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I think you have stretched the possibilties[pos iblites]of the Federal reserve system, so to speak, beyond the nth degree when you include these long-period movements that take, perhaps, a generation or half a generation at least to develop and work their full effects. I agree with you that they are deplorable in many ways, but to my mind they are deplorable for the same reason that the Mississippi floods are deplorable, and yet the rains from heaven can not be regulated or controlled.

The CHAIRMAN. In that connection, under the management of gold as exercised by the Federal Reserve Board here to-day, they can send out of this country large amounts of gold Mr. STRONG. And recall them.

The CHAIRMAN. And recall them. That would have an appreciable effect, would it not, on long-time prices?

Doctor MILLER. NO.

The CHAIRMAN. On the long-time cycles. If gold plays the part in this whole situation that has been indicated here before this committee, certainly the management of gold on the part of the Federal reserve authorities would have an effect.

Doctor MILLER1. On the long-time trend?


Doctor MILLER. NO ; I doubt that very much.

The CHAIRMAN. Supposing half a billion dollars of gold were shipped out of the country and remained out of this country; it certainly would have an effect, would it not?

Doctor MILLER. Well, I think you are to a certain extent taking your conclusion for granted when you say the gold would remain out of the country. Let us see how gold is shipped out of any country.

The CHAIRMAN. I am speaking of the management of gold.

Doctor MILLER. I am speaking of it, too; at least, I am thinking of it. There are cases, such as we have had particularly in the last few years, where gold has gone out of this country because countries like Germany and Italy and France actually want gold for the purposes of carrying through monetary reforms. They are going back onto a gold basis, and in order to achieve their purpose they must have gold. Therefore they come to the world's greatest gold market and they arrange for specific gold loans. They mean, when they come here, to take gold from us; that is the commodity they want. Those loans may be 10, 15, 20, or 25 year loans. They, however, in all cases have a definite maturity and they carry interest which makes this a pretty expensive convenience or necessity for these several countries.

That is one way in which gold goes. France has been drawing gold most abundantly in the last few months as a part of its policy of monetary restoration.

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bonds that are redeemed, are those who belong primarily to what we would call the investing class. If, in other words, a billion dollars of Government obligations were paid off in the course of a year, we might assume that perhaps 75 per cent of those obligations were held by people who belong to the investing class. When they receive their money from the Treasury they will probably turn around immediately and seek to reinvest, in which case there would be by that amount an augmentation of the demand for investments; there would be an addition to the supply of investment capital.

If they had not been paid off—in other words, if the income taxes requisite to finance our annual requirements were less by a billion dollars—the probability is that those who are large contributors to the income tax would use the money not taken from them to make investments.

The CHAIRMAN. Would you go so far as to say that in the reinvestment of the proceeds of a billion-dollar debt reduction that that fund might be used for the purpose of increasing brokers' loans?

Doctor MILLER. Yes.

Mr. WINGO. Is there any doubt about that ? Is not that one thing that is agreed on? At least, all of the articles I have been reading in the financial papers are to the effect that that is one factor that absolutely negatives the efforts of the board to check brokers' loans, that for several years we have been putting $1,000,000,000 of new money into the investment market by the retirement of the public debt. The one article I read the other day was predicting a continued bull market, for the reason that Mr. Mellon's theory and desire to continue a rapid reduction of the public debt evidently was going to prevail and that as long as the Government did counteract the open-market operations of the Federal Reserve Board by retiring a billion dollars a year of Government securities you would continue to get an easy money market and a flushed stock market.

Do you not think we all agree on that ?

Doctor MILLER. I would say that in the analysis of that matter you would have to pay a great deal of attention to the source whence the Government derived the revenue it used to reduce the debt.

Mr. WINGO. The presumption is that the source will continue the same as it has over the last few years.

Doctor MILLER. By the source I mean the contributors.

Mr. WINGO. I say that the contribution over a given period of years, with the securities distributed, is practically permanent now, because the shift has taken place. The presumption is, and most of the writers proceed upon the theory, that for the last few years this effect has taken place, notwithstanding the fact that the securities have been shifted from the temporary holders as a result of Liberty loan campaigns into the hands of the permanent investing class, and that in spite of the presumptions to which you referred, if they had not paid their taxes for the purpose of retiring these bonds that they would have used those funds to go into the investment market, the experience of the last few years has negatived that theory, and this writer that I was reading said it was fair to presume that the effect would continue to be the same and we would continue to have a cheap money market so long as we continued a million dollar reduction in debt.


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time, and I can also realize in that connection that the present question of a raise of salaries of Government employees is not a raise in salary but an adjustment to the purchasing power of the dollar.

Mr. WINGO. Will not the acceleration of the reduction of the public debt have an appreciable effect upon the purchasing power of the dollar, and may meet the other factor coming back to which Mr. Luce referred?

The CHAIRMAN. I think that is very pertinent.

Mr. LUCE. Does this all not bring out, Doctor, that somebody ought to study this thing ?

Doctor MILLER. They are studying it. I am perfectly agreeable myself to it going on. I think we have perhaps consumed too much time in the discussion of an item that I felt would better be left out of the bill than be pro forma included in the specific directions given to the Reserve Board. But I do not think it is a matter of such great importance.

Mr. LUCE. Possibly, as a mere matter of technique, it is not, but it strikes me we have reached the very nub of the whole problem before us when we are discussing this particular question. It seems to me the most important phase of the whole situation.

Mr. WINGO. I can not help but wonder, I will say to the gentleman, that if we were to do this, to give this mandate, and the board sat down and tried to carry out what we suggested, these investigations, whether they would not say, " The general fundamentals we can agree on; we can agree on what laws exist. The law of supply and demand is one of them."

But the difficulty we would have is not ascertaining what the fixed laws of economics and finance are but what would be the circumstances that would surround the operation of those loans and the effect they are going to have upon the purchasing power of the dollar, and then they will proceed to say, " W e have to study and try to anticipate what will be the policy of Congress, whether it will or not rapidly reduce the public debt, whether or not the troubles in China will precipitate such a burning up of commodities and how far the war there will go, and what effect it will have upon the operation of supply and demand in the commodity market," and then you will set your forces to work to try to predict and tell each Congress that " if you do so and so, if you will reduce the public debt so much, then we think it will affect the purchasing power of the dollar so much."

I am inclined to think that that would have great value, provided the legislative body would treat with any degree of respect the prognostications and recommendations which the board made.

Doctor MILLER. Mr. Chairman, let me ask a question here. Is it contemplated that Doctor Commons will conduct an inquiry of me before I am dismissed ?

Mr. STRONG. That is the understanding, when you have reached a suitable place in your remarks.

Doctor MILLER. The discussion has ranged over a pretty broad field here recently in connection with Mr. Luce's questions. You know, to my mind one of the great considerations to bear in mind in connection with any currency, banking, and monetary legislation is the liability of these things to inject themselves into politics. The " money

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Mr. STRONG. Of course, a gold standard can be unstable. If we have a gold standard at all we ought to strive to have a stable gold standard.

Doctor MILLER. The moment you prescribe a stable gold standard you are in effect already abandoning the gold standard and substituting in its place a dollar standard based on gold; and it is a dollar that is subject to other influences than those which affect the value of money under the unimpeded operation of the simple gold standard.

It means that you are, as it were, bringing into the picture in a very prominent way the judgment of men and management as against the fortuitous circumstances of nature affecting gold production, the interplay of money market, and so on.

Mr. STRONG. I think the purchasing power of our dollar should be maintained as a stable purchasing unit, and that that should be the aim of this Government even though the value of gold may appreciate or depreciate.

Doctor MILLER. I would not differ from you there, but I would like to see it demonstrated Mr. STRONG. That is the purpose of the study.

Doctor MILLER (continuing). Otherwise than as a venture in speculative economics that there is good ground for expecting that we will have greater economic stability or price stability, or other forms of stability, under the operation of this new scheme than we have had in the past under the gold standard.

Mr. STRONG. This is not a new scheme, but a measure to direct the continuance of what you gentlemen have been stating with a great deal of pride you have been doing for the past three or four years.

Doctor MILLER. If we have said that, we have taken a great deal of credit that is not due us. But this touches matters of fact and detail that I hope will be brought out later.

Mr. STRONG. Before we adjourn I would like to make this observation for the record: That I think the disturbing factor of war is not going in the future so to wreck our financial situation and our economic situation as the past war did, because I think the 4,000,000 men and their relatives and families that participated in this war are going to see to it that the next war will not be a money-making war; it will not be a war where the war contractors will be allowed to make a great deal of money while the men are fighting for the Nation. I think there will be a drafting of all of the faculties and all of the resources of this Government, instead of just drafting man power, and, if we do that, we will not emerge from the next war with a lot of profit-taking and debts as we did from this war.

Mr. GOODWIN. Why limit that to the 4,000,000 men and their families?

Mr. STRONG. I said their families and relatives. I think there is a very settled conviction on the part of the people of this country that the next war will be a war in which all the resources of this country will be drafted, and, if we do that, we will not emerge from it with the conditions that we have from the past war.

The CHAIRMAN. We will adjourn until to-morrow morning at 10.30.

(Whereupon, at 12.20 o'clock p, m., an adjournment was taken until Wednesday morning, May 16, 1928, at 10.30 o'clock a. m.) 15029—28 18

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most important of which would be, first, the diminished dependence, more especially in our country, of current business, trade, and industry upon current banking accommodations.

I would say, particularly in our country, that the nexus between the volume of activity in trade and industry and the volume of banking accommodation is a less close one than it was in the days when Mill formulated the quantity theory of money and in the succeeding generation or two, when it was the currently accepted theory in Great Britain and in our own country.

I think possibly, as your questions go on, it may be worth while to return to this.

Doctor COMMONS. I was thinking about the opposing theory which used to be called the commodity theory.

Doctor MILLER. I do not know anything about it; I have no theory to offer. I am not here to offer a theory; I am here to find one.

Doctor COMMONS. Why did you, in those days, reject the commodity theory—in your teaching days ?

Doctor MILLER. 1 do not think I ever really faced the question that way. I do not think it made enough impression upon me to attract me.

Doctor COMMONS. Would this be a correct statement of the two theories, that, according to the quantity theory an increase or decrease in the supply of money and credit would cause a change in the price level ?

Doctor MILLER. That was the assumption.

Doctor COMMONS. NOW, the commodity theory says that an increase in the activity of business creates a demand for credit, and therefore the volume of credit increases; that is, we have gotten away from the time when gold was the main instrument, so that the commodity theory, as I understand it, was a demand theory, demand for money, and the quantity theory was the supply of money. The two conflicted.

Doctor MILLER. I would say there was no conflict there.

Doctor COMMONS. There is no conflict?

Doctor MILLER. I would say there is the same kind of conflict as you may say there is between the two opposing blades of a pair of scissors. The conflict, or contact, is what makes the scissors; they are working against one another.

Doctor COMMONS. YOU would say that that is now the prevailing idea of economists ?

Doctor MILLER. What?

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