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Doctor SPRAGUE. When you take into account all of the qualifications inserted in the measure, and also implied by Congressman Strong, I confess I do not see that the situation, so far as the reserve bank management is concerned, is essentially changed, and, as I said before, if I were an officer of a bank, on the passage of this bill I should feel that I could do practically what I was doing before, and exercise my judgment as to when it was desirable and how far it was desirable to take account of certain price movements.

Mr. STEVENSON. I notice in this morning's paper that on account of the peculiar loaning conditions in which somebody has probably short sold and somebody has probably long bought in New York, the Senate committee is now undertaking to take steps to administer the policy of the Federal reserve bank. What business have they got to do that, and what effect is it liable to have upon the independence of the executive branch of this Government?

Mr. KING. They merely passed a resolution, if you noticed the record, requesting a desistance and rescission of that practice. They did not pass any law.

Mr. STEVENSON. They have not passed a law, but they are interfering with the executive arm of the Government.

Mr. KING. Not at all.

Mr. WINGO. Of course, they intended to give the executive officers the benefit of their wisdom.

Mr. GOODWIN. DO I understand that the Federal Reserve Board now has the authority which Congressman Strong seeks to obtain through the provisions of his bill ?

Doctor SPRAGUE. I think that they have. I believe they have a legal opinion to the effect that their various arrangements in connection with stabilization are entirely within the implied powers of

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Mr. STRONG. Well, in that case, this kind of legislation would be preferable to the remedy you suggest might follow, that of the resignation of the directors of the banks.

Doctor SPRAGUE. Well, I much prefer personally to legislate for positive, present needs rather than so improbable a situation.

At all events, that possibility does not, in my judgment, materially strengthen the case for the bill. I rather prefer to consider it in its bearing upon the every-day operation of the system and its bearing upon large general problems, such as the adequacy of the gold supply.

The CHAIRMAN. Doctor, yesterday, before the committee, Doctor Miller, of the Federal Reserve Board, referred to the last six months' period of the operations of the Federal reserve in which he dealt with the lowering of the discount rate in the early fall, and he referred to its effect and spoke of the speculative situation or the increase in the rise of stock values, etc., and in that connection he dealt with the openmarket transactions of the Federal reserve, rather expressing an opinion that, in his judgment, open-market transactions as conducted by the Federal reserve should be discontinued.

The committee would be very glad, I think, to hear you on that matter. It is a rather broad suggestion, but I think I have made it sufficiently clear so that perhaps you can give us a statement of your views of that.

Doctor SPRAGUE. I am disposed to think that the Federal reserve system can not function as an active influence in this country in the absence of open-market operations. When the reserve act was passed, I think most people presumed that the member banks would be regular or frequent borrowers of the Federal reserve banks, and that the demand for rediscounts would rise and fall with the varying demands for credit on the part of the industry of the country and that the supply of credit made available by the Federal reserve banks would be very nicely adjusted to requirements by a wise policy in the matter of the rediscount rate.

That, experience shows, is not the situation at all. The member banks are not regular and eager borrowers at the Federal reserve banks, and consequently the operations of many of the Federal reserve banks often have but a slight bearing upon the credit situation in their own locality. At the present time, for example, the Federal Reserve Bank of Kansas City is discounting for member banks only $19,000,000, and the reserve bank at Minneapolis is discounting some $3,000,000 for member banks.

Obviously the operation of these banks is not a large factor in the credit situation of those localities. If the Federal reserve banks were to eliminate open-market operations, the immediate effect would be to increase any rediscounts, but after a period of adjustment we should find our member banks borrowing very infrequently at reserve banks and the rediscount rate exerting a very slight influence upon the credit situation.

If we wish to accomplish anything in particular through the Federal reserve banks, whether to influence prices, money rates, or whatever it may be, I am inclined to think that most of that influence must be exerted and initiated through open-market operations, which will inevitably in large part be centered in New York, because that is the

–  –  –

Mr. STEVENSON. It did not become a speculative matter at all. I t did not go to the point where it made a hardship on the consumers, but every stimulation that you give to commodities helps a man who has commodities to sell, and there are a heap more of them that have commodities to sell than there are of those who have stocks and bonds to sell.

Doctor SPRAGUE. But stimulation of commodity prices to the extent of bringing about undue speculation is far more dangerous and more serious in its repercussions upon the community than a similar development in the securities market.

Mr. WINGO. Doctor Miller's suggestion was, as I gathered it, that the open-market operations of the Federal reserve system are not so important, as controlling, as some people thought. What is your conclusion upon the statement you have just been making Doctor SPRAGUE. On the statement I have made, I consider they are vitally important in the conduct of the Federal reserve system, but that they require energetic and farsighted handling.

Now, I wish to go on to the more recent situation. Having secured the advantages that I have indicated from the open-market operations in the summer, with the incidental possible disadvantage of undue speculation on the stock exchange, we reach the beginning of the present year, when the advantages gained from increased openmarket operations had been secured. The time was ripe for reversing the movement. By that time the position was such with regard to foreign-exchange rates and other matters so that a fair amount of pressure might be exerted upon the market, and this was initiated by a slight advance in the discount rate and some contraction in openmarket operations, with apparently an expectation that the result would be as in 1926, when similar operations were followed by some decline on the stock exchange and the liquidation of 500,000,000 in stock-exchange loans.

Events have not followed that course this year, for the market, after a slight decline, began to rise once more and now presents the earmarks of a boom, analogous to the boom in Miami, Fla., two or three years ago. The more prices go up, the more active is the trading.

Mr. WINGO. Then you say that Doctor Miller's theory is correct— that the open-market operations as a controlling element failed ?

Doctor SPRAGUE. NO. The failure in this instance was not due to defects in the device, but to a failure to use the device of open-market operation adequately. At the beginning of March, the Federal reserve banks had sold three hundred million of governments, and on evidence that the pressure exerted was not adequate, rapid sales of one or two hundred millions more of governments would have served the purpose, in my judgment, but not having served that purpose what is happening? We are having rates advanced throughout the country solely on account of undue activity on the stock exchange. The rates have been advanced in St. Louis and Minneapolis and Chicago for no reason arising out of the local situation in those districts, but solely because of an undue absorption of funds on the stock exchange.

Mr. WINGO. May I point out, as I did yesterday, that, taking it as of the first of the year, when you reversed the policy, it started the tightening process for the purpose of checking these stock loans,

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Mr. STRONG. That is the purpose of this bill.

Doctor SPRAGUE. Well, this particular situation has no particular reference to prices. Possibly your phrase, " stabilization of industry and commerce," might add force and support to my contention, but if anyone holds that the reserve banks are bound to lend to a bank simply because it offers eligible paper, then I think an additional provision should be put into the Federal reserve act to the effect that the Federal reserve banks are not obliged to lend merely because eligible paper is tendered.

Mr. STRONG. They should use their powers for stability and stabilization.

Doctor SPRAGUE. For a great variety of purposes.

Mr. WINGO. As I understand your suggestion, it is that the Federal reserve officials, who have the power, should say to their member banks that they shall not have loans for the purpose of doing indirectly what is now forbidden to be done directly; that is, stockmarket loans are not permitted to be rediscounted under the Federal reserve act, and they are getting around that by bringing in eligible paper for the purpose of procuring funds for stock-market operations.

Doctor SPRAGUE. I would not put it on that ground. Take a situation like this: Suppose that brokers' loans were far below what they are now, and that the rate was below other lending rates, as was the case some months ago, and a bank comes into the Federal reserve bank to borrow and it has some call loans. I see no objection to granting accommodations to that bank in that situation. It is because stockexchange expansion has gone to an undesirable extent, and even more because it is tending to raise rates on other classes of loans, that I contend that I would exert a little discrimination.

Mr. WINGO. But they now have the authority; that is the point I am getting at. It does not require a resolution of the United States Senate or an act of Congress to tell the responsible officials of the Federal reserve system that they must not permit loans indirectly that are barred directly.

Doctor SPRAGUE. If we regard it at the time being as undesirable, but I do not want to have it generalized that you are never going to lend to a bank that has call loans. It is because the demand for call loans has become so insistent that the rate is high, and it is drawing money from other sources and forcing up rates. Those are the reasons in this particular juncture for discriminating a little in the matter.

Mr. WINGO. But they have the authority to do that now. Suppose that we passed any bill that the Senate might send over here that would undertake to do that? If they can now get around the present provisions of the law and do it indirectly, is it not reasonable to suppose that these gentlemen would exercise their ingenuity and would still do just what is being done under the present law? So does it not come down to the wisdom and courage of the administration of the general laws that we have now ?

Doctor SPRAGUE. There are two situations now in which the Federal reserve banks discriminate, or may discriminate. One is in the event a bank is in an uncertain condition and yet has some good paper and offers it for rediscount so that practically, if it then fails,

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The remedy you suggested a while ago would fit that. I can see very readily that if they required these stock loan fellows in New York to liquidate before they loaned them any more money they could accommodate them without putting up the rate.

Mr. WINGO. The speculator never pays any attention to rates. He pays high; he can pay beyond what the legitimate business man can.

Mr. STEAGALL. IS there in the present situation anything that demands that the Federal reserve may either curtail loans to banks that are taking care of too many brokers' loans or raise the discount rate ?

Is there any situation that necessitates one or the other ?

Doctor SPRAGUE. That depends really upon something that is a little indeterminate. I think the extent to which a collapse of considerable moment on the stock exchange is an independent force exerting an unfavorable influence on business; an ordinary decline in the stock exchange does not exert very much of an unfavorable influence upon business. If business is in sound condition it will go forward notwithstanding some decline, but a severe decline on the stock exchange might have a damaging effect throughout the community. The situation is strikingly like that which we had two or three years ago in Florida, in that trading increased when prices went up, and the market is not sensitive to changes in rates. I am rather fearful that if we adopted a 31/2per cent rate throughout the country because business warranted it we would have prices moving up on the exchange to dizzy heights and falling of their own weight to a level so catastrophic that it would have an independent unfavorable effect upon the whole business position. For that reason I favor attempts to put some check upon the situation by the direct-action method that I have indicated.

Mr. WINGO. We probably will get results with less injury to legitimate business than if you undertake to control it by a high speculative rediscount rate which only the speculator could pay.

Doctor SPRAGUE. That I object to decidedly. Some people argued that we should pay no attention to the stock exchange and perhaps reduce the rate to 31/2per cent.

Mr. WINGO. I S not this the correct rule? The purpose of the act is to accommodate business, industry, and agriculture, and when the needs of legitimate business require you to put the rate up or down should you not do it regardless of the nature of the business going on in the stock market and undertake to control brokers' loans through another method ?

Doctor SPRAGUE. I think it would be desirable to experiment with this other method.

Mr. WINGO. I have before me an article in the Annalist of April 20 by you, Doctor. It has a heading, " Brokers' loans dangerous; reserve banks largely responsible for inflation."

Doctor SPRAGUE. I wish to say that I am not responsible for this heading and a careful reading of the article, I think, would indicate that the headings were not justified by the article.

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