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Those are technically called secular movements of prices—longtime movements of prices. They are periods in which prices are moving so slowly on the whole—a matter of 30 or 40 points over a period of 30 or 40 years—that the movement from month to month is slight and hard to notice, although the cumulative effect is very serious. The causes of these movements are still extremely obscure;

there are great differences of opinion among the best informed as to the reasons for this big decline and this big advance. Perhaps the best opinion, so far as I can judge, is that the period of declining prices from 1870 to 1896 was due to a large increase in production, and that the period of advance from 1896 to 1913 was due both to the increase in the gold supply, by reason of the cyanide process and other things, and to the fact that population growth was rapidly catching up with the growth of raw materials and there was a pressure on the raw materials.

The CHAIRMAN. Then it is a fact, Mr. Goldenweiser, that the influx of gold raises the wholesale price levels ?

Mr. GOLDENWEISER. It tends to.

The CHAIRMAN. In any situation such as we have now, a great influx of gold does not affect the wholesale prices because that gold has been managed by the Federal reserve system; is that correct ?

Mr. GOLDENWEISER. I should hesitate to say that it was because it was managed, Mr. Chairman. What I would say is that because of the existence of the Federal reserve system it was at certain times absorbed in the repayment of discounts.

The CHAIRMAN. That might be construed as management.

Mr. GOLDENWEISER. Yes, sir. But the real reason that the gold imported during 1920 and 1921 had little effect on prices—and that period stopped about 1922—was that the member banks were so heavily in debt at the reserve banks that the gold was used to repay the debt and therefore did not become incorporated into memberbank reserves.

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was so large on the basis of the reserves was that much of the growth in the member bank liabilities was in time deposits rather than in demand deposits, and only 3 per cent reserves were required against the time deposits, so that the average reserves of member banks compared with the total volume of credit were much smaller at the end of the period than at the beginning.

Under these circumstances, Mr. Chairman, it is difficult to say that the Federal reserve system impounded gold, or sterilized it, as it has sometimes been called, or had any other influence of that sort;

because the gold has had, I should say, a larger effect on the total volume of credit than any gold at any time anywhere.

The CHAIRMAN. I S it a fact, then, Mr. Goldenweiser, in that connection, that the management of the Federal reserve system was used in the control of the gold, in view of the possible expansion which might inflate prices, in such a manner that there was no amount of inflation that took place?

Mr. GOLDENWEISER. If I should say yes to that question, it would imply that the Federal reserve system has practically complete control of prices, which is the very thing that I have very serious doubts about.

Mr. STRONG. Be careful about saying that.

Mr. WINGO. Mr. Chairman, let me ask a question right in that connection, which will possibly elucidate what you have in mind. As I understood you, Mr. Goldenweiser, you said that there was an increase in the member-bank credit of eight and one-half billion dollars?


Mr. WINGO. Based upon the $450,000,000 increase in our gold reserve ?


Mr. WINGO. If this increased volume of gold that came into the United States had not come in, would there have been that eight and one-half billion increase in that time, in your judgment?

Mr. GOLDENWEISER. In my judgment, no, sir.

Mr. WINGO. Then it did have an effect to the extent of an eight and one-half billion increase—whether you call it expansion, inflation, or what not—in the credits created and sold by the member banks ?

Mr. GOLDENWEISER. The only modification I would make to that statement is that when I said " no " I did not mean there would not have been any. I mean there would not have been eight and onehalf billion.

Mr. WINGO. That is the next question I am coming to. How much of that eight and one-half billion represented the normal and natural increase that would have come if this surplus gold had not come in ?

Have you any way of estimating that, or have you attempted to estimate it arbitrarily ?

Mr. GOLDENWEISER. In a country that is as young as ours, and is developing as rapidly as ours, and in which conditions are changing as rapidly, I hesitate to call anything normal, and I do not know what would have been a normal growth. There are so many new developments, the use of bank credit increases, and the number or size of banks increases, and the financial habits of corporations

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produced by the creation of the Federal reserve system, and I wondered if any attempt at all had been made to measure that effect; I mean the normal effect of it.

Mr. GOLDENWEISER. The possibilities of it, you mean ?

Mr. LUCE. Yes.

Mr. GOLDENWEISER. In view of the fact that the whole relation between the volume of credit and the level of prices is still very largely undetermined, and that those of us in the Federal reserve system who have been working on it have a great deal of doubt of the directness and constancy of that relation, it would be impossible for me to say what the effect of the Federal reserve system on the price level might or would have been, or whether the full effect had been exercised or not.

Mr. LUCE. Have you any doubt that an expansion of credit by increasing the use of bank checks is a direct addition to the volume of money?

Mr. GOLDENWEISER. NO, sir; I have no doubt of that.

Mr. LUCE. And does not that have a considerable bearing upon the quantitative theory ?

Mr. GOLDENWEISER. It certainly has a bearing, Mr. Luce; but there are times when the volume of deposits is increasing very rapidly and prices are going down. For instance, take the period from 1925 to 1927. During that period member bank credit and deposits throughout the United States increased at a very rapid rate, and prices declined about 10 per cent.

Mr. LUCE. Have you any explanation of that yourself, in your own mind?


Mr. LUCE. May we have it?

Mr. GOLDENWEISER. Surely. I think that the decline in prices during that period was due to the increased efficiency of production, transportation and distribution, and the keen competition among the producing and marketing agencies.

Mr. WINGO. You would not say, though, that the cause to which Mr. Luce referred did not have its effect? What you mean to say is that the counterbalancing effect of the causes to which you direct attention were so much larger than the effect of the things that Mr.

Luce referred to that there was a net falling instead of an increase.

If this increased efficiency that you refer to had not taken place, then the natural effect to which Mr. Luce refers would have taken place; would it not?


The CHAIRMAN. YOU are referring now, Mr. Goldenweiser, to those commodities that enter into domestic transactions ?


The CHAIRMAN. Would that have the same effect on production which enters into the international market?

Mr. GOLDENWEISER. I think that the commodities that enter into the international market respond to changes in conditions in different countries more promptly than those that do not.

The CHAIRMAN. What conditions; the gold conditions ?

Mr. GOLDENWEISER. The general conditions of demand and supply, in which bank credit and gold reserves are a factor.

15029—28 3

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Mr. GOLDENWEISER. But I should be inclined to think that this comes as close to one that they would agree on as any.

Mr. WINGO. Are there any major or sharp conflicts between them?

Let me put it this way: Is there any outstanding economist in the United States who contends that at the present moment there are signs that are obvious to those who are teamed in reading those signs, from which they can determine whether 10 years from now they can look back to the year 1928 and that their present contention will be verified that it was a long-term downward movement;

or, if there should be a sharp upturn in the price movement, say, during the month of April, can they say whether or not it was simply a temporary upturn and that the general trend was still downward ? Is there any outstanding economic writer or student in the United States who contends otherwise than that which you have expressed ?

Mr. GOLDENWEISER. By limiting it to the United States you are facilitating my answer. I think there is not.

Mr. WINGO. Is there any in any European country?

Mr. GOLDENWEISER. I think that Prof. Gustav Cassel, of Sweden, thinks he knows.

The CHAIRMAN. May I interject one thing at this point?

Mr. WINGO. Certainly. You see what I am driving at, Mr. Chairman.

The CHAIRMAN. That is a very interesting question. I have heard many of these economists and prognosticators to which the gentleman is referring express themselves as quite at sea in regard to these movements because of the introduction of a new element, namely, the management of the Federal reserve system and its influence on the credit policy and gold movements in its work in connection with the central banks of issue in different countries of the world.

Mr. WINGO. They do take the same position, do they not, as has just been expressed; that while they can observe, of course, the temporary month-to-month fluctuations, they are not and have not been able to determine whether the passing movement is part of a longterm fall or a long-term rise, and that the things which you mention, the habits and practices that have grown up with reference to management of gold, have only added to the confusion and the uncertainty? Is not that true?


Mr. WINGO. In other words, my understanding has been that the conclusion that he has expressed is a correct one, and Cassel is the only man that I have heard suggested who disagrees. In other words, the expert who says " I can tell right at the passing moment whether we are going east or west, or up or down," is uncertain whether it is a temporary or a permanent swing of the price level.

Now, the confusion, as I understand, has been added to recently by the manipulation or sterilization or management of gold, or whatever you may call it, and instead of clarifying it and making it easier for the experts to say at the passing moment whether it is a permanent upward or downward trend, it has added to their uncertainty.

The CHAIRMAN. The policy adopted recently of earmarking gold is another source of confusion.

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Mr. GOLDENWEISER. I can understand this position; I certainly recognize that the long-time decline in prices causes a great many hardships. The only question I raise is whether it is at any time possible to determine whether the long-time decline has come to an end or not.

When prices turned up in 1880 there was not a man living who knew that the long downward trend of prices still continued and that the rise was only a temporary fluctuation; that is something that neither the people nor the experts could tell, and in so far as credit policy may have any bearing on the price situation, its bearing would be on the relatively short-time movements. I t is the question of those short-time declines and advances of prices that I should like to discuss for a few moments in completing my testimony.

The CHAIRMAN. Before you do that, might I ask you whether, in your judgment, the only effect that the operation of the Federal reserve system has on these rising and declining prices is through their management of the credit policy ?

Mr. GOLDENWEISER. I am not quite sure I understand your question.

The CHAIRMAN. In other words, is the sole influence of the Federal Reserve Board on the general price level through their management of the credit policy of the banks? Are there any other influences which are exercised by the bank ?

Mr. GOLDENWEISER. By " credit policy " you mean discount rate and open market policy?


Mr. GOLDENWEISER. I should say that in so far as they may have any effect on prices that would be the only channels through which it can be exercised. The only other thing is that the system may have a certain influence on the conduct of individual member banks, which is perhaps what you had reference to, and I think that that has no broad general effect except in improving the soundness of banking conditions.

Mr. LUCE. HOW do you tie up with that the factor of the increase or decrease of the volume of Federal reserve notes outstanding ?

Mr. GOLDENWEISER. The volume of Federal reserve notes under the Federal reserve system is influenced entirely by the general demand of the people for currency, and that demand is in turn influenced by the volume of business.

Mr. KING. Right at that point, what do you mean by the general demand of the people for currency ?

Mr. GOLDENWEISER. I mean that a certain amount, and rather a small proportion, of all the payments made by the people in the course of a year are made in cash, and the amount of cash that a person has to carry in his pocket depends on the level of retail prices and his own personal habits. In the aggregate there is a certain amount of cash that will do the business, and that business includes what we all carry in our pockets to pay for our lunches, car fares, etc., and the amount that the retail stores have to carry in their tills to make change, the amounts that the commercial banks have to carry in their tills to meet the demands of their customers, that experience has taught is apt to be needed in the course of a day, and the amounts that corporations and other industrial concerns have to carry to meet

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take surplus paper and deposit the gold and the paper with the Federal reserve agent and issue Federal reserve notes, could they not?

Mr. GOLDENWEISER. They could issue Federal reserve notes against acceptances, yes; not against Government securities.

The CHAIRMAN. I was not speaking of Government securities.

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