«COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES SEVENTIETH CONGRESS FIRST SESSION ON H. R. 11806 ( Superseding H. R. 7895, Sixty-Ninth ...»
Doctor COMMONS. YOU would have raised the discount rate ?
Doctor MILLER. Also by more energetic sales to the open market.
We still had a considerable volume of securities that could have been sold to the market.
Doctor COMMONS. YOU were selling them ?
Doctor MILLER. By very gradual degrees, merely to feel out the situation, without, however, any definite commitment that the situation was one that needed firm restrain and control.
In other words, I would say that the policy of the Federal reserve at that time was one of concern, but it did not propose to get alarmed because of the expression of alarm in the public press and in certain scientific business reviews, unless it found that conditions pretty definitely warranted it.
I would say only because we are talking here in connection with a legislative proposal, that attaches particular importance to the price curve, that the significance of this particular episode is that the Federal reserve, to the extent it gave a good performance at that time, gave it because it was not concerned with stability of prices.
Prices were moving rapidly upward, but I think the judgment of the Federal reserve may be properly said to have amounted to about this, that it did not interpret that upward movement of prices as inflationary in character, because close tab on the situation showed that while prices were moving upward, so was production and trade, and sooner or later production would overtake the rise of prices, demand would be satisfied, and prices in turn would trend downward, and, as a matter of fact, I think they did beginning about mid year, 1923.
Mr. WINGO. Do you recall whether or not the board realized that that upward movement had about spent its force ?
Doctor MILLER. Yes; I think it was our view in April that the movement had about spent its force. If we could go back now, or if we knew then what we know now, my own disposition would be to say that the Federal reserve might even have dispensed with the slight precautionary operations that it then engaged in, to wit, an advance of the discount rate in New York, I think in March of 1923.
The CHAIRMAN. I notice this, Doctor Miller, that following the activities of the board in the spring of 1923, the wholesale price level went down until, say, September of 1923, to about 97 or 98, which was followed by some irregularity later on in the year and in the early part of 1924, but in midsummer of 1924 the wholesale price level reached the low point of about 95. Was that lowering to that point of 95 the direct result of the activities that were taken by the Federal Reserve Board in the early part of 1023 ?
Doctor MILLER. I mean that prices went up because of shortages of supplies.
Doctor COMMONS. In 1923?
Doctor MILLER. Yes. The whole productive machinery of the country was speeded up to the highest point, I think, that was ever registered previous to 1926. The consumer demand could not keep up with the producing capacity, and therefore it was inevitable that goods should come on the market in greater amount than could be taken off, except at a lower price level.
That is what I mean by saying that the decline of prices in 1924 was a reaction.
Doctor COMMONS. If that is true, you should have applied pressure earlier than you actually did in 1922 and 1923 in order to keep that production from going up to the 1923 peak?
Doctor MILLER. I can not follow you there, and I can not grant it.
Doctor COMMONS. If you had foreseen that 1923 would bring you overproduction, then you should have applied it earlier and more experimentally, as we were speaking a moment ago.
Doctor MILLER. I do not think it would have made any difference.
I think if we had, these prices would have risen even higher.
The CHAIRMAN. I am going to suggest, as it is 20 minutes to 1, the committee recess until to-morrow morning at 10.30.
(Whereupon, at 12.40 o'clock p. m., an adjournment was taken until Thursday, May 17, 1928, at 10.30 o'clock a. m.)
Doctor COMMONS. I think, Mr. Chairman and Mr. Miller, that I was trying to bring out the comparison between the 1919 and 1920 operations and the 1922 and 1923 operations, to see what, you might say, the Federal reserve system learned by experience in those two events. I do not know whether you have a chart here of the price movements back to 1919.
Doctor GOLDENWEISER. I am afraid I have not the 1919 chart today. I brought one that goes back to 1921.
Doctor COMMONS. I want the 1919.
Doctor GOLDENWEISER. I have not one for months that far back.
I have one by years. Will that do ?
Doctor MILLER. DO you want one covering the years 1919 and 1920?
Doctor COMMONS. Yes. The computations from the Bureau of Labor indicate that the wholesale price level rose from 201 in April, 1919, up to 249.
Now, that would augment the purchasing power of Europe for American commodities, would it not?
Doctor MILLER. Yes.
Doctor COMMONS. SO that during that year, 1919-1920, Euirope had a purchasing power originating in America, first by Government loans and then by bank loans, of about $5,000,000,000, which had increased their purchasing power.
Mr. GOLDSBOROUGH. Was that all utilized?
Doctor COMMONS. I t probably was. This four billion of bank loans to Europe would be in what form; partly bankers' acceptances?
Doctor MILLER. Yes. I do not think that would constitute the most important part of it* I am at something of a disadvantage in discussing this in detail, because it has not been in my mind tor a long time. But, as I recall, it was in part a direct credit, or loans made by our Government to European governments. In that case it would be a credit in American banks. That is, our Government, which issued the Victory loan in the spring of 1919, and was bringing out issues of short-dated securities throughout the whole of the year, would use the proceeds in part to grant credits to the European governments. My impression is that those aggregated about two and one-half billion in 1919.
Doctor GOLDENWEISER. I think that was approximately the figure.
Doctor MILLER. In addition, it was assumed by many of our leading exporters, particularly of foodstuffs, that because of the depleted stocks of Europe there would be a very heavy demand for American breadstuffs, pork products, and so on; and there were enormous masses of pork products particularly that were sent to Europe on consignment and financed by American credit, partly in the shape of domestic acceptances and in other cases by foreign acceptances.
By foreign acceptances I mean acceptances by American banks, but against export transactions. There were direct expenditures in Europe. If I remember rightly, something like two hundred millions in gold was taken from Germany, from the Reichsbank, and was used in part payment for foods and other needed materials that went into Germany.
As to other loans, I would have to refresh myself by looking back at the record.
Doctor COMMONS. If the Government loaned two and one-^half billion, and if this estimate of what the banks loaned, four billion, is correct, that would be about six and one-half billions ?
Doctor MILLER. I would say that would be an exaggerated figure.
Doctor GOLDENWEISER. I think so.
Doctor MILLER. Very grossly exaggerated.
Doctor COMMONS. What would you put it at; about five billion ?
I have in mind the estimate—you are familiar with it, I think—that was made by B. M. Anderson in the Chase Bulletin, where he put it during that period at three billion seven hundred million.
Doctor GOLDENWEISER. That figure is controversial.
Doctor COMMONS. Then the Government loans were two and onehalf billion?
Doctor GOLDENWEISER. Perhaps.
Doctor GOLDENWEISER. I think not, Doctor Miller. A large part of it was an Argentine credit, but it was not earmarked.
Doctor COMMONS. But it went from the American banks to Argentina or other countries?
Doctor GOLDENWEISER. Yes.
Doctor COMMONS. SO those American banks that shipped gold would have been compelled, according to their condition, to borrow ?
Doctor GOLDENWEISER. Yes.
Doctor COMMONS. Have you the figure there, during that year, of the increased borrowings by the member banks of the reserve system?
Doctor GOLDENWEISER. During 1919 they increased about six hundred millions. I have the figures here of the total borrowings of member banks.
Doctor COMMONS. What was the increase from the beginning of 1919 up to May or June, 1920?
Doctor GOLDENWEISER. They increased from about $1,600,000,000 to about $2,500,000,000, an increase of about $900,000,000.
Doctor COMMONS. That increased the debt of member banks to the reserve system about $900,000,000. Now, those borrowings may have been of a different character, but I figure that the bulk of them was Government collateral; that is, most of that borrowing was done on the basis of Government collateral.
Doctor MILLER. I think that is probably true. Have you the classifications there?
Doctor GOLDENWEISER. Yes; I have the figures here. As it happens, it was not so. I jnean, there was no increase during the period in the borrowings on Government collateral, and practically the entire increase was in borrowings other than on Government collateral.
Doctor COMMONS. I have here a chart that I put in recently, Doctor Miller, and it shows the increased Government collateral, followed by the increased eligible paper, showing that in 1919 about 97 per cent of the total borrowing was on Government collateral.
Doctor MILLER. I think you must be using the same term in different senses.
Doctor COMMONS. HOW do you figure it ?
Doctor GOLDENWEISER. I think it is this way, Doctor Commons:
It is true that a large proportion of the borrowings in the beginning of 1919 were on Government collateral. Out of a total of $1,600,was on Government collateral. This was a period, however, during which the increased additional borrowing was not on Government collateral; so that when you speak of the increase during this period it was in loans other than on Government collateral; this class of loans increased from $250,000,000 in January, 1919, to $1,150,000,000 in June, 1920.
Doctor COMMONS. That is the commercial paper and eligible paper ?
Doctor GOLDENWEISER. Yes. The growth in that period was not on Government collateral.
Doctor COMMONS. I think that if you examine this you will find tkat it corresponds with what I have. Here [indicating] I have the 15029—28 20
Doctor COMMONS. Have you the banks' commercial rates in New York at that period ?
Doctor GOLDENWEISER. During most of 1919 they were about 6 per cent.
Doctor COMMONS. They could borrow at 4 ^ a ^d lend to their customers at 6 per cent. Would that be the standard by which you would measure it?
Doctor MILLER. Not alone; no.
Doctor COMMONS. What else would you use?
Doctor MILLER. What you need to know is why people are bidding for money and what they are doing with the money ?
Doctor COMMONS. Yes.
Doctor MILLER. If you bring into the picture at this point a chart showing the movement of trade and production, it will develop, I think, pretty clearly that this increase of credit was not validating itself, economically speaking, by any commensurate effects in increased productivity in trade; in other words; that it was inflationary in character. If it had been a real contribution to the increased productivity of the country, it would have been, I will not say unobjectionable but certainly less objectionable, and would have carried with it the same degree ox danger.
Doctor COMMONS. YOU do not have your production charts running back to 1919?
Doctor MILLER. I think so.
Doctor COMMONS Those published here do not go back to 1919.
Doctor GOLDENWEISER. NO.
Doctor COMMONS. Did you in 1919 have data on that question ?
Doctor MILLER. Nothing that was of a valid character. You have one chart here, have you not, on production, prices, and credit?
Doctor GOLDENWEISER. Yes.
Doctor MILLER. NO ; we had nothing that was anything more than crude and fragmentary.
Doctor COMMONS. Can you figure out from 1919 to 1920 what was the increase in production ?
Doctor GOLDENWEISER. From 1919 to 1920 there was a slight increase in production.
Doctor MILLER. Let us interpret this a little more broadly. In 1919 there was really no increase in production.
Doctor COMMONS. Just a moment. This chart is to be inserted.
The CHAIRMAN. Without objection, the chart will be placed in the record at this point.
Mr. STRONG. Referring to the chart entitled "Production, prices, and credit"?
Doctor MILLER. Yes, sir.
Doctor MILLER. One of the lines on this chart shows the movement of output in manufactures. My reading of that, for purposes of a general discussion, is that the year 1919 shows no appreciable increase in the volume of production. My best guess would be that on the whole, if you average the year, you get a slightly downward
The CHAIRMAN. And this period that you are speaking of now, of 1919 and 1920, is just such a period, as I understand?
Doctor MILLER. Yes; I should say 1919 particularly, and just the early part of 1920.
The CHAIRMAN. NOW, as to this excess amount of bank credit, how is that loosened ? How is that put into effect ?
Doctor MILLER. There was increased borrowing from the reserve banks. That supplied the base of this whole credit expansion.
The CHAIRMAN. Then the member banks, through their borrowings at Federal reserve banks, were responsible for that loosening of an excess amount of credit ?
Doctor MILLER. Yes, sir.
The CHAIRMAN. What prompted that? Was it the high price for money ? Was the fact that you could borrow at the reserve banks at a low rate and loan it at a high rate conducive to that ?
Doctor MILLER. It was due in part to the fact that our so-called war expenses were still going on. The Government was still borrowing, even though the war was over. A large part of those borrowings were financed in 1919, as in prior years, by an expansion of bank credit which reflected itself into an expansion of Federal reserve credit.