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Mr. STRONG. Doctor, to what propaganda do you refer as having been used in favor of this bill ?

Doctor SPRAGUE. Not of this particular bill, but of priced stabilization as a possible gain to the community. For example, I noticed a statement by one professor a short time ago Mr. KING (interposing). What professor?

Doctor SPRAGUE. Prof. Irving Fisher—to the effect that the decline in prices of 1926 and the first part of 1927, when business was very active, was the prime cause of the subsequent recession in business in the latter part of 1927. Now, I am not prepared to accept that for a moment. In my judgment, in that period of 1926 and the first half of 1927, of very active business, had the Federal reserve banks, because prices were declining somewhat, injected more credit into the situation, it would have developed at many points unsound conditions in business which would have been followed by a more serious amount of recession in the latter part of 1927, or possibly at the present time.

It is that sort of contention that, in all circumstances the movement of prices should be a signal for taking immediate action, that I fear.

If restraint in judgment and in expectation accompanies this bill, as to its possibilities, well and good.

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Doctor SPRAGUE. I t is probably impossible to express any view except in negative language, such as to avoid extreme changes; and possibly your positive expression, " to promote stability," serves the purpose.

Mr. STRONG. Let me suggest, Doctor, that there is one other change

suggested in line 7; to add the word " promote " and change " maintain " to " maintenance," so that it would read:

To promote the maintenance of the gold standard; to promote the stability of commerce, industry, agriculture, and employment; and, after the word " stable " in line 9, insert the word " average," so that it will read " and a more stable average purchasing power of the dollar."

Doctor SPRAGUE. Yes; I have that in the draft that I have received.

I wish to turn from the situations presented by minor fluctuations in prices, of somewhat uncertain significance, to problems presented by prolonged trends upward or downward in the level of prices, and inquire whether this bill is calculated to lessen the likelihood of such pronounced or prolonged trends.

The trend of prices throughout the world over long periods of time will depend in large part upon the monetary supply of gold and methods of its use. If the world returns to the use of gold coin as an essential part of a full gold standard, it is my judgment that there will not be sufficient gold available to support prices at the present level over the years to come. On the other hand, if gold is conserved for bank-reserve use by its practical exclusion from use in hand-tohand payments, then I am inclined to think that the gold supply will be adequate, and, at all events, that it will be a considerable number of years before a possible inadequacy in supply will manifest itself in a downward trend of prices.

Mr. WINGO. In other words, the management of the gold supply, you think, is going to affect the future trend of prices ?

Doctor SPRAGUE. Yes. I should expect an immediate downward trend of prices if all of the gold-standard countries, present and prospective, endeavored to use gold coin. Even if they do not use gold coin, it is possible that there may be a downward trend in prices, but it certainly would not come as soon. It might be manifest in 5 or 10 years or more, but it would not be an urgent question. The question that is urgent in connection with this matter at the present time is the policy which may be adopted in different countries as to the use of gold coin.

The CHAIRMAN. In that connection, are you familiar with the statement of Dr. John R. Commons before this committee on this same subject?

Doctor SPRAGUE. Yes.

The CHAIRMAN. DO you agree with him as to his position on the possible decline of the general price level; if there is a fulfillment of the present tendency of the various countries of the world to go back to a full gold basis, that the price level may go back to the 1913 normal of 100, declining from the present level of approximately 150?

Doctor SPRAGUE. I would not agree to that; certainly, if gold is not introduced as coin. There is a statement which I handed Professor Commons, and which might be put into the record, by Professor Kemmerer, of Princeton, which presents a view with which I am in agreement, with supporting figures. I would suggest that that be placed in the record.

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Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STABILIZATION 139 ounces, so that last year's total production of 9,962,852 ounces, which was a new high record in the history of the Rand, will certainly be exceeded this year."

The London Times of November 30, quoting a report for the year 1926 of the largest gold-producing company in South Africa, said: "The quantity of ore crushed, gold produced, and profits obtained show large increases over previous years." A couple of years ago I visited one of the largest gold mines on the Rand, where I saw gold mined at a depth of considerably over a mile, a thing which would have branded a man as a mad man if he had prophesied it a generation ago, while most of the gold was being produced from ores of grades so low that they would have been discarded in the nineties of the last century. Of the total world's gold production since 1492, about half has taken place since 1901. New gold-producing areas are continually being discovered, and it does not seem at all improbable that new methods may be discovered in the future that will materially reduce the costs of production and bring into use lower-grade ores than are to-day being worked, and of such ores there are enormous quantities available.

Furthermore, as in the past, any appreciation of gold by reducing the price level and, therefore, production costs, will tend to check itself by stimulating increased gold production.

Passing from the subject of the supply of gold to that of the demand for

gold, the following brief observations may be made:

First, the evils of monetary instability are appreciated by the intelligent public much more than they were a few years ago; likewise the possibility and desirability of exerting strong stabilizing forces through cooperative action among the world's leading central banks and among governments. The frequent conferences we have seen mentioned in the press in recent years among the governors of the New York Federal Reserve Bank, the Bank of England, the Bank of France, the Reichsbank, and other central banks are hopeful signs. International conferences, like the Genoa conference, dealing with this subject are likely to occur more frequently in the future under like conditions than in the past because of the existence of the League of Nations. This sort of international cooperation would probably become more powerful and effective in the future if need should arise to combat any strong tendencies toward gold appreciation.

A possible form of international cooperation in the direction of stabilizing the value of gold which has not yet been resorted to but which could probably be used in case of great need in the future is the regulation of the flow of gold into the arts. One can imagine few things that are affected with a greater international public interest than the value of gold for monetary purposes, and, on the other hand, one can imagine few things affected with a less international public interest than the principal uses for gold in the arts. Roughly speaking, something like a half of the worlds' gold production normally flows into nonmonetary uses. Certainly the flow of gold into these uses could be materially restricted by taxes and other governmental measures, thus leaving the monetary uses a larger proportion of the total annual production than those uses now obtain under conditions of competition with industrial uses.

Second, we may expect, I believe, contrary to the opinion of professor Edie, a much greater development of the gold-exchange standard in the future than we have had in the past. There was a considerable development of the goldexchange standard before the war, as, for example, in India, Java, the Philip pines, and the Straits Settlements, and it exists to-day in many more countries than it did in 1913. In some of these countries, at least, it is not looked upon as a half-way house on the way to the more customary form of the gold standard. In the future the gold-exchange standard is likely to be adopted particularly by smaller states and by colonies and other dependencies of larger states.

Third, there is an enormous possibility for the development of the check system in most countries of the world, aside from Anglo-Saxon countries, and the use of checks in place of bank notes is a large economizer of gold.

Fourth, and closely related to the above, in fact, another phase of it, is the great economy in the use of gold that will result from increases in the rate of monetary and deposit currency's turnover or, as it is often called, in the velocity of circulation. The efficiency of monetary gold varies with the rate of turnover of the gold coin itself, when it is used in hand-to-hand circulation, and of the notes and deposit currencies based upon gold when the gold coin is withdrawn from active circulation and held as reserve against notes

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Mr. LUCE. Yes.

Doctor SPRAGUE. Why, yes and no. The power of the Federal reserve banks in this matter is in some degree limited; they can not act alone. If the situation which I have indicated as a possibility should manifest itself of an inadequate supply of gold for monetary use, it would hardly be possible for the Federal reserve banks alone to maintain by their own action within this country either stable world prices or stable prices within this country. I t would be necessary that cooperative action be taken among the various countries or between the various central banks, and, in so far as the last sentence of section (h) would appear to support or strengthen the authority of the Federal reserve banks to engage in cooperative undertakings with other banks, designed to meet an inadequacy in the supply of gold, I think that the provision might prove serviceable.

Mr. WINGO. Do I understand, Doctor, that you think that it is possible, by proper management of the world supply of gold, to prevent a long period of gradual decline ?

Doctor SPRAGUE. Yes; to defer it certainly by the introduction of many economies in the use of gold.

Let me illustrate by another possibility. Assuming that the central banks of the world should eschew a policy of pulling and hauling in order to get gold, that they all recognized the desirability of free gold markets susceptible to influence through changes in lending rates, then it becomes less necessary for any particular bank to hold as high a gold reserve as would be needed if all the various central banks were working at loggerheads with each other, each scrambling to get all of the gold and each placing obstacles in the way of its going out.

Mr. WINGO. In other "words, if there is a proper cooperation in the management of the world supply of gold you feel that a deficiency of gold would not be realized?

Doctor SPRAGUE, I t would be certainly long deferred, in my judgment.

Mr. WINGO. Then do I understand you to take this position, that there is a period of decline facing us, and its velocity is going to be determined by how the gold supply is managed?

Doctor SPRAGUE. If you are thinking of periods of years and not of the shorter time fluctuations, I do not believe that there is necessarily a period of decline in prices facing us, for the reason that we have at least $1,000,000,000 in gold available to support either additional credit in this country or to export. That additional billion furnishes a very satisfactory margin for additional credit expansion here and in other countries.

The CHAIRMAN. YOU speak now of the cooperation with other central banks. Of course, we all know that the Federal reserve system here is cooperating with the central banks of issue of the important countries of the world now. In other words, there is a managed gold situation. Do you agree with that ?

Doctor SPRAGUE. Yes.

The CHAIRMAN. Take? for instance, the present exports of gold.

That is due to the carrying out of that cooperation in which we are engaged, is it not? It is not a free movement of gold; it is a managed movement of export gold, is it not?

15029—28 10

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which all experience shows to be the most important of the relations among the central banks of the different countries.

The CHAIRMAN. Right there, Professor, what you have said in connection with this gold situation and the cooperation of our Federal reserve system with the other banks of issue indicates to me the necessity for a continuance of these close working arrangements, at least over a period of the next 10 years.

Doctor SPRAGUE. I think so.

The CHAIRMAN. Else there will be chaos.

Doctor SPRAGUE. Yes.

The CHAIRMAN. And if gold is permitted to flow without any management, because of the important part it occupies in the world's banking and stabilization, gold might go to a premium and there might be a wild scramble for the accumulation of gold.

Doctor SPRAGUE. Yes; and that makes it necessary to hold more gold in any particular country than would be the case if the scrambling was not going on.

Mr. STEVENSON. AS at present constituted, is it not pretty well conceded that the banks have the powers which are being expressly conferred in this bill ?

Doctor SPRAGUE, Yes; I think so.

Mr. STEVENSON. I S it desirable to declare everything in explicit terms that the banks may do ? In other words, is it desirable for the legislative department to step in and tie up and control absolutely the administration of the financial affairs of this country ?

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