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Mr.' WINGO. The point I am getting at is this, that a great many people think that in order to have a real normal level with the prewar situation, prices would have to go down to what they were in

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The CHAIRMAN. In connection with the practical situation that confronts us here now, we are in the midst of what has been termed a speculative situation. Yesterday the Federal Reserve Bank of New York raised its rates. Brokers' loans were reported to have increased $150,000,000 in the report that was issued yesterday. Much attention is being directed to the volume of brokers' loans and its effect on the whole monetary situation.

We would be very glad to have your opinion on that present situation, if you care to express it.

Doctor CASSEL. Well, Mr. Chairman, I am very glad that you ask me this question, because it gives me an opportunity to show how the aim of checking this speculation, from the point of view of stabilizing the money of this country, is an outside interest, involving the monetary policy in great difficulties. If you had not that speculative tendency in the New York Stock Exchange, the Federal reserve banks here in this country, I understand, would be able to keep a Sy2 or 4 per cent rate of discount. Now, there is this stock speculation, and to meet that the Federal reserve bank in New York feels it is obliged to raise the rate of discount to 4 ^ per cent. That is, I assume, not at all done for monetary purposes; that is a measure entirely outside of the normal province of the Federal reserve system, which is to regulate the currency of the country; but there seems to be a popular demand that the Federal reserve 3ystem should mend all difficulties arising in the country and particularly fulfill the function of keeping the speculators in New York within reasonable limits.

I think that is unsound.

It would be a great benefit to the country if some means could be devised by which it would be possible to limit speculation on the New York Stock Exchange without increasing the Federal reserve bank's rates, because such increases may be very unwelcome. They may disturb the whole monetary policy, and it may have an effect on the general level of prices that will result in a depression in production in this country, followed by a decrease of employment, all only for the purpose oi combating some speculators in New York.

I think that is absurd, but I must add that the technical means by which we can master the wild stock-exchange speculation must be found by the experts in every country. I suppose there must be some such means as increasing systematically the demands for wider margins in the loans to the stock exchange. I could not give you any more definite advice on that subject; that is a technical subject of the bankers, but I understand that by moral influences it ought to be possible to restrict these speculative tendencies within reasonable limits, at least in the long run.

Perhaps it is impossible, owing to the speculative mind of these people, to entirely prevent speculation on the stock exchange, but I think it ought to be possible in the long run to restrict it within fairly reasonable limits, and I hope that that shall prove possible without applying the means of raising the rate of discount, which is likely to have a very detrimental influence on the whole monetary policy and on the price level of this country; i. e., the general level of commodity prices.

Mr. STEAGALL. YOU think that the Federal reserve system should serve legitimate business and shape its policy with that end in view?

15020—28 25

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Mr. WINGO. Your theory is that by monetary control we can control the price level of commodities ?

Doctor CASSEL. Yes. You see, you have always done it as long as you have had the gold standard, and all other countries have done it;

indeed, they have controlled price levels so completely that the purchasing power of every currency has always been equal to the purchasing power of the corresponding weight of gold.

Mr. WINGO. YOU think that circumstances have no effect at all upon the play of monetary forces?

Doctor CASSEL. NO.

Mr. WINGO. YOU think that a monetary law, a rule of monetary action, will have the same effect in every condition and circumstance ?

Doctor CASSEL. Yes.

Mr. WINGO. It is immutable, unchangeable, and unaffected by monetary climate or economic zone or anything else?

Doctor CASSEL. Yes; as long as the central bank system is being kept intact and has the power of action. If you come to such conditions as'in Europe during the war, when the governments asked the central banks to print notes for them and forced them to do so, then, of course, it is different. We must assume the whole time that the central banking system is absolutely independent of any such influences and is only to fulfill the simple function of providing a stable monetary standard for the country.

Mr. WINGO. YOU think a legislative rule can be devised that would insure the free play of economic forces at all times ?

Doctor CASSEL. That is a difficult question, because it is too wide.

Mr. WINGO. It is pretty wide.

Doctor CASSEL. It is wide, but whatever may happen to be the economic policy, the central banking system and the Federal reserve system is absolutely able to adjust its means of payment to keep up the purchasing power of the dollar.

Mr. WINGO. DO you think that in the Federal reserve system lies the power to absolutely control price levels in this country?

Doctor CASSEL. Yes. If you do not believe it, then you must make a, resolution here to abolish the gold standard. How can they keep the gold standard if they do not keep the purchasing power of the dollar exactly like the purchasing power of the weight of gold comprised within the dollar?

Mr. WINGO. I often have expressed my idea about it this way, that there are certain economic forces and laws that in their operation are far superior to either the wisdom or stupidity of legislative bodies.

Doctor CASSEL. NO; there is no economic force which would prevent a country from keeping to their gold standard as long as the central banking system is intact and can follow its own policy, because they are supreme masters of the situation, simply by the factthat they have to regulate the supply or means of payment.

Mr. WINGO. Suppose that the Federal reserve bank faces a situation where it had exhausted its securities that it could put in the market. I am assuming it. is trying to tighten money. Suppose they face the situation where they do not have any securities to sell and that the member banks are not coming to them to rediscount;

how could they, by either the open-market operation or by raising

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The rate of exchange between England and the United States, for example, exclusively in the long run, depends on the relative purchasing power of the pound and the dollar in terms of commodities.

The CHAIRMAN. If there are no further questions, I suggest that the committee adjourn.

(Whereupon, at 12.05 o'clock p. m., the committee adjourned.:)



Wednesday, May 23, 1928.

The committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden (chairman) presiding.

The CHAIRMAN. This is a resumption of the hearings on H. R.


I have here a letter which I desire to put in the record from a member of the Federal Reserve Board, Mr. Cunningham, in answer to the invitation extended to him to appear before the committee.

It reads as follows:


Washington, May 2i MY DEAR MB. CHAIRMAN : For the past several weeks I have been confined to my home on account of illness* and am now preparing to spend a few weeks away from Washington for the purpose of hastening convalescence. I am advising you of this in order that you may understand why you have not heard from me, at least with an acknwoledgment, in response to the invitation which your committee has extended to members of the Federal Reserve Board to express themselves individually on the bill pending before your committee, introduced by Congressman Strong of Kansas, known as the " Stabilization bill."

I am advised that the committee has heard from Governor Young and Doctor Miller and that Mr. Hamlin expects to be present at the meeting of your committee to be held to-morrow morning. Just at the moment I do not know that I have any viewte on the pending legislation which I would care to express formally to your committee, nor that I would care at this time to make any statement for the record of my own position with relation to recent policies of the Federal Reserve Board concerning which, I understand, there has been some discussion before the committee. As a matter of fact* should I feel otherwise, I doubt whether the condition of my health just now would permit me to expend the effort necessary to make either a written, or oral statement for the information of your committee.

On the other hand, as I understand your committee is inviting expressions of the individual members of the Federal Reserve Board, I do not want absence from the record of any statement of my own views to be construed as my acquiescing in or being opposed to all that has been or may be said concerning the pending legislation, and particularly as to the policies of the Federal Reserve Board since I have been a member of that body. If the hearings on the meas*ure which your committee is conducting are not closed with this session of Congress, and should your committee desire my presence, I will hold myself in readiness to respond to a request, when hearings are resumed, to come before your committee and answer any questions which the committee might care to ask of me concerning the policies of the Federal Reserve Board in so far as I have had knowledge of them since my membership on the board.

With kind personal regards, I am, Sincerely yours, E. H. CUNNINGHAM.

Hon. LOUIS T. M'CFADDEN, Chairman Banking and Currency Committee, House of Representatives, Washington, D. C.

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Information is stated to have reached here that the monetary union plan has been approved by the Bank of England. The stabilization of Rumania on Paris is a natural step in view of the fact that the Bank of France has arranged an $80,000,000 loan to Rumania. On the other hand, the Yugoslav financing is being handed in London.

However, the Bank of England is said here to have little interest in taking a direct hand in Yugoslav stabilization on London, as it would constitute another possbile source of demand on the gold stock there, and besides trade relations between Great Britain and Yugoslavia are not very great. Another obstacle to a Yugoslav accord with France on monetary problems was removed when the Serb-Croat-Slovens ambassador in Paris signed a compromise agreement on the pre-war debts of Serbia to French bondholders.

The CHAIRMAN. I desire also to refer to an editorial appearing May 21, 1928, in the same paper, headed " * Constructive ' Program."

I think that it would be well, in view of the fact that Governor Hamlin is here this morning, if he has not already noted that editorial, that it be read; so I will read it and ask that it be inserted in the record.

This editorial is as follows:

"CONSTRUCTIVE" PROGRAM Recent discussions before the House Banking and Currency Committee, as well as elsewhere, have more definitely than hitherto presented to the country, and especially to the financial community, the question of relations between our banking system and those of other countries. The problem is undoubtedly one of first-class importance and has been ever since the close of the war, if not longer. Yet, like other great issues, it has been allowed to drift and to fall into a dangerous, not to say hazardous, position. When critics have anything to say about it they are, as usual, blamed for finding fault with what is, and the complaint is made that they are not constructive.

The Journal of Commerce has had a good deal to say on this question, because it believes that the issue is fundamentally significant. A sound settlement of it is quite important, no matter what that settlement may be. Danger comes much more truly from leaving it unsettled, letting it drift, allowing ambiguous conditions to grow up, and "playing politics" than from acting in either one of two ways which are directly opposed to one another. The evolution

of a constructive program is consequently a perfectly easy one. This newspaper has no hesitation therefore in offering two, as follows:

The first program is based on adherence to existing law, and includes these steps— (1) Insist that the Federal Reserve Board shall exercise its legal function of supervising and representing the reserve system and accordingly require that it either represent the system at all conferences of foreign banks in which American interests need to participate, or, if it chooses, that it send such a representative associated with advisors drawn from among the executive officers of the several reserve banks, preferably with some degree of rotation among them.

(2) Whenever an action has been taken which fundamentally affects our relationship to the banking systems of other countries in such conferences, let the matter be formally reported to the Federal Reserve Board and such reports be placed 6n file, being eventually acted upon by the board in a recorded ballot.

(3) At stated intervals, or whenever conditions fully warrant, let the board issue to the public a statement of the resolutions or actions it has taken in this connection, just as the Fedeial advisory council finally brought itself to do with respect to domestic questions. Such publication might be made in the annual report or oftener.

(4) Let the board make plain to the public from time to time the general theory of discount rate management upon which it is acting so that the public need have no difficulty at all in interpreting steps that are taken, such as the raising or lowerine of the discount rate, etc. If, from time to time, the board feels that a complete change of policy or the adoption of a new theory is necessary, let it frankry so state in its monthly publication or eleswhere, indicating exactly what changes in its underlying methods of action have occurred.

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