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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 ?

–  –  –

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

–  –  –

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

–  –  –

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 that.

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. 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.

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