment of the Federal reserve system?
Doctor MILLER. I should say there is an open market for call
The CHAIRMAN. Its whole character has been changed, has it not ?
Doctor MILLER. What have you in mind ?
The CHAIRMAN. Prior to the installation of the Federal reserve
there was what was known as the call loan money market, which was a
post in the stock exchange?
Doctor MILLER. There is still a money post, or " money desk."
The CHAIRMAN. There still is; but it is influenced largely by the
Federal reserve rate?
Doctor MILLER. I t is influenced largely by the facts. Under our
old system, before the Federal reserve act, there was no method by
which you could produce more credit except by the importation of
gold or by some operation on the part of the Treasury. There were
Treasury operations that relieved various conditions of tension in
the money market, or currency strain, that were roughly analogous
to our open-market operations. That is, the Treasury went in and
bought bonds, or otherwise put new money into the market. Aside



from the importation of gold, or an operation of that kind, the United
States was operating in what I would call a limited and closed
market. There was no elasticity; there was no method by which in
time of strain new money could be brought into the situation. Now
the reserve banks have come into the picture, and as they contribute through discount operations and more immediately through
open-market operations, money to the market, the market has become more distinctively an open money market. Anybody from
the Atlantic to the Pacific, from Canada to Mexico, who puts his
money into the money market to-day, provided the loans are properly
handled, knows that he can always get his money out whenever he
wants it. Why? Because such a thing as a currency and credit
panic can not exist under the Federal reserve system. Its function
is to provide these when further provision is necessary.
But the criticism may be made that it has been a little too liberal
and generous in its provision, and has been a little bit, through its
open-market policy, in the attitude of the nursery maid at times
when she moves around among the children and rather pushes the
glass of milk into their mouths. That is the sort of thing that I feel
should be made less easy.
Mr. STRONG. YOU think the law, then, could be changed so that
it would read for the accommodation of commerce and business or
at the will of the Federal Reserve Board ?
Doctor MILLER. It is the same thing.
Mr. STRONG. I am afraid it is.
Doctor MILLER. The phrase "accommodation of commerce and
business" has always struck me as one of those rare inventions
that occur occasionally in American statesmanship. Whoever was
the author of that phrase did a magnificent thing. I t is great language. The word " accommodation " is susceptible of the wisest interpretation and reaches to the noblest of economic purposes.
Mr. STRONG. Mr. Chairman, the hour of 12 has arrived, and I move
you that the hearings be adjourned until to-morrow at 10.30.
(The motion was seconded; and the question being taken, the motion was agreed to and, at 12 o'clock m., the committee adjourned
until to-morrow, Friday, May 4, 1928, at 10.30 o'clock a. m.)

Friday, May 4, 1928.
The committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden
(chairman) presiding.
The CHAIRMAN. The committee will come to order. We will resume the hearings on H. R. 11806.
Mr. Wallace, kindly give the reporter your full name and connection.
Mr. WALLACE. My name is Henry A. Wallace, editor Wallace's
Farmer, Des Moines, Iowa. I am also president of the Stable Money
League and secretary of the Corn Belt Meat Producers' Association.



I may say first that I am not at this present time appearing on
behalf of the Stable Money League, because, as you people know, the
Stable Money League is not committed to any definite plan. I am
coming before this committee appearing on behalf of the agricultural interests. The farmers are very much interested in this problem
of inflation and deflation, but in a considerably different manner
from the people in the towns and cities.
The CHAIRMAN. DO you care to state just what agricultural interests you represent?
Mr. WALLACE. Well, my only official connection is with the Corn
Belt Meat Producers' Association, an Iowa organization, and as
editor of Wallace's Farmer, which is a farm paper circulating chiefly
in the Corn Belt States. We represent peculiarly the corn and hog
farmers of the Middle West.
So you see that officially I do not represent any organization like
the America Farm Bureau or the Farmers' Union, or anything of
that sort. The Corn Belt Meat Producers' Association is an Iowa
organization, composed of producers who produce hogs and fatten
cattle for the Chicago market.
I wish to state why it is that there is a gradual and growing
interest of the farmers in this problem of money. I suppose you are
all familiar with the events that arose in connection with the deflation following the Civil War. The farmer became only very slowly
interested in that. That was only, of course, on a paper basis, but
they were struck with the value of that paper in terms of gold,
and the thing did not come home to them in any strong form until
the deflation during the 70's, and it took a long time for the education—propaganda, may I say?—and gradually they became very
consciously aware of it.
If I can believe my grandfather, the first editor of Wallace's
Farmer, the farmers at that time were very well educated on money
problems. I remember that in my grandfather's library there were
books on bimetallism and free silver, and I know he wrote editorials
along that line.
My immediate interest in the problem dates from 1913 or 1914,
when one of Irving Fisher's pamphlets came out on the compensated
gold dollar, and my grandfather said to me, " You must get interested in this subject."
So, when Irving Fisher and his people held their first meeting in
1921, I believe it was, I attended the meeting and because I was the
only agricultural person there they elected me vice president of this
association and I have been such ever since.
Well, now, the interest of business men in stable money is much
different interest from the farmers. The farming business is a long,
slow affair, and a man goes into it as a lifetime proposition. He is
not interested in these short-time business cycles which extend, perhaps, two or three years each way. It is a long, slow trend of affairs
that interests him. He can withstand those short-time cycles, because
he furnishes his own labor; largely, he can depend in some measure on
the labor of the women and children, and he can usually tide over the
short-time cycle; but that long, slow trend of things is extremely
important to him, and it has been a matter of history that after every
great war the deflation policy has hit the farming class particularly.



You read the hearings held by the British committees of the House
of Commons on the deflation following the Napoleonic war, and you
will find things startingly[starlingly]similar to this situation now. The situation after the Civil War was similar to this situation; the farmers
were hit.
There are two factors involved in that. The one is that during
that period of deflation farm products do not have their customarily
normal pre-war ratio to other products, and the other is the long,
slow decline in the purchasing power of the dollar. They are two
separate things. The one, dealing with this ratio of farm products
to other products, can not be influenced in any way by monetary
policy. I think many people in the industrial centers feel that
farmers think that monetary policy may have something to do with
the price of individual farm products, but that is not the case. Most
farmers are not that ignorant; but they realize that this purchasing
power of money in general is influenced by monetary policy, and I
can say very frankly that some of our more educated farmers are
decidedly suspicious that the Federal reserve system may at any time
start a further deflation. We are watching their policy with the
very greatest interest.
I think more of those same educated people have great confidence
in the beneficent effects of the Federal reserve system if properly
managed, but if they are going to start a deflation such as took place
in 1920 for a time, late 1919, and early 1920, it would cause very
grave suffering to our people.
The CHAIRMAN. In that connection, if I may interrupt you with
something that is very pertinent to what you have said here and that
has been said in these hearings, Dr. John R. Commons, of the University of Wisconsin, made a statement here in which he indicated
that through the cooperation now taking place between the Federal
reserve system and the banks of issue of other countries of the world,
to get them all back on a gold basis, in which movement, it has
been pointed out, we are selfishly interested because of the fact that
we have this large amount of the world's gold in our custody, it
will result, when that process is fully completed, in the lowering of
the general price level from the present basis of 150 back to the
pre-war basis of 1913 of 100. That is what you are referring to,
is it?
Mr. WALLACE. That is what we are afraid of, that that might take
place gradually over the period of the next 20 years.
The CHAIRMAN. That statement has been definitely made here before the committee, that that will be the result of a successful termination of the activities that are now being engaged in by the banks
of issue of the world, in which our Federal reserve system is, of
course, an important factor.
Mr. WALLACE. Yes. It would seem, unless there are startlingly
new methods discovered in gold-mining processes and unless there
are startling changes in our credit mechanism which will make a dollar of gold support more credit, there will be great danger, almost a
certainty, of that happening during the next 20 or 30 years; and I can
say, from a political standpoint, that if we do take that long, slow,
painful, grinding deflation toward the 1913 price level, the difficulty
of farmers in paying interest on their mortgage indebtedness will
bring about a political situation somewhat similar to that which
existed in the eighties and nineties, of farmers to some extent striking



out rather blindly in their wrath to find if they can not do something,
and not intelligently, perhaps, and this next time they might act
more intelligently than that, but in the background there is that
It is so difficult to pay off those mortgages incurred at the highprice level. We in our State to-day have $1,500,000,000 of mortgages
against the farm land of the State. Taking all the farm land of
the State, it averages between $45 and $50 an acre.
There are many farms where the value is higher than that, but
that is the average, and if we have to pay that off in 1913 dollars instead of 1928 dollars, it becomes a very serious burden.
The CHAIRMAN. What is the average value of that land to-day?
Mr. WALLACE. A S I remember it, the 1925 census gave it as around
$145, and the Bureau of Crop Estimates, which gets out its estimates
each March, has reduced it. The trend has been downward since
that period. I would suspect that at the present time it is $135.
Mr. LUCE. Are there any figures giving the average life of a
mortgage ?
Mr. WALLACE. The typical mortgage is taken out for a 5-year
period, except in the case of joint-stock land banks and Federal land
banks, where they are on an amortization basis of 33 years. They
are typically renewed.
This $1,500,000,000 figure has been roughly constant at that point
for the last four or five years. It was cut down slightly last year.
These figures are from a bulletin put out by the Iowa State Agricultural College at Ames. They show no very great change during the
last four or five years.
Mr. LUCE. I am particularly interested in that by reason of the
assertions made by Professor Fisher that the contracts average a very
brief life. The argument against deflation would therefore not be
nearly so strong if the mortgages averaged a comparatively short life,
as they ran to 10 or 15 or 20 years on the average before they were
taken up.
Mr. WALLACE. An increased amount of the farm mortgages is
being refunded on the amortization basis, which gives an average life
of around 30 to 40 years.
The farm mortgage is occasioned more by young farmers, I suspect,
because the young man is taking over his father's farm and must pay
off the other heirs, or because he has been a tenant and is now starting out in business for himself, and it takes him customarily about
30 years to pay off that mortgage before he can really go steadily
As to how these mortgages on Iowa farms will be paid off at the
present time depends to a very large extent on the amount of agricultural prosperity we have. If the surplus disappears and we get off
the European market we may be able to pay off the mortgages with
a fair degree of rapidity, although the history of the past is that the
percentage that the mortgage represents to value has not declined in
the Middle West.
Mr. LUCE. There is quite a difference between the total of the mortgages and the turnover ?
Mr. WALLACE. Quite a difference.



Mr. STRONG. That figure is the result of the development of the
farms, of improvements and buildings and stock?
Mr. STRONG. And machinery and things they have to buy ?
Mr. STRONG. They have to build our country out there just like

built the East.
Mr. WALLACE. We are pretty well through that pioneer period in
Iowa at the present time.
Mr. STRONG. That is one reason why the mortgages have gradually
increased and not decreased ?
Mr. WALLACE. Yes; although since the war there has been a
refunding of the short-time obligations into the cheaper-interest
form of mortgages.
Mr. STRONG. But if we can get a fair return on our products out
there we will commence to pay those off after a while ?

I may say that Dr. G. F. Warren, of Cornell University, one of
the leading agricultural economists of the country and in no sense
a radical—in fact, I consider him very conservative—and in this
I disagree with him—feels that the surplus is done away with for
the most part, so far as paying an unfavorable price on the pressing
things in the next four or five years is concerned, but that the great
fear which the farmer has—and he holds this position very firmly
and strongly—is the general deflation policy. He feels that if we
are on the gold price level in the old sense of the term, and not a
managed price level, that the deflation will be such as to cause continuous hardships in the agricultural sections—because we are a
great debtor class—for the next 10 or 15 years. That is his opinion.
The CHAIRMAN. In that connection, Doctor Sprague has testified
before this committee this week, and he expressed the thought that
it would be necessary to continue the management of the gold reserve
through the cooperation of the central banks of issue at least over
a period of 10 years, because of the possibility that if all of these
countries went on the gold basis there might be a dearth of gold, and
that therefore it will be necessary to exert a management over that
gold during that period of time.
Mr. WALLACE. I rather like the idea of a managed gold affair, provided it does not mean either inflation or deflation, if it is handled
with the common sense which has characterized, as a whole, the management of the Federal reserve system during the past five or six
years, and I think all thoughtful people will agree to that, that it has
been a rather intelligent management, but we are fearful as to the
future. We thought we detected during the past years some symptoms on the part of the Federal reserve people indicating that they
might want to start a slightly gradual downward trend again.
The CHAIRMAN. Whom do you recognize as the managers in this
gold situation ?
Mr. WALLACE. DO you mean internationally at the present time ?

Mr. WALLACE. At the present time we feel that the Federal reserve
system, as a whole, has quite a dominant influence. In saying that I
am merely accepting the testimony of people more expert in such



things than myself, largely European authorities. There are a couple
Swedish economists, Ohlin and Cassel, who have made statements
along that line, and an Englishman, Mr. McKenna, and also I have
been rather led into that belief by a British cotton expert by the
name of Todd, who felt that our Federal reserve system did have quite
a dominating part in handling the world's gold supply at the present
Just who in this country has that dominating part would be a little
difficult to say. I rather suspect that that authority may rest with
the New York Federal Reserve Bank fully as much as with the Federal Reserve Board here in Washington; but, of course, that is merely
a suspicion.
So far as the bill itself is concerned, it seems to me like such a
reasonable bill that I am surprised that there should be any opposition to it. I just can not understand the position of the Federal
Reserve Board on it. I have not been able to see their position in
logical form. As a matter of fact, it seems to be a feeling on their
part rather than anything tangible to lay hold of. I have not attended these hearings, but from what has been reported that has
been the conclusion I have reached.
The CHAIRMAN. The opinion seems to have been expressed here
by at least one member of the board that the board was exercising
now without explicit direction the functions that are sought to be
conveyed by Congress in this kind of a measure, and they feel it
might be unfortunate to give positive directions to the board in
exercising these functions.
Mr. STRONG. Might I say, Mr. Chairman, in that regard that the
bill only directs them to use their powers for a policy of stabilization;
that is, they should use those powers to do what they can toward
stabilizing the purchasing power of money. That is what they claim
they have been doing. That is what we want them to continue to do.
We want that policy maintained and not changed.
Mr. BEEDY. I think the testimony, Mr. Wallace, of Doctor Miller
makes it quite clear as to his position at least. He grants the existence of all the powers necessary to do the things which seem to be
desired, and concedes that if exercised wisely and at the proper time
it would probably accomplish all the purposes sought to be accomplished by the bill. He fears that inasmuch as the men who are
intrusted with the management of this great study are merely human,
they ought not to be directed by a law to accomplish a result which
no one will deny is much to be desired.
I myself feel a good deal as you do. I do not see that there has
been offered any real objection to the making of this law, based on
logic and reason.
The CHAIRMAN. The governor of the Federal Reserve Bank of
New York, Mr. Benjamin Strong, expressed the thought that attention should more properly be directed toward world stabilization of
the gold standard, that the important thing in connection with all
of this was to get the world back onto a gold-standard basis.
Mr. WALLACE. Perhaps a person should not state suspicions, but
it is just as well. We are a little fearful—we have this feeling—that
the people who work with money, the bankers, the bond companies,
the insurance people, all have an instinctive and unconscious bias



toward enhancing the purchasing power of money, quite unconscious,
perhaps, that the folks that are likely to be on the Federal Reserve
Board and in the Federal reserve bank at New York are people
likely to have an unconscious bias in that direction just as farm
people and manufacturers have an unconscious bias in the direction
of decreasing the purchasing power of money or inflation. We feel
that there is a little bit of an unconscious bias in both directions,
and that the people who are likely to be intrusted with the management of the Federal reserve system, both regional and the board itself,
are likely to want to see deflation, and that they would much prefer
to have such instructions given 15 years hence when the price is lower
rather than now, and we with our bias—we all have bias—in the
Middle West, have the other feeling, that it would be better to
stabilize this thing right now. Of course, we prefer to hold it where
it is now, have the thing come to a head now instead of letting it go
ahead and causing continuous unrest over a period of years on the
part of the farmers.
The CHAIRMAN. Taking that position as your position, have you
given consideration to the possibility of our trade relationships with
the other countries of the world, now that they are getting back on
an established basis of consumption of manufactured articles, that
we might be in a very unfortunate position if our price level is maintained at the present basis in selling our superfluous products to
those countries in competition with other intensified manufacturing
industries in Germany, England, France, and so forth ?
Mr. WALLACE. This occurs to me that England would be very
anxious to cooperate with us in stabilizing at a moderately high price
level, that France would be equally anxious to do so, and that the
Scandinavian countries would be anxious to do so. That would be
especially true of England and France, because of the fact that it
lessens the burden of paying their Government debts to us if the
price level is stabilized relatively high.
The CHAIRMAN. If we stabilize on the present basis, do you give
them an advantage in marketing their products throughout the world
in competition with ours?
Mr. WALLACE. I must confess that I can not follow that reasoning.
The CHAIRMAN. If our general price level keeps up to the point
where it is and the other countries of the world intensify production
Mr. WALLACE (interposing). You are assuming that they will all
be on a gold price level and they will all at that time be on a gold
basis ?
The CHAIRMAN. Yes. In other words, I discovered in England
last February that the manufacturing element of England felt that
because they stabilized on a $4.86 basis instead of, say, a $4 basis,
they have impeded their industrial recuperation largely.
Mr. WALLACE. That would seem to me to suggest in that case the
advisability of our stabilizing on the present high basis—I mean
that your statement would suggest that.
The CHAIRMAN. I have wondered in connection with your statement of a moment ago, whether you have given consideration to the
possibility of our trade relations being disturbed by stabilizing at a
high-price or low-price level here, and what effect it might have on



the general economic situation, not only in this country but throughout the world.
Mr. WALLACE. I think you have come to the wrong place to look
for light, coming to the Middle West, on international trade relationships.
The CHAIRMAN. But the Middle West is extremely interested in
that, because you have a surplus production. We are hearing lots
about the surplus production from your section of the country now.
Mr. WALLACE. We are extremely interested in it, and would like
to have the people here on the Atlantic seaboard, who have had some
experience along the line of international relationships, throw some
light on just what the effects would be; but I can not see, if we are
on a gold basis in these different countries, the influence one way
or the other. If you are talking about a managed gold basis, that
would be another thing. We are assuming, I think, that we are on a
managed gold basis?


Mr. WALLACE. We are going to assume that ?
Mr. WALLACE. And therefore

we might manage gold in a different
way than England would manage gold; is that it ?
The CHAIRMAN. That is not entirely determined as yet, as I view
it. We are apparently cooperating with the other banks of issue
throughout the world, and whether we are taking an independent
stand or whether we are cooperating with them to the full extent
is not clear to me at this time.
Mr. WALLACE. I suppose the governor of the New York Federal
Reserve Bank has as much influence on this as any, but is it not important that those men in their conferences with the French and
British and Italian bankers work out gradually a policy which will
stabilize affairs at about the present level rather than gradually
throwing it on the side of the declining level? And if there were a
declaration such as the Strong bill, might it not have some influence
on the activities of these men in the direction toward which they
would throw their influence ? That is merely a question.
Just one word in closing. I feel I have taken too much time.
It seems to me that as you trace the last hundred years or so you
will find cycles occurring about 30 years each way, 30 years in our
agriculture getting the prices upward and 30 years the other way—
roughly that. Apparently you let deflation go on in the normal
course of events on the old-fashioned gold idea. You gradually make
agriculture a little less attractive.
The CHAIRMAN. YOU are speaking now of the war periods ?
Mr. WALLACE. That is the way they happened to have come. Following the Napoleonic wars you had roughly 30 years, and following
the Civil War roughly 30 years, and, perhaps, we have consumed
10 years in this postwar period of agriculture going down, and the
currency was managed in both of those preceding cases in a way
which gave an advanced purchasing power to the dollar, and in both
of those periods they finally forced enough people off of the farms
to indicate that the thing had gone too far, and agricultural products
went up and the general price went up and we would be again on the



Now, agriculture is interested in those long-time swings, not in the
short-time swings concerning which so much of this conversation is
about. We are interested in the long-time swing. The farmer is in
the business a long time, and I feel it is to the long-time interest
of this Nation to have the proper consideration given to these longtime swings just as well as to the short-time business cycles. It is
good form nowadays to consider the short-time business cycle, unemployment, and how it can influence policies of various sorts. What
we are contending for is that similar consideration be given to the
agricultural cycle, which is a much longer affair, and, in my opinion,
a much more vital affair to the fundamental welfare of the Nation.
The CHAIRMAN. DO you feel that the power is vested in the Federal reserve operations to influence this situation favorably or
unfavorably ?
Mr. WALLACE. I feel that the Strong bill would have some favorable influence in this direction and that it would cause knowledge and
a much greater understanding than we have now as to just what
powers they do have. Of course, it is not clear as to how much
ability they do have along this line. We should know more about
what these powers are and what they mean to agriculture and to
business, and I feel that the Strong bill is a movement in this
Mr. SHEARER. I am an old farmer—a retired farmer—too old to
work. I have made some study of this subject from a farmer's standpoint. I am very much interested in the passage of Mr. Strong's
Mr. STRONG. First, I think you ought to give us your position.
Mr. SHEARER. Well, you did not ask me.
Mr. STRONG. YOU are the representative of the farm organizations
of Kansas ?
Mr. SHEARER. I am vice president of the Kansas State Farm Bureau, which is one of the most influential farm organizations in our
State and in the Middle West. I am also in part representing the
three major farm organizations of Kansas, the Farmers' Union, the
Grange, and the Farm Bureau.
I have here some resolutions that were put through those organizations that I would like to have put in the record.
The CHAIRMAN. Without objection, these resolutions will be inserted in the record at this point.

That whereas there has recently been formed an organization known as the
Stable Money Association, its object to stabilize the purchasing power of money,
and thereby stabilize the general price level; also to prevent the seemingly
inevitable recurrence of periods of inflation and deflation with their attendant
ills to both investor and producer: Therefore be it
Resolved, That we, the committee permanently organized and representing
the major farm organizations of Kansas, hereby indorse the work and aims of
the Stable Money Association and agree to convey the ideas involved in securing
a stabilized price level to the membership of our several farm organizations in
an educational way; and



Whereas the Strong bill, now pending in Congress (as an amendment to
the Federal reserve bank act) seeks to instruct and make it obligatory on the
Federal Reserve Board to use all its powers to maintain a stable price level:
Be it
Resolved, That we hereby indorse the Strong bill and will encourage any
further legislation that may be necessary to the desired end through enlightened
public opinion.

Mr. SHEARER. The above-mentioned organizations are the Farmers'
Union, the Grange, and the Kansas State Farm Bureau.

Whereas agriculture has suffered much in the past and is now suffering from
extreme fluctuations of prices and values caused by inflation and deflation of
currency and credit, resulting in mortgage foreclosure, bank and business failure,
and widespread distress. We, therefore, indorse the effort now being made in
Congress to require the Federal Reserve Bank Board to use it's powers to maintain a stable price level and to stabilize the purchasing power of money. To
that end we indorse the Strong bill now under consideration in Congress.
We instruct that a copy of this resolution be sent to the Kansas delegation in

Mr. SHEARER. A similar resolution passed the Kansas State Agricultural Council and the Kansas State Farm Bureau annual meeting.

(k) We indorse the effort now being made in Congress to effect a stabilized
price level and stable purchasing power of money through additional instructions
to the Federal Reserve Board.

Mr. SHEARER. Included in the resolutions are three of our different farm organizations in Kansas, in addition to the three I have
mentioned, our State board of agriculture and our agricultural
council and livestock associations—six of them in Kansas—and I
also have a resolution here that was put through the American Farm
Bureau organization at the national meeting in Chicago last December, committing that organization to this measure. I want that in
the record.
(The resolutions referred to are as follows:)

We. heartily indorse the efforts of Congressman Strong of this State in pending legislation to require the Federal reserve bank system to use its powers as
was intended by Congress in the law establishing the reserve bank system.

I notice in your hearings of last session—and I read over a thousand pages of them to see just what you were doing to get a line on
you people—and in reading those hearings very patiently and in
listening since I have been here, the trend of thought and the trend
of discussion has been all in the line of the stock exchange and in
the line of dealing with credits and credit paper and foreign exchange
and foreign banking, and not a word said, or scarcely a word, in
regard to the production of wealth.
I want to speak for the men who are producing the tangible wealth
of the country. Without this tangible wealth, without the meat and
dairy products, and the cotton and steel and those things, your credit
paper would have little value.



We are producing the elemental things, the vital things, in the
business life of America, and I hope that in your discussions you
will not lose sight of that fact; that unless production is favored,
unless production goes ahead in a prosperous manner, the whole structure falls eventually.
To run the thing to the extreme, suppose that we men of the
Middle West who are producing the food should take a notion to
stop? Your credit paper would not have much value; and I see one
thing that I do not like very well, and that is that the stock exchange
in New York has got to be such a large affair that they have even
almost quit considering whether the stocks they are dealing in are
a paying proposition or not. They seem to have got to a point where
they are a business in and of themselves, regardless of production.
The tendency is in that direction, and we think, we men who are
producing and who are watching the situation closely for fear of a
fall in the price level, that the absorption of so much money or
credit by the stock exchange, to the detriment of the industrial interests, is not good for the country. We look at it in that light.
They are borrowing and gambling on the ability of corporation to
extract profits from the producer and consumer. The American
people have become great because they always want the most for
the least effort. That has made this Nation great. I do not blame
people for wanting a sure thing; but when too many of our people
get on the investment side, get on the credit side, and not enough
on the production side, why the car of progress may slow down.
Now, about this bill of my friend Strong's. Mr. Strong is my
neighbor. I have known him since he was a boy. I have been at
times of different political faith from him, but I have been working
in these farm organizations in a strictly nonpartisan way, so that
I can come here with very good grace as a Democrat and support
Mr. Strong's bill and urge this committee that it be reported out.
Now, I will tell you what effect I think it would have. You men
know that we have always had panics in this and every other country. All through the past ages, as far back as you can go, we have
had panics. We have had recurring panics in the United States.
I am old enough to have lived through the reconstruction period after
the Civil War and the panic of 1873. We have had recurring panics
about every 10 years, and the average business man and farmer have
gotten into a fatalistic mood. They regard it as a part of fate that
after a while we will have a panic. They say that what goes up must
come down, and after a while we will have a panic.
It is hard for them to believe that we have got a new system, this
Federal reserve system, through which it is possible to prevent panics.
They still do not feel that things are any different; they are still
afraid that something will drop unexpectedly.
Now, if this measure could be put through, it would be a wonderful assurance to us men, isolated as we are, scattered on the farms
of the United States of America. It would be a wonderful assurance to us that here at last, after so long a time, is a power to prevent panics, to prevent lowering our price level, to prevent ruining
our business, which has been done so often.
Now, I notice in your former hearings that Governor Strong
especially feared that the average uninformed citizen would expect
too much of the board; that they would think that if wheat went



down, the board ought to bring it up. Mr. Strong made that illustration and, as an experiment, I tried it out in our farm meetings
in Kansas. When I introduced those resolutions I tried that out.
At first blush there were a number who had not thought about the
matter, that did take that view of it—I will admit that—but it
only takes a moment's explanation to show them that the Strong
bill will not apply to individual items, to wheat as against steel,
but that it is for the general price level, to avoid panics in the future,
and the farmer immediately understands it. I tried it out on the
common citizen, the ordinary farmer of Kansas, and he is no different from any other farmer or other citizen.
I noticed in the hearings that the burden of the talk was fear of
inflation. That is natural, as Mr. Wallace said—it is perfectly
natural. We all see our own interests clearer than the other one's
interest; and you take the salaried class, the fixed-income class, the
class who are dealing in credit paper, and they naturally fear inflation. It makes their income worth less.
On the other hand, we who are producers fear deflation. Our fear
is for deflation and consequent price reduction, and I want to repeat
what Mr. Wallace said, in a little different way, that our business
of farming is a long-time business. It takes six years to produce a
work horse or mule; it takes five years to produce a milk cow. In
our farm rotations, to keep up the fertility of our soil, we frequently plant a crop that there is no money in to bring up the fertility of our soil, so that in a three or four year rotation we have
built up our soil and are getting better crops. It is a long-time
We are very much interested in stability. All we are asking is
stability, a stable price level, so that we know when we engage in
stock raising that at the end of four or five years, when those cattle
are fattened and ready to go on the market, we will not be ruined by
a sudden fall in the general level.
Then we are interested for another reason, and that is that our
business is out in the open. We have no possible way of combining.
I have been in farm organizations for 50 years in Kansas, and we
are very little nearer effecting a combination to-day than we were 50
years ago. We men are isolated; we live on isolated farms—one
here, one there—dotted all over the United States. Some of us are
stockmen, some are grain raisers, some raise cotton, some tobacco,
and our interests are varied.
Now, I happen to know personally that at least one of our large
manufacturing industries has a managed price. They manage that
price. They are nullifying the old law of supply and demand and
fitting supply to demand and managing prices. They are not so
much subject to inflation and deflation as we are. The industry is
centralized and can get together and can agree to maintain a certain
price for the goods, and is not a victim of deflation like we farmers
would be.
We are out in the open in competition with the world whenever we
have a surplus. When we have no surplus we are competing with
one another in our home markets. We have no possible means of
passing prices up or stabilizing them, only as the Federal Reserve
Board and the banking interests will do it for us.



That is why it becomes vital to us men. That is why I am here.
If it were not for that I would not be here.
We are beginning to understand this problem, although you men
know that this money question is the least understood of all our
public questions. Men are afraid of it, and it takes education to get
anything like a comprehension of it.
I want to make a statement rather disagreeing with Doctor Miller,
and you men may not agree with me, but I want to make it anyhow,
and that is that money is a positive factor. Now, here we are produring[producing]wealth in the United States, all kinds of tangible wealth,
bread and meat and cotton and tobacco and wool and steel and cloth
and lumber—everything. We are producing the wealth, and they
tell us that we produce too much. They tell us farmers that we have
overproduced. They tell us that that is the reason our prices are
low, we have overproduced; and they tell us that the spinning mills
of New England have overproduced and that the steel mills have
overproduced and that the cotton men have overproduced.
Now, I have lived a long while in the United States, almost 60
years. I have never seen any food thrown in the sea. I have never
seen any of it destroyed or burned up,, of bread or meat or cotton.
It is always consumed.
The truth is that to-day there is a market for everything we can
produce—if not in the United States, in Europe. There is a market
for all we can produce. I t is only a question of price.
It is no use to talk about hunting for markets. The hungry millions, the half-fed millions of Europe and Asia, are grabbing for
every bushel of wheat we have got and every pound of meat and every
bale of cotton, if they could only buy it. It is a question of price.
It is a big subject, gentlemen, and now this good old United States
of America is in a position where the dollar is the determining factor
of the price level of the world. We are the dominant nation, financially and otherwise. We are setting the price level in London,
Liverpool, Hamburg, Berlin, and Paris. This is a tremendous responsibility, and that is why if this Federal Reserve Board can
stabilize things and remain stable it means peace and prosperity,
not only in the United States, but in the world; and you men know
that when we have a panicky condition and a falling price level, as
well as a deflation of currency and credit, it results in disturbance at
home, in men thrown out of employment, in bankruptcy, in political
rebellions—all of those things result from this.
Every argument is on the side of Mr. Strong. Every argument is
for a stable price level and a stable volume of money and credit
commensurate with the population and the business we are doing in
the United States. Every argument is for it and there is no good
argument against it.
I am discouraged with Doctor Miller. I am discouraged that a
man of his caliber, a man holding the responsible position he holds
and has been holding all these years on the Federal Reserve Board,
should sit before us yesterday and say that he doubted if there was
any man in the United States wise enough to administer the Federal
reserve act. I was discouraged. I would not have said it. I do not
believe it. I believe that we have brains and men in the United States




of America, men of genius and vision who can administer that act
and do what was intended for it to do, to provide a sufficient amount
of currency and credit for the business of the country and keep our
business going on steadily and prosperously.
I want to mention this fact, though it is not exactly related to our
subject, that in the United States of America, on account of our
higher civilization, we are capable of using bank credit to an extent
that no other country does. The tremendous prosperity that we
have got, especially in our industrial sections and in the East, is the
result of the very extended use of bank credit.
You offer a check to a French peasant and he would not know what
it meant. They do not use checks; they want money.
Am I talking too long ?
The CHAIRMAN. NO, sir; go right ahead.
Mr. SHEARER. I can remember the time in Kansas when we took a
load of hogs to town, or 100 bushels of wheat, and we got the money
and we rolled it up in a roll and took it home. I can remember the
first check book I had, along in the early eighties of the last century,
and it was with very great timidity that I put my money in a bank.
I think there is a gentleman here old enough to remember that.
Mr. STEVENSON. I did not get a check book in the early eighties, but
I did in the later eighties.
Mr. SHEARER. NOW, we check our money and put it in the bank,
and the bank multiplies that money by 10 or more. When we issue
our Federal reserve money we multiply the gold dollar first by two
and a half, and then the bank multiplies it by 10—no wonder we
have the prosperity. That is what is making the prosperity.
Mr. BEEDY. Are these Democratic or Republican banks that you
are talking about now ?
Mr. SHEARER. Banks have no politics; never did have. They are
like Jay Gould was in his testimony before a congressional committee. He said that when he was in a Republican district he was a
Republican, and that when he was in a Democratic district he was
a Democrat, but he was always for Jay Gould. [Laughter.]
That is the way the larger banks are. They have no politics.
They are smart enough-—they are smarter than us poor devils out on
the prairies of Kansas; they do not fall out and quarrel and vote
opposite to one another when their vital interests are at stake. They
do not do it. It is all right; I am not finding fault with it.
I just wanted to mention that idea, and to say that since we got
the Federal reserve act it has been the salvation of the country.
There is no question about it; it was the greatest step forward that
this Nation ever took since its organization and the adoption of its
organic act, the greatest step forward for business. I am very proud
of it as a citizen. It has some faults.
I think it has got one radical fault, but I am not in a position to
dictate or to be the judge. I think that it was a mistake to give the
Federal Reserve Board the power to increase or decrease the volume
of currency. If our money is the measure of our mercantile prices,
why change the measure? We do not cut an inch off a yardstick;
we do not take a little out of a quart measure; we go on with those
just the same; but here is our great measure of value that is measuring all the wealth of the United States; that is gauging every



transaction every day of 120,000,000 of people, and we give the
board the power to change the yardstick on us. I think that is a
mistake, but we are getting along.
In the distribution of our wealth, I said that our fear was overproduction; in other words, we American people are so smart that we
have produced ourselves into trouble.
Mr. BEEDY. That is right.
Mr. SHEARER. Doctor Miller discussed the other day whether you
could induce people to eat more food or not. I do not think you can.
That is not a vital question, but I will tell you what you can do. You
can put the business on such a basis that every man can get all the
food he wants, and they do not get it to-day. We suffer from underconsumption, not overproduction.
Eight in my own little home town, where we are producing the best
kind of corn-fed beef and hogs, and where hundreds of head of fatsteers are being fattened around the town, I happened to be talking
with a very clean, decent citizen who is a clerk in a store. Last week
he told me he could not afford to buy meat but twice or three times a
week—right in the middle of where we are raising the meat.
If the industrial interests only knew of the enormous market that is
awaiting them in the Middle West if our buying power was restored.
I told my friend Strong the other day that in all my travel from
Frankfort to Washington, D. C, I had only seen one new barn. My
friend Strong remarked, " If you will give me a monopoly of painting all the farm buildings from there to here, I will be a millionaire."
I wonder that the industrial interests do not see what an enormous
market there is there.
Now, in this matter of distribution, our railroads are distributing
our stuff very nicely now. We are getting splendid railway service.
Our telegraph and telephone are getting perfect. The third factor
in distribution, viz, money, must be in insufficient supply. Money is
the positive factor in distribution. The saturation point in consumer's
needs has never been reached. Money in the hands of the consumer is
the great distributor. So long as there are unsupplied consumers the
cry of overproduction is an admission of the insufficiency of the greatest of all tools of trade, money—and becomes a case of underconsumption.
Fluctuation in the purchasing power of the dollar, either by
changes in its volume or quality, is at the bottom of nearly all our
economic ills. True, there are nonmonetary causes for varying prices
in certain specific lines. Propitious weather may give increased
supplies of food and fiber. Labor and time saving inventions may
result in increased supplies of certain commodities, but these things
are out in the open and known of all men and are to be expected.
Also, what is publicly known and understood rarely causes discontent. The unseen and usually unknown shifting of the purchasing
power of money always makes trouble, and often those least to blame
are made the culprits.
Whether buyer or seller, creditor or debtor, some one is always
wronged by instability of the dollar. That is why this initial step
toward stabilization provided for in the Strong bill becomes highly
As I said before, we farmers fear deflation. We have reasons to
believe that it is the policy of the moneyed interests to gradually



increase the purchasing power of the dollar, with a correspondent
reduction of the general price level. It wouldn't make such a great
difference to farmers were it not for the tremendous load of debt
they are carrying. A lowered price level makes it harder to pay
debts and other fixed charges. In fact, debts are increased to the
amount of the price reduction. Most of farm indebtedness was contracted in low-powered dollars with a high price level. Now we
must pay back higher-powered dollars on a lower price level. This
really constitutes the much-discussed farm problem, and were it
possible to bring about conditions whereby farmers could meet their
obligations with the same powered dollars they borrowed, there
wouldn't be much left of the farm problem. The great fluctuation in
the dollar has made our trouble. That is why even at the present
lowered price level we are for the Strong bill, to, if possible, prevent
further deflation.
The CHAIRMAN. What is the price of meat in your town ?
Mr. SHEARER. The price of beef ?
The CHAIRMAN. YOU say that this young man was not able to buy
Mr. SHEARER. The best steak costs me 35 cents a pound and ordinary round steak 25 and 30 cents.
Mr. BEEDY. What do you mean by the " best steak "—sirloin ?


Mr. STEVENSON. Those fellows are not "hollering" for a lower
price, then, are they—the fellows who are selling that steak ?
Mr. SHEARER. Just at present it so happens that in the circle of
things the men who are raising beef cattle are doing quite well. They
are on a paying basis.
Mr. STEVENSON. What you would like to do is to stabilize them, so
that they would stay there ?

that not stabilize the clerk, so that he would
stay in the same place ?
Mr. SHEARER. NOW, this money on credit
Mr. BEEDY (interposing). What do you say to that?
Mr. STEVENSON. Would not that stabilize that clerk in the same
place to two steaks a week?
Mr. SHEARER. NO price stabilization is general. There would still
be a variation in items.
Money is the great, vital, positive factor in distribution. Governor
Strong was inclined to say that it was not and that there were times
when currency would come back and was not wanted. But I will
tell you that whenever production—that is, the production of wealth,
either in manufacturing or farming—is profitable money soon goes
into it—the production of food, the production of steel, whenever it
is profitable money goes into it. When it is unprofitable money goes
into securities, as it is doing now.
Our business is unprofitable, and money is not going into it. Our
land is lower in price than it was in 1914.
Mr. BEEDY. I want to call your attention, apropos of something
you said, that some of our greatest problems are in distribution, to
this, that this is what happens to a pound of beefsteak between
Kansas City or your town and Washington, D. C. You pay 35 cents



a pound for T-bone steak. I pay 70 cents a pound for it. In the
meantime, since this left Kansas City and the railroads have put
on their transportation costs and the middleman has had his part, as
well as the retailer, you see what that costs me on my table.
Mr. SHEARER. That is your job, not ours.
Mr. BEEDY. It is everybody's job—this problem of distribution.
Mr. SHEARER. Our job is to produce it. Your job is to get it as
cheap as you can. I do not want that laid on the farmers.
Mr. BEEDY. I am not trying to.
M. SHEARER. I would like to tell you this about your beefsteak,
which I am giving to you as a fact: They have established a system
now, which has started in the principal cattle markets—Kansas City,
Omaha, and Chicago—of grading meat. They have first, second,
and third grades. All the meat is inspected by the Government and
I went into our butcher shop last week. I was thinking about this
very thing. I said, " Have you any graded meat ? " He said, " No;
I could not afford to buy it."
You are buying graded meat, first-grade meat. In my little town
it would cost me 50 cents, probably, for second grade, or a little less.
I buy meat that was inspected as wholesome meat and healthy meat,
but it is below the first three grades.
Mr. BEEDY. This steak that I referred to is steak that we say is
from corn-fed cattle.
Mr. SHEARER. Certainly; but there are grades of corn-fed cattle.
I wish you would inquire, for your own satisfaction, the next time
you buy steak, what grade it is, and look at the brand on it. You
will see a blue brand stamped on it. It does not go by first, second,
and third; it goes by " prime "—I can not remember the grades.
You watch it, and if it is prime or first class it will be way up. That
means meat that is nicely mixed, that has been fed a long time. That
means young meat, from a yearling, very tender and juicy, and the
necessary amount of fat mixed in, and absolutely clear as to disease.
That is what it means.
Mr. STRONG. Let me say that you do not get that here at 70 cents
a pound.
Mr. STEVENSON. NOW, speaking of that matter, of the price of
meats, I have seen in this committee, and so has Mr. McFadden—I
do not know whether Judge Brand was here or not—but he was on the
committee—where we had exhibits of bills that were paid, of 33
cents apiece net for a lamb. They would ship the lambs, and they
got 33 cents apiece net for them, and at the same time they had a
bill of fare, right here in our own cafe, in which two lamb chops
cost 60 cents, and the price received by the farmer was just equal
to one chop and a tenth.
Since then, of course, matters have swung the other way; but it
would not have been safe to have stabilized the lamb business at that
time, would it?
Mr. STRONG. And we do not want
Mr. STEVENSON. I do not either.
Mr. SHEARER. I have a great deal

to go back there.

I could say, but I am not going
to say it. This is a very large subject.



I want to make the statement again that money is the positive
factor in distribution. If you have goods and have not money to
move them, they lie on the shelves; our cattle remain in the food
Money is a positive factor, and I wish that there could be some
way of keeping our money west of the river from reaching New
York. We need it all. I nave lived there for almost 60 years, west
of the Missouri River, and our big job is to keep money west of the
river to do business with. Most of the time we have not enough, and
we have to borrow it from the East, and pay them high interest for
it. They have got ways of getting it from us.
This is our big job, and we are glad when you men make appropriations to build roads out in our country or to put up Federal
buildings or to make navigable our streams—anything to bring
money from the East, so that we can go on doing business without
continuing to borrow money.
It is a big job, this thing of keeping money away from the money
centers. We are interested in that, but that is aside from the question,
and I am going to quit talking just by repeating that I hope you
men will report this bill out favorably. It will be received favorably
by the great business interests and the farmers of the Middle West
and all over the United States; and let it get on the calendar, to be
printed and debated, because it is a matter of education.
I do not expect this bill to pass at this session, but we must begin
educating the people along this line so that they will understand the
matter and be able to act intelligently about it.
Just a word as to the way of finding the " index number " used in
determining the general price level. I feel sure it is true that many
of our larger manufacturing industries have managed prices independent of supply and demand or of the purchasing power of the
dollar. Why should they be given a rating alongside of commodities
which are open to competition and subject to the vicissitudes of a
variable dollar ? I t can not be a true " index number " unless some
allowance is made for manipulated prices.
I thank you for listening to me.
Mr. STEVENSON. I will say to you that I have enjoyed your address very much, and I am glad to see that you are not the extreme
optimist that some people are that come and ask for legislation that
they expect to have passed immediately.
The CHAIRMAN. The committee will adjourn until 10.30 o'clock
Tuesday morning.
(Whereupon, at 12 o'clock noon, the committee adjourned until
Tuesday morning, May 8, 1927, at 10.30 o'clock a. m.)

Tuesday, May 8,1928.
The committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden
(chairman) presiding.
The CHAIRMAN. The committee will come to order.
Doctor Miller, do you remember where you left off the other day i



would be to pursue such a policy as would even out those lines,
would it not ?
Doctor MILLER. NO. I would say, in answer to your question, but
looking at Mr. Strong, and having in mind doubtless some one or two
reserve-bank officers who may have influenced him in drawing his
bill, that one of the commonest mistakes, when people talk about
stabilizing price level, is to imply that it means stabilizing money
rates. I have occassionally[oc asionaly]seen something in reports of the openmarket committee to the effect that stable money rates, in relation
also to stable business conditions, prices, and so forth, should be the
objective of a certain policy.
Now, the only method, supposing that the thing is at all practicable,
by which ordinarily prices could be stabilized would be by variable
money rates. In other words, when the flow of credit gets to be too
rapid, and prices tend to rise in terms of the quantity theory and
the concept of this bill, the way to pull them back is by running
money rates up and checking borrowing, thus reducing the volume
of money in use.
Similarly, in terms of the conception of credit price stabilization,
when things are running down, when prices are going off and you
want to start a reverse movement with a view of coming nearer to
stability, you cheapen the cost of money so as to induce borrowing
and raise the price level.
Mr. BEEDY. On your chart, the lines which present the most violent
fluctuations are found under " Money Rates in New York" and
" Money Rates in the Principal Countries," but I notice the lines indicating " Loans " and " Investments " are steadily rising from 1922
to the beginning of 1928, while the line denominated "All Other
Loans " and which you say may be grouped under the head of commercial loans, is fairly steady. In other words, as the rates of money
rise and fall in big cities, the loans that are made on investments seem
to take advantage of them and present quite a violent change, while
industry in general does not seem to avail itself of these violent fluctuations, and that line is fairly even, there being no great rises or
Doctor MILLER. Here [indicating on chart] is 1927, and this represents the volume of borrowing for commercial accounts.
Mr. KING. When you say " this " and point to the chart, it does
not mean anything when we come to read the record.
Mr. BEEDY. He is referring to this line, indicating "All Other
Doctor MILLER. Yes; on the chart marked "Money-Market Factors." This line "All other loans " shows no marked changes during
the year 1927; it moves on a level not appreciably different from 1926.
In the latter part of the year it would show, I think, a decline.
Is that correct, Mr. Riefler ?
Mr. RIEFLER. A slight decline.
Doctor MILLER. Notwithstanding the fact that the Federal reserve
system pursued a policy of easing money, first through purchases of
United States securities. This black line, the heavy black line, " U. S.
Securities," shows about mid year the beginning of this policy of
purchasing securities, and you will notice how the curve rises.




Mr. STRONG. That may be a very good argument; rather a manufactured one, I think.
Mr. KING. It is very good.
Mr. STRONG. But in the prior hearings it was quite generally stated
that the Federal reserve system had been fairly successful in bringing
about stabilization in the last three or four years. The purpose of
this bill is only to direct a continuation of this policy by the use of
all the powers they have, not to direct just what you shall do with the
powers you have, but that the powers you have shall be directed
toward stabilization, leaving you a direction as to study and research
as to what might be best to do in the future.
Doctor MILLER. Well, if you read the bill as a whole, Mr. Congressman, beginning with paragraph (h), where it uses positive language,
a command is issued to the Federal reserve system. It says in effect:
" Use all your powers to promote or accomplish certain purposes."
Mr. STRONG. TO promote them.
Doctor MILLER. Let me go ahead. It says in effect, " Use all your
powers." That is the language of command.


Doctor MILLER. It then says, in effect, " Well, anyhow, do it so far
as it is practicable to promote these ends by monetary policy."
Mr. STRONG. Certainly; use all of your powers toward stabilization as far as it may be accomplished by monetary policy.
Doctor MILLER. YOU are already beginning to doubt and hedge.
You issue a command to begin with, but your later language shows
that there is a doubt in your mind as to whether what you command
to be done can be done, by saying, " Do it as far as it is practicable."
Then, in a later paragraph you add still further to the doubt by
saying, "Well, anyhow, go and investigate and find out what you
can do."
Mr. STRONG. That is unfair, because there is no doubt in my mind
that the language you refer to has been dictated and suggested by
members of the Federal reserve system.
Doctor MILLER. I regret to say that I do not think it is a very
creditable exhibition of their understanding of the seriousness of
this whole matter.
Mr, STRONG. Their objections are that we should not have a positive direction, for fear the people will misunderstand and think that
we can do all these things and blame us if we do not. Therefore, they
said, " Please change the bill, Mr. Strong, so that you only direct the
use of these powers toward a policy of stabilization as far as the
monetary policy can accomplish it," and I said, " Very well; if that
is your wish, I will so change the bill."
It is not that I am having any doubt as to the way the powers of
the Federal reserve shall be used.
Doctor MILLER. But they appear to have, and are therefore protecting themselves at once by qualifying the command and at the
same time getting a charter to go ahead and exercise certain experimental liberties, if you please.
Mr. STRONG. That is what you are doing, anyhow.
Doctor MILLER. I am trying to show that a little less of that sort
of thing would probably give us a more satisfactory result in the
Federal reserve system.



Mr. STRONG. I think that is true. That is what I do not want you
to do, to experiment, but to proceed with these powers toward the
policy of stabilization.
Doctor MILLER. I know what you want to have done; but very
frequently the way to get it is not the direct way or not the way that
assumes that a resolution or instruction will do it.
Mr. STRONG. DO you mean to say that the way to get it is not to
direct that they shall use these powers toward that policy ?
Doctor MILLER. No; I do not say that the powers shall not be used.
Mr. KING. I want to make a protest, that the gentleman from Kansas has referred to the fact that a member of the Federal Reserve
Board has changed the reading of this bill.
Mr. STRONG. I did not say the board. I said " system."
Mr. KING. While they have almost every power on earth they are
not infallible.
Mr. STRONG. I said the Federal reserve system. Some of these
amendments were made after a conference with the members of the
board and of the Federal reserve system.
Doctor MILLER. The Federal reserve system is a pretty big organization. There are many persons in it. We have a considerable
number of amateur economists, and from my point of view they
constitute one of its dangerous elements.
Mr. STRONG. I agree with you.
Doctor MILLER. There are altogether too many in and around it
for the good of the system, and there has been some influx into the
Federal reserve mind of half-thought-out ideas—notions almost
metaphysical in their character. These have penetrated the minds of
some of the operators of the Federal reserve system.
Mr. STRONG. That is just what I am afraid of.
Doctor MILLER. And I venture to say that some of the men whom
you have consulted do not know what this is all about. These are
high-sounding and captivating words you are using in your proposed
Mr. STRONG. Of course, one of them has been Governor Strong.
Doctor MILLER. Of course, he is a very able man. But when it
comes to economic insight and understanding, and when it comes to a
program of economic statesmanship such as this bill contemplates—
the most novel, the most untried, the most difficult—it calls for the
exercise of power of analysis, of power of foresight, that is very
unusual in any group of men anywhere, no matter what their
experience or training.
Mr. STRONG. DO you mean to say that for the past three or four
years the Federal Reserve Board has not been trying to use their
powers for stabilization?
Doctor MILLER. I do not know it.
Mr. STRONG. Why do you employ these economists to prepare
these charts for you if you are not trying to reach a policy of
stabilization ?
Doctor MILLER. I might simply repeat what I explained in great
detail before this committee two years ago, and what is explained
in considerable detail in the 1923 annual report of the Federal
Reserve Board, which is a fundamental document in the Federal
reserve system as then understood and conceived. It contains a



point-blank declaration against the price level as a guide to credit
policy, with some of the reasons for it.
It also contains an affirmative statement how Federal reserve credit
procedure is being developed. I question whether you can find a
more competent statement of the fundamentals of modern reserve
banking policy.
Mr. KING. What report is that?
Doctor MILLER. The Tenth Annual Report of the Federal Reserve
Mr. STRONG. And yet when members of the board and of the
system have come before this committee they have always brought
their charts, the basis of which has been a price level of some kind,
or indicating the price level.
Doctor MILLER. I am afraid you are not acquainted with
Mr. STRONG (interposing). I am very well acquainted. I have sat
here for two or three years around this table and heard them.
Doctor MILLER. Here is a book containing 24 charts which are a
part of the operating equipment of the Federal reserve system.
Mr. STRONG. I made my statement because when the members of the
Federal Reserve Board and system have come before this committee
they have always brought charts indicating price levels.
Doctor MILLER. Have they brought charts indicating anything
Mr. STRONG. Oh, yes; but all trying to reach a period of stability,
trying to show where there were fluctuations one way or the other.
Doctor MILLER. Fluctuations of what ?
Mr. STRONG. Of the levels they were discussing; and they have
always indicated that they preferred to have a stable level.
Mr. BEEDY. What percentage of the charts showed fluctuations in
price levels?
Mr. STRONG. I would say three-fourths of them; half of them,
Mr. BEEDY. Most of them, I think, showed fluctuations in volume of
money and credits.
Mr. STRONG. That is showing the price level of money.
Doctor MILLER. I S that what it means to you ?
Mr. STRONG. I think it means that to any ordinary man. I do not
think I am so deficient in the study of this subject.
Doctor MILLER. I am not raising any question as to competency or
deficiency. You are saying that that is what it means to you. It
may mean a great deal to somebody else that is different.
Mr. STRONG. That may be.
Mr. KING. Were you here when Governor Harding was the head
of the board ? When he appeared we had the room filled with charts.
Mr. STRONG. And so has everybody else who has appeared before
the committee from the system. But I want to make a further statement, that Governor Strong is only one of those whom I have consulted. You will remember I was before the board with Governor
Harding, and we discussed various amendments at the time.
Doctor MILLER. I do not question that you may have gotten the
impression that this or that group of officers of the Federal Reserve
Board or of the Federal reserve system may agree with you, and I do
not say that these men are not able, very able men, but on this par-



ticular subject I do not know that they understand just what they
are about.
Furthermore, it is human that on a subject with which a man is not
particularly familiar the last man that talks with him is very apt to
influence his mind. I would say that this bill was very cleverly and
very brilliantly drawn to accomplish that purpose. I do not say that
that was your purpose, but it is drawn, I would say, in language of
convenient vagueness.
Mr. STRONG. NOW, go ahead with your testimony.
Doctor MILLER. What do you want me to talk about ?
Mr. STRONG. The bill.
Doctor MILLER. What part of the bill?
Mr. STRONG. There is publicity to be discussed, and, after that, the
Doctor MILLER. Yes; but I want to finish up on paragraph (h),
which is the heart of the bill.
The CHAIRMAN. Before you do that, I would like to have you discuss these charts that you have here, because, as I understand it, these
charts are a history of past happenings, which have a bearing on the
decisions which the board makes or, at least, certain members of the
board rely on them to govern the decisions they make. I think it is
an important part of the operation.
Doctor MILLER. Mr. Congressman Strong, this is a chart that I
have had prepared for my personal use, and it always stands on a
table opposite my working desk. You will notice that it has no price
curve on it.
The CHAIRMAN. Without objection, this chart will be inserted in
the record at this point. It is headed, "Money Market Factors."
Mr. STRONG. But the chart does show the stableness or unstableness
of the various money rates and bank credits.
Doctor MILLER. Exactly.
Mr. STRONG. And it purports to show brokers' loans. It shows
that you are studying how you reach a stable situation.
Doctor MILLER. Where is the steadiness in that chart ?
Mr. STRONG. There is not any; and that is the reason you have that,
to point to the unsteadiness of it.
Mr. BEEDY. I direct your attention to the line, Mr. Strong, in the
center column, between the figures 10 and 5, which is fairly steady
It is called "All other lines."
Doctor MILLER. NO ; "All other loans." That is a statement that is
constructed from the reports of some 650 or 700 of the largest banks
of the country that make a report every week to the Federal Reserve
Board as to their condition.
Mr. BEEDY. Not members of the system?
Doctor MILLER. Oh, yes; they are members. They are the largest
members in the reserve cities, and so on. They are the large banks,
and they make a report weekly of the leading items in their condition.
The line that is marked "All other loans," you can roughly identify
in your own mind as meaning commercial loans; that is, lending to
borrowers for commercial, agricultural, industrial, and similar operations.
Now, of course, the striking thing in that chart, Mr. Strong, is the
fluctuation in these various curves, great fluctuations.



Mr. STRONG. Certainly.
Doctor MILLER. They are up and down. To my mind, from a
strictly interpretative point of view, the main interest arises the moment you find that curves which behave in a certain way in relationship to one another under ordinary conditions, begin to behave differently when you get a different set of conditions. They then begin to
cut through one another in one direction or another. In brief, when
you have a curve that for a long period of time has been moving above
another curve, later on it moves below it, that is an indication that
something is out of joint.
Now, do you care to go into these charts? I do not know just what
you would like. I have referred a good deal to the period of the last
eight or nine months.
The CHAIRMAN. The thing I am interested in, Doctor Miller, which
I think is important in connection with these things, particularly as
regards the decisions that the Federal Reserve Board makes, is what
goes into the mill that comes out in the form of a decision issued by
the Federal Reserve Board. These charts are apparently one of the
guides. In other words, for instance, by way of definite illustration,
take the decision which was made last summer when the discount
rate was changed and we entered into this new era to which you
are referring. Will you just tell us briefly how that matter was
brought to the Federal Reserve Board and what the influences were
that went into the final determination to bring about the lowering of
the discount rate, etc. In other words, the testimony before this
committee is that you members of the Federal Reserve Board arrived
at individual opinions and that you arrive at those opinions based
on such information as is before you. It may be a condition of the
weather; it may be a condition of charts; it may be a condition of
business; it may be a suggestion made from this source or that source,
all culminating in a decision which is of tremendous importance to
this country.
Now, I would like, if possible, for you to just visualize, if you
please, a decision similar to that which was arrived at last summer.
Doctor MILLER. YOU are asking me not only a difficult question but
a question impossible for me to answer. All I can do is to give you
my best impressions. I think it is a most difficult thing to know
what is another man's mind when he makes a decision.
The CHAIRMAN. Perhaps 1 can clarify that by asking this: Where
did the suggestion come from that caused this decision of the change
in rates last summer?
Doctor MILLER. Well, you will recall that last summer the three
largest central banks in Europe had sent representatives over to this
country. As I remember, there was the governor of the Bank of
England, Mr. Montague Norman; the president of the German
Reichsbank, Mr. Hjalmer Schacht; and Professor Rist, deputy governor of the Banque de France.
I think these gentlemen were in conference with officials of the
Federal Reserve Bank of New York, or some of them, at any rate,
and possibly with the directors. I am not advised as to these details,
so that it may well be that what I am stating, on the basis of mere
impression or hearsay, is not very accurate.
After, I should say, a period of a week or two, they appeared in
Washington for the better part of a day. They came down, I think,.



the evening of one day, and were the guests of the Governor of the
Federal Reserve Board at a luncheon the following day, and they left
that afternoon for New York.
The CHAIRMAN. Were the members of the board present at this
luncheon ?
Doctor MILLER. Oh, yes; it was given by the governor of the board
for the purpose of bringing all together.
The CHAIRMAN. Was it a social affair, or were matters of importance discussed?
Doctor MILLER. I would say it was mainly a social affair. Personally, I had had a long conversation with Doctor Schacht alone before
the luncheon, and also one of considerable length with Professor Rist.
After the luncheon I began a conversation with Mr. Norman, which
was joined in by the other foreign representatives and, as I remember,
by Governor Strong and perhaps one or two other officers of the
Federal Reserve Bank of New York.
The CHAIRMAN. Was that a formal meeting of the board? Were
minutes taken?
Doctor MILLER. NO.
The CHAIRMAN. It was just an informal discussion of the matters
that they had been discussing in New York?
Doctor MILLER. Well, I assume so.
The CHAIRMAN. NO definite statement was made of that, however ?
Doctor MILLER. NO. I assumed that the purpose of the visit here
was largely in the nature of a courtesy visit.
The CHAIRMAN. Was there a representative of the Federal Reserve
Bank of New York present at the luncheon ?
Doctor MILLER. Oh, yes; two representatives of the New York
bank, as I remember. It was quite a large party, including Assistant
Secretaries of the Treasury and State Department and a number of
other persons in official life here. It was mainly a social occasion.
As I remember, I was the only member of the Federal Reserve Board
asked to say anything, and what I said was in the nature of generalities. The heads of these banks also spoke in terms of generalities.
As a conference the meeting did not mean very much, and I was left
with a feeling after the luncheon adjourned that it was—well, not
very satisfactory.
Mr. KING. Was the menu satisfactory?
Doctor MILLER. I mean that these gentlemen had been here and
had said nothing in particular, and nothing in particular had been
said to them.
Mr. KING. What did they want?
Doctor MILLER. Well, Mr. Congressman, that is sometimes a very
difficult thing to find out. I wanted to find that out, and, as already
stated, had talked with two of these gentlemen separately in my
office. They were very candid in answers to questions. I wanted to
have a talk with Mr. Norman, and, as I say, we both stayed behind
after luncheon and were then joined by the other foreign representatives and two or three of the officials of the New York bank. But
I was the only member of the Federal Reserve Board. The conclusion that I drew—not that this was said, but it was a conclusion I
drew—was that these gentlemen were all pretty much concerned for
one reason or another with the way in which the gold standard was
then working. That was not said by anybody, but that was my read



ing of the mind of each one of these gentlemen. They were therefore
desirous of seeing an easy money market in New York and low rates,
which would deter gold from moving from Europe to this country,
and, possibly, stimulate a transfer of balances from New York to
London, and, possibly, even lead an outward movement of gold.
That would be very much in the interest of the international money
situation which then existed.
The CHAIRMAN. DO subsequent events indicate to you that there
was an understanding between these gentlemen representing the German Reichsbank, the Bank of France, and the Bank of England, with
the New York Federal Reserve Bank at that meeting ?
Doctor MILLER. An understanding among these men themselves?
You mean among the foreign representatives ?
The CHAIRMAN. Or was there a decision arrived at on the part of
the Federal Reserve Bank of New York to bring about such a
situation ?
Doctor MILLER. I can not testify on that as a witness as to a fact.
Mr. BEEDY. The chairman's question is, Do subsequent events indicate to your mind that there was some unnderstanding[understanding]arrivedat
between the representatives of these foreign banks and the Federal
Reserve Board or the New York Federal Reserve Bank ?
Doctor MILLER. Well, I would say in answer to that question, yes;
especially as between these gentlemen and the New York Federal
Reserve Bank.
Mr. BEEDY. YOU say that such an arrangement was not reported to
the Federal Reserve Board formally?
Doctor MILLER. NO. I would say it was not a part of the conversations held at the time they were in Washington as guests of the Governor of the Federal Reserve Board.
Mr. BEEDY. Was it subsequently reported by the Federal Reserve
Bank of New York to the board ?
Doctor MILLER. I am testifying here now at some disadvatage[disadvantage],because I left Washington about a week after the meeting there, but let
me say parenthetically, Mr. Beedy, with respect to your question,
because these things are all of record
Mr. BEEDY (interposing). You started to give us some information. You said " Later on
Doctor MILLER. Later on there came a meeting of the open market
policy committee, investment policy committee, of the Federal
reserve system, to which and by which certain recommendations were
made. As I remember them—though I have not a copy of the report—in substance the committee recommended that there be made
purchases of securities in the open market for system account; in
brief, that money be put into the market. I am not exactly sure
about this, but my recollection is that about $80,000,000 of securities
were purchased in August consistent with this plan. The policy was
made operative early in August, and, if I remember rightly in connection with that meeting, there was reference to the desirability of
a lowering of discount rates. Indeed, I suppose that any rational
account of Federal reserve policy at that time would state that it was
doubtless intended or expected by the authors of the program, that
the purchasing of securities should and would prepare the ground,
so to speak, for a modification of the Federal reserve discount rate,



and, as a matter of course, of open-market money rates, including the
call rate.
The CHAIRMAN. Might I ask here if there was any conference
between the open-markets committee and these bankers from abroad
whom we have referred to ?
Doctor MILLER. Certainly not as a committee, so far as I am
aware. They may have met them as individuals or possibly as a
group, but not as a committee; no.
The CHAIRMAN. But apparently as a result of the discussion
which took place, the open-markets committee responded to the suggestion which was made either in the conference in New York or
here or somewhere while these gentlemen were here in connection
with carrying out their views as regards open-market transactions
and the lowering of the discount rate.
Doctor MILLER. Yes; I do not know whose idea it was. It may
have been an idea that was simultaneously entertained by several of
these men. My own belief is that the directors of the New York
bank had for sometime been looking in that direction, and it may
have been that it was because of this that the visit occurred. I do
not know whether the original suggestion was presented from the
other side; it may have been. About all that I would say, on the basis
of my impression, is that the idea was very welcome on the other
side. It was distinctly a time in which there was a cooperative spirit
at work, a feeling that for one reason or another, and perhaps a
variety of reasons, an easing of conditions was desirable.
Mr. KING. What medium of exchange do you usually use between
those fellows that came across and the institutions that you speak
about ?
Doctor MILLER. What do you mean ?
Mr. KING. I mean the open-market operations committee.
Doctor MILLER. What do you mean by " medium of exchange " ?
Mr. KING. I do not mean "medium of exchange." I mean "medium of communication." How did they get these ideas into their
heads ?
Doctor MILLER. Sit around and talk about it.
Mr. STRONG, At a social dinner, I would say.
Mr. BEEDY. He has said that individuals of this committee
Mr. STRONG (interposing). I appreciate that.
Doctor MILLER. I suppose that Doctor Schacht was in my office
with me alone for about an hour and a half. I think I knew his
mind pretty well, because I was struck with his singular candor and
also his remarkable ability. He is far and away the ablest central
banker that I know anywhere in the world, a man of commanding
ability and solidity and with a minimum of illusionism in his mental
make-up as a practical administrator.
Having talked with him at length, the thing that rather surprised
me was that the things that appeared to come out of this visit later
did not seem to fall in with the impressions I picked up from him
as to his attitude, and subsequent reflection has led me to think that
probably he stood somewhat apart, possibly, on some of these matters.
I do recall this particularly, because it falls in now, as it fell in
then, with my own view as to what should be the official attitude of
the Federal reserve system as regards the international situation. I



remember asking "Doctor Schacht, what would you like in our
arrangements if you could have anything you wanted from the Federal reserve system; would you like a reduction of the discount rate ? "
He said, " No; that is a matter that you must determine for yourselves. What we want is that your discount rate, that your money
rates, shall be truly adjusted to your conditions. Then we shall have
something that we can work to, that I can work to in the administration of the Reichsbank."
In brief, he wanted a true money rate in the world's leading market so that he might have it as a guide. He said, " It is a hindrance
to me
The CHAIRMAN. I got the impression, Doctor Miller
Mr. BEEDY (interposing). "Hindrance to me " to what?
Doctor MILLER. "Hindrance to me if you make a rate"—I am
using my own language, because I can not recall definitely what
language he used—" that is artificial and subsequently have got to
correct it." He said, " I shall not know then how to direct my course."
I have often wished that I might sit down and talk with Doctor
Schacht for an hour or two now and see what his feeling now is. He
told me in that connection, " The greatest difficulty I have had in
controlling the situation in Germany is the fact that money spills
in from the outside and thus neutralizes my efforts at internal regulation and control."
The CHAIRMAN. What I started to say when Mr. Beedy interrupted me was this: You have outlined here negotiations of very great
Doctor MILLER. I would not call them negotiations.
The CHAIRMAN. Well, a conference.
Doctor MILLER. Well, I would say conversations. I think that is
the proper word.
The CHAIRMAN. Well, as a result of negotiations or this conference
or casual conversations, something of a very definite character
resulted ?
Doctor MILLER. Yes.
The CHAIRMAN. A change of policy on the part of our whole financial system, which has resulted in one of the most unusual situations
that has ever confronted this country financially. Now, this apparently took place by informal discussions, both in the Federal
Reserve Bank of New York and in Washington. It seems to me that
a matter of that importance, even if it was discussed informally,
should have been discussed and made a matter of record in the
Federal Reserve Board in Washington and nowhere else.
Doctor MILLER. I agree with you.
Mr. BEEDY. We would all agree to that, I guess.
With reference to this chart here that you have set up, the noticeable thing about these lines is the upward trend and then the sudden
falling, and you set it before you in order that you may derive some
conclusion as to the policy which you could recommend, for instance,
to the Federal Reserve Board, do you not, with respect to rediscount
rates ?
Doctor MILLER. Yes.
Mr. BEEDY. And in studying those lines and in arriving at the conclusion which you would like to recommend as to policy, your desire



Initially, about mid year, when this pronounced rise begins, the Federal reserve system, through its open-market operations, decided to
go into the market and buy securities. Later on, in order to offset
gold exports, it continued purchasing, so that it went on right
through to the latter part of the year. You have a pronounced rise
here [indicating on chart]. We will insert the figures in the record
later on.
Mr. RIEFLER. The total security holdings increased from about
$300,000,000 in May to about $600,000,000 in December.
The CHAIRMAN. Of 1927?

are referring now to the reserve-bank credit
chart ?
Doctor MILLER. TO the reserve-bank credit chart, precisely.
Now, if you will be good enough to look at the chart marked
"Money Rates in New York," in order to see what happened in
regard to money rates, you will see that in 1927, a little after mid
year, the rediscount rate, which is represented by the red line marked
" Federal Reserve Rate," dropped from 4 per cent to 31/2per cent.
You will notice almost simultaneously that the green line, which is
the line marked " Call Money," drops. Call money cheapens almost
simultaneously with the drop in the discount rate. You will also find
that the acceptance rate declines, while commercial paper goes down
about a quarter of 1 per cent, drops a little. The main influence
exerted by the change of discount rate, the main result of the policy
adopted, was to lower the call rate.
Now, as to the lowering of the discount rate, let us see what
peculiar combination of conditions existed at that time, although it
may not have been clear then. That combination of conditions introduced into the whole speculative situation the element of cheaper
money; in fact, we may say cheap money.
What effect did the low money rate have upon borrowing for other
than commercial purposes ? Well, Mr. Beedy has called attention to
the rise of these two curves, the one marked " Investments " and
the other " Loans on Securities." They both show a considerable rise
during the second half of the year 1927.
Now, if you turn to the curve on this chart marked " Brokers'
Loans " you will find that the rise is almost perpendicular.
In other words, the brokers' loans rise was the factor that was pulling up the security-loan curve. That shows here [indicating on
chart] and follows the reduction of money rates, following the rediscount rate change, and the injection into the market by purchase of
securities of a very considerable volume of new basic Federal reserve
credit. I think those things go together.
Mr. BEEDY. All of which has what, if any, effect on prices of commodities ?
Doctor MILLER. Before getting to that let me say that this was all
more or less in the interest of what I have called briefly the international situation, and our own interests so far as the international
situation has certain American reflexes. This low acceptance rate,
for example, which you find in the latter part of the year 1927 (chart,
Money Rates in New York), undoubtedly drew a volume of the
financing of our exports by the use of American acceptance credits
of probably $300,000,000 in excess of what we might call normal.



I think I explained the other day that the financing of the movement of commodities between countries is cheaper in proportion, to
the extent that an importing country can buy the currency of the
country from which it is importing cheaper. The effect of our low
American rates was to raise sterling exchange, to raise sterling exchange from about $4.85 to $4.87%. In other words, our policy
tended to increase the value of the pound by diminishing the value
of the dollar as compared with the pound. The result was that importers in England, or anywhere in Europe, who were financing
themselves through London, directly or indirectly, who wanted American dollars would find that they could get more dollars and cents, so
to speak, for their pounds as the result of Federal reserve policy
followed through the autumn than was the case hitherto or than
otherwise would have been the case.
Mr. STEAGALL. Putting it in the language of the layman bluntly,
what happened was that they made money a little cheaper?
Doctor MILLER. Yes; exactly.
Mr. STRONG. Made our money a little cheaper.
Mr. STEAGALL. That is a better way of expressing it.
Doctor MILLER. Exactly. I do not want to complicate the presentation too much, but if we turn to the international situation we find
that the spread between money rates in the United States and Great
Britain became wider after this new policy was adopted, so that
it had the effect of diminishing shipments of gold to the United
States; on the contrary, stimulating a movement of gold to Europe,
where it would command a better current return. There are a considerable number of American banks that have funds that they shift
from one market to another or from one class of investments to
another, according to the return they can expect to get that actually
make transfers to London, and it was those transfers that called, in
part, for shipments of gold to cover their transfers.
In brief the operation was this: They sold gold credits in New
York for sterling bills or sterling balances in London.
Mr. STRONG. Doctor Miller, I understand from your statement that
you do not agree with or approve of the change of policy that was
made by the Federal reserve system after the visit of the foreign
bankers ?
Doctor MILLER. That is correct.
Mr. STRONG. Then would it not have been a good thing if there
had been a direction that those powers given to the Federal reserve
system should be used for continued stabilization of the purchasing
power of the American dollar rather than to be influenced by the interest of Europe ?
Doctor MILLER. Well, I take exception to the term " influenced."
Mr. STRONG. YOU would, but I just wanted to get that answered.
Doctor MILLER. I would say that there is no such thing as stabilizing the American dollar without stabilizing every other gold currency. They are tied together by the gold standard.
Mr. STRONG. Then you approve of our efforts to stabilize Europe?
Doctor MILLER. I disapprove in toto of any mechanical formula in
Mr. STRONG. I agree with you.



Doctor MILLER. Let me explain what I meant when I said I disapproved of that policy. We are dealing here with conditions, not
theories. My belief was, and I so expressed it at the time, that the
policy of easy and cheap money would undoubtedly stimulate speculative activity in this country. My feeling was that it probably
would go to such excess that we would have to pay for the cheap
money that was created in the latter part of the year 1927 by dear
money in 1928. So far as the requirements of the commercial situation are concerned, it appears that we would have profited more by
cheaper money in 1928 than in 1927. We would not have suffered
appreciably, in my judgment, from money a little less cheap in 1927
than it was made through the intervention of the Federal reserve
The CHAIRMAN. NOW, getting back to these conferences with the
foreign bankers who were here and the change of policy last August,
I want to put into the record at this point a statement by the Federal Reserve Bank of New York on the gold movement for 1927-28,
which appears on page 2728 of the Financial Chronicle of May 5,
1928, and call your attention to the fact in that statement that the
net loss to this country in gold since September, 1927, is $345,000,000.
That covers this period of time, and I would like to ask you whether
or not that exportation of gold is the result of the policy established
back in August, 1927.
(The statement referred to is as follows:)


In reviewing the gold movement, the Federal Reserve Bank of New York, in
its May 1 Monthly Review, says:
The gold-export movement continued during April, with total shipments of
about $94,800,000. Imports totaled about $3,800,000, and there was a net
release of approximately $45,700,000 from earmark during the month, so that
the net gold loss for the month was about $45,300,000. This makes the net
loss to the country about $345,000,000 since the beginning of the export movement in September.
The export movements to Argentina and Brazil and the shipments of earmarked gold to France continued during April; further exports to Italy and
Uruguay were made; and the strength of sterling exchange led to another
small export of gold to England. The shipment of about $5,000,000 of good
received in February from Russia and refused by the assay office was transferred by the consignors to Germany. The only important import movement
was the receipt of $3,400,000 from Greece.
The destination of the largest shipments from New York during April and
the total amounts sent to those countries; since September 1 last are given in
the following table:
April 28, 1928

United Kingdom






1 April figures preliminary, covering Port of New York only.
Including $5,201,000 previously received from Russia.


2 5,353,000

September 1,
1927, to April
28, 1928 1
2 26,881,000



The monthly changes in the country's stock of gold in consequence of exports,
imports, and earmarking transactions during 1927 and the first four months
of 1928 are given below:
Gain or loss to gold stock
Year and month

August _ .






imports or




+11, 000,000






- 1 45,000,000

- 1 211,000,000

+ 191,000,000





1 Preliminary.

Doctor MILLER. I would say, in answer to your question, that that
is in part true, but not wholly so. Part of the gold that we have
lost is gold that foreign governments, notably France, have been
accumulating here for gome time. They are exporting it now.
The CHAIRMAN. This statement, I will say to you, shows the earmarking of that gold for the different months of 1927.
Doctor MILLER. But the total figure includes, I think, gold withdrawn either for exportation or for earmarking; that it, the form of
statement put out regards the gold as lost; that is, for the time
being, to the American credit system when it is earmarked and set
apart as the property of some foreign government.
The CHAIRMAN. It is impounded and in storage. It is out of our
system just as much as if it were out of the country.
Doctor MILLER. Yes.
The CHAIRMAN. In connection with these conferences which took
place and which subsequently resulted in definite action, you referred
to conferences in New York and conferences or a luncheon in Washington. I would like to ask you to put in the record the names
of the people who were here from abroad at this luncheon in Washington—in fact, all who attended that luncheon.
Doctor MILLER. I will do the best I can. I think I can give
you approximately the gentlemen here from abroad. I have already
given you the names of Mr. Norman, of the Bank of England; Doctor Schacht, of the Reichsbank; and Mr. Rist, deputy governor of
the Banque de France. There was also present one of the younger
men from the Bank of France. I think he was in charge of statistical work, and in part also acted as a sort of interpreter. I do
not recall that there were any others among the foreign guests at
that luncheon.



Mr. KING. This was at the New York luncheon ?
Doctor MILLER. N O ; in Washington. I think all members of the
Federal Reserve Board were present. Possibly there may have been
some member absent. That I do not recall.
My impression is that the Undersecretary of the Treasury, Mr.
Ogden Mills, was there, and the Assistant Secretary of the Treasury,
Mr. Schuneman; also two or three men from the State Department.
There were some members of the Federal Reserve Board staff, and
Mr. Warren, of the foreign department of the Federal Reserve Bank
of New York.
The CHAIRMAN. Who else was here from the Federal Reserve Bank
of New York?
Doctor MILLER. I think Mr. Harrison, deputy governor of the
Federal Reserve Bank of New York, was there.
The CHAIRMAN. Neither Doctor Burgess nor Governor Strong
were present?
Doctor MILLER. Oh, yes; Governor Strong was present. I think
Mr. Burgess was also present, but of that I am not positive.
The CHAIRMAN. Let me ask you something else, Doctor. This
Conference, of course, with these foreign bankers did not just happen.
The prominent bankers from Germany, France, and England came
here at whose suggestion ?
Doctor MILLER. I can not answer that. You will recall that at
the time, or, rather, two or three months earlier, a situation had been
created that was distinctly embarrassing to London by reason of the
impending withdrawal of a certain amount of gold which had been
recovered by France and that had originally been shipped and deposited in the Bank of England by the French Government as
security for a war credit. I presume the really provocative thing in
this whole situation was the indication that there was getting to be
some tension of mind in Europe because of the fact that France was
beginning to put her house in order for a return to the gold standard.
And there was some danger that the thing that had been predicted
by a good many people in the preceding two or three years would
happen, namely, that as Europe went further and further in the
direction of the restoration of the gold standard there might result
a scramble for gold and a possible scarcity of gold, with restricting
effects upon credit. The situation was one, therefore, that seemed
to call for some moderating influence, some moderating influence in
the monetary affairs of these different countries. The most natural
place to take their troubles was to this country, where existed the
leading gold market of the world and where, so to speak, the most
disinterested advice and help could be given.
That is my view of what probably lay at the bottom of this thing.
Mr. KING." Who was the moving spirit that understood that situation and got these people together ?
Doctor MILLER. That is a detail with which I am not familiar.
Mr. KING. That is immaterial?
Doctor MILLER. I am not particularly interested, because there is
nothing here that is per se objectionable. I want to say that I would
think it as a whole a better thing if members of the Federal Reserve
Board would make contacts with foreign bankers and know what
was in their minds, for it becomes a factor in our problems.



Mr. STEAGALL. All that you say is interesting, but it is a little bit
aside from the question propounded by Mr. McFadden. He asked
the question as to who was responsible for this meeting.
Doctor MILLER. I can not answer that. I suppose that it would
eventually come to this, that these men got together over there or
otherwise conferred with one another and then cabled Governor
Strong, " We would like to come over and have a talk with you." In
that case you would say the meeting was at their instance.
Mr. STRONG. Would it not be fair to say that the fellows who
wanted the gold were the ones who instigated the meeting ?
Doctor MILLER. They came over here. That is as much as I know
as a matter of fact. Beyond that I can throw no light on it.
Mr. STRONG. They came, they banqueted, they talked, and they
got the gold.
Mr. BEEDY. The answer to the question is that he does not know
who was the moving spirit in getting them over here.
Doctor MILLER. Yes.
Mr. BEEDY. I would like to get back to the bill.
Doctor MILLER. I can not let your expression stay in the record,
Mr. Strong, without a protest, because it carries with it a sinister
Mr. STRONG. Not sinister, but based on the facts.
Doctor MILLER. Well, what is the fact ?
Mr. STRONG. The fact is that they came over, they had a meeting,
they banqueted, they talked, they got the Federal Reserve Board to
lower the discount rate, to make the purchases in the open market,
and they got the gold.
Doctor MILLER. Well, now, if I took that view of the matter, if I
used the words you have used, I would say that it was pretty clearly
demonstrated why your bill should not be enacted.
Mr. STRONG. I know you would say that, but I think that if we
used this power to take care of our own standard of value, our own
Doctor MILLER (interposing). But you have said that these gentlemen did all these objectionable things. If they can do all these
things with the Federal reserve system, that is a good reason
Mr. STRONG (interposing). For stabilizing the American dollar
Doctor MILLER. Who is going to do the stabilizing?
Mr. STRONG. The Federal Reserve Board, instead of trying to
stabilize Europe first.
Doctor MILLER. What guarantee, or what warrant, have you for
expecting the Federal Reserve Board, taking your view, your own
words as to this recent performance, to give a more competent account
of itself in the future? If these gentlemen did these things you
charge, why will they not do them in the future ?
Mr. STRONG. That is the reason I want to direct them to stabilize
the American dollar first, not to stabilize Europe first, but America
Doctor MILLER. Let me say here parenthetically, because while it
has no bearing upon the problem, it may have at least a bearing upon
your statement
Mr. STRONG. Never mind my statement. I can take care of it.



Doctor MILLER. I mean in this committee. I do not know whether
Gustave Cassel is in this country now.
Doctor COMMONS. Yes; he is. I should like to see this committee
invite him to be here.
Doctor MILLER. I have just received an invitation to meet him at
what you call a banquet here, a dinner at the home of the Swedish
Mr. STRONG. I am going to be there.
Doctor MILLER. YOU know, Gustave Cassel is, among Europeans,
perhaps the foremost proponent of the stabilization theory of central
bank operation. He has also been a very persistent and very sharp
and aggressive critic of the Federal reserve system. He does not
think that we have always done very well. Unless we do better and
show a warmer heart toward Europe, he thinks that things are going
to go pretty hard in Europe in the future.
Well, since you are going to meet him and I am going to meet him,
perhaps we will have a nice exchange there.
Mr. STRONG. Have a nice dinner.
Doctor MILLER. At any rate, from the point of view that we were
discussing here a moment ago, I am merely now trying to convict you
of inconsistency.
Mr. STRONG. I know; but you are not going to convict me.
Doctor MILLER. Here is an eminent man coming here, and there
are other eminent men that will come. Others have come who are
very adroit in knowing how to approach the folk who make up the
personnel of the Federal Reserve Board.
Mr. STRONG. With the one exception.
Doctor MILLER. For the most part we are innocent of European
psychology. What warrant have you, therefore, that they won't use
this thing to improve their conditions if, as you think, they can
influence us so easily?
Mr. STRONG. I am only talking about the things brought up in your
statement this morning to which you said you were opposed.
Doctor MILLER. Yes; I was opposed, and I am candid enough—I
am respectful enough of the imponderable forces in all of these situations to say at this moment that I do not know which would have
proved to be the correct course, the one that was followed or
Mr. STEAGALL. I S it true that that action stabilized the European
dollar and demoralized or upset ours? Is it not true that whatever
change took place affected the two?
Doctor MILLER. It did affect the two.
Mr. STEAGALL. One one way and one the other ?
Doctor MILLER. Yes; that is what it was intended to do.
Mr. STEAGALL. SO it could not accurately be said that that action
stabilized the European dollar?
Doctor MILLER. It was not intended to stabilize the European
currency so much as to improve the exchanges, to raise them.
The CHAIRMAN. And relieve a very delicate situation.
Doctor MILLER. And relieve a very delicate situation.
Now, I think anyone who undertakes to deal competently with the
problems of Federal reserve policy has got to have guiding convictions as regards certain situations; otherwise he is flotsam and
jetsam, at the mercy of whatever influence is at work.



Personally, I am on principle opposed to artificial money conditions. To my mind, they are one of the most unfortunate things
that can happen, and many of the most serious conditions that we
have gotton[got en]into have come from just that sort of thing.
Mr. STRONG. What would you say is a natural rate?
Doctor MILLER. One that is pretty carefully adjusted to actual conditions, where you do not undertake to force and create conditions.
I would say, for illustration, that the 31/2per cent rate was an artificially low rate and it has brought in its cycle the present higher
rates; and that, in itself, is an undesirable condition.
Mr. STRONG. I would like to get one thing through my mind, referring to your chart there. The changed policy of the Federal
Reserve Board in the open-market operations, and the lowering of
the discount rate, tended, as I take it, to increase loans and investments and resulted in the violent increase of brokers' loans, but was
not accompanied by a corresponding rise in other loans for business.
Well, now, was anything done or any policy adopted or any action
taken by the Federal Reserve Board to hinder the use of cheap money
to increase the brokers' loans ?
Doctor MILLER. There is no method known to the Federal reserve.
Mr. STRONG. YOU remember that Doctor Sprague suggested the
method of adopting the English system.
Doctor MILLER. Yes.
Mr. STRONG. TWO remedies were suggested, one to adopt the English system to force the lending to be in a loan for at least seven
days and to pay interest for that time, in order to prevent borrowing sums of money one day and returning them the next and only
paying interest for one day, and then his other proposition was to
inquire into the purposes for which the money was to be borrowed.
Could either one of those remedies have been used ?
Doctor MILLER. I think the first one would be worthless. I think
it would produce just the opposite result from that intended.
Mr. STRONG. Why?
Doctor MILLER. Because a bank being limited to borrowing for
a 7-days' minimum would see to it that it kept its borrowed money
invested for the whole seven days and there would be no other place
that it could with certainty go with that money than the call-loan
Mr. STRONG. But would that not be a check when they wanted to
furnish money for speculative loans? Suppose that a man came in
and said that he would like to get money for a couple of days to be
used in the open market. They would say, " But we have to borrow
that money for seven days." Would that not be a check upon it?
Doctor MILLER. It does not work that way. The call-loan market
is the most impersonal thing in the money market. The bank borrows at a reserve bank, and that is notably true in the big cities,
and, of course, especially true in New York City, because it finds its
reserves depleted and needs to restore them. Being a central reserve
city, the New York member bank is required to keep a balance of 13
per cent against its demand liabilities.
Mr. STRONG. DO you think the other remedy of Doctor Sprague's
would be of any value ?
Doctor MILLER. I think, Mr. Congressman, that the most essential
thing in the operation of the Federal reserve bank at this juncture is



the development of some technique by which a restraint can be exercised over banks that are indebted to the Federal reserve bank when
they are lending in the call loan market. That is my opinion and
that is the opinion I expressed here two years ago.
Now, the interesting thing in an inquiry into the Federal reserve
system and its operation is why it is not done. It will be said by
some that it can not be done; it will be said by others that it does not
need to be done, that there is no evidence that the banks are borrowing for the purpose of reloaning the proceedings in the call-loan
market. There is some basis for a statement of that kind if you
are looking directly for, we will say, a culprit, but there is no basis
for it if you are looking for an explanation of a condition that
Only a few days ago in a Federal reserve conference this question
of whether the member banks were not borrowing for making call
loans came up. Well, they do not come in, as Mr. Strong implies, and
say, " I want to get $10,000,000 to lend in the call market."
Mr. STRONG. Of course, I know that.
Doctor MILLER. The president of the bank may not even know that
his bank is short in its reserve account at the Federal reserve bank
at Boston or New York because of call loans.
What happens may be this: That a member bank is engaged in a
vast volume of business of great variety; that it has a great mass of
commercial business. It may find that its commercial borrowers come
in and want more credit. It may have at the same time a considerable
amount of funds invested in the call-loan market. What it may do
under those circumstances is not to go to the call market and take
money out in order to meet the demands of its commercial customers.
It may instead go to the Federal reserve bank and borrow; and what
I think I have on several occasions tried to make clear is that it
will be more likely to do this when the call rate is high and the
Federal reserve discount rate is low. Therefore one of the dangers,
one of the risks always taken under such conditions, is the steady
maintenance or even accumulation of funds in the call-loan market.
Now, some of our reserve governors, when we were discussing this
thing, said that a particular bank is " i n " to-day $10,000,000,
$20,000,000, or $30,000,000, and then is " out" to-morrow, and some
other bank is in the reserve bank as a borrower. That is what might
be expected. The load is being shifted all around. But the figures
will indicate that the total volume is growing. And if you seek to
find where the reserve system ties into the situation is, you will find
it in the expanded discounts of the Federal reserve system or, under
other conditions, in expanded open-market purchases.
What has been going on recently is that the Federal reserve system
has been pursuing a policy of sales of securities with a view to
bringing pressure to bear upon the central money market. That
pressure, in my judgment, is succeeding, and the evidence is that call
money has gone to 5 per cent, has even touched, on occasions, 6 per
cent. But that 6 per cent rate is, so to speak, a call to the interior of
the country to send its money to New York if it has any, and the
result is that the interior money in New York City in the call market
threatens to cut commercial loans at home.
The CHAIRMAN. YOU were discussing a few moments ago this suggestion of Doctor Sprague's in connection with 7-day money as a



possible check as applied to the New York market. There is not very
much difference between the total amount of brokers' loans and the
deposits in New York banks. There are legal-reserve requirements
in connection with the deposits in the New York banks. In other
words, it is a deposit of money belonging to the country banks, or
that part of it that is loaned by the country banks on the market, and
the same thing would apply to industry.
Doctor MILLER. Unless they loaned it.
The CHAIRMAN. Supposing that the reserve law were changed in
that respect and that New York banks were forced to keep a reserve
against the total amount of brokers' loans; would not that have a
tendency to check the situation ?
Doctor MILLER. In effect, I think, if I understand your question,
that it does that now. When a New York bank makes a loan to anybody, but in a specific case a broker, it takes his note with collateral
and gives him a credit on its books. It creates, in other words, a
demand liability against itself and against that it must immediately
carry a reserve of 13 per cent.
The CHAIRMAN. That is true; but when these brokers' loans accumulate the New York banks know that overnight they may be called
on to supply the money to liquidate all those loans that are made
when they hold money from outside of New York City, and they
have an assurance now that if that call is made they can" go into the
Federal reserve and get the necessary funds.
Doctor MILLER. They have the assurance, but I think they
The CHAIRMAN. They have eligible securities from the applicants
to take care of just that situation.
Doctor MILLER. Government securities.
The CHAIRMAN. And they can go into the Federal reserve bank
and get whatever funds are necessary to take care of the sudden
call of the amount on brokers' loans held outside of New York City.
Doctor MILLER. That is true.
The CHAIRMAN. My question to you was whether or not it would
have a tendency to check that if we required a legal reserve requirement against those loans the same as is required against deposits ?
Doctor MILLER. Well, wherever you have a loan you have a deposit. Your loan is always offset by a corresponding item on the
liability side of the ledger. That is the deposit item.
The CHAIRMAN. In other words, look at it this way: If it were
not for the fact that around the corner is the Federal reserve bank,
to which the big banks in New York that have the responsibility
of furnishing the money to discharge those loans in case they were
called on to do so can go, those big banks in New York City would
take a different attitude in regard to brokers' loans than they do
now, because they would have to find themselves the money with
which to liquidate those loans. As it is now, the Federal reserve
bank, being around the corner, is furnishing a source of relief which
works to the advantage of the continuance of the brokers' loans.
Doctor MILLER. Yes; no doubt about that.
Mr. BEEDY. In other words, you are calling attention to one of the
weak spots in the Federal reserve system ?



The CHAIRMAN. I am calling attention to the assistance which the
present operation of the Federal reserve system gives to the continuance of the brokers' loan situation.
Mr. STEAGALL. Everybody would not agree as to whether it is an
evil or a weakness in the Federal reserve system now. If I can
prosper and have a fine car and a nice home and plenty of servants
and a trip abroad, I do not care if some gambler down here lives a
little better than he has been living. That will not hurt me.
Mr. BEEDY. Before the committee adjourns, I would like to have
this fact go into the record as pertinent to the observations made here
as indicated in the chart resulting from the cheapening of money
in the mid year of 1927, namely, the pronounced rise in the line indicating loans and investments and the pronounced check in the line indicating broker's loans. You will recollect that I asked the question
as to what is the effect, if any, on prices. I note in these Federal
reserve charts—and this is chart 16 in this little pamphlet which you
have here, the chart used by the Federal reserve system—that beginning mid year, we will say, the line begins to rise in this chart denominated " Wholesale prices " as prepared by the Bureau of Labor,
based on the prices of 550 commodities, and that the chart shows an
abrupt rise in the line indicating the amount of reserve-bank credits,
plus gold stock and reserve-bank credit, from which might be drawn
the conclusion that with this cheapening of money all the member
reserve banks began to participate in this extension of credit, and
that as the result of this cheap money there is some reflection of it
indicated in not a pronounced rise by any means, but an appreciable
rise in the wholesale prices of the 550 commodities.
Doctor MILLER. That would depend. I think a consistently incorrigible stabilizationist would say this proves it was done and can be
Mr. BEEDY. I am not that, but I am an impartial student of the
problems incident to the consideration of this Strong bill, and I think
we ought to have all of these elements in here.
Doctor MILLER. When you put those alongside one another it is
a pretty easy thing to conclude that the change in the one is the cause
of the change in the other. But if you go into detail and see what
groups of commodities have moved in price, you will find it is particularly those that are the products of the soil and for which price are
made in the world market.
The CHAIRMAN. I want to suggest that the committee adjourn now
to meet to-morrow morning at 10.30.
(Whereupon, at 12.45 o'clock p. m., an adjournment was taken
until Wednesday morning, May 9, 1928, at 10.30 o'clock a. m.)

Wednesday May 9, 1928.
Following the consideration of other business, the committee
resumed hearings on H. R. 11806, Hon. Louis T. McFadden (chairman) presiding.



The CHAIRMAN. NOW we will proceed with the hearings on H. R.
Mr. Miller, of the Federal Reserve Board, will resume his

Doctor MILLER. Mr. Chairman, yesterday's hearing and, I think,
one or two of the hearings last week concerned themselves very
largely with a review of Federal reserve policy and operations and
their effects during the past nine months. Yesterday's hearing took
on the character not simply of an inquiry but of an inquisition, so
to speak—a disposition to get something in the nature of a close
look-in with respect to the open-market operations and policies of
the Federal reserve system.
Personally I think that is not only proper but, I think, likely to
be profitable and enlightening to the committee and to others who
are really interested in the manner in which, humanly speaking, the
Federal reserve system operates.
Now, I think I have stated once or twice in connection with these
discussions that I have not always been in sympathy with the policies
that the Federal reserve system has followed in recent years. More
particularly is that true with respect to its open-market policy and
operations. And I have felt an embarrassment, a certain personal
embarrassment, in my desire to meet candidly and frankly the questions of members of the committee and at the same time maintain
an attitude of loyalty toward my colleagues on the Federal Reserve
Board and officers of the Federal reserve banks with whom I have
not always been in agreement.
But I feel that where a committee of Congress evinces the interest
that this committee has, not only in connection with the particular
bill that has given rise to these hearings but with reference to the
general operation of the Federal reserve system, that every help
should be given, and I am therefore prompted to make the suggestion, Mr. Chairman, that your committee ask the Federal Reserve
Board to send you a complete file of documents containing the reports of the open-market committee to the Federal Reserve Board
since the inception of the committee in April, 1923, the preliminary
memoranda prepared in connection with those reports, and complete
records of the action that the board has taken from its minutes.
I am under the impression that it will be seen as inquiries into the
Federal reserve system go on that the very heart of its more recent
credit policy lies in the open-market operation. I can see, as these
hearings have progressed, that that is a thing to which, in one way or
another, we always come back.
I think it will remain a mystery to you until you have all of the
facts before you. I think you will never be in a position to legislate
intelligently until you have that full understanding that will come
only when you have all the documents before you which will disclose
exactly what is going on, how it has taken place, and then estimate
the wisdom of the operation by the resulting effects of the policy.



Mr. STRONG. Should we not also have the reasons given for the
change of policy at the time it was made, so that, in studying the
question, we could see how it worked out ?
Doctor MILLER. I think you are thinking of something a little
Mr. STRONG. NO ; I think I understand.
Mr. BEEDY. Change of what policy?
Mr. STRONG. Open-market operations.
Doctor MILLER. YOU will get it.
The CHAIRMAN. The Doctor has suggested that we have the minutes which show the determinations of the board.
Mr. STRONG. What I wondered was, does that record give us the
reasons why?
Doctor MILLER. It will give you all there is, and from that you can
judge, for instance, whether that is sufficient.
Mr. STRONG. Does it give the reasons that prompted the board to
act in the change of policy toward open-market operations ?
Doctor MILLER. I would reply to that that is in the nature of an
inference or a conclusion.
Mr. STRONG. It is not in the record.
Mr. LETTS. YOU are speaking of certain memoranda of the committee, and those, I take it, are directed to the board and would
contain some of these reasons that Mr. Strong is inquiring about.
Doctor MILLER. YOU will have everything.
I am particularly moved in making this suggestion because of the
surprise, which I think was quite natural, expressed by the chairman
yesterday that there was no record of what went on last year on
the occasion of the visit of three of the central bankers of Europe.
The CHAIRMAN. The reason I raised that question was that if determinations are made in a casual conference like that, which determinations govern the action of the Federal Reserve Board, it ought
to be understood.
Doctor MILLER. NO determinations were made at that conference.
The CHAIRMAN. But as a result of that conference, evidently.
Doctor MILLER. There, again, I should say that that is a matter
of inference and conclusion, and I think that the only way to clarify
a situation of this kind is that you should have before you all that
there is in black and white and you can then see just what the
modus operandi is, wherein it is incomplete, and you can then, if
you want to, inquire why it is not more complete. In these matters
I think it very undesirable for a board or any governmental agency to
rest under the thought that there is a mystery about its proceedings
or any withholding of information. I think there is some mystery
in the public mind. I am a devotee of not only candor in these matters, but publicity at the earliest possible moment. (On these matters
I want to get ahead of my critics.) I think the best course for the
committee is to ask for the complete records. They should be a matter
of interest to the committee and a matter of considerable public interest. While I have pondered and hesitated a good deal in making
this suggestion, I think on the whole that in the long run great good
will come out of it and the good will compensate a thousandfold for
any immediate embarrassment, and I think it will save a lot of time
spent in your hearings in feeling around for something that can best
be found in the records.



The CHAIRMAN. The chair is ready to entertain a motion to carry
out the suggestion of Governor Miller.
Mr. STRONG. I move, Mr. Chairman, that the chairman of this
committee ask the Federal Reserve Board to furnish the details
and information referred to by Doctor Miller.
Mr. BEEDY. I second that motion.
(The question was put and the motion was agreed to.)
Doctor MILLER. NOW, what is your desire ?
The CHAIRMAN. Have you finished the detailed discussion of the
Doctor MILLER. NO ; I have not.
The CHAIRMAN. We should be very glad to have you proceed in
your own way. I might say to you that when you have finished that.
Doctor Commons has a few questions, and I imagine Mr. Strong
has some that he will want to ask you after that has been completed;
and, if it is your desire, I understand that Doctor Commons is willing
to be questioned by you.
Doctor MILLER. He suggested that, and if the committee thinks it
desirable, well and good.
The discussions in the hearings thus far have confined themselves
pretty much to paragraph (h), and I rather think it would be better,
if members of the committee have any questions they want to put
to me with regard to paragraph (h), that that be done before we
go on to paragraph (i), which is on a different subject, and on which
I might want to say quite a little.
The CHAIRMAN. I wanted to ask you this, Doctor Miller: Are you
entirely in accord with the policy being pursued now of cooperation
with the banks of issue in regard to getting the world back, or these
countries with which we are collaborating, to a gold basis, standard
gold basis?
Doctor MILLER. I am not enthusiastic about it, not always happy
about it. Considering our unique positions as a creditor nation, and
considering our gold position, which is without precedent in the history of finance, we have an obvious obligation and that obligation
entails a pretty large and serious responsibility for the Federal
reserve banks particularly. But I have never shared the feeling that
we should be overzealous in extending our hand and in undertaking
to suggest to any country or group of countries or any section of the
world what they should do.
The CHAIRMAN. That statement leads me to call your attention to
this recent conference in Paris, with which you are familiar, at which
Mr. Goldenweiser, director of research of the Federal Reserve Board,
is present, and Doctor Burgess, the assistant Federal reserve agent of
the Federal Reserve Bank of New York, who are apparently in consultation with the representatives of the other banks of issue with
which we are collaborating, and the reports of which conference
indicate a closer working arrangement, apparently, with the approval
or semiapproval of the Federal reserve system because of the fact
that these two important men are present, indicating that closer
working arrangements are being brought about. One of the press
notices I had in mind indicated that Doctor Burgess was to be the
liaison officer between the Federal Reserve Bank of New York, or the
Federal reserve system, and these other banks of issue, and other men



were being appointed by the various banks of issue to collaborate
with us in working out a closer arrangement.
Is that done with the approval of the Federal Reserve Board ?
Doctor MILLER. Well, the presence of Doctor Burgess and Doctor
Goldenweiser is with the knowledge and approval of the board. By
that I mean approval in a legal sense. Doctor Burgess, you know,,
is in the Federal reserve agents' department of the Federal Reserve
Bank of New York, and Doctor Goldenweiser is the head of the
Federal Reserve Board's own division of research and statistics.
My recollection is that the original invitation came both to the
reserve bank and to the Federal Reserve Board to be represented in
that conference, but of that detail I am uncertain. The Federal
Reserve Bank of New York indicated its opinion that it might be
well to be represented in that conference by Mr. Burgess, who is
primarily concerned with the statistical work of the bank, and I
think the thought here was that it would be well for the board to
have one of its representatives there so as to give our representation
a little broader base.
There was some discussion as to the propriety of it. I am obliged
to say again that I was opposed to it. I want to say, however, that
I think it is easy to exaggerate the importance of this conference.
These men were summoned there for the purpose of comparing the
statistical work and reporting services, what you might call the general information service, set up by these different banks. They have
all been very much interested in the character of the work done in
our Federal reserve system. That work goes far beyond anything
that any European bank has ever contemplated hitherto. I think
they feel in part that the rather happy results that they think we
have achieved here in recent years may be largely traceable to the
intelligent guidance as to credit policy that we derived from this
statistical work, and it would appear that they are trying to take a
leaf out of our book.
The CHAIRMAN. Further indication of this close-working cooperation was indicated in press notices when I was in London in
December of the arrival in London of Walter Stewart, who was
formerly the economist of the Federal Reserve Board and who is
supposed to be there in some capacity, either representing the Federal reserve bank or collaborating with the Bank of England, and
another indication that Blackett, who had been in India, was to come
to New York as representing the Bank of England and collaborate
with the operations of the Federal reserve there—all indicating an
apparent plan of cooperation.
Doctor MILLER. A mental rapprochement, a sort of getting together of minds.
Mr. LETTS. What was the date of that conference?
Doctor MILLER. Which conference ?
Mr. LETTS. That conference you just spoke of.
Doctor MILLER. I think it was in April of this year, was it not,
Mr. Perry?
Mr. PERRY. April 7, I think.
Doctor MILLER. Just a month or so ago.
Let me say, because no one is more interested in promoting research
and a scientific basis for credit policy in the Federal reserve system



than I am, that you may be surprised when I say that I was not
favorably inclined toward this participation.
My knowledge of Europe and Europeans goes back to my student
days. There are apparently few Americans who make their first
acquaintance with Europe in their maturity who are practically well
equipped to deal with Europeans in any kind of conferences, and I
am only too well aware that a conference may nominally be for one
purpose and actually prepare the ground out of which quite a different crop will develop in the future.
I am inclined to think, to use Mark Twain's phrase, that we have
had a good many American "Innocents Abroad" since the war;
and when we go abroad I want to see the United States, particularly
the Federal reserve system, represented by men who know their way
around and who know what it is all about.
These are matters that touch the human equation, and out of them
very frequently come results such as are not in contemplation at the
So that, generally speaking, I want to know not merely what a
conference of this kind is called for but what is probably the main
motive behind it.
The CHAIRMAN. Who called this particular conference. Doctor
Doctor MILLER. My recollection is that the invitation was sent out
by the Bank of France, but I am not positive as to that.
Governor YOUNG. It was the League of Nations, Doctor.
Doctor MILLER. The League of Nations called it ?
Governor YOUNG. Yes; sent the invitation.
Doctor MILLER. Did the League of Nations itself send the invitations? I had forgotten that. Well, the situation is a little more
serious, then, than I thought. (Laughter.)
Yes, I do recall, and my recollection is that either something that
I read or something that occurred to me in some way caused me to tie
this conference in with the Genoa meeting of 1922 and the so-called
Genoa resolutions.
It comes back to me still more now. I recall a visit from one of
the directors of the Bank of England—I think it was Sir Otto Niemeyer. Do you recall when it was ?
Governor YOUNG. It was this spring.
Doctor MILLER. I think it was in the late winter, probably.
Governor YOUNG. I would say January or February.
Doctor MILLER. January or February of this year.
I remember that I picked up from conversation with him, not from
anything he specifically said, certain impressions that I formed of
what might be in his mind, and especially as he had been a rather conspicuous and enthusiastic figure in the financial work of the League
of Nations—to the effect that many were still in a frame of mind
abroad where they wanted to get back to the Genoa resolutions. That
led me to connect it up with this proposal for a statistical and
economic conference this spring under the auspices of the Bank of
France, and I drew the conclusion that we would better keep out of it.
We had nothing particular to gain, and probably nothing particular
to contribute of value to ourselves.




The CHAIRMAN. I would like to insert in the record here a statement appearing in the Journal of Commerce during the last few days,
which I have not a copy of but which I will give to the reporter, and
which is a press notice, apparently, of the meeting which was held
in Paris.
Doctor MILLER. When did you see this, this morning or yesterday ?
The CHAIRMAN. Just a few days ago.
(The article referred to is as follows:)

A plan for effective cooperation among central banks in exchanging information and developing adequate economic and financial statistics was effected at
the conference held in Paris in the latter part of April by the economists of
these institutions.
The heart of the plan adopted by the economists, who conferred together for
nearly two weeks, was the appointment in each central bank of an officer who
is to act as its liaison with other central banks. This man will be responsible
for prearranging and dispatching to each central bank the banking and other
financial statistics for his country which will be of aid to the other banks.
Arrangements were made also for adopting uniform standards and forms in
which the statistics are to be made available.
The second important feature of the plan involved the development of complete statistical departments in each central bank to be devoted to the gathering
of the data for the use of the bank and the other banks. In this direction the
American delegates are understood to have contributed a number of important
ideas. The Federal Reserve Bank of New York was represented by Randolph
W. Burgess, assistant Federal reserve agent, who is expected to be appointed
liaison officer for the bank in exchanging statistics with other banks. The
Federal Reserve Board was represented by E. A. Goldenweiser, director of the
division of analysis and statistics.
The eventual material result of the work of the conference is expected to be
a more adequate system of gathering statistics in each important European
country for use in guiding their monetary and credit policies. In the second
place, it is expected that an increasing amount of publicity for this data will be
secured in the future, so that eventually each important central bank may
publish in periodical form data similar to that appearing in our own Federal
Reserve Bulletin. At present such data is generally considered crucially confidential by most European central-banking institutions.
Most of the sessions of the central-bank economists were closed, but it is
known here that questions of policy were for the most part left alone, the discussion generally dealing with the gathering and presentation of data rather
than its ultimate interpretation. However, opportunity was presented for private discussion among a number of the delegates of all questions of a financial
nature bearing on the international situation, and the exchange of ideas which
took place is expected to further a cooperative policy among the central banks.
Following the conference the American delegates visited the central banks of
Germany and England, at which they were able to begin immediately a study of
the needs of these banks for data from this country as well as to aid in making
data that will hereafter be exchanged by these banks more uniform. Doctor
Burgess is expected back here by the end of the present week.
Doctor MILLER. Let me add what I think is of some importance,
perhaps, in connection with matters that will be covered in other
cases, and it has a bearing upon the major idea of this stabilization
If I were a proponent of this bill, if I were sold to it as a thing
that was economically feasible and administratively practicable, I
should be inclined to put it forward as a plan to establish Federal
reserve credit administration upon a scientific basis. Administra-



tively thereby, to my mind, hangs one of its greatest dangers, and it
connects up immediately with the matter that the chairman's questions have brought to our attention.
The more scientific you undertake to make Federal reserve administration, whether in the case of the Federal reserve banks or in the
case of the Federal Reserve Board, the more dependent you make the
men who are officially charged with the administration upon their
so-called expert advisers. The more you make them trust the findings, the views, the conclusions, and the judgment of others the less
they will use their own native judgment, however strong it may be.
And I could well believe, though I do not know that there is at
this moment the slightest basis, either in fact or in anyone's intention,
that if the wise men of the European banks- and by " wise " I mean
wise in the understanding of human nature—wanted by a subtle, not
easily detectable method, as it were, to capture the mind of the
Federal reserve system no matter method, perhaps no less objectionable method, and possibly in the long run no more effective method
could be found than by laying a foundation for some sort of a
rapprochement between the expert services of these various banks; in
brief, set up a sort of college of augers.
The CHAIRMAN. In other words, you are likening that to the present conference in Paris ?
Doctor MILLER. Yes. I am a great believer in experts when you
know how to use them, but you want to know pretty well who your
expert is and what your own capacity to maintain independence of
judgment in the presence of your expert. And that becomes particularly true when other experts are involved. It makes a great deal
of difference whose expert a particular expert is. And the expert,
so called, in these matters is most apt to be a man of scholastic training and scholastic habit, and as a rule the better he is as a scientist
the less aware he will be as a man of what is going on, what is
happening. So that you run into certain dangers.
My belief is that in these matters the less you frame yourself in
by constructing an elaborate paraphernalia of experts, the more
likely you are to be successful in what you do.
Mr. STRONG. Doctor Miller, I am rather at sea in what you are
getting at. Do you mean that the Federal Reserve Board does not
need any expert advice, or, if they receive it, are not able to digest
it independently and handle it properly; are liable to be misled ?
Doctor MILLER. I heartily believe we should have experts, but I
think you want to be very, very careful not to erect a Frankenstein.
Mr. STRONG. I S it not for the Federal Reserve Board to be very,
very careful ? Is not that the kind of men we have on the board,
that will be very careful ?
Doctor MILLER. I say that they should be, and therefore I am particularly concerned in connection with the chairman's inquiry that
there be a constant awareness of the dangers, and you are very
frequently caught before you know it unless you are very watchful.
Mr. STRONG. I would hate to have to write in this bill advice to the
Federal Reserve Board how to use their experts.
Doctor MILLER. N O ; but the more emphasis you put upon those
things, the more you push the board in directions, perhaps, in which
the board will go slowly, while it is free to use its own judgment,



instead of rapidly. For instance, to make the matter specific, right
in this publicity section of the bill, do you know what interpretation
I would put on it ?
Doctor MILLER. I

believe in publicity, but I think this particular
section is a vicious one, because I do not think it correctly visions
what would probably happen.
Let me read this section—
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

That is, affects the purpose as set forth in paragraph (h)—
such decision or action and reasons therefor—

Not the reasons therefor, but reasons therefor.
reasons ?—

What kind of

shall be thereafter published by the governor of the Federal Reserve Board
at such time, place, and in such detail.

Now, tie back the reasons—
as may be deemed by him to be most effective in furthering such purposes.

That is, reasons are to be given that will further the purposes of
this act.
Propaganda—the invasion of the hired sophist into the Federal
reserve system; that is what this means to me.
You will introduce into the Federal reserve system some men who
will give reasons, which reasons may or may not be the true ones for
the action taken. The test of their value is to be whether or not they
tie in with stabilizing industry, commerce, employment, the dollar, etc.
Now, I do not mean for one moment, Mr. Congressman, to imply
that that is what is in your mind. Somewhere I have heard or read
that the word " the " was stricken out here; for what reason I do
not know, but I should say right there that you have got an illustration, if this amendment were enacted into law, of what I conceive
to be already a danger that hangs around the Federal reserve system.
I used advisedly the expression, " the invasion of the hired sophist."
A man will be hired to state reasons. In this particular case he will
be hired to state reasons that will play up the idea of credit as a
factor in the stability of agriculture, commerce, employment, prices,
and so on.
Mr. BEEDY. I would like to ask right here if the word " the " was
in some draft and has been stricken out; and if so, by whom ?
Mr. STRONG. The amendments that I proposed in making my introductory remarks when these hearings started were amendments suggested to me by members of the Federal Reserve Board and officials
of the Federal reserve system at the time of my conference with
them; I do not remember the date, but it was the date that I made
my remarks upon the floor of the House. We had a two-hour conference in the morning and in the afternoon.
The CHAIRMAN. DO you mean this year ?
Mr. STRONG. Yes; and as a result of that conference the amendments were suggested which I suggested to the committee when the
hearings opened.



Mr. BEEDY. My question was whether the word " the " was in there
before " reasons," and has been stricken out, and, if so, by whom or
by whose suggestion.
Mr. STEVENSON. The bill that was introduced should be read and
he can refer to that and see if it was there.
Mr. STRONG. One suggestion was to strike out the word " all."
These were suggestions made at the conference with the board and
officers of the Federal reserve system, and, in paragraph (h), after
the word " system," add " in addition to the purposes expressed in
the title of the Federal reserve act of 1913," and strike out the word
" all " in that line.
Beginning at line 7, add " promote the," and change the word
" maintain " to " maintenance," and add the word " of," so that it will
read " promote the maintenance of a stable gold standard."
In line 9, after the word " stable," add the word " average," and in
line 8, after the word " of," add " average of."
Those amendments that I have just read were suggested at that
conference, and I would like to say that paragraph (h) is not in the
original language in which I prepared the bill. The purpose of
paragraph (h) was to meet a great deal of criticism that I have
found as to the need of publicity.
Doctor MILLER. YOU are thinking of (i) now?
Mr. STRONG. Oh, yes; the publicity section. I want to say that I
have put the publicity section in the bill because I found quite a general demand in the correspondence which I had, and which embraced hundreds of letters, for a publicity section. Various financiers
and men connected with banking said that they ought to know when
the Federal reserve system intended to change its policies and why.
I first wrote that into the bill. When I came into conference with
the officers of the Federal reserve system, with Governor Young,
himself, and other members of the board, they suggested that a publicity section should be in it but that it had to be written very carefully; that if the reason for a change in policy were given out at
some crucial moment in the management of the Federal reserve system, more harm might be done than good and it should be written
very carefully, so I tried to provide that the publicity should be given
after the change of policy was taken and at such time and place as the
governor of the Federal Reserve Board thought best.
Mr. BEEDY. And, instead of " the " reasons
Mr. STRONG. I took out the word " the " and put in " reasons therefor." The reason I used the plural was because it was suggested
that the members of the Federal Reserve Board might not agree
and one might have one reason for changing a policy and another one
another reason, and that therefore all the reasons might best be given
by the governor when he goes at the publicity end of it. So this
section was written to meet the views of those who consulted with
me on the Federal Reserve Board, and I certainly did my best to get
all the cooperation from the board I could.
Mr. BEEDY. What I want to say is not any reflection upon you, but
I think this is the most astounding disclosure that has yet been made,
that you have attempted to put in here a publicity section, the aim
and purpose of which originally, of course, was to give to the public
honest information on any changes of policy by the board, and that



you have been advised by somebody in the board to so modify its
original wording as now to give us a section which would hoodwink
the public by furnishing it some kinds of reasons which would conform to the purpose of this bill to withhold from the public the
reasons which prompted the change in policy.
Mr. STRONG. I think, Brother Beedy, that that is rather unfair,
because I am certain that that was not the case.
Mr. BEEDY. I do not think that is unfair at all. I submit it to
the committee that that is the fact which now is presented to this
Mr. STRONG. Before you submit it to them, let us have the facts.
Mr. STEVENSON. Should not the word " all" take the place of
"the" ?
Mr. BEEDY. All the reasons.
Mr. STRONG. I am perfectly willing. I expected that the committee in executive session would adopt the amendments that they
desired, but I think that I ought to give the facts, so that you will
not suspect the motives. I am positive that the members of the
Federal reserve system who suggested these changes were not inclined
to hoodwink the public. They simply said that if at some period in
the management of the Federal reserve system they decided that it
was necessary to change the policy, and printed the reasons at that
time, it might do more harm than good. Then they said that the
reasons should be given thereafter; and I said this: That if, after they
changed their policy, they then gave the reasons why they did it, when
next they changed the policy the public would feel that they probably
had some good reason and that the public would be advised at the
proper time and the board would have in a greater degree the confidence of the public. Then the suggestion was made with respect
to the word " the." I had it " the reason," and they said, " Well,
then, the members of the Federal reserve system might not agree;
they might have different reasons. Would it not be best to make all
the reasons public ? "
So I took out the word " the " and made the word " reason " plural,
so that it would read " and reasons therefor," not meaning to camouflage the public, but to give them the reasons that prompted the Federal Reserve Board to change the policy.
Mr. BEEDY. "All the reasons " would make it perfectly clear.
Mr. STRONG. I think that would be a very proper amendment, and
if no proper reason is shown why it should not be, it ought to be
Mr. LETTS. Whether or not you make that change depends on
what you are trying to do.
Mr. STRONG. I am trying to advise the public.
Mr. LETTS. What you are trying to do is in the language itself.
I t is very clearly stated that it shall be discretionary, deemed by
him to be most effective in furthering such purposes.
Mr. BEEDY. The whole wording leaves
Mr. LETTS (interposing). It sounds like propaganda.
Mr. BEEDY. The whole wording of this section leaves it to the party
intrusted with carrying it out to frame it up just as he thinks it
ought to be framed.
Mr. STRONG. That was not the intention.



Mr. STEAGALL. I do not think Brother Strong added much to it
when he changed that language.
Mr. STRONG. My purpose was to advise the public, in due and
proper time, so as not to hurt the policy that they were trying to promote for reasons that caused the Federal Reserve Board to change the
policy. I think the public has a right to know that. If you gentlemen have any language that will better express the idea, let us have
it, but this language has been suggested to me by men whom I
believe want to operate the Federal reserve system in the best interests
of the country.
Mr. LETTS. This language certainly leaves it in the discretion of the
Governor of the Federal Reserve Board to determine what, in his
mind, will be the most effective way of giving this information to
the public.
Mr. STEVENSON. TO further the purposes of the act.
Mr. BLACK. It seems that it is sufficient for the Federal Reserve
Board to give out a statement of what it has done. You take a Member of Congress, for example. We are called upon to vote upon extremely important legislation from time to time, and suppose you
would compel us to state in the Congressional Record the reasons
why we cast our vote as we did. The responsibility is ours; we have
to stand by it.
Mr. STRONG. We do put in the Record the reasons why we pass the
Mr. BLACK. We are not compelled to state them at length in the
Record; we may or we may not.
Mr. STRONG. Every committee that makes a report to Congress on
a bill files a report saying why the legislation is necessary.
Mr. STEAGALL. YOU do not require them to give the reasons; you
tell the board to give reasons at such time and place and in such detail
as the governor may deem most effective in furthering such purposes.
When you get through with all that range of construction, there are
not enough lawyers in Washington to tell what he is required to do,
whether you add the " the " in there or " all," or leave it just as it is.
Mr. STRONG. I think I have stated to this committee repeatedly
that in drawing this bill I tried to meet the objections of the Federal
Reserve Board and of the officers of the Federal reserve system. I
anticipate that when we get into executive session we will probably
change it after we have had these hearings in such a way as to do
the things that we determine is necessary to be done after a study of
the question.
The CHAIRMAN. YOU have evidence before the committee to the
effect that the board is opposed to this amendment.
Mr. STRONG. Certainly.
The CHAIRMAN. YOU are not adopting their suggestion here?
Mr. STRONG. After I met all their objections, I find that they come
in here and are opposed to it. That is one of the wonders
Mr. STEAGALL. I do not find any fault with you; and I think
myself that Brother Beedy is a little bit hard on you to say that
that would hoodwink anybody, because this thing did not mean
anything before that.
Mr. BEEDY. I suggest that we go on with the hearings. I was
only going to say, for one, that when we go into executive session I
will never vote to report this section out.



Mr. STRONG. I think I will join you.
Mr. BEEDY. My friend Strong has put something in here that will
ruin the bill. Of course, the word " all" is absolutely necessary. If
you say " the reasons," that will mean all the reasons.
Mr. LETTS. If we have the information, it ought to be given at
once and not at such time and place and in such detail as the governor
of the Federal Reserve Board may think proper.
Mr. STRONG. We will try to fix that up after we have had these
The CHAIRMAN. Doctor Miller, if you can get your thoughts together, we will be glad to hear you some more.
Doctor MILLER. I think that the problem raised by this paragraph
(i), as to what can be done through legislation to promote a more
definitely official and organized publicity in connection with the important decisions of the Federal reserve system is one that is most
worth the attention of the committee in connection with this bill.
Mr. STRONG. Could I suggest, Doctor, along that line, that you
suggest to us what language
Doctor MILLER (interposing). I will do that presently, but I want
to state the problem before I undertake to offer a solution, because
it is by no means a simple problem. The pros and cons are pretty
closely balanced.
When I was before this committee two years ago my recollection
is that the chairman of the committee asked me some questions along
this line. I believe at that time I stated that it would be in my
judgment inadvisable to require a published official statement in
connection with the important actions or decisions taken by the
Federal Reserve Board. That was my judgment
Mr. STRONG. I think we ought to have the attention of the members
of the committee. It is pretty hard for a witness to testify under
these circumstances.
Mr. STEAGALL. We were discussing publicity on the side.
Mr. STRONG. The doctor is trying to get your attention.
Mr. STEAGALL. He has already had mine.
Doctor MILLER. That was my judgment at the time. It did not
represent a deliberate opinion upon a question that I had had an
opportunity to turn over in my mind, and, as I recall, the chief reason I gave at that time was this, and it still constitutes one of the
main difficulties, to my mind, in any publicity requirement in the
Federal reserve system.
It is the simple fact that, I think, we have all experienced, that a
man may have very excellent judgment and yet have no skill or
capacity in the statement of reasons for his conclusion or judgment.
I am not a lawyer, but I did study jurisprudence at one time, and
there are lawyers here who will possibly recall that it has been said
of some of the greatest of the chief justices of England that they were
great justices but very poor in giving the reasons or grounds for their
Now, if that be true in the case of the law, where the jurist is
a man who is highly trained for the exercise of his professional
duties, it is likely to be very much truer in the case of a board the
membership of which is chosen haphazardly, from here and there,
and from no profession which presumably has given him skill in



understanding his own thought processes or skill in stating the true
reasons, the actual reasons, that have led him to a conclusion.
The CHAIRMAN. IS not this a fact, also, if you will pardon an
interruption there, that when statements like that are issued, editorial writers, financial writers, will draw different conclusions from
the same statement ?
Doctor MILLER. They may.
The CHAIRMAN. And, by interpreting those statements, they try
to support their own views.
Doctor MILLER. That is true.
Mr. STEAGALL. It is also true that in the expression of reasons
you would fall somewhat in the hands of your experts again.
Doctor MILLER. May I go on and finish this statement? I am
analyzing this thing and trying to show what there is in it in the
way of good and why I have, on the whole, reached the conclusion
that we would better write into the Federal reserve act a publicity
Now, I would say as a general proposition—and I am a man of
years; I have had a great variety of human contacts, quite a variety
of experience—that the rarest and the most difficult thing in the
world to get is reasoned action. More frequently what is called
" reasoned action " is action with the invention of reasons afterwards
for public consumption, and it is precisely that sort of thing I have
in mind when I say I am anxious to protect the Federal reserve
from the invasion of the hired sophist, the man who is hired to dress
up the action of the Federal Reserve Board or system for public
That constitutes a very real danger. Your sophist may be the
man who, by reason of the fact that reasons have got to be given,
will eventually capture the mind of the Federal Reserve Board, not
with any intention on his part or because of any weakness on their
part, but because the necessities of the situation are such that something has got to be said.
I repeat that it does not follow that a man's judgment is poor
because he can not give reasons.
On the other hand
Mr. STRONG. Doctor
Doctor MILLER. DO not stop me from agreeing with you. I am
just about to slide across the line into your territory.
Mr. STRONG. All right; come on over.
Doctor MILLER. On the other hand, I think what Mr. Strong has
said, to the effect that there is a constant and a rather growing and
insistent demand for information on the part of the public, on the
part of the business public, and on the part of the banking public, that
in some instances there is a feeling that the action of the Federal
reserve system in important matter of credit policy has an arbitrary
character about it, because the rationale of its action is not clear.
That I think could be said, and has been said, more particularly with
respect to open-market operations, which are of a somewhat different
character in their manifestation, from a change in the discount rate.
That is an overt act. When we raise or lower the rate we do it
openly. Everybody can see it, even though we do not tell the reasons
for it. But the open-market operation by comparison is subtle,
it is invisible, and it may not be detected by many that anything



is going on until it has been going on for some time. It therefore
savors of a covert operation concerning which there is some feeling
of dissatisfaction, particularly the feeling that it is arbitrary in
Now, I am inclined to think a public administrative body like
the Federal Reserve Board set up in connection with the operation
of these banks, more particularly, as I conceive it, for the purpose
of giving to the general public assurance that the action of these
banks is public in character (by the requirement that important
actions shall be submitted to the Federal Reserve Board and have
the approval of that board before they become effective), must take
the public into its confidence with regard to the basis of its policies.
My belief, however slowly I have come to this conclusion, is that
the action of a body like the Federal Reserve Board, in order to
be good action, has got to be action which is accompanied by good
and sufficient reasons. In brief, I am rather inclined, as I look
back over the experience of the last four or five years, to believe
that if the Federal Reserve Board had been under the legal obligation to give a statement of the reasons for its action in important
matters of credit policy, we probably would have had better action,
because the board, I think, in that case would have been more deliberate and might not in all cases have taken the action it did, because
it would perhaps have reached the conclusion that it could not, after
all, give good and sufficient reasons for such action.
Mr. STRONG. Well
Doctor MILLER. Let me go on.
Mr. STRONG. All right; go on.
Doctor MILLER. I also want to say this, that even though this
paragraph were rewritten (and I will suggest a revision of it presently), I anticipate that we might have considerable difficulty for a
period of perhaps 1, 2, or 3 years. I do not for one moment deceive
myself as to the difficulty the board would find in pooling its reasons,
as it were, and drawing a conclusion by majority vote as to the reasons which tied in with action taken. But I am convinced, after
mature reflection on the matter, that in the long run the balance of
benefits will far outweigh the difficulties and the objections to where a
board has got to give reasons for its actions; its action in order to
be good public action, has got to be action based on reasons that in
the long run and on the whole the public will approve as good reasons. The educative effect on the board itself is not the least of the
important effects that would result from it. I believe also, especially
if the same requirement were made of the banks, that such a requirement would be bound in time to raise the standard of qualification for
service in the Federal reserve system.
In brief, we have got to have in the banks and in the board—let us
say in the Federal reserve system at large—men of the mental stature
requisite to state the reasons for their actions. In stating the reasons
they will gradually develop not only in the Federal reserve system
but outside, what might be called the rationale of Federal reserve
policy. It will, therefore, give one of the best guarantees that the
development of the banks and Federal reserve policy will be orderly
and progressive, that the system will devise, as it has already in part,



a method of procedure that in the course of a few years will become
more definitely recognized as such; that will, Mr. Strong, I venture
to say, go so far beyond what you have in contemplation here in paragraph (h) that you yourself will accept it as, on the whole, a good
solution of those problems in Federal reserve administration that you
have so much at heart.
Mr. STEAGALL. If this law should pass and the Federal Reserve
Board should find itself in difficulty in assigning reasons for any
action taken, I want to suggest that they might apply to the gentlemen before the committee, with a reasonable hope of success.
Mr. STRONG. May I ask you one or two questions ? Just to return
to plain, ordinary English language, do you think that the public is
entitled to know why the Federal Reserve Board changed its policy
with reference to the discount rate or open-market operations ?
Doctor MILLER. I do certainly as to the former. As to the latter, I
might want to make a reservation.
Mr. STRONG. I do not just get you. Do you or do you not think
that the members of the Federal Reserve Board have the intelligence
to give the reasons that prompted them in their action ?
Doctor MILLER. I have tried to state what I conceive to be the
Mr. STRONG. I see.
Doctor MILLER. What I think
Mr. STRONG. I have proceeded

would eventually come about.
upon the idea that we had members
on the Federal Reserve Board that possessed that intelligence.
Doctor MILLER. It is not a question of whether they have or have
not. You are asking for one of the most difficult things you can ask
of any administrative body.
Mr. BEEDY. I do not think anything the doctor said reflects upon
the intelligence of the present board.
Mr. STRONG. I wanted to get his opinion.
Doctor MILLER. I am giving you my opinion and my idea as to
what ought to be done to bring this paragraph into satisfactory
shape. I am trying to tell you that I am for publicity, but I want it
to be real publicity. I do not want anything factious and sophistical
about it, and so I would revise it somewhat as follows:
When any position is taken by the Federal Reserve Board—

There is no such entity as the Federal reserve system; that is
merely a convenient administrative phrase. Change it to read:
Whenever any position is taken by the Federal Reserve Board as to changes
in discount rates—

I want to reserve for further reflection whether or not I would include here open-market operations, and therefore you will kindly regard this as a tentative proposal—do I make myself clear?
Mr. BEEDY. Yes; but surely, from what you have just said, one
would draw the conclusion that the prompt necessity was for publicity
as to reasons in the open-market policy.
Doctor MILLER. I will come to that, and then recall an answer I
made to a question the other day. I think where you are dealing with
a piece of machinery which is a part of a whole, you can hardly deal
with one part without knowledge of what you are going to do with



the rest, so I will hang open-market operations up for the time being.
But certainly as to discount rates—
Such decision and action, together with the reasons therefor, shall be published by the governor of the Federal Reserve Board.

What does that mean?
Mr. STRONG. Would you mean immediately?
Doctor MILLER. When the action is published, the reasons should
be given immediately. Unless that view is entertained, I should say
have no publicity. Do not have canned publicity, do not have manufactured publicity. The only thing to my mind that is vital, if you
are going to have publicity, is that at the time action is taken the reasons should be stated.
In practice, how might this work out, particularly if the law carried
with it an amendment of similar import requiring the board of directors of the Federal reserve banks, when they take action on the discount rate, also to state their reasons; or, even if in the absence of
such a specific amendment, the board whenever it had before it questions of discount rate would administratively call upon the Federal
reserve banks, when they established discount rates, also to give a
statement of their reasons.
Informally the governor of the board has already done that. I do
not think I am stating anything that is improper. He has asked,
I think very properly and very profitably, of the chairman of the
Federal reserve bank of this place or that place, where they have
taken action to change their rate, for a statement of reasons, and he
has developed some very interesting statements.
Now, I can conceive that the board might very well approve of an
increase in the rate in this bank or decrease in that bank, and adopt
as its reasons the reasons stated by that bank when it transmitted its
action. If it did not adopt those reasons, then the board would have,
as it were, to find its own separate reasons and state them, provided
it took action.
That is the way that I conceive the thing might operate. As a
matter of opinion, I think that if last summer, when the Federal
reserve banks began reducing their rates to31/2per cent, a statement
of reasons from the point of view of the board and the banks that
took that action, good reasons, had been given—and the banks had
acted on what they believed to be good, sufficient, convincing reasons—the whole situation now might be very much better than it is.
I think the public would have been in a better position to cooperate
with the Federal reserve system and the other banks.
The reasons in this instance, as frequently happens in such matters, began to filter out very slowly to this group and that group, and
it is not until very recently that they had percolated through to
general knowledge. In fact, I have been asked within the last few
weeks by men who I supposed were in a position to pick up these
things promptly what was the real reason that led the Federal
reserve system to reduce discount rates last summer.
It is only less than a month ago that a very large money dealer in
the New York market asked me if it was really true that it was
reduced in the interest of the international situation. I told him it
was. He said, " I think if the market had generally known that it
would not have been quite so quick in going in to pick up the cheap
and easy money that was created as a part of that policy."



So I am inclined to think that if a body like the Federal Reserve
Board acts on good reasons? which are stated it is likely to elicit the
cooperation of the community or of sections of it in the accomplishment of its purposes; or, at any rate, if there is any interference with
the successful development and accomplishment of its purposes it is
in better position at least, I think, if it suspend the policy or is
forced to change its policy.
I think that one of the difficulties the Federal reserve system is in at
the present time—and there are evidences of restiveness right up here
in the Capitol and in the press—is that a confusion of mind exists
with reference to what is going on in the Federal reserve system,
and has been during the last 8 or 10 months. Anyone who is a student of these matters, or who is enough interested in them to take the
time to look up the public records of the Federal Reserve Board, can
find the facts. Pretty much if not most of them, in one way or
another or at one time or another, have or will come out, partly in the
Federal Reserve Bulletin, which is the monthly organ of the Federal
Reserve Board, partly in the board's annual report and partly in the
occasional weekly statements or special statements that may for one
reason or another be issued.
But I am of the opinion that that is not sufficient, from the very
fact that there is so much guessing, so much questioning as to what
all these recent changes have been about.
I had a visit yesterday afternoon from a New York banker who
said, " Why is there so much mystery about gold movements ? "
I said, " What mystery do you refer to? "
" Well," he said, " we get figures of shipments, but there seems to
be a great mystery regarding the earmarking of gold. Why not
publish the earmarked gold just as you do the gold that actually
leaves the country ? "
Here is a man of great intelligence, occupying one of the foremost
positions in the banking community of New York City, and he wants
publicity with respect to that subject.
I told him I thought that if he followed the published documents
of the Federal Reserve Bank of New York and of the Federal Reserve Board—to wit, its bulletin—he would find this out.
" Well," he said, " I find it out after the event. Why can not a
statement be made at the time it takes place? "
He said, " I happen to know of two considerable earmarkings made
in New York in the last week." One of the particular items he referred to happened to be new to me. I t was a bit of last-minute
His opinion was that that ought to be known, and if it were known
he thought we would get better cooperation, more intelligent cooperation, at any rate.
I am inclined to think that, with all the difficulties that the administration of a well-drawn publicity section would undoubtedly bring
with it, on balance the benefits would considerably outweigh the
The CHAIRMAN. AS a matter of fact, prognosticators and economists who study the trends of the times are embarrassed now because
of lack of information as to the elements entering into the situation
to change the normal flow of events.



Doctor MILLER. Yes; and I would not be too much influenced by
them. The prognosticators, or certain classes of them, are of the
opinion that the Federal reserve, so to speak, makes the financial and
economic weather. They are illusionists.
(At this point, following an informal discussion as to what further
hearings will be had on the bill under consideration, the committee'
adjourned, to meet Thursday, May 10, 1928, at 10.30 o'clock a. m.,
to consider another matter.)


Tuesday, May 15, 1928.
The committee resumed hearings on H. R. 11806 at 10.30 o'clock
a. m., Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order.
This is a continuance of the hearings on the Strong stabilization
bill. Dr. Adolph C. Miller, a member of the Federal Reserve Board,
is here.
Doctor, have you any further statement that you want to make this
morning ?
Doctor MILLER. Mr. Strong and I have been having a sort of an
informal conference this morning, and some allusion having been
made to the paragraph of his bill which provides for investigations,
perhaps I should say something about that.
With reference to the so-called section 28A of H. R. 11806, which
provides for studies and investigations of various subjects related to
the operation of the Federal reserve system, I will say in a general
way that, of course, I am thoroughly sympathetic with work of that
character. A great deal is now being done by the Federal reserve in
the field of the economics of credit, banking, exchange, prices, production, trade, and related matters.
The criticism I would make of this paragraph as a whole is that
it ties in the investigation authorized a little too closely with the
specific " stabilization " purposes of the bill. With that in mind, I
would suggest that the section be redrafted as follows:
" The Federal Reserve Board is hereby directed "—I think you should keep the responsibility definitely in the hands of
the board and not place it with the banks. There will be plenty of
work done by the banks even if the instruction goes to the board.
I would suggest the omission of the word " authorized," because the
board is already within its authority in undertaking work of this
character and its use may raise some question as to whether the board
is on solid ground in making studies not specifically authorized by
congressional statute.
Mr. STRONG. I t is a matter of the use of funds.
Doctor MILLER. Yes.
Mr. STRONG. That is the reason the word " authorized " was used.



Doctor MILLER. We are now doing a great deal under the authority
we have assumed we have under the terms of the Federal reserve act
as it is.
The CHAIRMAN. I S there any duplication of work that the board is
doing, that is being done by the several banks ?
Doctor MILLER. I think it would be better to question the Director
of Research on that matter. I would say some duplication, yes; but
not of a wasteful kind. Sometimes questions of this kind can be
profitably approached by two different groups of people, even though
nominally the problem is the same. Their approach may be different
and results also be different.
I would suggest that the section be amended to read as follows:
The Federal Reserve Board is directed to make and to continue investigations
and studies of the following subjects.

I would cut out:
For the guidance of the system's policies, at least to the extent and in the
manner prescribed in paragraphs 1, 2, 3, 4, and 5 of this section, and to such
further extent as they may deem to be desirable.

I would then leave paragraph 1 of this section stand as it is.
I think I would be content with paragraph 2.
Paragraphs 3, 4, and 5, in my judgment, would better be omitted.
Mr. STRONG. Why?
Doctor MILLER. I do not think that they are particularly germane
to the operation of the Federal reserve system, and I do not think
that the subjects on the whole are such as can be very well handled by
the kind of investigating organization the Federal reserve has or
should set up. They are a little bit vague and far-reaching.
Mr. STRONG. DO you not think some investigation and study might
very profitably be made of index numbers ?
Doctor MILLER. That will be done and is being done anyhow.
Mr. STRONG. But we are drawing a bill here directing the study
Doctor MILLER (interposing). You want to draw your bill to accomplish something not now being accomplished, or to get a better
Mr. STRONG. But you do not always know just what you are working toward, you know. That is the reason I put it in the bill. It
was suggested to me that no index number was perfect, of course, and
at times a lot of information is necessary, and I yielded to the suggestion of including in this investigation a study of index numbers.
Doctor MILLER. Yes. As I have said, studies of this kind are constantly being made.
You have in your paragraph 5 one or two additional clauses which
give, as it were, a purpose or slant to these price investigations. Let
me read the paragraph.
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 policies.

Mr. STRONG. Having laid down that this policy shall be toward
the stabilization of the purchasing power of the dollar, then what
can be attained in price-index numbers that would be helpful ?



Doctor MILLER. I am proposing this because, as you know, perhaps
better than anybody around the table here (and as has been brought
out in previous hearings), that my whole attitude toward the bill
is that it would be regrettable if paragraph (h) were enacted. That
paragraph contemplates a legislative formulation of the objectives
toward which Federal reserve policy should work. I am now trying
to see what parts I would retain of your bill if those parts of it
that I have objected to were omitted.
Mr. STRONG. Let me ask you a very frank question. Congress
having given these tremendous powers to the Federal Reserve Board
undirected, do you not think that the Congress, on behalf of the
people, ought to lay down a policy toward which these powers shall
be used ?
Doctor MILLER. Well, now, I am going to answer just as candidly
as I can.
I would say, first, that the powers of the Federal reserve system
at the present time, as defined in the Federal reserve act, are not
without legislative indication of the line or direction in which they
are to be exercised. I regard the statement which occurs in section
14 of the Federal reserve act in connection with the board's power to
determine discount rates, to the effect that such " rates shall be fixed
with a view of accommodating commerce and business," as giving
about as good an indication of the whole complex of considerations
and factors to be reckoned with by the Federal reserve system in
charting its credit policy as you can get. The word " accommodation " is one that can be weighted with as big a meaning as the men
who are chosen to administer the act are capable of conceiving.
Mr. STRONG. We might have a Federal Reserve Board that, when
you had a period of inflation, the bankers would come to and say,
" The law says that you shall accommodate business and commerce.
We want more money, even though we are using it to inflate, and we
have got the eligible paper. Now, comply with the law and accommodate us."
You might have a board which would say, " That is the law; go
ahead with the inflation."
Doctor MILLER. YOU might equally have a board or banks that,
when the first insidious indications of inflationary developments
were in progress, would say that the maintenance of unduly low
discount rates in situations of that kind is not the " accommodation "
of business within the meaning of the act, no matter what some
bankers or business men might say or wish to the contrary, and
that, therefore, under the charter of the authority given it by the
Federal reserve act would go ahead and put some restraint upon
the flow of credit from the Federal reserve banks so as to insure that
this credit actually accommodated business instead of merely accommodating somebody's wishes.
Mr. STRONG. If you direct your judgment in the right direction,
well and good.
Doctor MILLER. I would say that some of the things you have in
mind actually are in the minds of the Federal reserve system as an
appropriate part of the content of the word used in the existing
statute, to wit, " accommodation." I would say that you do not
accommodate commerce and business when you see banking develop-



ments in process that are going to create economic instability, if
Federal reserve action can prevent their development.
Mr. STRONG. But I do not want to accommodate them if that is
leading up toward inflation that will bring trouble later on.
Doctor MILLER. Yes; and by the same token, I think I myself
would be inclined to say that if the Federal reserve system, by an
error of judgment, by inadvertence or even negligence, if you please,
did not quickly enough detect what was in process in credit and business development to chart its course correctly and in consequence a
situation of the kind that we roughly call inflation developed, I
would say it would then not be true accommodation if, when it woke
up to the realities of the situation later, it suddenly tried to undo its
error by pursuing a policy of violent restriction of credit. Accommodation, to my mind, means that credit policy must at all times and in
all circumstances be adjusted to facts and conditions as they happen
to be.
Mr. STRONG. That is what I want; that is this bill.
Doctor MILLER. Well, it is in the act now, I should say. It is, however, a matter that I recognize may be debatable. I referred to it
only because I wanted to make clear why I was proposing certain
omissions in your section 28 here with regard to investigations.
To my mind there is a great deal that can be done in the way of
investigation that will in time enable us to know more than anybody
knows at the present time as to just what is practicable and not
practicable in the fields of, broadly speaking, central and reserve
bank policy, in relation to prices, industry, employment, and so
forth. We need to know a great deal more in my judgment than we
do now before we can improve upon the present guiding principle
contained in the Federal reserve act.
I would like to see retained in an amendment so much of a " direction" to make investigations as would justify the Federal reserve in
expending the money necessary to provide an ample foundation.
Mr. STRONG. Just one suggestion in defense of paragraph (5) on
page 4, and then I will not bother you with further questions or
interruptions. If the policy of the stabilization of the purchasing
power of money is to be the goal toward which the Federal reserve
system is to be directed in the use of its powers, then the system of the
measurement of the purchasing power of money is one of the questions to be studied.
Doctor MILLER. Certainly.
Mr. STRONG. And the measurement of the purchasing power of
money is that which the money will buy in commodities in general,
meaning index numbers, and it has been pointed out to me that there
is no perfect index number and they do not know at all times what
is best to use. Therefore, I put in the bill a direction for the study
of existing and proposed index numbers; that is all.
Doctor MILLER. I would see no objection whatever to taking out
the part of paragraph (5) reading—
proposed index numbers of prices or other measures of the purchasing power of
and putting it in as an additional item in paragraph (1). To my
mind, it is already covered in item (c) of paragraph (1), which




speaks of the general level of commodity prices. You can not have
a study of the general level of commodity prices without going into
the whole matter of index-number devices. That is the problem—
how to get at the general level of prices, what is the most competent
form of index.
However, I merely mention this, Mr. Congressman, to indicate that
I am thoroughly sympathetic with the enlargement of the investigative work of the Federal Reserve Board, and would only add the
suggestion that in anything that might be adopted by the committee
those phrases and clauses that seem to tie up the investigation with
the particular purpose of your proposed amendment be omitted so
that it may commend itself to those who are not yet sold to the idea
of using credit and monetary policy for the purposes of stabilizing,
etc. I would like to see more research work done, even if your general amendment is not adopted. I think the matter might best be
covered not by an amendment to the Federal reserve act but by a
joint resolution of Congress specifically directing the Federal Reserve
Board with regard to such work.
Mr. LUCE. All of them, Doctor?
Doctor MILLER. NO. I would say paragraphs (1) and (2), with
the inclusion in paragraph (1) of the item mentioned in paragraph
(5), and with the inclusion of a further item, say, (f), in paragraph
(1), reading as follows—
and of existing or proposed index numbers of prices or other measures of the
purchasing power of money.

That is now a part of paragraph (5).
Mr. LUCE. I would like to discuss this with you a little, if I may.
These three paragraphs interest me more than anything else in the
bill. I have, for a score of years, been convinced that the subject
matter of those three paragraphs is the most important consideration
to which the Congress may address itself. I think it has more to do
with the happiness and prosperity of mankind than any other
subject before Congress. It faces us practically at every turn.
Just a trivial illustration. I came down this morning in the street
car. In a seat adjoining was a good Samaritan who was telling a
stranger in town about all the wonderful things along Pennsylvania
Avenue, and we came to the Southern Railway Building, and he said,
if I remember his figures correctly, that before the war this could
have been bought for $1,200,000 and is now going to cost over
He ignored the fact entirely of the change in the purchasing power
of money, that that of itself would have changed that $1,200,000 to
$1,800,000. That is only a side light.
A more practical thing, the Welch bill, which occupies the columns
of the Washington papers at the moment, has that factor in it, that
changes the salaries to correspond with the changes in the value of
the purchasing power of money, and that is the most important factor
in it, and yet it is being wholly ignored in the considerations before
Congress and in the newspapers.
Our calendars are full of salary bills in which this is an important
factor. Furthermore, the economic literature of the day attaches, if
my judgment is correct, more importance to the problem here involved
than to any other now confronting the world.



Within 48 hours I have read what Doctor Cassel, I think it was,
has said about his expectations as to the failure of gold to meet the
needs of the world inside of 20 years, the diminishing supply of gold
and the necessity of making new arrangements to meet the situation
that will confront us if nothing is done in the way of preparing for
a managed currency.
Now, when the economists seems to think that this is the most important problem now facing mankind, and when in our daily work it
is a constant factor, are we not justified, some of us, in the hope that
some agency of the Government may be directed to compile the
statistical data necessary for wise legislation ?
You may, in reply, if I may anticipate what you would say—you
may think that the Federal Reserve Board is not the agency to do it,
but where would we turn for this except to the chief financial agency
of the Government ?
The Bureau of Labor Statistics has been doing this thing after a
fashion for many years, but its figures are not those of recognized—
I will not say experts, because I do not want to cast any slur upon
the bureau, but I think we all take the figures we find in the reports
of the labor statistics with a grain of salt, with some uncertainty as
to whether they are thorough and adequate. I know that their figures about unemployment, printed from month to month, are greatly
at variance with those printed in the current papers, the reports of
the American Federation of Labor, etc., and I have my doubts
whether the Bureau of Labor Statistics is the best qualified agency
to compile this all-important information.
I can not follow you, Doctor, in the suggestion that there is anything dangerous in acquiring knowledge.
Doctor MILLER. There is no objection from my point of view to
acquiring knowledge. On the contrary, I think the more knowledge
we have, if it is actual knowledge and is pertinent to the problems
the Federal Reserve Board has to deal with, the better off we shall be.
My objection to certain of these paragraphs, e. g., to this paragraph 3, is that you are dealing with matters that are physical in
substance; any conclusive as to their future must be largely speculative or, if you please, even metaphysical.
For instance, here is one of the things that the Federal Reserve
Board would be directed to undertake—
The study of the effect upon the purchasing power of the dollar or changes in
the supply of and demand for gold, either actual or prospective.

I have the greatest respect for the eminent economist whose name
you just mentioned, Prof. Gustav Cassel. He may be right in
his forecast of a scarcity of gold in the future, say 10 years from
now, in connection with the growing demand for gold, both for
monetary and nonmonetary use. He warns against threatened deflation under the gold standard.
There is no method by which the Federal Reserve Board, no matter
how competent the men grouped together into an organization far
the study of the future effects of the gold standard could resolve
that doubt.
An eminent South African professor, Robert Lehfeldt, who died
six or eight months ago and who lived close to the mines, a very
eminent scholar, takes direct issue with Professor Cassel's forecast



and in a very elaborate study of the subject, buttressed at every point
by an array of facts, has reached the conclusion that the thing that
we need to protect ourselves against by central banking policy in the
future is gold inflation. The thing that he fears is that under a
gold standard, not tempered, we will say, by discretionary management, we are more likely to have an inflation than a deflation.
These are things which relate to the future. No body of men can
be clairvoyant enough, even though it has an official mandate to go
ahead and equip itsef[itself]for the undertaking, to say what is going to
Now, let me follow it up, if I may, Mr. Congressman.
When one's mind gets to working with intangibles it may reach a
point where it feels that it can perhaps resolve the uncertainties.
One may say that the mass of evidence points to the almost certain
scarcity of gold in the future. That point reached, it is very difficult
to dissociate the policy compartment of one's mind, so to speak, from
what may in fact be little more than a guess.
Competent administrative judgment has got to be based upon an
appraisement of facts that are determinable and an approximation
of facts more or less conjectural. If, for instance, I believed at this
moment, if I had an active conviction, that the menace that was
hanging over the world was a scarcity of gold, unquestionably that
conviction would influence my mind in the decisions I have to reach in
connection with Federal reserve policy. Similarly if I believed the
contrary. Frequently though a " fact " that is not capable of establishment by scientific process may give a sense of direction to the
mind which is more or less uncontrollable.
My thought about these matters relating to the future of gold, etc.,
is that we shall find out about them in the usual course, and we shall
probably find out soon enough. I am talking now when I say " we "
of the Federal reserve system and of the country and Congress, so
far as they are particularly interested in the way in which new problems as they arise are handled by the Federal reserve.
If there should be good reason for expecting a scarcity of gold in
the future, and therefore a slow, gradual, but nevertheless real and
injurious restriction of credit threatened in consequence, we shall not
only sense its approach but sense it, in my judgment, in time to take
such necessary moderating action as is practicable by Federal reserve
When I appeared before this committee, I think two years ago
this very time, shortly after the gold standard had been set in operation in Germany and in Great Britain, I felt a little apprehension
myself as to the possible effects the rapid restoration of the gold
standard in one country after another might have upon the adequacy
of the supply of gold in the future. But more particularly what I
was fearful of was that there might be an imaginary scarcity when
there was actually no real scarcity. My reason for that fear was that
suspicions of that kind had developed in the past, notably in the
decade from 1870 to 1880, when, somewhat as now, after, a period of
currency disorganization in a great many countries, they were moving rapidly toward either the adoption or the restoration of the gold
standard. There then developed for a period of years a real anxiety,
something that was called a " scare," as to whether there was going
to be enough gold to go around.



Mr. LUCE. But, Doctor, we would be derelict in our duty, it seems
to me, to pursue your policy of waiting. We owe in this country
nearly $20,000,000,000 of public debt. We are confronted at the door
with the issue of whether we shall retire the payment of that debt.
It is a vital political issue with us now, and involved in that issue is
the question whether it is better for us to hasten the payment of the
debt while the dollar is at its present level or retire the payment of
the debt when we may have to pay it, as we did after the Civil War,,
in two or three times the amount of the purchasing power of our
dollar to-day.
Now, that is only one of the various problems that the mind can
hardly grasp in the size of the figures that are involved in this problem here before us now of whether we are going to attempt to keep
the level of the purchasing power where it is.
Now, you suggest that there be a further accumulation of experience. It happens that last night I was reading Doctor Burgess's
book on the Federal reserve system. I had about one-third finished
it, but I had read enough to see that that book is just crammed with
the proofs that this system is now trying to read the future from the
past. Diagram after diagram—and here is one right before us—
is of no earthly value unless it is a basis for attempting to judge
what ought to be done in order that we may act intelligently, prudently, and wisely.
Now, for the life of me I can not understand why you demur at
getting more information to carry out the purpose which is now
one of the chief purposes of your work.
Doctor MILLER. I do not demur at getting more information. I
want just as much information as can be obtained, but there are
certain of these subjects upon which the information is not obtainable by investigation. Fortuitous circumstance may be the decisive
When one speaks about the actual present supply of gold, of
course that is a definite, ascertainable, statistical fact. That is just
production statistics published in the Federal Reserve Bulletin. That
is determinable, historic, fact. But when it comes to the prospective
supply, either for next year or 10 years hence, who knows ?
The CHAIRMAN. Doctor Burgess has said that in 10 years the natural growth of our credit requirements here will take up all the
gold we have in this country.
Doctor MILLER. That has been said.
The CHAIRMAN. I might also add that we have in these hearings
the statement of Doctor Lafelt, to whom Doctor Miller just referred;
and I would like also to state for the benefit of the committee that
Doctor Gustav Cassel, whom Mr. Luce referred to, will appear before
the committee on next Friday morning at 10.30. He has very kindly
consented to come before the committee and make a statement on this
very matter.
Mr. LUCE. YOU point out that Doctor Cassel and Mr. Lafelt are at
opposite extremes, and of course it is impossible for us to determine
with any accuracy which man is right, but does it follow that we
should make no attempt to determine and, if possible, adjust our
financial system in some way so that in either case disaster may not



Doctor MILLER. I can only repeat that whether the Congress
should enact a bill retaining this paragraph or not, the Federal
Reserve Board will keep on thinking about this problem, as it has
been doing without congressional instruction.
My objection to the bill is that the thinking of the board is made
official thinking and thinking upon which, if you please, by referring
t o section 28B, it is obliged to report its conclusions from time to
time and at least annually. The board would be obliged to report
annually whether it thought there is impending an actual scarcity
or a superfluity of gold. It would have to erect a conjecture into a
conclusion, the best presumption that could be made within the limits
of human fallibility as to what the future gold supply and gold
demand are going to be, and to tell it officially under this set of
provisions here.
Now, it is perfectly conceivable a very competent investigative
organization might be set up and carry on for the next 5 years which
would reach the conclusion that there is ground for apprehending
that within 10 years the gold supply of the world will fall short
of what is necessary to maintain, we will say, using Mr. Congressman Strong's favorite phrase, the price level upon a stable basis.
Within two or three years after that, with a change in the organization, and so forth, it might be found that an equally competent
group of men would come to the conclusion that there is no basis for
It might easily turn out that the board confronted at that juncture
with the predicament that, having made a public declaration in an
earlier report, under the inspiration of its scientific organization, that
there was threatening a scarcity of gold, would hesitate to counter
that previous conclusion.
Where one is dealing with problems that are so indeterminable, so
conjectural in their character, it is not advisable to think aloud publicly or to speak officially unnecessarily. Of course, everyone who
deals with such things has got to form opinions, but he ought to
maintain, in my judgment, such flexibility of mind as not to hesitate
to change an opinion. And it should not be made difficult for him to
change his opinion if new facts warrant it. In other words, he might
feel this year that there is a good deal of material at hand that looks
as is the world were coming into a period of gold shortage. Two
years hence he ought to be perfectly free to say to himself, " I was
Mr. LUCE. We are all fallible; but you demur at official thinking,
while it is our duty here as Members of the House to engage in official
This afternoon the Senate is going to continue its discussion of
whether there shall be a reduction in the tax level of $200,000,000 to
$225,000,000 or $290,000,000. There is a difference of $70,000,000 a
year in the tax level, which will inevitably determine whether the
debt shall be reduced by $70,000,000, more or less, and within a week
every member of this committee must vote on that question. One
great political party says, " Reduce the taxes, but do not pay your
debt as rapidly." The other political party says, "Do not reduce
your taxes and pay as much on your debt as you can."
Now, what is there obnoxious, when we must act, in telling our
experts that they must help us think?



Mr. STEAGALL. I want to say parenthetically right there to the gentleman that he is not accurate in his reference to the two parties with
reference to tax reduction. Both parties want tax reduction, but one
wants to give it to one set and the other to another.
Mr. LUCE. But there is a difference in the total of $70,000,000.
Mr. STEAGALL. But it can not be stated that one party wants to pay
everything that exists on the debt and the other does not. That is not
an accurate statement. I am sure the gentleman does not want to
put an inaccurate statement in the record, although it is beside the
Mr. LUCE. Whether I have righly[rightly]read the political signs of the
times or not, and possibly I have misconstrued the political aspects
of the situation
Mr. STEAGALL. SO far as this discussion is concerned, your contention is absolutely all right, but in its details it was not entirely
Mr. LUCE. I am simply trying to bring out that Congress is composed of 531 men, and very few of them have had any economic training and must in large measure rely upon the information furnished
to them and in considerable measure upon the advice given to them
by the experts in these most important questions before Congress of
taxes and the debt, and there is allied with them the future price
level in its bearing upon the obligations of the United States and
upon individuals.
I know of no agency in the Government that is so well equipped
and so well trained as yours to furnish us the facts upon which, so
far as you can get them, we must act. I do not expect you to do the
impossible; I do not expect you to be clairvoyants and read the future.
If any of us could do that, we would be millionaires overnight; but
the whole scheme of your conduct, of your system, now is to attempt
to serve the interests of the country by information and such action
as you can take based upon your estimate of what the future is going
to bring forth.
Why should we not turn to you, rather than to anybody else, to
help us?
Doctor MILLER. I think, if you want information upon these subjects, if you feel it is really obtainable, the Federal reserve system is,
on the whole, the best situated of any governmental agency to make
the necessary studies.
I do not know that I have anything to add beyond what I have
already said, except this: I think most men who are dealing with
policy matters are very apt, if certain things begin to lodge in their
mind as facts which are not actually determined or determinable facts,
to see things differently and possibly less truly and competently than
they otherwise would.
I always have this in the back of my mind: It is my general attitude that in matters of credit and banking policy, as a reliable guide
to an administrative body, you can place more reliance in the gold
standard than in any set of devices or formulae that can be invented
as a substitute.
I think Doctor Commons would probably agree that we had before
the war, on the whole, a tolerably stable price level. There was
occasional criticism that over a period of years there was a slow but
nevertheless steady and perceptible rise of prices. Opinions differed



as to whether the resulting hardship to the creditor was or was not
offset by the resulting stimulus to business enterprise and to industry.
In my judgment, it must be a very wise man who undertakes with
any degree of confidence to express a broad social judgment in this
matter. We are all very apt, I think, to identify the public interest
with what happens to be either our private interests, or those of the
group with which we are most chiefly identified. It is well known
by the economic historian that the world has in times of gold inflation
in the past sometimes experienced the greatest stimulus to the broadening of the spirit of industrial enterprise and to economic development and productivity, even though such inflations have brought with
them a certain amount of maladjustment, and, even, if you please,
social injustice by disturbing relationships between debtors and
creditors whose relations extended over considerable periods.
So that I felt a certain revolt—it is temperamental in part, in part
it is based upon observation and in part upon my reading of history—
against what I would call legislative prescriptions that proceed from
a more or less static conception of society.
We are not living in a static world; certainly not yet in the United
States. I am inclined to think that as long as we live in a world that
is susceptible to a wide range of new responses, as our American
world is, and one in which we invite and solicit, desire, and expect
change, we are bound to have elements of instability which will be
absolutely beyond control.
If you want a perfectly stabilized economic society, then you have
got to get a static human nature. As long as we live in a world in
which there are many men who dare to think and plan and imagine
and risk their fortunes in undertaking new ventures—and this is
true of the modern world as a whole and preeminently true of our own
country—you are not going to have stability.
I would suggest that if the committee really wanted to prosecute
this inquiry to a point where it would become fully illuminating,
that it would be well worth while to review the last three years and
inquire what has produced such instability of prices as we have had
in this period. What has produced such instability of employment
as is the subject of not only criticism at the moment but even of controversy as to its extent? What has produced good years and bad
years in the last four or five years in agriculture and in commerce?
Now, I venture to say that among the responsible factors you
would find that the pressure, so to speak, or, rather, let me pluralize
it, the pressures put upon the American captain of industry by the
new hazards that business enterprise and undertaking has had to
face as the result of all of the post-war uncertainties, have led to
developments in the technique of business and industrial management, in the scope of industrial organization, that have resulted in
putting American business and enterprise ahead to a position it
probably would not have reached in the ordinary course in less than
25 years.
What has provoked it? Many things. In part, the high wages
of labor that were left by the war. I remember, and I think you
gentlemen will all recall, that one of the most common things we
heard after the armistice in 1918, was that the first thing to be done
was to liquidate labor.



Labor, however, was not liquidated; it would not be liquidated,
and the history of past inflations similar to the one we had in
1919-20 inflations, during and following a period of war, pretty
generally shows that labor does not liquidate, that it is one of the
surest and solidist gainers from the inflation war brings, that it
tenaciously holds to the abnormal wage level attained under war
conditions, and that this is particularly true where labor is as well
organized as it is in several countries and in our own, where its position has been strengthened by a statute restrictive of immigration.
Now, then, what happened? The American business man was
up against a condition. His labor costs were increased. In order to
keep his total costs down he had to invent new sources of efficiency.
He did it. It is one of his great achievements. It is one of the
wonders that European observers come here to see. But in the
process of doing it we find, according to the statistics of the Bureau
of Labor and of the National Industrial Conference Board, that
American factory productivity has been increased from 20 to 30
per cent in many lines, with the result that there are fewer men
to-day engaged in many of these industries turning out a bigger
product than was the case three or four years ago.
Now, then, what does this mean from the point of view that we
are discussing here ? It means that industry, business, in undertaking to save and stabilize itself, has brought about at least a temporary instability in the condition of labor within those particular
From my point of view, that is a very regrettable result for the
laborer who is displaced and obliged to find a new connection. But
I think it is more less inseparable from a state of society, so to speak,
in which there is continuous and rapid progress in industry.
The great question, to my mind, is whether the instability that
you and I regret as such is not really inseparable from a highly
competitive industrial society. I do not think you can get away
from it, and I am afraid that in the attempt to, as it were, control
it through a monetary-policy device of the kind set up in this bill
you will either accomplish nothing, or if you succeed, you will succeed only by actually putting at times a strait-jacket upon the forces
of growth that inhere in the American industrial system.
Mr. LUCE. The problems you have just been discussing, important
problems, are covered by paragraph (4), which refers to stabilization of agriculture, industry, commerce, etc. My inquiry had been
meant to be addressed particularly to the factor covered by paragraph (3).
Now, let me recall to you just hastily half a dozen very important
happenings in this country, the panic of 1818, due to the inflation of
currency by the creation of State banks; the panic of 1837, having
much the same cause; the panic of 1857, due to the discovery of gold
in California, in part at any rate; the panic of 1873, also a financial
problem; the development of the Populist and Greenback Parties
following the resumption of specie payments; and the campaign for
the election of Mr. Bryan in 1896, the most fiercely fought campaign
in all my own political experience.
These are but the high lights which indicate that in the past this
very problem that we are facing here has at intervals been paramount in our public life, of the greatest concern to all of those who



are in public life, and of immeasurable importance to the comfort
and happiness of the great masses of our people.
Why should not we see by study if we can not lessen the likelihood
of a repetition of the Populist and Greenback agitation, of the bimetallist agitation? We can handle the banks perhaps adequately with
our Federal Reserve Board and will not have a repetition of the circumstances that brought on the panics of 1818, 1837, and 1857, but we
have done nothing as yet to remove the conditions that brought about
the political and commercial troubles following the Civil War.
Those are not things to be minimized, in my judgment; they are not
things to be called academic; they are problems that are here facing
us. Shall we do nothing about it ?
Doctor MILLER. Well, you are getting into the general purposes of
the bill in raising those questions.
I would say that the upsets you refer to were in the nature of
cataclysms. Following the World War, the particular impulse that
had given rise to the ideas and plans contemplated in this bill was
the disorganization of the currency, the disturbances of price levels—
and I call them revolutionary in scope and character—that grew out
of the last war.
The difficulties experienced in 1857 were probably an inevitable
aftermath of the gold discoveries in California and Australia about
the middle of the century. The panic of 1857 was the last phase of
the wonderful development of industry and enterprise that either
coincided with the period of the gold discoveries or was, as I believe, occasioned by them. On the whole, and regarding the matter
from the point of view of national economy, the crisis was a small
price to pay for the enormous growth in the productive power of the
Western World and the improvement in the economic condition of
the masses or the people in the Western World, which on the whole
I do not think, should we ever be precipitated into another great
war, that anything you could ever write into a statute would stop
us from doing the things thought necessary in order to put through
the Government's financial program. Laws of this kind—of most
kinds—are not made for the exceptional situations of national emergency, but for the more ordinary conditions, and if we were in a
great World War again, and were under pressure to provide not
twenty-five or thirty billions but seventy-five or one hundred billions
in order to take care of war needs, and Congress for one reason or
another would not tax or could not tax, I fancy that the Federal reserve printing presses would be set to work again at high speed. It
would not govern its actions by price levels or by considerations of
present and future production or scarcity of gold.
"Inter arma, leges silent."
So that, from my point of view, the objection to your proposal is
that, firstly, it orders an investigation that gets great official importance from the fact that it has got to be the subject of at least an
annual report to Congress.
Secondly, included in the scope of the proposed gold investigation
is the prospective as well as the actual demand and supply of gold.
Underlying that proposal, I think, must be the belief that somehow
or other there is a potency in the Federal reserve that actually can



control what economists sometimes call secular movements of prices,
which means the long-period swings of prices.
Personally, I have the gravest doubts as to whether that can be
done. I think the most that any mechanism like the Federal reserve
system can do with regard to these factors of instability is limited
to those that are, generally speaking, confined within a comparatively
short period of time—swings that modern economists are very apt to
describe as cyclical as against those which are secular—short-period
trends as against long-period.
I think you have stretched the possibilties[pos iblites]of the Federal reserve
system, so to speak, beyond the nth degree when you include these
long-period movements that take, perhaps, a generation or half a
generation at least to develop and work their full effects. I agree
with you that they are deplorable in many ways, but to my mind they
are deplorable for the same reason that the Mississippi floods are
deplorable, and yet the rains from heaven can not be regulated or
The CHAIRMAN. In that connection, under the management of gold
as exercised by the Federal Reserve Board here to-day, they can send
out of this country large amounts of gold
Mr. STRONG. And recall them.
The CHAIRMAN. And recall them. That would have an appreciable
effect, would it not, on long-time prices?
Doctor MILLER. NO.
The CHAIRMAN. On the long-time cycles. If gold plays the part
in this whole situation that has been indicated here before this committee, certainly the management of gold on the part of the Federal
reserve authorities would have an effect.
Doctor MILLER1. On the long-time trend?

Doctor MILLER. NO ; I doubt that very much.
The CHAIRMAN. Supposing half a billion dollars of gold were
shipped out of the country and remained out of this country; it certainly would have an effect, would it not?
Doctor MILLER. Well, I think you are to a certain extent taking
your conclusion for granted when you say the gold would remain
out of the country. Let us see how gold is shipped out of any
The CHAIRMAN. I am speaking of the management of gold.
Doctor MILLER. I am speaking of it, too; at least, I am thinking
of it. There are cases, such as we have had particularly in the last
few years, where gold has gone out of this country because countries
like Germany and Italy and France actually want gold for the purposes of carrying through monetary reforms. They are going back
onto a gold basis, and in order to achieve their purpose they must
have gold. Therefore they come to the world's greatest gold market
and they arrange for specific gold loans. They mean, when they come
here, to take gold from us; that is the commodity they want. Those
loans may be 10, 15, 20, or 25 year loans. They, however, in all cases
have a definite maturity and they carry interest which makes this a
pretty expensive convenience or necessity for these several countries.
That is one way in which gold goes. France has been drawing gold
most abundantly in the last few months as a part of its policy of
monetary restoration.



Let me add before I leave this subject that a country that wants
gold in order to reform its currency will go where it can get the
gold cheapest, if it can be sure of getting it at all, in the amounts
that it requires. It is probable that, of the many countries that have
been borrowers of gold for monetary restoration purposes in the last
year, some have come here because the rate at which they could
borrow was lower, we will say, than in England. They go to the
cheapest market where they can get the gold, just as the buyer of
wheat and cotton will go to the cheapest market in which he can get
the cotton in the amount he requires. If England had been a cheaper
market, as it was very apt to be before the war, nations that wanted
to borrow gold for monetary purposes would go to London. But not
so recently. New York has been the cheaper market. The rate of
interest is apt to be the controlling factor.
Now, in addition to gold movements occurring in this way there are
certain funds, so to speak, in the nature of an international shortterm loan fund. It consists, we will say, of balances of one kind and
another that can be shifted from one market to another, from one
country to another. They also will be shifted more or less in accordance with changes in relative money or discount rates. It is
probably true, though the figures are not available for an accurate
statement, that low money rates in this country last autumn stimulated the transfer of international balances to the London market,
where the rate was higher.
Now, we have seen that, whether as a sequence of the policies that
were adopted by the Federal reserve system last summer or whether
from other causes independent in their character, money rates have
latterly tended upward in this country so that they are now pretty
nearly equal to the London rates.
The CHAIRMAN. Let me ask you there what effect the reduction of
the public debt by a billion dollars has on money rates ?
Doctor MILLER. It has a very important temporary effect.
The CHAIRMAN. I refer to the fact that during the past year the
public debt has been reduced a billion dollars in a flush money market,
and you were speaking the other day of the effect of open-market
operations on the money market. Take the various Treasury transactions in connection with bond purchases and sinking-fund purchases;
do they have a similar effect on the money and stock market ?
Doctor MILLER. They do when they buy.
The CHAIRMAN. Suppose that those purposes are synchronized with
the operations of the Federal reserve and its open-market operations ?
Doctor MILLER. There is a constant disposition not to work at
cross-purposes, but to let the Treasury's program, whenever it is
practicable, work in with the Federal reserve's.
The CHAIRMAN. Have you or the board made a study of the effect
on the economic situation and the money market of the continued
reduction of, say, a billion dollars a year of the public debt?
Doctor MILLER. NO ; no systematic study. It is always dealt with
as a factor in our current discussions and conclusions. Of course,
what is done is this, and I doubt whether you could get very far.
The Treasury collects taxes, mainly income and corporation taxes.
It pays off the debt to the extent of $1,000,000,000 a year, we will say.
Presumably the recipients of the paid-up debt, the holders of the



bonds that are redeemed, are those who belong primarily to what
we would call the investing class. If, in other words, a billion dollars
of Government obligations were paid off in the course of a year, we
might assume that perhaps 75 per cent of those obligations were held
by people who belong to the investing class. When they receive their
money from the Treasury they will probably turn around immediately and seek to reinvest, in which case there would be by that
amount an augmentation of the demand for investments; there
would be an addition to the supply of investment capital.
If they had not been paid off—in other words, if the income taxes
requisite to finance our annual requirements were less by a billion
dollars—the probability is that those who are large contributors to
the income tax would use the money not taken from them to make
The CHAIRMAN. Would you go so far as to say that in the reinvestment of the proceeds of a billion-dollar debt reduction that that
fund might be used for the purpose of increasing brokers' loans?
Doctor MILLER. Yes.
Mr. WINGO. Is there any doubt about that ? Is not that one thing
that is agreed on? At least, all of the articles I have been reading
in the financial papers are to the effect that that is one factor that
absolutely negatives the efforts of the board to check brokers' loans,
that for several years we have been putting $1,000,000,000 of new
money into the investment market by the retirement of the public
debt. The one article I read the other day was predicting a continued bull market, for the reason that Mr. Mellon's theory and
desire to continue a rapid reduction of the public debt evidently
was going to prevail and that as long as the Government did counteract the open-market operations of the Federal Reserve Board by
retiring a billion dollars a year of Government securities you would
continue to get an easy money market and a flushed stock market.
Do you not think we all agree on that ?
Doctor MILLER. I would say that in the analysis of that matter
you would have to pay a great deal of attention to the source whence
the Government derived the revenue it used to reduce the debt.
Mr. WINGO. The presumption is that the source will continue the
same as it has over the last few years.
Doctor MILLER. By the source I mean the contributors.
Mr. WINGO. I say that the contribution over a given period of
years, with the securities distributed, is practically permanent now,
because the shift has taken place. The presumption is, and most of
the writers proceed upon the theory, that for the last few years this
effect has taken place, notwithstanding the fact that the securities
have been shifted from the temporary holders as a result of Liberty
loan campaigns into the hands of the permanent investing class, and
that in spite of the presumptions to which you referred, if they had
not paid their taxes for the purpose of retiring these bonds that they
would have used those funds to go into the investment market, the
experience of the last few years has negatived that theory, and this
writer that I was reading said it was fair to presume that the effect
would continue to be the same and we would continue to have a
cheap money market so long as we continued a million dollar reduction in debt.



The CHAIRMAN. But you referred to the sources from which this
money comes. One source is taxes, the other is customs, and the other
is from the railroads and others to whom the Government has made
loans. Of course, during the past year or two there have been large
recoveries in the way of the repayment of loans made to the railroads and various others.
Doctor MILLER. And we get some foreign payments, too.
The CHAIRMAN. And we get some foreign payments. That would
not have the same effect on the situation as would the use of the
money that we received from taxes or customs, would it ?
Doctor MILLER. NO ; it would not.
Mr. LUCE. Possibly there is one factor that ought to be mentioned
here in connection with the other things, that the reduction of the
debt by canceling a billion dollars of paper, if we may assume it did
balance in that way, has by so much reduced the basis for loans that
were made on that paper, and it is just as broad as it is long.
Doctor MILLER. Well, I do not think we have suffered from that.
The time may come when that would prove to be an embarrassment.
Mr. LUCE. I did not mean it as an embarrassment, but I meant
it as an offsetting consideration to the one which Mr. Wingo has
referred to.
Mr. WINGO. There is another factor, and that is the effect of the
interest charged on the Treasury.
Mr. LUCE. Yes.

point was this, that with the experience of the
last few years, it is reasonable to presume that if the reductions continued the same, the appreciable effect upon the market would be the
same. Of course, it must be noted that there may be a failure of
some of the sources of funds to reduce the tax, like these special payments that have come in and that will mean an appreciable decline in
the volume of reduction of debt in the next few years, even if your
tax rate and income remain the same.
Doctor MILLER. I would say if I were going to study that subject, that I would want to analyze the sources of revenues of the
Government and see to what extent they were derived from, let us
say, essentially the same class of contributors. I would call it
broadly the investment and saving class on a large scale and the
creditors of the Government. I think we have several new factors
in our whole economic situation in the last 10 years that, to a certain
extent, differentiate it very sharply from anything we have ever
known before or that has ever existed anywhere else.
The CHAIRMAN. My reference to this deft reduction has nothing to
do with the merits or the wisdom of that reduction, but as to the
effect that a reduction of $1,000,000,000 would have on our economic
and money market situation, and whether or not that was actually
the throwing in to an already flush money market of a billion dollars' worth of additional funds would it or would it not tend to
accelerate speculation in securities?
Doctor MILLER. I think it is undoubtedly a very considerable, but
transitory, factor of disturbance.
The CHAIRMAN. I appreciate the thought of Mr. Luce, that this
is a very propitious time for us to reduce the public debt as rapidly
as possible because of the purchasing power of the dollar at this



time, and I can also realize in that connection that the present question of a raise of salaries of Government employees is not a raise
in salary but an adjustment to the purchasing power of the dollar.
Mr. WINGO. Will not the acceleration of the reduction of the
public debt have an appreciable effect upon the purchasing power
of the dollar, and may meet the other factor coming back to which
Mr. Luce referred?
The CHAIRMAN. I think that is very pertinent.
Mr. LUCE. Does this all not bring out, Doctor, that somebody
ought to study this thing ?
Doctor MILLER. They are studying it. I am perfectly agreeable
myself to it going on. I think we have perhaps consumed too much
time in the discussion of an item that I felt would better be left
out of the bill than be pro forma included in the specific directions
given to the Reserve Board. But I do not think it is a matter of
such great importance.
Mr. LUCE. Possibly, as a mere matter of technique, it is not, but
it strikes me we have reached the very nub of the whole problem
before us when we are discussing this particular question. It seems
to me the most important phase of the whole situation.
Mr. WINGO. I can not help but wonder, I will say to the gentleman, that if we were to do this, to give this mandate, and the board
sat down and tried to carry out what we suggested, these investigations, whether they would not say, " The general fundamentals we
can agree on; we can agree on what laws exist. The law of supply
and demand is one of them."
But the difficulty we would have is not ascertaining what the fixed
laws of economics and finance are but what would be the circumstances that would surround the operation of those loans and the
effect they are going to have upon the purchasing power of the
dollar, and then they will proceed to say, " W e have to study and
try to anticipate what will be the policy of Congress, whether it
will or not rapidly reduce the public debt, whether or not the troubles
in China will precipitate such a burning up of commodities and
how far the war there will go, and what effect it will have upon the
operation of supply and demand in the commodity market," and
then you will set your forces to work to try to predict and tell each
Congress that " if you do so and so, if you will reduce the public
debt so much, then we think it will affect the purchasing power of
the dollar so much."
I am inclined to think that that would have great value, provided
the legislative body would treat with any degree of respect the
prognostications and recommendations which the board made.
Doctor MILLER. Mr. Chairman, let me ask a question here. Is it
contemplated that Doctor Commons will conduct an inquiry of me
before I am dismissed ?
Mr. STRONG. That is the understanding, when you have reached a
suitable place in your remarks.
Doctor MILLER. The discussion has ranged over a pretty broad field
here recently in connection with Mr. Luce's questions. You know, to
my mind one of the great considerations to bear in mind in connection with any currency, banking, and monetary legislation is the liability of these things to inject themselves into politics. The " money



question," as we use the phrase in this country, as we have used it
over a period of 50 years, means not an economic question but a
political question. However it originates, it becomes such because
people, for one reason or another, get excited or disturbed about its
effect on them and take opposite sides and then it injects itself into
political and party discussions.
I would say that on the whole one of the incidental but yet very
important merits of the gold standard is that it carries with it a
greater promise of keeping the money question out of politics than
any other. That is the reason why I constantly come back to the
position I have taken in these hearings. I would hold to this position
even if I felt that indications were favorable to the practicability of
a price-level stabilization program being effectively promoted and
accomplished by the Federal reserve system. I want to see what the
now generally restored gold standard is going to show itself to be in
operation for the next five years or so before entertaining any proposal in the nature of a radical departure from it. If it proves
competent on the whole to give the world as good results as it did
before the war for a period of 15 or 20 years, my disposition would
be to say it is part of wisdom to keep legislative hands off. I am
satisfied in my own mind that clauses and phrases and language of
the kind used in this proposed bill will give rise in their application
and administration to new political issues should the bill be enacted
into law.
Mr. Strong. After all, Doctor Miller, is not the only purpose of the
act to direct a continuance of that policy that we feel has been fairly
well carried out and that all sound men want to see continued to be
carried out?
Doctor MILLER. Well, I had in mind, when I asked the chairman the
question whether Doctor Commons was going to question me, whether
it was still the intention of the committee to go into these details. In
that connection I think my reasons will come out.
Before we part company, I want to say that I feel that the gold
standard, on the whole, will be the major controlling principle in the
operation of the Federal reserve system in the near future. Let us
wait and see how the gold standard works within the next few years.
When I say the gold standard, I do not mean a blind adherence to
the old principles of operation. I would expect it to be tempered in
its application now and then, here and there, by a very informed discretion and at time with a certain degree of courageous interference.
On the whole I think we will be better off in our monetary affairs if
we have something that is, so to speak, above expected and intended
interference by an administrative agency like me Federal Reserve
Board, than if we have something that is specifically subject and
intended to be specifically subject to interference, and that not only
over short periods, but also over long periods, and all according to
the judgment of the Federal reserve authorities and in obedience to an
instruction from Congress.
Mr. STRONG. I do not quite get you when you talk about departing
from a gold standard. The purpose of this, as stated in the preamble, is to promote the maintenance of a stable gold standard.
Doctor MILLER. A stable gold standard is something that the world
has never known.



Mr. STRONG. Of course, a gold standard can be unstable. If we
have a gold standard at all we ought to strive to have a stable gold
Doctor MILLER. The moment you prescribe a stable gold standard
you are in effect already abandoning the gold standard and substituting in its place a dollar standard based on gold; and it is a dollar
that is subject to other influences than those which affect the value
of money under the unimpeded operation of the simple gold standard.
It means that you are, as it were, bringing into the picture in a very
prominent way the judgment of men and management as against the
fortuitous circumstances of nature affecting gold production, the
interplay of money market, and so on.
Mr. STRONG. I think the purchasing power of our dollar should be
maintained as a stable purchasing unit, and that that should be the
aim of this Government even though the value of gold may appreciate or depreciate.
Doctor MILLER. I would not differ from you there, but I would like
to see it demonstrated
Mr. STRONG. That is the purpose of the study.
Doctor MILLER (continuing). Otherwise than as a venture in speculative economics that there is good ground for expecting that we will
have greater economic stability or price stability, or other forms of
stability, under the operation of this new scheme than we have had
in the past under the gold standard.
Mr. STRONG. This is not a new scheme, but a measure to direct the
continuance of what you gentlemen have been stating with a great
deal of pride you have been doing for the past three or four years.
Doctor MILLER. If we have said that, we have taken a great deal
of credit that is not due us. But this touches matters of fact and
detail that I hope will be brought out later.
Mr. STRONG. Before we adjourn I would like to make this observation for the record: That I think the disturbing factor of war is
not going in the future so to wreck our financial situation and our
economic situation as the past war did, because I think the 4,000,000
men and their relatives and families that participated in this war
are going to see to it that the next war will not be a money-making
war; it will not be a war where the war contractors will be allowed
to make a great deal of money while the men are fighting for the
Nation. I think there will be a drafting of all of the faculties and
all of the resources of this Government, instead of just drafting man
power, and, if we do that, we will not emerge from the next war with
a lot of profit-taking and debts as we did from this war.
Mr. GOODWIN. Why limit that to the 4,000,000 men and their
Mr. STRONG. I said their families and relatives. I think there
is a very settled conviction on the part of the people of this country
that the next war will be a war in which all the resources of this
country will be drafted, and, if we do that, we will not emerge from
it with the conditions that we have from the past war.
The CHAIRMAN. We will adjourn until to-morrow morning at 10.30.
(Whereupon, at 12.20 o'clock p, m., an adjournment was taken until
Wednesday morning, May 16, 1928, at 10.30 o'clock a. m.)




Wednesday, May 16, 1928.
The committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order to continue the
hearings on H. R. 11806.
Under the arrangement as heretofore stated, Doctor Commons
desires to ask certain questions of Dr. Adolph C. Miller, of the
Federal Reserve Board.
Doctor Commons, will you proceed now?
Doctor COMMONS. Doctor Miller, you made a reference to what you
considered the theory back of this bill, which you indicated was the
theory you used to teach as a professor of economics.
What I want to do is to inquire into the methods by which you and
the board learn by experience when you take up the statistical material and then apply it to certain episodes. I have in mind especially
the period of 1922-23, when, it seems to me, the Federal Reserve
Board could be said to have been the most successful during its
career in handling the situation, but I would like to know what
would be your statement of that theory underlying this bill, and I
take it that the theory you used to teach is what is called the quantity
theory of money?
Doctor MILLER. I suppose what you really have in mind is to find
out why I have qualified my adhesion to it. or abandoned it, or whatever you please ?
Doctor COMMONS. That is it.
Doctor MILLER. That would be a pretty long story, and I am not
sure, even if I took the full time, that I could tell you all that has led
me to this feeling of doubt as to its validity as a working or, guiding
principle in bank administration.
I think I would say this, Doctor Commons, first that I have been
very much impressed with the more recent work done by economists,
notably in our country, in the field of economics of credit, prices,
banking, business cycles, and related matters. All these studies have
seemed to me pretty clearly to have thrown much light on the mechanism of credit, the price system, how prices are made, how prices
are changed, how, in the presence of more or less common factors,
the prices of different commodities change differently or react differently to the same or a closely similar stimulus.
Let me repeat that we do not know nearly as much with regard to
the behavior of prices as was assumed in the days when I was taught
the quantity theory of money and prices and in the days when I
myself taught what I had been taught.
Now, in part I think that is due, as is the case with most shifts in
the emphasis or reformulations of economic theory, to an actual
change in economic conditions.
If I were to undertake to say what I thought the important
changes were, I should put them perhaps under a few heads, the two



most important of which would be, first, the diminished dependence,
more especially in our country, of current business, trade, and industry upon current banking accommodations.
I would say, particularly in our country, that the nexus between
the volume of activity in trade and industry and the volume of banking accommodation is a less close one than it was in the days when
Mill formulated the quantity theory of money and in the succeeding
generation or two, when it was the currently accepted theory in
Great Britain and in our own country.
I think possibly, as your questions go on, it may be worth while to
return to this.
Doctor COMMONS. I was thinking about the opposing theory which
used to be called the commodity theory.
Doctor MILLER. I do not know anything about it; I have no theory
to offer. I am not here to offer a theory; I am here to find one.
Doctor COMMONS. Why did you, in those days, reject the commodity theory—in your teaching days ?
Doctor MILLER. 1 do not think I ever really faced the question that
way. I do not think it made enough impression upon me to attract
Doctor COMMONS. Would this be a correct statement of the two
theories, that, according to the quantity theory an increase or decrease in the supply of money and credit would cause a change in the
price level ?
Doctor MILLER. That was the assumption.
Doctor COMMONS. NOW, the commodity theory says that an increase in the activity of business creates a demand for credit, and
therefore the volume of credit increases; that is, we have gotten away
from the time when gold was the main instrument, so that the commodity theory, as I understand it, was a demand theory, demand for
money, and the quantity theory was the supply of money. The two
Doctor MILLER. I would say there was no conflict there.
Doctor COMMONS. There is no conflict?
Doctor MILLER. I would say there is the same kind of conflict as
you may say there is between the two opposing blades of a pair of
scissors. The conflict, or contact, is what makes the scissors; they
are working against one another.
Doctor COMMONS. YOU would say that that is now the prevailing
idea of economists ?
Doctor MILLER. What?
Doctor COMMONS. That there is no conflict between the two; that
the two operate together ?
Doctor MILLER. I do not know. I will tell you frankly that even
in the days when—I should say in the early nineties—we had a revival
of an acute interest in money and price phenomena, and men were
expected to take sides either by proclaiming their faith in the validity
of the quantity thereof or against it; it never really made much of
an appeal to me, and it does not now. I feel that, taking that as a
touchstone or test of a man's economic faith—it does not mean
very much to me. Personally I would suppose that no man would
deny that changes of conditions affecting the supply of money and
credit have an important bearing upon price changes. I would also



suppose that any man who really looks at the facts and at history
would say that the actual quantity of credit, the volume of credit, and
of money in use will depend upon men's disposition to use credit and
money; that if they do not want it it exercises no effect. If they want
it, and can not get it, then the fact that they can not get it, if you
please, exercises an effect. If there is any money available for which
there is no imperative demand at a certain price, it is conceivable
that the lending power might induce some use of it through cheapening the price, but I suppose even under the quantity theory it must
be recognized that it takes two to make a price.
The one item in the quantity theory that always seemed to me
of importance was contributed by John Stuart Mill when he said
that credit influences prices only when it is used as a means of payment or purchase. It is not the potential volume of credit, but the
credit that is used, and credit is used only as there is somebody who
wants credit for use, so that I should say that, in explaining the
changes in the volume of credit, you have to take into account those
influences that act upon the appetite for credit—in other words, that
influence the demand.
But I want to go further on this very point and set myself squarely
with you. It is a long time since I have had occasion to concern myself with the niceties of theoretical formulation in economics, but I
think one thing that I carried away with me is a permanent distrustn
and prejudice against the use of the words " cause " and " causation
in economic theory, and the whole problem to me is one in the balance
of more or less interacting and counteracting forces.
Doctor COMMONS. HOW would the demand for credit arise? It
would arise from the expectations of business men. They demand
credit now for 30, 40, or 60 days ahead. They are looking forward
to two things, the volume of commodities and the price of those
commodities. Is not that where the demand originates ? It is their
expectations ?
Doctor MILLER. I should say primarily upon their expectations as
to whether to hazard safely an investment in the production or the
purchase for sale of commodities with the expectation of at least a
certain rate of return on their investment. The profit is what they
are after.
Doctor COMMONS. Would not that resolve itself into two things,
the future volume of business, we will say, or trade, or employment,
and the future price that they expect to receive ?
Doctor MILLER. Either one, or both.
Doctor COMMONS. SO that the demand is always in the form of
expectation on the part of the business man of cheaper prices and
volume of business ?
Doctor MILLER. Yes.
Doctor COMMONS. And the supply is in the nature of the volume
of credit or money that is forthcoming now, in the present, to meet
those expectations ?
Doctor MILLER. Well, I will let that pass without challenge, although I would state it differently.
Doctor COMMONS. I wanted to apply that to the statistical investigation that I presume you are largely responsible for inaugurating,
which, I take it, you looked upon as an aid to gauging these future
forces, to prophesy what was going to happen.



You spoke of three things that guided you—experience, experiment, and judgment. Now, what do you mean by judgment?
Doctor MILLER. Of course, you are aware that psychologists will
tell you that the judgment process is the most difficult one to analyze
and describe.
By judgment as I use it in discussions of this kind I mean most
frequently what I would call the judgment of degree. I think most
commonly men who have good abilities will agree upon what might
be called the qualitative analysis of any situation. They will agree
upon a specification of the factors that enter into a given situation,
but when it comes to their evaluation, to saying that this is .5 or 10
per cent responsible, this is 3 per cent, or 17 per cent, and so forth,
they may differ. In other words, you are then dealing with forces
that are imponderable, immeasurable, except by what I call the
process of judgment.
Into that goes your experience, your scientific and intellectual
equipment, yoiir imagination, your capacity to sense things. I t is
what makes the difference frequently between a man of great
capacity in business and another of lesser capacity.
Now, of course, into the judgment frequently enter many factors
that are at least in an approximate sense measurable. A good deal
of the scientific apparatus of the laboratory in medicine or in the
Federal reserve is set up for the purpose of ascertaining, if you
please, the knowable quantities so as to reduce those that are incapable of exact determination or perhaps even of approximate determination and which therefore have got to be referred to the judgment of an individual or a group of individuals who have to take
the responsibility for acting.
Let me go perhaps a little step further here. You have asked about
this term. I would say that judgment, as I can conceive of it in relation to such matters as Federal reserve administration, also implies
the power to select the factors of difference in a different situation
from which you have previously dealt with. In other words, you
might give the proper valuation to 10 or 12 different factors in this
situation. Some of those perhaps have got to get a different appraisement in a different situation; therefore good judgment means
that you also sense what are the factors in the latest situation that
have gained in relative importance, and which, therefore, in the
language of our index number making, we describe as a different
weighing. I should say it is knowledge of how to weigh these factors, as well as what the factors are, and to free yourself from valuations which you have attributed to them in the past.
Doctor COMMONS. Well, then, according to that, good judgment
always looks toward the future effects of any action that you may
now take.
Doctor MILLER. Action always looks toward the future, and judgment, as I see it, is for the purpose of action.
Doctor COMMONS. YOU would not call that a cause-and-effect relation ? You do something now, say open market and discount, with
the idea that in the future it will have certain effects. Now, your
idea is that that factor to which you have for the time being given
the greatest importance will work out toward a certain result in
the future. That is about what judgment means, then; it means



forecasting or predicting what the effects will be of your present
Doctor MILLER. Well, of course, that narrows it. I should say if
you carried that out it would be rather a definition of judgment working ideally or perfectly. Actually we very blindly have to use our
judgment upon what has happened in the immediate past.
Doctor COMMONS. I S not that experience and experiment?
Doctor MILLER. I am not talking about experience; I am talking
about what has happened in the immediate past, and therefore great
errors of judgment are very apt to be made. For instance, if the
price of cotton is good this year because there has been a shortage
of the crop, it is very likely to have the effect of inducing the planting
of more cotton for the next crop than the reverse. Men are apt to
be influenced by their most recent experience in what they do as
regards the future, so that when you speak of judgment as directing
itself always to the future I should say that is when the judgment is
clearly to be rated as good judgment, as ripe judgment.
Doctor COMMONS. Well, my idea of that would be to say in either
case, whether you make a good forecast or a poor one, it is judgment.
Doctor MILLER. Yes; whether you have selected a good basis or a
bad basis for determining what your line of conduct or action will
be, in either case it is judgment; you had to take an attitude. I
myself would not use the word " forecast."
Doctor COMMONS. Prediction?
Doctor MILLER. Oh, no.
Doctor COMMONS. YOU are balancing up many factors which you
think will happen in the future ?
Doctor MILLER. YOU are taking cognizance of a great many regarding whose bearing you know with such a degree of approximation
that you do not need to be in any great uncertainty as regards them.
Doctor COMMONS. Then combining all of those complex factors
which you have to deal with, you have to weigh them each to see
what is going to be the predominant factor and what will be, not its
effects but consequences ?
Doctor MILLER. Yes.
Doctor COMMONS. Of course, you can understand that what I am
driving at
Doctor MILLER (interposing). I am not quite sure yet.
Doctor COMMONS (continuing). Is that if you are looking forward to a stabilization of the price level would there be any different
exercise of judgment than when you disregard the future price level?
Doctor MILLER. Please restate that question.
Doctor COMMONS. I will put it this way: When you presented your
charts the other day of the credit mechanism you called attention
to the fact that there were no prices on those charts, which might
lead one to reach the conclusion that you did not pay any attention
to the expected effect on prices. You do not mean to be understood
that way, do you ? You take into account future price moves, do you
Doctor MILLER. Yes. You are addressing your question to me now
personally, I assume ?
Doctor COMMONS. Yes; from that explanation of how you used
those charts.



Doctor MILLER. Yes; sometimes to a very slight degree; sometimes
to a pretty considerable degree; and sometimes I would feel that the
changes in the price level were a very important and essential indicator, and that would be when I felt that the situation warranted an
increased weighting of that factor, and at other times I would be
disposed to pay practically no attention to it. I would not pay
much attention to it now, for instance, in the determination of a question that came before the Federal Reserve Board to raise or lower
discount rates, to put into the market or take out of the market two
or three hundred million dollars.
Doctor COMMONS. If this bill were enacted into law you would be
required to take into account your expectations, the effect of what
you do upon price movements, would you not?
Doctor MILLER. It would contemplate that, undoubtedly.
Doctor COMMONS. A matter which you do not now consider of
importance except as conditions change?
Doctor MILLER. Personally I consider it of importance when it is
important, in my judgment. When it is not important I do not pay
much attention to it.
Doctor COMMONS. YOU use your judgment to tell which is important ?
Doctor MILLER. Exactly.
Doctor COMMONS. And if Congress proposed to say that you shall
use your judgment to determine that prices are important
Doctor MILLER (interposing). Always important; uniformly important.
Doctor COMMONS. SO that your judgment under such a guidance
will probably be somewhat different from what it is now, when you
do not necessarily
Doctor MILLER (interposing). It ought to be, if one is, at my age,
capable of refashioning his mental processes to fit the requirements of
a legislative mandate. I do not know to what extent that is possible.
Doctor COMMONS. Personally I believe you could fit yourself very
well into this bill.
Now I want to ask you about the statistical charts which you have
developed as an aid to what I would call this prediction or judgment
of what is going to happen. As I understand it, those statistical compilations were not begun until about in 1922—September, 1922—
when Mr. Stewart came to the research and analysis division ?
Doctor MILLER. They were begun earlier, but the more active
development and the publication of results came in 1922.
Doctor COMMONS. What do you mean by more active development ?
More prompt development?
Doctor MILLER. N O ; I meant more concentrated study of various
groups of data thought to be relevant to the effective handling of
credit problems by our division of research.
Let me just refresh my recollection. My recollection is, Doctor
Goldenweiser, that we began some of these in 1919, that in 1920 they
were carried on, and in 1921 we were pretty active?
Doctor GOLDENWEISER. I think so.
Doctor MILLER. But they did not come to fruition, so to speak,
until a large amount of preliminary work had been done, and they
did not appear in publication until the early part of 1923. If I



remember rightly, it was about the early part of 1923 that we began
to publish certain charts and recast the form of our monthly review
of business conditions.
Doctor GOLDENWEISER. Yes, sir.
Doctor COMMONS. My own recollection from reading the bulletins
is that in about February or March, 1923, you began a rather analytical discussion of these various movements indicated by index numbers. Taking production, you had evidently then compiled some
indexes of production.
Doctor MILLER. That is correct.
Doctor COMMONS. And of trade and of employment and of pay
rolls. Those were outside of the control of the Federal reserve system
and they were indexes of expected future demand for credit. That
is the way they are treated in your bulletin. So I take it that the
first time you really had adequate statistics on which to base your
judgment was about January, February, or March, 1923 ?
Doctor MILLER. I just want to say that my silence does not indicate
that I should not want to qualify the word " adequate."
Doctor COMMONS. YOU do not think they are yet adequate ?
Doctor MILLER. I do not think they ever can be adequate.
Doctor COMMONS. But they are based on an economic analysis of
many factors which you have to weigh, and you try to put them all
on a comparable basis of index numbers. If you see one moving up
and another in another direction,, you form some idea as to what is
the probable future movement.
Now, I notice that you published at that time a chart on price statistics. You had your own index number of prices, 101 commodities,
and published in 1923 a summary of the way in which that was compiled and analyzed it by domestic and export and import, all reduced
to index number. You kept that up until—the last publication of it
I can find is December, 1925, appearing later in the February bulletin.
Why did you discontinue that index number?
Doctor MILLER. Why did we, Doctor Goldenweiser ? Let me ask
Doctor Goldenweiser about that.
Doctor GOLDENWEISER. The reason we discontinued it is that we
decided that the Bureau of Labor Statistics index, being a more comprehensive index, was adequate for our purposes. What the board
had intended by starting its own index number was comparing the
price movements in different countries, and the idea was that by
selecting some of the leading commodities and having approximately
the same commodities in the different countries you would have a
better basis of comparison. After experiments and after many of the
countries had returned to the gold standard we decided that the index
that was best adapted for domestic measurement was also the best
index for international comparisons. During that same period Canada and England and Japan had all improved their index numbers
and we decided it was not up to us any longer to compile index numbers for those countries, and the index number for the United States,
which had been compiled for the purpose of comparison with those,
fell by the wayside along with those others, because we decided that
we could use the 404 commodity index of the Bureau of Labor Sta-



tistics and the figures the board of trade had, etc., and they would
furnish the best basis for international prices.
Doctor COMMONS. What I want to know
Doctor MILLER (interposing). You want to know why publication
of a price chart was discontinued in the bulletin; is not that so ? Not
the specific price curves that the Federal Reserve Board itself had
been constructing, but why the price chart disappeared?
Doctor COMMONS. I will put it thisi way. The Bureau of Labor
and the board of trade did not publish their statistics in an analytical form such as you evidently started out to do. That is, you distinguished export prices, import, domestic, and so on, and had your
separate index numbers for those different prices.
Doctor GOLDENWEISER. The answer to that, somewhat in detail,
Mr. Commons, is that these people also analyzed prices, although
they did not analyze them in the same way we did. We found that
the import and export classification was not a satisfactory classification, because the imports in this country applied to only a few commodities and the export group was very much dominated by the
price of cotton, and we found we would not get any additional light
out of them. The official foreign indexes are also grouped; the
grouping of the board of trade, for instance, is shown on page 850
of the bulletin for May. It includes the food and nonfood products
and then the industrial products under certain other groups, and we
found by actual experiment that these groupings that they were
making were more significant than our groupings, in which the
exports and imports seemed the most significant but turned out not
to be. The other grouping we had was into raw materials, semifinished products, and finished products, and we found that this
grouping did not work out; that it was too complicated and that
there were difficulties in definition, and all the work we did in trying
to make use of those figures turned out to unsuccessful; so we decided
that we were no longer justified in spending money on those compilations when they were not yielding any results.
Doctor COMMONS. The point I am getting at is this: I have
taken your chart and I have analyzed the index number and
divided it into exports and imports and the general average,
and I find that since 1919, when there was a rise in prices, the export
and import prices rose much faster than the general level, and when
there was a full in prices, the same happened. This is what I gathered from your charts up to as long as I continued it.
From that I would draw this inference
The CHAIRMAN. Can we not identify this chart so as to have it in
the record?
Doctor COMMONS. This is a chart of wholesale prices, having three
curves, one being of commodities, of the Federal Reserve Board, and
later of the Bureau of Labor; the second being exported goods; and
the third being imported goods, with the index numbers of each.
(Chart, commons; whole prices, p. 278.)
The CHAIRMAN. Without objection, this chart will be inserted in
the record at this point. We will call it the chart headed " Wholesale prices2 1913, equals 100, covering the years 1919 to 1928." The
clerk will insert the proper number, to more properly identify it.



(The chart referred to is as follows:)

(1) Federal Reserve Board's index numbers for the period 1919 to 1925, inclusive. AH
commodities: 1926 and 1927 from the Bureau of Labor Statistics, first four months of
1928, relative changes from the Analist. Exported goods for April, July, and December,
1927, computed by Professor Commons.

Doctor COMMONS. While we had knowledge of those price movements analyzed in that way, it indicated that our foreign trade, export and import, wa^ more sensitive, quickly responded to changes
which I would call changes in monetary credit, or it might be cyclical
changes, but they responded more rapidly, so that if you would try
to figure out the effect of credit and currency on prices you would,
if I am correct on that, first look to its effect on the export and
import prices. There is where it first showed its effect, and by that
export rising index it pulled the average up more than it otherwise
would have done. Of course, the weight of those, reduced to export,
is about 10 per cent, and the import i£ about 5 per cent, leaving
the rest 85 per cent.
Doctor MILLER. Well, now, Doctor Commons, I have not studied
this chart, obviously, but my approach to it would be altogether
different. I would say, particularly as regards the exports, that
what I would look for is to see when the prices rose, inasmuch as
exports, particularly in the year when the price curve rises here,
are made up mainly of agricultural staples. You take your line
here [indicating on chart] and you find that it inclines sharply
Doctor GOLDENWEISER. It would closely follow the curve of cotton
Doctor MILLER. Here is your all-commodity price index. We have
not an export line here, but you will notice the all-commodity index
goes up in 1924, and goes up further in the early months of 1925.
Doctor GOLDENWEISER. This is the chart of wholesale prices which
is in the record, both in my testimony and Doctor Commons's testimony. I t shows the price index for all commodities, cotton, grains,
and livestock.



Doctor MILLER. I would suggest at this point, in case this chart
goes into the record now or is referred to, in view of the fact that
we have here a chart contributed by Doctor Commons, that these
charts be marked " Federal Reserve Board," so that they can be distinguished from one another.
The CHAIRMAN. The clerk will make note of that so that there will
be no confusion as to the origin of these two charts.
Doctor MILLER. YOU see, in 1927 there is a very sharp rise in the
price of cotton. I can not say offhand—perhaps you can, Mr.
Goldenweiser—about approximately what the ratio of the value of
cotton exports is to our exports during the autumn months.
Doctor GOLDENWEISER. I should say about 25 per cent.
Doctor MILLER. SO you see it will pull up prices of export commodities very materially. We had the same general movement,
though in a less pronounced degree, with regard to grain. We know
last year was a good grain year.
Back in 1924, we had a very pronounced upward movement in the
price curve for grain. We know that that was due, firstly, to the
short crops in Europe. The autumn of 1924 was a bad wheat year
in Europe, and the establishment of credits in this market enabled
the European consumer and the purchaser to get our goods and pay
those prices. Approximately the same is true of cotton. So that I
would say that, with regard to the exports, the primary factor of
variation is the state of the European or outer world demand, the
state of our crops, and the resulting prices. Credit also comes into
it; it came into it strikingly in 1924.
Mr. WINGO. I think this chart should reappear in the record right
at the beginning of this statement.
Mr. GOLDENWEISER. We can very well have it reinserted.



The CHAIRMAN. Without objection, this chart of the Federal Eeserve Board, of wholesale prices, will be inserted at this point in the
Mr. WINGO. No; at the beginning of this explanation the doctor
has made.
Doctor COMMONS. NOW, you attributed that change in these export
prices mainly to crop conditions, apparently.
Doctor MILLER. I say that that was the physical factor over which
nobody had any control. No central banking policy, no device, could
alter that fact.
Doctor COMMONS. By what discount rate or money rate do you
assist these foreign exports ? Is it the bankers' acceptances ?
Doctor MILLER. The rate on the bankers' acceptance has a very important influence in facilitating the financing of our exports by
American credit. In certain situations probably it has also an effect
in effecting the volume of certain of our agricultural exports that
Europe can profitably import. In other words, it would affect the
attitude of a speculative buyer in Europe, either of cotton or corn
or some other commodities.
Doctor COMMONS. I notice in your chart here, that in 1924 you
Doctor MILLER. What chart?
Doctor COMMONS. " Money rates in New York."
The CHAIRMAN. I S that in the record ?
Doctor GOLDENWEISER. I do not know.
Doctor MILLER. My impression is that it went in the other day.
You know that this chart has one additional line, the call-money rate.
The CHAIRMAN. Without objection, this new chart, " Money rates
in New York," will be inserted at this point, a Federal Keserve Board
(The chart referred to is reproduced below.)



Doctor COMMONS. I notice the acceptance rate makes an extraordinary spread from what is called the bank discount rate in 1924.
It drops down to 2 per cent, whereas the discount rate on commercial
paper is 3 per cent.
Now, would that facilitate the furnishing of credit to Europe
through bankers' acceptances? Would it cooperate, in other words,
in helping raise the prices of exports and imports ?
Doctor MILLER. I do not answer your last question because
Doctor COMMONS. YOU do not know?
Doctor MILLER. I do not know, and, from my point of view, it is
an approach at the wrong end, but that does not mean that you may
not be right. I would say it is a factor in the cost of importation of
American products. Now, to the extent that Europe will take more
grain when she can import it at a little less cost by reason of the fact
that credits for financing it can be arranged in the New York money
market, at a lower rate than the current rate in London—to that
extent it may do what? It may result in a brisker demand in this
market, in which case the price would be higher, or it might result
in the importation of a larger amount which would be sold in Europe
at an existing price.
I do not believe there is any method by which you can tell, particularly in the case of commodities like grain and cotton, whether
a revision in the cost of financing through a lower acceptance rate,
either in New York or London or anywhere else, is going to raise the
price or simply increase the amount taken at a given price.
I do not know as it would be worth while, Doctor Commons, except
as you want to pursue this particular thing, to introduce into the discussion here the terms "elasticity" and " inelasticity" of demand,
but we do know from studies that have been made that there are certain commodities the consumption oi which is very quickly stimulated by a reduction of price. The same commodities will be those in
which there is a contraction in the amount that will be taken the
moment the price shows a disposition to go up.
Mr. BEEDY. Those commodities are notably what?
Doctor MILLER. Those commodities, the commodities whose consumption would change quickly with a change of price, belong to the
group of what we might call articles of optional consumption, and
notably the luxuries.
It is probably true that if the price of automobiles to-day could by
reason of some superorganization be cut in half it would get response
in the increased use of automobiles.
On the other hand, if the price of a loaf of bread were cut to 2
cents it is doubtful whether there would be any notable increase in
the consumption of bread. We eat as much bread as we eat, irrespective of the price.
In general, it may be said, in answer to your question, Mr. Beedy,
that the higher the well-being of any community, the less responsive
is the demand for what we call articles of necessity. Everybody has
all of those he wants anyhow and he is not going to get more because
they are cheap.
So that, to sum up, I do not believe that you can draw any conclusion there that is of much value, except as you start with your conclusion in your interpretation or analysis of facts.



Doctor COMMONS. That leads me to ask a question which bears
upon the way in which a change in the discount rate affects the market. It is quite evident that a change of 1 per cent in the discount
rate has very little change in the cost of production, is it not ? It is
an insignficant change in the cost of production. If we depended
upon the discount rate to raise or lower the costs of production of
goods, we would have a factor there which would not be more than t
say, 1 per cent of the total cost of production, using cost in the sense
of outgo for production.
So that if that is so, then the discount rate would have no effect
whatever. You could change it 1, 2, or 3 per cent in considering the
amount of bills payable and receivable as compared with the total
costs of production, and you would find that it was of very slight
effect if you base your argument on the cost principle. You must
base the influence of the discount rate which you emphasized greatly
here upon some other principle rather than cost.
Doctor MILLER. What would you like me to answer ?
Doctor COMMONS. My idea is that it has an important bearing on
the expectations of business men. It determines whether they are
going to increase or decrease their commodities or raise their prices.
It looks to the future.
Doctor MILLER. NOW, when you refer to the important bearing on
expectations, do you refer to the expectation of the attitude of the
Federal reserve system, or because it influences the cost at which they
can obtain money?
Doctor COMMONS. I would say that in so far as it influences the
cost, in the sense of cost of production, it has no influence, no appreciable influence, but in so far as, say, a raise in the discount rate
would lead business men to be cautious about commitments, about
expected prices and expected volume of business, then a change in the
discount rate might have tremendous effect.
Doctor MILLER. YOU think that effect is mainly sentimental or
psychological ?
Doctor COMMONS. What they call psychological, and that means
nothing more or less than expectations. That is what psychology
means in this case. It influences their expectations as to how much
they are going to produce, how much they are going to sell, and with
reference to being paid for it in the future.
Doctor MILLER. Well, is that really your view, Doctor Commons ?
Doctor COMMONS. I am trying to find out whether it is yours.
Doctor MILLER. That is what I want to know, if you are trying to
develop my point of view.
Doctor COMMONS. I want to develop your point of view on how you
analyze these changes in the discount rate as to their effect upon the
market, in quantities and prices.
Doctor MILLER. Well, we do not analyze the discount rate. We
make the discount rate, so that is a factor controlled by the Federal
reserve system.
What we do analyze are factors that bear upon and therefore give
some indication of whether or no there should be a change, and, if so,
whether that change should be an increase or a diminution, or, in
certain contingencies, whether there should be any change.



Now, I would say, taking one of the periods that you have referred
to here, the earliest one, namely, 1924, when the acceptance rate of
the Federal reserve banks ran as low as 2 per cent, I think, and I
think the same is true of the call rate
Doctor GOLDENWEISER. That is right.
Doctor MILLER. YOU asked why those rates were so low. The
acceptance rate was falling steadily throughout the first half of the
year 1924. It began to show a tendency to rise in the third quarter
of 1924, and the rise was rapid in the last quarter or the last two
months of 1924.
The year 1924, as a whole, was a dull year in American trade.
I do not think you want to stop to verify that point by reference
to fhese charts, but I think we all remember it sufficiently as a dull
year. The acceptance rate was running down, and so were other
rates in the first half of the year, because we were getting an extremely large importation of gold.
Do you know approximately what the gold imports were ?
Doctor GOLDENWEISER. $200,000,000 of gold in the first six months.
Doctor MILLER. That was at a time when the demand for credit
was very slack and when trade was running down.
Now, the turn came in the autumn of the year, and it came primarily, I should say, with short harvests in Europe, and therefore
an increased demand for American farm products and also with a
considerable volume of foreign financing. The first of the outstanding years in which foreign loans were placed in the American market
was the year 1924, in the second half of that year.
Now, under those circumstances it may well be asked, What kind
of a discount or credit policy was indicated for the Federal reserve
system? The year opened with a 4 ^ per cent discount rate, and in
April or May it dropped to 4 per cent, then Sy2 per cent, and late
in July or early in August it went to 3 per cent in New York.
At the time when the rate went to 3 per cent it was a debatable
question whether or not it was advisable. My own opinion at the
time was that it was advisable for a variety of reasons, even though
there were different reasons for believing that it could not safely be
left at 3 per cent for a very long interval.
Now, I say that I think it was advisable. I am speaking now
purely personally, because I have said here a good many times that
you may know what is in your mind, particularly when you are
referring to a past situation, but you can not be sure that you know
what is in the minds of others. The view I have entertained since
1922-23 was that in the incipient stages of a business recovery a
low rate may exercise a stimulating effect, that when that effect is
in process and has gone approximately near the limits of safety it
is not advisable to leave your rate low but to begin to apply a little
pressure in order to make it less easy for commitments, perhaps, of
an undesirable character to be taken on.
Now, what happened was that the rate went to 3 per cent in, I
think, August, 1924. The latter part of the year 1924 was one of
distinct business recovery. A distinct good feeling existed in the
country, and that feeling registered itself, as I recall, among other
things, in the first pronounced upward swing in the stock market
since the brief spurt in the early part of the year 1923. There was



getting to be pronounced evidence of this sort of thing that we
have been recently complaining of in this country, an active stock
market with a steady rise of quotations.
The rate continued at the 3 per cent level until about February,
1925—is that correct, Doctor Goldenweiser?
Doctor MILLER. It was then advanced in the New York bank to
%y2 per cent. In the meantime open-market rates were moving up.
The call rate was going up, the commercial-paper rate was going
up, the acceptance rate was going up, and money was in demand.
It was in demand because of active securities speculation and because of more active trade, and it seemed advisable to test out the
situation by the application of a higher rate, and there were some
accompanying sales of securities in the market at that time.
Doctor GOLDENWEISER. The period you were discussing was the
first couple of months of 1925, and there were considerable sales of
Doctor COMMONS. I am speaking of 1924. You bought securities
during 1924.
Doctor GOLDENWEISER. In the early part of 1924 there were very
large purchases of securities.
Doctor COMMONS. What was the increased volume of securities
in 1924?
Doctor GOLDENWEISER. $500,000,000. We started at about $100,000,000, and went up to about $600,000,000.
Doctor MILLER. Does that represent simply the total of United
States securities, or the special investment account ?
Doctor GOLDENWEISER. This is the total.
Doctor MILLER. Yes. Approximately, at the maximum, there
were $600,000,000 in the portfolio of Government securities.
Doctor COMMONS. That was at the end. Toward August, what
was it? At that point there was about $600,000,000?
Doctor GOLDENWEISER. $540,000,000.
Doctor COMMONS. And in January how much ?
Doctor GOLDENWEISER. About $120,000,000.
Doctor COMMONS. SO that your increased purchases were
Doctor GOLDENWEISER. Close to that; yes.
Doctor COMMONS. YOU have a working principle which you have
mentioned in your former testimony, and I find it in Governor
Strong's testimony and also in your report, that you need to multiply
by 10 in order to find the increase in bank credit, of an increase in
securities—that is to say, if you increased the securities by $500,000,000, it would work out, on the principle of 1 to 10, if you increased
the bank credit of the country ten times, that it would be $5,000,000,000. Would that ratio apply to that situation?
Doctor MILLER. It certainly would not.
Doctor COMMONS. What is the reason for that ?
Doctor MILLER. The reason is that a good deal of that money was
used to pay off rediscounts. I t simply meant that the reserve credit
that was afloat in the country was open-market credi^ instead of
rediscount credit.



Doctor COMMONS. HOW do you figure that ratio of 1 to 10? Does
it always remain 1 to 10, and what are the conditions which cause
it to change ?
Doctor MILLER. I t is subject to a variety of factors, one of which is
the nature of the increased credit that is being used, and also the
character of the member-bank liabilities which give rise to the need
of more reserve. When you have, as we have had in recent years,
notably in the years 1925-26, a relatively great increase in so-called
time deposits which under the law require a reserve of only 3 per
cent, obviously a given volume of reserve credit on the books of the
member banks will sustain a far larger volume of credit on the part
of the member banks than when the credit in the member-bank liabilities is not time deposits but demand deposits, which require a
reserve in the so-called country banks of 7 per cent, of 10 per cent
in the reserve city banks, and 13 per cent in the central reserve city
Also, the requirement of currency is a most important factor and
when the member banks borrow from the Federal reserve banks in
order to get currency the ratio is practically 1 to 1. In order to get
a dollar of currency, they have to put up a dollar of paper.
Doctor COMMONS. That would be also true when they are paying off
their indebtedness, would it not ?
Doctor MILLER. Yes; or when they are borrowing, in order to get
gold for exportation, they have to give dollar for dollar.
Doctor COMMONS. SO that it might have increased, instead of, say,
$500,000,000, multiplied by 10, which would be $5,000,000,000, to
something less than that, only five times as much.
Doctor MILLER. When you are saying, it might have, what do you
Doctor COMMONS. I mean the bank credit.
Doctor MILLER. I would say nothing could have happened in the
year 1924 different from what actually did happen. We are not in a
vacuum with respect to that year.
Doctor COMMONS. I wanted to get what your statistics showed as
to the augmentation of bank credit in use.
Doctor GOLDENWEISER1. The total volume of reserve bank credit did
not increase at all during the year 1924 as a whole.
Doctor COMMONS. That is because the debts were paid off ?
The CHAIRMAN. YOU made a reference there a moment ago to openmarket credit. What is the difference between open-market credit
and general credit ?
Doctor MILLER. AS I use the term, it is an elliptical term for indicating reserve bank credit that is in the market by virtue of the fact
that the reserve bank itself has put it in the market through the
purchase of Government securities. By the alternative method,
credit comes into the market at the instance of the member bank,
which goes to the reserve bank with its paper and has it rediscounted.
It is largely a question as to who takes the initiative. In the openmarket operation, the Federal reserve bank takes the initiative.
The CHAIRMAN. That clarifies it.
Doctor COMMONS. I had a different meaning of open-market rate of
interest as distinguished from the discount rate of interest.




Doctor MILLER. The open-market rate of interest?
Doctor COMMONS. I thought you meant the four or six months commercial rate.
Doctor MILLER. No; I am talking about the method by which this
money that was put into the market in the first six or seven months
of the year 1924 effected a redistribution of the assets of the Federal
reserve banks when it came into the market and was deposited with
the member banks. The member banks did not use it to expand their
business, but to pav off their indebtedness to the reserve banks, and so
you see that the line there [indicating on chart] which represents
rediscounts goes down as the United States securities go up.
The CHAIRMAN. SO that the record may show clearly, the witness is
now using the chart of the Federal Reserve Board called, " Volume
of reserve bank credit." Without objection, this will be inserted in
the record at this point.
(The chart referred to is as follows:)

Mr. BEEDY. YOU are referring to the chart showing the volume of
Federal bank credit?
Doctor MILLER. Doctor Goldenweiser has that chart there. The
upper line indicates the total amount of reserve-bank credit in the
market, and there was no pronounced movement there within the
trend of the curve during the first half of the year, When you
come to the second half of the year you get a different situation.
Doctor GOLDENWEISER. There was a big decrease in the first part of
the year.
Doctor MILLER. That is purely seasonal.
Doctor GOLDENWEISER. It was also due to the very large imports of
gold that were taking place at that time.
Doctor MILLER. I think the point of view of Doctor Commons's
inquiry is that you get those kinds of movements—in other words, if
you take the first six months of 1924 as a whole and compare them
with 1922 and 1923, you get no very pronounced change in the total
volume. You get up and down movements, but there is nothing conspicuously different in the actual volume of Federal reserve bank
credit outstanding.



Doctor COMMONS. He brought out another figure, of member-bank
Doctor GTOLDENWEISER. Yes, This was all member banks; this is
the chart of all member-bank credit.
Doctor COMMONS. For 1924?
Doctor COMMONS* HOW much did that rise during the period ?
Doctor GOLDENWEISEH. In the latter part of 1924
Doctor MILLER (interposing). Let us keep the first part of 1924,
when we were putting money into the market, separate. That is an
episode in itself.
The CHAIRMAN. The chart now inserted into the record is entitled
"All-Member Banks." Without objection that will be inserted at this
(The chart referred to is printed below.)

Doctor MILLER. I would say, Doctor Commons, that the first striking thing in that chart for the year 1924 is that during approximately
the first half of the year, despite the fact that the Federal reserve
banks at that time were steadily putting money into the market by
open-market purchases of securities



Doctor COMMONS (interposing). Did it begin in the first part of
the year?
I see, by looking at the chart of reserve-bank credit, that they
began putting money into the market in January, and continued to
buy securities until August.
Doctor MILLER. Yes; and at that time we were apparently getting
no marked response in the total loans and investments of member
banks, and in part the reason for that is that they were using the
money to reduce their rediscounts at reserve banks. You see, the
first six or seven months of the year 1924 was a time of almost unprecedented gold imports. Those imports of gold were exerting the
same sort of general influence upon the situation of the member banks
and on the money market as the purchases of securities by the reserve
bank. They were in part used to reduce their rediscounts. They
exerted no pronounced effect upon the upward movement of loans
and discounts.
Now, Doctor Goldenweiser, please get your price chart.
Doctor GOLDENWEISER. Prices also were not going up.
The CHAIRMAN. The chart now inserted in the record is entitled
" Wholesale Prices." It shows the price index for all commodities,
farm products, and nonagricultural commodities.
(The chart referred to is printed below.)

Doctor MILLER. NOW, what I would like to call attention to is that
at the time when the Federal reserve bank was pursuing a policy of
open-market purchases in greater volume than it ever did before, or,
I think, has since, when gold imports attained a magnitude of approximately $200,000,000 or more in the first half of the year, and when
the rediscount rate was being lowered, there appeared to be no re-



sponse in the borrowings of the public. There is no reflection of the
increase in the loans and investments of all the member banks and
no response in the movement of prices; in fact, at the time when we
were pursuing the most liberal money policy we had up to that time
prices were steadily running down.
Doctor COMMONS. That is to say, there were three forces—gold imports, purchasing of securities, and a low money rate?
Doctor MILLER. Exactly.
Doctor COMMONS. All of which would make for easy money, and
yet prices continued to fall?
Doctor MILLER. And yet prices continued to fall at the time when
this was in process.
Doctor COMMONS. HOW long, in your experience, have you figured
out that it takes for these processes to filter through until they reach
the stock market and the export market and the price market?
Doctor MILLER. I wish you would figure that for us.
Doctor COMMONS. I figure it very plainly here, that, beginning in
July, 1924, prices had started up. I have not the stock prices. 1
presume they started up earlier and faster. Prices started up from
about 95 and went up to about 105, about 10 per cent or 11 per cent,
apparently a steady process, when business was dull and a falling off
of gold imports and open-market purchases and a lowered rate to $
per cent, which was, of course, lower than you ever had it before
at any time, had no effect until something from the outside started
things up, which seems to have been about the middle of July, 1924.
That may have been some foreign situation. You say that the foreigners began borrowing a billion dollars.
Doctor MILLER. That was later in the year.
Doctor COMMONS. That would not have had any effect on this?
Doctor MILLER. It had an effect later in the year, undoubtedly.
Doctor GOLDENWEISER. The world shortage of wheat was the cause.
Doctor COMMONS. It may be another nonmonetary cause.
Doctor MILLER. When you have a period of fairly prolonged dullness in trade, it is inevitable that there is going to be sooner or later
a revival, and that revival will show itself in the movement of
prices. It may be the upward movement of prices that produced the
revival; it may be the signal that the consumer wants mor^ goods;
it may be an indication that the producer is willing to face the hazards of resuming, but whatever may be the combination of causes, I
should say that they became active in the latter part of the year 1924,
and it may haye been that the immediate cause was the increased demand for farm products and the buying in this country by Europe
because of the favorable terms upon which they could get credits here.
Doctor COMMONS. The rate of interest was very low, so they could
float their securities in this country and borrow more money.
So, putting it in your own terms, does it not come out this way,
that when business is dull you can not push things, you can not crowd
things, but meanwhile you can enormously increase the possibilities;
that is, you can increase the gold imports, just taking that period?
The CHAIRMAN. YOU are speaking now of the action of the Federal
Reserve Board?
Doctor COMMONS. Yes; I am thinking now partly of the action of
the Federal Reserve Board. There are two things the Federal Re-



serve Board controls—open market and the low rates of discount. As
to the gold imports, I do not know. Would you say the Federal Reserve Board controls that or not ?
Doctor MILLER. The money rates control that in normal times and,
to the extent that the Federal reserve is a factor in the money rate,
it can control it. In 1924 the world was not yet on a gold standard,
gold movements were not free and were not so responsive to money
Doctor COMMONS. It was also during the early half of 1924 that
you kept piling partly gold from abroad, partly open-market purchases, and the very low rate of discount, amd it had no effect. Now,
if you should take the time factor into account, we should hardly
expect any of these forces to operate coincidentally, should we? We
would have to have a time interval, and that time interval apparently
comes from some industry that starts up or something that starts the
demand. Then all of your Federal-reserve policy, all of your accumulations of easy money, begin to concentrate on that nonmonetary
factor, which you say is the demand side, and you have an easy
market which they can immediately take hold of, so you have practically there one of the most rapid rises of prices, and if you take the
export prices you will find that they rose about the same as all domestic prices.
I think that this analysis follows exactly the answer you made to
Congressman King the other day, in which you said that in a dull
time no low rate of interest will help anything. I would say also
no gold imports would help and no open-market purchases would
help, and, when things are going down, everybody is pessimistic.
But you also say that when the things do start up then you can
stimulate the start by having these low rates and these open-market
purchases, but you have to wait until that time comes.
Is not that entirely consistent with the theory you
Doctor MILLER (interposing). I would not object to that statement.
Doctor COMMONS. It comes under the head of what you call time
Doctor MILLER. Yes.
Doctor COMMONS. If there is a dull season here and you know that
low, easy money is not going to help, yet if by timely action preceding that you prepare the way and get an easy money market, thea
when the time comes that demand will absorb it and you will have
this increase in price. Of course, there was a great increase in the
volume of production at that time, as your figures also show. Would
you say, then, if you took into account the time factor or time limits,
if you planned in advance at the proper time your discount rates and
your open-market rates in the prospect of some event that is going
to happen, which you know always will happen—you know there will
be seasonal upturns of industry and all that—if you h^ve prepared
for that, you can by that means effect a demand for credit along
with the return of business activity—that is, you can stimulate the
demand ?
Doctor MILLER. Stimulate the use.
Doctor COMMONS. Yes; stimulate the use.



Doctor MILLER. Yes; by making your credit cheaper at the time
when business wants creait and wants to borrow. If it does not
want it, you get no appreciable response.
Doctor COMMONS. YOU have got to wait.
Doctor MILLER. There must be an appetite for credit before you
can affect the consumption of credit by your rate.
Doctor COMMONS. I t is just like feeding my hogs. I can go out
and fill the tank with plenty of provender, but if the hogs are not
hungry they won't eat it. So you can fill the market with money,
and if the market has not any expectations or boost it won't take it,
but when it does take it it will take it very fast. You may have a
rapid rise of prices.
I would like to go on with the period of 1922-23 in order to get
this thing down to a quantitative basis. We have just so far talked
qualitatively, not quantitatively, and it appears that in 1922-23 you
used the same instruments you talked about here with very great
I should like to analyze the different factors of 1922-23. First,
the net gold imports from September, 1920, to March, 1923,1 figured
out to be $1,120,000,000.
Doctor GOLDENWEISER. That sounds as if it were correct; 1920 is
not on this chart, but there were two or three months of heavy gold
imports during the latter part of 1920.



Doctor COMMONS. But we had net exports prior to September,
1920; then we began to have an accumulation of net imports, which
I figured during that time, up to March of 1923, was $1,120,000,000.
Now, on top of that, during that, same period, you first started in to
buy securities—what year was that ?
Doctor GOLDENWEISER. 1922, you mean?
Doctor COMMONS. The first part, up until May, 1922, you were buying securities. How much in securities were bought during that
year? Was that the low point?
Doctor GOLDENWEISER. This is about the low point, yes; close to
the low point.
Doctor COMMONS. Apparently the buying of securities early in
1922 had no effect. It simply enabled the member banks to pay
their debts to the Federal reserve system, so you would say that
the security buying would not have any effect—would that be the
way you would interpret it ?
Doctor MILLER. Y es; I would say it simply changed the name of
the credit.
Doctor COMMONS. NOW, from May, 1922, when the open market
committee began operating—May or June, 1922—and began selling
securities, until the middle of 1923, how much was sold?
Doctor GOLDENWEISER. About $500,000,000.
Doctor COMMONS. I would like to follow that up in relation to 1922
prices. This is the way I find it: That beginning in January, 1922,
up until April, 1923, prices arose from about 138 to about
Doctor GOLDENWEISER. One fifty-nine.
Doctor COMMONS. That was an increase of about how much?
Doctor GOLDENWEISER. About 15 per cent.
Doctor COMMONS. NOW, we had a discount rate there of what ?
Doctor GOLDENWEISER. The discount rate at New York was 4 per
cent during most of that period.
Doctor COMMONS. NOW, we had then a rise of prices beginning in
1922—going up very rapidly.
Doctor MILLER. What part of the year?
Doctor COMMONS. The beginning of 1922.
Doctor GOLDENWEISER. January, 1922, was the postwar low point.
Doctor COMMONS. That is to say, 1921 was the year of depression,
and business started up in January, 1922. As you doubtless remember
at that time a great many people became alarmed at the rapid rate
at which prices were advancing in 1922 and 1923, and they predicted
that there was a recurrence of the inflation of 1919. In fact, at a
certain period their prices were rising more rapidly than they had
risen in 1919.
What would be the counteracting effects by which, as a reserve
system, you would attempt to check that rise of prices ?
Doctor MILLER. Well, I should say that, taking the period as a
whole, the Federal reserve did not undertake to check that rise in
prices, on the theory that that rise in prices was due to certain
economic factors that inevitably would and should be permitted
to work out their effects in price changes. We were emerging from



a period of acute depression. Business was at a low ebb. Goods
were in short supply, and a rise of prices as interpreted by the Federal reserve would be the signal that the consumer was beginning
to show a disposition to consume, and we had concurrently an upward
movement of prices and an upward movement of production and
The CHAIRMAN. The chart that is now introduced is called " Production of manufactures and minerals."
The chart referred to is printed below.)

Doctor MILLER. Prices were rising from the low level of 1921,
both the curve marked "Manufactures" and the curve marked
Doctor COMMONS. May I answer there that your index of industrial production shows that the physical volume of industrial production rose from about 74 in January, 1922, to about 107 in April
or May, 1923. That would be an increase in the physical volume of
production of about from 74 to 107.
Doctor GOLDENWEISER. That is about 50 per cent.
Doctor MILLER. That is a very pronounced increase.
Doctor COMMONS. NOW, if you take your pay rolls, they showed
an increase in 1922
The CHAIRMAN. The chart that is now introduced is "Factory
employment and pay rolls."



(The chart referred to is printed below.)

Doctor COMMONS. That increased how much?
Doctor MILLER. From under 80 to about 120. That is also 50 per
Doctor COMMONS. NOW, employment increased
Doctor GOLDENWEISER. From about 83 to about 104, about 25 per
Mr. BEEDY. From January, 1922, to when ?
Doctor GOLDENWEISER. From January, 1922, to about May, 1923.
Doctor COMMONS. NOW, I understand from reading the bulletin of
that period, 1923, that it was considered by the Federal Reserve
Board that there was no inflation because there were still people
unemployed, because production had not reached its normal, saying
there were 3,000,000 or 4,000,000 people out of employment in 1921.
They had to b© absorbed into industry, and it was not until about
March or April, 1923, on the basis of the statistics you had, that you
could infer that production and employment had about reached full
production and full employment.
Doctor MILLER. Yes; we will let it go at that, and that the rise of
prices had about exhausted its effects on the activity of the productive agencies of the country, and that the movement had approximately reached its end or was about to.
Doctor COMMONS. That was on the basis of such statistics as you
had been compiling at that time. Well, then, this alarm that was
felt by the public generally about that increase in prices did not
alarm you because you felt that it had not gone far enough yet—that
is, in January and February—to stabilize production ?
Doctor MILLER. I would not, of course, use those terms
Doctor COMMONS. Stabilize employment?
Doctor MILLER. We were not thinking of stabilization at all. If
we had been thinking of stabilization, I think we might have put



the brakes on this movement and either checked or destroyed the
first considerable spasm of recovery after the depression of 1921.
Doctor COMMONS. HOW would you put the brakes on ?
Doctor MILLER. By a very severe contraction of credits.
Doctor COMMONS. YOU would have contracted credits by what
methods ?
Doctor MILLER. By any method available.
Doctor COMMONS. Discount rate?
Doctor MILLER. Discount rate.
Doctor COMMONS. YOU would have raised the discount rate ?
Doctor MILLER. Also by more energetic sales to the open market.
We still had a considerable volume of securities that could have been
sold to the market.
Doctor COMMONS. YOU were selling them ?
Doctor MILLER. By very gradual degrees, merely to feel out the
situation, without, however, any definite commitment that the situation was one that needed firm restrain and control.
In other words, I would say that the policy of the Federal reserve
at that time was one of concern, but it did not propose to get alarmed
because of the expression of alarm in the public press and in certain
scientific business reviews, unless it found that conditions pretty
definitely warranted it.
I would say only because we are talking here in connection with a
legislative proposal, that attaches particular importance to the price
curve, that the significance of this particular episode is that the
Federal reserve, to the extent it gave a good performance at that
time, gave it because it was not concerned with stability of prices.
Prices were moving rapidly upward, but I think the judgment of
the Federal reserve may be properly said to have amounted to about
this, that it did not interpret that upward movement of prices as
inflationary in character, because close tab on the situation showed
that while prices were moving upward, so was production and trade,
and sooner or later production would overtake the rise of prices, demand would be satisfied, and prices in turn would trend downward,
and, as a matter of fact, I think they did beginning about mid year,
Mr. WINGO. Do you recall whether or not the board realized that
that upward movement had about spent its force ?
Doctor MILLER. Yes; I think it was our view in April that the
movement had about spent its force. If we could go back now,
or if we knew then what we know now, my own disposition would be
to say that the Federal reserve might even have dispensed with
the slight precautionary operations that it then engaged in, to wit,
an advance of the discount rate in New York, I think in March of
The CHAIRMAN. I notice this, Doctor Miller, that following the
activities of the board in the spring of 1923, the wholesale price level
went down until, say, September of 1923, to about 97 or 98, which
was followed by some irregularity later on in the year and in the
early part of 1924, but in midsummer of 1924 the wholesale price
level reached the low point of about 95. Was that lowering to that
point of 95 the direct result of the activities that were taken by the
Federal Reserve Board in the early part of 1023 ?



Doctor MILLER. I would say emphatically no; emphatically no. I
would say that prices were down at that time primarily because
they went up so high in the previous period and that the whole
movement of prices in this period was one toward the ascertainment of a new level. The prices themselves were, so to speak, finding their new level.
The CHAIRMAN. SO any actions of the Federal Keserve Board
taken in 1923 were not reflected in that movement of low prices of
95 in 1924?
Doctor MIIXER. I would not want to go so far as to say that. They
were a factor, but, I should say, mainly a psychological factor. The
very existence of the Federal reserve, the assurance that there was
a reservoir that could be drawn upon for credit in case of increased
credit needs, acted as a moderating and steadying influence, and
rates also had a minor effect.
The CHAIRMAN. When the wholesale prices reached that low point
of 95 in midsummer of 1924, there was an immediate upturn. What
part did the Federal reserve management have in that ?
Doctor MILLER. In the upturn?
The CHAIRMAN. Yes. Just what occurred in the management of
the Federal Reserve Board at that point, when the general wholesale price level reached the point of 95 ?
Doctor MILLER. YOU mean, in reaching the low point ?
The CHAIRMAN. At that point when the wholesale price level
reached 95, what did the Federal Reserve Board do, if anything?
Doctor MILLER. The Federal Reserve Board was easing the situation at the time the price level was descending. The price level was
descending in the first half of the year 1924. That was the time when
the Federal reserve was pursuing definitely a policy of easing the
situation, not for the purpose primarily of restraining the fall of
prices. That was undertaken from an entirely different set of considerations. Nevertheless, if it had been its policy to try to direct its
credit policy toward an influence on the movement of prices, the easing of the money market at this time would have shown, I think, no
immediate effects on price movements.
After midyear of 1924 prices began to rise. At about the same
time the credit policy of the Federal reserve shows the application of
some pressure on the situation.
Doctor GOLDENWEISER. You are referring to the period of 1925 ?
Doctor MILLER. 1924. The Federal reserve began to sell securities toward the end of the year 1924.
In brief, I would say its attitude was one of exercising some pressure. In the meantime prices were going up.
Now, here is a question, Doctor Commons, that I think we have
already covered—to what extent the credit that was available by
reason of large gold imports in the first half of 1924 and by the
liberal credit policy of the Federal reserve system was responsible for
the movement of prices that went on later in the year.
Doctor COMMONS. YOU said that the fall in 1924 was due to reaction
of what had occurred in 1923. Do you say that the price level in
April and May, 1923, had gone too high ?
Doctor MILLER. NO.
Doctor COMMONS. What do you mean by " reaction " ?



Doctor MILLER. I mean that prices went up because of shortages of
Doctor COMMONS. In 1923?
Doctor MILLER. Yes. The whole productive machinery of the country was speeded up to the highest point, I think, that was ever
registered previous to 1926. The consumer demand could not keep up
with the producing capacity, and therefore it was inevitable that
goods should come on the market in greater amount than could be
taken off, except at a lower price level.
That is what I mean by saying that the decline of prices in 1924
was a reaction.
Doctor COMMONS. If that is true, you should have applied pressure
earlier than you actually did in 1922 and 1923 in order to keep that
production from going up to the 1923 peak?
Doctor MILLER. I can not follow you there, and I can not grant it.
Doctor COMMONS. If you had foreseen that 1923 would bring you
overproduction, then you should have applied it earlier and more
experimentally, as we were speaking a moment ago.
Doctor MILLER. I do not think it would have made any difference.
I think if we had, these prices would have risen even higher.
The CHAIRMAN. I am going to suggest, as it is 20 minutes to 1, the
committee recess until to-morrow morning at 10.30.
(Whereupon, at 12.40 o'clock p. m., an adjournment was taken until
Thursday, May 17, 1928, at 10.30 o'clock a. m.)

Thursday, May 17,1928.
The committee met at 10.30 o'clock a. m., pursuant to adjournment,
Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will come to order. We will resume the hearings on H. R. 11806. If you gentlemen can remember
where you left off, we will be very glad to have you proceed.

Doctor COMMONS. I think, Mr. Chairman and Mr. Miller, that I
was trying to bring out the comparison between the 1919 and 1920
operations and the 1922 and 1923 operations, to see what, you might
say, the Federal reserve system learned by experience in those two
events. I do not know whether you have a chart here of the price
movements back to 1919.
Doctor GOLDENWEISER. I am afraid I have not the 1919 chart today. I brought one that goes back to 1921.
Doctor COMMONS. I want the 1919.
Doctor GOLDENWEISER. I have not one for months that far back.
I have one by years. Will that do ?
Doctor MILLER. DO you want one covering the years 1919 and
Doctor COMMONS. Yes. The computations from the Bureau of
Labor indicate that the wholesale price level rose from 201 in April,
1919, up to 249.



Doctor GOLDENWEISER. I have the chart covering that here.
Doctor COMMONS. And, according to the Federal reserve bulletin
the corresponding movement was from 195 to 269, which would show
that tKe two estimates did not move quite the same, There was an
average 25 per cent increase according to the Bureau of Labor, and a
much larger increase as shown by the Federal reserve bulletin.
In the period of 1922 we had a rise in prices of—I think we figured
it out the other day——
The CHAIRMAN. DO you want to put this chart in the record ?
Doctor COMMONS. I prefer the one from 1919.
Doctor GOLDENWEISER. I will have one put in going back to 1919.
I do not have it here, but I will put it in the record. It is on the
1913 base and covers the years 1913-1926.

Doctor COMMONS. NOW, there are certain monetary and credit
policies, and there are nonmonetary business situations. The question
I want to raise, Mr. Miller, is: What is the difference between those
two circumstances which in 1919 and 1920 caused prices to go up
25 to 40 per cent; that is, from the beginning of 1919 to 1920?
Doctor MILLER. What caused prices to rise 25 to 40 per cent from
1919 to 1920, and what per cent in the second period ?
Doctor COMMONS, About 15 per cent.
Doctor GOLDENWEISER. From 138 in January, 1922, to 159 in May,
1923. That is about 15 per cent.
Doctor MILLER. My answer would be, nobody knows.
Doctor COMMONS. Now, let us take the operations that were occurring at that time. I will analyze them partly. In the first part
of 1919 the Government was lending money to Europe up until about
April. That would increase the purchasing power of Europe. From
that time on until, we will say, the early part of 1920, the banks in
this country were lending on short-term paper to Europe to the
extent of nearly $4,000,000,000. The estimates have been made. I
figure that it was about three and three-quarters up to $4,000,000,000.



Now, that would augment the purchasing power of Europe for
American commodities, would it not?
Doctor MILLER. Yes.
Doctor COMMONS. SO that during that year, 1919-1920, Euirope
had a purchasing power originating in America, first by Government loans and then by bank loans, of about $5,000,000,000, which had
increased their purchasing power.
Mr. GOLDSBOROUGH. Was that all utilized?
Doctor COMMONS. I t probably was. This four billion of bank loans
to Europe would be in what form; partly bankers' acceptances?
Doctor MILLER. Yes. I do not think that would constitute the
most important part of it* I am at something of a disadvantage in
discussing this in detail, because it has not been in my mind tor a
long time. But, as I recall, it was in part a direct credit, or loans
made by our Government to European governments. In that case
it would be a credit in American banks. That is, our Government,
which issued the Victory loan in the spring of 1919, and was bringing out issues of short-dated securities throughout the whole of the
year, would use the proceeds in part to grant credits to the European
governments. My impression is that those aggregated about two and
one-half billion in 1919.
Doctor GOLDENWEISER. I think that was approximately the figure.
Doctor MILLER. In addition, it was assumed by many of our leading exporters, particularly of foodstuffs, that because of the depleted
stocks of Europe there would be a very heavy demand for American
breadstuffs, pork products, and so on; and there were enormous
masses of pork products particularly that were sent to Europe on
consignment and financed by American credit, partly in the shape
of domestic acceptances and in other cases by foreign acceptances.
By foreign acceptances I mean acceptances by American banks, but
against export transactions. There were direct expenditures in
Europe. If I remember rightly, something like two hundred millions
in gold was taken from Germany, from the Reichsbank, and was
used in part payment for foods and other needed materials that went
into Germany.
As to other loans, I would have to refresh myself by looking back
at the record.
Doctor COMMONS. If the Government loaned two and one-^half
billion, and if this estimate of what the banks loaned, four billion,
is correct, that would be about six and one-half billions ?
Doctor MILLER. I would say that would be an exaggerated figure.
Doctor GOLDENWEISER. I think so.
Doctor MILLER. Very grossly exaggerated.
Doctor COMMONS. What would you put it at; about five billion ?
I have in mind the estimate—you are familiar with it, I think—that
was made by B. M. Anderson in the Chase Bulletin, where he put it
during that period at three billion seven hundred million.
Doctor GOLDENWEISER. That figure is controversial.
Doctor COMMONS. Then the Government loans were two and onehalf billion?
Doctor GOLDENWEISER. Perhaps.



Doctor COMMONS. Am I correct in saying that that four and onehalf billion of increased purchasing power was given to Europe on
the indebtedness to America ?
Doctor MILLER. Nobody can say whether that is correct or incorrect. I think all we can say for the purpose of the discussion is, let
it be taken as a basis for whatever conclusion you want to draw from
it. But I would at once say that if the validity of your conclusion
depends upon the accuracy of that figure, your conclusion would be
subject to——
Doctor COMMONS. Investigations?
Doctor MILLER. Yes. It probably could not be determined, either.
Those facts are not ascertainable at this date. They were not then
Doctor GOLDENWEISER. There is a good deal of duplication, Mr.
Commons, because the estimate of what the banks had included bank
balances, and some of those balances were created through loans
secured from the Government.
Doctor COMMONS. I see your point.
Doctor GOLDENWEISER. SO there is a good deal of duplication.
Doctor COMMONS. Any how, there was a large amount, four billion three and one-half billion, or whatever it was. It increased the
purchasing power of Europe, and it was based on credits which they
obtained in America. Now, that would be one reason for increasing
the level of prices, especially our export prices, would it not?
Doctor MILLER. I should say it was a factor in the actual increase
of prices that then took place. I mean we are now dealing with an
actual situation, are we not?
Doctor COMMONS. Yes.
Doctor MILLER. Not with an imaginary one.
Doctor MILLER. In that actual situation it was a factor.
Doctor COMMONS. NOW, at the same time, during 1919, we exported
large quantities of gold. You mentioned a transfer in Europe;
but our exportation of gold during that period, I figure, was nearly
Doctor GOLDENWEISER. That is correct; yes.
Doctor MILLER. The net figure.
Doctor COMMONS. The net figure was nearly $300,000,000. Now,
what would be the effect of that $300,000,000 of gold going to Europe?
Doctor MILLER. My recollection is that it did not go to Europe.
Doctor MILLER. It went to South America, to Japan, and to other
countries that had gold credits here.
Doctor COMMONS. SO you would not count that as increasing the
purchasing power of Europe in any way ?
Doctor MILLER. Not at all.
Doctor COMMONS. It would, however, require the American banks
to borrow at Federal reserve banks, would it not?
Doctor MILLER. TO the extent that it had not been previously earmarked. I do not know about that. Some of the gold was earmarked, was it not ?



Doctor GOLDENWEISER. I think not, Doctor Miller. A large part of
it was an Argentine credit, but it was not earmarked.
Doctor COMMONS. But it went from the American banks to Argentina or other countries?
Doctor COMMONS. SO those American banks that shipped gold
would have been compelled, according to their condition, to borrow ?
Doctor COMMONS. Have you the figure there, during that year, of
the increased borrowings by the member banks of the reserve system?
Doctor GOLDENWEISER. During 1919 they increased about six hundred millions. I have the figures here of the total borrowings of
member banks.
Doctor COMMONS. What was the increase from the beginning of
1919 up to May or June, 1920?
Doctor GOLDENWEISER. They increased from about $1,600,000,000
to about $2,500,000,000, an increase of about $900,000,000.
Doctor COMMONS. That increased the debt of member banks to the
reserve system about $900,000,000. Now, those borrowings may have
been of a different character, but I figure that the bulk of them was
Government collateral; that is, most of that borrowing was done on
the basis of Government collateral.
Doctor MILLER. I think that is probably true. Have you the
classifications there?
Doctor GOLDENWEISER. Yes; I have the figures here. As it happens, it was not so. I jnean, there was no increase during the period
in the borrowings on Government collateral, and practically the
entire increase was in borrowings other than on Government
Doctor COMMONS. I have here a chart that I put in recently, Doctor Miller, and it shows the increased Government collateral, followed by the increased eligible paper, showing that in 1919 about 97
per cent of the total borrowing was on Government collateral.
Doctor MILLER. I think you must be using the same term in different senses.
Doctor COMMONS. HOW do you figure it ?
Doctor GOLDENWEISER. I think it is this way, Doctor Commons:
It is true that a large proportion of the borrowings in the beginning
of 1919 were on Government collateral. Out of a total of $1,600,000,000, $1,350,000,000 was on Government collateral. This was a
period, however, during which the increased additional borrowing
was not on Government collateral; so that when you speak of the
increase during this period it was in loans other than on Government
collateral; this class of loans increased from $250,000,000 in January,
1919, to $1,150,000,000 in June, 1920.
Doctor COMMONS. That is the commercial paper and eligible paper ?
Doctor GOLDENWEISER. Yes. The growth in that period was not on
Government collateral.
Doctor COMMONS. I think that if you examine this you will find
tkat it corresponds with what I have. Here [indicating] I have the




increase an Government collateral. This is 1919. There was really
a falling off in other collateral. (Chart, Commons; Federal reserve
bank holdings of bills discounted, p. 77.)
Doctor COMMONS. Then the Government collateral fell, and the
other greatly increased.
Doctor COMMONS. SO that if you average it up, this [indicating]
being the total, it is composed of those two.
Doctor GOLDENWEISER, Yes. Your chart is evidently based on the
same figures.
Doctor COMMONS. NOW, at that time you had two rates of discount
on paper secured by Government collateral. Have you your money
rates for 1919?
Doctor GOLDENWEISER. I believe that the Government collateral
rates were 4 and 4*4 per cent in the early part of the year.
The CHAIRMAN. Let me suggest that inasmuch as you are referring
to various charts, it is going to be almost impossible for anyone to
understand this testimony unless these charts are properly inserted.
The committee will have to rely on the witnesses to insert at the
proper points in these hearings a statement as to these charts that they
are referring to.
Doctor COMMONS. This is chart 2 of my testimony, which I introduced. It shows that the rate on Government collateral in 1919
was 414.
Doctor MILLER. At what point?
Doctor COMMONS. During thee-quarters of the year 1919; and that
the rate on eligible paper was 4%.
The rate on Government collateral was raised in 1918 to 4*4v and
that continued until about October, 1919, and at the corresponding
dates the rate on industrial or commercial paper was 4%. It kept
that difference until along in 1921, when the two rates were consolidated, and the differential at the peak of 1920 was 1 per cent.
That is to say, on eligible paper, commercial paper, it was 7 per
cent, but on Government paper it was only 6 per cent.
Doctor MILLER. In New York?
Doctor COMMONS. Yes; in New York.
Now, the question is would 4 ^ per cent, which represented, I
should say, 90 per cent of the borrowings, have been a low rate at that
time? Would you consider that a low rate?
Doctor MILLER. I would consider them both low.
Doctor COMMONS. What is your standard of measuring a high or
low rate ?
Doctor MILLER, The rate of growth of borrowing under a given
rate and the use that is made of the proceeds of the credit obtained
from the reserve bank.
Doctor COMMONS. Apparently, then, you would compare it with
the rate that the banks charge their customers ?
Doctor MILLER. Not primarily.



Doctor COMMONS. Have you the banks' commercial rates in New
York at that period ?
Doctor GOLDENWEISER. During most of 1919 they were about 6
per cent.
Doctor COMMONS. They could borrow at 4 ^ a ^d lend to their
customers at 6 per cent. Would that be the standard by which you
would measure it?
Doctor MILLER. Not alone; no.
Doctor COMMONS. What else would you use?
Doctor MILLER. What you need to know is why people are bidding for money and what they are doing with the money ?
Doctor COMMONS. Yes.
Doctor MILLER. If you bring into the picture at this point a chart
showing the movement of trade and production, it will develop, I
think, pretty clearly that this increase of credit was not validating
itself, economically speaking, by any commensurate effects in increased productivity in trade; in other words; that it was inflationary
in character. If it had been a real contribution to the increased productivity of the country, it would have been, I will not say unobjectionable but certainly less objectionable, and would have carried with
it the same degree ox danger.
Doctor COMMONS. YOU do not have your production charts running
back to 1919?
Doctor MILLER. I think so.
Doctor COMMONS Those published here do not go back to 1919.
Doctor COMMONS. Did you in 1919 have data on that question ?
Doctor MILLER. Nothing that was of a valid character. You have
one chart here, have you not, on production, prices, and credit?
Doctor MILLER. NO ; we had nothing that was anything more than
crude and fragmentary.
Doctor COMMONS. Can you figure out from 1919 to 1920 what was
the increase in production ?
Doctor GOLDENWEISER. From 1919 to 1920 there was a slight
increase in production.
Doctor MILLER. Let us interpret this a little more broadly. In
1919 there was really no increase in production.
Doctor COMMONS. Just a moment. This chart is to be inserted.
The CHAIRMAN. Without objection, the chart will be placed in the
record at this point.
Mr. STRONG. Referring to the chart entitled "Production, prices,
and credit"?
Doctor MILLER. Yes, sir.
Doctor MILLER. One of the lines on this chart shows the movement
of output in manufactures. My reading of that, for purposes of
a general discussion, is that the year 1919 shows no appreciable increase in the volume of production. My best guess would be that on
the whole, if you average the year, you get a slightly downward



trend. Certainly there is no pronounced change. On the other
hand, there is a pronounced growth of bank credit. There is a
marked upward rise in prices, and I suspect this is what you are
after, Doctor Commons.
Doctor COMMONS. Yes.
Doctor MILLER. SO I will anticipate you. It was the more rapid
increase of bank credit than of production, or the rapid increase of
bank credit with a practically unchanging output of industry, that
lifted the wholesale price curve.
Doctor COMMONS. Then that is what you would call inflation ?
Doctor MILLER. That is what I would call inflation.

Doctor COMMONS. Inflation is not a rise of prices merely if it is
accompanied with a corresponding increased employment and an
increased production of trade. But if prices rise at a point when
everybody is employed and when they can not possibly increase
production any more, then the rise above that you would take to be
inflation ?
Doctor MILLER. I would exclude some of your " ifs " there. It
does not matter what the cause may be; if you have an increased
credit that moves without a response in production, you then have
a rise of prices that is unmistakably due to the fact that credit is
increasing at a more rapid rate than production, whatever may be
the cause why production does not increase.



The CHAIRMAN. And this period that you are speaking of now,
of 1919 and 1920, is just such a period, as I understand?
Doctor MILLER. Yes; I should say 1919 particularly, and just the
early part of 1920.
The CHAIRMAN. NOW, as to this excess amount of bank credit, how
is that loosened ? How is that put into effect ?
Doctor MILLER. There was increased borrowing from the reserve
banks. That supplied the base of this whole credit expansion.
The CHAIRMAN. Then the member banks, through their borrowings at Federal reserve banks, were responsible for that loosening of
an excess amount of credit ?
Doctor MILLER. Yes, sir.
The CHAIRMAN. What prompted that? Was it the high price for
money ? Was the fact that you could borrow at the reserve banks at
a low rate and loan it at a high rate conducive to that ?
Doctor MILLER. It was due in part to the fact that our so-called
war expenses were still going on. The Government was still borrowing, even though the war was over. A large part of those borrowings were financed in 1919, as in prior years, by an expansion of
bank credit which reflected itself into an expansion of Federal reserve
The CHAIRMAN. The point that I was getting at was this: Was
that done for the purpose of making money or was it done for the
purpose of relieving a situation ?
Doctor MILLER. From the point of view of the bank, it was done
for the purpose of making money; but the bank could make money
only as there was an acute demand for credit on the part of borrowers. What actually took place in that year is a long story, but I would
say, having in mind your question particularly, Mr. Chairman, that
the war being over, and there being a disposition for people to lay
aside their self-imposed war-time restrictions, and the Government
relaxing also at the same time many of its controls—for instance,
the War Trade Board, the War Industries Board, and the like—
there was a desire to consume and to buy, and there was real bidding
in the market for goods. That bidding went to a point where it soon
set in operation speculative buying, speculation in inventories for the
rise; and that in part was what gave rise both to the borrowing and
to the rise of prices. Men were speculating in commodities then, as
they are speculating in securities now.
The CHAIRMAN. Then borrowing on the part of member banks at
that time was largely on Government-secured obligations, was it not ?
Doctor MILLER. Mr. Goldenweiser has just given the figures. I
should say it was almost half and half, was it not, when we got into
Doctor GOLDENWEISER. Yes. The increased borrowing over what
they had at the beginning of 1919 was not on Government obligations.
Doctor COMMONS. Mr. Goldenweiser, I would like to have you
check up on that, because my figures show a great increase on Government collateral and a falling off in commercial paper.
Doctor GOLDENWEISER. In the early part of 1919?
Doctor COMMONS. Yes; in the early part of 1919. The increase on
commercial paper started in then, and reached its peak in the latter
part of 1920.



Doctor GOLDENWEISER. I think that is correct. From January to
May, 1919, borrowing on Government collateral increased rapidly.
Doctor COMMONS. SO that it was mainly, I would say 90 or 95 pel*
cent, on Government collateral.
The CHAIRMAN. Here is one other question I want to ask in that
connection. The rate of interest, I understand, is lower on Government-secured borrowings than on commercial paper ?
Doctor MILLER. I t was then.
The CHAIRMAN. Is that the general rule?
Doctor MILLER. NO, sir.
The CHAIRMAN. There is no special rate?
Doctor MILLER. Rates are uniform as between so-called Government-secured paper and commercial paper.
The CHAIRMAN. I S there any difference between a straight loan
secured by Government securities and a repurchase agreement? Is
there a different rate of interest on repurchase agreements?
Doctor MILLER. Not in New York. I think there are possibly one
or two of the banks which have at times made a slight differential.
I think Chicago has at times; whether she still does it or not, I
do not know. But that is an inconsequential part of their business.
Do you happen to know about that, Mr. Goldenweiser?
Doctor GOLDENWEISER. It has been one-eighth of 1 per cent at
The CHAIRMAN. The same as rediscounts?
Doctor COMMONS. If I may refer to this chart again, I figured out
the ratio of Governments to others, and it runs around 50. In the
last few months it has gone up to 95.
Doctor MILLER. What does 95 mean?
Doctor COMMONS. Ninety-five per cent of the total borrowings.
Doctor MILLER. The total borrowings from reserve banks ?
Doctor COMMONS. Yes. This is in this chart 2 of mine, and I think
that might be checked up.
The CHAIRMAN. I would like to get this straight; this borrowing
on Government securities, by particularly the large member banks,
which are the ones that largely go into these big credit movements
with their loans. That is the usual method, is it not, for the large
banks in getting loans from the Federal reserve now—using Government-secured loans, or entering into repurchase agreements?
Doctor MILLER. There is not much of that.
The CHAIRMAN. Not much of the repurchase ?
Doctor MILLER. NO.
The CHAIRMAN. But that method is available, of course, if they
want to resort to it ?
Doctor MILLER. It is available. When you talk of Government
securities, it is a negligible item.
Doctor GOLDENWEISER. Member banks rarely obtain funds from the
Federal reserve banks on repurchase agreements.
Doctor MILLER. I think if you look at any of our recent statements
they will show a rather small amount.
Doctor GOLDENWEISER. Very small.
The CHAIRMAN. In other words, the big banks, who have to respond to these quick movements, and who act as the buffer for with-



drawals by country banks and others occasionally, find it to their advantage to carry large blocks of Government securities to be used
for the purpose of loans at the Federal reserve bank at a moment's
notice ?
Doctor MILLER. I would amend that statement, Mr. Chairman, by
saying that as a matter of general policy they do carry considerable
holdings of Government securities. I think they would do that as a
part of good banking policy, quite irrespective of any thought they
might have of using these as a basis of borrowings from the reserve
banks. Having them, they constitute a most convenient form for
short borrowings. That is, instead of getting together a great portfolio of commercial paper, if they want to borrow $5,000,000, they
take $5,000,000 of Government securities and send them along as
collateral to the reserve bank; or, as the thing works out in practice,
they have large amounts of these Government securities actually in
storage in the reserve banks, do they not, Mr. Goldenweiser!
Doctor MILLER. SO that the reserve bank, as it were, has the collateral right there. The transaction, therefore, is mechanically a very
simple one.
The CHAIRMAN. The borrowing, then, is made available through
the Federal reserve banks, who also act as custodians of Government
Doctor MILLER. Yes.
The CHAIRMAN. SO that their access has been accelerated ?
Doctor MILLER. Simplified.
The CHAIRMAN. Yes; simplified. And, as I understand you, that
class of borrowings is not favored by a lower rate over other rediscounts ?
Doctor MILLER. I do not think it has been since 1920.
Doctor GOLDENWEISER. Certainly not since 1921.
The CHAIRMAN. But in 1919 and 1920 there was a lower rate ?
Doctor MILLER. There was. There was the so-called differential.
The CHAIRMAN. Inasmuch as bonds of public utilities, railroads,
and that class are not eligible as a basis for rediscount or as security
for loans through the Federal reserve bank, is it a good policy, do
you think, for the Federal reserve banks to continue to grant loans
or rediscounts on the basis of Government securities?
Doctor MILLER. YOU are opening up a pretty big question there.
The CHAIRMAN. I realize that.
Doctor MILLER. Personally I would rather be disposed not to think
particularly well of this form of borrowing from Federal reserve
banks. It is not clear just what it does that is objectionable, but I
am inclined to think that in certain cases it facilitates very large
borrowings from Federal reserve banks by banks that are not primarily engaged in commercial lending, and it makes it a little bit
easier, thereiore, to draw money from Federal reserve banks for general financing purposes or other purposes that I think are not strictly
germane to the use of Federal reserve credit; and in practice it has
developed that while the so-called Government-secured member-bank
loan is a 15-day loan, the borrowing may be for a single day.
The CHAIRMAN. It does permit the financing by member banks of
these underwriting houses of investment securities to an extent that
otherwise might not be possible ?



Doctor MILLER. It certainly would not be quite as easy; and if all
of the paper brought for purposes of establishing credit at the reserve
bank had to be commercial credit, at any rate you would have that
test, that the bank that is borrowing is also engaged in making
commercial loans, at least to the extent of the amount of the commercial paper that it brings there. I do not know that you could
reach even a very loose opinion as to how much it would affect the
situation. But I am inclined to think that we have, on the whole,
made access to the facilities of the Federal reserve system by amendments in recent years a little bit too easy. The arrangement has no
particular merit, except from the point of view of the convenience
of the large borrowing member banks, and it might have been considerably better if Federal reserve credit could not be tapped quite
so easily.
The CHAIRMAN. Doctor Commons, I beg your pardon for asking
these questions. There is one more that I want to ask that has reference to the previous question.
Doctor COMMONS. May I ask something on this same question?
Doctor COMMONS. Feeling,

as you do, that it possibly facilitates
borrowing which does not go into commerce but goes into the loan
market or something of that kind, why would it not be a feasible
experiment for the system to reverse the process that they had in
the early days, where they charged a lower rate on loans secured by
Government collateral than they did on eligible paper, and now
charge a higher rate on loans secured by Government collateral as
against eligible paper ? Might not that be a technical device already
within your power which would tend to check that easy flow of credit
outside of commercial paper ?
Doctor MILLER. It would be unpopular.
The CHAIRMAN. Doctor, have you or the board given consideration
to the fixing of different rates on money to use for different purposes ; in other words, a classification on a different basis of different
uses to which money is to be put?
Doctor MILLER. Of course it will not do for any member of the
Federal reserve system to admit that Federal reserve credit can be
used for any purpose but one, to wit, what is broadly called a business purpose; that is, commerce, agriculture, and industry—shorttime borrowing. In fact, from the point of view, I think, of the
Federal reserve act, and at least the traditional interpretation put on
that .act by the Federal Reserve Board, that is the only legitimate
purpose for the use of Federal reserve credit.
Trie CHAIRMAN. It is a pretty well-established fact, however, that
the Federal reserve member banks have discovered a method of using
the Federal reserve funds, either through rediscounts or borrowings,
to obviate that very thing.
Doctor MILLER. I want to be perfectly fair about that. I would
say that by a process of inference you can reach that conclusion. It
is not so easy, in the course of the ordinary operation of a Federal
reserve bank, to say when a member bank borrows, "Are you borrowing for the purpose of lending this for uses that are not contemplated
by the Federal reserve act ?" It goes into a common pool, and it is
not arlways easy to identify that particular credit and say it has gone



into, we will say, stock-exchange loans, or into security loans that are
facilitating the promotion of some new organization, or that it has
gone into real-estate loans, or for some other purpose. That question
has often been discussed in Federal reserve conferences. I t was
recently. I think it is when we look back and see what has taken
place and find that there has been a great growth of security loans, a
great growth of brokers' loans, a slight growth of commercial loans,
no increase in currency, no importation of gold, but a growth of
Federal reserve credit, that the conclusion is justified that that increase of Federal reserve credit has been the basis upon which this
expansion of member-bank loans, mainly security loans, has taken
place. But it is not easy to detect that in its incipient stages.
The CHAIRMAN. An analysis of the portfolios of these banks that
are located in close proximity to the transactions such as you have
referred to, I am sure will reflect a changed condition over that
which existed in 1913, just prior to the organization of the Federal
Doctor MILLER. Yes.
The CHAIRMAN. In other words, these institutions located in close
proximity to the transactions that we are discussing now have found
it to their advantage to make themselves very liquid, or have in their
portfolios the class of securities that are most readily available for
loans or borrowings from the Federal reserve banks, so that the
facilities for easy movement of credit are at hand.
Doctor MILLER. Yes, sir.
The CHAIRMAN. NOW, through the organization of the Federal
reserve that has been possible. I realize, of course, as you men do,
how hard it is to analyze the use to which a dollar of borrowings
from the bank is to be put; but it is an important part of the
Doctor MILLER. Yes. I think it is a most important part and one
that I think is capable of development and improvement. I think
there is a problem in the technique of Federal reserve bank operation
there that from my point of view ought to have more attention,
because I think it is possible to devise a method that is not meddlesome or inquisitorial or objectionable from any reasonable point of
view, that would give some check upon what might be called ungov*
erned borrowing for purposes that are pretty remote from the
Federal reserve act.
Mr. STEAGALL. But, Doctor Miller, could there be any ungoverned
borrowing in the Federal reserve system or from Federal reserve
banks? Does not the law fix limitations, and is not the kind of
paper to which you refer noneligible ?
Doctor MILLER. NO ; it is not. It is eligible.
Mr. STEAGALL. All of it?
Doctor MILLER. We are referring

now specifically—at least that is
what I have in mind—to the so-called member-bank loans for not
over 15 days, with Government securities as collateral.
Mr. STEAGALL. Yes; I understand that.
Doctor MILLER. That is eligible.
Mr. STEAGALL. But what I mean is this: The paper that they offer
you, of course, is eligible; but when it comes to dealing with paper
which is noneligible, the Federal reserve could not take it ?



Doctor MILLER. NO, sir.
Mr. STEAGALL. And therefore, as I understand the situation, that
could not be said to be ungoverned borrowing. I think that is a little
further than you would want to go, if I understand the situation.
Doctor MILLER. When I use the term " ungoverned," I do not mean
ungoverned by the Federal reserve act, but ungoverned by, we will
say, the Federal reserve bank; and perhaps the word " ungoverned "
is not quite the proper word.
Mr. STEAGALL. I do not see how it could be called ungoverned,
except in the sense that it is ungoverned by the will of the Federal
Reserve Board or the will of somebody other than those in charge of
the particular bank that wants to engage in that kind of business.
Doctor MILLER. By " those in charge of the particular bank " you
mean in charge of a particular borrowing bank ?
Doctor MILLER. I use

your term, and I will say ungoverned by the
will of the Federal Reserve Board and the will of the Federal reserve
bank that is supplying the credit. In other words, it is not part of
the practice of the Federal reserve banks, if a member bank comes
in, and especially in these cases that the chairman has in mind in the
larger centers, and borrows $1,000,000 or $5,000,000, to ask, before
it receives the paper, " What are you doing with this money ? Why
are you borrowing? Before we loan this to you we want to satisfy
ourselves that the use you are going to make of it is a use contemplated by the Federal reserve act."
Mr. STEAGALL. Doctor Miller, I am just a little bit old-fashioned
and I am just feeling my way in this situation in so far as any view
I might have is concerned. I am largely governed and influenced
by men like yourself, in whose judgment I have great confidence.
Where would we land if we started with the policy of having a board
limited to a certain number of men with high authority to censor,
superintend, and control the activities of the various and numerous banks throughout the country and indirectly control the policies
of each of those banks? I am just wondering how far we will get
when we start on that road.
Doctor MILLER. I am not prepared to say that it is impossible to
devise an administrative rule that will enable us to test the country's
economic need of credit from the Federal reserve system.
Mr. STEAGALL. Why not let the country itself have a little say in
determining this?
The CHAIRMAN. May I suggest right there that the Secretary of
the Treasury has, in his last two or three annual reports, called attention to the growing tendency of investment securities getting into the
Federal reserve system, and pointing it out as a dangerous tendency.
Mr. STEAGALL. Yes; I think that is true, and I should like to see
it remedied whenever there is danger of evil results coming from
it, but I am thinking of the principle involved in the policy of having
a, board of a limited number of men directing it and ordered by the
law to exercise power so far-reaching.
Doctor MILLER. I think there that possibly you exaggerate the
situation. If something such as you have been criticizing
Mr. STEAGALL. I do not mean to criticize; I am simply trying to



Doctor MILLER. If the situation that you have been inquiring about
were one that actually existed, you have 12 Federal reserve banks
that actually, through their officers and directors, have got to perform this job of satisfying themselves as to the uses their member
banks are making of reserve-bank credit.
Mr. STEAGALL. And I grant you that the tendency to which I
refer, and the benefits, of which there may be some doubt—I am
not prepared to say—I grant you that the tendency is curtailed somewhat, or at least any possible objection to it is curtailed by the fact
that you have the 12 Federal reserve banks located in the different
communities of the country and more or less in touch, of course, with
peculiar conditions in those communities.
Doctor MILLER. There are 25 branches also.
Mr. STEAGALL. But the fact remains that in large measure the
policies of those banks are influenced to a great extent by the one
board in Washington; and I am not saying that in a spirit of criticism against the board; I do not mean it in that way, but I am just
thinking of the vast power involved in a policy underlying legislation. I am just trying to think out loud about it.
Doctor MILLER. I think it constitutes one of the most pressing and
one of the most difficult problems.
Mr. STEAGALL. I think it does.
The CHAIRMAN. NOW, Doctor Commons, I beg your pardon; go
ahead with your questions.
Doctor COMMONS. In this situation in 1919, apparently, according
to your statement, the demand for credit arose from two sources,
first this four or five billions that Europe borrowed in this country
and then the domestic demand greatly increased, so that the rate
in New York on the commercial loans was about 8 per cent; yet
you were at the same time discounting their paper when secured by
bankers' paper, and not the eligible paper at all, except about 5 or
10 per cent, but the bankers' borrowings secured by Government
collateral at about 4*4 per cent. You said that that was a low rate,
considering all those other circumstances. Would it have been a
high rate if the Federal reserve bank had raised that rate up to, say,
7 per cent?
Doctor MILLER. When ?
Doctor COMMONS. In 1919.
Doctor MILLER. 1919 was a year of 12 months.
Doctor COMMONS. I will say the middle of 1919.
Doctor MILLER. The middle of 1919 would have been the beginning of July.
Doctor COMMONS. Yes.
Doctor MILLER. I do not recall at this moment whether the Victory loan payments were out of the way.
Doctor GOLDENWEISER. No; not until November.
Doctor MILLER. Not until November. I do not consider it would
have been advisable to establish a rate of 7 per cent on any class
of paper in the middle of 1919. I think it would have been advisable
to establish a rate of 5 per cent about the 1st of September, 1919. I
choose that particular date because the public debt reached its maximum on the 30th of August; that is, the Government was no longer
in the market for more new money, though it did a large amount, as
it still does, of refinancing.



Doctor COMMONS. YOU kept the rate down there in order not to
accommodate business but in order to accommodate the Treasury in
floating securities ?
Doctor MILLER. The rate was down, and it was left down or left
without very much change until the end of January, 1920.
Doctor COMMONS. Supposing there was no pressure by the Government at that time and you did not allow that differential in favor
of Government securities and they put the commercial rate up to,
say, 6 per cent in the middle of 1919. I must use an "if" here$
because it is the only way I can eliminate the Government influence
from your consideration. If they put the rate up to 5 or 6 or even
8 per cent, nearly to the amount all your commercial banks were
receiving on their loans, would there have been that expansion of
credit ?
Doctor MILLER. Well, I just can not entertain the thought that any
competent body of men would have contemplated the establishment
of a rate as high as 8 per cent in the middle of 1919. I would rather
rephrase it as follows: If the Federal reserve system could have and
had reached the conclusion in the middle of 1919 that, unless it undertook to get an effective control of the credit situation, there would
ensue an expansion of credit, the consequences of which would be
injurious, it would have gone to whatever length was necessary. My
own belief is, if that had been its attitude, it would not have been
necessary to go so high as the rates you have in mind.
Look at the middle of 1919 on the chart. About half of the expansion of credit in 1919 occurred in the first six months, and the other
half in the last six months. In the first six months the item of Government loans was a very large one. I should say that probably a
fairly moderate increase of rates, from your point of view, would
have been adequate. When you speak of an 8 per cent rate you refer
to something that has never yet occurred in the reserve system.
Doctor COMMONS. YOU were compelled to do that in 1920, when
your ratio got low; but supposing you had done it a year before the
time you actually did it,, or six months before—that is, there was no
timely action then—then would you not say, no matter for what cause,
so far as it affects prices, that it was that delay, in starting to raise
the rates which contributed to this inflation in 1920 ?
Doctor MILLER. Yes.
Doctor COMMONS. YOU could not estimate how much, but you could
have experimented. If 5 per cent was not enough, you could have
raised it to 6 per cent, could you not?
Doctor MILLER. Yes.
Doctor COMMONS. NOW, what indications had you in 1919 as to
whether production had reached its maximum?
Doctor MILLER. We had no indication that was worth very much,
if anything. I should say that, turning the tables a little bit on you,
that the economists of the country and the statisticians had been
singularly remiss in not waking up to a service they could render
until the Federal Eeserve Board stimulated them to a little activity
when it was groping around for a statistical basis upon which it could
proceed in formulating its credit policy. We did not know; we were



Doctor COMMONS. But in that year my observation was that in
June and July everybody was employed. I t was a scramble to get
high wages and it was not increasing production, and that is the
principle, as I understand it, with which vou correlate the rise of
prices with the conditions that you do not nave control of. That is
to say, if employment and production are increasing by an increasing
amount of credit, then that would not be inflation, so my information
about it as I observed it at the time traveling over the country and
visiting many factories was that the maximum of production had been
reached in the middle of 1919. Everybody was employed; the laborers were able to command three or four times the wages then that they
ordinarily command^ so that if you had operated then as you did in
1923, upon the principle that as long as industry had not yet reached
its proper proportion, you would probably have taken action in the
middle of 1919. That would be the inference I would draw.
Doctor MILLER. Well, assuming the field had been as clear for independent action on the part of the Federal reserve system in 1919
as it was in 1923. We were still under the influence of war psychology. The Government was still a very large borrower.
Doctor COMMONS. Apart from the Government; if you had been
free from Government influence
Doctor MILLER. If we had been free from Government influence
of any character, and free also from the national psychology of the
moment—and I want to recall very definitely, because we forget these
things, that I think as late as March, 1919, there was set up, under
the auspices of the Department of Commerce a so-called industrial
board. The particular function of that board, as I recall, was to
stabilize—I think that that word was used—the transition from the
war-time economic and industrial situation to the postwar, particularly against the expected collapse of prices. The general assumption was, I think, that there was going to be a great collapse of
industry in 1919. That was in the atmosphere, I think, Doctor Commons, pretty well into midyear. If you will turn back and read
the economic history of the times, you will find that in connection
with this industrial board that I have alluded to, the membership of
which consisted of some very eminent men, who had been here temporarily in Washington in connection with various war boards, the
conclusion was reached that we must moderate the peace-time descent of industry by equipping it with a parachute.
Doctor COMMONS. Which meant a low rate of discount.
Comparing that with 1923, there was in 1923, in May or April, a
situation where you had reached the position where a further increase in prices would have been inflationary in the sense in which
you used the word.
Doctor MILLER. I think I would say, and I am answering you now
on the basis of subsequent information and impressions, and not
contemporaneous ones; I think I would say the general situation
in 1923 was not favorable to an inflationary or a dangerous inflationary development. Agriculture was flat, very flat. There was no r.eal
recuperation of agriculture as yet in sight, and without that I am
inclined to think that inflation was also not in sight.



Doctor COMMONS. I have reference to this question, that the prices
rose 15 per cent and employment was increased until about everybody
that was willing to work was employed, not as to anything else that
would operate, but just that correlation between prices and contraction. There was no indication, as I gather from your monthly
reports, that the price had been risen beyond what was necessary to
bring industry up to, say, a normal capacity, employment, and
Doctor MILLER. Yes; I would put that a little differently. I am
thinking now of what I actually did think at the time, which was
this, that consumer demand had overtaken production and consequently there was a rise of prices, but the evidence derived from our
trade and employment and production charts pretty clearly indicated that production was making rapid strides so that in due course
it would catch up with the increased consumer demand, and at that
point we would have reached, so to speak, a new landing place and
prices would have reached a new point, and then it would have to be
redetermined in accordance with new conditions, whether they were
going to move upward or on a level or downward.
Doctor COMMONS. In 1923, as contrasted with 1919, you carried on
open-market operations. During 1922-23 you were selling securities. The open-market instrument did not appear in 1919. It was
purely a discount policy then, a low discount policy?
Doctor MILLER. That is correct.
Doctor COMMONS. NOW, then, you began selling securities in June,
1922, and continued selling them in very large amounts up to 1923?
Doctor MILLER. Summer of 1923.
Doctor'COMMONS. Will you say that that had no influence at all
in checking the rise of prices?
Doctor MILLER. Let use see the chart showing reserve-bank holdings of United States securities and bills discounted.
Doctor COMMONS. The question is, Did the open-market sales have
any effect whatever in checking the increase in prices in 1922 and
Doctor MILLER. YOU will observe, Doctor Commons, that the line
marked " United States securities " descends pretty steadily, with no
interruption in the first half of the year 1923.
Doctor COMMONS. From about May, 1922, to about the middle of
Doctor MILLER. Well, in the latter part of 1923; you see, it goes
down and then goes up.
Doctor COMMONS. At that point; yes. I bring it up, then, to 1923.
That is the knowledge you had about that time?
Doctor MILLER. Yes; but as that line declined—in other words, as
the holdings of securities diminished, the bills discounted—the credit
obtained from tlie reserve bank by means of bills discounted went
up, so that the effect, I should say, and the justification—or, rather,
let me say the motivation of the policy of selling open-market securities at that time was to apply some sort of a test to the urgency of
the needs for the existing volume of Federal reserve credit; and the
test seemed to indicate that when the burden was shifted on to the
member banks, even though there was an increase in discount rate,



they actually came in and borrowed, so that you have, taking the
year 1923 as a whole, and looking to the upper line—the heavy black
line marked "Total bills and securities"—a fairly uniform trend
for the year.
Doctor COMMONS. Begin back a little further—1922. The price
increase began, as I think, in 1922, did it not?
Doctor MILLEK. Yes. I t began at the third week of 1922, as I
remember it. The prices touched their bottom at the end of the year
1921, and then the movement was upward.
Doctor COMMONS. Was gold coming into the country at that time?
Doctor MILLER. Yes.
Doctor COMMONS. SO that those sales seemed to offset the gold
imports ?
Doctor MILLER. Yes.
Doctor COMMONS. And the borrowings partly augmented the credits in 1922, up to the beginning of 1923; that is, the total bills and
securities was augmented from $1,000,000,000 to, say, $1,300,000,000.
The rise of prices was going on from 1922 up to April, 1923.
The CHAIRMAN. Might I suggest that, if it is agreeable, we will
shortly adjourn until 2.30 this afternoon.
Just before we adjourn I want to call the attention of the committee to an editorial that appears in the Journal of Commerce of
New York. This paper is edited by H. Parker Willis, who was
formerly secretary of the Federal Reserve Board and was one of
those men who was actively engaged in the writing of the Federal
reserve act.
Inasmuch as this editorial refers to matters which are pending
before this committee, I am going to read this.
It is headed " International Bank Tinkering." [Reading:]
[Thursday, May 17, 1928]

Once again it is announced that there is to be a meeting of the heads of
central banks, this time in a foreign country. Those who are "scheduled" to
participate are the governors of the banks of France, Germany, and England,
and also, it is reported, the executive head of one of the Federal reserve banks.
The announcement comes opportunely, just at a time when testimony on the
part of a member of the Federal Reserve Board before the House Banking
and Currency Committee has brought out the real nature of the deliberations
of this same bankers' conference when it met in New York last summer and
afterwards went to Washington for a brief discussion or "interchange of ideas "
with the members of the Reserve Board. What is now planned appears to be
a continuation of the meeting of last summer.
According to the official statement now definitely on file before the Banking
and Currency Committee, last summer's conference was devoted largely to a
consideration of discount rates. The foreign bankers desired to have a cut in
our local discount rate here in the United States in order that they might more
easily accumulate capital and gold in their markets, so they came to the United
States and discussed the matter with one of the reserve banks. The subject
was then informally talked over with the Reserve Board, no " record meeting "
being held, according to the testimony now furnished. Thereafter a cut in
discount rates was initiated at eastern reserve banks, and then the board was
wrought upon by these same banking influences to the extent that it finally
ordered the interior banks to cut their rate. Thus was inaugurated a general



reduction of rates and period of "easy money" all over the country which
powerfully accelerated the movement of funds into the stock market and furthered an inflationary condition all around.
These are the facts as ascertained through authentic public statements, and
the question now is what will be our attitude toward the next bankers' conference? Are we sending to that conference a delegate representing the Federal
Reserve Board and system who is authorized to act for and commit the banking resources of this country to such policy or policies as may be deemed best?
In times past the Federal Reserve Board has denied that it has given any such
roving commission to any member of the system and has asserted positively
that it reserved its own power to do as it saw fit and as circumstances dictated.
It is also of fundamental importance to know by what theory, if any, the
reserve system, and for that matter the central banking organizations, are being
guided in their effort to control or manipulate discount rates. It is not long
since members of the Reserve Board were in the habit of categorically denying
in public their belief that the discount rate had any relation to the price level
or could or should be used to control its movements. On the other hand, the
author of one of the stabilization bills before Congress has lately, in a public
statement issued to the press, asserted that he is informed by the head of one
of the reserve banks that the latter does believe in this use of the discount rate
and is endeavoring experimentally to apply it in that way. To the same source
of authority is ascribed by some the assertion that changes in the discount rate
should never be employed for the purpose of restricting the growth of: speculative or other movements but should be used entirely for the purpose of stabilizing or controlling the prices of commodities. If there has been an actual change
in the policy of the reserve system, why should it not be truthfully announced
to the public? It is only in that way that a fair idea can be formed by the community of what is actually going on in its own banking system.
Ever since our Federal reserve system was formed it has suffered steadily
from back-stairs influences and behind-the-doors conferences. These conferences
were first aimed at the destruction of the authority of the board itself and gave
rise to the famous " council of governors," whose doings never got into the newspapers much but came so close to disrupting the whole system that Governor
Harding, then at the head of the Reserve Board, had to break up the council by
main force. The effort to establish a subterraneons authority in the reserve system has continued and has at times taken form as an alliance between the Treasury Department and one or two of the reserve banks, the department giving
orders directly to these reserve banks and practically leaving the board aside
as a kind of fifth wheel. In short, this phase of our reserve banking system is
not working very well and needs modification. The reason for giving it special
attention at the present moment is found in the recurrence of secret conferences of an international nature, at which we are represented by apparently
unauthorized persons, with bad subsequent results in our domestic financial
Ought not this matter to be given a thorough clearing up before Congress
adjourns, if possible.
The CHAIRMAN. In that connection I would like to ask Doctor
Miller, of the Federal Reserve Board, the same question that Mr.
Willis has asked here:
Are we sending to that conference a delegate representing the
Federal Reserve Board and the system who is authorized to act for
and commit the banking resources of this country to such a policy or
policies as may be deemed best ?
Doctor MILLER. I know nothing about it, Mr. Chairman. I do not
know whether there is any conference that is in contemplation.
Certainly the Federal Reserve Board has sent nobody. As far as I
know, nobody has gone. All that I have heard in connection with the
matter is what is derived from the public press. Officially I know
nothing about it; actually I know nothing about it. Whether anybody has o^one or is on the water or going, I know simply as a matter
of newspaper statement.
The CHAIRMAN. Another question is asked: By what theory, if
any, the reserve system, and, for that matter, the central banking



organizations, are being guided in their effort to control or manipulate discount rates?
Doctor MILLER. YOU are addressing that to me as a question ?

Doctor MILLER. I am not quite clear that I know what that means,
" by what system." Do they mean by what system of conferences?
Mr. STRONG. International conferences.
The CHAIRMAN. I will quote this from the editorial:
It is also of fundamental importance to know by what theory, if any, the
reserve system, and, for that matter, the central banking organizations, are
being guided in their effort to control or manipulate discount rates.

Meaning, of course, that at this conference, apparently the subject
of discount rates will be a part of the discussion.
Doctor MILLER. Well, the statement there, of course, assumes a
degree of knowledge which the editor may or may not have. It
assumes that a group of men are getting together for the purpose of
"manipulating" discount rates. That may or may not be the case;
I do not know; but, in any case, I would be inclined to say that pretty
strong language is being used in the term " manipulation."
I have this feeling, Mr. Chairman: The matter of conferences
between the heads of central European banks and officers of the Federal reserve banks has been made the subject of reference two or
three times in the course of these hearings. I think it is clear, from
what I have said, that I have not personally been in the fullest
sympathy with some of the things that have been undertaken or the
way in which they have been undertaken, but I feel that if the committee is interested in the details in connection with that phase of
Federal reserve bank operation, it is only fair to those who have been
actively identified with those operations that they be your first source
of information and your main source.
If, then, the committee feels that the subject is one of such importance as to merit further investigation, I should be very willing
to be summoned here as a witness to explain my position, but I am
not really in a position to answer some of these questions on the basis
of positive information, and therefore I am afraid this record would
look as though I was either pleading my ignorance or using my
ignorance to construct a case against those of my colleagues, or
officers of the reserve banks, or the reserve banks themselves, that
have been actually' the sponsors) for the program or the action taken
by the Federal reserve banks.
So that I feel, as a matter of simple justice to everybody in interest
and in order to really get the information that you want and need,
that it is not desirable that this subject should be made the matter of
occasional reference, but should be a matter of systematic inquiry.
I am inclined to think that there is a great deal there that might
well be the subject o,f methodical inquiry by the committee. I think
that some good would come from it, but I doubt whether it could well
come from these occasional inquiries addressed to me in connection
with these matters.
Personally I am at your disposal. I want to answer candidly
everything I can, but I do not' want to be in a position where
my candor may perhaps lend itself subsequently to a different




The CHAIRMAN. I might say at this point that Governor Strong,
of the Federal Reserve Bank of New York, has appeared before this
committee and has made statements here in connection with Federal
reserve operations and their contacts with foreign banks of issue.
There is already in the testimony in these hearings much information
on this particular subject.
These conferences that are referred to in this editorial are important conferences affecting the Federal reserve system. It is pertinent to note that apparently these conferences are proceeding independently of the Federal Eeserve Board and are being carried out
independently by the management of one or more of the Federal
reserve banks composing a part of the Federal reserve system.
Mr. GOLDSBOROUGH. Did it not state in this editorial, however, that
there was a lowering of discount rates among the eastern banks as the
result of this international conference? Is not that stated in the
editorial, Mr. Chairman?
The CHAIRMAN. Doctor Miller, who is now a witness before the
committee, stated to the committee that the change in discount rates
occurred after a conference of the heads of these international banks
which took place in New York and Washington.
Mr. GOLDSBOROUGH. Well, is not the Federal Eeserve Board responsible for that change in the rediscount rates which occurred as a
result of the conference between the heads of the central banks of
Europe and the head of the New York Federal Reserve Bank ?
The CHAIRMAN. Doctor Miller is a member of the Federal Reserve
Board, and he can perhaps answer that better than I can.
Mr. GOLDSBOROUGH. The purpose of my making the inquiry was
your statement, Mr. Chairman, which you had put in the record and
which, as I understood it, was that this work which was being done
by officials of the Federal reserve banks was being done independently
of the Federal Reserve Board.
The CHAIRMAN. I assume that that was the case from the statement Doctor Miller made here a few moments ago. It seems to me
that these important conferences with the other banks of issue of the
important countries of the world should be authorized by or at least
known to the Federal Reserve Board before they are entered into.
Mr. GOLDSBOROUGH. Did not the Federal Reserve Board have any
connection with the change in the rediscount rates due to the
conferences ?
Doctor MILLER. There can be no change in discount rates except
with the approval of the Federal Reserve Board.
Mr. GOLDSBOROUGH. And that was done as a result of the conferences which were mentioned here?
Doctor MILLER. It followed them, and it is my understanding that
it was involved in conclusions that grew out of the conversations and
interchanges that occurred in connection with the visit of European
bankers here last summer, but let me say that if it is the disposition
of the committee to want to go into it, I know very little about what
took place. I can speak only as to what I did and not as to what
others may have done.
Mr. GOLDSBOROUGH. The situation in this country now, as I understand it, is that the public has absolutely gone wild on the subject of
speculation, and that it is due more than anything else to the action



of the Federal reserve banks in refusing to gradually raise their redis*
count rates at the time when this wild speculation was evidently
beginning, and it would be very interesting to me to know just why
the Federal Reserve Board did not check that very apparent tendency
at the proper time, which has now gotten away from everybody.
Doctor MILLER. When was it apparent?
Mr. GOLDSBOROUGH. It has been apparent for two years.
Doctor MILLER. YOU are talking in new dimensions.
Mr. GOLDSBOROUGH. You asked when it was apparent, and I said for
two years.
Doctor MILLER. When you asked the question, I supposed you had
in mind this most recent phase of it.
Doctor MILLER. I quite


agree with you, though I think, if I wrere
in the privileged position of an outsider, I would be inclined to suspend judgment, final judgment, upon the developments that have been
in progress in this country in the last four years until the whole
chapter is written out. I am not at all convinced that we have not
been going through a revolution in American business that may mean
that we have got to reappraise a great many things in new terms. So
that if I were in a position where I could forthwith indulge this
privilege of an outsider I would want to see what the thing was going
to eventually include.
It has been my consistent position, as a member of the Federal
Reserve Board for a period of almost four years, that we were in
danger of sowing the wind ultimately to reap the whirlwind, and I
have not felt easy and comfortable about it.
Mr. GOLDSBOROUGH. There have been efforts made by certain members of this committee—in other words, there have been hearings here
every year since 1922 on this question of stabilization and the effort
to try to avert just what is about to happen, and my contention always
was before the committee that unless we had some automatic process
by which credit could be controlled, the pressure of business would
overcome the will of the Federal reserve system and that it absolutely
would get beyond control.
It has always been my theory that no set of men could possibly
control the pressure of big business when it portrayed a condition
when any appreciable raising of the discount rates would probably
cause a panic or some terrible business calamity.
That has been my theory, and it was under that theory that I introduced the Fisher bill, which would produce, it seems to me, an
automatic control of the situation.
The CHAIRMAN. I want to state here that what has been said in
the statement I made is no attempt on my part to criticize any governor of any of the Federal reserve banks participating in the" conference referred to, but, realizing the importance of these conferences
to the management of the Federal reserve system and this country, it
has seemed to me important that the Federal Reserve Board should
have knowledge of and authorize such conferences, and it is a matter
of some surprise to us to find that no such authorization has been
given. I do not know, except from the newspaper reports, as apparently Doctor Miller does not know, that a conference is about to
take place to which the editorial in the Journal of Commerce has



referred. The cooperation of our Federal reserve system with the
banks of issue of the other countries of the world I regard as of
extreme importance; in fact, I do not think there is any other function that is more important at the present time than that cooperation,
but when it is entered into it seems to me as if it ought to be entered
into with the fullest knowledge and after due and deliberate consideration of matters that are to be discussed.
Mr. STEAGALL. I want to ask you this question. There may have
been discussion of it in my absence, because, unfortunately, I have
not been able to attend all of these hearings.
At one time the Federal reserve banks were committed to certain
loans in Europe. What is the status of the relations of our banks
now with the European situation in that connection ?
Doctor MILLER. I would have to refresh mvself on that. These
were in the nature of credits, or arrangements for credits.
Mr. STEAGALL. Yes. At one time we were told that there was an
agreement made with the Bank of England by which, upon request
or demand, we were to loan them $200,000,000.
Doctor MILLER. Up to $200,000,000.
Mr. STEAGALL. I am not sure that I remember all the details of
that arrangement, but somewhere in some way I was informed, or
got the impression, that there were other loans of similar nature;
and I would just like, if you can, to have you give us the information in that connection and let it go in the record.
Doctor MILLER. DO you want me to give you my offhand impression?
Mr. STEAGALL. Offhand, and if it is not entirely correct you may
change it when you go over the record.
Doctor MILLER. Please check me, Doctor Goldenweiser, where I am
not correct.
I think the first central bank credit arrangement that followed
that made in 1925 with the Bank of England was the credit arranged
on behalf of the National Bank of Belgium.
Would you like to have the amount ?
Mr. STEAGALL. Yes; if you have it.
Doctor MILLER. The maximum amount of that was $10,000,000,
and it ran for a period of 12 months.
The next one was with the Central Bank of Poland. That ran
in amount of $5,250,000. I think that credit is still alive.
The CHAIRMAN. These credits were arranged through the purchase
of bills?
Doctor MILLER. These credits I am now describing, for the Banks
of Belgium and Poland, were different from the credit arrangement
with the Bank of England. They contemplated purchase of bills.
The next one was on behalf of the Bank of Italy for $15,000,000.
That credit is still alive.
The CHAIRMAN. That was in participation with the banks of
issue ?
Doctor MILLER. Yes.
The CHAIRMAN. And that was the arrangement for the purchase
of bills?
Doctor MILLER. Yes; and there is one that has been under discussion, but not consummated.



Mr. STEAGALL. Does that cover the entire list of transactions ?
Doctor MILLER. I think so. I think there have been informal
suggestions that others might come along, but this, I think, exhausts
the list of cases where credits actually have been arranged.
Mr. STEAGALL. What is the present status of the arrangement with
the Bank of England ?
Doctor MILLER. I t has expired.
Mr. STEAGALL. What were the total committals under these arrangements to which you referred—something like $300,000,000 ?
Doctor MILLER. Not as much as that. Some expired before others
Mr. STEAGALL. DO you know just what transactions the governor
of the Bank of England was having with the United States and our
investors at the time that our banks were committed to this loan to
Doctor MILLER. I do not quite get you.
Mr. STEAGALL. I am wondering what other borrowings they were
negotiating for contemporaneously with the agreement made with
our banks.
Doctor MILLER. Well, you may have forgotten, Mr. Congressman,
that part of the general arrangements that included the credit of
$200,000,000 from the reserve system to the Bank of England also
included credit arranged by private bankers for $100,000,000.
Mr. STEAGALL. That is what I was getting up to. I wanted that
information from you, because I was not sure just where I got it.
The CHAIRMAN. I will say to the gentleman that it was put into
the record by Governor Strong, of the Federal Reserve Bank of New
Mr. STEAGALL. I am testifying from my recollection of that, but my
memory is not entirely clear about it. So our committal of an amount
of $200,000,000 was substantially a contemporaneous transaction with
that by which the Morgan banks loaned to the Bank of England
Doctor MILLER. AS a matter of fact, I think neither credit was ever
availed of.
Mr. STEAGALL. HOW was this loan to be handled through our banks ?
Was it not an arrangement with the 12 Federal reserve banks ?
Doctor MILLER. They were to participate; that is, they were to be
given the opportunity of participating.
Mr. STEAGALL. I want to ask you one question aside from what
we have been talking about. In sitting here listening to this discussion and thinking of this legislation and the obligations and duties
that would be put upon the Federal Reserve Board, this inquiry has
occurred to me, which is largely one of policy: I want to ask you what
you think of the idea of providing for a member of the Federal Reserve Board from each of the 12 Federal reserve districts, my thought
being, of course, primarly that you would have on that board at all
times a representative of each district presenting the views and approaching questions arising before the board from the viewpoint of
his environment and the people of his particular district.
Doctor MILLER. Of course, you now get that from the Federal
advisory council. Each district sends a member, and they are meeting in Washington to-day.



Mr. STEAGALL. HOW are they selected?
Doctor MILLER. By the Federal reserve banks.
Mr. STEAGALL. I am speaking now of having members of the board
representing the different districts.
Doctor MILLER. I have thought of that a great deal. My judgment
on that is that you would get the best results from such an agency as
the Federal Eeserve Board; or, let me put it this way, if the Federal
Reserve Board is to perform under the Federal reserve system the
function that it has always been my belief it was set up to perform,
you would most nearly get that result if the membership of the board
consisted of only five members with no ex officio representation.
Mr. STEAGALL. I am thinking not only of having every section being
able to have its needs properly understood by the board, but also
have in mind the diffusion, the spreading of those vast powers conferred upon the Federal Eeserve Board, if it may Tbe done without
any injury to efficient management.
JDoctor MILLER. Well, my expectation would be that if you had a
board consisting of 12 men, it would be tantamount to a small legislative assembly in which each member would be disposed to regard
himself as a representative of and for the particular Federal reserve
district from which he was appointed.
Mr. STEAGALL. I t was not my thought that any suggestion of that
kind would be in the legislation at all, but that by an enlargement of
the board you would incidentally get a viewpoint presented coming
from each particular section, not that that would be controlling
Doctor MILLER (interposing). It is my belief that with an enlargement of the board you would get such a division of responsibility
that you would find that your board would lack capacity for constructive leadership and initiative such as I think the chairman has
in mind in some of the questions he has put to me. I think if that
is what is desired, and I believe that is necessary if the Federal
reserve system is to function to the best advantage of the country,
it can be gotten only through concentrating responsibility by reduction of membership.
You must not forget that the Federal Eeserve Board is peculiarly
a policy board—a board that is dealing with matters of policy. That
involves a good deal of concentration, of attention, and continuity of
interest, patient evaluation of facts and statistics, acquaintance with
conditions, all of which, as brought out here in the testimony yesterday, eventually present the problems that call for the exercise of a
broad vision, discretion, and judgment.
It means, therefore, that if you are to get the best results, each
individual member of the board, in my judgment, has got to keep
himself in such a mental condition as he would have to if he alone
were responsible for the action taken by the board; as if he were a
single individual invested with that discretion.
Mr. STEAGALL. The Bible says that in a multiplicity of counsel
there is wisdom. I am wondering whether, where there is such a
vast power to be exercised, it would not bring together a wider range
of information and wider expression of interest and sympathy, and
if it would not bring into the council chamber certain other elements
of deliberation, possibly resulting in compromises of opinions at times
but promoting conservatism of action that would be desirable.



Doctor MILLER. That would depend on the membership of the
board. It might work out that way at certain times, and at other
times it might, perhaps be an obstruction to action. I think it would
seldom work so as to give, through the agency of the Federal Reserve
Board, a sense of direction to the Federal reserve system.
Mr. STEAGALL. I think I have your answer on that, and I want to
ask you one other question. You referred to the ex officio membership of the board. That has been a question that has been running
through my mind, as to whether the board should not have been
entirely independent in that regard. I would like to hear your views
on that and your reasons for the though you expressed a moment ago.
Doctor MILLER. I think my reasons are pretty well implied in
what I said.
Mr. STEAGALL. I guess that is true, but I am wondering if you
might want to enlarge upon it.
Doctor MILLER. I am not thinking of any particular persons when
I speak of this. The relations on the whole, with the different gentlemen who have been Secretaries of the Treasury have been very agreeable, but I have observed over and over again that where you have a
member of the board who is weighted with other very serious responsibilities and who is an occasional member, therefore, he is
brought in at a time when the active membership of the board, those
who have no other job, have been thinking on a problem for a long
time and been living with it. As has happened on several occasions,
perhaps you have a divided board or close to it and the deciding vote,
or the decisive influence, may be one or other or both of the ex officio
members. That, I think, is something that is inevitable under the
present set-up.
You may also have to deal with this, and that applies more particularly to the Secretary of the Treasury, because that is one of the
greatest positions of the Government, a position that carries a great
prestige, particularly to the membership of the Federal reserve system, that it may well happen that if you have members of the Federal
Reserve Board who are on the margin of doubt as to how to act, that
doubt might be resolved by a disposition to be in step with the
thought of the Secretary of "the Treasury.
Mr. STEAGALL. It had been my thought that, out of the necessities
of the situation, no man whose first obligations and duties are involved in the administration of some great office and responsibility
other than that of membership on the Federal Reserve Board
could devote to the work of the Federal Reserve Board that persistent
and continuing effort that is indispensable to the healthiest efficiency.
Doctor MILLER. Yes; and there are other reasons, but I think these
are enough, perhaps, for the present.
Mr. GOLDSBOROUGH. Mr. Chairman, may I insert in the record a
speech I made before the Bankers' Association of the State of Maryland at Atlantic City on May 6, 1924, having to do with the rediscount policy of the Federal reserve system and also its open-market
operations, and also an address made by Mr. Reginald McKenna,
president of the Midland Bank, before the stockholders of the Bank
of England on January 28, 1928, on the same subject ?
The CHAIRMAN. Without objection, those two speeches will be inserted in the record at this point.



(The addresses referred to are printed below:)

Mr. Chairman and gentlemen of the Maryland State Bankets' Association,
in the course of these remarks I hope you wili not be forced to feel about me
as a woman felt who met a friend she had not seen for several years, and who
said to her:
" Your husband does not knock you about as he used to do, eh? "
" No, sir," the woman answered.
" I am mighty glad to hear it. After all, his heart is in the right place."
" Oh, yes, sir; his heart's in the right place, and the rest of his body, too.
He is in jail."
I trust also you will not be as careful to show this feeling as was Mrs.
Maloney when she was brought before the magistrate for an assault on Policeman Casey. She had been unusually attentive throughout the proceedings,
and now the judge was summing up the evidence.
" The evidence shows, Mrs. Maloney," he began, " that you threw a stone at
Policeman Casey."
" It shows more than that, your honor," interrupted Mrs. Maloney. " It
shows that Oi hit him."
When I was asked to address this distinguished body of representative
Marylanders the question naturally arose as to what I could say which would
be of interest and possibly of some service. Years ago in Caroline County,
when I was a boy, we had only one bank, and the offering of a promissory note
to that institution for discount was done with the humility proper in the asking
of a great favor, while the board of directors in discounting that note, which,
by the way, had to be protected by indorsements representing many times the
amount asked for, deported themselves as if they were a charitable organization bestowing from their own individual resources largess to the benighted
multiude. This is no longer the condition. With 10 banks in the county, each
bidding for business, the danger now, in so far as there is danger, is toward
too great laxity in loaning the funds of these banks. What has happened in
Caroline County is typical of what has happened in the other counties of
Maryland and in Baltimore City, is typical of what has happened in all the
older communities through the length and breadth of the United States, and is
typical of that spirit of democracy which is the result of a vastly increased
average intelligence, enlightenment, and education, and which, in its spread not
only throughout our own great people but the people of the world, is so great
a part of the hope of the future.
It is extremely difficult to segregate basic human necessities and single out any
given one or two as of paramount importance, but, based not only upon preconceived notion but upon what I believe has been a patient investigation, I
have reached the conclusion that there are at least two fundamental human
problems that our people are now prepared to consider and solve—the abolition
of war and the stabilization of money. It is of this last I would speak.
My grandfather was a country doctor, and in 1885, as a very small boy, I
began to drive with him constantly, except when I was in school. In those
days the farmer had no hours; the farmer's wife had no hours. They worked
from the time they could see the morning until daylight down at night, and as
a class they were always poor. This fact was driven home to me because time
and again when it was necessary for the family doctor to make some sort of
a collection in order to live he found that after the interest and bonus on the
bill of sale had been paid and the interest and part of the principal on the
fertilizer note and the taxes and insurance attended to there was nothing left
for the doctor; and a great many times, instead of making a collection, he
" lightened his wallet," to him who was less well off than he. I wondered about
this condition. I tried to think why it was that these people whose work was
never done were always poor. Afterwards, with a broadening view, I wondered
why it was that the average of those with things to sell were at such a great
disadvantage relatively with those who had money to sell. About the time I



graduated from college in 1899 I noticed a change. Those with things to sell had
gradually begun to prosper and those with money to sell gradually began to do
not so well, and finally I reached the conclusion that from my earliest recollection until near the beginning of the century the investor and the man with a
fixed income appeared to be always in a gradually better position, while the
small business man, and especially the producer—having in mind the farmer—
was constantly going back; and that since the beginning of the century and up
to 1914 the position was exactly reversed, although the farmer, for other reasons,
has always occupied a relatively unfavorable position. Finally, it appeared to
me that various social phenomena had resulted and were resulting from these
varying conditions. The gradual fall in prices from 1873 to 1896 culminated in
the Bryan free-silver campaign, which, if successful, would have resulted and
was intended to result in the paying of debts with cheap money; that is, in the
partial repudiation of obligations.
In the period from 1896 to 1914 we heard no more about free silver, but a
wave of unrest began to spread among those with a fixed income; the clerk, the
school-teacher, the salaried man of every class began to feel with ever-increasing
pressure the gradual rise in the cost of living. Labor unions were formed,
strikes became uncommon, radical legislation of all sorts was offered in Congress ; some of it was passed. We began to hear of capital as distinguished
from labor and labor as distinguished from capital, as if our people occupied
two armed camps, each battling against the other. And then the World War
came on. Providentially, just prior to that time the Federal reserve act was
passed, which increased potential credit many times. We have seen the period
of inflation in 1919 and 1920 with general commodity prices rising to about two
and one-fourth times what they were in 1914; and then the collapse of the latter
part of 1921 and 1922, and the conservative, careful period of 1923.
What does it all mean, and is there any solution after we find out what it all
means? When I went to Congress in 1921, with some opportunity to investigate these things which I had been wondering about for so long, I began to
mull around, and one day in the Bureau of Labor Statistics I was shown a
curve of prices based on the bureau's index number, and as I ran my finger
along the line of falling prices from 1873 to 1896 and of rising prices from
1896 to 1914 I began to see why it was that the first period was one of prosperity for the man of fixed income, the mortgagee, and the bondholder, and
why the last period was one of relative prosperity for the producer, the business
man, and the stockholder, each period causing social misunderstanding, unrest,
and misery to that part of our people not on the right side of the price trend.
Now, there was a reason, of course, for these long periods of rising and falling
prices, and remembering that we were on a gold b a s s it then occurred to me
that gold began to be produced in South Africa and the Klondike just about
1896. By this time it seemed there was a little light just ahead and that
the foundation of our changing economic conditions had been either a scarcity
or a plentitude of gold. And now what is the answer?
Careful economists tell us that there is a constant equation between the
volume of production and its turnover and the volume of money and credits
and their turnover (of course, I am speaking roughly), so that in order to
preserve their relative positions of debtor and creditor, mortgagor and mortgagee, bondholder and stockholder, seller of goods and seller of money a means
should be devised to preserve this ratio so that the volume of money and
credit will expand only in the same proportion as production and turnover
expands and contracts as production and turnover subsides. In the March
number of Harper's Magazine there is an article entitled " Stabilizing the
dollar,'* which analyzes this subject in every satisfactory way, and which,
incidentally, spoke favorably of certain legislation now pending in Congress
and introduced by me. I mention this fact as indicating two things: First,
that the stabilization of purchasing power is becoming a matter of public
interest; and second, that I am discussing a question in the solution of which I
am attempting to assist in a practical way. In the Bureau of Labor Statistics,
in Washington, there is kept an index number of wholesale price levels made
up of a composite of something over 400 commodities, each weighed in accordance with what exper'ence has shown to be its relative market importance.
The standard from which conclusions are now drawn is the average price level
of 1914. The present price level relative to 1914 is about 161. The legislation



referred to and now pending in Congress contemplates starting with the general
price level at the time when the proposed legislation becomes law and after*wards maintain approximately that price level by means which I will indicate
in a few moments. In the meantime I want to make it perfectly clear, of
course, that there is no attempt in this legislation to control the price level
of individual commodities. They will move in accordance with the law of
supply and demand, but the purpose is to keep the average the same, so that the
value of money in an aggregate of the general commodities! which it will buy
will not appreciably change. In other words, while flour and eggs and butter
and chickens and meat and sugar and coffee will individually vary in price,
the filled market basket made up of these different commodities can always
be purchased with the same amount of money. And right here let me say that
when the general pa-ice level is kept constant, when there is an automatic
restraint against inflation and its consequent deflation and collapse, the tendency
of individual prices to change will be immeasurably reduced, because the
unhealthy economic conditions, the result of these abnormal periods, is the chief
cause of the sudden rise and collapse of the price of any given commodity.
How can we keep this index number constant? How can we prevent
periods of inflation succeeding periods of business expansion, culminating in
periods of speculation and ending in periods of collapse? The quantity theory
of money has been recognized as essentially sound by practically /all economists
for more than a century. Illustrating by reducing the theory to its simplest
form, if the total volume of commodities consists of 20 bushels of wheat and
wheat is only traded in by the use of money, and the total volume of money is
$20, as long as all that wheat is being traded in and all that money is in
circulation wheat will be worth $1 a bushel. If, under the same conditions,
there are $40 in circulation, wheat will be worth $2 a bushel; if, with 20 bushels
of wheat and $20 in money $10 of that money is withheld from circulation and
all other conditions are as stated in the first previous illustration, wheat will
be worth 50 cents a bushel; if, on the other hand, one-half of that wheat is
being withheld from the market and there is only a turnover in 10 bushels of
the wheat, other conditions remaining as in the first illustration, wheat will be
worth $2 a bushel. Or, expressed in the generalization mentioned heretofore
in these remarks, there is a constant ratio* between the volume of production
and turnover and the volume of money and credits and their circulation. So
that if your index number of general price levels remains constant, you are
assured that your volume of money and credits are expanding only in proportion as production and turnover expands—that is, only in proportion to the
legitimate needs of business—and you can be assured that when you restrain
the rise of the index number you are restraining credits beyond the legitimate
necessities of business, you are restraining unhealthy and abnormal production,
and you are restraining business expansion within wholesome limits and stopping in its inception overproduction, waste, speculation, and collapse.
The basis of our monetary system is gold; our entire credit structure is based
on gold. Now, let's assume that all the gold is withdrawn from circulation, gold
certificates being substituted; and let's assume that we start with a reserve of
$1,000,000 in gold at the present number of grains of pure gold in the dollar,
and that the index number goes up 1 per cent, indicating that our money and
credit structure is expanding more rapidly than our production and turnover.
If we then increase the theoretical gold content in a dollar by 1 per cent, we
have reduced our gold reserve from $1,000,000 to $990,000 and the possibilities
of our credit structure by 1 per cent, which in turn tends to reestablish the
normal ratio between production and turnover on one side and money and credit
in circulation on the other.
Without going into the details of the proposed legislation, the above illustrations will serve to indicate its theory. Now, the question arises, Is such
legislation possible at this time? The law requires us to maintain our gold
reserves at 40 per cent. We now have about 82 per cent, and in order to make
this plan feasible without unduly weighing the dollar it will be necessary to
legislate for a required gold reserve of about 70. It is, therefore, difficult to
have passed such legislation at this time, but in the various discussions concerning stabilization caused by this proposed legislation various alternatives
have been suggested, such as a legislative direction by Congress to the Federal
Reserve Board to have raised rediscount rates in the Federal reserve banks



when the index number is rising and reduce them when the index number is
falling and in that way tend on the one hand to discourage unhealthy expansion and on the other hand to make money easy when business is not so good
and thus tend to stimulate it. Another proposal is legislation requiring the
Federal Reserve Board to have the reserve banks put securities on the market
and thus tend to draw money from active circulation when the index number
is rising and to buy them up and thus put money in circulation for business
when the index number is falling.
In considering the necessity of legislation, let us go over for a minute what
happened in 1923. At that time the mental attitude of the country regarding
economic conditions was the attitude of a people who had just been through a
period of unhealthy inflation and drastic and stupefying deflation and corresponded to the way people feel about a war just after the war is over. We
would never have wars if people kept in the same frame of mind they are in
just after one is over. In 1923 we were cautious, not because we are habitually
wise enough to be cautious, but because and only because we had just had our
lesson. Various banks in their monthly letters during 1923 gave reminders of
the disasters of 1920; the monthly letters of the National City Bank of New
York, for example, one of the most widely read of economic bulletins, in January
advised business men to operate with caution. In February it remarked that
business men " are following conservative policies and showing little inclination
to become extended, which is the part of wisdom in present conditions." In
March it warned its readers that every upward movement is in danger of running away. In April it again called attention to the danger of inflation. " The
industries of the country," it declared, " are already working practically at
capacity or to the limit of the labor supply. Under this condition they can not
use more credit to advantage."
These warnings are typical of the state of mind of bankers in the early months
of 1923. In February and March, 1923, the reserve banks of New York, Boston,
and San Francisco raised their rediscount rates. Due in part to this action,
interest rates of commercial banks rose in February and again in March, rates
rates on call loans on 60 to 90 day paper and on 4 to 6 months paper being all
higher in March than in any month of the previous year. Raising of money
rates was followed promptly by curbing of the upward movement of prices and
overproduction. Not so generally understood is the fact that the open-market
operations of the Federal reserve banks in the first half of 1923 tended to curb
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
open-market acceptances and United States securities to the value of $734,000,000. These they reduced steadily throughout the period of incipient business
boom. By July the total holdings were less than $300,000,000. Between October 17 and the end of the year, however, the holdings increased from about
three hundred million to four hundred and seventy-three million dollars. 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 volumes of trade, and later in the year when these same guides began to
point in the other direction the open-market operations put more money into
circulation. We were cautious in 1923 because we had had a recent lesson.
We 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.
In 1920, with our gold reserve down to 43.4 per cent, the index number was
226, or two and one-fourth times higher than in 1914. In 1922, with a reserve
percentage of 77.9, the index number fell to 149. With the present reserve
percentage of 82 per cent, the index number of wholesale prices is about 160, so
that a determined demand for credit based on our gold reserve could pull our
reserve percentage down to 45, probably, before it could be stopped. The index
number would rise to around 300, which would mean prices higher than this
country has ever seen, and which would result in an economic collapse greater
than that of 1921 and 1922. This problem, my friends, is on the very verge of
being solved, but we can't wait too long. As I said before, human memory Is
short. Unless our obligations as a world power and a leader of civilization
are fulfilled shortly, the gradual abolition of war never can be achieved until



the lessons of the next war direct the human mind to the solution of the problem, and unless we have promptly some legislation looking to real scientific
monetary stability, it will be too late until the next so-called business cycle has
left in its wake its dreadful toll of economic waste, misery, and human despair.
I, personally, am an optimist. When I compare conditions now with what
they were 30 years ago I see tillage where there was swamp; I find sewers
taking the place of unhealthy, insanitary conditions; I find the people willing
to spend thousands of dollars a year to build roads to lighten the human burden
and to draw the city, the town, and the country ever closer together; I find the
body of the child taken care of in a manner undreamed of 30 years ago; and I
see a public endeavor to surround with the beneficence of education every class
from the highest to the lowest; and if you and I live out the normal span of our
lives I have no doubt whatever that we will look back and wonder why we
were ever short-sighted enough to allow a condition of constantly changing
money value to exist without making the necessary changes in our system. A
problem like the one we are discussing to-day is a problem of democracy, a
democracy which is one in fact and not one in name only; a democracy which
demands that that which one has accumulated by his industry and his endeavor
shall not be taken away from him because of a fall in the value of the medium
of exchange, and that the results of human toil shall not be dissipated and the
toiler left in his despair because of an increase in the value of the medium of
In the course of some litigation several years ago a certain prominent manufacturer said during his cross-examination that he knew nothing of history and
didn't recognize the value of such knowledge. This was either an ill-considered
statement or else was the result of the kind of practical success along a given
line which creates in some minds the obsession that they are blessed with all
wisdom, an obsession which interferes with the process of reflection.
In an address delivered at the University of Michigan in April, 1911, on the
study of ancient literature the Hon. James Bryce, then ambassador to this
country from Great Britain, had this to say concerning the study of history:
" We can conjecture the future only from what we know of the past; that is
to say, from what we know of human nature and the processes by which it and
human institutions change. One who knows only his own country and people
does not really know them, because it is only by knowing something of other
countries and their peoples that he can tell which characteristics of his own
people are normal, generally present in all peoples, and wjiich are peculiar to
his own. So likewise he who knows only his own time does not really know it,
for he can not distinguish between characteristics that are transient and those
that are permanent. This is the main use of history besides, of course, the
pleasure which all knowledge gives. To know what we are we must know how/
we came to be what we are, and must realize that we shall before long pass
imto something different."
The lessons of history teach of the cycle, inevitable, under our present monetary system—expansion, inflation, speculation, collapse, slow recovery. Stabilization, restraining expansion at the point of overproduction and consequent
inflation, is not only an economic problem the solution of which people are ready
to undertake, but is clearly a direct problem of civilization involving selfrestraint and mental and spiritual elevation.
The great body of bankers, representing as they do much of the best thought
of our communities, are bound to be conservative in the sense that they shrink
from political nostrums and fundamentally unsound economic proposals, but pure
conservatism is alike offensive to them, as it means stagnation and a refusal
to note the march of civilization.
In the language of Edward G. Ryan, the great Wisconsin lawyer and judge:
" Pure conservatism is always wrong; civilization is never fixed. No Joshua
has power to stay the course of the human mind. Change is the necessity of
human history, progress the duty of the human race. Pure conservatism has no
place in the annals of mankind. It concedes the past, but denies the future. It
worships the actual, but anathematizes the possible. Its creed is the present
because it is the present. It holds with Pope that whatever is, is right. It is
the bigot of the present, without sympathy with the past or prophecy of the
future. Content where it finds itself, pure conservatism sits down by the way-



side, while the march of civilization passes by and presses on to the promised
land of the future, guided on its dark way by faith in the destiny of man as by a
pillar of fire."

To-day I shall turn to ask you to consider the present position of gold as an
international standard of value.
Nearly three years have elapsed since the pound sterling was reestablished on
the gold basis, and most of the important currencies are now stabilized in relation to gold. This general reversion to gold gives the appearance of a return to
pre-war conditions in matters of credit and currency, but if we look further into
the question we shall find that there has been a remarkable change. The development of central-bank policy in the United States has shown that, while
gold may be retained as a medium for making international payments, it can
be deprived of its function as the ultimate standard of value. How this came
about, the stages through which American policy has passed, and the meaning
of the conclusion deserve our close attention.

Let me begin by reminding you of the conditions before the war. At that time
the central banks adopted a purely passive attitude with regard to the control
of credit, allowing the movement of gold into or out of a country to regulate the
internal supply of money. If gold flowed in freely, credit and currency expanded; if more credit was created than was required to support the current
growth of business, prices rose.
If gold flowed out, credit and currency contracted; the growth of business
was checked and prices showed a tendency to fall. It followed from this that
the current course of world prices was determined by the supply of monetary
gold. This does not mean that other causes, such as improved methods of production and communication, do not affect the price level, but these only come
into play over more extended periods of time.
This passivity of the central banks probably arose from the peculiar structure of the British central banking system. London was then the unchallenged
financial center