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During the second half of the period the inflowing gold was treated in an entirely different manner. Industry was recovering from the slump, trade was in process of development, and the banks were being called upon for larger supplies of money. The necessary credit expansion could only be effected upon a broadening basis of bank cash, and the incoming gold was utilized for this purpose. It was paid into the reserve banks, and some of it was allowed to form a permanent addition to member banks' reserves.

So insistent was the demand for money that bank cash was also provided by reserve bank purchasesi of securities* and other earning assets, the result of the increase in bank cash being an expansion of nearly $8,000,000,000 in the deposits of all the banks in the country. Incidentally, it should be noted that the reserve banks did not themselves retain the incoming gold, but handed it

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I will now summarize the developments in the years since 1920, the period during which the reserve bank credit policy has been most actively in operation. On balance, $1,700,000,000 of gold have been imported into the United States. Over one-half of this amount has been absorbed into the Federal reserve banks, while the remainder has been taken by the Treasury as backing for gold certificates which have gone into circulation in the place of Federal reserve notes. Of the total import only one-third on balance has been allowed to form new bank cash. Throughout the entire period, whether gold was flowing in or out, the central banks have been careful, as far as possible, to regulate the supply of bank cash in accordance with the needs of business. Trade has expanded rapidly and has been accompanied by a growth in bank deposits amounting in the aggregate to $15,000,000,000, an increase of 40 per cent.

Meanwhile, the almost uninterrupted prosperity enjoyed by America has been attended by a large measure of stability in the price level.

Here we find ourselves face to face with a definite test of success or failure in monetary policy. Temporary booms can always be obtained by inflationary methods, but it is certain that prosperity on a sound and lasting basis can not be secured except on a fairly steady price level. It must be remembered that, whether we are on a gold or any other standard, the direction in which the price level moves is immediately determined by the volume of money, as modified by its rate of turnover, in relation to the volume of business.


If the supplies of money increased beyond the requirements of business, prices tend to rise; if, on the other hand, the supplies of money are inadequate, prices fall. The relation between money supplies and business requirements, viewed in its effect upon the price level, should then be the first care of the central banking authority, and we find on an examination of American statistics for recent years that movements in the price levels upward or downward have never been allowed to proceed far. We must therefore conclude that the monetary authorities have met with a high degree of success in the formulation and execution of their policy. This they have done under conditions of great difficulty, brought about by gold movements of unprecedented magnitude.

It is necessary now to observe the bearing of the American monetary policy on the operation of the gold standard. To-day, as before the war, the price of gold in America is fixed, and we are apt to assume that the value of gold continues to govern the value of the dollar. But such an assumption is no longer correct. While an ounce of gold can always be exchanged for a definite number of dollars, the value of the ounce will depend upon what these dollars will buy, and this, in turn, will obviously depend upon the American price level.

If the price level in America fluctuated according to the movements of gold, the purchasing power or value of the dollar would still depend, as it did formerly, upon the value of gold. But we know that this is not so. As I have just shown, the American price level is not affected by gold movements, but is controlled by the policy of the reserve banks in expanding or contracting credit. It folDigitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STABILIZATION 333 lows, therefore, that it is not the value of gold in America which determines the value of the dollar, but the value of the dollar which determines the value of gold.

The mechanism by which the dollar governs the external value of gold is obvious. If'the price level outside America should rise in consequence of an increase in the supply of gold, America would absorb the surplus gold; if, on the other hand, the external price level should fall in consequence of a shortage of gold, America would supply the deficiency. The movement of gold would continue until the price levels inside and outside America were brought once more into equilibrium. Although gold is still the nominal basis of most currencies, the real determinant of movements in the general world level of prices is thus the purchasing power of the dollar. The conclusion, therefore, is forced upon us that in a very real sense the world is on a dollar standard.

Such is the position as I see it to-day, and I am naturally led to ask how long it is likely to continue ? America is able to control the world price level because of two conditions. In the first place her gold stocks are so great that she can afford to lose large quantities without running any risk of the gold reserve falling below the legal minimum; in the second place, her central banking system is so constituted that, given her great wealth, she can absorb large quantities of gold and at the same time deprive it of its credit-creating powers.

In a word, America is rich enough either to lose gold or to gain it. She holds now one-half the total monetary gold of the world.

Moreover, her creditor position constitutes a permanent magnet for gold.

Her debtors must pay, and, if they can find no other way, they must pay in gold.

The only condition, as far as I can judge, under which America might be drained of her gold surplus is that she should continuously make foreign loans beyond her true capacity to lend. That she will lend excessively at times is quite probable—there are indications, indeed, that she has done so recently;

it is by no means an uncommon practice with ourselves, but that she should overlend%o heavily as to make a serious inroad into her surplus gold seems to me very unlikely. I conclude that as long as conditions remain at all similar to those we know to-day America will be able to pursue her credit policy without regard to gold movements, and to maintain control over the world level of prices.


Let me repeat that I speak of conditions as I see them to-day. Taking a view of the world as a whole it is evident that a great advance has been made since the time when gold was the main determinant of the direction of the price level. But we have still some way to go before we attain full understanding of the principles upon which the volume of credit should be regulated in relation to business demands. We know that the proper control of credit by the central bank in any country is a very important factor in trade prosperity, and that a guiding principle in the exercise of this control should be the maintenance of a stable level of prices.

But this is not all; there is still a wide field for inquiry on both the practical and theoretical sides. Unfortunately, however, the dearth of statistical information is a grave diflSculty in the way of investigation. Individual banks can not do much; it is useless for them to publish more than the customary details at present disclosed in their periodic statements, since no sound generalization can be deduced from banking figures unless they relate to the banks as a whole. Cooperation between all the banks, including the central bank, in publishing the statistics required by scientific students, would help us materially in the solution of some of the problems of credit control.

The CHAIRMAN. NOW, I am going to suggest that we recess until


(Whereupon, at 12.20 o'clock p. m., a recess was taken until 2.30 o'clock p. m.)


2.30 O'CLOCK P. M.

The CHAIRMAN. The committee will come to order. Doctor Commons, you may proceed.

15029—28 22

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Doctor COMMONS (interposing). There are two elements here, one of which is the diminished power of the consumers owing to agricultural distress, and other things; and then we have three elements of policy, all of which meant contraction—selling of securities, raising of the rate, and caution to the business public not to expand any further—as physically indicated by the slight rise of the rate.

You see the two things that I am trying to contrast there. Which do you place the most emphasis on ?

Doctor MILLER. I am not sure that I understand you. Your question is whether the change in the direction of the price curve—say, with early summer of 1923—was due to the pressure that was being

•exerted to a slight extent by the Federal reserve system through these three agencies you specified ?

Doctor COMMONS. Yes.

Doctor MILLER. Principally, or was it duie principally to what might be called the noncontrollable factors so far as the Federal reserve is concerned, to wit, the overtaking of consumer demand by production ?

I think the latter was more important by far.

Doctor COMMONS. YOU would give no weight to the other?

Doctor MILLER. Oh, yes; I give weight to them. I would say, Doctor Commons, to make that clear, that what the Federal reserve did at that time perhaps should be described differently, and I would describe it differently from what you did.

If we look at this chart which shows reserve-bank credit, goldstock money in circulation, and member-bank reserve balances, with a curve at the top showing reserve-bank credit plus gold stock, we

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Harvard Economic Service predicted continued prosperity. On April 20 Mr. Hoover issued a warning against inflation. On April 27 the American Bankers' Association decided that inflation needed to be watched and advised caution. On May 9 Mr. Hoover again warned against further inflation. On May 19 the National Building Trades Council took action to curb overexpansion in their industry.

The first two of the things that I mentioned, the sale of securities and the raising of the discount rate, required some time to get into the price situation. The prices kept raising up until April and May.

May was the highest.

The CHAIRMAN. 1923?

Doctor COMMONS. Yes. The discount rates were raised in the latter part of February, so with the accumulation of those two influences and then the inferences that got into the minds of the public, it required until March 16 before President Coolidge gave the warning. He was the first one to give the warning about too rapid recovery, and up to May 29 this publicity was being given out.

The CHAIRMAN. YOU mentioned an array of warnings that were issued from various sources. I would like to inquire of Doctor Miller if these warnings were issued as a result of a stated policy of the Federal Eeserve Board.

Doctor MILLER. These warnings, of course, were from sources outside of the Federal reserve system.

The CHAIRMAN. Or were they initiated by or reflected from the Federal Eeserve Board ?

Doctor MILLER. That I do not know.

Mr. STRONG. Did not the board take any action at all ?

Doctor MILLER. YOU mean in the line of publicity ?

Mr. STRONG. Yes.

Doctor MILLER. Nothing beyond what was contained in its regular monthly review of conditions.

Mr. STRONG. What was that?

Doctor MILLER. I will give you an example here. Perhaps it would be well worth inserting this whole paragraph in the record.

The CHAIRMAN. Without objection, the whole paragraph will be inserted.

Doctor MILLER. This was in May, 1923, referring to the great

increase that had taken place in production. It reads:


The increased use of credit, which is reflected in the larger loans and investments of member banks, but not in the earning assets of Federal reserve banks, lias been primarily in response to the increased volume of production. Thus far business expansion has been characterized by a rapid increase in the output of basic commodities. In fact, the growth in the physical volume of production since the middle of 1921 indicates a rate of industrial recovery almost without parallel in American business. Within a year and a half after recovery began the monthly output of 21 basic commodities, as measured by the Federal Reserve Board's index of production, increased, over 67 per cent.

The volume of goods produced and consumed during the first quarter of 1923 probably exceeds that of any similar period in the history of the country.

Fuller employment of equipment and of labor has produced the additional income from which profits and wages were realized. In fact, profits in many

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Mr. STRONG. Just a polite, diplomatic way of telling the financial world they want to be careful and look out.

Doctor COMMONS. They read that correctly. It was one of these intimations that the Federal reserve system now contemplates a further raise of the rate.

Doctor MILLER. It might have. My own view was that the business mind of the country was itself in a very cautious state and that these fears that to a certain extent were anticipated were ill grounded. I think there was a spirit of caution abroad in the whole business world in the United States at that time that would have insured against any abuses or any over-expansion that was occasioning solicitude in these comments you quoted and in these extracts which I have read from the bulletin.

Doctor COMMONS. NOW, in 1919 there were no comments or cautions uttered by the board or by anybody against that inflation which was going on. I will assume that the inflation started in July, 1919.

Prices rose, but employment was not complete until about July,

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