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Doctor MILLER. Yes. But I don't think you can dissociate the two. I think they were pretty much interwoven. You help the international situation when you help the movement of American products abroad and you help our domestic situation when you help the foreign buyer.

The CHAIRMAN. I see.

Mr. STEVENSON. YOU started right there to discuss bankers' acceptances. Now, here is a man who wants to buy a hundred thousand dollars' worth of products. Instead of paying cash, he pays in bankers' acceptances. Now, he has his money in bank in London, or he has his credit there. He has his bank there accept a draft for a hundred thousand dollars. Isn't that the procedure?

Doctor MILLER. It may be handled in London, but, as things were last autumn, it is more likely that the credit would be provided in New York.

Mr. STEVENSON. Well, he gets a bankers' acceptance for, say, 60 days.

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crease, in the exchange of any foreign country gives an advantage to the importer over there, it puts the importer here under a disadvantage, because he gets less sterling for his dollars. Just as the English importer gets more dollars and cents for his pound sterling, the American importer gets fewer pounds and pence for his dollars.

So a rise in the foreign exchanges has a tendency to stimulate outward movement and to retard inward movement of merchandise.

And therefore, if the question is regarded in other than its transitory aspects it may be a nice question to determine where balance of advantage will lie as between the two countries.

Let me go further, because one can not easily reach a limit in the analysis. It can be extended further and further until it eventually gets back to where it started. As the rise, we will say, in sterling makes British goods, perhaps also, European goods, more expensive to the American importer, it tends to diminish American purchases of British or other European manufacturers, and thus to act as a retarding influence on the growth of their export trade. So it is only in a very limited view, that is to say, limited in point of duration, that it can be said that its effect is to stimulate the export trade of the country, because, while it is doing that, it may do a great many other things that may not be immediately noticed, and the thing has got to be handled with the utmost appreciation of all that may be involved, and yet with a full appreciation of the importance of the time element.

Let me add this, for I think it is pertinent to this discussion, Mr.

Strong: In the psychology of " cheap and easy money policy " as a rule even people who are pretty wise in money market matters are apt to see only the things they have at heart as the objective of their money policy, are apt to see only what they want, and are apt to lose sight of the counteracting factors.

Mr. STRONG. May I suggest that we get back to this bill ?

Mr. MILLER. Have I finished your major question, Mr. Beedy?

Mr. BEEDY. NO. I thought you started out to say that there were certain factors in the situation which caused surprise to the Federal reserve system.

Doctor MILLER. Yes.

Mr. BEEDY. Who expected a beneficent result and found that the devil had been at work. "Angelic," I believe, was the term you used.

Mr. STRONG. "Angelic desires."

Doctor MILLER. I have tried to describe the objectives that were in mind in this policy of easing and cheapening money through the summer and autumn and into the early winter of last year.

Now, as to what resulted in connection with this policy, that is a further chapter in the story. When money rates went down in New York last summer American business was, as we now know, in a state of recession. I suppose it might be said that the recession extended back even into the early summer or late spring of last year. The result of slackened trade was that there was a light demand for commercial credit. The actual volume of commercial credit in the latter months of 1927 declined below that of 1926.

Doctor MILLER. That is to say, there was a slackened demand for commercial credit, lower relatively than we have had for some time.

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Now, gentlemen, that may simply have been a lucky guess. I t is quite conceivable that at least some of the officers of the Federal reserve system who recommended the policies adopted, and who believed in them, might also have entertained some apprehension and have concluded that what the Federal reserve was after in this case would more than compensate for possible harm from the stimulus that cheap money might give to speculation.

There was an element that appeared later on that probably nobody could have predicted would occur. Gold began to be withdrawn from the United States in large amounts. The monetary reforms being put through in South America had reached the stage where they wanted the actual, physical gold in their custody. There was a considerable movement or gold, partly into " earmark " account, partly into actual exportation. In either case the gold went out of the Federal reserve and the American banking picture.

When gold is wanted for " earmarking " it is physically locked up in the strong box of some New York bank; it is just as much gone as if it were put on board a ship and sent out of the country. I t is no longer America's gold. The Federal reserve, therefore, in this situation and still adhering to its policy of maintaining an easy condition of the money market, decided to offset withdrawals of gold for either " earmarking " or exportation by purchase of securities in the open market. Whenever gold is withdrawn for foreign account it means that the member bank handling the account has got to get the gold. And normally the place to get that gold is the reserve bank. The member bank will therefore have to go to the reserve bank and rediscount, unless at the time the reserve bank relieves it of that necessity by pursuing a policy of open-market purchases.

The effect of offsetting open-market purchases is to put reserve money into the market at the time when member banks want it in order to get gold for shipment.

A purchase of securities in the market by the reserve bank, as far as the member bank is concerned, is identical in its effect with an importation of gold, just as a withdrawal is equivalent to an exportation of gold.

The CHAIRMAN. That is what gives it its power and influence ?

Doctor MILLER. That is it exactly. That is what gives the reserve bank its power and influence. So that the reserve system in pursuing its policy of easy money said, "As gold is withdrawn for export we will make offsetting purchases in the market so as not to allow the withdrawal of gold to firm money rates in New York and thus defeat the policy we are operating on."

But as autumn wore on, and the absorption of funds into the stockexchange loan account grew to amazing dimensions, a feeling of misgiving arose with regard to what was taking place.

Well, now, I think it is a fair statement in.accounting for the extraordinary ease of money in the autumn of 1927 to say that in part it also was due to the fact that there was then a real recession of business, and therefore a relatively slack demand for commercial credit, and, what was more important, a diminution in the volume of currency required by the ordinary business of the country. The figure I have in mind is a reduction of a hundred millions or thereabouts in the volume of money in circulation as compared with a year earlier.

15029—28 12

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Doctor MILLER. If the committee is not advised on this fact of present-day banking practice, perhaps it will be worth while to put it into the record at this point.

The banks to-day carry no surplus reserves. Under our old banking system, there was a good deal of variety in the practice of banks according to the different temper The CHAIRMAN. YOU mean the member banks of the reserve system ?

Doctor MILLER. Yes. Under the old regime, before we had the Federal reserve system, there were conservative bankers and there were bankers who sailed pretty close to the wind. There were country bankers who felt uncomfortable if their reserve ran below 40 per cent, even though their required reserve was only 15 per cent. They wanted a good reserve. There were others that would go just as far the other way as the comptroller's office would permit.

As the banks look at the situation now there is no reason why any bank should carry a surplus reserve. I think one of the things that is overlooked in banking changes under the Federal reserve system, with its safeguards, is that the banker has been released from that constant sense of responsibility for his own good condition that was characteristic—at least, more characteristic—of banking under our old money system. This has introduced a new factor, the full influence of which on recent movements and conditions is just beginning to be appreciated in the Federal reserve system. The result of the habit of carrying no surplus reserves was that the hundred millions or more of currency which flow into the banks, because trade did not need as much pocket cash and pay roll requirements were diminished, was deposited by the member banks with their respective reserve banks and credited to their reserve accounts, giving them in first instance surplus reserves.

Now, since the banks do not any longer carry surplus reserves they would immediately look around and invest their surpluses; make the money which flowed out of circulation and into the banks earn a return without interruption. That is one of the noteworthy things in the reserve system—the immediate and constant investment of bank funds has been very much heightened by the smooth-working Federal reserve machinery; its system of transfers and quick clearances.

There is no country in the world probably where the rapidity of turnover of money is as great as it has become in the United States under the reserve system.

The CHAIRMAN. Velocity, I think it is commonly referred to.

Doctor MILLER. Velocity, or, as I would prefer to call it, efficiency of performance of the monetary unit of value under the operation of the Federal reserve system. The American dollar has become an efficiency marvel. Currency, we will say, is retired from circulation in San Francisco to-day. To-morrow it is loaned on call in New York City. This means that the San Francisco member bank gets credit in its reserve account with the Federal Reserve Bank of San Francisco on the day it deposits redundant currency, immediately arranges for a transfer wire to New York, and it is out on call to-morrow.

Mr. STEVENSON. It is money from banks all over the United States that is being loaned on call in New York so much ?

Doctor MILLER. Yes.

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Mr. STEVENSON. Let me ask Doctor Miller one question first.

Mr. STRONG. GO ahead.

Mr. STEVENSON. YOU are speaking of the question of checking the unusual investment in call loans, the unusual amount of brokers' loans. What is your attitude as to the position taken by the witness yesterday—that the most effective method would be for the Federal reserve banks to be able to say or be instructed to say to a bank that comes for rediscount, " You are carrying a very heavy amount of brokers' loans. We deny you any further rediscounts while that condition exists." Now, that is a practical suggestion that he made yesterday, and it would no doubt be an effective method of dealing with it. The question would be whether it is a judicious method or not.

Doctor MILLER. Well, I would be inclined to answer a bit cynically by a quotation from a great man: " Thought is easy, action is difficult; and action in accordance with thought is the most difficult thing in the world."

Theoretically the thing is perfectly conceivable; and if we were dealing with a theory instead of a condition, I not only think it could be done but would have been done long ago. The fact, however, that it has not been done is the thing to be explained when talking about what is and what is not practicable. It might be that a clarification of the law with regard to the borrowing status of member banks could be brought about so as to leave the Federal reserve banks and the member banks, so to speak, no loophole for misuse of Federal reserve credit. I think one or two questions were asked yesterday by Mr. Beedy on this subject of the witness. He did not seem to think well of amending the Federal reserve act so as to prohibit the use of Federal reserve money for so-called speculative loans, if I remember correctly.

The CHAIRMAN. May I suggest this: The members are required on the floor of the House, and I think we ought to adjourn very shortly.

Mr. STRONG. I move we adjourn until to-morrow at 10 o'clock.

Mr. STEAGALL. What would be the effect in the matter of feeling created, and all that sort of thing, that would result from such action as this on the part of the Federal Reserve Board to take over the control of policies of all of the banks of the country ?

Doctor MILLER. Well, it can't be done, and should not be done.

That is not a function of government.

Mr. STEAGALL. In other words, the Federal Reserve Board, sitting in Washington, should not assume responsibility and control and management of a member bank of the Federal reserve system in a distant city as to the details of its business ?

Doctor MILLER. NO. Of course not. But it can do a great deal, in my judgment, that would be effective without any such invasion of the field of management of the member banks.

Mr. STEAGALL. But suppose the Federal Reserve Board concludes that here is a situation that has sprung up where we think there is a certain character of loans that is being extended beyond the point that we think is wise and healthful; and when banks that have got into this practice apply to us for loans, even if it is in every sense desirable and satisfactory otherwise, because of this particular situation we will arbitrarily refuse them loans. Would that not be a direct interference with their management?

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