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Doctor MILLER. I am not thinking of any particular persons when I speak of this. The relations on the whole, with the different gentlemen who have been Secretaries of the Treasury have been very agreeable, but I have observed over and over again that where you have a member of the board who is weighted with other very serious responsibilities and who is an occasional member, therefore, he is brought in at a time when the active membership of the board, those who have no other job, have been thinking on a problem for a long time and been living with it. As has happened on several occasions, perhaps you have a divided board or close to it and the deciding vote, or the decisive influence, may be one or other or both of the ex officio members. That, I think, is something that is inevitable under the present set-up.

You may also have to deal with this, and that applies more particularly to the Secretary of the Treasury, because that is one of the greatest positions of the Government, a position that carries a great prestige, particularly to the membership of the Federal reserve system, that it may well happen that if you have members of the Federal Reserve Board who are on the margin of doubt as to how to act, that doubt might be resolved by a disposition to be in step with the thought of the Secretary of "the Treasury.

Mr. STEAGALL. It had been my thought that, out of the necessities of the situation, no man whose first obligations and duties are involved in the administration of some great office and responsibility other than that of membership on the Federal Reserve Board could devote to the work of the Federal Reserve Board that persistent and continuing effort that is indispensable to the healthiest efficiency.

Doctor MILLER. Yes; and there are other reasons, but I think these are enough, perhaps, for the present.

Mr. GOLDSBOROUGH. Mr. Chairman, may I insert in the record a speech I made before the Bankers' Association of the State of Maryland at Atlantic City on May 6, 1924, having to do with the rediscount policy of the Federal reserve system and also its open-market operations, and also an address made by Mr. Reginald McKenna, president of the Midland Bank, before the stockholders of the Bank of England on January 28, 1928, on the same subject ?

The CHAIRMAN. Without objection, those two speeches will be inserted in the record at this point.

–  –  –

graduated from college in 1899 I noticed a change. Those with things to sell had gradually begun to prosper and those with money to sell gradually began to do not so well, and finally I reached the conclusion that from my earliest recollection until near the beginning of the century the investor and the man with a fixed income appeared to be always in a gradually better position, while the small business man, and especially the producer—having in mind the farmer— was constantly going back; and that since the beginning of the century and up to 1914 the position was exactly reversed, although the farmer, for other reasons, has always occupied a relatively unfavorable position. Finally, it appeared to me that various social phenomena had resulted and were resulting from these varying conditions. The gradual fall in prices from 1873 to 1896 culminated in the Bryan free-silver campaign, which, if successful, would have resulted and was intended to result in the paying of debts with cheap money; that is, in the partial repudiation of obligations.

In the period from 1896 to 1914 we heard no more about free silver, but a wave of unrest began to spread among those with a fixed income; the clerk, the school-teacher, the salaried man of every class began to feel with ever-increasing pressure the gradual rise in the cost of living. Labor unions were formed, strikes became uncommon, radical legislation of all sorts was offered in Congress ; some of it was passed. We began to hear of capital as distinguished from labor and labor as distinguished from capital, as if our people occupied two armed camps, each battling against the other. And then the World War came on. Providentially, just prior to that time the Federal reserve act was passed, which increased potential credit many times. We have seen the period of inflation in 1919 and 1920 with general commodity prices rising to about two and one-fourth times what they were in 1914; and then the collapse of the latter part of 1921 and 1922, and the conservative, careful period of 1923.

What does it all mean, and is there any solution after we find out what it all means? When I went to Congress in 1921, with some opportunity to investigate these things which I had been wondering about for so long, I began to mull around, and one day in the Bureau of Labor Statistics I was shown a curve of prices based on the bureau's index number, and as I ran my finger along the line of falling prices from 1873 to 1896 and of rising prices from 1896 to 1914 I began to see why it was that the first period was one of prosperity for the man of fixed income, the mortgagee, and the bondholder, and why the last period was one of relative prosperity for the producer, the business man, and the stockholder, each period causing social misunderstanding, unrest, and misery to that part of our people not on the right side of the price trend.

Now, there was a reason, of course, for these long periods of rising and falling prices, and remembering that we were on a gold b a s s it then occurred to me that gold began to be produced in South Africa and the Klondike just about

1896. By this time it seemed there was a little light just ahead and that the foundation of our changing economic conditions had been either a scarcity or a plentitude of gold. And now what is the answer?

Careful economists tell us that there is a constant equation between the volume of production and its turnover and the volume of money and credits and their turnover (of course, I am speaking roughly), so that in order to preserve their relative positions of debtor and creditor, mortgagor and mortgagee, bondholder and stockholder, seller of goods and seller of money a means should be devised to preserve this ratio so that the volume of money and credit will expand only in the same proportion as production and turnover expands and contracts as production and turnover subsides. In the March number of Harper's Magazine there is an article entitled " Stabilizing the dollar,'* which analyzes this subject in every satisfactory way, and which, incidentally, spoke favorably of certain legislation now pending in Congress and introduced by me. I mention this fact as indicating two things: First, that the stabilization of purchasing power is becoming a matter of public interest; and second, that I am discussing a question in the solution of which I am attempting to assist in a practical way. In the Bureau of Labor Statistics, in Washington, there is kept an index number of wholesale price levels made up of a composite of something over 400 commodities, each weighed in accordance with what exper'ence has shown to be its relative market importance.

The standard from which conclusions are now drawn is the average price level of 1914. The present price level relative to 1914 is about 161. The legislation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 326 STABILIZATION referred to and now pending in Congress contemplates starting with the general price level at the time when the proposed legislation becomes law and after*wards maintain approximately that price level by means which I will indicate in a few moments. In the meantime I want to make it perfectly clear, of course, that there is no attempt in this legislation to control the price level of individual commodities. They will move in accordance with the law of supply and demand, but the purpose is to keep the average the same, so that the value of money in an aggregate of the general commodities! which it will buy will not appreciably change. In other words, while flour and eggs and butter and chickens and meat and sugar and coffee will individually vary in price, the filled market basket made up of these different commodities can always be purchased with the same amount of money. And right here let me say that when the general pa-ice level is kept constant, when there is an automatic restraint against inflation and its consequent deflation and collapse, the tendency of individual prices to change will be immeasurably reduced, because the unhealthy economic conditions, the result of these abnormal periods, is the chief cause of the sudden rise and collapse of the price of any given commodity.

How can we keep this index number constant? How can we prevent periods of inflation succeeding periods of business expansion, culminating in periods of speculation and ending in periods of collapse? The quantity theory of money has been recognized as essentially sound by practically /all economists for more than a century. Illustrating by reducing the theory to its simplest form, if the total volume of commodities consists of 20 bushels of wheat and wheat is only traded in by the use of money, and the total volume of money is $20, as long as all that wheat is being traded in and all that money is in circulation wheat will be worth $1 a bushel. If, under the same conditions, there are $40 in circulation, wheat will be worth $2 a bushel; if, with 20 bushels of wheat and $20 in money $10 of that money is withheld from circulation and all other conditions are as stated in the first previous illustration, wheat will be worth 50 cents a bushel; if, on the other hand, one-half of that wheat is being withheld from the market and there is only a turnover in 10 bushels of the wheat, other conditions remaining as in the first illustration, wheat will be worth $2 a bushel. Or, expressed in the generalization mentioned heretofore in these remarks, there is a constant ratio* between the volume of production and turnover and the volume of money and credits and their circulation. So that if your index number of general price levels remains constant, you are assured that your volume of money and credits are expanding only in proportion as production and turnover expands—that is, only in proportion to the legitimate needs of business—and you can be assured that when you restrain the rise of the index number you are restraining credits beyond the legitimate necessities of business, you are restraining unhealthy and abnormal production, and you are restraining business expansion within wholesome limits and stopping in its inception overproduction, waste, speculation, and collapse.

The basis of our monetary system is gold; our entire credit structure is based on gold. Now, let's assume that all the gold is withdrawn from circulation, gold certificates being substituted; and let's assume that we start with a reserve of $1,000,000 in gold at the present number of grains of pure gold in the dollar, and that the index number goes up 1 per cent, indicating that our money and credit structure is expanding more rapidly than our production and turnover.

If we then increase the theoretical gold content in a dollar by 1 per cent, we have reduced our gold reserve from $1,000,000 to $990,000 and the possibilities of our credit structure by 1 per cent, which in turn tends to reestablish the normal ratio between production and turnover on one side and money and credit in circulation on the other.

Without going into the details of the proposed legislation, the above illustrations will serve to indicate its theory. Now, the question arises, Is such legislation possible at this time? The law requires us to maintain our gold reserves at 40 per cent. We now have about 82 per cent, and in order to make this plan feasible without unduly weighing the dollar it will be necessary to legislate for a required gold reserve of about 70. It is, therefore, difficult to have passed such legislation at this time, but in the various discussions concerning stabilization caused by this proposed legislation various alternatives have been suggested, such as a legislative direction by Congress to the Federal Reserve Board to have raised rediscount rates in the Federal reserve banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STABILIZATION 327 when the index number is rising and reduce them when the index number is falling and in that way tend on the one hand to discourage unhealthy expansion and on the other hand to make money easy when business is not so good and thus tend to stimulate it. Another proposal is legislation requiring the Federal Reserve Board to have the reserve banks put securities on the market and thus tend to draw money from active circulation when the index number is rising and to buy them up and thus put money in circulation for business when the index number is falling.

In considering the necessity of legislation, let us go over for a minute what happened in 1923. At that time the mental attitude of the country regarding economic conditions was the attitude of a people who had just been through a period of unhealthy inflation and drastic and stupefying deflation and corresponded to the way people feel about a war just after the war is over. We would never have wars if people kept in the same frame of mind they are in just after one is over. In 1923 we were cautious, not because we are habitually wise enough to be cautious, but because and only because we had just had our lesson. Various banks in their monthly letters during 1923 gave reminders of the disasters of 1920; the monthly letters of the National City Bank of New York, for example, one of the most widely read of economic bulletins, in January advised business men to operate with caution. In February it remarked that business men " are following conservative policies and showing little inclination to become extended, which is the part of wisdom in present conditions." In March it warned its readers that every upward movement is in danger of running away. In April it again called attention to the danger of inflation. " The industries of the country," it declared, " are already working practically at capacity or to the limit of the labor supply. Under this condition they can not use more credit to advantage."

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