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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 present.

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 DO you mean there that the money is being withdrawn by the Federal reserve member banks ?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 sources?

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.

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The CHAIRMAN. This chart has already been inserted into the record.

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 starting.

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

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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

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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

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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.

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