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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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Mr. STRONG. HOW would you suggest doing that ?

Doctor MILLER. I would suggest that we clear up this episode that has been under discussion here now for two or three days, particularly with Doctor Sprague (?), who preceded me on Tuesday, followed by myself on yesterday and continuing to-day. I think if we get that episode and its difficulties out of the way, perhaps we will be in a better position to see whether it does or does not suggest something.

The CHAIRMAN. YOU spoke of the two powers that it has, the power over discount rates and the power over open-market transactions. You would also include the power of publicity, would you not ?

Doctor MILLER. Yes; that can very well be included. I think of that as perhaps something that is incidental to and involved in these others.

Mr. KING. YOU mean the power of secrecy rather than that of publicity ?

Doctor MILLER. That depends on how you look at it.

Mr. STRONG. It strikes me, if we have given the Federal reserve system, or a board, such great powers that men of ordinary human intelligence can not operate them, if we can not direct them to use those powers for certain policies but that they must be left by them for experimental purposes in secrecy, we had better repeal them.

Mr. KING. If you had a committee of Gods, you could confer this power.

Doctor MILLER. Evidently.

(The question of Mr. Strong was here read aloud by the stenographer.)

–  –  –

Doctor MILLER. NO.

The CHAIRMAN. The five member banks?

Doctor MILLER. Yes; because we might as well recognize right here, particularly in a period when the movement of gold has been outward instead of inward, that the only method by which the banks of the country can extend their business is by getting credit at the Federal reserve banks; and during the last year, when we have had trade and production of comparative slackness when set alongside of the years 1926 and 1925, as indicated among other things by rates of employment and by amount of money in circulation, the only source of reserve money was the reserve banks, and therefore whatever went on in the way of expansion went on with money borrowed from them. To that extent we were tied into the situation.

The CHAIRMAN. Yes.

Doctor MILLER. And the expectation, intent, the purpose and policy, entirely apart from the Federal reserve system, has been a contributing factor. It has resulted from the policy that money has been made so abundant that, as stated, cheap and abundant money became a provocative factor in the stock market; and to that exent [extent] I feel that it is our concern. When they are doing these things with Federal reserve money, then it is the business of the Federal reserve banks to take heed and consider what action may be taken.

But there I think the whole episode illustrates that action in matters of credit policy, as a rule, is either impotent action, or may be injurious action, unless it is action that is taken sufficiently well in advance to protect against the consequences, rather than to undertake to undo them. There is no use in closing the door after the cow has gone out of the stable; and that is too frequently apt to be the case where you have administrative bodies, where the fear of making a mistake may lead to such delays or tardy action, that it really becomes mischievous action.

I think the mischievousness of the open-market policy of the Federal reserve system is, as it has been operated and as I believe it will be operated, that it offers too great a temptation to some one who feels the itch to do something, with the scalpel in his hand, to go in and do something. Usually you find that men who have got creative imagination, who have got force of will, who are animated by the instinct of domination, and that is something you have got to reckon with constantly where you are dealing with matters of money, finance, and credit—right in the Federal reserve system itself this openmarket operation offers, to my mind, too big a temptation to use it unnecessarily, and carries the danger, therefore, that it may result in just these difficulties and impasses in which the Federal reserve system has found itself in recent months. I think this shows about what you may expect.

If the attitude of this committee or of the Congress or the public at large is that the Federal reserve system on the whole has given a satisfactory account of itself in the last eight months, leave it alone;

but I take it that there is a good deal of concern, and in going into this matter if you are finding out just what it is that has given rise to these conditions I undertake to say that the provocative factor of the open-market operation in Federal reserve policy is an instru28 13 <

–  –  –

Doctor MILLER. They take action under the provisions of the Federal act.

Mr. BEEDY. Under a vote of the Federal Reserve Board ?

Doctor MILLER. The language is ambiguous.

Mr. BEEDY. DO they not vote on it?

Doctor MILLER. YOU know, there is a so-called open-market committee for handling Mr. BEEDY. Yes.

Doctor MILLER. That committee consists of five banks which are represented on the committee through their governors.

Mr. BEEDY. A majority of those five determines ?

Doctor MILLER. Well, it may be sometimes a majority of one. I t may be one that is the majority.





The CHAIRMAN. I would like to ask you a few questions regarding that. As between the open-market transactions and the discount rate, which do you regard as the most essential ?

Doctor MILLER. I regard the discount policy as the most potential from the point of view of good operation.

The CHAIRMAN. The use of the discount rate is confined to openmarket operations ?

Doctor MILLER. Yes.

The CHAIRMAN. I have understood that open-market transactions were used frequently to prepare the market for money, and when it is once prepared, frequently the discount rate follows naturally.

Doctor MILLER. Yes.

The CHAIRMAN. In that connection, also, you agree with the thought that has been expressed before the committee that we are on a gold basis at present?

Doctor MILLER. I should think that language might have some pertinence to what took place in the autumn of last year; as a description of the attitude of the Federal reserve system over a term of years, I think it is too strong.

The CHAIRMAN. YOU recognize that the Federal reserve movement has a great responsibility, due to the fact that we have this vast amount of gold here, which is largely under the supervision of the system ?

Doctor MILLER. Yes.

The CHAIRMAN. TO what extent would the changes in the openmarket operations affect the discharge of that responsibility that rests on them in the management of this gold ?

Doctor MILLER. I think the effect would be good.

The CHAIRMAN. YOU think it would improve it?

Doctor MILLER. Yes. If you will permit me, I think that openmarket operation is an instrument of direct intervention or interference with the money market. I t is lying there on a shelf and there is a constant temptation to use it. It is like a magnificent automobile standing there constantly. " Let us use it."

The CHAIRMAN. NOW it is a brake on administrative operation?

Doctor MILLER. Yes. But I think wisdom on the part of the Federal reserve system will be shown in making the exercise of that power occasional rather than regular and frequent. That is the conclusion to which I have come; and for that reason I would suggest that any amendment that might be made to the law should be not by changing the power but by making the indications on which

–  –  –

from the importation of gold, or an operation of that kind, the United States was operating in what I would call a limited and closed market. There was no elasticity; there was no method by which in time of strain new money could be brought into the situation. Now the reserve banks have come into the picture, and as they contribute through discount operations and more immediately through open-market operations, money to the market, the market has become more distinctively an open money market. Anybody from the Atlantic to the Pacific, from Canada to Mexico, who puts his money into the money market to-day, provided the loans are properly handled, knows that he can always get his money out whenever he wants it. Why? Because such a thing as a currency and credit panic can not exist under the Federal reserve system. Its function is to provide these when further provision is necessary.

But the criticism may be made that it has been a little too liberal and generous in its provision, and has been a little bit, through its open-market policy, in the attitude of the nursery maid at times when she moves around among the children and rather pushes the glass of milk into their mouths. That is the sort of thing that I feel should be made less easy.

Mr. STRONG. YOU think the law, then, could be changed so that it would read for the accommodation of commerce and business or at the will of the Federal Reserve Board ?

Doctor MILLER. It is the same thing.

Mr. STRONG. I am afraid it is.

Doctor MILLER. The phrase "accommodation of commerce and business" has always struck me as one of those rare inventions that occur occasionally in American statesmanship. Whoever was the author of that phrase did a magnificent thing. I t is great language. The word " accommodation " is susceptible of the wisest interpretation and reaches to the noblest of economic purposes.

Mr. STRONG. Mr. Chairman, the hour of 12 has arrived, and I move you that the hearings be adjourned until to-morrow at 10.30.

(The motion was seconded; and the question being taken, the motion was agreed to and, at 12 o'clock m., the committee adjourned until to-morrow, Friday, May 4, 1928, at 10.30 o'clock a. m.)

–  –  –

You read the hearings held by the British committees of the House of Commons on the deflation following the Napoleonic war, and you will find things startingly[starlingly]similar to this situation now. The situation after the Civil War was similar to this situation; the farmers were hit.

There are two factors involved in that. The one is that during that period of deflation farm products do not have their customarily normal pre-war ratio to other products, and the other is the long, slow decline in the purchasing power of the dollar. They are two separate things. The one, dealing with this ratio of farm products to other products, can not be influenced in any way by monetary policy. I think many people in the industrial centers feel that farmers think that monetary policy may have something to do with the price of individual farm products, but that is not the case. Most farmers are not that ignorant; but they realize that this purchasing power of money in general is influenced by monetary policy, and I can say very frankly that some of our more educated farmers are decidedly suspicious that the Federal reserve system may at any time start a further deflation. We are watching their policy with the very greatest interest.

I think more of those same educated people have great confidence in the beneficent effects of the Federal reserve system if properly managed, but if they are going to start a deflation such as took place in 1920 for a time, late 1919, and early 1920, it would cause very grave suffering to our people.

The CHAIRMAN. In that connection, if I may interrupt you with something that is very pertinent to what you have said here and that has been said in these hearings, Dr. John R. Commons, of the University of Wisconsin, made a statement here in which he indicated that through the cooperation now taking place between the Federal reserve system and the banks of issue of other countries of the world, to get them all back on a gold basis, in which movement, it has been pointed out, we are selfishly interested because of the fact that we have this large amount of the world's gold in our custody, it will result, when that process is fully completed, in the lowering of the general price level from the present basis of 150 back to the pre-war basis of 1913 of 100. That is what you are referring to, is it?

Mr. WALLACE. That is what we are afraid of, that that might take place gradually over the period of the next 20 years.

The CHAIRMAN. That statement has been definitely made here before the committee, that that will be the result of a successful termination of the activities that are now being engaged in by the banks of issue of the world, in which our Federal reserve system is, of course, an important factor.

Mr. WALLACE. Yes. It would seem, unless there are startlingly new methods discovered in gold-mining processes and unless there are startling changes in our credit mechanism which will make a dollar of gold support more credit, there will be great danger, almost a certainty, of that happening during the next 20 or 30 years; and I can say, from a political standpoint, that if we do take that long, slow, painful, grinding deflation toward the 1913 price level, the difficulty of farmers in paying interest on their mortgage indebtedness will bring about a political situation somewhat similar to that which existed in the eighties and nineties, of farmers to some extent striking

–  –  –

Mr. STRONG. That figure is the result of the development of the farms, of improvements and buildings and stock?

Mr. WALLACE. Yes.

Mr. STRONG. And machinery and things they have to buy ?

Mr. WALLACE. Yes.

Mr. STRONG. They have to build our country out there just like they built the East.

Mr. WALLACE. We are pretty well through that pioneer period in Iowa at the present time.

Mr. STRONG. That is one reason why the mortgages have gradually increased and not decreased ?

Mr. WALLACE. Yes; although since the war there has been a refunding of the short-time obligations into the cheaper-interest form of mortgages.

Mr. STRONG. But if we can get a fair return on our products out there we will commence to pay those off after a while ?

Mr. WALLACE. Yes.



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