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Now, originally it had the definite article (the) in front of the word " reasons," and to leave that out makes a very material alteration of the meaning of that phrase. It permits of a certain latitude in making both a comprehensive and concise statement, which would not be permitted if he was required to give all the reasons.

Mr. WINGO. In other words, you would swear the witness to tell the truth but not the whole truth ?

Governor STRONG. Well, Congressman, that is one way of expressing it. I think there are occasions when a man is unable to tell the whole truth.

Mr. WINGO. I am not quarreling with you.

Governor STRONG. It is the difference between stating facts and motives. When you come to expressing motives you have difficulty enough in expressing your own, but when you engage yourself honestly and exactly to express other people's motives you are in no end of difficulty, and that is the difficulty I apprehended about a definite article.

All of section 28 (a) is addressed to a direction, or an authorization, for the Federal reserve system to conduct certain inquiries and to report the results. It is my belief that, in the main, in the general authorizations of the Federal reserve act there is probably ample authority now to conduct very extensive inquiries as to all monetary matters of that sort; but as to those matters in which we are especially interested in the Federal Reserve Bank of New York, I think some authorization of this character would give us all a sense of assurance that what we were doing in those respects is affirmatively understood by Congress and approved.

Of course, we have to recognize that the world is gradually emerging from a period of the most extraordinary disorder ever known in the history of monetary affairs. I t presents many novel problems, and too much study can not be given to the subject. Certainly a voluntary expression of the desire of Congress that we should do whatever is necessary to get an adequate understanding of these problems is to our great advantage, and I believe that it would be to the

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I hope there is no impropriety in my saying one thing about legislation of this character, which was suggested by something that one of our directors said—-I think Mr. Young. This is the kind of a bill where a very slight change would alter the fundamentals of the bill to such an extent that I might alter my views very materially as to what the bill would accomplish. I do not know very much about methods of legislation, but enough to realize that a bill as introduced does not always emerge in exactly the form in which it is introduced.

I think I might summarize my general feeling about the bill by saying that the principal objections which I personally entertain are those which I first described, as to the effort toward bringing about stability by this particular mandate of Congress, and the possibilities that this bill may not be in substantially the form which it now is when it is approved.

Those are the two points on which possibly I feel justified in laying some emphasis, but I do not know whether it is proper to make that suggestion to a committee of Congress.

The CHAIRMAN. Inasmuch as I am assuming that those remarks are largely directed to the possible changes that might be made in the United States Senate, I think it is quite all right. [Laughter.] Governor STRONG. I had not thought of that.

Now, I think it is only fair—and I am trying to give a judicial opinion, if that is possible, on such a matter—to say this: That I very firmly believe that everything sought to be accomplished by this amendment to the Federal reserve act can be accomplished, and, in fact, will be accomplished, provided you have two things. First, good management in the system, honest, intelligent management;

and, second, a general restoration of the full gold standard in the world.

Mr. STRONG. DO you mean a full coverage of gold ?

Governor STRONG. NO ; I mean the full and free payment of gold in redemption of notes circulated in the nations.

Mr. WINGO. Do I understand that that means an unrestricted flow of the free gold of the world ?

Governor STRONG. Between the nations.

Mr. WINGO. I say, between the nations.

Governor STRONG. Yes.

One other thing which I think it is not fair to omit is this: That you will find, on page 183 of the hearings, Part I, 1926, a chart of prices extending from the year 1800 down to the year 1924. If you will observe, the great price distortions that occurred grew out of war in every instance; that is to say, the Napoleonic wars, the American Civil War, and this last war, were the occasions for price disturbances which in every instance gave rise to efforts to legislate exactly as Congressman Strong is now attempting; and I do not believe, and I can not think that Congressman Strong believes, that any legislation of this character, no matter how strongly it may be framed, will protect the monetary system against the strain imposed by financing a great war, and therefore I feel that there is a little exaggeration of the importance of this question because of the bitter experiences growing out of the recent war, and that if you gradually get back to the old method by redeeming our obligations in gold we shall accomplish pretty much what he wants.

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Mr. BRAND. Would you mind if I interrupted you for a moment to ask the chairman a question ? The House is meeting now; how long are you going on with this ?

The CHAIRMAN. Just until Governor Strong finishes this statement.

Mr. BRAND. But Congressman Strong wants him to answer all these questions.

Mr. STRONG. NO. The governor suggested that he could in a few words answer these particular questions and I made a few remarks so that he would understand what the main purpose of them was.

* * * * * * * Governor STRONG. We were discussing the question of the change of management of the Federal reserve system. The members of the board are appointed for terms of 10 years, and unless some catastrophe happened the change of management of the system, as far as the Federal Reserve Board is concerned, would take place very slowly. With respect to the suggestion that the complexion and character of the board might be changed by appointment, and that the new board would appoint class C directors who were avowed inflationists, if you please, even that would not bring about, necessarily, any period of deliberate inflation of the currency, because there are only three class C directors in each bank, and the other six directors are elected by the member banks, three of whom are experienced bankers and three experienced business men. So that, in the 12 reserve banks, you have 36 directors appointed by the Federal Reserve Board, 36 bankers and 36 business men, and my belief is that changes of that character could be brought about only so slowly that there is very little if any danger to be apprehended on that account.

If the whole country were bent upon having some inflation of the currency, no doubt, in the face of public pressure and pressure by Congress, the system—and the Government as a whole of the Federal reserve system is not a supergovernment—might put up a fight against the country, but probably in the end it would get licked;

so that, after all, the reliance against such an extraordinary occurrence has got to be public opinion.

Now, as to the internal management of the system itself and what might be done to check either an inflation or a deflation, I go back again to the operation of the gold standard. The creation of a great volume of credit, in excess of what the business of the country requires, immediately has certain reactions. Interest rates go down.

You have an exodus of capital from the country and, if such a policy is so deliberate as to be generally recognized, there would be a flight of capital, and if it was a gradual policy of inflation, insidious and not readily perceived by the public, it would undoubtedly in time have some effect upon prices.

But in every case the consequence is the same; gold would leave the country, Gresham's law would operate at once, and it would be an apparently short time, particularly if the public were aware of the situation, before the reserves of the country would become so impaired that we would be facing a suspension of specie payments.

I do not know of anything that would bring the country to its senses any quicker.

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where the limitation upon judgment is very exact and precise and the penalty for bad judgment is immediate.

Where you are speaking of efforts simply to stabilize commerce, industry, agriculture, employment, and so on, without regard to the penalties of violation of the gold standard, you are talking about human judgment and the management of prices which I do not believe in at all. I do not think anybody should be given the power to say what the price of anything should be.

Mr. WINGO. Price fixing indirectly is just as vicious as price fixing directly.

Governor STRONG. But if your system of price fixing is that which has been tested, so far as human society goes, by operation of the automatic system of gold payment and redemption of the notes of banks of issue, I think you minimize the possibilities of bad judgment or abuse of power by a better method than any that has yet been devised.

Mr. WINGO. Here is another factor: You can not foresee all of the picture. There are never two sets of circumstances exactly alike in the handling of the credit machinery. You might have a different commodity situation and a different gold situation each time and, in the last analysis, there has got to be a judgment based upon the wisdom of experience in handling these affairs which must control, and, in addition to that, the old fact still obtains that there are certain laws of economics that are far superior to any wisdom or stupidity of Congress. There are certain economic laws that you will run up against. You may check them here and say, " You can not come in the front door," but you divert the stream around to the back door, and that is the thing that is in my mind and I was very much relieved to find that the author of the bill does not intend to change any law at all but still wants to make a stump speech more elaborate than the one in the last session.

Governor STRONG. Unless there is something you wish me to deal with, that covers what I had to say.

The CHAIRMAN. In reference to Judge Brand's desire to submit questions, he just informs me that he will submit those for the record to-morrow and they will be forwarded to you so that, as an extension of your remarks, you may submit your answers to his questions.

Governor STRONG. If the committee desires me to return later, I shall be very glad to at any time. I rather enjoy being here.

The CHAIRMAN. We enjoy having you here.

Governor STRONG. Before leaving, Mr. Chairman, I want to express to the committee and to you personally, my appreciation of the consideration you have shown me during my appearance here, as well as my gratification at the opportunity which you are giving to the members of the Federal reserve system to come here to exchange views with you on these important matters.

The CHAIRMAN. The committee will adjourn until 10.30 o'clock to-morrow morning.

(Whereupon, at 12.17 o'clock p. m., an adjournment was taken until Tuesday, March 20,1928, at 10.30 o'clock a. m.)

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Mr. GOLDENWEISER. This chart is primarily made for the purpose of bringing out the different kinds of price fluctuations. You see the three big peaks, those three tremendous advances in prices about 1812, 1865, and 1920. Those are all war peaks. They are all the results of war inflation. It is these very violent convulsions of prices that cause most of the great distress which underlies the sentiment in favor of this bill. As to the more recent one, in 1920, while the war was over in 1918 as a matter of fighting, financially it was not over for a year or more afterwards, because some of the war financing had to continue.

The CHAIRMAN. Mr. Goldenweiser, this covers, as you say, a long period of time, from 1800 to 1927. This is the general wholesale price level?


The CHAIRMAN. Were the same commodities used as component parts of it in 1880 that were used in 1927?

Mr. GOLDENWEISER. NO, sir. The earlier figures, of course, are on a much smaller base. The figures are not as good for earlier years as they are for later years. They are the best that have been found.

The CHAIRMAN. They are the best index that you have?

Mr. GOLDENWEISER. The best index for the whole period.

Mr. STRONG. Why was it necessary, after the war was over, in order to complete the war financing, to have continued inflation ?

Mr. GOLDENWEISER. Congressman, that is a point that I can not discuss in great detail. It has been discussed here. It was first the flotation of the Victory loan, and then later the issue of Treasury certificates in connection with the very heavy expenses that continued a long while after the armistice. I am not saying that it was

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accompanied the depression from 1873 to 1896. I do not think we should address ourselves entirely to temporary and accidental conditions of war while this palpable change in 14 years was so serious.

Mr. GOLDENWEISER. No, sir. That is the very next thing I want to take up.

Mr. LUCE. Very well.

Mr. GOLDENWEISER. TO what extent these war peaks can be modified is a matter largely of fiscal policy and of taxation, and it is something that is outside of the province of my discussion now. The largest peaks are war peaks, and no statute would prevent them, I think; because, no matter what statute was on the statute books, in time of war it probably would be repealed or ignored in view of a national emergency. All the countries of the world had violent inflation, and the reason that ours was less violent was that we were less involved in the war financially than the other countries.

The other kind of fluctuations that I want to speak about are the ones that Congressman Luce just referred to; that is, the fluctuations from the seventies to the nineties and from the nineties to 1913—a long decline during a period of 30 years, which caused distress and made it very hard for the debtor class—and then the advance after that.

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