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Of course, in the open market their policy is to buy Government securities and acceptances.

Mr. GOLDENWEISER. They do not buy acceptances of their own initiative; they buy acceptances when they are offered to them by member banks and by dealers in acceptances. The only thing the Federal reserve banks buy on their own initiative The CHAIRMAN. They could take their acceptances which they hold in their investment account and place them with the Federal agent, together with gold reserves, and make the determination within the banks themselves.

Mr. GOLDENWEISER. They not only could do it, but the fact is that practically all the eligible paper the banks have is pledged for Federal reserve notes.

I might repeat in the record here, although I think it has been mentioned in the previous hearings several times, that none of these transactions that you have been discussing now affect the total volume of money in circulation, and they do not affect prices, and they do not affect the credit position. They have no effect on anything except the balance sheet of the Federal reserve banks. To give you an illustration: If you have in your pocket $20, and you are going somewhere, it would make no difference to you whether it was a gold certificate or a Federal reserve note.

Mr. KING. Unless you wanted to offer it as legal tender.

Mr. GOLDENWEISER. Yes, theoretically; but it rarely happens that the technicality of legal tender comes up.

Mr. KING. If I were practicing law now, I think I would know enough about legal-tender money to refuse a tender on behalf of my client in Federal reserve money.

Mr. GOLDENWEISER. That would not affect the general situation.

It would be a very rare case.

Mr. KING. Of course not.

Mr. GOLDENWEISER. NOW, when the Federal reserve banks pay out gold into circulation it diminishes the volume of Federal reserve notes outstanding and it has no effect on the volume of currency outstanding to meet the demands that I described to you.

As a result of this transaction, none of you gentlemen, nor anyone else, kept more money in his pocket; no stores kept more change; no pay rolls were enlarged. The whole situation remained exactly as it was before, and the only consequence was that the Federal reserve banks had a somewhat smaller gold reserve. Even the reserve ratio of the Federal reserve banks changed little, because their liability was diminished by the same amount that their reserve was diminished. While there was a slight decline, it was slight, because both sides of the equation were diminished by the same amount.

I think it is a current misconception and one that has caused a good deal of criticism of the Federal reserve system at times, that the policy of paying out gold had an effect on the credit situation

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Mr. KING. Those who handle the agricultural end of it ?


Mr. KING. And not the farmer.

Mr. STRONG. If the price of commodities in general trend downward month after month and month after month and the Federal Reserve Board would send for you and ask you what could be done about it, what advice would you give them?

Mr. GOLDENWEISER. That would depend on a large number of considerations.

Mr. STRONG. What could you do? What could the Federal Reserve Board do to change conditions if the trend of prices month after month would gradually be downward ?

Mr. GOLDENWEISER. That would depend on a large number of other considerations. If that decline in prices were occurring at a time when bank credit was growing rapidly, when money rates were low, and there was no evidence of a decline in prices being related to a shortage of credit or tightness of credit or a high price of credit, as was the case from 1926 to 1927,1 should have to say to the Federal Reserve Board that in my judgment there is nothing that the Federal reserve system can do to arrest the decline.

Mr. STRONG. YOU do not think, if the prices were going down in this country, that increasing the volume of money among the people and lessening the cost of it and the expanding credits would be of advantage ?

Mr. GOLDENWEISER. I think that you can not make people use credit when they do not wish to, and that the price of credit determines the volume used only at certain times.

Mr. STRONG. YOU might not make them do it, but you could induce them to do it by giving them cheap money and plenty of it.

Mr. GOLDENWEISER. I t is difficult to keep my own position straight because there are so many angles to this question, and this is just one corner of it.

The Federal reserve system can, if it sets its mind to it, influence the price level, especially in the direction of an advance.

To do that it would have to make that its sole object for the time being, continue to buy Government securities, say, and the proceeds of those funds would be used by the member banks to reduce discounts; keep on buying after all the discounts were paid off, until the funds thus released would begin to accumulate as reserves in the member banks and would induce those member banks to revise their credit policies and to increase their loans, and finally it would find its way into those channels of business that offered the greatest opportunity. That might be speculation in commodities; it might be speculation in stock exchange securities or in real estate. If the Federal reserve system made its one purpose to cheapen money, it could cheapen it, and the chances are that in the long run it would raise commodity prices, but in the meantime there would be no way of preventing it from doing a lot of other things, nor would there be any way, after that price advance created by deliberate and unconscionable inflation got under way, in which the Federal reserve system could arrest it, because inflation feeds on itself and it would inevitably in the long run lead to Mr. WINGO (interposing). You want to qualify what you just said, that they could do it, do you not ?

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meet the demands of the public for credit, and it does not force credit on the public, is conscious of its responsibility in the matter, and would not set out to accomplish a purpose that would be obviously criminal.

The CHAIRMAN. In other words, you are answering my previous question that the management of the surplus gold which is impounded in the Federal reserve system is the reason why prices have not advanced ?

Mr. GOLDENWEISER. I t is in a way true. I would have to agree with you to the extent that I might say it was a matter of common decency rather than of management. It is not a matter of real management to refrain from undertaking a course that would be dangerous to the interests of the country.

Mr. KING. What prices do you refer to, Mr. McFadden, when you say " prices " ?

The CHAIRMAN. The average prices.

Mr. STRONG. YOU have said in answer to my question that when a long period of gradual deflation came the Federal reserve system could check it and bring about inflation by what you think would be an unconscionable extension of credit or purchase of Government securities. Well, now, could they not also check inflation, if it was a continued, positive, aggressive inflation?

Mr. GOLDENWEISER. I think so; yes, sir.

Mr. STRONG. Then, do I understand that the reason they did not take that action after the armistice, when the price level kept going up, was because of the necessity making it possible for the Treasury to carry on its operation ?

Mr. GOLDENWEISER. This question has been asked in this committee many times. It dates back to the period before I came to the Federal reserve system; it was a policy matter at the time when I was not connected with the Federal reserve system.

Mr. STRONG. YOU mean that it is a delicate thing to inquire about ?

Mr. GOLDENWEISER. It is a matter that is rather awkward for me to discuss, particularly because I do not know much about it.

The CHAIRMAN. It was a Treasury policy, was it not?

Mr. GOLDENWEISER. Yes; and it has been discussed both before the Commission of Agricultural Inquiry and before your committee, and Governor Strong discussed it two years ago when he was before you, so you have the information on the subject.

Mr. STRONG. Has the Federal Reserve Board the power now to attract gold to this country ?

Mr. GOLDENWEISER. The Federal reserve system could attract gold to this country by making money rates higher here; yes.

I should like, if I may, to continue to discuss those short-time price fluctuations, because Mr. STRONG. I want to ask you some questions before you are through.

Mr. GOLDENWEISER. I will be very glad to try to answer them.

I wanted to speak about these short-time fluctuations, because it seems that they are the ones with which you are primarily concerned, and it is somewhat technical stuff that I want to say in this connection.

–  –  –

any credit policy at that time could have stopped this rise in the index would have been by exerting its influence on the whole business situation, and in so far as that would be reflected in the price trends it would depress the prices of other commodities than those that advanced, because the world shortage of wheat was such that its price could not be affected by credit. The effect of any influence exerted by any banking organization at that time would have been to make the person who sells boots and shoes or steel rails get less for his product because the farmer got more for his wheat, a situation that, if it were entirely within the power of the system to bring about, would neither be desirable nor equitable.

The CHAIRMAN. In other words, the changed policy in regard to credit control only affects the general price level ?


The CHAIRMAN. And not of any individual commodity ?

Mr. GOLDENWEISER. I t does not affect any individual commodity, but the general price level reflects the movements of those groups.

The CHAIRMAN. For instance, in the case of cotton, if it was at a very high price, the tendency would be this, that if the credit policy was working, then the change would be to affect the price of all other commodities, to bring them down to an average level.

Mr. GOLDENWEISER. That is right; that is just the point I want to make.

Mr. STRONG. But the rise of the price in wheat and livestock did not affect the average price of commodities to any great extent, did it?


Mr. STRONG. What does your chart show on that ?

Mr. GOLDENWEISER. This does not look like it, but this chart is on a scale that had to be made smaller to allow room for the wide fluctuations of group prices. Though the rise in the average is relatively smaller, it was a rise from 97 to 106.

The CHAIRMAN. Which corresponds to the high peak in cotton.

Mr. STRONG. It is only a change above and below the line of 9 per cent total.

Mr. GOLDENWEISER. That is right.

Mr. STRONG. YOU would not consider that a very violent fluctuation?

Mr. GOLDENWEISER. It is a more violent flucti ation than we had ever seen before the war. A change in the price level of 6, 8, or 10 per cent in the course of three or four months is a violent change of prices, and it is one that does not occur in ordinary times.

This cotton starts up here [indicating on chart] in 1923. I had to have it cut off.

The CHAIRMAN. It reaches its highest point in the middle of 1924.

Mr. GOLDENWEISER. It was in 1923. I t had dropped quite a bit by 1924.

This last year we had some advance in prices, between June and November, and that advance in prices was largely due to cotton and cattle.

Mr. STRONG. But as to those violent fluctuations in individual prices, as shown on your chart, your average price shows pretty fair stability, does it not?

Mr. GOLDENWEISER. The average price shows much smaller fluctuations, but fluctuations that are for a price level pretty violent fluctuaDigitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 42 STABILIZATION

–  –  –

Mr. GOLDENWEISER. No; I should think not. I do not see how you reach that conclusion.

The CHAIRMAN. I reached that from what you just said.

Mr. GOLDENWEISER. Perhaps we misunderstood each other. I did not mean to say that.

The CHAIRMAN. I meant to say that those commodities that were below the average price level would, under the management of the stabilization powers and the management of the credit policy, start an inflation. For instance, a very drastic high-price inflation of cotton would have a tendency to increase the price level on all commodities that were below the fixed price level.

Mr. GOLDENWEISER. I think what would happen if the price of cotton advanced, beyond control, and that carried the index up above where it had been, and by some power the index was kept where it was, it would result in a decline in all prices other than on cotton.

Mr. WINGO. The truth of it is that you and the chairman both must not overlook the fact that, in the chart you have before you at one time you had just the reverse of his illustration. Instead of having a high price of cotton, you had a declining price of cotton, and yet at the same time you had livestock and grain both going up.

If you were to assume that, say, cotton and wheat—we will pick those two commodities—each only has the same weight in your price level, and that there was an equal difference—in other words, that cotton was going up, as the chairman suggested, and yet to the same extent and to the same value and to the same weight wheat was going down, then the effect upon all the other prices would remain unchanged, would it not?

Mr. GOLDENWEISER. Yes; they would offset each other.

Mr. WINGO. SO you can not always pick out one particular commodity, because its effect on the general price level may be counterbalanced by just the opposite condition in some other commodity of equal value and equal weight in your price scale.

The CHAIRMAN. In a case like that, those who are charged with the operation of the credit policy which was being used for the purpose of stabilization would not find it necessary to do anything to affect the general price level by the change in the credit policy.

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