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Mr. STRONG. Mr. Miller, if Congress should see fit to write into the law a direction that the policy of the Federal reserve system toward stabilization be continued, what harm could result? I understood you just now that the Federal reserve system has been very successful the past three or four years in that direction. Should Congress direct that the. objective of the Federal reserve system should be toward the stability of the purchasing power of money, what harm could result?

Doctor MILLER. YOU are asking me a pretty big question.

Mr. STRONG. I appreciate it.

Doctor MILLER. Should the majority opinion, or the controlling opinion, in the Federal reserve be one of fear that prices might fall or that the effect of falling prices would be prejudicial to the wellbeing of the country, I think it would tend to stimulate at certain times a very active open-market policy, a policy of putting money into the market.

Mr. STRONG. But the fear might come without the considerations you have just expressed.

Doctor MILLER. Let me follow through. To my mind, the most difficult thing in the whole operation of the open-market policy is to know when and how much to buy, how much money to put into the

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Doctor MILLER. I would say this, Mr. Strong, if I may say it without carrying the implication that I have in mind my colleagues, or any of my colleagues, that I think one of the main conditions affecting the operating of the Federal reserve banking system is that most Americans are, by temperament, inflationarily inclined. Under such a law as this, were it enacted, there might a disposition, perhaps, to seize the first indication or appearance that things were running off, that prices were down, to put into effect a pretty energetic open-market policy, with consequences that Mr. STRONG. That is what you have been doing.

Doctor MILLER. That interpretation can be put upon what has happened in the last eight or nine months. I do not know what the results of that will be.

Mr. STRONG. Of course, at this time your surplus money goes into brokers' loans.

Doctor MILLER. That is where it usually goes.

Mr. STRONG. But the question is whether there should not be something done to check that.

Doctor MILLER. I wish to avail myself of this opportunity to say that when that " something" is done you will find me very much more sympathetically inclined toward your major proposal.

Mr. STRONG. I am glad of that. My thought is this: That if Congress should say to the Federal Reserve Board, "We are directing you to continue the policy you have been pursuing," which is what this bill intends to do, then you will find a way to correct the failure of your experiment if it does not work, and you say that it failed to work last year. If your cheapening of money increased brokers' loans, and you think it is objectionable, you will find a way to prevent it.

Doctor MILLER. The way has not been found.

Mr. STRONG. I know you will keep on experimenting if you are only directed to continue the policy that you haye been pursuing.

That is the purpose of this bill.

Doctor MILLER. I should say, then, hold off until it is demonstrated that the Federal reserve has found a way.

Mr. STRONG. I say to you frankly, Doctor Miller, that while I do not want to hold up anybody in the wrong, we have built up a business development in this country, and a volume of business that has expanded; we have built up a credit structure greater than we ever had before and developed new industries—automobiles, radio, flying machines—on expanded credits. Now, we are seeking to put the world back upon a gold basis. I am very much afraid in the effort to build this great credit structure, if it perchance should be upon a freegold standard, it might bring a deflation in this country; and I would like to direct the Federal reserve system to continue the policy they have been pursuing of stabilizing now and not when we have receded to a pre-war price; stabilize at this point as near as may be;

go on with their program; that is my thought.

The CHAIRMAN. IS it your thought that this bill should stabilize at he present price levels ?

Mr. STRONG. Stabilize now. If you inflate, you will have trouble.

If you deflate, you will have trouble. If you are going to stabilize,

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Doctor MILLER. When you go to Europe, to England, you meet a situation which is widely different from this. Their industries can not expand their operations without bank credit, and bank credit there has a relationship to the current volume of trade that it does not have in our country at the present time and can not have. American business has attained a position of great financial independence, and it is a factor rather in the lending situation than in the borrowing situation. That is one of the things that is troubling the Federal Reserve Board to-day, this lending of business money to the market.

The CHAIRMAN. That reduction is one of the things that causes the increase of the investment securities which the Secretary of the Treasury directs attention to that are accumulating in the Federal reserve system.

Doctor MILLER. Yes, sir.

15029—-28 24

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And nobody doubts that the Federal reserve system is able to keep up the gold standard in this country. But I think it is necessary that we should ask ourselves for a moment, what does that mean?

It means that the purchasing power of the dollar, the unit of your currency, must be kept constantly at par with the purchasing power of the corresponding amount of gold. Therefore, if you expect tho Federal reserve system to keep up the gold standard, you actually expect the system to keep the purchasing power of the unit of your currency, as against commodities, at a certain height. And I wish to add "that what you expect is a particularly difficult thing, in so far as the value of the quantity of gold contained in your dollar is liable to alterations, and if the value of gold as against commodities alters, the Federal reserve system has to hold the purchasing power of your monetary unit in accordance with these alterations.

But you expect them to do that, and nobody doubts that they are able to do that.

There is a lot of experience confirming the fact that a central bank system has that capacity, because long before the War—in some countries almost a century—a gold standard has been kept up, and it has been kept up in no other way than that the central bank in a given country has kept the monetary unit at a purchasing power as against commodities corresponding to the purchasing power of a certain amount of gold.

That is a fact, and that is most important to remember, because it does away with a lot of troubles with reference to the capacity of a central banking system to master the purchasing power of the monetary unit. I think this fact can not be doubted, because it is not only a theoretical fact, but it is a fact established throughout a century in numberless countries.

Now, if gold had a fixed value, the attainment of the purpose would be comparatively easy, because then the Federal reserve system would only have to keep the purchasing power of the dollar in comparison with other commodities at a certain definite figure. But the value of gold is not fixed, and what is still more important in this connection, the value of gold is not independent of the action of the Federal reserve system. If it were, you could say to the 'Federal Eeserve Board, "You have to keep the currency on a par with gold," and that would be a definite fixation of their duties.

But if the Federal reserve system itself has an influence on the value of gold, their aim, the ultimate aim of their policy, is not absolutely fixed if you only tell them that they should keep the dollar at par with gold. You must add something telling them how they should use their influence on the value of gold itself.

I think that must be quite clear.

That is not anything artificial. It is not a mere theoretical construction, but it is an obvious necessity that if the Federal reserve system, as every other central banking system, has an influence on the value of gold, you must add to your instruction to your central banking system something telling them how they should use this particular influence that they are in possession of.

Now, if this is clear, I think it should meet with general consent that the central bank can not possibly use this influence in any other way than to prevent unnecessary fluctuations in the value of gold;

and I venture to think that the instruction which has to be added

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have done that. That means a general interdependence of all countries with respect to their currencies.

That is something that can not be avoided, and I think it is very important that this point should be made quite clear, so that there shall be no doubt about this question. As long as you have a gold standard you are dependent upon all other countries; although naturally the other countries are much more dependent upon you, because, as I said, you are the most prominent country in the whole gold-standard system of the world.

Some people say, " We will have nothing of that sort of cooperation for regulating the world's monetary demand for gold;

we will go back to a system where every country tries to get its own gold reserves and does not take any notice of what other countries do in that respect." Think a moment on that proposition. What wTould that mean? That would mean that there would be a reckless competition for gold among all central banks and among all governments issuing gold coins, and this competition would be bound to raise the value of gold considerably. You would not be independent of other countries in that way, because if the other countries wanted to draw gold to themselves, you had to protect your own gold reserves, and you could not protect them in any other way than by raising your rate of discount. The result would be that you would have to raise your rate of discount exclusively in order to protect yourselves against foreign demand for gold, and there you would have the real dependence on other countries.

Perhaps this raising of the rate of discount would not at all be warranted by the internal situation in the United States. The situation here may be such that the low rate of discount is very good, and quite compatible with the stabilization of business conditions in this country and with the stabilization of prices; but there comes the gold demand from abroad, and you are bound to raise your rate of discount. You can see that in this case of reckless competition you would be much more dependent upon other countries than if you accepted the system of friendly cooperation with their central banks.

I have the view that we will have to face in the future an increasing scarcity in the supply of gold. I shall explain a little latei the grounds for this view. But I think it is pretty certain that the world's supply of gold is going to be diminished, whereas the need for annual additions to our gold stock is bound to increase, simply because of the general economic development of the world. If you have a certain rate of progress in the world, say an average rate of 3 per cent a ;year, you must increase the gold stock of the world by something like that. But as the gold stock of the world is always growing, this annual increase must increase itself; and the annual need for gold is, therefore, in a progressing society, bound to rise year after year. Therefore, when gold production can not keep pace with this growing need, you have to face an increasing scarcity in the supply of the metal.

For that reason the cooperation between the different countries must be directed to economizing in the use of gold, and of course that can not be done in any other domain than in the monetary demand for gold. The monetary demand for gold arises from two sources: The desire of different governments to put gold coins into

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I said, if India is going to do that, that means the end of the whole economizing policy of the world, because the Indian demand will be so overwhelming that it will cause every other gold-standard country to take all sorts of measures to protect its gold reserves. You would have done it in this country, and I suppose most other gold-standard countries would have done it, with the result that we would have to face a very intense scarcity of gold in the whole world, with the natural consequence that the value of gold would have risen and the commodity prices in all gold-standard countries would have been bound to fall. That would have meant a general economic crisis arising, meaning lack of employment and very great difficulties for the whole worldl There you see the fact, which is absolutely undisputable, that by cooperating with different countries we succeeded in preventing India from introducing gold coins in their circulation and thereby in economizing very materially in the use of gold. I understand that the American representatives who were called in before the Indian currency committee have a great responsibility for that, and we are bound to thank them very much for what they did there.

I quote that example because that has proved absolutely and indisputably the fact that such cooperation between the different countries may lead up to results which are to the very greatest profit for all countries, without any single country having to make any sacrifice at all. This settlement was not even unfavorable for India. I think it was very good for India, because otherwise the great silver stock of the country would have been infinitely depreciated, with enormous loss for the whole population of India, particularly the poorer classes, possessing mainly silver.

I am anxious to point out that this cooperation is unusually favorable, because it requires no real sacrifice from any country, and it always results in a distinct practical advantage to them all.

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