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Mr. WINGO. It might not be necessary economically, but it would be politically under some conditions. If the price of cotton were going down and if my cotton farmers believed that Governor Young was such a wizard that he could bring it up, they would be determined to have it go up, and at the same time if wheat were climbing up, the consumers of wheat products would come around to him and say, " You have been invested with this extreme authority; try to get us relief "; and he would be between the devil and the deep blue sea and, after all, they would all be against it.

Mr. STRONG. Just like it is when one man wants to borrow money and the other says, "Don't lend it; we have too much now."

The CHAIRMAN. If the gentleman's theory is correct, any attempt to stabilize the price level by the management of the Federal reserve people who are in control of the credit policy, would be affected by the price of individual commodities?

Mr. WINGO. I think it would.

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and are a part of our economic mechanism, and the reason that I bring it in here is not because I do not realize that Congressman Strong is aiming his bill at the general price level, but because, in the first place, that is not as widely understood as it might be, and, in the second place, because I have just pointed out that frequently the general price index—not the price level, but the price index—reflects movements of groups of commodities.

Now, the function of price in that connection is a perfectly wellknown function. The advance in price in one group of commodities makes a larger group of individuals go into that particular industry, with the consequence that there is a boom in it and ultimately the price declines somewhat; and the low price of another commodity makes industry move out of the production of that commodity, with the consequence that there ultimately is a shortage and a rise in that price.

In other words, price movements are to a certain extent business stabilizers, and price stability and business stability are in that sense not entirely consistent.

Mr. LUCE. I want to say something more about that, because I think you have got down to the core of the matter. Now, I understand you to impugn the value of the price index, pointing out its inadequacies and warranting the conclusion that it would not be a prudent guide for the Federal reserve system in its financial transactions.

If that be the case, can it be a guide to committees of Congress in passing judgment upon the questions with which they deal? If it is of no value to the Federal reserve system, can it be of any value to anybody else? What is the good of it, if it is to be vitiated by the authorities which you have pointed out?

Mr. GOLDENWEISER. I am glad you raised that question, because your statement goes further than I intended it to go. I had not intended to give the impression that the price index is of no consequence. It is one of the indicators of the business situation.

In presenting material to the Federal Reserve Board along the lines of business statistics I bring to their attention whatever lines of information we have, and prices are one of these lines.

I think nothing that I have said was intended to mean that the price index is no good. I merely meant to point out its limitations at times as a sole guide to credit policy or as the determining guide to credit policy.

For instance, in determining the wages or the salary level of Government employees the retail price index or the cost of living index would be a perfectly valid index to go on. It has limitations even there. It is rough; it may not absolutely represent the exact condition, but the movements of it would be reasonably fair, and there is no reason why it could not be used for that purpose.

Index numbers, like any tools, must be used with discretion, and to have that one index picked out as the thing that could determine credit policy is made more difficult by some of those considerations Mr. BLACK (interposing). May I ask this one question, to see if I understand the purport of your testimony? It is that if the 15029—28 4

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Mr. WINGO. I do not know. Suppose that you went out and talked to the farmers. They would not say that there is general prosperity in the country.

Mr. STRONG. I just said that individual groups, of course, would come back on any deflation or change to them by the falling of their own prices, but I am talking about the whole; I am trying to quiet this continual harping on individual prices when we are only talking about general prices.

Mr. WINGO. Well, take your position, if the witness will rest for a while. The two general classes are the credit and the debit classes.

Is it the part of the Government to say which one of those they are going to have ?

Mr. STRONG. NO ; but I think it is very necessary to the success of both classes that they shall have a policy that they shall use in loaning and borrowing between themselves, to have as near a stable purchasing power as possible. I think it is an outrage to ask a man who borrows, when the time for payment comes, to pay back with a dollar of half the purchasing power if it can be avoided.

Mr. WINGO. I agree with you on that, but you are off on something else.

The CHAIRMAN. Before you proceed, it is now 12.30. What is the pleasure of the committee ?

Mr. KING. I move that we adjourn.

The CHAIRMAN. I should like to finish with Mr. Goldenweiser if possible.

Mr. STRONG. I would like to ask Mr. Goldenweiser some questions.

You have said that you thought, in a large decline of average prices, the Federal Reserve Board could, by directing its efforts, check the deflation, or vice versa. Why should they not use their powers to that end?

Mr. GOLDENWEISER. They should, and they would.

Mr. STRONG. Then there is no direction of that kind in the law now.

is there?


Mr. STRONG. What objection could there be to writing such a direction in the law ?

Mr. GOLDENWEISER. The only objection that I have to writing that in the law is that I feel that the powers of the system in the matter are applicable only at times when the rise or decline is extremely violent. That is the only time when the system could be pretty certain to exert an influence, and those times occur rarely. The fluctuations in prices ordinarily are very much milder and are not directly influenced.

Mr. STRONG. But it is those periods of inflation or deflation that bring the greatest disasters to the country.

Mr. GOLDENWEISER. Yes; and those are brought about by war conditions in every case, and no law could prevent it.

Mr. STRONG. But you could have lessened the inflation in 1918, after the armistice, if you had had these powers to that end.

Mr. GOLDENWEISER. I think, as you are going back to that point, that I ought to say that the Federal reserve system at that time did its level best to do so, but was not able to do it.

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Mr. WINGO. In the light of the policies that you know are in existence in the different countries, is it not the general opinion that there will be a gradual depletion of our gold to the extent of $1,000,000,000 in the next 5 or 10 years ?

Mr. GOLDENWEISER. I have heard of the suggestion. I have not recently heard it so much as some years ago.

Mr. WINGO. What steps are they taking, then, to change what they expected to be a general movement? You are the first one I have heard suggest that may be there has been a change in that trend.

Mr. GOLDENWEISER. It is a question of analyzing the situation. The world produces about $400,000,000 in gold in the course of a year.

Industry consumes between $150,000,000 and $200,000,000 for jewelry and other purposes and the remaining $200,000,000 goes into reserves, but a reasonably large amount of that goes into India and stays there. India has been for generations the sink for gold, and they have absorbed a couple of billion dollars's worth of gold in 50 or 60 years. The remainder is distributed among the other nations that require additional gold reserves, and it is only after that is absorbed, so to speak, that the demand would come to us.

Mr. WINGO. Instead of their being a probable increase in the production of gold there is a probable decrease, is there not ?

Mr. GOLDENWEISER. Well, I do not know.

Mr. WINGO. I S not that the general trend? Take the trend for the last few years; there has been a downward trend in the production of gold.

Mr. GOLDENWEISER. NO, sir; I think not. I think the last year was the largest year since 1915.

Mr. WINGO. I believe you are right; but is it not expected that if you put these nations back on the gold standard, the management you are going to have of the gold and the expedients that are going to be resorted to are to be temporary so as to gradually ease it back to a free flow of gold which will cause us to lose a billion dollars in the next 10 years ?

Mr. GOLDENWEISER. I will follow you right up to the last point. 1 think that the intention is to return to the full gold standard and to restore the free flow of gold, but I have doubts whether or not that will result in our losing gold.

Mr. WINGO. If we do not lose gold, what we will have to do, if these nations get back to the gold standard, will be to raise the rates as high as a cat's back and hold them.

Mr. GOLDENWEISER. Not necessarily. If our price level and our money rates are on a fairly even keel, that is not necessarily so.

The CHAIRMAN. There are some students of this subject who are of the opinion that the increase in the demand for credit facilities in this country will require the retention of all of our surplus gold within a period of 10 years in this country or else it will slow up our credit facilities.

Mr. GOLDENWEISER. I am inclined to think that that is essentially correct. The thing you have to recognize is that gold is an expensive commodity for a Government, that they would rather buy our cotton and our grain and our automobiles and sewing machines than our

–  –  –

Mr. GOLDENWEISER. I may be wrong; but I want to say this, that I feel myself in entire agreement with Governor Strong's statement.

I do not know what he thinks about the movement of gold, and I do not know whether he would agree with my statement that the gold would not move out, but I believe that the tendency is toward the reestablishment of an absolutely free gold standard everywhere, and there has been great progress made in that direction in the last year.

The CHAIRMAN. I S it not pertinent that in this period in which we are accumulating this vast amount of gold, for the major portion of which we have no immediate use, that in the constitution of the Federal reserve system we have the ability now, because of the fact that the Federal reserve system is not organized as a money-making institution, to impound that gold ? In other words, if that gold had come in to a system here that had been differently constituted and which had to earn money, had to earn interest, it would result in an inflation in this country which would be beyond the control of anyone ?

Mr. GOLDENWEISER. Yes, sir; no question about that.

Mr. STRONG. I fear, from your testimony here, that you believe that, rather than have Congress direct the Federal reserve system to use its powers toward stabilizing the purchasing power of money, it should be left just to use its powers as directed by the present law to the accommodation of commerce and industry ?

Mr. GOLDENWEISER. To use its powers primarily for the purpose of having elastic currency and sound banking conditions and the gold standard.

Mr. KING. Then the conclusion of the whole matter, in the words of Saint Paul, is this, that, taking advantage of the suggestion of the gentleman from Arkansas that a certain condition would place the governor of the Federal Reserve Board betwee[betwe n]the devil and the deep blue sea, the passage of this bill would place the whole Federal reserve system in a similar position, would it not ?

You need not answer that.

Mr. GOLDENWEISER. I will avail myself of that privilege.

Mr. STRONG. What have you to say regarding the matter of publicity set out in the bill.

Mr. GOLDENWEISER. I would like to say a few words on that.

The thing I would like to say about publicity is this, that as the bill now reads, the publicity is so regulated and there is so much discretion given to the governor of the Federal Reserve Board that I do not believe it would create any serious embarrassment. I would like to point out to the committee, however, that a certain amount of publicity is being continuously given by the Federal Reserve Board in its bulletins. If I may, Mr. Chairman, I would like to introduce into the record the last paragraph in the review of the month that appeared in September, which summarizes the circumstances under which the easy money policy last summer was adopted.

Mr. CHAIRMAN. Without objection, that will be inserted.

(The paragraph referred to is as follows:) This advance of sterling and of other European exchanges will assist foreign buyers in making their autumn purchases of grain, cotton, and other American farm products. At the same time the decline in rates charged on bankers' acceptances in New York will have a tendency to attract a larger volume of the inancing[financing] of exports to the banks of this country, and consequently to red

–  –  –

The CHAIRMAN. This is a part of the annual report which I understand will be released about the 26th of March ?


The CHAIRMAN. Inasmuch as this is an official publication for release at that time, I wonder if this can not be held in abeyance until the report is issued ?

Mr. Goldenweiser. It will be out in a few days, and I will be glad to insert this in my testimony. I asked Governor Young yesterday whether there would be any objection and he said there would not.

The CHAIRMAN. The thing that I had in mind was that it should not be taken account of by the newspaper men.

Mr. WINGO. He is simply embalming it in the record.

The CHAIRMAN. It will hardly be fair to give it out in advance, and if any newspaper men are here they should not take notice of it.

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