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1919. Now, during all that increase of prices, there was continuous publicity as to the scarcity of goods, the poverty of Europe, and consequently those things would cause prices to rise. Now, that had reached the point where there could be no further production owing to the limited labor of the country.

Was the rise of prices after the middle of 1919 a nonmonetary phenomenon, or was it a monetary phenomenon ?

Doctor MILLER. Both.

Doctor COMMONS. Why should prices have risen when people could not buy the increased quantity at the high prices ?

Doctor MILLER. Why should they?

Doctor COMMONS. They could buy the increased quantities at the high prices ?

Doctor MILLER. There was not the increased quantity to be had.

Doctor COMMONS They could then pay the increased price ?

Doctor MILLER. They were buying in a market in which there was no adequate response on the part of the producer; in other words, it was a seller's market. The consumer wanted to consume; he wanted to buy; prices began to rise, and the jobber, the distributor, and the speculator in commodities went out to buy these goods in anticipation of a further rise, and through that helpecl to bring about the further rise, and the consumer had the purchasing power from one source or another that enabled him to pay these prices and he was in a position where he wanted the goods pretty much irrespective of price.

I want to recall to you the ubiquitous appearance of the silk shirt The CHAIRMAN. What year are you now speaking of ?

Doctor MILLER. 1919 and 1920. I assume you have in mind the period from the middle of 1919 to July, 1920?

Doctor COMMONS. Yes. What I am getting at, Mr. Miller, in brief, is this: You spoke of the consumers' demand falling off. Now you speak of the consumer having an abundance of money with which to buy goods.

Doctor MILLER. YOU are now speaking of 1923 ?

–  –  –

1923. The result was that the producer in his effort to take advantage of the rise in the price scale went into the market and began to bid for labor, so you get this rising pay roll curve. I have no doubt it would also be paralleled by figures showing that wages were increasing at the same time.

Doctor COMMONS. That is quite true, but Doctor MILLER. NOW, what the laborer received as wages constituted a demand for goods in the market. He came back with his high wages and wanted to buy, and with no commensurate growth in the volume of purchasable commodities, it tended to aggrevate and accentuate the already rapid rate of increase in the scale of prices.

Doctor COMMONS. NOW, at the same time you had a very low rate of rediscount.

Doctor MILLER. What was the rate ?

Doctor GOLDENWEISER. During most of 1919 the average was close to 414 per cent.

Doctor COMMONS. Which is a low rate. When the banks could borrow at 4% per cent and lend to these business men and to exporters at probably 6, 7, and 8 per cent, that gave them a greater quantity of money with which to hold inventories and to bid for labor.

Doctor MILLER. They were given that money at a cheaper price.

Doctor COMMONS. SO they took much more of it. They marked up the prices, and that required more money, and they increased the quantities up to the limit which they could, which was reached in 1919, the latter part of it, and that took more money, and the fact that the reserve system kept the rate down too long, did not start to raise it until six months too late, enabled them in that period to have much more bank credit with which to inflate wages and to hold onto the commodities, so th£ difference, I would infer from this, was mainly the difference in the Federal reserve policy.

Doctor MILLER. Well, I would say that you left out what is, perhaps, the most important factor of all, that in 1919 and early 1920 there was a demoralization of mind induced by the steady rapid upward flight of prices, a distinct demoralization of mind since we were going into a period when prices were twofold and more than twofold of the old pre-war scale.

Then came the terrible collapse of 1920, the collapse of commodity prices, the pronounced drop in the activity of industry, trade, the utter depression that overtook agriculture, and that went through the year 1921. That, perhaps, was the most severe experience that this generation of business men has had. The memory of that carried over into 1922 and 1923, and it probably still lingers as a force of some consequence.

Doctor COMMONS. YOU said this morning that if there had been an increase of rate of 5 per cent it might have accomplished what I had in mind.

Doctor MILLER. I think it would have accomplished it if any rate increase could have, and I think there was enough warrant for expecting that timely rate action, if it could have been taken or if it had been taken in the summer of 1919, would have done a good

–  –  –

Doctor COMMONS. Well, coming to " primary regard to the accommodation of commerce," that is in the law. Now, you have added there something that is not in the Federal reserve act, namely, " primary regard to the effect of such purchases or sales on the general credit situation."

What is meant by "general credit situation "?

Doctor MILLER. Well, what does it mean to you ?

Doctor COMMONS. I would characterize it somewhat as you characterized this bill, that it is vicious rodomontade; it does not mean anything.

Doctor MILLER. Well, I would take issue with you there and say that if you read the following paragraph from the Federal Reserve

Bulletin it throws a good deal of light on it. [Reading:]

Since in open-market operations the initiative can be taken by the reserve banks rather than by member banks, these operations may be used as a gauge of the degree of adjustment between the requirements for reserve bank credit and the volume of it in actual use. The sale of an investment by a reserve bank is a means of testing the demand for credit by placing the initiative for and the cost of such credit directly upon the borrowing banks.

Doctor COMMONS. It has reference, then, to the rate of discount?

That is what you mean by that ?

Doctor MILLER. I mean by that just what we say in the illustration here regarding the sale of securities, that that is what took place in

1923. You force your member bank either to reduce the volume of its loan operations or to come to the Federal reserve bank to obtain needed credit that it has hitherto had through the open market by the process of readjustment.

Now, at this time more particularly the member banks felt a good deal of hesitation about showing rediscounts. I mean by that to recall that they T^ere still under the influence and memory of 1920 and 1923.

The CHAIRMAN. But, as a matter of fact, during the last sale of securities by the Federal reserve system, the member banks took those same securities which they purchased in the open market and used them as collateral for rediscounts, did they not ?

Doctor MILLER. What period are you referring to now ?

The CHAIRMAN. The period of April or May of this present year.

Doctor MILLER. Yes. Well, whether they took those same securities or not, they did go to the reserve banks and obtained by way of rediscounts the amount of credit substantially that was taken out of the market by the Federal reserve bank when it sold securities to the market. In other words, when the responsibility was thrown, as in recent months it has been thrown upon member banks, the charts seem to indicate that the member bank took the responsibility of keeping extant in the market an unchanged volume of credit.

The CHAIRMAN. In other words, instead of calling loans to meet the situation, that required more funds, they have gone back into the Federal reserve in the way of rediscounts or borrowings.

Doctor MILLER. Or borrowings. Now, you see, the loans and investments of member banks [indicating on chart of reporting member banks] have gone right up. If we look at this chart, showing reserve

–  –  –

Doctor MILLER. It was to make the discount rate effective by putting the member banks in a position where they would either have to reduce their loan operations or borrow, and therefore put them in the grip of the Federal reserve banks.

Doctor COMMONS. And if it went beyond that, it was excessive?

If the sales should go beyond that, they would be excessive, unnecessary, from the standpoint of the general credit situation?

Doctor MILLER. Yes. Well, you come back to the general credit situation, and I was about to add that the general credit situation is a situation that is explained in this bulletin from which you were quoting, the one in which the changes in the volume of credit are related to changes in the volume of credit requirements.

–  –  –

Doctor COMMONS. If you accomplish this set-up of equilibrium where they are moving, it means they are moving at that price, does it not? We had stability of prices very decidedly in 1923, and we had also these other conditions of stability of employment, and so on.

Doctor MILLER. N O ; you did not. You had an improving situation.

Doctor COMMONS. A S to employment?

Doctor MILLER. We had not a stabilized situation but a changing situation.

Doctor COMMONS. Changing greater than the population?

Doctor MILLER. I should say so; yes. I should say the volume of employment was Doctor COMMONS. Very steady throughout the year?

Doctor MILLER. Not very steady; I should say it was increasing.

Were you referring to 1922 or 1923 ? I would take the years 1922 and 1923 together as marking a period.

Doctor COMMONS. I would say from the time the peak of employment was reached, which was about March through the middle of that year that you had two-thirds of the year perhaps with steady employment. You had also a steady price level—comparatively steady price level—and you had in relation to what it had been in 1920, comparatively steady. So that the price level and the employment level had some sort of relation to the equilibrium.

Doctor MILLER. Well, I would describe that price period, if it is 1922 and 1923, as one that showed considerable movement. We had a steady rise during 1922, which continued until the spring of 1923.

We had a short period there, about May, when the price level shows no change; and then it takes a drop, rising in the autumn again.

So that, in terms of stability, I should say the period of stability indicated by the price index was a very transitory one, probably, to be described as more or less of an accidental occurrence.

Doctor COMMONS. YOU will notice this has a bearing on lines 7 and 8 of the bill.

The CHAIRMAN. Page 2 ?

Doctor COMMONS. Page 2, lines 7 and 8. In the former bill of Congressman Strong he had nothing about stability of industry, commerce, agriculture, or employment; he had only in the former bill the stability of the wholesale price level. In this bill he has, besides stability of price level, stability of commerce, industry, agriculture, and employment. So that he has five purposes here, whereas formerly he tied himself up solely to the price level.

Now, should this be retained in this bill, or would you strike it out—I am trying to get your help as a friend of this bill, you understand. You were very critical of these five different kinds of stability when you started your statement. You said it was quite confusing, but is not that exactly what you are doing when you make that contention ? You say stability of price levels does not tell us employment is steady. So that here, according to this bill, you give weight to the price level and you give weight to employment and

–  –  –

level, and that grows out of what has been brought forward in the testimony here. And when we speak of the gold standard there are four meanings to the " gold standard ": First, there is the meaning where gold freely circulates—I would say that would be when our gold certificates are freely circulating gold in the community.

Now, if the gold freely circulated, as it did in England before the war and is now somewhat freely circulated in the gold certificates in this country, then it would appear that there might be a scarcity of gold. The second meaning of the " gold standard " is that gold shall be corralled in central banks and represented only by note issues, in which case the notes might be in our case two and a half times the volume of gold reserves. So that you might have two and a half times—and that would reduce the demand for gold by about 60 per cent; gold would do 150 per cent more work. That is the second meaning—central banks, with note issue.

The third meaning, which goes along with that, is the gold-exchange standard, and that has been adopted by most countries, either in whole or in part, except England—all European countries; some have no gold, as you know, of course, and others have gold exchange.

Lastly, there has been developed here somewhat the idea growing out of these conferences with foreign banks, the idea of internationally managed gold control through agreements on discount rates or otherwise.

Now, these might all be gold standards. Which of those do you have in mind as the one which you tliink is preferable—the one in your mind which is the goal that we ought to go for ?

Doctor MILLER. We.ll, I am a respecter of facts. I do not think we can control and direct facts according to our own preconceived ideas. I do not expect to see the gold standard in the old-fashioned sense, under which there is a considerable volume of gold actually in circulation, restored.

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