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period under review to the close of the year 1927. Let me say here that one difficulty I have in recollecting what has already been said is that during the days these hearings have been in progress, the spring conference of the Federal reserve bank governors has been going on here in Washington, and while I have been here in the mornings I have been there in the afternoons, and a great many of these same questions have been under discussion there; so that I am not always sure as to what I may have said here and what I may have said there. Toward the end of the year 1927 after the Federal reserve system had been pursuing the policy, mainly through open-market operations, but assisted by the lowered discount rate, of creating an easy credit condition—a policy which manifested itself when an outward gold movement began in the autumn of 1927, in so-called offsetting purchases of securities in the open markets by the Federal reserve system; in other words, by the restoration to the open market of the money which has been taken out of the market by gold withdrawn either for ear-marking or for foreign shipment—there was evidence of steady and pretty rapid absorption of credit into security loans, not only speculative loans of the kind that are reported in our weekly statement as brokers' loans, but of other security loans also.

At the same time the best information obtainable by the board was to the effect that the commercial loans were running at a lower level.

Is that right, Mr. Riefler?

Mr. RIEFLER. In comparison with the year before.

Doctor MILLER. That is what I mean; they were lower than the year before.

The Federal reserve, I think, began to feel that somehow or other its plan of easing money conditions was bringing about some unexpected consequences, and the first real result of that in policy was the suspension of these so-called offsetting purchases of securities—these purchases of securities in the open market—against gold exports.

I want to see whether that is clear, because to my mind it is a rather important detail in the history of this policy.

The CHAIRMAN. YOU mean by that that exports of gold were made and that the Federal Reserve Board changed its policy with regard to purchases in the open market?

Doctor MILLER. Yes; instead of purchasing securities in the open market—in other words, of putting back funds into the market equal to the amount of gold taken out for export or earmarking—it pursued a policy of allowing the gold so withdrawn to exert some pressure.

The CHAIRMAN. In other words, a tightening of the money market ?

Doctor MILLER. A tightening of the money market. But even that did not register the effect that was expected and that might normally be expected. It became fairly clear, therefore, that there must be some mysterious forces in the situation of which the Federal reserve was not cognizant.

The CHAIRMAN. And over which the board had no control ?

Doctor MILLER. And over which the board had no control, except as it always has control over its action if it knows what conditions are.

You have no control over the rain, but you can protect yourself by carrying your umbrella and gum shoes with you. A subsequent study of that situation indicated what these influences were. I do not know whether they are generally appreciated.

The CHAIRMAN. Would you care to express your views on that?

–  –  –

The CHAIRMAN. And the organization of small community banks, labor banks, and all kinds of financial institutions. Installment buying has been a stimulent[stimulant]?

Doctor MILLER. Yes; and I would say, on the reverse side, it has stimulated installment buying. It has certainly stimulated, in my judgment, mail-order purchases. The fact that a man can sit in a tent or a log cabin in Idaho or in the mountains of California, and if he has a banking account, order merchandise without the trouble of going to the bank and getting the currency and buying a money order or draft, without the trouble of doing anything except dropping his list and his check into a letter and then into the nearest box on the mail route certainly has tended to increase the mail-order business. Generally, making things easier makes them more used.

At any rate, the fact is that there has been this considerable reduction in the volume of money in circulation, not wholly explained, I think, by diminished industrial activity nor by employment changes.

Mr. GOODWIN. Does the amount of money in circulation bear any relation to the amount of bank loans ?

Doctor MILLER. Yes; but a varying relation. We used to assume, and it was a fairly justified assumption, that the amount of money in circulation was perhaps a sixth part of the volume of commercial credit as indicated by demand deposits. A member of the board's statistical staff is here, and I turn to him to sell me whether I am too far off. There was formerly a ratio of one to six. The ratio is subject to change, as monetary practice and banking habits change; but that is approximately a statement of a working ratio.

The reduction of money in circulation from the point of view of the member banks of the Federal reserve system, is the same in effect as though an equivalent amount of gold had come into the country from foreign sources. It is the basis of reserve credit. So that, at the time that the Federal reserve was losing gold and making offsetting purchases of securities in the money market, the circulation of the country was becoming redundant, and was being sent into the banks and by them into the Federal reserve banks for virtual retirement.

This returned-currency flow acted exactly as though there had been a counteracting gold import movement into the country at the very time the gold export movement was on, and when there was solicitude on the part of the Federal reserve that the gold export movement should not interfere with the maintenance of low and stable money rates.

That redundant currency was an element not quickly detected It was one of the mysteries at the time when the Federal reserve was wondering why its policy was not working as anticipated.

The CHAIRMAN. There is no direction that caused that retirement of circulating medium ?

Doctor MILLER. Not at all.

The CHAIRMAN. It was just natural conditions of supply and demand ?

Doctor MILLER. Yes. Currency became redundant in comparison to the volume of transactions that needed to be handled through currency.

–  –  –

We have not experienced this in recent years. But if you turn back in our economic history you will find that we have had so-called money plethoras and stagnant trade conditions, with discount rates lower than any we have seen in the Federal reserve system in recent years with the possible exception of the year 1924. After the revulsion of 1873 such was, I believe, the case.

There have been such times in the history of the Bank of England.

Perhaps that gives the most complete catalogue of episodes where even a very low rate of interest will sometimes fail to stimulate the use of money.

Of course, there is some foundation, I think, for believing that these episodes are going to be less frequent and less severe than they have been in the past, but we have had them in the past, and we had in this country in 1924 a 2 per cent rate on bankers' acceptances and on call-market loans that did not have very much stimulating effect for some months. People were still under the influence of the memory of 1920 and 1921, and the reaction that came in 1923, and they were in no state of mind to borrow simply because money was cheap.

Mr. LUCE. Must we disabuse ourselves of the impression that the discount rate is an indication of conditions?

Doctor MILLER. We must rid ourselves of the impression that lowering the discount rate will stimulate business when business is not in a mood to respond to stimulation. A part of the rare wisdom and the rarer skill in the application of discount policy is the knowing or sensing when you may and when you may not expect to get a response. It can not be done mechanically.

An economic rule in this matter is not possible of formulation.

At least that is my opinion, based upon observation and experience in the Federal reserve system, and that is, I think, what is in large measure responsible for some of the surprises and unexpected consequences that were involved in the development of the credit policy that was followed by the Federal reserve system last autumn and on into this year.

Mr. LUGE. I venture to push my interrogation, because it strikes me you are getting right down to the core of this provision. If we were to adopt Mr. Strong's proposal, and if it would be possible either to stimulate or retard business activities, I should be glad to know quite definitely whether it is your opinion that that is of no great consequence ?

Doctor MILLER. It is my opinion that looking at the thing in its practical and practicable aspects as well as its theoretical aspects, there is not a sufficiently close relationship between the two things to make it certain that any ordinary body of men—and by ordinary I mean in point of, let us say, mental equipment for a highly delicate task; for, let me say, an act of economic statesmanship of, perhaps, as delicate a character as has ever been conceived or proposed.

Therefore, I would say, it awakens exaggerated expectations and probably will result in miscarriages—the disappointment that usually comes where you have an unfulfilled expectation. And the criticism.

I think it would be a matter of very grave doubt whether, if it were possible to put the control of the Federal reserve system or any other great reserve banking system into the hands of, say, six or eight

–  –  –

Mr. STRONG. It did not bring about a reduction or deflation in 1920?

Doctor MILLER. I think it would be unprofitable to go into that.

I am perfectly willing to, but I think that it would be an unprofitable investigation.

Mr. STRONG. Put it the other way; what power do you think that you have not ?

Doctor MILLER. The mistake that the Federal reserve made then (1920) was in not saying there was no use doing those things, and of putting itself in the position of accepting responsibility for what happened more or less under the impulse of fear of the investment and banking community; and more or less the impulse of fear of the Senate of the United States.

The CHAIRMAN. That includes the Treasury as well, in that ?

Doctor MILLER. I think that is a more complicated question.

Mr. STEVENSON. AS I understood you day before yesterday, I think it was, your idea was that the open market operations were not particularly efficient in either stabilizing or reducing prices, or raising them.

As I understand you to say, the rates of discount being raised or lowered, if business is in a static condition as my good friend from Indiana used to say, does not have any particular effect. Those are the two principal ways in which it is supposed that the Federal reserve system affects business.

Now, I want to ask you this. Suppose you have had a period of, as I said a while ago, static condition in business; just marking time.

When is the time to begin to loosen it up; or is there a time when the Federal Reserve Board could? And, in addition to that, is it not necessary—I will put two questions in one because you comprehend them both—is it not necessary to create the condition which may invite business to come out of its marking time and begin to march?

Does there not a time come when that should be done; and what could be done to do that?

Doctor MILLER. Yes. I think I have said, perhaps, two or three times that I think it is reasonable to believe—I hesitate to put that more absolutely, because I think experience is the only real guide in this matter, and the reserve system, though in some respects very old, in other respects is still an infant; but without specifying a lot of qualifications and details, I think that the discount policy of the Federal reserve system, or of any central banking system, properly timed in a period of what I would call business recovery following after a period you have described as one of static conditions, is capable of having a stimulating effect. And I might add that on that basis right now, in our own country, it would be far better if the discount rate—I am now looking at the matter exclusively from the point of view of the effectiveness and relationship of the discount rate to the business activity of the country—it would be far better right now if the discount rate were 3 1/2 per cent than when that rate was established last autumn.

We know now—I am not saying this in any critical way, but we know what has happened—that we have been in a period of business recession during the last part of the year 1927. We know that the average growth in economic activity was only21/2per cent.

–  –  –

men who have a combination of imagination and will, and what I would call sound selective judgment, or, much more rare still, creative judgment, are very, very rare; and that calling men by high-sounding titles and putting them in high positions in the Federal reserve, or anywhere else, does not do anything except, in some cases, paralyze them a little bit in the exercise of the native ability they might have.

I have seen a lot of that, where men by reason of the fact that they are expected to do the wonderful, can not even do efficiently the things God intended them to do. I do not know that that should stay in the record. I am talking here pretty frankly to you men.

Mr. STRONG. DO you think that these powers that have been given to the Federal reserve system are too great and important to be handled by men of human limitations?

Doctor MILLER. What do you refer to?

Mr. STRONG. TO the great powers we have given them.

Doctor MILLER. I would say that the two important powers the Federal reserve system exercises are powers over discount policy and over open-market policy and operations.

Mr. STRONG. DO you think those two powers should be taken away from them?

Doctor MILLER. I do not, because you might as well shut up the Federal reserve system; but I am inclined to think that the exercise of the power of open-market operations, of the Federal reserve system, should be subjected to limitation rather than to be left as elastic and in some respects uncertain as it is.

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