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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 inception.

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

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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 market.

Mr. MILLER. Yes.

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.

Mr. MILLER. NOW, 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

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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

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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 gold?

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

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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 may.

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;

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