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«COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES SEVENTIETH CONGRESS FIRST SESSION ON H. R. 11806 ( Superseding H. R. 7895, Sixty-Ninth ...»

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in other words, leave more to natural forces in the national and international money situations.

Mr. STRONG. Then Mr. MILLER. Let me add, Mr. Congressman, because it is a part of what I was saying, that in my opinion the importance of discount policy as an instrument of credit regulation shall be emphasized by the Federal reserve henceforth and an abridgement of open-market operations as a primary instrument of credit policy. I am of the opinion that open-market operations have been the cause of almost 15029—28 9

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Mr. MILLER. Well, Chicago is represented on the committee; it is not an eastern city.

Mr. STRONG. IS that a very large factor in the operations of the committee ?

Mr. MILLER. NO ; but it would not be even if Kansas City or San Francisco or Minneapolis were on the committee.

Mr. STRONG. Suppose it were composed of representatives of San Francisco, Kansas City, New Orleans, Chicago, and New York. Do you think that the New York situation would control them, anyway?

Mr. MILLER. Well, as a rule, it is only the men who are close to the money market who have very definite convictions as to what the situation of the market is and what is required. You know in New York banking is a primary industry. In most other places it is an auxiliary. New York is banking center not only for the country but for the world. The result is that men who come to the front in New York as bankers are men who, so to speak, belong to the master class in banking, and they usually put their ideas over upon those of less prestige and experience.

Mr. STRONG. Well, the Federal reserve system was created for the benefit of the whole country, wasn't it ?

Mr. MILLER. I know that.

The CHAIRMAN. Let me ask you, Doctor Miller: These conclusions and recommendations of this open-market committee are referred to the Federal Reserve Board, are they not ?

Mr. MILLER. Yes.

The CHAIRMAN. And approved or disapproved by the board ?

Mr. MILLER. Yes.

The CHAIRMAN. Before they are put into operation ?

Mr. MILLER. Yes; or modified.

Mr. WINGO. Doctor, the price level in Kansas City for money and credit is higher than the price level in New York City, isn't it?

Mr. MILLER. Yes.

Mr. WINGO. And that is true of Chicago not quite so much ?

Mr. MILLER. Yes.

Mr. WINGO. I think it would be safe to say that the price level in Kansas City is a little bit higher than in Chicago ?

Mr. MILLER. Yes.

Mr. WINGO. At times, especially ?

Mr. MILLER. One moment. You have always got to except, of course, in any statement of that kind, the rate paid by borrowers who, so to speak, have access to the money market of the whole country.

There are borrowers in Kansas City who can borrow in New York or Chicago. If the rate in New York City is lower than in Kansas City, banks in the latter place have got to meet the New York rate to hold the account, or at any rate, to get the current business of the customer. In other words, commercial rates are competitive for the best class of customers.

Mr. WINGO. That refers only to loans, I suppose ?

Mr. MILLER. New York maintains a considerable competitive market for loans from other sections of the country.

Mr. WINGO. I am talking about the mass of banking credit. Perhaps there may be some exceptional eases in which people in New York City and in Pittsburgh in recent months have financed themselves in Chicago banks. But I am talking about the mass of bank

–  –  –

Mr. WINGO. It is true that in the last few years there has been a great tendency on the part of banks in Chicago and St. Louis and Kansas City to invade the territory of New York and to invade the territory of each other on these large loans ?

Mr. MILLER. Yes.

Mr. WINGO. I happen to know by hearsay of several instances of that kind in the last several months whereby one big concern in western New York was financed by money in Kansas City.

Mr. MILLER. Yes. Take the recent situation in New York and the advance of the discount rates in Boston and, say, St. Louis. The New York banks were reducing their funds in the call market, and the money market in New York was under a certain pressure because gold was being withdrawn for export, and also because of sales by the Federal reserve system of securities in the open market. The effect of open-market sales and purchase is, of course, always most immediately and keenly felt in the New York market, because that is in a special sense the national money market. The result of the recent pressure in New York was that those who were looking for money against collateral loans there had to get it somewhere else than from the New York banks; had, indeed, to get funds from the outside for use in New York banks. The demand for money in New York was spilling over into other districts. There was some evidence that such was the case with regard to Boston, and the Boston bank had to take some measure to protect itself against the diversion of its funds into uses that were not obviously local and commercial in character. The discount rate was their method of doing that, which bears out what Mr. Wingo said, that under a situation such as we particularly had recently a uniform rate as between New York and other districts means actually and effectively that the New York rate is the higher rate.





Now, the movement of loose money is toward New York when there is no adequate home demand; and that movement is stimulated by anything that puts up or works up the rate in New York. So that sometimes an interior district has got to, as it were, make a counterdemonstration against the movements that are going on in the New York money market by making the discount rate at the Federal reserve bank a little higher by making money a little less easy in the interior banks.

The CHAIRMAN. It is time to adjourn now. We will adjourn until

10.30 o'clock to-morrow morning.

(Whereupon, at 12.20 o'clock p. m., the committee adjourned until Tuesday, May 1, 1928, at 10.30 o'clock a. m.)

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both as to the desirability and the feasibility of the policy embodied in the measure, I now come to a general examination of the possibilities of executing this policy through the Federal reserve banks, including the related subject as to whether the passage of this measure will in practice make any particular difference in the determination of Federal reserve policy.

I ask myself what I would do if I were a responsible officer of a Federal reserve bank, after the passage of this measure, other than what I would presumably do if the measure were not passed; and I am not able to say that I should do anything very different following the passage of this measure from what I would be disposed to do in any event.

If there were clear evidence of a rapid upward movement of prices and speculative purchases of commodities, accompanied by a growing demand for credit, manifested, among other ways, by an increased demand for rediscounts at Federal reserve banks, I should favor an advance in the discount rate, as well as, perhaps, other measures designed to check such undesirable developments. I would not measure the situation exactly by an index number, by the movement of prices, but I should consider the movement of prices as one of the factors leading to the action suggested, namely, an advance in the discount rate. But no particular advance in prices of 3 points or 6 points or some other number of points in an index number would determine the decision at which I think I should probably arrive. The upward movement of prices would be simply one factor in the situation, sometimes significant and at other times probably of minor importance.

If, for example, I had been concerned with the Federal reserve system during the last three years, I do not believe that the movement of prices would have been a large factor, in my judgment, as to what it was desirable to do. The movement of prices has not been sufficient to suggest that price movements have been a large factor in the situation. Other considerations would have been, in my judgment, controlling as guides of action.

Now, I wish to indicate certain situations in which an attempt to offset or counteract a given price tendency might be positively inadvisable.

Let us suppose, for example, that certain important lines of business activity should be overdeveloped—let us say automobiles and the building industry—so that a desirable readjustment presumably would involve some shrinkage in the amount of labor and capital employed in those industries; certainly not a further expansion.

An adjustment or readjustment of that sort would probably involve a slackening in trade activity for the time being, and presumably would be reflected in some decline in the general level of prices.

Mr. KING. DO you object to an interruption ?

Doctor SPRAGUE. NO ; I welcome interruptions.

Mr. KING. I S this all based upon theory, or have you some actual demonstration of what you are testifying about?

Doctor SPRAGUE. I am going to give you one in a moment. That would be my judgment as to the development of prices in that event;

that prices would decline somewhat, and that an attempt to offset

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Doctor SPRAGUE. Per capita; yes. I think we all know that in our own experience; that the thick steaks that people used to eat are not apparently in demand any more.

Mr. STRONG. Not for us, Doctor, but for the young man and the workingman. Do not they consume just as much?

Doctor Sprague. No; a man who is sitting before a machine does not eat as much month after month as a man who is engaged in active, arduous outdoor work.

Mr. KING. Would it not take his whole pay for one day to pay for a decent steak nowadays? Is not that one of the reasons why he is not eating them?

Doctor SPRAGUE. I might say that there are some possibilities of a refinement in the quality of the food consumed.

Mr. KING. IS it not due to the cases of diabetes and to food advice by the doctors?

Doctor SPRAGUE. Very likely that is a factor. But I take the feet as I find it, and I believe that it is exceedingly difficult, through any probable reduction in costs and any probable reduction in price, to bring into the market a very large increase in demand.

Mr. STRONG. Then it is your idea that farmers can not look for much success in this country in their industry?

Doctor SPRAGUE. They can look for the same sort of success which has been experienced by my friends in Vermont. We have lived under conditions since 1870 in which no one has anticipated that the price of land was going to improve. A large acreage of the less fertile land is not now in cultivation that was in cultivation in 1870.

A comfortable living is derived from the better lands, and only from them; and I believe that that will be the case throughout a widening area in the United States.

Mr. STRONG. Then those who engage in extensive farming as a business must fail?

Doctor SPRAGUE. I would not wish to make that statement.

Mr. STRONG. That would be the conclusion. If there is a living to be had only from the better farms, and if a man who goes into farming extensively can not get more than a living, he can not possibly hope to get a fair return on his investment.

Doctor SPRAGUE. N O ; and no one is getting a fair return on his investment in Vermont if he reckons his investment at the price at which land was selling in 1870.

This is rather aside from the discussion of this bill, except that I do not see any particular relief for any particular overdeveloped industry in this measure. At most it will have a generally ameliorating effect upon all industries; it will be of as great advantage to the successful industries and the growing industries as to the others.

But the contribution that it will make, at most, will not be sufficient to render the declining industries profitable or to render unnecessary from time to time a readjustment of the capital and labor force of the community, withdrawing it in some directions and increasing it in others.

Mr. STRONG. DO you not think the stable purchasing power of the dollar, if it could be brought about, would be of great benefit to all classes of the Nation ?

Doctor SPRAGUE. It would, depending upon what you mean by the stable purchasing power of the dollar.

–  –  –

of general stabilization of prices or of the price level, it might do no harm and might not inconvenience the management of the Federal reserve banks. What I am afraid of is that in the process of converting the public to this measure overemphasis has been placed upon the importance of the price level over short periods of time. Much has been said, for example, before this committee regarding the influence which the Federal reserve banks have exerted upon prices during the last six years, and the impression has been created that prices have been the major objective of Federal reserve bank policy during the last six years. I question whether that has been the case.

All sorts of considerations have had a bearing upon reserve bank policy.

Mr. STRONG. But you do agree that, as a policy, the Federal reserve system should aim for stability ?

Doctor SPRAGUE. Yes; I think that I could agree to that.

Mr. STRONG. Then you do not think that, acting under this bill, a reasonable man of experience, such as we have and are apt to have in the Federal reserve system, would attempt to use his powers with every fractional increase or decrease in the price level ?

Doctor SPRAGUE. I should hope not.

Mr. KING. Why are you afraid of the public ?

Doctor SPRAGUE. I am not so much afraid of the public as I am of the sort of propaganda that has been used for the passage of this bill.

Mr. KING. IS not the public, as a matter of fact, keeping up with you professors on all these things, and following you very closely ?

Doctor SPRAGUE. Well, the professors are not by any means in agreement about the possibilities of the determination of credit policy by price changes. They still feel that there is much to be learned from additional experience, and some of us wish to be quite certain that the movement of prices within moderate limits will not, either in the management of the reserve system or in the judgment or expectation of the public, be made the invariable controlling factor in reserve-bank policy.



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