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The CHAIRMAN. The point that I was getting at was this: Was that done for the purpose of making money or was it done for the purpose of relieving a situation ?

Doctor MILLER. From the point of view of the bank, it was done for the purpose of making money; but the bank could make money only as there was an acute demand for credit on the part of borrowers. What actually took place in that year is a long story, but I would say, having in mind your question particularly, Mr. Chairman, that the war being over, and there being a disposition for people to lay aside their self-imposed war-time restrictions, and the Government relaxing also at the same time many of its controls—for instance, the War Trade Board, the War Industries Board, and the like— there was a desire to consume and to buy, and there was real bidding in the market for goods. That bidding went to a point where it soon set in operation speculative buying, speculation in inventories for the rise; and that in part was what gave rise both to the borrowing and to the rise of prices. Men were speculating in commodities then, as they are speculating in securities now.

The CHAIRMAN. Then borrowing on the part of member banks at that time was largely on Government-secured obligations, was it not ?

Doctor MILLER. Mr. Goldenweiser has just given the figures. I should say it was almost half and half, was it not, when we got into 1920?

Doctor GOLDENWEISER. Yes. The increased borrowing over what they had at the beginning of 1919 was not on Government obligations.

Doctor COMMONS. Mr. Goldenweiser, I would like to have you check up on that, because my figures show a great increase on Government collateral and a falling off in commercial paper.

Doctor GOLDENWEISER. In the early part of 1919?

Doctor COMMONS. Yes; in the early part of 1919. The increase on commercial paper started in then, and reached its peak in the latter part of 1920.

–  –  –

drawals by country banks and others occasionally, find it to their advantage to carry large blocks of Government securities to be used for the purpose of loans at the Federal reserve bank at a moment's notice ?

Doctor MILLER. I would amend that statement, Mr. Chairman, by saying that as a matter of general policy they do carry considerable holdings of Government securities. I think they would do that as a part of good banking policy, quite irrespective of any thought they might have of using these as a basis of borrowings from the reserve banks. Having them, they constitute a most convenient form for short borrowings. That is, instead of getting together a great portfolio of commercial paper, if they want to borrow $5,000,000, they take $5,000,000 of Government securities and send them along as collateral to the reserve bank; or, as the thing works out in practice, they have large amounts of these Government securities actually in storage in the reserve banks, do they not, Mr. Goldenweiser!


Doctor MILLER. SO that the reserve bank, as it were, has the collateral right there. The transaction, therefore, is mechanically a very simple one.

The CHAIRMAN. The borrowing, then, is made available through the Federal reserve banks, who also act as custodians of Government securities?

Doctor MILLER. Yes.

The CHAIRMAN. SO that their access has been accelerated ?

Doctor MILLER. Simplified.

The CHAIRMAN. Yes; simplified. And, as I understand you, that class of borrowings is not favored by a lower rate over other rediscounts ?

Doctor MILLER. I do not think it has been since 1920.

Doctor GOLDENWEISER. Certainly not since 1921.

The CHAIRMAN. But in 1919 and 1920 there was a lower rate ?

Doctor MILLER. There was. There was the so-called differential.

The CHAIRMAN. Inasmuch as bonds of public utilities, railroads, and that class are not eligible as a basis for rediscount or as security for loans through the Federal reserve bank, is it a good policy, do you think, for the Federal reserve banks to continue to grant loans or rediscounts on the basis of Government securities?

Doctor MILLER. YOU are opening up a pretty big question there.

The CHAIRMAN. I realize that.

Doctor MILLER. Personally I would rather be disposed not to think particularly well of this form of borrowing from Federal reserve banks. It is not clear just what it does that is objectionable, but I am inclined to think that in certain cases it facilitates very large borrowings from Federal reserve banks by banks that are not primarily engaged in commercial lending, and it makes it a little bit easier, thereiore, to draw money from Federal reserve banks for general financing purposes or other purposes that I think are not strictly germane to the use of Federal reserve credit; and in practice it has developed that while the so-called Government-secured member-bank loan is a 15-day loan, the borrowing may be for a single day.

The CHAIRMAN. It does permit the financing by member banks of these underwriting houses of investment securities to an extent that otherwise might not be possible ?

–  –  –

into, we will say, stock-exchange loans, or into security loans that are facilitating the promotion of some new organization, or that it has gone into real-estate loans, or for some other purpose. That question has often been discussed in Federal reserve conferences. I t was recently. I think it is when we look back and see what has taken place and find that there has been a great growth of security loans, a great growth of brokers' loans, a slight growth of commercial loans, no increase in currency, no importation of gold, but a growth of Federal reserve credit, that the conclusion is justified that that increase of Federal reserve credit has been the basis upon which this expansion of member-bank loans, mainly security loans, has taken place. But it is not easy to detect that in its incipient stages.

The CHAIRMAN. An analysis of the portfolios of these banks that are located in close proximity to the transactions such as you have referred to, I am sure will reflect a changed condition over that which existed in 1913, just prior to the organization of the Federal reserve.

Doctor MILLER. Yes.

The CHAIRMAN. In other words, these institutions located in close proximity to the transactions that we are discussing now have found it to their advantage to make themselves very liquid, or have in their portfolios the class of securities that are most readily available for loans or borrowings from the Federal reserve banks, so that the facilities for easy movement of credit are at hand.

Doctor MILLER. Yes, sir.

The CHAIRMAN. NOW, through the organization of the Federal reserve that has been possible. I realize, of course, as you men do, how hard it is to analyze the use to which a dollar of borrowings from the bank is to be put; but it is an important part of the consideration.

Doctor MILLER. Yes. I think it is a most important part and one that I think is capable of development and improvement. I think there is a problem in the technique of Federal reserve bank operation there that from my point of view ought to have more attention, because I think it is possible to devise a method that is not meddlesome or inquisitorial or objectionable from any reasonable point of view, that would give some check upon what might be called ungov* erned borrowing for purposes that are pretty remote from the Federal reserve act.

Mr. STEAGALL. But, Doctor Miller, could there be any ungoverned borrowing in the Federal reserve system or from Federal reserve banks? Does not the law fix limitations, and is not the kind of paper to which you refer noneligible ?

Doctor MILLER. NO ; it is not. It is eligible.

Mr. STEAGALL. All of it?

Doctor MILLER. We are referring now specifically—at least that is what I have in mind—to the so-called member-bank loans for not over 15 days, with Government securities as collateral.

Mr. STEAGALL. Yes; I understand that.

Doctor MILLER. That is eligible.

Mr. STEAGALL. But what I mean is this: The paper that they offer you, of course, is eligible; but when it comes to dealing with paper which is noneligible, the Federal reserve could not take it ?

–  –  –

Doctor MILLER. If the situation that you have been inquiring about were one that actually existed, you have 12 Federal reserve banks that actually, through their officers and directors, have got to perform this job of satisfying themselves as to the uses their member banks are making of reserve-bank credit.

Mr. STEAGALL. And I grant you that the tendency to which I refer, and the benefits, of which there may be some doubt—I am not prepared to say—I grant you that the tendency is curtailed somewhat, or at least any possible objection to it is curtailed by the fact that you have the 12 Federal reserve banks located in the different communities of the country and more or less in touch, of course, with peculiar conditions in those communities.

Doctor MILLER. There are 25 branches also.

Mr. STEAGALL. But the fact remains that in large measure the policies of those banks are influenced to a great extent by the one board in Washington; and I am not saying that in a spirit of criticism against the board; I do not mean it in that way, but I am just thinking of the vast power involved in a policy underlying legislation. I am just trying to think out loud about it.

Doctor MILLER. I think it constitutes one of the most pressing and one of the most difficult problems.

Mr. STEAGALL. I think it does.

The CHAIRMAN. NOW, Doctor Commons, I beg your pardon; go ahead with your questions.

Doctor COMMONS. In this situation in 1919, apparently, according to your statement, the demand for credit arose from two sources, first this four or five billions that Europe borrowed in this country and then the domestic demand greatly increased, so that the rate in New York on the commercial loans was about 8 per cent; yet you were at the same time discounting their paper when secured by bankers' paper, and not the eligible paper at all, except about 5 or 10 per cent, but the bankers' borrowings secured by Government collateral at about 4*4 per cent. You said that that was a low rate, considering all those other circumstances. Would it have been a high rate if the Federal reserve bank had raised that rate up to, say, 7 per cent?

Doctor MILLER. When ?

Doctor COMMONS. In 1919.

Doctor MILLER. 1919 was a year of 12 months.

Doctor COMMONS. I will say the middle of 1919.

Doctor MILLER. The middle of 1919 would have been the beginning of July.

Doctor COMMONS. Yes.

Doctor MILLER. I do not recall at this moment whether the Victory loan payments were out of the way.

Doctor GOLDENWEISER. No; not until November.

Doctor MILLER. Not until November. I do not consider it would have been advisable to establish a rate of 7 per cent on any class of paper in the middle of 1919. I think it would have been advisable to establish a rate of 5 per cent about the 1st of September, 1919. I choose that particular date because the public debt reached its maximum on the 30th of August; that is, the Government was no longer in the market for more new money, though it did a large amount, as it still does, of refinancing.

–  –  –

Doctor COMMONS. But in that year my observation was that in June and July everybody was employed. I t was a scramble to get high wages and it was not increasing production, and that is the principle, as I understand it, with which vou correlate the rise of prices with the conditions that you do not nave control of. That is to say, if employment and production are increasing by an increasing amount of credit, then that would not be inflation, so my information about it as I observed it at the time traveling over the country and visiting many factories was that the maximum of production had been reached in the middle of 1919. Everybody was employed; the laborers were able to command three or four times the wages then that they ordinarily command^ so that if you had operated then as you did in 1923, upon the principle that as long as industry had not yet reached its proper proportion, you would probably have taken action in the middle of 1919. That would be the inference I would draw.

Doctor MILLER. Well, assuming the field had been as clear for independent action on the part of the Federal reserve system in 1919 as it was in 1923. We were still under the influence of war psychology. The Government was still a very large borrower.

Doctor COMMONS. Apart from the Government; if you had been free from Government influence Doctor MILLER. If we had been free from Government influence of any character, and free also from the national psychology of the moment—and I want to recall very definitely, because we forget these things, that I think as late as March, 1919, there was set up, under the auspices of the Department of Commerce a so-called industrial board. The particular function of that board, as I recall, was to stabilize—I think that that word was used—the transition from the war-time economic and industrial situation to the postwar, particularly against the expected collapse of prices. The general assumption was, I think, that there was going to be a great collapse of industry in 1919. That was in the atmosphere, I think, Doctor Commons, pretty well into midyear. If you will turn back and read the economic history of the times, you will find that in connection with this industrial board that I have alluded to, the membership of which consisted of some very eminent men, who had been here temporarily in Washington in connection with various war boards, the conclusion was reached that we must moderate the peace-time descent of industry by equipping it with a parachute.

Doctor COMMONS. Which meant a low rate of discount.

Comparing that with 1923, there was in 1923, in May or April, a situation where you had reached the position where a further increase in prices would have been inflationary in the sense in which you used the word.

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