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Later the governor reported to the board just what the conference was. As I remember, it was purely a discussion of the international question, leading up to no agreement as to rates and no agreement whatsoever, as I remember it.

Then, later—I think in July, 1927—the open-market committee, with Governor Strong, came before the board and they gave us a formal report of conditions in this country and conditions abroad and they made certain recommendations. I think one recommendation was that the discount rate at New York could be and should be reduced, and they discussed the international situation and, as well, the local situation.

Their recommendation, as I remember it, was more largely based on international considerations and the necessity of stabilizing the

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might not possibly be somewhat restricting business at that time in recession but struggling to come up. So I said to myself, as a purely local matter, that if there is to be any further recession I hope that our rate would be the very lowest rate consistent with prudence and safety, and I wanted to try that Sy2 per cent rate.

So, you see, there were many differences of opinion, but in answer to the other part of your question I will say that there is a minute of the board covering that whole meeting, which was read carefully after it had been prepared and formally approved by the board and it is in the board's records to-day.

The CHAIRMAN. We thank you very much.

Mr. GOLDSBOROUGH. May I ask you one question? Professor Cassel was here the other day and he emphasized several times his opinion that the central banks could absolutely control the price level; that nothing else was necessary than the powers which the central banks now have, referring in this country to the Federal reserve banks.

Do you agree with him ?

Mr. HAMLIN. I did not hear the professor. I am very sorry; I should hesitate very much to place my opinion against that of such a learned economist, but I am not an economist; I am a poor layman and I am not impressed with that statement. I say that will all modesty.

Mr. GOLDSBOROUGH. YOU said a few moments ago, as I understood you, that the machinery you now had was sufficient to control conditions under ordinary times.

Mr. HAMLIN. I was referring to the general reserve provisions of the law.

Mr. GOLDSBOROUGH. NOW, do not the necessities for some machinery especially arise under extraordinary conditions in the way of something to stop the period of speculation ?

Mr. HAMLIN. Yes; if the extraordinary conditions are not merely caused by some other force or other power. I think it is ordinarily said that this speculation has been caused by easy money. In a psychological sense that undoubtedly is true, but I think there is another factor. The wonderful increase in savings has helped bring about that condition, a condition where business has not required much credit and where the savings of the community seemed to be pouring into Wall Street. This is not so much a banking condition;

it is a state of mind and it has got to run its course and it will.

There is always a danger, of course, in giving extreme power in these extreme cases, but, as I have pointed out, the real power would have to be given in the way of a power to increase reserves, and that would undoubtedly stop future increases in speculation. I do not mean for the means of deflating loans at all; that is a danger in itself, but it would stop future unwise expansion if you gave that power.

As I say, I do not ask for that power; I doubt if Congress would ever give it, and it would be a power almost impossible to be exercised by any board of eight human beings.

Mr. GOLDSBOROUGH. One other question: Doctor Miller, when here the other day, testified that in his judgment the board should not have members ex officio; that the great prestige of the Secretary of the Treasury in any case where the members were somewhat on a

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Mr. STEAGALL. The thought has occurred to me, not that there should be any particuuar interest or any sectional view represented on the board, but that by having an enlargement of the board and a member from each district you would have a larger sum total of information covering the whole country to present and to consider.

Mr. HAMLIN. Well, I think it would be for the best interests of that board to have a small number of men to try to see the whole country from the whole country's point of view, and that the work that we do would be done better and more expeditiously, with the present board rather than with a board such as you suggest.

That is merely my opinion in answer to your question.

Mr. STEVENSON. ± move that we discontinue this hearing. We have a quorum here now, and I suggest that we want to dispose of one piece of legislation which, if it is to be passed, is of great importance.

(Whereupon the committee proceeded to the consideration of other business.)

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Mr. HUSHING. Mr. Chairman, the American Federation of Labor would favor very much a bill which would stabilize the purchasing power of the dollar. We note in this bill under consideration the proposition for investigation, which appeals to us very much. Now, whether this bill will accomplish the purpose in mind or not we do not know; but it seems to us that it is a start along the right lines, and we would very much favor some practical way, as I said before, of stabilizing the purchasing power of money.

Mr. STRONG. Mr. Hushing, none of us know whether we can ever have an absolutely stable purchasing power of money; and, in fact, it probably never will be done in this world. But the purpose of the bill is to direct that all the powers that the Federal Reserve Board now has or which may hereafter be given to it shall be used with that end in view. If the purchasing power of money rises, they are to use their powers to check it and turn it back toward a stable policy; if it goes below the present stable purchasing power of money, they are to use their powers to raise it. So, while it may fluctuate above and below an exact stable line, they will try to keep it in small fluctuations, working toward a policy of stabilization of the purchasing power of money, so that there may be no violent inflations or violent deflations.

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Mr. STRONG. I have not seen it for a long time, and if you have a copy of it, I would like to read it again.

Mr. YOUNG. Since I have been in Washington I have had but little opportunity to reflect upon the contents of that letter. At times I have been inclined to think that in that letter I minimized a little too much the powers of the Federal Reserve Board, or, rather, the Federal reserve system, but recently I have been rather inclined to think that that letter was a pretty accurate statement, as I see the situation.

(The letter referred to is as follows:) JUNE 11, 1928.

Congressman JAMES G. STRONG, House of Representatives, Washvngton, D. G.

DEAR CONGRESSMAN STRONG : Before replying to your letter of May 21, I have taken some time to study your suggested amendments. I have approached your suggestions with an open mind, but frankly, Mr. Congressman, I do not feel that your amendments would be of any benefit, and might be an opportunity for harm. My conclusions necessitate explanation.

Bankers deal primarily in credit. Credit is that commodity that plays such a a important part in our everyday life, and its use is not confined to banks sntireiy. Everyone uses it to a certain extent Some one has estimated that the borrowers in the United States owe the lenders well in excess of $200,000,Banks handle but a fraction of this immense volume of credit— approximately $49,000,000,000—member banks but $31,000,000,000 of the $49,Of the $31,000,000,000, but $2,200,000,000 is on deposit with the Federal reserve banks as legal reserve.

Inasmuch as banks function in this credit structure as borrowers from their depositors and lenders to their borrowers, it is interesting to observe how the $49,000,000,000 of deposit liability has come about. Bank deposits are created through two sources—(1) the deposit of gold, (2) the granting of loans which directly or indirectly are redeposited- The total gold holdings of the United States aggregate approximately $4,500,000,000. Therefore, a large percentage of the deposit liability of the banks has been created because of the granting of loans. In other words, the banks, on the inverted pyramid principle, can extend a large volume of credit without using the reserves of the Federal reserve system. That credit can be extended discriminately or indiscriminately, because there are no legal restrictions, either under the notional law or State laws, as to how a bank may lend its money, except the amount it may lend on real-estate security or the amount it may lend to any one person, firm, or corporation. This general statement applies to practically all banks with the exception of a few mutual savings banks and trust companies.

The Federal reserve system has three methods of exerting influence upon credit: (1) Open-market operations, (2) rediscount rate, (3) lending policies.

Tha system, by selling or buying in the open market, can adjust unusual credit conditions that are brought about because of international, national, or seasonal conditions, but when you stop to consider the relation between $200,the amount of credit used, and $500,000,000, the probable extent of the system's open-market operations, you can understand why the effect upon credit can be only a temporary stabilizing one. Sometimes these large figures confuse us, and by resorting to cancellation we grasp their significance more readily. In the above figures, if we eliminate eight of the ciphers, we have lenders with $2,000 to lend to borrowers, and the system with $5 attempting to control how the $2,000 be lent. It is obvious that it can not be done. Psychologically the system's open-market operations may have a more far-reaching effect, but from a purely mathematical standpoint the effect is limited.

It is likewise obvious that when member banks are not borrowing from the system a rediscount rate or lending policies can have but little effect upon credit other than psychologically. I have had sufficient experience during the last 11 ysars to know, that you can not always depend upon the psychology of the American people. One of the outstanding examples occurred between the years 1914 and 1919. During that period, and without any great assistance from the Federal reserve banks, the banks doubled their deposits, and at the same time doubled their loans. The increase in loans contributed largely to the increase in

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the Federal reserve system through the Federal reserve banks to make certain studies, and those studies are very far-reaching. Many of them, no doubt, will be beneficial to the system. Some of those studies we are already making. If all of those suggestions are followed, I can not help but arrive at the conclusion that it will be extremely expensive, but the fact that it is expensive should not deter the system from going on with the studies if they are productive of good results.

Taking the three points of the bill, the first part of the bill commands us to do something in reference to stability, and it is the third part that requires us to study and determine whether we have the power to do these things and whether it would be desirable to do them. That, it seems to me, Mr. Congressman, is a little inconsistent.

It seems as if we should do the studying first and take the action afterwards.

I have tried to figure this out in my own mind from the operating standpoint. At the present time we have 12 banks that are autonomous in their operation, and we have one board in Washington that is a supervisory rather than an administrative body. Let us assume that this plan could be successful from the operating standpoint. In that case I am convinced in my own mind that we would have to abandon the regional system of banking and establish a central banking system in this country in order to make it successful. I question very much whether the American public would ever consent to any such set-up as that.

The present situation is an extremely interesting one. There is a slight advance of commodity prices, and it may be that those commodity prices will go higher. If they do go higher and this bill were in effect it would command the Federal reserve system to take certain action at that time, which, in my opinion, would not be desirable, regardless of commodity prices. When you analyze those commodity prices you find that the increase in the index price comes almost entirely from agricultural products—cotton, wheat, cattle, hides, and some of the other grains—which have also increased in price. Now, if I understand this bill correctly, if those agricultural commodities should continue to increase in price to a certain point under this index, regardless of whether you used the Fisher index, the Department of Labor index, or any other index—and you would have to use one of them—it would command the Federal reserve system to take action to stop that increase. I may be entirely mistaken about this, but it seems to me that the agricultural and livestock;

interests during the last nine years, in so far as their products are concerned, have not been getting as fair a price as other industries.

In other words, it looks to me as if they have about nine years of good prices coming to them, and I would not want to be a party to the taking of any action at this time that would curb any agricultural prices that may be advancing.

Mr. STRONG. DO you think that is the purpose of the bill ?

Mr. YOUNG. AS I say, if I understand it correctly, Mr. Congressman, that would be the effect.

Now, that is simply a statement made from my own limited experience. I have made it in good faith, and I have the utmost respect 15029—28 27

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Mr. YOUNG. I think if you use your powers as a central bank or banking system to maintain the value of your money, that is about all you could require of a central bank.

Mr. STRONG. But your aim would be to maintain its stability, or the stability of its purchasing value, would it not ?

Mr. YOTTNG. Our money is always at a certain value in respect to gold.

Mr. STRONG. But you would want to maintain its purchasing power, would you not?

Mr. YOUNG. HOW could you do that?

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