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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.

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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 issue.

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,

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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 bonds.

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.

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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 ours.

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 ?

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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 other.

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 call?

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

–  –  –

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.

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