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On the other hand, if the price of a loaf of bread were cut to 2 cents it is doubtful whether there would be any notable increase in the consumption of bread. We eat as much bread as we eat, irrespective of the price.

In general, it may be said, in answer to your question, Mr. Beedy, that the higher the well-being of any community, the less responsive is the demand for what we call articles of necessity. Everybody has all of those he wants anyhow and he is not going to get more because they are cheap.

So that, to sum up, I do not believe that you can draw any conclusion there that is of much value, except as you start with your conclusion in your interpretation or analysis of facts.

–  –  –

Now, I would say, taking one of the periods that you have referred to here, the earliest one, namely, 1924, when the acceptance rate of the Federal reserve banks ran as low as 2 per cent, I think, and I think the same is true of the call rate Doctor GOLDENWEISER. That is right.

Doctor MILLER. YOU asked why those rates were so low. The acceptance rate was falling steadily throughout the first half of the year 1924. It began to show a tendency to rise in the third quarter of 1924, and the rise was rapid in the last quarter or the last two months of 1924.

The year 1924, as a whole, was a dull year in American trade.

I do not think you want to stop to verify that point by reference to fhese charts, but I think we all remember it sufficiently as a dull year. The acceptance rate was running down, and so were other rates in the first half of the year, because we were getting an extremely large importation of gold.

Do you know approximately what the gold imports were ?

Doctor GOLDENWEISER. $200,000,000 of gold in the first six months.

Doctor MILLER. That was at a time when the demand for credit was very slack and when trade was running down.

Now, the turn came in the autumn of the year, and it came primarily, I should say, with short harvests in Europe, and therefore an increased demand for American farm products and also with a considerable volume of foreign financing. The first of the outstanding years in which foreign loans were placed in the American market was the year 1924, in the second half of that year.

Now, under those circumstances it may well be asked, What kind of a discount or credit policy was indicated for the Federal reserve system? The year opened with a 4 ^ per cent discount rate, and in April or May it dropped to 4 per cent, then Sy2 per cent, and late in July or early in August it went to 3 per cent in New York.

At the time when the rate went to 3 per cent it was a debatable question whether or not it was advisable. My own opinion at the time was that it was advisable for a variety of reasons, even though there were different reasons for believing that it could not safely be left at 3 per cent for a very long interval.

Now, I say that I think it was advisable. I am speaking now purely personally, because I have said here a good many times that you may know what is in your mind, particularly when you are referring to a past situation, but you can not be sure that you know what is in the minds of others. The view I have entertained since 1922-23 was that in the incipient stages of a business recovery a low rate may exercise a stimulating effect, that when that effect is in process and has gone approximately near the limits of safety it is not advisable to leave your rate low but to begin to apply a little pressure in order to make it less easy for commitments, perhaps, of an undesirable character to be taken on.

Now, what happened was that the rate went to 3 per cent in, I think, August, 1924. The latter part of the year 1924 was one of distinct business recovery. A distinct good feeling existed in the country, and that feeling registered itself, as I recall, among other things, in the first pronounced upward swing in the stock market since the brief spurt in the early part of the year 1923. There was

–  –  –

Doctor COMMONS. HOW do you figure that ratio of 1 to 10? Does it always remain 1 to 10, and what are the conditions which cause it to change ?

Doctor MILLER. I t is subject to a variety of factors, one of which is the nature of the increased credit that is being used, and also the character of the member-bank liabilities which give rise to the need of more reserve. When you have, as we have had in recent years, notably in the years 1925-26, a relatively great increase in so-called time deposits which under the law require a reserve of only 3 per cent, obviously a given volume of reserve credit on the books of the member banks will sustain a far larger volume of credit on the part of the member banks than when the credit in the member-bank liabilities is not time deposits but demand deposits, which require a reserve in the so-called country banks of 7 per cent, of 10 per cent in the reserve city banks, and 13 per cent in the central reserve city banks.

Also, the requirement of currency is a most important factor and when the member banks borrow from the Federal reserve banks in order to get currency the ratio is practically 1 to 1. In order to get a dollar of currency, they have to put up a dollar of paper.

Doctor COMMONS. That would be also true when they are paying off their indebtedness, would it not ?

Doctor MILLER. Yes; or when they are borrowing, in order to get gold for exportation, they have to give dollar for dollar.

Doctor COMMONS. SO that it might have increased, instead of, say, $500,000,000, multiplied by 10, which would be $5,000,000,000, to something less than that, only five times as much.

Doctor MILLER. When you are saying, it might have, what do you mean?

Doctor COMMONS. I mean the bank credit.

Doctor MILLER. I would say nothing could have happened in the year 1924 different from what actually did happen. We are not in a vacuum with respect to that year.

Doctor COMMONS. I wanted to get what your statistics showed as to the augmentation of bank credit in use.

Doctor GOLDENWEISER1. The total volume of reserve bank credit did not increase at all during the year 1924 as a whole.

Doctor COMMONS. That is because the debts were paid off ?

The CHAIRMAN. YOU made a reference there a moment ago to openmarket credit. What is the difference between open-market credit and general credit ?

Doctor MILLER. AS I use the term, it is an elliptical term for indicating reserve bank credit that is in the market by virtue of the fact that the reserve bank itself has put it in the market through the purchase of Government securities. By the alternative method, credit comes into the market at the instance of the member bank, which goes to the reserve bank with its paper and has it rediscounted.

It is largely a question as to who takes the initiative. In the openmarket operation, the Federal reserve bank takes the initiative.

The CHAIRMAN. That clarifies it.

Doctor COMMONS. I had a different meaning of open-market rate of interest as distinguished from the discount rate of interest.

15029—28 10

–  –  –

Doctor COMMONS. He brought out another figure, of member-bank credits.

Doctor GTOLDENWEISER. Yes, This was all member banks; this is the chart of all member-bank credit.

Doctor COMMONS. For 1924?


Doctor COMMONS* HOW much did that rise during the period ?

Doctor GOLDENWEISEH. In the latter part of 1924 Doctor MILLER (interposing). Let us keep the first part of 1924, when we were putting money into the market, separate. That is an episode in itself.

The CHAIRMAN. The chart now inserted into the record is entitled "All-Member Banks." Without objection that will be inserted at this point.

(The chart referred to is printed below.) Doctor MILLER. I would say, Doctor Commons, that the first striking thing in that chart for the year 1924 is that during approximately the first half of the year, despite the fact that the Federal reserve banks at that time were steadily putting money into the market by open-market purchases of securities

–  –  –

sponse in the borrowings of the public. There is no reflection of the increase in the loans and investments of all the member banks and no response in the movement of prices; in fact, at the time when we were pursuing the most liberal money policy we had up to that time prices were steadily running down.

Doctor COMMONS. That is to say, there were three forces—gold imports, purchasing of securities, and a low money rate?

Doctor MILLER. Exactly.

Doctor COMMONS. All of which would make for easy money, and yet prices continued to fall?

Doctor MILLER. And yet prices continued to fall at the time when this was in process.

Doctor COMMONS. HOW long, in your experience, have you figured out that it takes for these processes to filter through until they reach the stock market and the export market and the price market?

Doctor MILLER. I wish you would figure that for us.

Doctor COMMONS. I figure it very plainly here, that, beginning in July, 1924, prices had started up. I have not the stock prices. 1 presume they started up earlier and faster. Prices started up from about 95 and went up to about 105, about 10 per cent or 11 per cent, apparently a steady process, when business was dull and a falling off of gold imports and open-market purchases and a lowered rate to $ per cent, which was, of course, lower than you ever had it before at any time, had no effect until something from the outside started things up, which seems to have been about the middle of July, 1924.

That may have been some foreign situation. You say that the foreigners began borrowing a billion dollars.

Doctor MILLER. That was later in the year.

Doctor COMMONS. That would not have had any effect on this?

Doctor MILLER. It had an effect later in the year, undoubtedly.

Doctor GOLDENWEISER. The world shortage of wheat was the cause.

Doctor COMMONS. It may be another nonmonetary cause.

Doctor MILLER. When you have a period of fairly prolonged dullness in trade, it is inevitable that there is going to be sooner or later a revival, and that revival will show itself in the movement of prices. It may be the upward movement of prices that produced the revival; it may be the signal that the consumer wants mor^ goods;

it may be an indication that the producer is willing to face the hazards of resuming, but whatever may be the combination of causes, I should say that they became active in the latter part of the year 1924, and it may haye been that the immediate cause was the increased demand for farm products and the buying in this country by Europe because of the favorable terms upon which they could get credits here.

Doctor COMMONS. The rate of interest was very low, so they could float their securities in this country and borrow more money.

So, putting it in your own terms, does it not come out this way, that when business is dull you can not push things, you can not crowd things, but meanwhile you can enormously increase the possibilities;

that is, you can increase the gold imports, just taking that period?

The CHAIRMAN. YOU are speaking now of the action of the Federal Reserve Board?

Doctor COMMONS. Yes; I am thinking now partly of the action of the Federal Reserve Board. There are two things the Federal Re

–  –  –

Doctor MILLER. Yes; by making your credit cheaper at the time when business wants creait and wants to borrow. If it does not want it, you get no appreciable response.

Doctor COMMONS. YOU have got to wait.

Doctor MILLER. There must be an appetite for credit before you can affect the consumption of credit by your rate.

Doctor COMMONS. I t is just like feeding my hogs. I can go out and fill the tank with plenty of provender, but if the hogs are not hungry they won't eat it. So you can fill the market with money, and if the market has not any expectations or boost it won't take it, but when it does take it it will take it very fast. You may have a rapid rise of prices.

I would like to go on with the period of 1922-23 in order to get this thing down to a quantitative basis. We have just so far talked qualitatively, not quantitatively, and it appears that in 1922-23 you used the same instruments you talked about here with very great success.

I should like to analyze the different factors of 1922-23. First, the net gold imports from September, 1920, to March, 1923,1 figured out to be $1,120,000,000.

Doctor GOLDENWEISER. That sounds as if it were correct; 1920 is not on this chart, but there were two or three months of heavy gold imports during the latter part of 1920.

–  –  –

a period of acute depression. Business was at a low ebb. Goods were in short supply, and a rise of prices as interpreted by the Federal reserve would be the signal that the consumer was beginning to show a disposition to consume, and we had concurrently an upward movement of prices and an upward movement of production and trade.

The CHAIRMAN. The chart that is now introduced is called " Production of manufactures and minerals."

The chart referred to is printed below.) Doctor MILLER. Prices were rising from the low level of 1921, both the curve marked "Manufactures" and the curve marked "Minerals."

Doctor COMMONS. May I answer there that your index of industrial production shows that the physical volume of industrial production rose from about 74 in January, 1922, to about 107 in April or May, 1923. That would be an increase in the physical volume of production of about from 74 to 107.

Doctor GOLDENWEISER. That is about 50 per cent.

Doctor MILLER. That is a very pronounced increase.

Doctor COMMONS. NOW, if you take your pay rolls, they showed an increase in 1922 The CHAIRMAN. The chart that is now introduced is "Factory employment and pay rolls."

–  –  –

the brakes on this movement and either checked or destroyed the first considerable spasm of recovery after the depression of 1921.

Doctor COMMONS. HOW would you put the brakes on ?

Doctor MILLER. By a very severe contraction of credits.

Doctor COMMONS. YOU would have contracted credits by what methods ?

Doctor MILLER. By any method available.

Doctor COMMONS. Discount rate?

Doctor MILLER. Discount rate.

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