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Mr. STRONG. Would it not be fair to say that the fellows who wanted the gold were the ones who instigated the meeting ?

Doctor MILLER. They came over here. That is as much as I know as a matter of fact. Beyond that I can throw no light on it.

Mr. STRONG. They came, they banqueted, they talked, and they got the gold.

Mr. BEEDY. The answer to the question is that he does not know who was the moving spirit in getting them over here.

Doctor MILLER. Yes.

Mr. BEEDY. I would like to get back to the bill.

Doctor MILLER. I can not let your expression stay in the record, Mr. Strong, without a protest, because it carries with it a sinister suggestion.

Mr. STRONG. Not sinister, but based on the facts.

Doctor MILLER. Well, what is the fact ?

Mr. STRONG. The fact is that they came over, they had a meeting, they banqueted, they talked, they got the Federal Reserve Board to lower the discount rate, to make the purchases in the open market, and they got the gold.

Doctor MILLER. Well, now, if I took that view of the matter, if I used the words you have used, I would say that it was pretty clearly demonstrated why your bill should not be enacted.

Mr. STRONG. I know you would say that, but I think that if we used this power to take care of our own standard of value, our own dollar Doctor MILLER (interposing). But you have said that these gentlemen did all these objectionable things. If they can do all these things with the Federal reserve system, that is a good reason Mr. STRONG (interposing). For stabilizing the American dollar first?

Doctor MILLER. Who is going to do the stabilizing?

Mr. STRONG. The Federal Reserve Board, instead of trying to stabilize Europe first.

Doctor MILLER. What guarantee, or what warrant, have you for expecting the Federal Reserve Board, taking your view, your own words as to this recent performance, to give a more competent account of itself in the future? If these gentlemen did these things you charge, why will they not do them in the future ?

Mr. STRONG. That is the reason I want to direct them to stabilize the American dollar first, not to stabilize Europe first, but America first.

Doctor MILLER. Let me say here parenthetically, because while it has no bearing upon the problem, it may have at least a bearing upon your statement Mr. STRONG. Never mind my statement. I can take care of it.

–  –  –

Personally, I am on principle opposed to artificial money conditions. To my mind, they are one of the most unfortunate things that can happen, and many of the most serious conditions that we have gotton[got en]into have come from just that sort of thing.

Mr. STRONG. What would you say is a natural rate?

Doctor MILLER. One that is pretty carefully adjusted to actual conditions, where you do not undertake to force and create conditions.

I would say, for illustration, that the 31/2per cent rate was an artificially low rate and it has brought in its cycle the present higher rates; and that, in itself, is an undesirable condition.

Mr. STRONG. I would like to get one thing through my mind, referring to your chart there. The changed policy of the Federal Reserve Board in the open-market operations, and the lowering of the discount rate, tended, as I take it, to increase loans and investments and resulted in the violent increase of brokers' loans, but was not accompanied by a corresponding rise in other loans for business.

Well, now, was anything done or any policy adopted or any action taken by the Federal Reserve Board to hinder the use of cheap money to increase the brokers' loans ?

Doctor MILLER. There is no method known to the Federal reserve.

Mr. STRONG. YOU remember that Doctor Sprague suggested the method of adopting the English system.

Doctor MILLER. Yes.

Mr. STRONG. TWO remedies were suggested, one to adopt the English system to force the lending to be in a loan for at least seven days and to pay interest for that time, in order to prevent borrowing sums of money one day and returning them the next and only paying interest for one day, and then his other proposition was to inquire into the purposes for which the money was to be borrowed.

Could either one of those remedies have been used ?

Doctor MILLER. I think the first one would be worthless. I think it would produce just the opposite result from that intended.

Mr. STRONG. Why?

Doctor MILLER. Because a bank being limited to borrowing for a 7-days' minimum would see to it that it kept its borrowed money invested for the whole seven days and there would be no other place that it could with certainty go with that money than the call-loan market.

Mr. STRONG. But would that not be a check when they wanted to furnish money for speculative loans? Suppose that a man came in and said that he would like to get money for a couple of days to be used in the open market. They would say, " But we have to borrow that money for seven days." Would that not be a check upon it?

Doctor MILLER. It does not work that way. The call-loan market is the most impersonal thing in the money market. The bank borrows at a reserve bank, and that is notably true in the big cities, and, of course, especially true in New York City, because it finds its reserves depleted and needs to restore them. Being a central reserve city, the New York member bank is required to keep a balance of 13 per cent against its demand liabilities.

Mr. STRONG. DO you think the other remedy of Doctor Sprague's would be of any value ?

Doctor MILLER. I think, Mr. Congressman, that the most essential thing in the operation of the Federal reserve bank at this juncture is

–  –  –

possible check as applied to the New York market. There is not very much difference between the total amount of brokers' loans and the deposits in New York banks. There are legal-reserve requirements in connection with the deposits in the New York banks. In other words, it is a deposit of money belonging to the country banks, or that part of it that is loaned by the country banks on the market, and the same thing would apply to industry.

Doctor MILLER. Unless they loaned it.

The CHAIRMAN. Supposing that the reserve law were changed in that respect and that New York banks were forced to keep a reserve against the total amount of brokers' loans; would not that have a tendency to check the situation ?

Doctor MILLER. In effect, I think, if I understand your question, that it does that now. When a New York bank makes a loan to anybody, but in a specific case a broker, it takes his note with collateral and gives him a credit on its books. It creates, in other words, a demand liability against itself and against that it must immediately carry a reserve of 13 per cent.

The CHAIRMAN. That is true; but when these brokers' loans accumulate the New York banks know that overnight they may be called on to supply the money to liquidate all those loans that are made when they hold money from outside of New York City, and they have an assurance now that if that call is made they can" go into the Federal reserve and get the necessary funds.

Doctor MILLER. They have the assurance, but I think they The CHAIRMAN. They have eligible securities from the applicants to take care of just that situation.

Doctor MILLER. Government securities.

The CHAIRMAN. And they can go into the Federal reserve bank and get whatever funds are necessary to take care of the sudden call of the amount on brokers' loans held outside of New York City.

Doctor MILLER. That is true.

The CHAIRMAN. My question to you was whether or not it would have a tendency to check that if we required a legal reserve requirement against those loans the same as is required against deposits ?

Doctor MILLER. Well, wherever you have a loan you have a deposit. Your loan is always offset by a corresponding item on the liability side of the ledger. That is the deposit item.

The CHAIRMAN. In other words, look at it this way: If it were not for the fact that around the corner is the Federal reserve bank, to which the big banks in New York that have the responsibility of furnishing the money to discharge those loans in case they were called on to do so can go, those big banks in New York City would take a different attitude in regard to brokers' loans than they do now, because they would have to find themselves the money with which to liquidate those loans. As it is now, the Federal reserve bank, being around the corner, is furnishing a source of relief which works to the advantage of the continuance of the brokers' loans.

Doctor MILLER. Yes; no doubt about that.

Mr. BEEDY. In other words, you are calling attention to one of the weak spots in the Federal reserve system ?

–  –  –

The CHAIRMAN. NOW we will proceed with the hearings on H. R.


Mr. Miller, of the Federal Reserve Board, will resume his testimony.


RESERVE BOARD—Resumed Doctor MILLER. Mr. Chairman, yesterday's hearing and, I think, one or two of the hearings last week concerned themselves very largely with a review of Federal reserve policy and operations and their effects during the past nine months. Yesterday's hearing took on the character not simply of an inquiry but of an inquisition, so to speak—a disposition to get something in the nature of a close look-in with respect to the open-market operations and policies of the Federal reserve system.

Personally I think that is not only proper but, I think, likely to be profitable and enlightening to the committee and to others who are really interested in the manner in which, humanly speaking, the Federal reserve system operates.

Now, I think I have stated once or twice in connection with these discussions that I have not always been in sympathy with the policies that the Federal reserve system has followed in recent years. More particularly is that true with respect to its open-market policy and operations. And I have felt an embarrassment, a certain personal embarrassment, in my desire to meet candidly and frankly the questions of members of the committee and at the same time maintain an attitude of loyalty toward my colleagues on the Federal Reserve Board and officers of the Federal reserve banks with whom I have not always been in agreement.

But I feel that where a committee of Congress evinces the interest that this committee has, not only in connection with the particular bill that has given rise to these hearings but with reference to the general operation of the Federal reserve system, that every help should be given, and I am therefore prompted to make the suggestion, Mr. Chairman, that your committee ask the Federal Reserve Board to send you a complete file of documents containing the reports of the open-market committee to the Federal Reserve Board since the inception of the committee in April, 1923, the preliminary memoranda prepared in connection with those reports, and complete records of the action that the board has taken from its minutes.

I am under the impression that it will be seen as inquiries into the Federal reserve system go on that the very heart of its more recent credit policy lies in the open-market operation. I can see, as these hearings have progressed, that that is a thing to which, in one way or another, we always come back.

I think it will remain a mystery to you until you have all of the facts before you. I think you will never be in a position to legislate intelligently until you have that full understanding that will come only when you have all the documents before you which will disclose exactly what is going on, how it has taken place, and then estimate the wisdom of the operation by the resulting effects of the policy.

–  –  –

The CHAIRMAN. The chair is ready to entertain a motion to carry out the suggestion of Governor Miller.

Mr. STRONG. I move, Mr. Chairman, that the chairman of this committee ask the Federal Reserve Board to furnish the details and information referred to by Doctor Miller.

Mr. BEEDY. I second that motion.

(The question was put and the motion was agreed to.) Doctor MILLER. NOW, what is your desire ?

The CHAIRMAN. Have you finished the detailed discussion of the bill?

Doctor MILLER. NO ; I have not.

The CHAIRMAN. We should be very glad to have you proceed in your own way. I might say to you that when you have finished that.

Doctor Commons has a few questions, and I imagine Mr. Strong has some that he will want to ask you after that has been completed;

and, if it is your desire, I understand that Doctor Commons is willing to be questioned by you.

Doctor MILLER. He suggested that, and if the committee thinks it desirable, well and good.

The discussions in the hearings thus far have confined themselves pretty much to paragraph (h), and I rather think it would be better, if members of the committee have any questions they want to put to me with regard to paragraph (h), that that be done before we go on to paragraph (i), which is on a different subject, and on which I might want to say quite a little.

The CHAIRMAN. I wanted to ask you this, Doctor Miller: Are you entirely in accord with the policy being pursued now of cooperation with the banks of issue in regard to getting the world back, or these countries with which we are collaborating, to a gold basis, standard gold basis?

Doctor MILLER. I am not enthusiastic about it, not always happy about it. Considering our unique positions as a creditor nation, and considering our gold position, which is without precedent in the history of finance, we have an obvious obligation and that obligation entails a pretty large and serious responsibility for the Federal reserve banks particularly. But I have never shared the feeling that we should be overzealous in extending our hand and in undertaking to suggest to any country or group of countries or any section of the world what they should do.

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