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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 direction."

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

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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 15029—28 8

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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 don't.

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 them.

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.

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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

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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 recovery.

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

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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 remedies.

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