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# «COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES SEVENTIETH CONGRESS FIRST SESSION ON H. R. 11806 ( Superseding H. R. 7895, Sixty-Ninth ...»

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We will call that the volume. That volume is constant. I t does not change; it does not go up and down. But suppose that you are operating that automobile at the rate of 5 miles an hour. You have a certain rate of turnover, a certain velocity, or, in other words, a certain amount of work which your engine is doing. I t is turning it over. I t is not enlarging the diameter of the wheel at all, but it is turning it over slowly. Then, if that automobile is pushed up to 50 miles an hour, you do not change the diameter of the wheel but you change the velocity by putting more punch, more power into it, and if it is going at 50 miles an hour, with the same height of wheel, you will be getting ten times as much work, ten times as much power out of that machine, as if it were going 5 miles an hour. That is the difference between volume and velocity.

Let me apply it to the banking system. We have in the figures of demand deposits what we might call the volume of money. I will, attend to the credit end of it, and call them demand deposits.

We will say, for illustration, that there are \$50,000,000,000 of demand deposits—bank credit—in existence. Now, it has been calculated 15029—28 5

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Professor COMMONS. YOU are right. I say they jumped at their conclusion. I am going to bring that out on the question of publicity.

I think the responsibility of an officer for publicity is tremendous in this whole question.

For illustration we will say that on 'the preceding day the volume of sales was 2,000,000 shares. The next day, after his testimony, the volume of sales was, say, 3,000,000 shares. Now, was there any increase in the volume of credit on the stock exchange ? Very little.

The first thing that happened was that there was an enormous increase in the velocity of transactions of buying and selling, and it was that increased velocity, say, from 2,000,000 shares up to 3,000,000 shares, that caused prices to rise.

I have not the figures, but as a result of that velocity, and as a result of the increase in prices, there may have been an increase in the quantity of credit necessary to sustain those stocks at that higher level of prices; but the primary cause, and the one that is taken into account by all advocates of stabilization—that is the reason we attach so much importance to this section on publicity—is that you can speed up the velocity by an announcement in advance of what you are going to do or what you are not going to do. The velocity in that case may have resulted from misinterpretation. It undoubtedly was, as I know from Governor Young's position and explanation of the matter, because I heard the testimony and the way in which it came up. I myself never would have guessed that the amount of sales on the stock exchange the next day would double. But the point I want to bring out now is simply this difference between volume and velocity. It is in part the speeding up of the velocity or the slowing down of the velocity that causes prices to rise or fall, and also increases or decreases the quantity of products that are going to be produced.

Let me give another illustration from Governor Strong's testimony day before yesterday on the publicity clause of this act.

He said that it would be very dangerous for the Federal reserve system if it should announce, say, two weeks in advance, that it was going to raise the discount rate 1 or 2 per cent. What would happen ?

He said, in effect, that everybody would get scared; the quantity of business would fall off; prices would fall, and at the end of the two weeks they might find that instead of raising the discount rate they must reduce it in order to save the country from the publicity which they had previously given. What he actually meant there was, of course, interpreting it in terms of velocity, that the velocity of business, the amount of transactions, the amount of money that would be called for to support those transactions, would fall off, which means also that the prices would fall.

So this publicity feature is perhaps the most important part of it;

and I am sure the Federal reserve authorities themselves recognize the tremendous responsibility of publicity. That accounts, perhaps, for their reticence in giving out any information, and thus keeping the public in the dark as to what they are going to do. I appreciate that thoroughly. But let me show you what happens if the Federal reserve system does not give out publicity in advance.

In my former testimony, at page 1092, I give a record of the publicity which was given out from different sources during this

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Mr. BLACK. I do not think, Doctor. that the President's statement or Secretary Mellon's statement, either one, referred in any way to the rate of rediscounts.

Mr. WINGO. I t might have been unwise, but I am sure, certainly so far as the President is concerned, that he was simply responding to an inquiry and gave it as his personal opinion—a very natural explanation from a man who is not a financial expert—that it was a normal development justified by the increased wealth and volume of business. I know I read it at the time, and while it occurred to me that possibly it was not a very wise thing to say and might mislead, it never occurred to me that he was trying to mislead anybody.

Professor COMMONS. N O ; if I gave the impression that they were consciously trying to mislead people, of course I was entirely misunderstood.

Mr. WINGO. That was the impression that I got from your statement, Doctor, and I did not think it was fair, because I do not believe either one of them intended that.

Professor COMMONS. Oh, I did not say that they intended it. T say that it was misleading in the sense that the public generally interpreted it in that way; and it would apply in the same way to the misinterpretation by the public of Governor Young's statement.

The essential point is that we should have an authoritative source of publicity, which would be a man canvassing all the methods which are used in the reserve system, and such a man is evidently the governor of the Federal Reserve Board. He is in direct longdistance or telegraphic communication with all the reserve banks.

He could give out the publicity. Now, that does not mean anything like centralization of control, as Mr. Owen D. Young seemed to think it might. It would not concentrate control. I t would simply mean that he would be the responsible one for giving out information.

Another point on that publicity: There has not been understood, apparently, the great discretion which is placed in the hands of the governor by the clauses of this bill. On page 2 of the bill there are prescribed three fields of discretion. He may choose the time when he will give out the publicity; he may choose the place where it is to be given out; that is, it may be given out in New York or in Washington ; and—this is the most important one, which has so far been overlooked by witnesses—he mav give it out " in such detail as may be deemed by him to be most effective in furthering such purposes."

The detail is the whole thing. Of course, if the governor of the reserve board should give out a very foolish statement, such as Governor Strong used in his illustration, namely, " We are going to raise the discount rate in two weeks," the thing is all off. But I am assuming that he would give out a considered statement. Suppose, for example, that the governor of the reserve board in January, 1922, had given out a general statement like this: " We have a law which says that we shall maintain stability of prices. We find that prices are rising very rapidly, as rapidly as they were in 1919. I t may be necessary in the future for the Federal reserve system to take account of this rise in prices." I am assuming that the statement would be something like that; not a foolish or wild statement, but a wellconsidered statement, based on the experience that they had gained.

Mr. BLACK. On that point will you permit just one inquiry?

Professor COMMONS. Yes, sir.

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Mr. LUCE. In connection with what Mr. Wingo has said the record might well show my own recollection, that the commission divided, a majority thinking the board acted too soon, and the minority, with Mr. Ogden Mills as the spokesman—and I am not sure whether there was anybody besides him—thought that they acted too late, but they agreed that that factor of the Treasury operations was an important consideration.

Mr. WINGO. I only took what the report indicated, and got myself in trouble once on the floor of the House by paraphrasing that report.

I have a good recollection of what was intended to have the commission report. I was barred from that commission because they said I was not conservative enough and would not agree in advance what my findings would be.

The CHAIRMAN. May I suggest to the committee here that when Doctor Commons started I suggested that he be not interrupted until he had completed his statement, in order that he might make his statement connected to the members of the committee.

Professor COMMONS. Mr. Chairman, I have finished three of the five points I wanted to talk on. Publicity was the third.

I want to bring in this matter of futurity now. The reserve system, so far as its powers over credit are concerned, and over the velocity of circulation, operates through the expectations of business. They can act without publicity through their statistical service and their clues as to what is going to come relative to all kinds of considerations. They can act long before the public is aware of what they are doing, but as soon as the public begins to get the idea that prices are going to rise, then you are going greatly to increase the velocity of business transactions and consequently the line of credit needed to support the new high prices and the new quantities of production is increased.

So that those two items which I consolidated in the two terms— velocity and futurity—are really the important instruments in the power of the reserve system, and I think I have given illustrations to point that out.

Let me take up the investigation. I t is quite true that the investigation called for in this bill has as its basis the idea of stabilization.

I do not think that the investigations of the Federal Reserve Board have been based primarily on the idea of stabilization. They would have to collect and combine different kinds of figures, or additional, or make new combinations.

They have also abandoned the idea of continuing the investigation and publication of their own average of prices of commodities, leaving that to the Bureau of Labor, and these other things which are itemized here all turn on the question of their power to control the price level. That is additional, I should say, and is a necessary addition to the powers of the Federal reserve act as originally passed, which did not include the idea of stabilization.

How would such an investigation naturally be conducted? I will give my idea of what such an investigation should be. I think it would be the kind of an investigation that the Federal Reserve Board, on consideration, would probably adopt.

It is an investigation similar to that which Mr. Hoover is now conducting through the agency of the National Bureau of Economic Research in New York. I understand he has raised \$150,000 on the

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T. S. Adams, professor of political economy, Yale University, president;

John R. Commons, professor of political economy, University of Wisconsin;

Edwin F. Gay, professor of economic history, Harvard University, director of research; Wesley C. Mitchell, professor of economics, Columbia University, director of research; L. C. Marshall, dean of college of commerce, University of Chicago; Joseph H. Willits, professor of economics, Wharton School of Finance, University of Pennsylvania.

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## DIRECTORS BY APPOINTMENT OF OTHER REPRESENTATIVE ORGANIZATIONS

Hugh Frayne, American Federation of Labor; David Friday, American Economic Association; Lee Galloway, American Management Association;

George E. Roberts, American Bankers' Association, treasurer; Malcolm C.

Rorty, American Statistical Association; A. W. Shaw, National Publishers' Association; Gray Silver, American Farm Bureau Federation; Oswald W.

Knauth, recording secretary; Gustav R. Stahl, executive secretary.

## RESEARCH STAFF

Edwin F. Gray, director; Wesley C. Mitchell, director; Willford I. King;

Frederick C. Mills; Frederick R. Macaulay; Leo Wolman; Willard L. Thorp;

Walter F. Wilcox; Harry Jerome; Simon Kuznets.

Professor COMMONS. YOU will notice that there are directors at large, there are directors selected by university appointment, and there are directors by appointment of other representative organizations. Among the latter are the American Federation of Labor, the American Economic Association, the American Management Association, the American Bankers' Association, the American Statistical Association, the National Publishers' Association, and the American Farm Bureau Federation. There are five universities represented.

In other words, the kind of an investigation which they make includes supervision not simply by one interest, but by all interests, and among theprivisions[provisions]of the constitution of this bureau is the provision that any member of the board of directors who disagrees with the findings of the staff of investigators may send in his disagreement. If it is taken account of by the investigators adequately, then nothing more need be done, but if it is not taken account of by the investigators he has the right to publish it as a dissenting opinion in the findings.

I am not saying that the Federal Reserve Board would join in with the National Bureau of Economic Research, but I do say that it will take a good deal more money for expenses than they are now paying;

that it would involve the whole question of the power of the Federal reserve system over prices of different kinds and one of the most complex problems in the whole field of economics.

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