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Mr. KING. I doubt very much whether this will be of any benefit to the committee. It bears the same relation to this matter as George Creel's official bulletins used to bear to the war. I have them all bound on my shelves, and also the Federal reserve bulletins.

Mr. STRONG. HOW often are these Bulletins issued ?


Mr. STRONG. TO whom ?

Mr. GOLDENWEISER. They are sent free of charge to all the member banks of the Federal reserve system and for $2 a year to any other subscriber.

Mr. LUCE. Take that first Bulletin; how long was that explanation made after the thing happened ?

Mr. GOLDENWEISER. The purchases of securities and reductions of rates last summer occurred during August, and this came out in the September Bulletin, which was released to the press on September 1.

The Bulletin actually did not appear until the 10th or 12th, but the review which was to appear in it was mimeographed and released to the press on September 1. That was pretty prompt.

Mr. LUCE. Would you say that ordinarily less than a month follows ?

Mr. GOLDENWEISER. I think that, as the bill contemplates, that is in the discretion of the governor of the board. There are times when it is considered desirable to have a very prompt explanation. At other times it is desirable to have the explanation take its regular course and come out later.

Mr. WINGO. It is all a question of when the necessity for secrecy ends and the necessity for publicity begins. A good many people think that the President's Cabinet ought to have open meetings and the juries open sessions and the Supreme Court consider its decisions in public. There is a difference of opinion about that.

Mr. KING. They have to be careful about publishing this material.

Mr. STRONG. What have you to say with regard to the direction for a study of these various subjects?

Mr. GOLDENWEISER. I feel about the same as Governor Strong felt yesterday, namely, that to have a specific authorization for the studies which we make would be a desirable thing. It would give us a feeling that Congress is back of us in this work. On the other hand, I do feel, in connection with this long list of questions enumer

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most of the information that we currently present to the board, and we have just decided to print it. This is a page proof of it, and I will be glad to present a copy of it to the chairman now and to any member of this committee as soon as it is out in print.

Mr. STRONG. What is the purpose of presenting these charts to the board?

Mr. GOLDENWEISER. It is to point out to them the various developments that have a bearing on credit policies.

Mr. STRONG. For what purpose ?

Mr. GOLDENWEISER. For the purpose of deciding those questions that it is up to them to decide, whether it is open-market policy or any other policy.

Mr. STRONG. IS that for the purpose of advising them as to whether or not they should extend credit to commerce and industry; whether or not they should accommodate commerce and industry?

Mr. GOLDENWEISER. AS to whether they should do so at a higher or a lower rate.

Mr. STRONG. I see. Well, if they did it at a higher rate, it would not be so nice an accommodation as if they did it at a low rate.

Let me ask you one more question. Is not the real purpose of those charts to enable them to use the powers of the Federal reserve system toward stabilization ?

Mr. GOLDENWEISER. If I have to answer that in one word, I would say no.

Mr. STRONG. Then they are not using the information they have for that purpose ?

Mr. GOLDENWEISER. Only incidentally.

Mr. STRONG. Incidental to what ?

Mr. GOLDENWEISER. Incidental to those things that are more directly the duties of the Federal reserve system.

Mr. STRONG. That is, to accommodate business and industry ?

Mr. GOLDENWEISER. TO maintain sound banking conditions.

(Thereupon, at 1 o'clock p. m., the committee adjourned to meet to-morrow, Wednesday, March 21, 1928, at 10.30 o'clock a. m.)



Wednesday, March 21, 1928.

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

The CHAIRMAN. The committee will come to order. We will proceed with the hearing on H. B. 11806, and will be glad to hear Prof. John E. Commons, of the University of Wisconsin.

I would suggest, inasmuch as the doctor has a considerable statement to make, that he be permitted to proceed and make his connected statement without interruption, after which we will be glad to answer any questions that may be propounded.

I might say also, before we start, that Dr. Adolph C. Miller, a member of the Federal Reserve Board, phoned this morning that he would not be able to be present this morning on account of illness.

Doctor Miller is very anxious to be heard, and I gave him the assurance that at a subsequent date, these meetings being held open,

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commodation of commerce and business; and, lastly, there can be read into it, and undoubtedly is implied in it—it is really the substance of the whole act—the centralization of the reserves of the member banks. We may call those the purposes of the act as enacted into law in 1913.

I would say that this bill now before us, H. R. 11806, adds four purposes: First, the idea of stabilization; second, the relations between the American reserve system and foreign banks of issue; third, publicity; and fourth, investigation.

Also, it should be observed that this bill has been worked over at great length in order to meet all of the objections which could be obtained from individuals on the Federal Reserve Board or individuals in the Federal reserve bank at New York, or others.

It must be evident to all persons that any administrative authority—and here I can speak from my own experience, if you will allow me, for I was for two years on the Industrial Commission of Wisconsin, and also served on the Federal Industrial Commission— every person upon whom is placed responsibility for carrying out legislation may be looked upon as having two different psychologies.

The first is his opinions and thinking as an individual; the second is his opinions and thinking as a member of the system which he is trying to maintain and continue. Consequently no administrative commission follows out exactly the law as laid down mathematically in a congressional enactment. It necessarily changes the meaning of the law somewhat in its administration. I t either enlarges its meaning or contracts its meaning, and that enlargement or contraction of the meaning of the words used in the act is a change actually in the act itself. I t is an administrative change in the act itself.

Consequently we can not always tell from the wording of an act just what will follow when that act is interpreted by the administrative authority. We can not tell what is going to be done under that act. The same is true of the judicial authority. The same process appears in the courts in interpreting an act. The court endeavors to interpret the act as applying to an individual case.

Consequently the courts for several hundred years have always added the word " reasonableness " to any legislation which they have interpreted. For example, in our public utility legislation, which says, " This commission shall ascertain the value," when it comes to the courts, and even the commissions themselves, they endeavor to ascertain the "reasonable value." So when we have the words "stable gold standard" or "stable purchasing power" the word " stable " must always be interpreted as " reasonably stable."

We have the decision in the famous public utility case of Smythe v.

Ames, which has defined this word "reasonableness" in the case of railroads. It says that in ascertaining the value of railroad property the commission shall take into account all the factors—cost of production, earning power, etc., enumerating a large number of factors—and then goes on to say that in taking into account all of the factors it shall give "due weight" to each—that is, proper weight or reasonable weight.

That is attempted to be cared for in this bill by enumerating various things besides the stability of the purchasing power. There

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sonage in Washington in about February, 1923—when by the chart you will note prices were rising very rapidly, more rapidly even than they did in 1919. This personage in Washington wrote to the other in New York to the effect that there was a great inflation sentiment in Washington, and wanted to know what could be done about it.

Thereupon, when the letter was shown to me—a letter of introduction was given to me to this personage in Washington, whom I had already known—I called upon him. I might have been called a sort of voluntary liaison officer. He took me over to the Federal Reserve Board about the 1st of February, and I learned there that they were perfectly aware of the inflation, that they knew their powers, and that they were just waiting the opportune moment for acting.

Mr. WINGO. February of what year ?

Professor COMMONS. February, 1923.

I learned also, through this sort of semiparticipation in the Federal reserve system, what those powers were. It was explained to me what was the power of the open-market operations. Prior to November, 1922—I think I can give that as the proper date—the 12 banks had been buying and selling securities without any concerted action, and it had been deemed necessary that they should all act together. So about November, 1922, they created the open-market investment committee, centralizing all of the buying and selling of securities on the open market in the hands of a committee of three to five governors of the various banks. We had here a new phenomenon that had never occurred before in monetary history, and the Federal reserve people did not themselves know what that instrument could do. Prior thereto they had scattering and conflicting buying and selling of securities by the reserve banks, so they could not have any particular effect. But in November, 1922, they concentrated it all, for all the 12 banks, in the hands of one committee. There was now concerted action. Thereafter, instead of each reserve bank throwing its own ball, all of them together threw all of their weight at one time in one direction.

This was a new power which had never been known before, and it could not have been known before the large issues of Government securities during and after the war. Of course, those acquainted with banking history would know to what extent the Bank of England had used it, but I will not go into that.

Anyway, here was a new power. So they began selling those securities and continued the sale for some time in 1922, until they got down to the minimum in 1923. The idea of that, of course, is quite familiar to you all. I have simply stated the historical setting of it in order to show you why I have confidence in my so-called exaggeration.

Then, in the middle of February, about a week after I happened to be interviewing the people at Washington, they raised the discount rate in two districts very slightly. Prices of commodities kept on rising until about the middle of April, for about two months;

but from the beginning of that operation, which was November, 1922, until April, 1923, we had about five months of operation of, first, the open market, and, second, the discount rate, as an instrument to check the further inflation of prices.

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They omit the factor of velocity, and they omit the factor of what I would call futurity or expectation, which is sometimes called psychology. I will just call it futurity.

Mr. WINGO. Will you explain just what you mean by those terms, Doctor ? I want to follow you.

Professor COMMONS. We are going to have hard trouble getting there. I am going to explain what I mean by velocity.

Mr. WINGO. Take " futurity " and " psychology." You used them as synonymous?

Professor COMMONS. They are the same thing.

Mr. WINGO. All right; maybe I will catch up with you.

Professor COMMONS. I am giving an academic term; a comprehensive term which will cover everything. I t depends upon how a human being acts. He acts in the present, in view of what he expects Will happen in the future; so that the theory of causation which should be applied in economics is a theory of expectation. That is, his present act is caused by what he expects in the future. In other words, in all these affairs that we are dealing with, the causation is not in the past; the causation is in the future. I t is in their expectations; and I find that the power of the Federal reserve system has, to control the demands of business for money or credit, lies in its power to modify the expectations of business men throughout the world.

As to the question of velocity, Mr. Stewart made the inference in Jus criticism of those who advocate stabilization that we have a theory that if we can change the volume of money, the volume of credit, we can thereby change prices. I am quite surprised that an economist of such great ability as Mr. Stewart should ever have put himself on record as saying that any economist holds that a mere change in the volume will change prices. Every economist who has ever given any study to the subject always includes, not merely the volume but the velocity of circulation.

Let me explain the two ideas, first by an analogy. If you have an automobile with a 3-foot wheel, and you are going along the road, the top of your tire is always 3 feet above the level of the road.

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